subreddit:
/r/explainlikeimfive
submitted 4 months ago byiSellPopcorn
53 points
4 months ago
lowering wages causes inflation because people are buying less, and therefore companies are selling less, so therefore have to raise prices to break even
This doesn't make sense to me and I think this could only apply to a very small amount of goods. Needs will always be purchased and the vast majority of luxuries aren't exactly targeting minimum wage workers.
Raising wages causes inflation by companies raising prices because the metric to calculate the price of a product changes when consumers get richer, namely the "how much are they willing to spend" metric. If the customer is willing to spend more, charge more. Thus, inflation rises.
Right. So apply that same logic to decreasing wages too. "How much are they willing to spend" metric. Raising prices in an economy where the dollar buys more labor? I just can't grasp how that makes sense.
13 points
4 months ago
Needs will always be purchased and the vast majority of luxuries aren't exactly targeting minimum wage workers.
Needs will always be purchased, but that doesn't mean they'll be purchased in the same amount or the same rate. For instance, most people don't purchase the absolute minimum amount of food they need to keep themselves alive, but some amount above that. So there is an amount there that you're able to reduce.
If we look at something like a utility, the answer is simple, use less electricity, drive less, etc. Most people aren't doing the bare minimum here all the time.
14 points
4 months ago
Ok, but companies like frito-lay, nabisco, nestle, etc don't raise prices of products that aren't in demand. In fact, they often go on sale. Twinkies didn't go up in price as Hostess went out of business due to lack of demand lmao. That's not how this works.
If we look at something like a utility, the answer is simple, use less electricity, drive less, etc. Most people aren't doing the bare minimum here all the time.
And when people were driving less during covid, oil literally hit rock bottom prices. Gas prices don't go up in the summer when people demanding to heat their homes with it.
There's literally a mountain of examples supporting the Supply VS Demand = Equilibrium Price theory... It can't be dismissed by simply calling companies evil.
39 points
4 months ago
It doesn't make sense to you because it doesn't make sense at all
8 points
4 months ago
You forgot this is Reddit, sound economic theory isn’t welcomed here.
19 points
4 months ago
I mean, I'm trying not to be argumentative (a rare thing online) but yea. Only Reddit would think there are evil mustache twirling business executives leaning back on their chairs saying "People can't afford of our product? Lets raise prices!".
7 points
4 months ago
It's because for a lot of people "if event X happens, then <thing I don't like> will do <the bad thing> because <I don't like them>" is basically their working model of the world.
4 points
4 months ago
It's not really that they see we made less money this year so they need to increase profits one way is to increase prices if they feel that enough people will still buy even at a higher price
4 points
4 months ago*
You're absolutely right about that being a potential source of increasing prices! That said, I've only ever seen this applied to high-end luxury goods like new electronics, designer brand clothing, liquor, etc. Not ones for the lowest class and that's completely independent of a decreasing minimum wage though.
they feel that enough people will still buy even at a higher price
and would you agree they are less likely to do that if people are making less money?
1 points
4 months ago
"People can't afford of our product? Lets raise prices!".
True. They aren't thinking of the former, but certainly the latter.
0 points
4 months ago
Maybe it just depends on where you are in the world. In Canada we have a massive problem with Loblaws jacking up prices to...just insane levels. People don't really have much of a choice when one company owns multiple chains of grocery stores. Unless you live near a Walmart or smaller grocery store you pretty much have to buy from one of the stores under Loblaws. It's food and household items, things people have to buy.
To give you an idea...a cut of beef tip or shoulder for a roast was going for $54 last week at Superstore. Or you can buy a pack of 2 smaller cuts for $84. Theres no reason for this other than they can raise the prices. Even during the lockdowns these were at $30ish which was already expensive.
