Quote:Prices are set by supply and demand.   If a business can raise its price, it will and should.   Imagine if you were selling widgets at $12 per widget.   But you figured out you could price them at $20.   What do you do?   Your customers don't care how much those widgets cost you.   All they care about is how much you are going to charge them.  

 

Now imagine you go to your customers and tell them you are raising the price of your widgets because your costs have gone up.   Do your customers really care that your costs have gone up?   No.   All they care about is how much money they have to spend, and how much do they want that widget.  

 

This is why every time a business tells you it is raising its prices because its costs have gone up, it is conning you.  They are raising their prices because they figured out that you are willing to pay more.  They are just giving you an excuse.  "My costs have gone up." 

 

If a restaurant decides to raise their prices because their costs have gone up, and they successfully raise their prices, well why did they wait until their costs had gone up?  Why didn't they raise their prices a long time ago?  Obviously, the public was willing to pay a higher price.  And obviously, the diners don't care about the fact that the restaurant is going through some sort of cost squeeze.   All they care about is how good is the food, and how much are they willing to pay to eat there. 

 

Yes and no.  Yes prices are pretty much a balance of supply and demand, but there is also overhead figured into the price.  The restaurant industry or even fast food is an example of this.  They operate on some of the slimmest profit margins.  Think about it this way, and I'll use hypothetical numbers to illustrate my point.  How much does it cost you to make a pepperoni pizza in your own home from scratch?  Let's just say that it costs you $2.00 just for the ingredients.  However, you have to also consider climate control (air conditioning), rent/mortgage and electricity to run your oven and insurance to cover your house/apartment.  So let's say that the cost goes up to $5.00 to make that pizza.  You decide that you are going to sell pizzas.  Well, how much time does it take to make one pizza?  Let's just say one hour.  How much is one hour of your time worth?  We'll say that one hour of your time is minimum wage, and the minimum wage is $10.00 per hour.  The cost of that pizza is now $15.00.

 

So in order for you to pay your bills, buy ingredients and make the pizza for sale it's going to cost $15.00 per pizza.  This includes your "profit" when it comes to paying yourself.  Now what happens if the price of pepperoni or cheese goes up, and your cost for buying ingredients is now $5.00 instead of $2.00?  What happens is your $10.00 per hour earnings just fell to $7.00 per hour.

 

Next, property taxes rise and the cost of a barrel of oil rises, so your rent/mortgage costs and electricity costs rise with them.  Suddenly, your $7.00 per hour becomes say $4.00 per hour.

 

This is a very elementary example using numbers that are really not reality, but illustrates what business faces, especially in the food/service sector.

 

My point is that in a low profit margin business, a rise in operating cost does in fact lead to a rise in prices or the business folding.

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