Economic Ripple Effect

I've been reading on economics lately, and I'm stumbling across traces of a theory that doesn't seem to have been fully examined (or perhaps, I simply haven't read quite enough to find where it has been): that the interdependencies among industries and markets have a specific and aggregate ripple effect: that supply and demand for one good impact the supply and demand for specific other goods, and that each good has a potential impact on market demand for all goods.

The specific ripple effect is fairly simple to conceive, as it is generally evident on the large scale and has a significant impact on the demand of specific goods that are component materials of specific other goods.

It's no great leap of logic to understand that an immediate increase or decrease in the consumer demand for bread in a given market initially impacts the baker, whose reaction is to increase or decrease his production - thereby increasing or decreasing his demands for component materials for his own product. In that way, an increased demand for bread yields an increased demand for wheat.

The more general impact on demand for all goods in a market is derivative of the increased or reduced need for a specific component of production: labor. Just as the baker needs less what to make less bread, so does he need fewer workers to make the bread. However, the decrease in demand for labor has a more widespread effect on the market, in that the value given in exchange for labor (wages) is itself exchanged for a wide array of goods needed by the laborers.

This is clearly evident in the example of the "mill town" where the closing of a cotton mill is devastating not only to the farmers who grow cotton, but to the laborers who worked in the mill, whose income is eliminated and, as a result, all local merchants suffer a significant loss in business.

My sense is that this ripple effect is evident, to a lesser degree, in the broader market of goods, where a change in demand for a given good creates economic ripples throughout related industries and specific local economies. A 10% decrease in the demand for cloth leads to a 10% decrease in the demand for cotton and a 10% decrease in the demand for labor (more or less - the precise ratio of labor to materials varies).

Where demand of one good is decreased as a result of substitution of another good, the "general" ripples likely cancel one another out - labor is not eliminated, but merely transferred from one industry to another. Hence in the mill-town example, a decreased demand for cotton cloth as a result of substitution of wool would lead to a decreased demand for cotton as an agricultural product, an increase in the demand for raw wool, and no significant effect on the demand for labor (except as there are inequities of productivity in the separate industries).

I'm likely venturing into deeper waters at this point, and will end this note here.