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Thursday, January 28, 2010
Wednesday, January 20, 2010
What Determines Value and Cost (Part 2)
What Determines Cost?
Last week we saw how the cost of raw materials may vary over time. We also discussed the influence changing currency markets have on product costs. There are many other factors, although we only have space to discuss a few.
1. Transportation. When petroleum exceeded $140 a barrel, prices of all commodities jumped. Almost all products are energy dependent. Even farm stands, where the produce is sold where it is produced, reflect increased transport prices as merchants pay for packaging, items they cannot produce themselves, and shipping.
Interestingly, as transportation prices fell, the retail costs did not drop as rapidly. This was due to a need to make up previous losses and the fear that the reduction in oil costs was just temporary. With commerce interlaced, it takes only one area of elevated merchandise expenses to affect all others.
2. Insurances. How do I insure thee? Let me count the ways…. Businesses maintain liability, fire, production, and property insurances. They may pay for or contribute to employee health, dental, and other insurance plans. Although per product the expense may be minimal, these costs have to be passed on to the consumer.
3. Salaries and Payroll Expenses. Salaries are among the greatest expenses a company has, especially in the United States, Japan, and Europe. A major factor in moving to a third-world company for production is the relatively low cost of labor, a lack of employee benefits, and few government regulations.
In addition to salaries, many countries require additional expenses such as Social Security (half is paid by the employer), unemployment insurance, and business taxes. Add in business contribution to medical insurance, pensions, sick time, vacations, and office perks, and the actual cost of labor may be double the salary rate.
4. Taxes. When will people stop falling for the politician’s lower tax ads? If Federal or State taxes are reduced, local property and school taxes rise. You always land up owing more no matter what they do. There are income taxes, land taxes, usage taxes (such as toll roads and bridges), and taxes on purchased items.
You are aware of sales tax. Almost every state and many localities add a percentage of the product purchased as a tax. I happen to live in New York, which has state, county, city, and other add-on fees. But even before the sales tax, many products get import taxes known as tariffs. They serve a dual purpose: raise funds for the government and increase the cost of foreign goods that can sell for less than similar domestically produced items (usually due to low foreign labor costs).
There are also excise taxes added to products and services. These can be added at the front end (taxes the production company pays) or directly on the consumer. Examples of such fees included those added to gasoline and other fuels, alcoholic beverages, tobacco products, and on telephone and cable bills. New York has been considering a tax on sugary beverages such as certain fruit drinks and soda.
5. Building Costs. It costs lots of money to build a factory, and considerably more to maintain it, upgrade it, and fix problems. Many companies (in part due to local ordinances) spend millions anually on landscaping, safety or security fencing, parking lots, and the maintenance of all such things. As you might expect, all these costs are added to the price of the product.
6. Profit. No one is in business to break even or to lose money, although that does frequently happen. All along the line, every company, person, and associated group takes a share of the pie. Each slice adds to the total cost. Let’s consider who may take profit from the cost of an apple:
a) Farmer
b) Sorter
c) Trucking company
d) Crate builder
e) Cold storage facility
f) Another trucking company
g) Wholesale produce market
h) Commodities traders and product brokers
i) Retail store chain
j) Local store
While the apple does not cost the tree anything to produce, when you consider the maintenance of the farm and equipment, the taxes, insurance and fees owed each step of the way, salaries and benefits, spoilage, and profits for all people involved, even if all involved takes a fraction of a cent per fruit, that one poor apple may become worth 20 or 25 cents before it reaches the consumer.
The Unknown Factors. While it may be possible to calculate a simple product produced or grown locally, it is nearly impossible to even guess at how much a more complex product costs. When a store cries that it’s selling for below cost or is losing money, or when an advertisement announces a major sale, just how accurate is the information in the ad?
During the next few weeks we will investigate how advertisement and store statements mislead the customer into believing they are getting a great deal. Don’t cry for the store owners.
