Carpe Diem

Q: Are people responsive to 25% changes in price or not?

Walter Williams asks some economic questions about what happens when prices or wages change by 25%:

“In his State of the Union address, President Barack Obama proposed raising the minimum wage from $7.25 an hour to $9 an hour. That would be almost a 25 percent increase. Let’s look at the president’s proposal, but before doing so, let’s ask some other economic questions.

“Are people responsive to changes in price? For example, if the price of cars rose by 25 percent, would people purchase as many cars? Supposing housing prices rose by 25 percent, what would happen to sales? Those are big-ticket items, but what about smaller-priced items? If a supermarket raised its prices by 25 percent, would people purchase as much? It’s not rocket science to conclude that when prices rise, people adjust their behavior by purchasing less.

“It’s almost childish to do so, but I’m going to ask questions about 25 percent price changes in the other way. What responses would people have if the price of cars or housing fell by 25 percent? What would happen to supermarket sales if prices fell by 25 percent? Again, it doesn’t require deep thinking to guess that people would purchase more.”

11 thoughts on “Q: Are people responsive to 25% changes in price or not?

  1. In fact, I can recall situations where companies implemented an across the board 10% pay cut rather than face layoffs of their personnel. That preserved jobs, but at a lower wage.

    But, of course, that is the real world where business decisions are made.

  2. Actually a raise of the minimum wage would cost employers more than the $9.00/hour part, right?

    That new hourly rate will now be added to the already existing costs of FICA, workmens comp insurance, other mandated government paperwork…

    What are the upsides for an employer? Where is the ‘value added‘ in that equation?

  3. Greetings from the Virginia School of Political Economy! Walter Williams is exactly correct. “Ceilings and floors” have never once worked in economics. Enter Walter’s friend James M. Buchanan: politicos enjoy ceilings and floors, as they generally work in politics. The problem being, both Williams and Buchanan are correct. Which is rather large clue.

  4. Recently at work they raised the prices of the drinks in the machine from $1 to $1.25. It didn’t effect how often I purchase the drinks.

    • That’s because you value the drinks at more than $1.25, and don’t have what you consider to be an acceptable alternative. At some price level you will change your behavior.

    • If your boss walked up and, for no reason at all, gave you a 25% raise, that might change things. If the raise applied to all workers, that would certainly change things. It might even put the company into financial distress.

      And, assuming you buy one drink a day and work about 200 days a year, if someone walked up and said, “If you want to be able to buy drinks for a dollar for the rest of the year, you need to pay us $50 now”, you might see that differently, too.

  5. Yes, but the question was are people responsive to 25% changes. I gave one example where I was not and I imagine many other people are not as well.

    • yes, let’s imagine a person earning $50,000 being faced with a $50 annual cost increase. That is 0.1% of their income, a tiny, tiny fraction. So sure, people don’t care about such tiny things. That does not mean an employer of those at the minimum wage would see things the same way.

      Let’s say an employer of a small business like a Subway employs 20 minimum wage workers who work full time.

      that is $15080 per worker per year (excluding payroll taxes, benefits, etc.)

      so we’re looking at a total salary cost of 301,600 per year.

      now add the 25% increase: 377,000

      that change is equal to 5 jobs at the original rate.

      does it seem likely that places like Subway that average somewhere around 500,000 in revenue per year are going to be able to accept a $75000 salary increase and stay in business?

  6. I’ve never been in any subway that had 20 employees working at one time. You’re continuing to miss the point. I’m fully aware that you’ll find many many examples where a 25% increase will have very real and noticeable effects on outcomes. You’ll also find many examples where it will not. As to the blog post question, the answer is most certainly “it depends”.

    I hope you can understand that.

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