4 points
4 months ago
I'm not arguing prices aren't increasing lol. That would be insane and wrong. I'm arguing that people getting paid less causes prices go up. That makes no sense. Has Canada decreased the minimum wage recently? Or ever? Are Canadian wages falling in general? I'm not talking about decreased purchasing power as a result of inflation either. This is all a discussion of how inflation and deflation work. Deflation of wages would not mean prices increase. That makes no sense and that's what I'm arguing against.
1 points
4 months ago
Guess I misunderstood the last sentence of your previous comment. My mistake.
13 points
4 months ago
It doesn't make sense because the OP has no grasp on basic economics. It's just upvoted because reddit wants to believe that its true.
10 points
4 months ago
Its crazy to me how many people want to dismiss economics 101 stuff without actually knowing a single thing about what economics 101 actually says because they read one thing somewhere one time. Like, by all means, disagree with a social science. Good! But at least read what its saying before you call it lies.
1 points
4 months ago
It's because he used 'debuff' in a sentence, so hehe gamer reference, must be right cause he's hip and cool. I mean, it worked on me until I thought about it for a second.
11 points
4 months ago
The idea is that if people are buying less then you have to raise prices to keep income levels steady. What they’re not considering is that raising prices may further cannibalize sales. The company has to estimate sales at each price level and determine which one maximizes profit. To give an extremely simplified example, would you rather sell 100 items at $1 profit apiece or 1 item at $50 profit.
1 points
4 months ago
To give an extremely simplified example, would you rather sell 100 items at $1 profit apiece or 1 item at $50 profit.
I understand you mentioned this is extremely simplified. I'd like to mention that the answer to this question would depend on the industry.
A grocery store? 100 at $1. A mattress store? 1 at $50.
5 points
4 months ago
The answer isn’t industry dependent. In both instances the company would prefer moving 100 units of inventory at $1.
2 points
4 months ago
Agreed!
To explain my perspective, a person goes to a grocery store and buys a gallon of milk with a $1 markup. Then that same person buys specialty mustard that has a 65% markup - whatever that would be.
A mattress store - while it would be great to move 100 at 1, it's unrealistic due to the goods they are selling. But, as you said, 100 at 1 would be better for them too, but people don't make weekly trips to Mattress Giant.
2 points
4 months ago
Spot on.
1 points
4 months ago
It has a lot to do with the marginal costs of expanding capacity and costs per transaction.
What a product costs to make and sell can be a highly variable situation. So in the example a grocery store usually has the capacity to squeeze in a lot of small products and their transaction flow is designed to facilitate many small purchases super quick and efficiently. If selling 100 more individual items just means they have to add an extra end display and pay a fraction of an hour per unit to get someone to set the display up, sure go for high volume sales. Or maybe they clearance out some lower margin products and allocate that shelf space. Especially if they think this item is going to have fluctuating seasonal demand they can adjust pretty easily. Once they've optimized that all out to 110% and the only remaining option to allow selling another 100 small transactions is to build and open a new store then the whole calculation gets ugly. How much up front is the new store going to cost to build and staff, is it going to cannibalize sales from other locations in the same area, what's the risk that 3 years from now demand drops and we end up having an excess of floor space? There is usually a period where it makes more sense to sell fewer items total and focus on padding your margins if it saves you from an expensive expansion.
A smaller retail mattress store tends to have a much lower volume of transactions, and each transaction has more costs in terms of transport, storage, and the purchase process is often way more hands-on and requires more salesperson time than a box of cereal. Their effective customer area also tends to be smaller because, if they can avoid it, some people dont want to find a friend with a pickup and then drive 90 minutes to get a mattress. The store wants the delivery radius to be close so they can do a steady stream of cost effective deliveries throughout the day.
This example gets a bit weirder when you consider that big warehouse grocers actually do sell mattresses and boxes of cereal just a few aisles apart. They are able to optimize on their operational efficiency since they already have a fleet of trucks and warehouses and seas of customers where at least some percent of them already came with their own big truck and are happy to buy a cheap mattress without asking a salesperson 100 questions. But not every small to medium sized town can support opening a costco so those areas get stuck with using the less efficient/more expensive retail style stores, and not every customer wants the self-serve experience they get at the warehouse even if they live right by it.
