"An increase in the minimum wage will raise workers' incomes, which will increase aggregate demand, which will increase output and employment. So would an increase in union wages."
I remember hearing that argument a lot in the 1970s. You don't hear it as much nowadays, but it still lives on in the underworld of economic ideas.
It's (usually) wrong; but it's not a stupid argument. And you can't dismiss it just by drawing a downward-sloping labour demand curve, and showing how an increase in wages will cause a movement up along that demand curve, to a point with lower employment. The whole point of the argument is that an increase in aggregate demand will shift the labour demand curve to the right.
And (most) firms (nearly) always want to expand output and employment. What constrains firms from doing so is not that wages (and other costs) are too high to make additional sales at current prices unprofitable. What constrains firms is demand. They want to sell more output, and would be able to hire the extra labour needed to produce more output. They just can't find the extra customers to buy more output.
Ask any firm this question: "If I could bring you more demand, at your existing price and quality, would you be able and willing to produce more and sell more?" Most would answer a very enthusiastic "Yes!". That's why they spend money on advertising, for instance.
When I put down the textbook and look out the window I see a world where output and employment are (nearly always) constrained by demand, not by supply. So it seems very plausible to suppose that an increase in wages across the economy, if it raised aggregate demand, would increase output and employment, even if it did raise costs a bit. You wouldn't want to raise wages too much of course. If you did raise wages too much so that marginal costs increased above the price of the good, it wouldn't work, because firms would no longer want to increase output and employment to satisfy an increase in demand.
So, what's wrong with the argument?
First, if you wanted to increase aggregate demand, why not just use monetary and/or fiscal policy? Why increase minimum wages? Fair enough. But suppose you wanted to change the distribution of income as well? Why not use an increase in minimum wages to increase aggregate demand?
Second, why would an increase in minimum wages increase aggregate demand? The simple argument is that an increase in wages increases people's incomes and if people's incomes rise, their demand will rise. But that simple argument is fallacious. It forgets that capitalists are people too. For a given level of output, which means a given level of income, if wage income takes a greater share, then non-wage income must take a lesser share. You need to argue that the distribution of income affects aggregate demand.
It might. Maybe there's a lower propensity to save out of wage income. Or maybe the velocity of circulation is higher for wage income.
But let's get to the main point.
Start in equilibrium where there is no upward or downward pressure on prices (or where the upward and downward pressures are exactly balanced). That does not mean that supply equals demand. It would mean that supply equals demand if markets were perfectly competitive, but they aren't. Markets are imperfectly competitive.
If markets were perfectly competitive, in equilibrium each firm (and worker) is on its supply curve. Price = Marginal cost (Wage = Marginal disutility of leisure). It doesn't want to sell any more output (labour) at the current price (wage). The economy as a whole is on its aggregate supply curve.
The one great thing about New Keynesian macroeconomics is that it let us think about macroeconomics when markets are imperfectly competitive, and each firm (worker) faces a downward-sloping demand curve. And most firms (and some workers) do want to sell more output (labour) at the current price (wage). The economy as a whole is off its aggregate supply curve. It wants to sell more.
Offered a deal in which demand increases so they can sell more output and labour, but cannot raise prices or wages, most firms and some workers would accept the deal. Aggregate output and employment could rise.
But that's not the deal they are offered when aggregate demand increases. They are offered an increase in demand; they can choose to increase output and employment, or increase prices and wages, or a bit of both. Most will choose a bit of both. And that's the problem.
Starting in equilibrium with no upward pressure on prices or wages, any increase in aggregate demand, output and employment will put some upward pressure on some prices and wages. It doesn't matter how small it is; even if the average individual firm (worker) raises its price (wage) just a little, the positive feedback effect results in an infinite rise in prices and wages.
There is positive feedback because each individual firms and worker cares only about the real price and wage — which means the price and wage relative to other prices and wages. Upward pressure on prices and wages means upward pressure on relative prices and wages. And it's impossible in aggregate for the average firm to raise its price and wage relative to the average price and wage. The attempt by each to do so results in an upward spiral of unlimited speed.
It's the Long Run Phillips Curve that limits the effectiveness of aggregate demand, not the Long Run Aggregate Supply Curve. Both are vertical, but they are not the same curve. The LRAS curve tells you the level of output at which firms and workers would be unwilling to sell more output and labour at existing prices and wages. The LRPC tells you the level of output at which firms and workers would be unwilling to try to raise their relative prices and wages.
