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Originally Posted by guthmund
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Originally Posted by Yakk
You sell him gas. You earn 325$, and place it in a bank account that earns 6%/year. Next week, you have to buy 100 more gallons of gas. You earn 36 c in interest, and pay 400$ more for gas next week.
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Once you cut into the gas reserve you bought at $4/gallon, don't you just raise the price of gas sold at your station to compensate? Then you can sell the 100 gallons you bought at $4/gallon for $4.25/gallon and still earn the same profit-wise, right? |
I explained it mathematically. If you are planning on filling up your storage tank next week at 4$/gallon, then selling gas now at 3.25$/gallon will make you poorer next week than if you chose not to sell it.
In 1 week, do you want to have more money or less money? If you want to have more money, you don't sell your gas at 3.25$.
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Originally Posted by ratbastid
You're confusing Cost of Goods Sold with pure cashflow.
If you buy product at price X and sell it at price X + Y, then your profit on that product is Y. Plain and simple. I don't care who's coming with more product next week at price Z. You better price THAT product at Z + Y if you want to maintain your margin. THIS week's product's margin is figured based on a cost of X.
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You are suffering from the "sunk cost fallicy". Costs you have already spent are spent, and do not directly factor into your future and present profit decisions. Econ 101. =p~
Your assets are "a tank of gas with 100,000 gallons". The price information you care about is "how much will it cost to replace that asset" and "do I want to replace it", not how much you paid for it. How much you paid for it is information that might factor into the other two decisions.
You may decide that it isn't worth your bother to replace that tank of gas next week. If that is true, you could sell for under 4$/gallon. But this only holds if you plan to not refill your fuel tank. If you can
sell the fuel in your fuel tank next week for 4$/gallon next week, you should also refuse to sell at 3.25$.
It is a common fallicy to consider sunk costs (money you have already spent) as part of your future profit-maximizing decisions. Doing so loses you money.
Selling that gas at under 4$/gallon
makes you lose money, because you'd rather save it and not buy gas next week,
if you know the price of gas will be 4$ next week. I don't care if someone walked up to you and gave you free gas last week, or you paid 1$, 2$ or 3$/gallon for the gas last week.
Now, practically, people sell gas at whatever price other people sell gas at. The market just happens to work out something that matches my description of what is going on closer than it matches yours.
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If you buy product at price X and sell it at price X + Y, then your profit on that product is Y. Plain and simple. I don't care who's coming with more product next week at price Z. You better price THAT product at Z + Y if you want to maintain your margin. THIS week's product's margin is figured based on a cost of X.
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Follow that, and you'll be less rich then you should be.
Of course, if you do
not plan on nessicarially replacing all of the goods you sell this week, the situation changes massively. In which case, you could quite possibly be right.