Can anyone explain this graph ? it's from Duke 2016 Special Steel case

Hello!

It´s an interesting case, indeed .

The first thing that catches my eye is that it seems like a classical demand-supply graph, but the axis here are inverted! Normally, you would have price in the Y, which makes it more interpreatable

Instead of reading it as "the higher the total production is, the higher the prices are", read it as "the higher the price becomes -for raw materials for instance-, the more suppliers supply -since it make sense internally only from certain thresholds onwards-. It´s pretty clear if you look at those graphs in the alluminium industry for instnace.

For this in particular, I would interpret it as that there is excess supply to meet the current demand with the expected prices - 3 VIMs at 75K.

Hope it helps!

Cheers,

Clara

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Hi there,

Tricky chart!

This is a classic supply/demand chart (normally in economics cases, not strategy ones)

There has clearly been a (positive) exogenous shock to demand that has shifted it right.In the meantime, the client has recognized this and planned for increased capacity.

The problem is this chart is bad economics. The axes should be reversed (quantity on the x-axis, price on the y-axis). Please read about supply/demand to understand how to understand this chart better..

There's the demand curve which indicates how many people would buy at a given price. Supply determines where these two curves meet, which sets the quantity supplied and the price.

You'll need to calculate the clients total profits a point A, B, and C to figure out how many VIMS they should have. The formula is as follows:

Revenue = Quantity (y-axis) X price per ton (x-axis)

Cost = Cost of each VIM X number of VIMs

You can also calculate marginal cost/revenue at each stage, to see where you start to lose money.

Supply Demand Curves

https://www.econlowdown.org/supply-and-demand?module_uid=120&section_uid=292&page_num=2610&p=yes

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