Last week we saw how the cost of raw materials may vary over time. We also discussed the influence changing currency markets have on product costs. There are many other factors, although we only have space to discuss a few.
1. Transportation. When petroleum exceeded $140 a barrel, prices of all commodities jumped. Almost all products are energy dependent. Even farm stands, where the produce is sold where it is produced, reflect increased transport prices as merchants pay for packaging, items they cannot produce themselves, and shipping.
Interestingly, as transportation prices fell, the retail costs did not drop as rapidly. This was due to a need to make up previous losses and the fear that the reduction in oil costs was just temporary. With commerce interlaced, it takes only one area of elevated merchandise expenses to affect all others.
2. Insurances. How do I insure thee? Let me count the ways…. Businesses maintain liability, fire, production, and property insurances. They may pay for or contribute to employee health, dental, and other insurance plans. Although per product the expense may be minimal, these costs have to be passed on to the consumer.
3. Salaries and Payroll Expenses. Salaries are among the greatest expenses a company has, especially in the United States, Japan, and Europe. A major factor in moving to a third-world company for production is the relatively low cost of labor, a lack of employee benefits, and few government regulations.
In addition to salaries, many countries require additional expenses such as Social Security (half is paid by the employer), unemployment insurance, and business taxes. Add in business contribution to medical insurance, pensions, sick time, vacations, and office perks, and the actual cost of labor may be double the salary rate.
4. Taxes. When will people stop falling for the politician’s lower tax ads? If Federal or State taxes are reduced, local property and school taxes rise. You always land up owing more no matter what they do. There are income taxes, land taxes, usage taxes (such as toll roads and bridges), and taxes on purchased items.
You are aware of sales tax. Almost every state and many localities add a percentage of the product purchased as a tax. I happen to live in New York, which has state, county, city, and other add-on fees. But even before the sales tax, many products get import taxes known as tariffs. They serve a dual purpose: raise funds for the government and increase the cost of foreign goods that can sell for less than similar domestically produced items (usually due to low foreign labor costs).
There are also excise taxes added to products and services. These can be added at the front end (taxes the production company pays) or directly on the consumer. Examples of such fees included those added to gasoline and other fuels, alcoholic beverages, tobacco products, and on telephone and cable bills. New York has been considering a tax on sugary beverages such as certain fruit drinks and soda.
5. Building Costs. It costs lots of money to build a factory, and considerably more to maintain it, upgrade it, and fix problems. Many companies (in part due to local ordinances) spend millions anually on landscaping, safety or security fencing, parking lots, and the maintenance of all such things. As you might expect, all these costs are added to the price of the product.
6. Profit. No one is in business to break even or to lose money, although that does frequently happen. All along the line, every company, person, and associated group takes a share of the pie. Each slice adds to the total cost. Let’s consider who may take profit from the cost of an apple:
a) Farmer
b) Sorter
c) Trucking company
d) Crate builder
e) Cold storage facility
f) Another trucking company
g) Wholesale produce market
h) Commodities traders and product brokers
i) Retail store chain
j) Local store
While the apple does not cost the tree anything to produce, when you consider the maintenance of the farm and equipment, the taxes, insurance and fees owed each step of the way, salaries and benefits, spoilage, and profits for all people involved, even if all involved takes a fraction of a cent per fruit, that one poor apple may become worth 20 or 25 cents before it reaches the consumer.
The Unknown Factors. While it may be possible to calculate a simple product produced or grown locally, it is nearly impossible to even guess at how much a more complex product costs. When a store cries that it’s selling for below cost or is losing money, or when an advertisement announces a major sale, just how accurate is the information in the ad?
During the next few weeks we will investigate how advertisement and store statements mislead the customer into believing they are getting a great deal. Don’t cry for the store owners.
Saturday, January 9, 2010
What Determines Value and Cost (Part 1)
(Consumer Safety & Awareness article: Part 43)
What is Value?