If the economy is in equilibrium, at a point on the Long Run Phillips Curve, an increase in minimum wages, or union wages, even if it does increase Aggregate Demand, will not increase output and employment in any sustainable way. Nothing that only increases Aggregate Demand will increase output and employment in any sustainable way.
It's worse than that.
An increase in minimum wages will cause a firm's Marginal Cost curve to shift up. For a given level of demand, an increase in MC will cause an increase in the firm's profit-maximising price. Start in equilibrium, at a level of output and employment where there is no upward (or downward) pressure on prices and wages. So the economy is on the LRPC. Then increase the minimum wage. Now there is upward pressure on prices and wages. The economy is no longer on the LRPC. The LRPC has shifted. We would now need lower output and employment to create an offsetting downward pressure on prices and wages. Anything that increases the upward pressure on prices and wages, for a given level of output and employment, will reduce the sustainable level of output and employment.
Are there any cases where an increase in the minimum wage would cause a sustainable increase in employment? Yes, I can think of three:
1. Suppose aggregate demand is too low, so we are off the LRPC, and there is risk of a deflationary spiral. And suppose that monetary and fiscal policy cannot be used, for some reason. Then it is conceivable that an increase in minimum wages could increase aggregate demand, and bring the economy back to the LRPC, and be the only way to do so. Maybe.
2. Suppose the labour market has monopsony power. Wages are below the competitive equilibrium. There is excess demand for labour at the given wage. Firms won't hire more labour because they would need to raise wages to persuade workers to sell more labour. In this case, an increase in minimum wages would shift each firm's MC curve down, not up. They would respond by lowering prices. For a given level of output and employment, this would put downward pressure on prices. This would shift the LRPC curve in a good direction. But that's a labour market where firms are hungry for workers; not a labour market where workers are hungry for jobs. It doesn't sound much like Canada, on average.
3. This one's weird. Start in equilibrium, at a point on the LRPC where there is neither upward or downward pressure on relative prices and wages. Now suppose that an increase in output and employment would cause downward, not upward pressure on prices and wages. That means the initial equilibrium is unstable. Any small increase in output and employment would cause prices and wages to start falling, and the economy would move down along the AD curve to higher output and lower prices, until it eventually hit the LRAS curve, and prices and wages stopped falling, because nobody wants to sell any more output and labour at given prices and wages. As with all cases of unstable equilibria, the comparative statics have the "wrong sign". Anything that increased upward pressure on wages and prices would shift the LRPC in the good direction.
I could rig up a model that looked like this, if I wanted. Assume some combination of: increasing elasticity of an individual firm's demand curve as aggregate output increases; increasing marginal product of labour as aggregate output increases; downward-sloping aggregate labour supply curve. Anything that causes an individual firm's Marginal Revenue curve to shift up, and/or Marginal Cost curve to shift down, when aggregate output increases.
But we can rule out that last case. It would only be by sheer fluke that any economy found itself in an unstable equilibrium. Almost certainly, the economy would already be at maximum capacity, or else be at zero output.
And in any case, if we were by fluke at that unstable equilibrium, and an increase in minimum wages shifted the LRPC in the good direction, the economy would likely go off in the other direction, towards zero output and employment. The better thing to do would be a sudden burst of monetary expansion, which would cause output to rise and prices to fall.
Worthwhile Canadian Initiative 
Allan: Do you think that firms seek to maximize profit or sales volume (the two are not the same thing)?
Greg: good question. I have read about people advocating this sort of policy.
As a countercyclical policy, to increase Aggregate Demand in times of recession, and to reduce AD in times of boom and inflation, a modified version of this policy could work, at least in principle.
But as a policy to permanently eliminate unemployment, it won’t work. Here’s a simple explanation:
For simplicity assume an economy that has involuntarily unemployed workers, but is stationary. Output, price level, money supply, etc., aren’t changing. Then the central bank starts a new policy. It will pay unemployed workers $10 per hour to do something. (Assume the going wage for employed workers is above $10, so it doesn’t attract workers away from other jobs).
