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This is correct in almost all cases (outside of highly commoditized goods) and it's crazy how people don't understand it. It's why the price of McDonalds doesn'

by enjo 5y ago

This is correct in almost all cases (outside of highly commoditized goods) and it's crazy how people don't understand it. It's why the price of McDonalds doesn't increase when minimum wage does. McDonalds is already charging as much as they can for a Big Mac (where stores averages a 40% margin). Increasing minimum wage means that margin goes down a bit, not that prices increase. If they could increase prices they already would have.

stale2002 5y ago
So you just reject the field of economics entirely? Like, lets say that the government adds a 20$ tax/fee on fast food, per burger sold. Clearly McDonalds would no longer be able to sell burgers for 4 dollars. Thus price would increase. Or supply of burgers would go down (thereby only leaving higher priced burgers in the market).
EricE 5y ago
Fast food prices have increased greater than inflation for some time: https://www.delish.com/food/news/a39265/fast-food-menu-price-increases-from-2002-to-2013/ https://www.delish.com/food/news/a39265/fast-food-menu-price... Thinking that labor costs do not impact product costs is grossly ignorant.
- tut-urut-utut 5y ago
  > Thinking that labor costs do not impact product costs is grossly ignorant. No one is arguing that labor cost doesn't impact product cost, but the fact is that in general it doesn't impact product price. Or to put it the other way: can you imagine a business not increasing product price as much as they can, regardless of the product cost, as long as the supply is matched? If they can increase the price, why would they wait for cost to rise before doing so? The outcome is that business/landlord already charge as much as they can, and increased cost doesn't change the product price, since they already chareg as much as they can.
  - syshum 5y ago
    You seem to be missing the fundmental problem here Sure not all prices are infinitely elastic, but if Labor costs out strip the ability to prices to absorb them that do not mean the business simply magically makes them go away, no that business goes bankrupt and wages go to $0. Owners / Investors demand a return on investment, if the market average is 8%, and business x is only returning 4% why would an investor continue to keep their capital there? Worse still if inflation is 3% and the business is only returning 2% the investor is LOSING MONEY by keeping their capital in the business, better to cut their losses and move on This mythical position where by businesses just "absorb the cost" because the prices are not elastic is pure fantasy
yunohn 5y ago
> This is correct in almost all cases (outside of highly commoditized goods) and it's crazy how people don't understand it. What are you on about? Of course McD will change prices relative to input expenditure. You can even see this across all the countries they serve. If there were to be a significant impact on margin, they can increase prices. All fees are passed onto customers, that’s how you calculate profit margins.
- colinmhayes 5y ago
  You're not really right at all. The percentage of fees that are passed on is completely dependent on elasticity. >All fees are passed onto customers is not even close to correct.
  - yunohn 5y ago
    Most business only absorb the minimum amount of margin loss they can, and for very short terms. No business aims to operate at a loss unless propped up by outside investments. All businesses will increase prices to maintain the profits they need, up until what the market will bear - which is why taxes will also not end up pushing it too far, the gov isn’t stupid.
    - colinmhayes 5y ago
      Again, it depends on elasticities. Businesses can't just raise prices and expect demand to remain at old levels. People quickly substitute goods and services in the face of price changes. In the case of mcdonalds price increases cause people to cook or eat food that doesn't need to be prepared. In the case of rent, supply is fixed, so landlords are already charging monopoly prices. There is very close to zero wiggle room for landlords to raise prices.
      - yunohn 5y ago
        > There is very close to zero wiggle room for landlords to raise prices. This is disproved very easily by reality - most places have increasing rent YoY. Same goes for house prices. Because of low supply and large demand, like you say, landlords can charge monopoly prices. Not sure why you claim they don’t go up?
syshum 5y ago
Except is does.. and no they do not charge "as much as they can" for the big mac. Prices go up all the time, just in the last year the price of the Big Mac has increased a lot due to input costs, including labor, going up you are simply wrong
Karunamon 5y ago
McDonalds is a bit of an outlier here; they have incredibly predictable food costs due to high levels of standardization and a worldwide inventory network. The franchisees have a certain amount of leeway on pricing, some of which is dictated at the corporate level down, but it's based on bona fide expenses. If local regulatory conditions cause your labor cost to go up, they are absolutely allowed to (and will) raise prices to compensate.

by enjo 5y ago

stale2002 5y ago

So you just reject the field of economics entirely? Like, lets say that the government adds a 20$ tax/fee on fast food, per burger sold. Clearly McDonalds would no longer be able to sell burgers for 4 dollars. Thus price would increase. Or supply of burgers would go down (thereby only leaving higher priced burgers in the market).

