“The Ripple Effect”, A Blog Write-Up

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

The economic concept of supply and demand is perhaps the most abundantly utilized economic theory in the present day market. It is the main determinant in setting prices for all of today’s goods and services. The main focus of “The Ripple Effect”, written by Bruce Dybvik, is to show how price changes in one market can cause price changes in another, and more specifically, how fluctuations in petroleum prices can cause price changes for certain foods.

Mr. Dybvik begins his argument by discussing wavefunction, the quantum theory that nothing occurs in isolation, and applying it to economics.  Because every action has some sort of reaction, markets that might be seemingly independent of one another, are in fact connected via the economic system.  Specifically, the oil market plays a major role in connecting diverse markets, such as food.

In particular, petroleum is necessary in the production, transportation, and selling of food products.  It is worth noting that some foods require higher petroleum costs than others based on their size, content, packaging, etc., and are thus more influenced by changing prices.  Thus, as the price of production increases, suppliers will likely push at least some of these costs onto the consumer, causing food prices to increase.  Because of this, Dybvik then delved into consumer purchasing behavior by examining how people are choosing to purchase food in larger quantities, less frequently.

Thanks to these extra fuel charges, not only are consumers suffering from higher prices, but retailers are being hit hard as well with extra “fuel surcharges” (note that not all new costs due to higher oil prices can be pushed onto consumers, as customers will stop buying if costs get too high). These added costs have pushed people do change their shopping preferences. People have become more prone to buy local, longer lasting items, and stay in and cook meals, rather than eat out. Many local food markets have become bigger supermarkets in their towns, since the local population has become more prone to travel less for groceries.

In conclusion, this article encompasses all of the supply and demand topics we discussed during lecture this week. We can see how the price only affects the quantity supplied/demanded, and not the actual Supply/Demand itself. The article also gives some examples pertaining to the income and substitution effect (using corn to make ethanol, a biofuel and gasoline substitute).  All in all, “The Ripple Effect” is a very interesting and educative article in relation to the economic concept of Supply and Demand.

In the article “The Ripple Effect”, Dybvik states that, “oil prices are at the heart of inflation in all sectors of the economy including food.”  This is a truth that is inherent in the economy, although it may not be initially obvious.  Oil is a main input in the economy, impacting everything from transportation to production to distribution.  With few exceptions, oil impacts prices, at least to some degree, in all industries.  However, Dybvik incites oil prices as impactful on inflation.  When one thinks of inflation, the first input that comes to mind is monetary supply and the behavior of the Federal Reserve.  Furthermore, inflation tends to draw to mind the concept of the diminishing purchasing power of money.  However, the diminishing purchasing power of money is simply a result of inflation, which is technically defined as a broad-reaching increase in prices across an economy.  From this perspective, because oil prices have such a direct effect on multiple industries, increases in oil prices create increases in prices across the board (in other words, inflation).  In this way, Dybvik is accurate in his assessment of oil prices as a major component of inflation.

The ripple effect can be seen throughout the American economy.  Consider, for example, the fast food industry, where input prices have seen a drastic increase in recent months.  Beef, bacon, and cooking oil have all experienced price increases; these costs in turn have been affected by overall economic conditions.  Cooking oil, in particular, which was a topic of conversation in Dybvik’s article, is directly correlated with the price of petroleum.  In turn, chains such as Wendy’s have been forced to push some of these costs onto the consumer by raising prices at their restaurants.  This has created a double-edged sword for Wendy’s, as they try to raise prices on Americans who, as the economy has fallen into recession, have tightened their wallets.  This is a great example of how fluctuating prices can ripple through an economy and create pressures on supply/demand curves.

Posted by George, Rafael and Armani (Section 3)

Resources:

http://www.toledoblade.com/business/2011/05/11/Wendy-s-Arby-s-to-raise-prices.html

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