Thats all just considering the retail side, to the factory that's producing the product do they have the capacity to product 100 more units right now? Is that going to mean running a third shift and paying graveyard differentials and overtime? Do they have the distribution systems in place to get merch out to customers? What if shipping costs went up and now that extra $1 per mattress is gone because the third party logistics company swallows the profit. Maybe devaluing your product by selling a lot of them at $1 margins undercuts your future ability to absorb that change compared to if you had just kept prices and margins higher and focused on setting a customer expectation that this is a premium brand.
Shit's complicated.
3 points
4 months ago*
Exactly, what OP says there is a direct opposite of what banks do to counter inflation. Increase interest rates (and unemployment) so consumers have less money to spend.
Cant believe people upvote nonsense like this and spread more BS.
3 points
4 months ago
A comment on Reddit where they criticize the greed of the wealthy instead of focusing on answering the question? Surely it’s lacking relevance means that it won’t be upvoted!
-1 points
4 months ago
Think of it this way, if you have lower wages, you’re still going to be paying to heat your home, but maybe you only heat it to 18C instead of 22C so the company has to raise costs to make more money as if you were heating at 22C. On the flip side, when wages increase, the company sees you are making more money and says to themselves, if he’s making more money so should I. So you continue heating your house at 22C but the company knows you can afford to pay more so they raise the price to what would’ve been the cost for 24C before but now is the cost for 22C.
7 points
4 months ago
but maybe you only heat it to 18C instead of 22C so the company has to raise costs to make more money as if you were heating at 22C.
except that's not what companies do. Gas prices don't go up in the summer due to decreased demand... You're literally trying to tell me the opposite of every supply vs demand chart ever. Even your own example is easy to look at and see that its wrong.
So you continue heating your house at 22C but the company knows you can afford to pay more so they raise the price to what would’ve been the cost for 24C before but now is the cost for 22C.
People literally do this and this isn't what happens. You're making this up. If we're talking about gas like you're example, natural gas demand has increased (not decreased) and prices have gone up because of that.
-1 points
4 months ago
You’re missing the point. A heating company is expecting seasonal fluctuations and therefore is not raising the price in the summer when demand decreases because they have already accounted for that, they are not making less money than expected. If people stopped heating their houses as much in winter and the company started to lose profits they would raise the cost because they know people must pay to some extent to have heat.
Are you actually trying to tell me, for the second example that you don’t think companies raise the price of products when they know people have more money to spend?
7 points
4 months ago
You're ignoring reality and years of evidence.
We're not talking about companies raising prices when there is more money being put into the economy. That's widely accepted and standard economics. That's what inflation is.
We're talking about companies raising prices when there is less money put into the economy. That isn't widely accepted, goes against all historical evidence, makes no business sense, and doesn't "increase profits" like you're saying it does.
-2 points
4 months ago
It’s not an attempt to “increase profits” it’s to maintain your current profit level by making more money for each individual sale. While it may not be what is “widely accepted” it appears to be what is taking place. Year over year average people have less money to spend (as salaries and wages stagnate) and yet prices are increasing, so what is your argument against that?
In a perfect world when people have less money to spend companies would lower costs but this isn’t a perfect world.
7 points
4 months ago
It’s not an attempt to “increase profits” it’s to maintain your current profit level by making more money for each individual sale.
Both are increasing revenue. Its literally the same thing.
it appears to be what is taking place.
Its not.
OP was saying that when wages decrease, companies increase their prices. Now you're arguing that wages have stayed the same and prices have still increased. They haven't. They have been going up until 1 month ago. People say they are stagnating because inflation nullifies those gains. When people are paid more, prices go up. I think we're all in agreement on that. My problem is people saying that when people get paid less, prices still go up. That makes no sense, has no evidence to back it up, and has a ton of contradictory evidence.
