Supply, Demand and Equilibrium

Discussion on Bruce Dybvik’s “The Ripple Effect: Cost of gas and groceries go hand in hand” (Dunn County News, 2008)

In the article, “The Ripple Effect,” Bruce Dybvik discusses the way in which the price of gasoline affects all sectors of the economy, including food. In the food sector, gas prices affect “what we choose to eat, the way it is sold and purchased, and even the way we prepare our meals.” When gas prices rise, the cost of shipping food to vendors increases, so the price of food rises. At the same time, consumers’ purchasing habits change from shopping whenever convenient to buying more but less frequently.

As a result of the rising input cost of oil, producers have raised the reserve price on their goods. The resulting rise in the price of the food goods has caused movement upward on the demand curve, suggesting that consumers across the economy will purchase less food at the new, higher price; however, food is not an elastic commodity. Consumers must purchase food, which is why purchasing habits change. Consumers are avoiding using vehicles often by going to the grocery store less frequently, and are purchasing more products at a time. The food that consumers purchase has changed, as well, to include pastas, rice, and other inexpensive products that will cause meals to last longer.

This is a result of the substitution effect, a theory discussed in class. The substitution effect, along with the income effect, helps to explain the inverse relationship between price and quantity demanded. Consumers are finding cheaper alternatives to their regular purchases in order to stretch their budgets. Food vendors have noticed this trend, and stock more of the foods that consumers will purchase. Vendors are stocking more local products and buying in bulk, as well, because of high shipping fees from food suppliers.

The article states, “Oil prices are at the heart of inflation seen in all sectors of the economy including food.” Since oil serves as a major input in the economy, its price fluctuation affects all sectors of the economy. It fuels everything from transportation, the production of everyday items such as ink, deodorant, CDs and DVDs, to important activities like cooking. Oil prices are now consistently on the rise, and as a result, vendors are forced to pay additional fuel surcharges which lead to price increases for consumers. It is difficult for businesses and consumers to avoid being affected by this trend because oil is such a major commodity. Not only that, but production costs tend to increase as a result of this upward trend in oil prices which causes vendors to move prices up for consumers.

Furthermore, consider the real-word example regarding the relationship between gas prices and the use of public transportation. According to the American Public Transportation Association, when gas prices increase there is a sharp acceleration in the amount of passengers regularly on public transit. In fact, during the 2007 and 2008 gas price spike, 85% of transit agencies in the US reported “experiencing capacity constraints on their systems.”  This was even after half of the agencies had added extra lines with expanded service to new areas in order to deal with the overflow. Moreover, studies found that the relationship between the price of gas and usage is rather elastic. When there is even the smallest of increases in price, the more elastic the demand for gas became. Thus people are more inclined to look for an alternative or substitute when some prices of goods reach excessive levels. As a result, we see the pattern that when gas prices increase, the quantity demanded of gas (in the sense of consumers filling up their own cars) decreases, while the demand for public transportation greatly increases. An example like this makes it easy to see why, in the law of demand, price and quantity demanded are inversely related. When there are similar options available to consumers, they will most likely choose whatever option now costs less.

Posted by Marybeth, Kim, Kirsten and Grace (Section 1)

Resources:

Potential Impact of Gasoline Price Increases on U.S. Public Transportation Ridership, 2011-2012. Rep. Washington D.C.: American Public Transportation Association, 14 March 2011. Web. 20 Jan. 2012.  <http://www.apta.com/resources/reportsandpublications/Documents/APTA_
Effect_of_Gas_Price_Increase_2011.pdf>

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