W 4: Is The Balloon Market Over-Inflated? - Capacity In The Market

For more information about how hot-air balloons are marketed and the way the market is split, you may want to look at the explanation of marketing. This worksheet looks at the problems that may be caused for firms by the over-capacity that exists in the balloon market currently.

A printable version of this worksheet is available for filling in answers.

Step 1 - What inflates it in the first place?

In the case of a market (as well as an individual!!) over-capacity may occur because of a high growth in the level of demand. When a product is in the growth phase of its product life cycle (see worksheet on product life cycle and the marketing theories section for more information on product life cycles), there will be a high level of demand for the product.

Fill in the diagram below to show the effect of an increase in demand:

What has happened to the:

• equilibrium price?
• equilibrium quantity?

Now, if the price has gone up the market mechanism will then automatically attract resources to the production of that good. The higher price acts as a signal to firms that there are good profits to be earned in the production of this good, and so new firms are attracted into the industry.

Draw on the diagram below the effect on the market of new firms entering that market:

What has happened now to the:

• equilibrium price?
• equilibrium quantity?

So the combination of these two effects is:

1. demand grows
2. price increasing
3. new firms attracted into the industry
4. more capacity in the market
5. as this extra capacity grows too fast: price falling

Step 2 - What happens when it is inflated?

As we have seen in Step 1, over-capacity in the market may lead to the price falling. This can make life difficult for the firms in the market.

What can firms do to avoid these price falls having an adverse effect on their profits?

A key part of avoiding problems is forecasting and planning. If a firm can forecast when these market changes are going to take place, they may be able to plan ahead and minimise the impact of them. Using your course book or library, investigate what different types of planning there are, and write a short paragraph outlining what they are and why they are important.

Step 3 - When is over-capacity most likely?

Economies tend to grow in cycles. The peaks and troughs of the trade cycle on average have been on average 5 years apart. The trade cycle may look something like this:

Which phase of the cycle is over-capacity most likely in? Justify your answer.

As outlined in the marketing explanation section balloons will tend to be an income dependent purchase. The faster incomes are growing the more likely people are to buy one. This makes recession a difficult time for balloon manufacturers. Fill in the table below to show the effect the different stages of the cycle will tend to have on their business:

Stage of the cycle	Sales	Profit	Liquidity	Investment	Prices	Employment
	High / low	High / low	Good / bad	High / low	High / low	High / low
Boom
Recession

Step 4 - How does it all finish?

In the end the over-capacity may have to lead to changes in the industry. Write a short paragraph detailing what these changes are likely to be.