You may wonder how prices in one market affect the prices in others. For example, you often hear that OPEC is reducing their oil production, oil prices are increasing, and that is going to affect the price of your airline ticket. Or, most recently, increases in tariffs are going to raise steel prices which are going to affect the price of cars. How does that work?
Let’s talk about butter… and croissants. If you’ve ever made a croissant, you know that there is a lot of butter that goes into it. But, let’s be honest, most people have not spent two days making a batch of croissants. More likely, you’ve eaten a croissant. What creates that beautiful flakiness? What’s that amazing flavor that you taste? Butter! Croissants are layered with butter. I’d go as far as to say that besides flour it is the KEY ingredient.
The French are known for the croissants. You can’t walk down a Parisian street without walking by a
French patisserie selling pain au chocolates (chocolate croissants… forgive me if that is not how you make a plural of the French spelling of "chocolat"). A few years ago, the French had a crisis. There was a shortage of butter in French grocery stores. Here is what happened:
1. The world demand for butter increased. The “West” was viewing butter in a more positive light. Meanwhile, the “East” started increasing the use of butter in their cuisines. So… at every price level, more people were wanting to buy butter than before.
2. What happened to the price of butter? It increased! More people wanted butter than suppliers were willing to sell at the original price, so the price went up.
3. What happens when the price of butter rose? Suppliers stepped up and supplied more butter. Some people substituted toward cheaper substitutes (such as margarine… gasp).
4. But… wait… why did that cause a shortage in France? I thought suppliers were supplying more. As an economist, this is the funny part. French grocery stores refused to raise the price they would pay for the butter (in economic terms, they imposed a price ceiling on themselves). If you are a supplier of butter are you going to supply abroad where you can get a higher price? Or are you going to supply to the stubborn grocery stores? I think you know the answer. Suddenly there were empty shelves at the store.
5. Eventually, the French grocery stores relented and increased the price they would pay for butter. The stock of butter at their stores returned to normal… even if the price of butter was now higher.
Ok. So demand for butter increased which led to higher butter prices. But, what does this have to do with croissants? Think about it. Did the change in butter prices happen in a vacuum? Nothing else is affected? No! Suddenly, anything that uses butter (think French croissants) becomes more expensive to make. As a French patisserie that is churning out pain au chocolats, their cost of production just went up.
Maybe patisseries have to raise prices. Or, maybe their profit margin falls. That decision will likely depend on whether stores think this change in price will be permanent or not. But, you can see how the price of butter would affect the croissant market. All because the demand for butter increased.
Now, hopefully you have a minimal understanding of how oil or steel prices (both inputs in other markets) might affect the price of other goods.
Sources:
Want to hear more about the French Butter crisis? Listen to this humorous blog by NPR.
Recipes for chocolate croissants:
I loved this recipe from Sally's Baking Blog. I was super intimidated by pounding out butter, but she recommends softening the butter, then shaping it, then re-chilling it. Worked like a dream.
Then I got to the last step. I had trouble flattening my dough, so I jumped over to King Arthur Flour. I like the way they recommend rolling out the dough and cutting in the shapes you want already.
Key words: input prices; shortage; price ceiling