A business manager in a capital-intensive industry needs to monitor its own industry cycles because they routinely experience ().
Elements that make capital-intensive industries prone to overbuilding:
A hypothetical example illustrating how the cost structure could induce huge swings in prices and profitability.
| mining company (VC = $25/ton, FC = $20/ton) | strawberry importing company (VC = $40/pound, FC = $5/pound) | |
|---|---|---|
| When the price is above $45 | keep producing because it is profitable | keep producing because it is profitable |
| When the price dips below $45 in a downturn | Little change to production. There is little flexibility because much of the cost is fixed. The company keeps operating as long as the price is not lower than VC, $25. | Decreased production. The company is flexible because much of the cost is variable. For example, it can cut production with layoffs. |
The early warning system for capital-intensive industries is required to include an indicator for new capacities in said industry.
Think contrarian.
| A manager should: | |
|---|---|
| When prices rise and competitors announce new expansion plans | Stop adding new capacity. Sock away cash and wait for the industry’s over-expansion to play out. |
| When writers gather up all the bad news at the bottom of the market | Pick up new capacity as troubled competitors offer up equipment and facilities at discounts. Do not move too quickly and wait for real distress by monitoring the financial conditions of weak competitors. |
These industries that put such a high stress on capital intensity require a different type of warning system from other industries.
Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
Costs that can be eliminated by halting and cutting production
A cost figure that is not affected by production
How market value decreases (or depreciates) over time
Describe the characteristics of the following events briefly.
The U.S relies heavily on foreign oil imports, so when Russia attacked Ukraine in early 2022 those oil prices skyrocketed. Another reason oil prices were driven up is inflation, the value of a dollar has been depreciating for a while now. Oil prices going up isn’t necessarily a bad thing, as it highlights the ever so important need for the U.S so increase clean sustainable energy production. Political pundits like to point to oil prices as a sign of the current administrations struggles. Personally I believe that this is shady and misleading as it doesn’t take into account the real factors that actually contribute to oil prices rising.