The money supply is now increasing over time, and so AD is increasing over time. That means (eventually) the price level will be rising over time. (If the workers employed by the central bank are producing something useful, that might also increase Aggregate Supply too, which would put downward pressure on the Price level, but this is a one-shot increase in AS, as opposed to the continuously growing AD, so eventually the growing AD would be bigger than any one-time increase in AS, so P would rise over time.)
With the Price level rising over time, the real value of the $10 wage paid by the central bank would be falling over time. Eventually it would get so low that workers quit working for the central bank. When the price level gets so high, and the real value of $10 gets so low, that all workers quit, then the process stops, and we get to a new stationary equilibrium.
Neat idea, but doesn’t work.
Greg: here’s the modified version, for a countercyclical policy, that does work in principle.
Assume otherwise stationary economy (no long-term growth trend) for simplicity, that is hit by random shocks to Aggregate Demand. The central bank offers work at $10 per hour, paid for by printing money. The central bank also imposes a tax on the economy of $1,000 per hour, and it burns the currency collected through this tax.
Equilibrium is where 100 workers work for the bank. That keeps the money supply constant.
Suppose there’s a positive shock to AD, so output and employment rise, and prices rise. Some of the 100 workers quit the bank because they get jobs. Now the money supply starts to fall over time, so AD is falling over time, output and employment start falling, prices and wages start falling, and unemployed workers start returninmg to the bank jobs, until there are 100 workers again.
Suppose there’s a negative shock to AD. Just the reverse. The number of workers at the bank rises above 100, so the money supply starts rising, so AD starts rising, etc.
Actually, this is very similar to the gold standard, if any worker could go off to the gold fields and earn a fixed quantity of gold by panning.
Greg:> Now the wage is not a cost to the business <
Someone else mentioned the low income credit plan. As I said,
Absolutely NOT!! Government is always looking for an excuse to expand bureaucracy, and such economic meddling makes the government bigger and more expensive, and usually has none of the benefits expected. Attempting to boost the minimum wage by government handouts means that employers are less inclined to give the raises that are deserved and are required to make the economy grow.
Allan: “Why should banks be paying for all wages?”
All wages? Nobody said the central bank should be paying all wages. You should at least be polite enough to read what you’re critiquing, that is if you can read at all (a fact not in evidence thus far).
“A little knowledge is a dangerous thing. So is a lot.”
— Albert Einstein
Adam
I was trying to say that the government is not the currency issuer. Neither is the CB. It is not I who does not understand what you guys are saying, but it is you guys who are having trouble understanding what I am saying.
Allan: “it is you guys who are having trouble understanding what I am saying.”
Hard to argue with that.
” You raise the prices once the volume is where you like it, obviously after you are showing profit. This isn’t a maximizing of anything, but actually a limiting of the growth to the confines of the facilities, and the confines of life.”
This does not happen in reality. Care to give an example of an industry or company that has done this? Or even a product line that has done what you just said?
The thing is, that the most superficial course in economics should render the student with a firm comprehension of what money is, and yet almost all economists think that money is a creation of a central bank.
Money existed long before any central bank, and the central bank is an outgrowth, or an adendum to the bank/cash system. When you take a loan from a bank, the bank does not go into its vaults and give you paper that the CB printed. It creates an account. This account is then transferable by cheque or other order to other accounts. Money is a creation of the local bank just as it has always been. Money is the credit of the local bank, and a bank draft is as secure as any other means of money conveyance providing the credit of the issuing bank is acceptable to the depositor’s bank. What really gets deposited is a loan from the depositor’s bank to the issuing bank. Then came the coins and printed notes, meaning that the bank no longer had to prepare a draft every time someone wanted some “money” to carry with them. Then the banks decided to get a central “printer” to issue all the printed notes, and to “lend” these notes to the banks so that the interbank accounts could be cleared through this printer. Then people got the stupid notion that the printer was actually a bank and was actually creating money when it printed the notes.
Yes it does not happen often, and certainly not often enough. My brother was a student of your school. He felt that higher profits should mean lower prices, and so was completely uncomfortable in hiking his prices once his volume got comfortable. He felt that he would be letting his clients down or gouging on his clients, but this mindset that business should always continue to grow led to his death. Businessmen should grow their business until they are comfortable with the volume, and then raise the prices to limit the growth.
