Thursday, March 13, 2014

Yep, higher prices mean less buying...

Mid-terms are approaching, and, from what I'm hearing, the President's party isn't polling so well. Which might explain why, in addition to his push for a higher minimum wage---and, amazingly, in the face of high unemployment---he's looking to force employers to pay overtime wages in situations where they aren't currently required to.

While at first blush, adding such additional costs to employers might appear to benefit the targeted group of voters (those who might receive the overtime pay, and those who advocate for their idea of "fairness"), basic economics---as it does in the case of minimum wage legislation---strongly suggests otherwise.

I was messing around the other day with the following pretend Q and A after listening to a report of Ferrari's 2013 sales numbers. In light of the latest developments, I figure I may as well post it. While my method (my effort to drown the minimum wage debate in commonsense) may seem silly, make no mistake, for people looking for work (and not just entry-level), this is serious stuff.


If a brand new Ferrari happens to be on your bucket list, you better get after it right away---it's getting more out of reach by the minute. The high-end automaker has committed to keeping total sales to no more than 7,000 cars per year. Thus, this year, you'll have to pony up anywhere from $200k to $1.7 mill if you're to check a Ferrari off your list.

To help us understand the logic of what Ferrari is up to, our ace reporter, Ace Reporter, recently caught up with famous investor/economist Warren Krugman and asked him a few questions. Here's that brief interview:

AR: Warren, help me understand why Ferrari would limit the production of its cars to such a small quantity.

WK: Well, Ace, they clearly want their brand to remain the most exclusive among automakers.

AR: Okay... and of course it allows them to charge very high prices in the process.

WK: You got it.

AR: So, why would they set the number of cars at 7,000, as opposed to pricing their models at where they believe the market will produce 7,000 buyers?

WK: Of course that's what they're in effect doing: If more than 7,000 buyers come knocking, Ferrari will gradually raise prices to a point that prices all but 7,000 buyers out of their market. They actually sold more than 7,000 in 2012, so they raised prices and came in just below that number in 2013.

AR: Oh, okay. That makes perfect sense.

WK: Yep, it's basic economics.

AR: Changing subjects a bit: I see an opportunity here for government to control toxic emissions. If Washington would mandate a higher price for all cars with gas engines, automakers would sell fewer dirty autos, and they'd be doing a good thing in terms of climate change. Am I thinking straight?

WK: Well, yes, you're thinking straight in terms of price and demand. Certainly, if government were to step in and force higher prices onto buyers of a certain type of automobile, without  question, folks would buy less of that type.

AR: Does it work that way with everything?

WK: Of course.

AR: Really?

WK: Yes.

AR: Seriously?


AR: So then, given that, as you've convinced me, it works that way with everything: if certain politicians, as they're threatening to, succeed in raising the minimum wage---that is, if they mandate a higher price for unskilled labor---there's for sure going to be less buying of unskilled labor going forward. Now isn't that a crying shame for all of those folks who are desperate to enter the workforce, and for those who'll lose their jobs because their productivity doesn't justify 39% higher wages?


AR: Hey, where'd he go?

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