How to Treat Your Life as Your Business
Understanding the difference between cost and price can help you make more money.
The difference between price and cost is lost on nearly everyone. If the cost of oil goes down, the price of gasoline may not. If the Fed lowers interest rates to banks, that lowered cost of money may not translate into lower mortgage interest and lower price of money to home buyers.
Price and cost are not related the way many seem to believe. If a business can make a chair for $100, that does not mean it will sell for $110. The cost to the business is $100. The value to the buyer may be more or less. If buyers are willing to pay $1000 for a chair that costs the company $100, the company has an incentive to make more. Others have an incentive to compete. Some competitors may be willing to accept $500. If the quality is the same, we expect buyers to buy the $500 chair. Competitors may continue to enter the market until supply exceeds demand. At that point no buyers exist for chairs at any price. Sellers are stuck with an inventory of chairs. They will have to pay to warehouse the chairs. At some point, they will sell the chairs at a steep discount or give them away because it saves them warehouse costs. What did we just learn?
Suppliers do not determine price. Buyers determine price. If price is higher than the buyer values the product, the buyer does not buy. If the price is equal to or lower than the buyer values, the buyer will buy.
The price determines the supply. If the price is much higher than cost to make it, competitors will step into the market and supply increases. As demand is filled, fewer buyers are willing to pay and price falls to liquidate the excess supply.
What if costs increase? Do companies just pass along the cost increase as higher prices? They can try. However, in a free market, the buyer can decide that the price is too high. If companies cannot cover their costs, they will stop making the product and supply will drop.
Buyers set price. Suppliers create product as long as price is enough higher than cost to make the profit worth it.
Think of your labor as a product. You must eat. You must have a place to live. You must have transportation. All of the things that you need to have a happy life are your costs. Imagine that your costs are $100,000 per year. You are willing to work a maximum of 40 hours per week for 50 weeks per year. That is 2000 hours per year. Your cost is $50/hour.
Employer A offers you $100/hour. Work as much as you want. Will you only work 1000 hours and just cover your costs? Or will you increase your supply and make more money?
Employer B offers you $40/hour. Work as much as you want. That is $80,000 per year. If you take the job, you will lose $20,000 per year. You cannot afford to take the job.
I had an employee who said she was worth more than I was paying her. I agreed. I told her to go find someone who was willing to pay her what she was worth. I was the buyer. I set the price. For what I wanted her to do, the value to me was not high.
If you want the price of your labor to go up, make yourself more valuable to employers. What can you do that employers value? Which employers would value your labor more than your current employer? That is how you treat yourself like a business.
Next time we will look at the difference between raising costs through tariffs and minimum wage.