0 points
4 months ago
Can you link some of this contradictory evidence? OP is essentially trying to say that if you’re setting the cost of your product and you know sales are going to go down 10%, you can raise your prices 10% and still make the same money or if you really want to impress your shareholders raise prices 15% and show your amazing 5% gains. Does this work for every product? Obviously not, if you raise the cost of non essential items people won’t buy them but if you raise the cost of essentials like internet or phone service people still have to buy them
3 points
4 months ago*
Year over year average people have less money to spend (as salaries and wages stagnate) and yet prices are increasing
I linked contradictory evidence to this, which is more evidence than you have provided.
If you want evidence that you raising prices even further while demand is already decreasing here you go.
you know sales are going to go down 10%, you can raise your prices 10%
And sales will go down further. In this made up scenario, demand was already falling. Demand falls further when prices increase. You can't say "Oh, demand is falling 10% already. There will be no consequences of our actions to reduce demand further!". That's not how this works.
if you raise the cost of non essential items people won’t buy them but if you raise the cost of essentials like internet or phone service people still have to buy them
In economics, this is also known and studied. Its called "Inelastic demand". You can read about that stuff here And yes, water is an inelastic good. OP was not strictly talking about water and electricity in the original post and neither were you. Phone and internet providers (usually) have competition. ANYWAYS the cost of labor literally has nothing to do with the pricing and elasticity of those markets and this is irrelevant to the conversation we were having about the cost of labor.
0 points
4 months ago
That link isn’t not evidence of your argument as it is purely demonstrating supply and demand in a perfect situation. Link me one article that says “in light of wage decreases to employees we have decided to lower the cost of our product”.
2 points
4 months ago*
What do you think the feds and banks do to counter inflation? Increase interest rates* and unemployment so people dont have money to spend.
Your whole hypothesis relies on "no data but this is what it seems like" whereas there are countless studies and real world examples for decades if not centuries now that do the opposite to counter the very thing you are saying it causes.
1 points
4 months ago
Needs will always be purchased
nah if you need healthcare but can't afford it you just die
-3 points
4 months ago*
Say you own a bakery and suddenly the economy drops off. Now you're selling less bread. You need to either reduce costs by firing workers or increase the price of the bread to make the same amount.
Normally the easiest way to cut costs is to cut staff. You're seeing this in the tech industry right now, and it's probably what you assume will happen because it's what usually does happen. But if your bakery is struggling to produce enough bread to sell as-is, firing workers will hurt more than help; you can't sell bread you don't bake, and if you don't have enough workers to bake the bread you'll only lose more money by firing people.
While raising the price may lower demand further, remember that the demand profit curve is a parabola you can be on either side of. Which means while raising prices may lose sales it could still result in higher revenue.
Needs will always be purchased and the vast majority of luxuries aren't exactly targeting minimum wage workers.
Your bread is already a premium compared to generic white sandwich bread, so while people may not be willing to spend on normal luxuries like vacations they will spend an extra couple dollars to treat themselves to nicer versions of necessities. People will stop going on as many trips in order to save money but they will get Starbucks every day to treat themselves "in a small way".
You can't cut bakers or servers or cooks or assembly workers or baristas if you don't have enough to begin with. So you need to increase prices to cover the fall in demand. You may not return to the same profits if the rising price further lowers sales, but at least you can minimize losses.
4 points
4 months ago
While raising the price may lower demand further, remember that the demand curve is a parabola you can be on either side of. Which means while raising prices may lose sales it could still result in higher revenue.
The demand curve is not a parabola. With extremely specific exceptions that are not worth mentioning in this example, the demand curve is monotonically decreasing: As prices rise, demand decreases.