“My brother was a tax accountant. The last time I saw him alive he told me that the next year he was going to double his prices so as to shove off some business. I was quite angry with him, and asked him why he had not done so 4 years prior when he had started to have health problems? He was dead a month later from stress. I am not keen on maximizing your business potential, whether it be profit or volume. ”
This anecdote is really very vague. Was your brother working his own firm, or was he part of a big company? secondly, I don’t see how this shows that prices are increased once you make profit. As you said, he got rid of some business that probably wasn’t making him money. Probably a bad way to do it. And I also believe your brother’s heart problems stemmed from more than just stress at work. There were more factors. Overall, to make this your anecdote, you were very vague in the info you gave us.
And as you said, higher prices slow down sales.
Allan, what the hell is the “local bank?” Seriously, it seems to me you are substituting the term central bank for local bank.
“When you take a loan from a bank, the bank does not go into its vaults and give you paper that the CB printed. It creates an account. This account is then transferable by cheque or other order to other accounts”
Actually, it does. No, it doesn’t get the paper that the CB printed. That would be dumb. But it does get the money that depositors have given the bank in the first place. That is why deposits are necessary and if too many people withdraw their money from a bank, that is what is meant by a “bank run.” Otherwise, northern trust wouldn’t have had that issue where many people were withdrawing their money all at once. That wouldn’t even matter as long as people were taking out loans.
” Then came the coins and printed notes, meaning that the bank no longer had to prepare a draft every time someone wanted some “money” to carry with them”
Coins, printed notes, and hard currency came before credit. Money by definition is simply a medium of exchange. Seashells, gold, silver, copper, cattle, all of these things were once used as money.
The question then Allan is where did the local bank get that money to give out the loan? Where did the money originate? A loan is not a creation of money, but simply a transfer of money from one bank to another.
See Allan, your brother is going on with the law of demand. Higher prices means less sales. Yet, you deny that this is ever true. You instead want to call it “lower growth.”
Also, slowing down sales is the same as controlling it. There is no difference. Raising prices decreases growth, while lower prices increases growth. That is controlling it! And by admitting to this, you are also agreeing with the economists by saying that increase prices lower demand. Because increasing prices lowers the growth.
Unless you see a huge difference between growth and sales.
Secondly, you argue that firms focus more on volume, instead of how much they make per unit. That is not universally true. There are industries that do not sell a lot of volume, yet make a ton of money. Take the Bentley of cars. They don’t experience high sales volume. But they do make a lot of profit per car. There is such a thing as low sales volume and high profit. And there is the exact opposite.
A great example is dog food. IAMS vs Ol’roy(wal-mart brand). Ol’roy has a high sales volume compared to IAMS dog food. In terms of quantity sold, Ol’roy wins hands down. But the amount of money made between the two is relatively the same. IAMS has a better profit margin than ol’roy, despite the fact that ol’roy sold more.
In other words, you can not make a general claim Allan, that sales volume is the only thing that matters, or that ALL businesses only care about selling a lot.
I’ve deleted this comment. Allan, dial it back. SG
Another message deleted. Three strikes and you’re out, Allan. SG
Allan: “See, you guys have been under the impression that prices go lower to get more sales. That just doesn’t happen ever.”
That’s pretty obviously wrong. At some price (call it Pmax) Q will $0; nobody is going to pay $10^9 for a hamburger, for example. Also at some price (call it Pmin), the produced simply won’t bother or can’t produce anything (e.g she can’t afford to buy ground beef to make any hamburgers). So there is a supply curve. Now, granted between Pmin and Pman it might do funny things like have discontinuities, or slope the ‘wrong’ way, but it does exist and price does matter.
Allan: “The right price will get you more sales faster. The higher price will get you more sales slower.”
There might be prices ranges where this is true, but it simply and pretty self-evidently is not true always and everywhere.
I think what Allan has in mind is a model where there are lags in the response of quantity demanded to price. Or a partial adjustment model. Something like Q=f(P), and deltaQd=b(Q-Qd).
Doesn’t make any real difference of course. Just define MR as the change in the Present value of Total Revenue, and MC as the change in the PV of Total Cost.
Probably the most important thing that learning economics teaches students is the necessity of abstraction. Otherwise all you see is the blooming buzzing confusion, and cannot really analyse anything theoretically.
Actually Allan I think you can show your points less controversially if you require boundary conditions for the supply and demand curves… even if the MC curve is upward sloping and the MR curve is downward sloping.
