The Wall Street Journal has had some fantastic coverage of tariffs since the so-called “Liberation Day” tariffs were announced. One recent article (“Retail Giants Manage to Keep a Lid on Prices but Warn It Can’t Last,” 29 April 2025) demonstrates some important insights into tariffs. Sarah Nassauer, Shane Shifflett, and Sebastian Herrera write (emphasis added):
To keep prices low on phone chargers, towels and blenders in the face of rising tariffs, America’s largest retailers are trying everything.
They are pressuring their suppliers to absorb cost increases and dropping free perks from corporate offices. They have paused some shipments of goods from China and are leaning on inventory that has already been imported to the U.S.
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They warned Trump that higher prices would be difficult to avoid and said certain products could become scarce if retailers decide not to sell them to avoid tariff costs.
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Some cost-cutting measures are in full effect. Last week, Walmart told staff of its Hoboken, N.J., office that free plates, bowls and cups would no longer be available in the office, according to people familiar with the situation. A memo sent to staff encouraged employees to bring their own.”
The whole article is full of insightful tidbits that all lead to one thing: there are many ways for firms to adjust to tariffs, not all of them are raising prices. Walmart is reducing employee benefits. Some firms are considering cutting product lines. Firms are overstocking now. In another WSJ article, other firms are cutting employee benefits like travel. All of these are real costs over and above the loss in consumer welfare and deadweight loss from the tariffs.
Economic models are extraordinarily useful; they explain a lot. The supply and demand model is exceptionally useful as it explains much human behavior outside of the market relationship. The model looks at the relationship between price and quantity. Those are the two variables—the margins people adjust along.
But, in reality, there are many margins beyond price and quantity. What’s more, what those margins are and their relative value will vary from decision-maker to decision-maker. This means that decision-makers will make different decisions, even when faced with the same constraints. With tariffs, some may raise prices. Some may cut benefits. Some may switch products. It’ll all depend on the opportunity cost: the realistic alternatives each individual faces.
The key takeaway from the supply and demand model is not the relationship between price and quantity per se, but the effects costs have on various margins. When costs rise, people will economize along many margins, not just price. Consequently, when looking at the costs of tariffs (or any other policy like minimum wage), we cannot look solely at changes in price. Looking at just one margin can cause one to miss all these hidden margins.
