The Business of Business.

They call it the ‘law’ of demand. These economists love calling everything a law.

For ‘normal goods’, as the price of a good increases, the customer’s demand will decrease. If the price drops, the demand will increase. Every customer loves a deal.

As the price increases, the customer might look for a substitute for the item, maybe a store brand version of cereal or a less fancy car. This is called the ‘ substitution effect ’.

As prices increase, the amount of money the customer has to spend decreases. Because money doesn’t grow on trees, the quantity the customer would purchase decreases. This is called the ‘ income effect ’. Less money to work with, less they can buy.

Makes sense if you don’t think about it too much.

But if you do decide to rub a couple brain cells together, you’ll be quick to point out that this doesn’t make much sense for all items.

If the price of baby formula increases, you’re less likely to put your infant on a diet. The quantity of formula you purchase won’t change much. Similarly for other essential things like water, rent, or golf tee times. Things you can’t live without with limited substitutes.

These are called ‘ inelastic goods ’. Things where the price can increase but demand won’t change so much.

But if the price of movie tickets doubled, you’re likely to skip that and totally legally stream at home. If the sushi spot increased their menu prices, you might get ramen instead. If the baby grows up to be an annoying teenager, you might have another baby instead.

These are called ‘ elastic goods ’. Things where the price increase has a greater decrease in quantity demanded. These items are often impacted by the substitution effect.

Like milk and cookies, there are also ‘ complimentary goods ’. Things that are frequently purchased together. When you buy shampoo, you might also buy conditioner. Theres a reason eggs are near the butter and the chips near the salsa.

Of course a customer is not going to keep buying more units no matter how sweet the deal. Every pair of shoes you buy makes you less likely to buy another pair. Since you won’t have as much need for the 10th pair as you did the first, it has ‘diminishing marginal utility’ or usefulness.

There is a restaurant that has great happy hour deals, half off appetizers and some entrees. I would go to this restaurant because of the generous deals, but I often won’t even get the happy hour items. The deal got me in the door, and the feeling of gratitude made me spend more than I probably would have.

In the ‘law of demand’ the economists like to assume the customer is a rational person and will purchase in relation to the price. In your business, your customers aren’t always rational people. Customers spend based on how they feel more often than what’s the most rational option.

When a restaurant faces rising ingredient costs, they are often forced to raise menu prices in order to fill the gap. This sounds pretty obvious, since profit is revenue minus costs.

To the business, it seems you can either raise revenue by increasing the price of menu items or reduce costs by cutting staff hours. It doesn’t really seem there are many other options beyond that. A steakhouse might not be able to influence the broad rising costs of beef, nor can brunch place with egg shortages.

The problem of broad hikes in prices becomes pretty obvious when you take into account the demand curve we discussed. The demand elasticity of the brunch place is closer to the movie ticket than the baby formula. A $30 omelette can be easily substituted by just sleeping in and skipping brunch all together. Not really the shift in consumer demand a restaurant that only operates 7am - 2pm can manage.

So of course, what option does the brunch place have that doesn’t scaring away customers, or pissing them off with reduced quality?

Bottomless pancakes, free refills on coffee and high quality service.

Costco is famous for refusing to raise the price of their hotdogs. In a crowded and complex market like retail or restaurants, loss leaders like happy hour and cheap hotdogs drives consumer loyalty and satisfaction.

A local business does not have the luxury of big analytics departments to analyze product mixes, price elasticity or news of an avian flu that impacts egg laying hens as it did in 2025.

A major restaurant chain may understand the expected rise in egg prices and potential shortages. The local brunch place may not have the luxury, so they are disproportionately impacted. Same thing with the rising price of beef, transportation and tee times.

Retail chains that spend millions on data teams, consultants and fancy software are better positioned to maneuver rising costs and shifts in consumer demand. It doesn’t take much more than record of sales and a little analysis to do complex forecasting.

Local and regional chains often don’t have that luxury to experiment with prices or build out a custom software (or hire a consulting firm to do it for you). Much of the analytics tools on the market are designed for large enterprises. As the technology is largely unaffordable, the simple understanding of price elasticity or of consumer demand is also behind a strategy firm’s high fees. Double loss.

As the price of a 'normal good’ increases, the quantity a supplied by a producer increases. As the price drops, so does the quantity supplied. If the price of beef doubled overnight, a rancher might raise more cattle and less chicken. If there is a global pandemic and a sudden increase in price of toilet paper, the guy selling newspapers might start selling toilet paper (many publications already seem to serve double duty).

The quantity supplied will increase until it matches the quantity demanded and there is a ‘market equilibrium’.

This of course assumes ‘perfect competition’ where there are many producers in the market (fantasy-land). Of course in reality, a handful of producers sell most things. The large grocer already used their understanding of demand to corner the supply. Pricing out the regional chains creates their monopoly, and by extension, pricing power.

