A business manager in a capital-intensive industry needs to monitor its own industry cycles because they routinely experience (a visual cycle of over investment, over capacity, and the price war).
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. |
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. |
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 which can be discarded just from reducing production. Some examples are labor, raw materials, and energy.
Costs which is not changing in the short-term. Some examples are insurance, interest and depreciation, rent or a lease, and some administrative staff expense.
It’s the decrease in value of assets, whether it’s from wear and use or just because the item is now outdated.
Describe the characteristics of the following events briefly.
Well you had a few factors, you had the Invasion of Ukraine and with Russia being one of the worlds largest oil producers lead to nations in Europe and around the world having to get there oil from other countries, which is expensive. You also had more people traveling and a more increase of oil demand as the pandemic has ended. Also we are producing less oil, OPEC+ is producing less oil then its target amount. So with more demand and less of the product its value is going to go up, they are simply making more money per barrel.