Supply/Demand and Labor

[greg10]

Can anyone with an economics background explain this to me.

-Companies set up their prices in stores so that they can maximize their profits. The price point they choose is the one on the supply/demand curve that gives them the greatest revenues/profits.

-When it comes to discussions on companies increasing employee wages, the discussion always ends up with the point that companies would pass on those costs to consumers in the form of higher prices.

-Why would increasing the costs to consumers generate higher revenue if the original price is at the point of the curve where they generate the most revenue?

Why is the original price inefficient? Why doesn't the business charge the higher price in the first place?

 

[KevinWestern]

Can anyone with an economics background explain this to me.

-Companies set up their prices in stores so that they can maximize their profits. The price point they choose is the one on the supply/demand curve that gives them the greatest revenues/profits.

-When it comes to discussions on companies increasing employee wages, the discussion always ends up with the point that companies would pass on those costs to consumers in the form of higher prices.

-Why would increasing the costs to consumers generate higher revenue if the original price is at the point of the curve where they generate the most revenue?

Why is the original price inefficient? Why doesn't the business charge the higher price in the first place?

Hi Greg---

Not sure if I can answer all of those questions, but will take a stab (in a very unscientific way).

Try to think of it this way.

Say your product costs $3 to make and you sell it for $4. A $4 price point will get you 50 customers/yr and therefore your profit on a YOY basis would be $50 (simple enough).

Now lets say labor costs increase and the product now costs $3.50 make. If you keep pricing flat you will still retain those 50 customers, but will make only $25 profit for the year. Not great.

However, you make the decision to up your price to $4.25. Although this price increase may drive away 20% of your customers (40 people now), notice that you will now be generating $30 profit for the year; this is obviously an alright improvement.

So, key takeaway is that you need to consider that there’s a price that will get you the most people to buy your product/service, yet this price isn’t necessarily the price that maximizes your profit. Make sense?




.

 

[sjay]

Basic yet excellent question and answer,it's too bad that this type of dialog can't be more common,after all this is an economics forum.Instead what we have are immature dick measuring contests between democrats and republicans neither of whom are innocent pertaining to the problems we have in this country.

 

[Whereisup]

There are other factors which make this much more complicated.

Economy of scale is on of the major factors. If the number of items a company sells increases, then the cost to make each product decreases. So with sales of 100 units, it might cost $3 per unit to make, but with sales of 200 units, it might cost only $2 a unit to make.

Economies of scale result because fixed costs remain the same no matter how many units are produced. Thus, for example, if interest is being paid on loans, the interest payments are the same even when production increases.

It isn't talked about, but if sales decrease, there are negative economies of scale. That is the reason companies get themselves into trouble even with small drops in sales.

Now if employees are paid more, then they buy more units,, so the cost of making the units decreases. So the increase in wages doesn't add nearly as much to the cost as the face amount of the increase.

In addition, there are increases in productivity almost every year, so as the years go by, it requires fewer workers to produce the same number of units.

Looking at the economy as a whole, the result therefore is that if wages increase, the rate of economic growth increases because then the employees can afford to purchase more units of this and that.

There are limits. If wages rise faster than production capacity can ne increased, then that causes inflation. However, a nation can increase its rate of economic growth if it raises wages at a rate less than that inflation point.

Jim

 

[BillyV]

Can anyone with an economics background explain this to me.

-Companies set up their prices in stores so that they can maximize their profits. The price point they choose is the one on the supply/demand curve that gives them the greatest revenues/profits.

-When it comes to discussions on companies increasing employee wages, the discussion always ends up with the point that companies would pass on those costs to consumers in the form of higher prices.

-Why would increasing the costs to consumers generate higher revenue if the original price is at the point of the curve where they generate the most revenue?

Why is the original price inefficient? Why doesn't the business charge the higher price in the first place?

The original price isn’t necessarily “inefficient”; you’re assuming companies operate in a vacuum. Competition has a significant effect on price efficiency; you can’t arbitrarily set any price without considering the sales prices of the same or similar products. In a perfectly competitive situation, profit tends to approach zero; if costs increase, all producers would have to factor that into their pricing and each would find a new equilibrium at a higher level. In the real world, companies do often have some pricing power due to lack of competition, cutting edge products or protected markets (or even a “cool” factor – see iPhone, iPad, etc). Those companies might be more inclined to suffer a lower profit if they had a cost increase as they may already be at the optimal pricing. However, it seems unlikely that a retailer or fast food restaurant would have that pricing power due to the number of players in the marketplace and the fierce competition for customers.

 

[mascale]

At Venice Beach, in CA, where I am located: Google Los Angeles is now in the widely unknown "Binoculars Building," fomerly an agency, Chiat Day. If the link works, I myself had a red car, parked like in the photo.

Google Image Result for http://droiddog.wpengine.netdna-cdn.com/wp-content/uploads/2011/01/Venice-Chiat-Day-Building-four-story-pair-of-binoculars-Frank-Gehry-design-2-550x368.jpg

So if manufacturers are making more red cars, and Google is making more binoculars, then any labor cost increases actually catch up to any revenue increases.

It could even happen in China. A $1.00 per hour increase for all of China is maybe a lot of money. But a lot of that money might go to buying red cars, or even binoculars, from Google. That is the other part of the increase of "cost." Increase of affodability is actually a boon, not even. . .whatever bras are for(?). . .if these things can be discussed in schools(?).

"Crow, James Crow: Shaken, Not Stirred!"
(Many White Eyes maybe not now ready to buy Disney, "Tonto" costumes for little kids in October. . . .even now(?)!"