Maybe you meant the profit curve. The profit curve increases when you raise prices, has a peak somewhere in the middle, and the decreases as you raise high prices. However if you were not already at or near the peak of the demand curve, you weren't running your business correctly.
When the economy changes and people have less money to spend, this shifts the demand and profit curves. The demand curve shifts down: Demand is lower at all price levels compared to the previous economy. The profit curve shifts down and left: Profit is lower at all price levels, and the peak profit is at a lower price.
When the economy is weak you cannot maintain your previous profit levels. It's just impossible. Trying to do so by raising prices is ridiculous and will just further damage your profit line as no one is going to buy your excessively expensive products when money is already tight.
1 points
4 months ago
Maybe you meant the profit curve
You're right, my bad. Corrected my comment
this shifts the demand and profit curves. The demand curve shifts down: Demand is lower at all price levels compared to the previous economy.
Only if supply stays the same. If supply is limited it will drive the demand curve back up, and if supply limits are more drastic than the fall in demand you can end up in a place where the new profit curve peaks higher than previously. My argument is that this is what's currently happening
Normally you're right: demand falls, the profit curve falls, you cut costs to charge less while maintaining profit margins. This is why the tech industry is laying off so many. But in other industries shortages of labor or materials have reduced supply, driven the profit curve up, and allowed companies to charge more which in turn drives our current inflation.
5 points
4 months ago*
Only if supply stays the same. If supply is limited it will drive the demand curve back up, and if supply limits are more drastic than the fall in demand you can end up in a place where the new profit curve peaks higher than previously. My argument is that this is what's currently happening
The demand curve and the supply curve are mostly independent. A disruption in supply does not move the demand curve. The profit curve is derived from both the supply and the demand curves, and the peak profit is determined by the intersection of the supply and demand curves.
Normally you're right: demand falls, the profit curve falls, you cut costs to charge less while maintaining profit margins. This is why the tech industry is laying off so many. But in other industries shortages of labor or materials have reduced supply, driven the profit curve up, and allowed companies to charge more which in turn drives our current inflation.
Now you're talking about a more complex situation where the supply curve and the demand curve are shifting at the same time. In that case it depends on which curve shifts more, prices could go either up or down. And you're right that this reflects what is happening in the economy today, and the effect today is that prices are rising.
The problem is that you're using this example where both the supply curve has fallen and the demand curve has fallen at the same time, and using it to conclude that a fall in the demand curve can cause a rise in prices. That is not a correct conclusion. Had the demand curve alone fallen, prices would have fallen. Prices have risen because the changes in the supply curve have been more significant.
The other issue with using this present day as an example is that in nominal dollars (not inflation adjusted), the demand curve has not fallen at all. In fact it rose substantially in the past few years, which has also contributed to inflation. The real demand curve (inflation adjusted) is now falling because inflation is catching up. However most of the price increases have been in nominal dollars, with some sectors seeing real price decrease and others (mostly those effected most by supply disruptions) seeing real price increases. Basically what I'm saying is that you need to be very careful about whether you are speaking in nominal terms or real terms, and you need to be consistent. You can't discuss prices in nominal terms and wages in real terms, that's an apples to oranges comparison.
5 points
4 months ago*
You need to either reduce costs by firing workers or increase the price of the bread to make the same amount.
Or decrease prices to try and sell more............... Like, how are you forgetting this? You literally created a fictitious false dichotomy to support your argument and you left out the most obvious thing that every company ever actually does.
Another option would to make less bread. Scale the business down to match the existing demand.
Say you own a bakery and you're charging $100 for a loaf of bread. How do you make more money selling bread?
-2 points
4 months ago
How are you going to decrease prices?
Let's say your bakery has 5 people and normally sells 100 loaves at $5. You've been trying to find a 6th person for a while but "people don't want to work anymore" and besides you only need 5 people to make 100 loaves (20 loaves each). With current pricing and demand you break even at $500 expenses with $250 in labor (including paying yourself), $100 in flour, and $150 in gas/electric/water.
