I’m trying to maximize the value of an economic system, which constitutes only consumers, employees, and shareholders. The three of these people have no overlap, although I’m not sure if that matters, but for simplicity, let’s assume that a consumer can’t be the other two and so on. Intuitively, we know that by selling the goods/service at a cheaper price, the cost to the consumer has been reduced, but the shareholder’s value (measured as earnings or net income) decreases also. On the other hand, by decreasing the employee’s salary (SG&A), and holding everything else constant, we know that the shareholder’s would benefit, since the capital would flow down to the bottom line. Finally, we also know by increasing the cost of the goods/service (i.e. increasing revenues by raising the price), the shareholders benefit, all things being equal. However, this has an increased cost to the employees. Therefore, I’m interested in finding an optimal price for the goods/service, the amount for SG&A (i.e. the salaries), and earnings of the company to maximize the following: 1. 2. 3. Total Wealth of Society = SG&A + Earnings - Consumer’s price . My “baseline” company had the following: Revenue = 100 SG&A = 20 Tax Rate = 40% COGS = 60 - This variable doesn’t change, and it maybe interpreted as the fixed costs. Consumer price = 0 ----> Because at these price levels, the consumer’s real cost is $0 when revenues are $100. However, the cost is $10 when the revenues are $110. The cost of the goods/service maybe interpreted as the price the consumer paid - the value of the goods/service. Another example is, for this simplified example, the cost to the consumer is -10 if the revenues of the company is 90. Earnings = Revenue - 0.4*(Revenue - COGS - SG&A) Consumer’s cost = NewRevenue - 100 --> Again, if the NewRevenue (which is the new price of the goods/service) is <0, than the consumer is benefitting compared to the “baseline” situation. SG&A for the baseline company is 20. This is in lines with many companies. My analysis indicates that, neglecting the government as a being part of the Economic System, the best situation to maximize the value of this system is to: 1. Reduce the price of the goods/service from 100 to 80. 2. Pay the employees the same amount. 3. However, the earnings of the company is 0, and therefore, the taxes collected by the government is also 0, since all expenses are tax deductible. My questions/comments are: 1. Should I have used the market capitalization, instead of earnings, for my “Wealth of Society” calculation? Why or why not? What are your thoughts/questions/comments? Cost to consumers SG&A Earnings Total -20 0 8 28 -20 5 6 31 -20 10 4 34 -20 15 2 37 -20 20 0 40 -20 25 -2 43 -20 30 -4 46 -20 35 -6 49 -20 40 -8 52 0 0 16 16 0 5 14 19 0 10 12 22 0 15 10 25 0 20 8 28 0 25 6 31 0 30 4 34 0 35 2 37 0 40 0 40 20 0 24 4 20 5 22 7 20 10 20 10 20 15 18 13 20 20 16 16 20 25 14 19 20 30 12 22 20 35 10 25 20 40 8 28
One more thing, the only kind of economic model which supports this maximizing of societal wealth is one which doesn’t care for corporate profits and places more emphasis on consumer prices. This model is the SOCIALISTIC or GOVERNMENT-OWNED model. However, I’m convinced there are short-comings with my simplified model/analysis.