The economist reads about a survey of people picked at random who were asked the question: What percent profit on each dollar of sales do you think the average company earns after taxes? The average response was 36 percent. Hear What and How the Economist Thinks: Thirty-six percent is not even close to reality. When the economist Mark Perry checked the Yahoo! Finance database for 212 industries, he found that the “average profit margin for the most recent quarter was 7.5 percent and the median profit margin was 6.5 percent.” He did not find a single industry out of 212 with a profit margin as high as 36 percent. What about those companies that many members of the public seem to think earn higher profits, such as so-called Big Oil companies? They had a below-average profit margin of 5.1 percent in the most recent quarter. Wal-Mart’s profit margin was 3.1 percent in the most recent quarter. If the public believes that the profit margin is 36 percent (for companies) and the median profit margin is 6.5 percent, then we have a situation in which the profit margin is lower than what the public thinks it is.
Now, if the public’s perception of the actual profit margin is off by a large percentage this may explain why many members of the public think that it would be easy for most companies to pay higher wages, pay out greater benefits, and so on. But if the profit margins are not as hefty as the public thinks they are, if they are sometimes as low as 3.1 percent, then a rise in costs is likely to be viewed differently.
So why is there such a common misunderstanding? Economists have an answer for this: for every activity there are costs and benefits.
To become more informed about economics has a cost—time, energy, and so on—which may not outweigh the benefits of what people perceive themselves to stand to gain from learning economics.
Questions:
1. On September 30, 2011, the CDFI Fund (Community Development Financial Institutions Fund, which is an organization within the U.S. Department of the Treasury) published the report “Understanding the Grocery Industry.”
In the report, the profit margin for the grocery store industry was identified.
Do you think it was between 5 and 10 percent, 11 and 15 percent, or neither?
2. Did you think the profit margin for the grocery store industry, identified in the answer to question 1, would have been higher or lower than it was?