The price will rise until it gets high enough that the product of sales * price falls.
It has always been that way. Businesses haven’t been selling goods and services out of the goodness of their hearts at an arbitrary price. It’s always supply and demand.
Tariffs are expected to reduced demand because they increase prices. This is why the stock market is down and nearly every economist is calling the tariffs a big problem. Companies won’t have room to raise prices infinitely because they feel like it, because consumers are about to be able to afford fewer things because the things they need are getting more expensive.
Supply and demand is one driver of economic pricing, but not the only driver. Efficient pricing is a complex topic and not as black-and-white as it seems. As demand falls, the price may be expected to fall, but there is an inelastic limit set by material, labor, transport, and taxation cost. A company may elect to decrease their profit margin per sale to offset increased costs, but there is only so much margin to eat.
In the current circumstances, though, companies do not have a choice to lower prices. The basic cost of taking an item into inventory from these suppliers has risen significantly, in most cases well above 2024 margins.
The net effect is that, despite the market's best effort to correct prices to within an affordable range, costs may rise considerably and availability may still fall regardless. Under severe shock to the system, the usual maxims that account for nominal shifts in day to day trading no longer apply.
> Both supply and demand change depending on the price.
But that's a massive oversimplification. It's like saying programming is "just typing". Technically, sure; accurate, no. There's latency in the real world. Bad actors. Information asymmetries. Regulations. Monopolies. Stuff you can't do without and can't even always decline (ambulance ride for an unconscious person). Fake news about a supply crunch changes demand without changing supply for a while.
Most relevant in modern global economies: lack of available alternatives.
One of the primary reasons for combination in low-margin markets is to gain pricing power. And even if there are 2-5 entities in a given market, informal price collusion is far from unheard of.
It's a lot more complicated than that. Prices are sticky. When you raise prices, consumers notice and your sales go down. Therefore price changes are generally larger and less frequent than would be indicated by a pure supply & demand situation. And that's just one complication among many.
The demand side in particular can be tweaked by human factors, though. We have advertising because the level of demand isn't some fundamental cosmic constant of the universe like the speed of light.
"The price went up 10%, that must be the 10% tariffs" is something consumers will inherently understand… but it's not the case. The 10% is not on the on-the-shelf price; it's on the wholesale price the importer's charging. The $20 shirt at Old Navy is probably $4 (with $0.40 in tariffs added) for tariff purposes… but they'll add $2 to it anyways, because consumers will go "oh ok". There's a massive information asymmetry here.
The unpredictable nature of these specific tariffs is fairly unique, too. The rates change randomly, with zero warning, and how they're set isn't sensical. With ships across the ocean taking weeks, that's gonna chill the supply side as well.
We recently had a good article about the tariffs and the price of shoes here which had a good explanation for why the retail price goes up at the same rate as the tariff. Sorry I can't find and link it.
1. The average apparel retail store margin is nominally 50%, but half of that margin is given back to the consumer for their ubiquitous sales. So that $20 shirt costs the store $10, but the average selling price is actually $15. So if they directly pass through the 10% tariff, it adds $1 to the average $15 sale on that $20 shirt.
2. Increased prices reduce sales. Non-product costs are fairly fixed, so just passing through the tariffs will have a significant impact on store profitability. Retail stores are going bankrupt left and right in this Amazon age. They don't have the capacity to absorb increased costs, if they don't pass them on they'll just go bankrupt more quickly. So that $1 in tariffs turns into a $1.50 price increase.
Re: "You can get 2,000 calories for a couple bucks." Extraordinary claims require extraordinary evidence. Can you please let us know how can you get 2,000 calories for $2?
Rice bought in bulk can certainly be had for that price per calorie with some left over for a little protein. I don't recommend anyone follow such a diet though.
"You can see that the money runs out before the month is gone, you can see that people are buying smaller pack sizes at the end of the month," McMillon said.
They do need to eat, but they are eating less - and not by choice. They don't have the money to buy what they want to. No amount of advertising will fix that.
Apparently my country is technically capable of being self sufficient but people diet would have to change back to the 19th century if we were completely cut off (no coffee, tea, tomatoes, bananas, shiracha sauce).
True, but human psychology is a huge confounding factor. One area where this is evident is gas prices that "go up like a rocket, and come down like a feather" in response to crude oil prices. Simple supply and demand does not explain this.
There is inelasticity in gas prices. If the cost of gas goes up you still have to drive to work and the supermarket. Eventually you buy a more fuel efficient car or switch to an EV.
The reason the stock market is down is because of the raging uncertainty of the environment in which businesses have to navigate. Multi-month, let alone multi-year planning has become impossible. Businesses can deal with tariffs, taxes and costs. What they can't deal with is uncertainty.
I am so tired of people echoing “supply and demand” like it’s Econ 101. The modern market is infinitely more complex with infinitely more ways to create inefficiencies that don’t respond to simple supply and demand.
The problem is that focusing on supply and demand ignores all the ways markets are sticky and not efficient. Asserting that markets are efficient is equivalent to asserting that P == NP.
It's especially galling because if markets actually worked this way, then central planning would work as well.
"Econ 101" people always seem to ignore that there are higher level economics courses that further expound upon the many complexities, nuances and vagaries of "supply and demand."
The price will rise until it gets high enough that the product of sales * price falls.
It has always been that way. Businesses haven’t been selling goods and services out of the goodness of their hearts at an arbitrary price. It’s always supply and demand.
Tariffs are expected to reduced demand because they increase prices. This is why the stock market is down and nearly every economist is calling the tariffs a big problem. Companies won’t have room to raise prices infinitely because they feel like it, because consumers are about to be able to afford fewer things because the things they need are getting more expensive.