With the surge in gas prices I’ve heard the public complain about getting hit at the pump, and airlines complain about the cost (but what else is new, aren’t they always complining about losing money).
But I haven’t heard anyone complain yet about retailers charging more for goods to offset the costs of shipping/fuel costs.
Surely companies that rely on getting goods from overseas and cross country are getting hit with some enormous fuel costs.
Have you seen or do you foresee rising fuel costs being “passed on to the consumer” anytime soon?
You talk like the cost of of something influences its price. The value of a thing is the price that it will bring on the open market. If someone is willing to pay a dollar for something that it costs me a nickel to produce, why should I sell it for a dime? Conversely, if something that costs me a dollar to produce will only bring a nickel on the open market, how can I charge more than that?
If the cost of something increases, and the price of it does not, the margins will slip until the less efficient producers go out of business and the supply diminishes. Then, in a free market economy, the price will rise to its natural level. This may take years in some cases, as the cost of the fuel is a minor component in the cost of some items.
Surely that is taking demand side economics to a illogical extreme. Of course the cost of something influences its price! It is just not the only thing that influences the price. Items that already have squeezed margins due to being in an extremely competitive environment can’t really eat much of the cost increase. The increase in airline tickets based on the increase in gas prices is just one example that comes to mind. I bet many household and food staples are pretty similar.
I agree. Price is determined by where the supply curve and demand curve intersect. Demand is how much the market is willing to pay for any given quantity of an item, so is a kind of measure of value. Supply is how much the seller is willing to accept for a given quantity, and of course this is driven by cost.
The sensitivity of the market to a change is price is called elasticity. If the price goes up, for example, the bigger the corresponding decrease in demand, the greater the elasticity. Tobacco and gas are examples of fairly inelastic products. The price has to go up quite a bit before people will buy less. (This changes over a longer term, as people find alternatives and find ways to be more efficient.)
Price changes on all products are inevitable due to rising fuel costs, but fuel is a smaller component to consumer products than it is to. . .fuel. So the rise is smaller, slower, and more subtle. But it’s happening.
If something costs you more to produce than the selling price, it typically means you should stop producing it; certainly it isn’t a sustainable market situation to be selling at less than cost (unless you’re doing it as part of some kind of promotion to increase sales on profitable lines).
If the selling price drops below cost, you stop producing and let your competitors drive themselves out of business if they are daft enough to continue selling at a loss; when they have done so, there will be a shortage of the product on the market (i.e. elevated demand) and you can resume selling at a profit.
Exactly so, that’s why I added the phrase:
The cost of something only influences the price as it allows inefficient producers to stay in business, thereby increasing the supply and lowering the price.
Look, what would happen if we slapped a $10,000 tariff on imports of Japanese automobiles to the US? The price of Japanese cars would go up, certainly, but so would the price of US made automobiles. The market charges what the market will bear, as it should.
Actually, if something costs more to produce than the selling price, you raise the price (and your competitors will be doing the same thing).
Why would you stop selling something just because you couldn’t sell it for a profit at the current price?
True, you lose some of your customers, as long as the the price increases are reasonable, you will hear some grumbling, but are you honestly going to stop going to the local supermarket simply because your bill is suddenly a few dollars higher? Do masses of people suddenly stop driving their cars because gas prices are > $1.00 CAD per Litre? No. Sure, some smaller businesses go out of business, but the big ones stay in business.
Fair enough; what I was really trying to say is that it would be unlikely for a business to continue merrily selling a product at less than cost on the reasoning that the price was all that the market was able to support.
Anecdote time, fwiw. My brother is a driver for a local courier company, they circulated a memo stating every customer was to be charged a 5% extra fee because of the rise in pump prices.
A friend that owns a landscaping service has a clause about fuel prices in his contracts, he was eating it up until this week but finally raised his rates and lost a few customers by doing so.
I work for Ford, and some of the independent owner-operators have approached TPTB asking for fuel surcharge increases, so far the company’s said no. They can demand that routes be re-bid, but so far haven’t done so, for fear of losing the work to the larger trucking companies that can float a lower profit margin.
So, yeah, I think it’s starting.
The price of gas went up 20% tonight in Edmonton. There were lines of cars at the last cheap gas station tonight. Haven’t seen car lines at gas stations in a long time.