EricE 5y ago

Fast food prices have increased greater than inflation for some time: https://www.delish.com/food/news/a39265/fast-food-menu-price-increases-from-2002-to-2013/ https://www.delish.com/food/news/a39265/fast-food-menu-price... Thinking that labor costs do not impact product costs is grossly ignorant.

tut-urut-utut 5y ago
> Thinking that labor costs do not impact product costs is grossly ignorant. No one is arguing that labor cost doesn't impact product cost, but the fact is that in general it doesn't impact product price. Or to put it the other way: can you imagine a business not increasing product price as much as they can, regardless of the product cost, as long as the supply is matched? If they can increase the price, why would they wait for cost to rise before doing so? The outcome is that business/landlord already charge as much as they can, and increased cost doesn't change the product price, since they already chareg as much as they can.
- syshum 5y ago
  You seem to be missing the fundmental problem here Sure not all prices are infinitely elastic, but if Labor costs out strip the ability to prices to absorb them that do not mean the business simply magically makes them go away, no that business goes bankrupt and wages go to $0. Owners / Investors demand a return on investment, if the market average is 8%, and business x is only returning 4% why would an investor continue to keep their capital there? Worse still if inflation is 3% and the business is only returning 2% the investor is LOSING MONEY by keeping their capital in the business, better to cut their losses and move on This mythical position where by businesses just "absorb the cost" because the prices are not elastic is pure fantasy

yunohn 5y ago

> This is correct in almost all cases (outside of highly commoditized goods) and it's crazy how people don't understand it. What are you on about? Of course McD will change prices relative to input expenditure. You can even see this across all the countries they serve. If there were to be a significant impact on margin, they can increase prices. All fees are passed onto customers, that’s how you calculate profit margins.

colinmhayes 5y ago
You're not really right at all. The percentage of fees that are passed on is completely dependent on elasticity. >All fees are passed onto customers is not even close to correct.
- yunohn 5y ago
  Most business only absorb the minimum amount of margin loss they can, and for very short terms. No business aims to operate at a loss unless propped up by outside investments. All businesses will increase prices to maintain the profits they need, up until what the market will bear - which is why taxes will also not end up pushing it too far, the gov isn’t stupid.
  - colinmhayes 5y ago
    Again, it depends on elasticities. Businesses can't just raise prices and expect demand to remain at old levels. People quickly substitute goods and services in the face of price changes. In the case of mcdonalds price increases cause people to cook or eat food that doesn't need to be prepared. In the case of rent, supply is fixed, so landlords are already charging monopoly prices. There is very close to zero wiggle room for landlords to raise prices.
    - yunohn 5y ago
      > There is very close to zero wiggle room for landlords to raise prices. This is disproved very easily by reality - most places have increasing rent YoY. Same goes for house prices. Because of low supply and large demand, like you say, landlords can charge monopoly prices. Not sure why you claim they don’t go up?

syshum 5y ago

Except is does.. and no they do not charge "as much as they can" for the big mac. Prices go up all the time, just in the last year the price of the Big Mac has increased a lot due to input costs, including labor, going up you are simply wrong

Karunamon 5y ago

McDonalds is a bit of an outlier here; they have incredibly predictable food costs due to high levels of standardization and a worldwide inventory network. The franchisees have a certain amount of leeway on pricing, some of which is dictated at the corporate level down, but it's based on bona fide expenses. If local regulatory conditions cause your labor cost to go up, they are absolutely allowed to (and will) raise prices to compensate.