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Politics : Formerly About Applied Materials

AMAT 249.89

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Nov 26 3:59 PM EST

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To: Katherine Derbyshire who wrote (24446)	9/20/1998 8:01:00 AM
From: Clarksterh	Read Replies (2) of 70976

Katherine - But I think you may be saying the same thing in a different way. If prices drop because no one will buy at the current price, then you have a demand shortage rather than a supply surplus, but it's still too much capacity. I am definitely confused by what you find confusing here. Not all drops in price are associated with over-capacity/lower-margins. The most famous example of this is the drop in car prices by Ford at the beginning of the century. As Ford got more and more efficient at manufacturing cars, he dropped the prices without adding much in the way of extra features. His margins stayed about the same since the demand elasticity was such that even at lower per-car costs and sales price his total revenues still grew substantially. He ran into trouble only when the demand elasticity curve gave out - people didn't want a black, no-features, car for $50. They would rather have the price point fixed at several hundred dollars and new features added. So hypothetically, imagine that there is a huge unfulfilled demand for cheap (less than $500) full P-II class machines for your kids, kitchen, ... . Right now this is untapped because the manufacturers would actually lose money at this (i.e. very small margins), but as prices come down via Moore's Law, and as the systems get shrunk onto fewer chips it may become possible to sell these devices for $500 and still make the same margins as computer makers currently do - as long as the demand elasticity is enough that total revenues continue to grow at 20% per year or so to soak up excess capacity. Clark PS The computer in the kitchen was a little hyperbolic, but nonetheless the situation isn't all that different than the one for TV's in the 50s. I suspect that the 50s family would have found the concept of an RCA TV in the kitchen bizzarre, but it happened none-theless.

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