The key is that at P0 (p naught) both the supply and demand curves intersect at Q0, the quantity already purchased for the production = at minimum the price its inputs were purchased for.
That means that by fundamental calculus that the demand curve must be increasing over some Price interval if they are to intersect again… which is the whole theory behind micro. Even if demand decreases at some exponential rate proportional to exp-(p-p0) over the longer price interval the most desirable supply curve still is one where the intersection point on the demand curve is through the most inelastic section (most horizontal section… or where dQ/dp = 0) because that is where profit is maximized. Every business, if they were on objective pursuit of profits, would be subject to this goal.
Now I recognize that employee wages affect the slope of the supply curve so if they are raised the slope decreases and profit is lost (bad); however, if employees can generate technology, expertise, efficiency or even luck (hypnosis, high pressure marketing, etc) in which the supply curve’s slope increases… profit is gained. And, if a portion of the increase is paid to employees the net result is everyone gains … except maybe the purchaser which is a separate conversation.
Further, because this is an equilibrium model with boundary conditions there is no shifting up and down the demand curve at the same point in time and space… that doesn’t even make sense anyway….
And even better, this doesn’t even include aggregate demand stretching if the wage increase passes employees to a threshold where they can now buy the product…..
The problem with economists, no offense Nick, is that you throw around differential equations without ever really learning calculus… but if you did you might have a hard time propagating this supply side rhetoric with a straight face
QED
No offence taken Rick. I was never that great at math, anyway!
But you totally lost me on that comment.
For starters, what have you got on the vertical and horizontal axes? P on vertical, and Q on horizontal (economists’ convention, for obscure historical reasons)? Because some of the things you say, like “…where the intersection point on the demand curve is through the most inelastic section (most horizontal section… or where dQ/dp = 0)…” aren’t making sense to me.
And: “…there is no shifting up and down the demand curve at the same point in time and space… that doesn’t even make sense anyway….”
Yes it does. Quantity demanded depends on things other than price, and if one of those other things were different right now than it is in fact right now then the demand curve would be in a different place than it is right now. We call that a “shift”.
“The problem with economists, no offense Nick, is that you throw around differential equations without ever really learning calculus… ”
and the biggest problem with commenters in the blogosphere and, for that matter, with the vast majority of the western world’s population is that you throw around critiques of economic theory (and of economists) and economic policy proposals without ever learning the first thing about economics.
“Yes it does. Because your theory dictates that the prices will naturally become lower over time as the firm tries to get to the perfect price. I am telling you that the prices are more apt to get higher over time as the firm seeks the perfect volume.”
No they do not. Take the video game industry for example. Accounting for inflation, the price of consoles and games themselves have gotten lower over time. The nominal price has stayed the same, but the real price has actually decreased. 10 years ago, a new blockbuster title for a video game was $50. Today, that price remains the same. Real prices do decrease over time.
“If you can’t sell it at the price you decided on, you scrap it a move to the next item”
This is not true either. The Iphone again is another example of this where you are wrong. Or hell, even the PS3. When the PS3 came out, it was priced at $600. It did sell, but not a lot. The volume of sales was actually quite low. Today, the price is now half that. Sales volumes have increased since then, and there has been a natural progression towards the lower price. And their sales volume, as well as their consumer base has increased over time. Same thing goes for the Iphone.
If what you say is true Allan, we should see product cycles have increasing prices over time. Can you name a product(not a service like what your brother did) that has what you say happens in the real world? I mean, if what nick, myself, and the rest of us say is wrong, you should be able to provide an example very easily.
In reality, companies lower their price because they know some people did not choose to buy their product simply because of the price. That is why Henry Ford lowered the price of cars compared to his competitors. That is why with every single product, in order to target a new market, they lower the price.
“No it doesn’t. And in the macro, what is paid in wages comes back to business in sales, affecting the demand curve. Look at my coke example. The hourly expenses of the store were easily covered with the sales as long as there were sales.”
In the macro, anything paid comes back to business in sales. What is paid in costs comes back to the business in sales. Everything goes back to sales. But an increase in money received by a consumer does not mean more money will be spent. If that was so, then the stimulus plans would have worked.