Technically, something is valued if it is needed, wanted, or generates special memories. When we refer to an economic value, though, we are looking at a product we want at a price that is less than we expect to pay. Generally the only way we have to know if a thing is truly on sale is if we make it ourself, believe the store that is selling it, have compared the price of that product at many other locations, or know how much it costs the store to purchase it (wholesale).
In a blanket statement, although one that does not always apply, consumer economists suggest that you never believe a “list price,” an advertised rate, or a store sign as an indication of the true value of the product.
Thus to know if something is a good bargain, the consumer must know how much it costs to produce. The true cost can be determined in two ways. One is the Supply and Demand method and the other is an actual calculation of all the factors that goes in to creating the product, bringing it to the store, and making it available for you to purchase. Few people know what those factors are. This week we will look at a few of them, and conclude in the next article.
1. Raw Material. All products originally come from natural resources. Be it grown, mined, harvested, artificially altered, or chopped down, the cost of removing the raw material from its original source can vary. This is where Supply and Demand has the most influence. If the product contains a rare material, and many people want it, the cost of production may be elevated.
We see changes in raw material prices frequently as a food item’s availability is affected by storms, drought, blight, or other “act of God.” A frost in Florida may reduce the amount of oranges available, and thus increase the cost of production. The farmers still have to pay for the care of the trees, taxes, fertilization, pest control, etc., for their orchard. They have fixed costs, yet may be getting a fraction of their normal crop production. Prices go up so that they can stay in business.
Another fixed cost of raw material is the search for new sources of the item. One reason oil production is expensive is due to the need to constantly search for new fields. They may be under the ocean, in hard-to-access locations, or in populated regions. The cost of geological surveys, land leases, the moving of equipment, and many other factors all add to the cost of the product. Even if the new oil wells are unproductive, the expense of drilling has to be passed on to the consumer or the company cannot stay in business.
2. The Human Factor. Ineptness, power, and greed play a huge role in the cost of an item. When a petroleum transport goes aground and spills oil into the ocean, the company has to pay for the repair and replacement of the ship, the clean up, any fines, as well as the cost of the lost product. The expense of such actions is passed on to the consumer.
International policy also affects how much a product costs. When the United States placed a boycott on products from Iran in the 1980s, we lost our main source of pistachios. Prices tripled in less than a year. The increased prices reduced demand. Eventually pistachio farms were developed in California and elsewhere, increasing the supply and thus lowering the cost.
Throughout recent history, petroleum has been used as a power-pawn. OPEC artificially reduces production in an effort to: a) obtain more money for member nations; b) increase their international power and importance; c) use as a hammer to force through policies that are beneficial to them. Hugo Chevez used Venezuela's oil production as a propaganda tool, offering discounted prices to America’s poor in order to win friends.
In 1980, Nelson Bunker Hunt and William Herbert Hunt, together with some wealthy Arabs, controlled the supply of silver in an attempt to gain extra profit. Silver had been selling for under $2 an ounce in 1973 when their scheme started. By 1979 their manipulations increased the cost to over $5 an ounce, and they were not satisfied. These people purchased more than half the world’s supply of silver and withdrew it from availability, causing prices to skyrocket. At its peak in early 1980, silver was going for $54 an ounce. Once the Federal Government stepped in, the prices collapsed falling 80% in less than a month.
3. Currency Exchange Rate. The price of most products float – they are unrelated to the value of a specific currency. Petroleum and other commodities are tied in to the value of the American dollar. With political, economic, and other factors constantly changing the value of currency, the costs of products related to them vary as well. The current high cost of petroleum and oil products is in part due to the lower value of the American dollar as compared to other currencies.
Exchange rates can have both positive and negative effects. A lower American dollar means that products produced in this country cost less overseas and thus sell better. This lowers our trade deficit and helps multinational companies. Products produced elsewhere, though, such as cocoa, bananas, electronics, European wine, and raw material, cost more in the United States.
Next week we will look at transportation, insurance, and fees that add to the cost of a product.
What is Value?
