Sometimes I wonder at how deficient in basic math skills are our public figures and the talking heads. The other day (perhaps Tuesday) on his TV show, Bill O'Reilly was discussing the evil oil companies. Mentioning how one of them had made billions in profits, he offered that if they simply reduced the price of gasoline by 10%, they would only reduce their profits by 10%, but still make plenty of money, and help out the average consumer. This is mathematically wrong, not to mention offensive.
If a company spends $20 billion dollars drilling, distributing, and selling gasoline, and generates $24 billion in sales, it has earned $4 billion in profits. That's simple enough.
Here comes the big math. If the company had been induced to lower it's prices by 10% (and the same number of gallons had been sold), how much lower would their profits be? 10%? (Would I really be writing this article if it were 10%?)
Am I insulting your intelligence if I do the math? I suppose this entire post insults your intelligence.
10% off of $24 billion in sales is $21.6 billion in sales. Subtracting the $20 billion in costs, yields $1.6 billion in profits. That's $1.6 billion instead of $4 billion. The profits would have dropped by 60%, not 10%! In fact, had they reduce their prices by 17%, they would have actually lost money!
Now these were all hypothetical numbers, but the point is that anytime someone offers advice for anyone on how to run their affairs, you can be sure it's not as well thought-out as he thinks, or that at most he's got only his interests in mind.