tag:blogger.com,1999:blog-4290163255778893789.post1755123817439118714..comments2024-03-16T05:19:07.061-04:00Comments on Retirement Blues: That Aggregate Demand ThangJazzbumpahttp://www.blogger.com/profile/07337490817307473659noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-4290163255778893789.post-38630899502288663092011-11-20T10:21:50.932-05:002011-11-20T10:21:50.932-05:00Tux -
Yeah. Good points.
Cheers!
JzBTux -<br /><br />Yeah. Good points.<br /><br />Cheers!<br />JzBJazzbumpahttps://www.blogger.com/profile/07337490817307473659noreply@blogger.comtag:blogger.com,1999:blog-4290163255778893789.post-8571871515767390922011-11-20T10:20:36.637-05:002011-11-20T10:20:36.637-05:00nanute -
It's hard to say what the exact assu...nanute -<br /><br />It's hard to say what the exact assumptions are. Almost certainly, though, they are assuming a very low sensitivity to price.<br /><br />The price/profit relationship relates to current margin. I just ran some made-up numbers and found this:<br /><br />cost price profit Margin<br />15 16.67 1.67 11.13%<br />15 18.337 3.337 22.25%<br /><br />Here, a 10% price increase doubles the unit margin. This assumes no cost increase associated with the price increase. For the total profit to double, there would have to be no loss in sales.<br /><br />At lower margins, the 10% price hike more than doubles margin. At higher prices, the margin increase is less. <br /><br />Cheers!<br />JzBJazzbumpahttps://www.blogger.com/profile/07337490817307473659noreply@blogger.comtag:blogger.com,1999:blog-4290163255778893789.post-58353983446841146002011-11-20T05:21:11.843-05:002011-11-20T05:21:11.843-05:00Bad Tux,
Great point. I've noticed that the co...Bad Tux,<br />Great point. I've noticed that the company that I work for just increased pricing to distributors without an expectation of increased demand. The question in my mind, is where is the break even point if sales decline as a result of increasing prices? I recently participated in a work related exercise where it was stated that a 10% increase in price can result in a 100% increase in profit. Is this possible? Does it depend on the product being inelastic, and does it assume that there will be no decline in sales?nanutenoreply@blogger.comtag:blogger.com,1999:blog-4290163255778893789.post-2559473602830329842011-11-17T18:34:58.532-05:002011-11-17T18:34:58.532-05:00The market doesn't find that price for a diffe...The market doesn't find that price for a different reason, actually -- because of <i>price stickiness</i>, which I've covered on my own blog from time to time. That is, a business will <i>not</i> sell goods for less than it cost to produce them. A business which does such a thing is called a <i>former</i> business. Instead, a business will accept lower volume in order to remain profitable selling at a higher price than demand would otherwise justify, and because the whole <i>point</i> of a business is profit, will lay off all workers not needed to sell that reduced volume of product, which in turn will <i>further</i> reduce demand at the price point needed to remain profitable. <br /><br />In addition, resource prices are dominated by <i>capital equipment</i> costs, not by manpower costs. That capital equipment must be amortized over the production lifespan of the capital equipment. If an aggregate crusher lasts ten years, its cost must be amortized over the entire lifespan of the copper mine. If the demand for copper and thus the amount of copper shipped plummets, this has the perverse effect of <i>increasing</i> the cost of copper, because that sunk cost must be paid for regardless of how much copper gets shipped. Assuming we already had a competitive free market and thus all copper producers were already running at the least amount of overhead needed to be profitable, what you'll have is that an *entire industry* can raise its prices due to reduced demand.<br /><br />So add in price stickiness plus resource price increases, and there you go. This isn't rocket science. This is Business 101, and, specifically, rule #1 of business: "The purpose of a business is to make a profit." Duh!<br /><br />- Badtux the Snarky Economics PenguinBadTuxhttps://www.blogger.com/profile/01345749557330760251noreply@blogger.com