Write two summary articles for following two articles(I will post the link) that gives a brief summary, states a problem the business (or individual) is facing, and connect the chapter content to the article.The link for article 1 is : http://www.foxbusiness.com/features/2014/02/13/smartphones-with-flappy-bird-sell-for-thousands-on-ebay.htmlfor article 2: http://www.ibtimes.com/why-do-roses-cost-more-valentines-day-how-buy-cheap-flowers-amid-spike-prices-because-1815850you should use the related knowledge from the ppt that I attched with this question. Each article should be about 500 words.Dont plagiarize any other one’s articles !froeb3e_08a.ppt11
Chapter 8
Understanding
Markets and
Industry Changes
1
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Anecdote: Y2K and generator sales
• From 1990-98, sales of portable generators grew 2%
yearly.
• In 1999, public anticipation of Y2K power outages
increased demand for generators.
• Walters, Rosenberg and Matthews invested
to increase capacity in anticipation of this
demand growth – they vertically integrated
their company to increase capacity and
reduce variable costs.
• Demand grew as expected – Industry shipments increased
by 87%. Prices also increased by an average of 21%.
• Discussion: What will happen next? Why?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Which industry or market?
• Every industry or market has a time, product,
and geographic dimension.
• For example: The yearly market for portable
generators in the U.S.
• Time: annual
• Product: portable generators
• Geography: US
• When analyzing a problem, or investment
opportunity, it helps to first define the time,
product and geographic dimensions of the
market in question.
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Shifts in the demand curve
• Movement along the demand curve indicates the
“quantity demanded” increased.
• Shifts in demand curve can occur for multiple
reasons
• Uncontrollable factor – affects demand and is out
of a company’s control.
•
Income, weather, interest rates, and prices of substitute
and complementary products owned by other companies.
• Controllable factor – affects demand but can be
controlled by a company
•
Price, advertising, warranties, product quality,
distribution speed, service quality, and prices of
substitute or complementary products also owned by the
company
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Anecdote: Microsoft
• In the late 1970s, Microsoft developed DOS, an
operating system to control IBM computers.
• The price for DOS depended on the price and
availability of computers that could run it and the
applications that ran under it as well as the price of
DOS itself.
• To increase demand for DOS Microsoft:
•
Licensed its operating system to other computer
manufacturers
•
Developed its own versions of complimentary products
•
Kept the price of DOS low
• Discussion: How did Microsoft control demand
using these factors? How did competitors (Apple,
for example) operate differently?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Demand increase
• At a given price, more quantity demanded
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Supply curves
• Definition: Supply curves are functions that
relate the price of a product to the quantity
supplied by sellers.
• Discussion: Why do supply curves slope upwards?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Market equilibrium
• Definition: Market equilibrium is the price at which
quantity supplied equals quantity demanded.
• At the equilibrium price, there is no pressure for the
price to change given the equality of quantity demanded
and supplied.
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Market equilibrium (cont.)
• Proposition: In a competitive
equilibrium there are no
unconsummated wealth-creating
transactions.
Price
$12
$11
$10
$9
$8
$7
$6
$5
$4
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Demand
1
2
3
4
5
6
7
8
9
Supply
9
8
7
6
5
4
3
2
1
Using supply and demand
• Supply and demand curves can be used to describe changes
that occur at the industry level
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Portable generator market 1997-1998
• 1997- Stable industry sales with intense competition (2% avg.
sales growth)
• 1997- Industry anticipates record demand will occur in 1999
• 1998 – Massive capital expenses throughout industry on vertical
integration projects
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Generator demand shifts graph
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using supply and demand (cont.)
• Discussion: “over the past decade, the price of
computers has fallen, while quantity has risen.” How?
Why?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Problem: commercial paper
• In September 2008 there was a
significant increase in prices and
decrease in quantity in the commercial
paper market
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Commercial paper problem
(cont.)
• In the second week of September the
price of the loans (interest rate) shot up
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Commercial paper: Question
• These changes spooked Treasury Secretary
Paulson and Federal Reserve Chairman Ben
Bernanke, and they were characterized as
a “freeze” in the market for short-term
lending, the essential “grease” that
facilitates the movement of assets to
higher-valued uses.
• What could have accounted for these
changes?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Commercial paper: Answer
• After a few big bank failures, commercial lenders
became increasingly worried that borrowers would
not be able to repay the commercial paper loans.
• This resulting decrease in supply caused both an
increase in the price of borrowing (the interest rate)
and a decline in the amount of lending.
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Prices convey information
• Prices are a primary way that market participants
communicate with one another
• Buyers signal their willingness to pay, and sellers
signal their willingness to sell with prices
• Price information especially important in financial
markets
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Prices convey information
(cont.)
• Discussion: Gas pipeline burst between Tucson
and Phoenix
• What happened to gas prices in Phoenix, in Tucson
and in Los Angeles?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Market makers (cont.)
• If there were but a single (monopoly) market
maker, how much would she offer the sellers (the
bid)?
• How much would she charge the buyers (the ask)?
• How many transactions would occur?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Market makers
• Discussion: Compute the optimal “spread”
• Discussion: Competition forces spread down to the
costs of market making, $2. What is bid-ask spread?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Competition among market makers
• On May 26, WSJ & LA Times published results of Bill Christie’s
research
• On May 27, spreads collapsed
• Discussion: WHY?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Extra: using demand and supply
• Discussion: Is there a shortage of affordable housing?
• Discussion: Is there a shortage of kidneys?
Copyright ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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