10/26/2007

California rebuilding effect on building supply prices

This article talks about the effect of the rebuilding efforts about to start in California on building supply prices. After Hurricane Katrina we saw an increase of the building supply costs because of the demand in effected region. An increase in price does not come as a surprise as you would expect an increase in demand to cause the price to raise.

In the article Jaren Patterick who is a framing division manager for the Utah division of BMC West which is a Boise-based building materials supplier said "The supply won't go down but prices will go up. They'll ride it for what it's worth. They're just like the oil industry, most producers of lumber and building supplies are looking for opportunities to raise prices."

Jaren seems to be showing a basic lack of understanding of supply and demand principles or else he just misstated what he meant. The price increase will not have anything to do with a change in supply but actually a change in demand. We can assume that the market is supplying lumber at the equilibrium quantity and that the market is currently buying at the equilibrium price. When the demand changes that will cause the price to increase. The market will adjust over time by either supplying more to meet increased demand, or the demand will drop as the rebuilding effort slows.

Jaren may have meant that the increase in demand because of the rebuilding would be so small that it really should not effect prices but that the suppliers will just increase prices because of a perceived increase in demand (or as he states decrease of supply).

8 comments:

Timothy said...

I wouldn't put it past some suppliers to try and get away with increasing the prices, even if it meant for a relatively short period of time when the market would demand they reduce their prices to the equilibrium.

I've seen it with our gas prices here in town. A noticed one day that on some news regarding oil prices a particular service station who I won't mention (Fabulous Freddies, Whoops did that slip out?), raised their gas prices over $0.10. The very next day when they realized that no one was buying their gas, they lowered it back to the original price. I guess they thought it was worth a shot.....

Caden said...

I've seen the same thing with the Maverick close to where I live. Just this week their prices went from 2.82 up to 2.86, down to 2.85, up to 2.89, back to 2.86, then back up to 2.89. That was just from Monday to Thursday.

Dr. Tufte said...

-1 on Caden and Timothy for poor grammar.

I wouldn't doubt that with the specialization of building materials that there is some pricing power in the hands of these suppliers. So, they may be able to raise prices a bit.

On the other hand, don't ever forget that the ability to raise prices - even when you can - is dependent on the elasticity of demand. Demanders who show themselves to be inflexible are just asking for sellers to sock it to them.

As to gas stations, I'd just lay off. They are not high margin businesses, and they deal with a lot of uncertainty in their underlying prices. I've never seen anyone complain when they change prices downward for no reason.

Matthew said...

Dr. Tufte reminded us that the ability of a firm to raise their prices is dependent on the elasticity of demand. Dr. Tufte is right on when he stated that, “Demanders who show themselves to be inflexible are just asking for sellers to sock it to them.” Although it may seem “unfair” to us when, say, a convenience store increases its price for umbrellas when it is raining, but wouldn't it also be “unfair” if you had the money to buy the umbrella, but people who had less money and less demand for the umbrella bought the last one? You would have been able to get the umbrella if the seller would have increased the price. The law of supply and demand is a great thing collectively, but it doesn't seem that great when we are the ones who individually lose out.

Gavin said...

Extra Credit - Dr. Tufte
Dr. Tufte said that, "the ability to raise prices - even when you can - is dependent on the elasticity of demand." Are consumers blaming suppliers for what truly are the effects of demand? If the suppliers are treating us so unfairly, then we should stop buying.

William said...

Dr. Tufte,
As you mentioned a lot has to do with the elasticity of the product. If the suppliers raise the prices and no one buys it, then of course they will have to rethink raising the price. But, if they raise the price and receive the same demand, then why wouldn't they raise the price. I think this is the same concept with gasoline. If people really could not afford gas then they would result to other sources such as carpooling, taking the bus, etc. Over time if the demand decreased then the gas companies would have to lower the price.

I think that too many times we complain about this issue, but it all boils down to the elasticity of demand. If you were the supplier you would do the same thing so stop being a hypocrite!

Hutton said...

Wow..... 84 Lumber offered me best quality products with true prices.

Dr. Tufte said...

Not much to add - I guess you liked me on this one. ;)>