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Economics & Profit

Published by Brock Henderson in Business · 2/2/2021 17:43:47
Tags: economyinflationbusiness

There are a number of politicians in the U.S., and possibly the world, who are in favor of raising the minimum wage to $15 per hour.  On the surface, the typical consumer is thinking:  Great!

On the one hand everyone is certainly grateful for more money in their weekly pay, and I don’t blame them.  What they don’t realize is that the company they work for must raise their prices to cover that increase.  For example:

(The example doesn’t include any of the incidentals incurred by the business on behalf of the employee, such as health insurance, retirement benefits, and the like.  This typically runs between 15% and 25% of total expenses.)

Assume for a moment that a bakery has 20 employees, each being paid $10 per hour – that’s $8,000 per week.  If the minimum wage is raised to $15 per hour, then that’s $12,000 per week.

Clearly, any business must make a profit to stay in business, so the bakery raises the price of bread.  Now, the grocery store has an increased expense of bread, and of labor.  So, they have to raise the price of bread, which the consumer has to pay.  

Meaning their pay raise is eaten up by increased prices in the grocery store, the gas station, restaurant, and everywhere they shop.  Each business has to raise their prices to make a profit and stay in business.

You may think that the huge international companies, the oil and gas industry for example, makes billions each year, why should they raise their prices.  Most businesses in the U.S., (including huge oil companies), only make a pure profit of 10% or less of revenue.  While 10% of a billion is 100 million, which is considerable, they still need that to show investors that they are successful, and therefore a solid company to invest in.  

If a company is successful, investors will purchase stock in the company, and the company will grow.

If a company is losing money, not only will investors not buy stock in the company, but those who have stock in the company will start selling.  That is bad news for the company, and potentially for the industry as well as the stock market in general.

If people lose confidence in Big Company, (BC for short), then other investors in that industry might get spooked, and start selling their stock in a different company in the same industry.  If enough people are spooked, it could have an impact on other companies not in the same industry, and those shares drop in price as well.  

So don’t begrudge any BC for making a profit, even if it seems unseemly, every business must make a profit to stay in business.  So . . .

Profit is Good
Inflation is Bad

Questions or comments gratefully accepted and appreciated.

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