This is a bit simplistic but this isn't an economics lounge! *** YEAR 1 You make 10 cars at £10 each and sell two at £12. You are left with a stockpile of 8 cars you can't sell and you have to rent space to store them costing, say, £1 per car. Total income £24, total costs £108, loss £84. (I'll not bother with book values of the unsold cars). YEAR 2 Your costs rise 10%, do you pass this rise on? CUT PRICE If you make 10 cars at £11 each and sell all ten at £7, plus all your stockpile of eight cars, no storage costs. Total income £108, total costs £126, profit £18. MAINTAIN PRICE If you make 10 cars at £11 each and sell two at £12, stockpile rises to 16 cars. Total income £24, total costs £126, loss £102. RAISE PRICE If you make 10 cars at £11 each and sell one at £13. Total income £13, total costs £129, loss £116. YEAR 3 Demand remains subdued, do you want to shut down some factories? and so on *** If your costs rise but the market won't bear a price rise you are better off cutting prices to sell unsold stock at a loss than passing on your costs. High street retailers do this every year to churn revenue - but carmakers seem to prefer to fill up unused airports.
"If you reward everyone, there will not be enough to go around, so you offer a reward to one in order to encourage everyone." Mei Yaochen in the 'Doing Battle' section of Sun Tzu's: Art of War. .
