Thursday, June 5, 2008

Supply and Demand

Large or "big box" retailers wield enough power in the market to dictate policy including "buybacks". This is when an item is not sold, for whatever reason, the manufacturer is required to buy the product back at the retail price, therefore freeing up valuable shelf space for other products. This shifts the risk of sales back to the manufacturer who is then incentified to advertise thier products, and the retailer, to ensure goods move off shelf to consumers and not back to the manufacturer.
This is also where discount warehouses obtain stock. They purchase this "overstock" at huge discounts due to the manufacturer's inability to absorb the cost of re-shipping and storing buyback product.
This lack of risk and fixed costs, allows the big box to expand rapidly, therefore expanding it's influence and also it's ability to dictate price. This is why WalMart is inexpensive and everywhere.


Amber said...

This all makes sense when supply is something that can simply be manufactured... however, what happens when the supply of a non-renewable resource is depleted? Something where supply CANNOT grow indefinitely?

For example, supply of US oil used to be far above demand... yet the US has passed it's supply of "peak" oil, meaning, the half (or less) or oil that's left on home soil is lower quality, "produced" or extracted/refined at a higher difficulty and cost.

*My source for the following is the book "The Long Emergency" by James Howard Kunstler*

As M. King Hubbert's curve predicted, the US hit "peak" around 1970, when production was 11.3 million barrels a day... but has fallen every year since, currently under 6 million - while demand for oil has increased.

Hubbert and other geologists have also predicted world oil to peak between 2000-2008... but knowing for sure can only happen in retrospect, after production begins to decrease and discovery of new attainable sources becomes minimal.

In energy economics, there is a formula: ERoEI = energy returned over energy invested.
Eventually, the energy to extract/refine the oil becomes more than the energy the final product can produce. Despite the push for drilling in ANWR, this is likely the case there, and it probably won't produce enough oil to make a difference anyway (never mind any environmental reason not to drill there).

You may argue that the market will demand a replacement for our oil-based economy... but when that idea is further investigated, you find that almost every current alternative (wind, solar, hydrogen, etc.) is pretty much dependent on cheap oil to exist in the first place. Oil is used in production of the materials to create wind turbines, to transport them to the destination, to maintain them, etc.

On another note, the existence of WalMart is also highly dependent on cheap oil. Cheap production in far away lands in needed for manufacturers to meet the demands of low prices dictated by the retailer. Many of the products themselves use oil in their creation... any plastics, for example. Then, the products must be shipped cheaply (across oceans and continents) to at store. Cheap fuel is needed for suburban life, and to continue to make it worthwhile to drive to the outer edges of suburbia to shop at WalMart anyway.

What do you think? What happens when cheap oil is no longer a possibility?

Whoa - that was loooooong. Dalyn, I'm half way through "The Long Emergency," and so far I think you would find it very interesting... especially his recap of wars starting around WWI. For the first time ever, someone has made an argument for the war in Iraq that makes sense to me. I still don't like it, but his argument is very strong.

Amber said...

Also, Hubbert's curve may be something you'd enjoy researching (along with the man himself) for a "page in your notebook."

brohammas said...

Supply and demand assumes that products are not ever renewable but function on the principle of "scarcity". As oil becomes more scarce the price goes up, and up, and so on, and so on.

Often times business and government are at odds regarding free trade of valuable resources. Free market economy would dictate that the market, including oil, should take care of itself. I generally agree with this and feel the govt. has no business meddling (pun intended). Businesses will try to get govt. to meddle in an industries favor, such as the restriction of foreign goods or services to squelch competition. Hence the problem of big business lobbies.

The flip side is that free markets function best when disregarding the sovereignty of nations. Markets don't care if the U.S. runs out of oil, but the U.S. govt and military do and will/should aact accordingly.

The issue becomes amplified when those creating policy do not accurately understand the consequences both short and long, of their policy. For example protecting the auto industry in order to preserve American jobs, squelches the manufacturers' need for innovation to stay viable. this lack of innovation maintains a staus quo that is unsustainable long term. Meaning that eventually there is no oil to run the cars, which don't sell, running the manufacturer out of business, and the jobs are lost...along with the cars, blah, blah, blah.

The laws of supply and demand still hold.

Claudia said...

Tangentially on topic: have you read Thomas Friedman's "The World Is Flat"? Sounds like something you would enjoy.

tristanjh said...

Clearly you did better in economics class than I did.

I'm curious about your opinion of Walmart in general.

brohammas said...

My strongest opinion of Wal Mart is frustration over long lines. Seriously, there are 20 checkout stations but only two open.
I do not fault WalMart for China's poor human rights record or for American's losing jobs.
I like inexpensive stuff as much or more than the next guy. I do not like the monopoly like power they woeld, and the fact that they all look the same. It has become that you can never tell where you are in America because everywhere looks the same...WalMart, Target, Depot, Lowe's, McDonald's, Wendy's, Subway, Gap, Old Navy, etc etc.
Texas, Georgia, Utah, Pennsylvania....all the same. Conveniant but boring.