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Any net profits acquired through a price increase would be forfeited to the third party contractor. The overall net profit of each pie would also go down. This means that the company would be working harder for less money, which is not a viable decision for working towards an expanded future.
The strongest option available to Shelly would be to temporarily increase prices and maintain current production levels. According to the rules of economics, "The law of supply and demand predicts that the price level will move toward the point that equalizes quantities supplied and demanded," (Net NBA 1). Thus, the levels of supply and demand must reach an equilibrium point. By maintaining current levels and increasing prices temporarily, this will create an equal point for supply and demand of Shelly's pies. As demand continues and supplies do not meet that demand, the price of the pies should be raised to help equalize the two within the short-term. This may loose some customers upfront, but it is both equaling supply and demand as well as providing the greatest levels of net profit which can then be re-invested in expanding production without borrowing more money. This will then lower demand to a number that the company...
After such expansion the price should drop once again because they will be producing more of a supply. Thus, in long-term price models, the price per pie will once again be lowered because the company will be more capable of increasing supply.
This will once again increase demand levels, which will be able to be met by the future expanded production methods. All this is done without borrowing money or giving money away to an external source to increase production. With the pie's already proven success, small price increases should not have a dramatic impact on demand, but just enough to allow the supply levels to catch up with consumer demand. Therefore to level the supply & demand points, prices must be dropped to once again increase demand.
References
Henderson, Hubert D. Supply and Demand. Kessinger Publishing. 2004.
Hirt, Geoffry & Ferrell, Linda. Business: A Changing World. 5th ed. McGraw Hill. 2005.
NetMBA. "Supply and Demand." Internet Center for Management and Business Administration. 2007. Retrieved 28 Oct 2009 at http://www.netmba.com/econ/micro/supply-demand/
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