” You set your price where you think you will get the best growth, and then ride that baby until the sales volume is satisfactory to you before you start to monkey with the price.”
no, you don’t do that. This ignores your competitors, and ignores the outside world. No successful company does this, and that is not how they determine the price of their product.
and the biggest problem with commenters in the blogosphere and, for that matter, with the vast majority of the western world’s population is that you throw around critiques of economic theory (and of economists) and economic policy proposals without ever learning the first thing about economics.
-Confucius
The theory is that prices will come down until the marginal profit is zero, at which point the company will no longer be interested in selling any more. This theory is necessary to give an up sloping supply curve to the macro.
There are no businesses that have a zero marginal profit.
All businesses want to sell more and all businesses know that their sales volume is not directly and immediately affected by price.
The theory of supply and demand is illogical
“The theory is that prices will come down until the marginal profit is zero, at which point the company will no longer be interested in selling any more”
No, that is not the theory.
“The theory is that prices will come down until the marginal profit is zero, at which point the company will no longer be interested in selling any more. This theory is necessary to give an up sloping supply curve to the macro.
There are no businesses that have a zero marginal profit.
All businesses want to sell more and all businesses know that their sales volume is not directly and immediately affected by price.
The theory of supply and demand is illogical”
No, because as you argued with me before, as demand increases, prices decrease. that is the opposite of what supply/demand says. But now you are arguing the opposite, or what conventional economics says. As demand increases(sales), so do prices. As you said, once sales volume gets high enough, the prices of the good also increases. So you are in other words agreeing with conventional economics.
And no, not ALL businesses believe that sales volume has no connection to price. There are certain industries where price is the BIGGEST factor in whether or not a sale will be made. Let us use the example of the Brazilian steakhouse, since as you said, “all businesses” so one example will make your statement wrong.
The one near me has most of their customers, and most of their sales volume come when they lower the price. This usually comes in the form of a 50% off discount. Instead of paying $42 for dinner, it is now $21 a person. This doesn’t include drinks or dessert. Now, according to you, I should see these sort of deals stopping soon. This is because they will slowly ween them away because they already have sufficient volume. But they have been in business for many years, and they have yet to do this.
And the theory of supply and demand assumes that as demand increases, so do prices. The theory of supply says that as supply increases, prices decrease.
Can someone please put this post into something of a logical and focused argument that I can respond to.
One observation as I watch this debate from a somewhat detached distance.
If you were to attend two introductory classes, Economics 101 and Marketing 101 – and faced with the same problem – you might see two different analyses.
The confusing aspect is that it appears to me that Allen is combining/mixing up two different approaches – without a complete and fully developed understanding of either. So, its like an oil/water emulsion – ok if you’re a salad dressing, unsavoury if you’re a slick headed for the Louisina coastline. Best just to leave it be.
Allan: “All businesses want to sell more and all businesses know that their sales volume is not directly and immediately affected by price.”
I wish that were true. Then I would start a lemonade stand, and after a few days, when I was selling a few glasses a day, jack my price up to $1 billion per glass, then retire on the proceeds.
Just: wise comment.
Nick: “I wish that were true. Then I would start a lemonade stand, and after a few days, when I was selling a few glasses a day, jack my price up to $1 billion per glass, then retire on the proceeds.”
You remember the joke about the door-to-door brush salesman?
Customer: “How much are you selling your brushes for”?
Salesman: “$1 million dollars.”
Customer: “You’re not going to sell many brushes at that price!”
Salesman: “That’s fine, I only need to sell one.”
“MR and MC do not ever cross”
“Supply is always excess to demand”
Oh my…..
Break out the tinfoil hats people.
“Double the minimum wage, attach it to the GDP/capita and put a sliding tax on corporations so that the bigger they are, the more tax they pay. Then you will not have business eating business but business fostering business. There is more than enough to go around, but there just is not a fair distribution.”
Um, there is already a sliding tax on corporations that they pay way more taxes than the individual. Hell, 50% of all tax that comes into the united states comes from the top 10% of individuals.
“Not in that severity, but the sentiment is there. The rat race that is the western economy that is fed by the notion of ever increasing production and ever increasing efficiencies is not good for anyone. There is no benefit to big business getting bigger. The businessman should have a plan to limit his volume once it is adequate, but by what is taught in business school, you just run faster until you find the elusive zero marginal profit.”