For as long as a profit is to be had, a price will rise. There is no reason why a major chain that enjoys a regional monopoly has to do otherwise. There are no substitutes for their products, so their products become relatively more inelastic compared to the local business . The fruits of their labor for undercutting the competition and cornering a market.

While monopolies are ‘technically’ regulated, it becomes obvious why. A large grocer that maintains pricing power and undercuts local businesses have total control of the local economy.

The death nail for a local economy is a Dollar Tree (or other dollar store). By selling products manufactured for them and only them, they are able to sell products at a price a local business cannot. The products at the dollar store are ‘dollar store varieties’ of popular products. For example, Coca Cola will sell a smaller bottle of their normal sodas, priced for a dollar.

A major retailer not only possess pricing power, but also supply chain dominance. Walmart can force suppliers to heavily discount their products, otherwise they won’t have the privilege of being in a Walmart. Same goes for grocers, restaurant chains and beef processing plants.

A rise in the price of beef rarely benefits the rancher that raised the cattle, but the handful of meat-packers and distributors. With the supply chain controlled by a handful of processors that capture the producer surplus between the cost of producing the good and the price it’s sold for.

When the major grocer that scooped up the regional grocers, with some of the ‘less profitable than expected’, they would eventually get shut down. In some of the most rural places, the single grocer can be shuttered, leading to a food desert.

Then the only source of food within 100 miles gets shut down, gas stations end up becoming the grocers.You can expect some of these towns to end up as ghost towns in the not distant future.

I wouldn’t be surprised if the same doesn’t happen in agriculture as well. A major company pricing out rancher until they can pick up their parcels on a discount.

Of course there is nothing wrong with a competing business wanting to compete. Why shouldn’t the large corporations take Joe’s farm? They were a small farm once too you know! Don’t hate the player, Joe.

Of course the size of an industry leader doesn’t matter so much as the amount of competition. These companies serve as single points of failure in the food supply, technology, manufacturing, and logistics. The shortages from the pandemic and in semiconductors are a prime examples of how our lives got twist, turned upside down.

You would think that by now, technology had advanced enough to allow smaller technology and manufacturing companies pop up regionally.

And you would be right, it absolutely did.

In developing countries, and even developing neighborhoods in developed countries, there tends to be a greater proportion of small business owners vs employees of large enterprises. The entrepreneurs vs wage workers.

Whether incentives align one way or another, it really doesn’t matter why the people of these economies make the decision they do. That’s all they really can do most of the time.

Massive corporations are like cruise liners compared to the speed boats of small businesses. Ones is able to maneuver quicker, but the other can crush through an iceberg (sometimes).

One of the biggest explanations you might hear is that larger enterprises and monopolies are ‘more efficient’, because of their size. Which makes sense in industries of days past when you had 100 men lined up side by side each putting in a screw.

Maybe the industrial resources and capacity to operate at a reasonable rate is too high for the small business. But that’s only because of the monopolies within the supply chain leading up to having the screw delivered have no reason to compete on their prices.

The local manufacturer has been doing very well. It has experienced significant growth and has their items on the shelves of top grocers. There is one problem, the growth lead to a surge in open orders that were taking too long to fill, while the inventory on hand kept growing. They have products, just not the ones that are being ordered. Not a good position for the seller of perishable goods.

Toyota is well known for their “Just In Time” manufacturing. They would organize their supply chain so that only the products that are getting sold would be produced, and their ingredients delivered just in time. This helped them avoid the difficult circumstance that plagues many producers.

Restaurants are also victims of this economic misfortune. Way too many ingredients of the wrong kind risk expiring, while you don’t have enough of the right kind to make the popular dishes. Just like the local manufacturer, the cost of operating keeps climbing.

There are certain plants that can only be pollinated by certain animals. Some flowers might depend on hummingbirds, some bees, others butterflies.

You’ve heard the saying about a butterfly flapping its wings having a wide reaching effect around the world. And in the business of business, its not too different.

A local manufacturer may not be able to fulfill their orders, leaving money on the table, because of a cascading effect of producing the wrong items at the wrong time. At a low volume, you can run things on your own intuition. You can do that for a long time and be very successful. But as volume grows, prices rise and items expire, it can become hard to manage.

Toyota was always able to be just in time because they understood the dynamic interactions between different parts of a supply chain. They’ll buy exactly what they need and have it delivered exactly when they need it. The concept of that would drive the local manufacturer crazy.

In order to get exactly what you need, exactly when you need it, you have to understand what every aspect of the business is doing. Procurement needs to know what Sales is selling, Inventory needs to know what Production needs to make. Finance needs to know what to allocate to where. Not very easy.

A sale with the inability to fulfill it not only leaves money on the table, but can risk losing customers along the way, cascading into chaos like that butterfly across the world.