Lately, the news has been full of talk about tariffs—cue the ominous music—and suddenly, everyone thinks we’re in the middle of a trade war. There’s also renewed chatter about the minimum wage, and whether or not it should go up. Both topics bring out a lot of macroeconomic hand-waving about inflation, retaliation, and confused arguments over who actually pays what.
But let’s set aside the big-picture theory and focus on something simpler: how this stuff actually plays out at the level of individual businesses and real people. That’s where microeconomics and basic accounting come in. Yes, we’re talking debits and credits, revenue and expenses, profit and loss—stay with me.
Step One: Accounting Basics
If you’re running a business, money comes in (revenue) and money goes out (expenses). When you bring in more than you spend, that’s profit. If you spend more than you make, you’ve got a loss. Basic math.
Naturally, you want your business to be profitable—because you, too, have bills to pay and things to buy. So ideally, you sell your product for more than it costs to make it. Simple, right?
Until… something changes.
Step Two: The Curveball
Let’s say the government slaps a tariff on a component you use. Or the minimum wage increases and your payroll costs jump. Either way, your expenses go up—and now you have to figure out what to do about it.
You really only have three options:
Option 1: Change Nothing
Just eat the cost. Accept a smaller profit margin. This is everyone’s least favorite option, but sometimes you don’t have a choice—especially if raising prices isn’t realistic and cutting expenses would do more harm than good. We’ll circle back to this.
Option 2: Raise Revenue
This is often people’s first assumption: “Just raise prices!” And yes, that’s one possibility—but not the only one. You might also:
- Add a new, higher-margin product.
- Improve productivity to make more with the same resources.
- Hope your now-better-paid employees work harder.
Still, price increases can lead to inflation, and you might not be able to pull them off without losing customers. Again, we’ll revisit this.
Option 3: Cut Expenses
This could mean:
- Finding cheaper suppliers (which is often the whole idea behind tariffs).
- Cutting wages (good luck with that).
- Laying off staff (which comes with productivity risks).
- Using cheaper materials, delaying equipment upgrades, or turning down the thermostat to save on utilities.
You don’t have to commit to just one strategy. Many businesses tweak all three levers—raise prices a little, trim some expenses, and live with slightly lower profits.
A Real-World Curveball: Supply and Demand
Ah, Econ 101. Remember that graph with two lines crossing? That’s where we live now.
If a widget costs you $5 to make, and people are only willing to pay $4, you’re not going to make any. If they’re willing to pay $10, you’ll make as many as you can. But if the price goes too high, people stop buying. That’s the equilibrium point: where the price is just right so that supply meets demand.
And it’s not just about cost. If quality drops—say, you switch to cheaper materials—people may stop buying even if the price is the same.
The Balancing Act
So let’s review:
- If expenses go up, but revenue stays the same, you lose money.
- If you raise prices too fast, customers might disappear.
- If you cut costs too aggressively, quality or output might suffer.
Sometimes, the least painful option is to take a temporary hit in profit and ride it out.
One Last Twist: The Demand Curve Isn’t Always Fair
Gasoline is a classic example of what we call inelastic demand—you need it, no matter the price. That’s why gas prices often go up after tariffs, especially in places where public transportation isn’t an option. (Yes, I live in an oil-producing state, and yes, prices still spiked when the Canadian oil tariffs hit.)
Other goods, though, have elastic demand. A small price bump might tank sales. If wages go up and your favorite megastore raises prices, you might just avoid the shoe aisle and stick to groceries.
The Bottom Line
Tariffs and wage increases don’t play out in a vacuum. They trigger a cascade of decisions that businesses must navigate, and while the options seem simple on paper, the real-world application is a tangled mess of risk, psychology, and guesswork.
So the next time someone says, “It’s obvious what will happen,” smile politely. They’re probably trying to sell you something.