What? Never. Why should we limit on how much you succeed? Ever increasing production and ever increasing efficiencies is good for EVERYONE. And the business school never teaches about zero marginal profit. That is never taught. Who here mentioned that businesses work towards zero marginal profit? And there is no such thing as “the perfect volume” unless you want to call it infinity.
Secondly, I thought of this. Higher prices control growth, or in other words, lower it. The higher you place your price, the more negative growth you receive. Therefore, raising minimum wage would slow down growth in some way. In other words, people buying labor. Unless you can show a difference between wages and consumer prices. Unless businesses are not consumers of labor.
“Not in that severity, but the sentiment is there”
So you believe Nick’s argument can work? Ok, let us not say 1 billion, but let us use the coke example. If I increase coke prices from $1 for a 20 oz bottle, to say, $50, I should not see any immediate decrease in selling? For how long? one day? One week? You will have to give an exact timeline for “immediate”
Could someone please render this post into an argument against what I have said?
Let me re-post my comment into a few sentences. I will get the key points:
1. If raising prices lowers growth, then I can conclude raising minimum wage lowers growth.
2.You said that the sentiment is there with Nick’s example. Are you saying it could work? If I increase the bottle of coke from $1 to $50, will I see the same amount of sales as I did before the increase? And for how long?
3. It is not true that there is “perfect volume” or even that we should teach that we should limit our potential. I wonder Allan, do you teach your children that? That they should stop at a certain point? What about in the macro? Should a country limit on how much GDP it should obtain?
Sorry… yes I have Price on the horizontal axis and Q on the vertical, my point is that demand is increasing with price somewhere– if the postulate is that the supplier will not sell if the demand is at a price below the input price– even if that demand increases at large P. This will lead producers to try and find that point, wherever it is.
The reason for this is that the supply curve exists because the demand curve exists and the supply of the product is the demand for the product if it can’t be sold…. whoever produces it is stuck with it. Again this is only true if the postulate is that there will not be a loss taken (which I sort of believe when hearing peoples mentality about selling houses, old hockey cards etc.)
That is essentially what Allan is saying with the coke example, sell less volume for more cost for more by exploiting what amounts to be a demand step function (whether it is natural or artificial) with emotion based marketing, aggressive sales, hypnosis, incomplete market information or insufficient competition whatever… the increase in demand can theoretically happen anywhere on the price axis which leads business to search for it
and the reason I say there is no shift to the supply curve is that it is stuck with a specific supply at the original price and that isn’t going to change, unless something happens to change the price to supply just one unit. The slope can change, even discontinuously, but there can be no shift…. its a boundary condition….
Oh and what I meant earlier was if the demand function := fd(p) than the inelastic point is where d(fd(P))/dQ = 0 not dP/dQ = 0
1.I disagree that the minimum wage is the foundation price for everything. How is the cost of a can of coke related to the minimum wage? How is the cost of maintaining this website related to the minimum wage? How is the cost of maintaining your kids related to the minimum wage? You can say it is based off of consumer spending, but the minimum wage doesn’t cover all consumers. If you are not considered an employee of a company(independent contractors), then you are not covered under minimum wage. A lot of companies hire people this way to avoid paying benefits, and even minimum wage to their employees.
2. With your explanation of the minimum wage, I do not believe that scenario to be true. So the sentiment doesn’t exist, and you have overall agreed with nick that prices actually do matter, and that price can have an immediate effect on volume. Unless you can provide some sort of equation that can help us determine how much one dollar affects how much time we get from having the same sales as the original price.
But that is interesting for you to say that. A $4 jump will yield the same sales for one month. Why do you say that?
3.How do you objectively define a comfortable income? Also, just because it provides more stress, doesn’t mean it is a bad thing. Hiking the prices might not be worth it. It depends on how loyal your customers are. If you have bad brand loyalty, then people will simply switch. It won’t lower stress by simply increasing prices. You will have the same amount of stress for a certain amount of time. And reality disagrees with you. I believe the owner of wal-mart, the simpsons, family guy, new york life, and many other companies are wealthy because of expansion and would disagree with you(to be fair, new york life is not owned by any one person. Policyholders are owners of the company).
Now are you arguing, or just asking? Because if you’re arguing, you should give some reason for your position/beliefs, and if you’re just asking, you should try really understanding what it is that I have already said before you ask me to expand.