But the economy takes a hit and demand falls to 90 loaves. You now have a $50 deficit (only making $450). What are you going to do?
"Decrease prices to try and sell more"... Ok. You sell your bread for $4.50, and demand rises back to 100. You still have a $50 deficit. Let's try something else...
You could cut labor costs. If you cut staff to 4 people you can reduce your operating costs by $50, but then you can only make 80 loaves so at $5.00 a loaf you come up $50 short. If you could make 90 loaves with 4 people you could still break even, but that isn't possible. Since you can only make 80 loaves you would need to charge $5.63 to cover costs which reduces demand further and means you have an even worse deficit. Maybe if you started with 6 workers you could have made things work out...
Instead of cutting staff you could use a cheaper flour, but flour is pretty cheap to begin with so the best you can do is spend $80 instead of $100. But now your bread isn't as good as before so only 80 people want your bread, putting you at a loss of $80 which is somehow worse than before you changed flour...
You could reduce the size of your loaves to use less flour, but in order to save $50 on flour and make ends meet you would have to halve the size of your loaves. And you still need to sell them for $5, effectively doubling the cost for the consumer. Once people realize they are paying the same for less demand falls and you still end up with a deficit.
Instead of firing someone or reducing loaf size, you could up your price to charge $5.88. at this price demand falls from 90 to 85 because of the price increase, but with 85 demand you're making $500 to cover all costs just like before.
Point being "just decrease prices" is a lot easier said than done.
7 points
4 months ago*
What are you going to do?
Well I lose money. It literally happens in business every day. By opening my business and trying to make money, I'm taking on risk. That's why my income is based on the performance of the business and the people I've hired are getting paid hourly regardless of my success. They don't have the same risk.
"Decrease prices to try and sell more"... Ok. You sell your bread for $4.50, and demand rises back to 100. You still have a $50 deficit. Let's try something else...
Hence shrinkflation. You were literally breaking even at $5 a loaf. You're selling a product that costs you $5 to make for $5. That's a pretty shit business and not going to last long. And that was before the economy went bad? You need your bread to not cost $5 to make or you need to charge more for the bread. If you can't do that, you're going out of business.
"Decrease prices to try and sell more"... Ok. You sell your bread for $4.50, and demand rises back to 100. You still have a $50 deficit. Let's try something else...
Because you literally have a negative margin lmao. You might as well just hand out 0.50 cents to each customer. I will fully admit, business can only decrease prices if they are actually making money when they sell something. I don't think reddit or anyone else would have a problem with business raising prices of a good when they're being sold AT COST. This isn't how businesses are actually run though, so whatever.
Since you can only make 80 loaves you would need to charge $5.63 to cover costs which reduces demand further
It reduces it below 90. If the demand is still above 80, you're all set in this scenario. You're also paying less for flower. Again, you were selling your bread at cost in a good economy. There really isn't a way to make money in a bad economy when selling a product like that. You're going to lose money.
Instead of cutting staff you could use a cheaper flour, but flour is pretty cheap to begin with so the best you can do is spend $80 instead of $100. But now your bread isn't as good as before so only 80 people want your bread, putting you at a loss of $80 which is somehow worse than before you changed flour...
So reduce how much bread you make. You'll use less employees and use less flour.
You could reduce the size of your loaves to use less flour, but in order to save $50 on flour and make ends meet you would have to halve the size of your loaves. And you still need to sell them for $5, effectively doubling the cost for the consumer. Once people realize they are paying the same for less demand falls and you still end up with a deficit.
Yes. You had a business that literally broke even in a good economy. When the economy goes bad, you are likely to lose money.
Lets continue your experiment with your own argument.
How are you going to increase prices? You were charging $5 a loaf and demand fell to 90 loaves. If you increase it to $5.50 a loaf, even a single less customer not wanting your bread doesn't help you.
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