The Economy of Scale

You know how they set the price of something you buy at the store, right? First they do market research to see what people are willing to pay for a particular product and then they figure out if that product can be made cheaply enough to be worth bringing it to market. Isn’t that the most reasonable thing you ever heard?

Yes and no.

Let’s suppose that a designer pair of tennis shoes attached to a sports celebrity’s name should cost, in the opinion of the buying public, $200. Lovely. Please understand that if these shoes can go from design to store shelf for $100 then those shoes will be priced at retail for $200. Please also realize that if these shoes can go from design to store shelf for $1 then they will still be priced at retail for $200.

Market perception of value sets the price. And if advertising can affect that market perception then all the better.

I’m all about labor. I’m about a person doing a reasonable amount of work and making enough money to have a healthy and happy life. I used to work in a factory and the more I thought about it, the more I realized that people’s wages impact the expense of making a product very little.

Mass production has gotten extremely efficient. The basic principle with labor and wages is that the more parts you make per hour the less the expense per part. If you could make an infinite number of things per hour then no matter what amount you paid people their wage would not affect the cost of the product at all.

So as productivity increases, the expense in wages becomes more and more insignificant. And that brings us to situations like Papa John’s Pizza and the cost of Obamacare.

To the average individual, health insurance is pretty expensive. But to a company that puts out lots of product the cost of that health insurance for an employee is almost completely ignorable. According to the big guy from Papa John’s, this Obamacare for all his employees would cost 14 cents per pizza (which is NOTHING). According to outside examiners doing the math that cost is more like 3 cents per pizza. Not only is this doable, it is an outrage to not both give employees health insurance and a nice big fat raise which would hardly impact the cost of making each pizza at all.

The problem is, while wages do not much affect the cost of efficiently mass produced products, wages are still money. And while you as a consumer are not impacted at all by the cost of wages, the net gain of lowering wages goes directly into the pockets of the people at the top of the management pyramid.

So now we know why there is such a big pissing match about wages. It is NOT about the cost of the product to the consumer, it is about executive bonuses and salaries. It is about a huge windfall of greed for those at the top.

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