Technically, something is valued if it is needed, wanted, or generates special memories. When we refer to an economic value, though, we are looking at a product we want at a price that is less than we expect to pay. Generally the only way we have to know if a thing is truly on sale is if we make it ourself, believe the store that is selling it, have compared the price of that product at many other locations, or know how much it costs the store to purchase it (wholesale).
In a blanket statement, although one that does not always apply, consumer economists suggest that you never believe a “list price,” an advertised rate, or a store sign as an indication of the true value of the product.
Thus to know if something is a good bargain, the consumer must know how much it costs to produce. The true cost can be determined in two ways. One is the Supply and Demand method and the other is an actual calculation of all the factors that goes in to creating the product, bringing it to the store, and making it available for you to purchase. Few people know what those factors are. This week we will look at a few of them, and conclude in the next article.
1. Raw Material. All products originally come from natural resources. Be it grown, mined, harvested, artificially altered, or chopped down, the cost of removing the raw material from its original source can vary. This is where Supply and Demand has the most influence. If the product contains a rare material, and many people want it, the cost of production may be elevated.
We see changes in raw material prices frequently as a food item’s availability is affected by storms, drought, blight, or other “act of God.” A frost in Florida may reduce the amount of oranges available, and thus increase the cost of production. The farmers still have to pay for the care of the trees, taxes, fertilization, pest control, etc., for their orchard. They have fixed costs, yet may be getting a fraction of their normal crop production. Prices go up so that they can stay in business.
Another fixed cost of raw material is the search for new sources of the item. One reason oil production is expensive is due to the need to constantly search for new fields. They may be under the ocean, in hard-to-access locations, or in populated regions. The cost of geological surveys, land leases, the moving of equipment, and many other factors all add to the cost of the product. Even if the new oil wells are unproductive, the expense of drilling has to be passed on to the consumer or the company cannot stay in business.
2. The Human Factor. Ineptness, power, and greed play a huge role in the cost of an item. When a petroleum transport goes aground and spills oil into the ocean, the company has to pay for the repair and replacement of the ship, the clean up, any fines, as well as the cost of the lost product. The expense of such actions is passed on to the consumer.
International policy also affects how much a product costs. When the United States placed a boycott on products from Iran in the 1980s, we lost our main source of pistachios. Prices tripled in less than a year. The increased prices reduced demand. Eventually pistachio farms were developed in California and elsewhere, increasing the supply and thus lowering the cost.
Throughout recent history, petroleum has been used as a power-pawn. OPEC artificially reduces production in an effort to: a) obtain more money for member nations; b) increase their international power and importance; c) use as a hammer to force through policies that are beneficial to them. Hugo Chevez used Venezuela's oil production as a propaganda tool, offering discounted prices to America’s poor in order to win friends.
In 1980, Nelson Bunker Hunt and William Herbert Hunt, together with some wealthy Arabs, controlled the supply of silver in an attempt to gain extra profit. Silver had been selling for under $2 an ounce in 1973 when their scheme started. By 1979 their manipulations increased the cost to over $5 an ounce, and they were not satisfied. These people purchased more than half the world’s supply of silver and withdrew it from availability, causing prices to skyrocket. At its peak in early 1980, silver was going for $54 an ounce. Once the Federal Government stepped in, the prices collapsed falling 80% in less than a month.
3. Currency Exchange Rate. The price of most products float – they are unrelated to the value of a specific currency. Petroleum and other commodities are tied in to the value of the American dollar. With political, economic, and other factors constantly changing the value of currency, the costs of products related to them vary as well. The current high cost of petroleum and oil products is in part due to the lower value of the American dollar as compared to other currencies.
Exchange rates can have both positive and negative effects. A lower American dollar means that products produced in this country cost less overseas and thus sell better. This lowers our trade deficit and helps multinational companies. Products produced elsewhere, though, such as cocoa, bananas, electronics, European wine, and raw material, cost more in the United States.
Next week we will look at transportation, insurance, and fees that add to the cost of a product.
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