Let’s say you own a business making little vases that allow you to wear flowers in your hair if you go to San Francisco. We have looked at this business model before. You decide that you have to make money and choose a paltry 2% profit margin. After costs, taxes, cost of goods sold, etc., you decide that all those costs equal $1. You set a sell price of $1.02. That means you will make two cents for every vase.
Are you with me? That means if you sell 100 vases you made two dollars.
Now imagine that because the government restricted the supply of raw materials, the cost of your vases went up to $2 each. You still want to make your lousy 2% margin, so you now charge $2.04 for each vase.
If you sell 100 vases your profit will be $4. Your profit margin did not change. There was no windfall profit. Your percentage did not change. You just want to make the same percentage profit as before.
Now we shall put another layer on the cake. What if no one traveled to San Francisco for a couple of years because of, let’s call it a pandemic. After restrictions are lifted everyone wants to go. Demand for you little vases doubles, even at the higher cost. Now you sold 200 vases. At the same profit margin, 2%, you now made a whopping $8.
I ask again is this windfall profit or just capitalism at work? Should you take less profit because your costs went up or demand increased? Should you never earn more than $0.02 per vase?
I’m just asking for a friend in the oil business.
3 comments:
Love your take on "greedy capitalist". Town hall on Bret Bair last night was excellent. Tim Ryan agrees with Biden on oil companies should just suck it up and turn loose all their product plus lower prices. What about the other end of all the stockholders who supplement their income with dividends. Then he went on to greedy rich people. But No One ever mentions where they get all their tax cuts from. They don't appear out of thin air. Congress writes all the Tax Laws. So if they take advantage because they can hire people who are versed in reading that they why shouldn't they take advantage. People in Congress take advantage but the really rich shouldn't?
Loved the song and SF was beautiful.
I didn’t ven talk about what would happen to our little company when they try to borrow money or raise capital through shares if there profit margin shrinks because they want to keep the same raw profit, not margin.
This is what happens when politicians and academics make economic policy for nstead of business people.
Or socialists.
Post a Comment