Demand Elasticity
Categories: Econ, Company Management, Financial Theory
Here’s your underwear band thingy. The bane of wedgies, super wedgies, atomic wedgies and over-the-head wedgies all around the globe.
What do they all have in common? Stretchiness. The band stretches and moves and gives.
Well, think about that elastic as representing the marketplace for a paperback copy of Moby Dick. It’s the same new paperback copy, freshly minted with that, um…new book smell. It’s the same product whether you buy it on Amazon, Barnes & Noble (for both people who still shop there) or at walmart.com, which has 34 more buyers than Barnes & Noble, so it’s the second place “winner” in the Book Wars saga.
Moby Dick. Same total commodity product. And lots of sellers of it. So the volumes sold depend almost entirely on price. Or rather, if the price of that book drops like two percent, you’d just buy it wherever it's sold cheaper. It's a total commodity, so the curves move around like…elastic. A buyer will go to the area of least, uh…resistance. And yeah...it’s like what happens in that atomic super wedgie.
So if elastic means “no pricing power of the seller, and very low margins for the seller and a world where the buyer has all the power”...then what’s inelastic?
Well, it’s when you try to do an atomic wedgie on some dude wearing steel underwear. It doesn’t move. The material is inelastic.
Inelastic would be the sole remaining copy of Moby Dick, signed by Melville himself, and still with a little whale blubber oil on the manuscript cover. There’s only one copy. And hundreds of billionaires all around the world who read (or maybe just care about important literature) would love that copy. Could it sell for 50 bucks? A thousand? A hundred thou? A mil? Sure sure sure sure sure. All the power is with the one seller of that product, who can charge almost anything they want when they go to sell it.
Think of inelastic demand as being things you can’t live without. Like that last drink of water for a parched human traveler in the desert. Or chemotherapy to a cancer patient. Prices can go up or down, and it won’t matter. Buyers will pay and sellers will reap the powered rewards of inelasticity.
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Finance: What are accretive v dilutive v...18 Views
Finance allah shmoop what are at creative dilutive and neutral
acquisitions All right people Well it's all about the multiples
you work for boring co dot com You make stationery
roller coasters for the faint of heart And you grow
revenues at about ten percent a year All right well
your stock trades at about twelve times earnings and you
really want to buy your would be competitors Let's bounce
dot com which makes concrete bounce houses Yeah they're made
in russia What do you expect Unfortunately let's bounce has
been growing revenues at about fifteen percent but because they
make such a much more exciting than you do product
people are really into inflicting pain on themselves these days
Well they trade at thirty times earnings thirty years Fifteen
they're thirty they're willing to be bought but they'll want
thirty six times earnings for the privilege That is a
twenty percent premium toe where they trade today And they
only want stock no cash you know because the primary
shareholders would all suffer a huge tax bill if they
took cash so they'll only take stock Yours All right
So this is a conundrum You traded a low multiple
Twelve times your shareholders own you because you are a
quote value story unquote meaning that your cheap but you
are a low risk company Now if you try to
buy a growth company and pay a high multiple for
it well you risk alienating your shareholder base and that's
bad like they'll sue you in elected Different forces will
do different things but if you do buy let's bounce
while the combination would be really powerful birthday parties everywhere
would be a thrill a minute or something like that
Well the problem is that a twelve times earnings company
paying thirty six times earnings to acquire a competitors is
dilutive to that twelve times earnings company That is the
combined company If each piece were equal and they just
merged as equals a mow their m o ya that's
what they're called Well they would not have one Half
of the combined company is being valued at twelve times
earnings when it was a standalone company and then another
piece valued at thirty times as a stand alone but
combined at a price of thirty six times that's twelve
plus thirty six or forty eighth and divided by two
Companies combining here so the new company should the stock
price is all remain flat at the proposed acquisition or
merger Price set would be trading at twenty four times
earnings and we're talking really slow so you could follow
the map All right well the combination of born cohen
let's bounce would have been diluted to boring co because
it's multiple of twelve would've been diluted down via the
high multiple paid for let's bounds and the combination would
have been act creative too Let's bounce because now they're
stock will traded around twenty four times earnings instead of
thirty times earnings Right obviously had both companies traded the
same multiple of earnings when they combined Well there'd be
no dilution or at creation for either side and the
merger would simply be called neutral sort of like someone's
reaction to a roller coaster that neither rolls nor coasts
Yeah it's sort of like doing these videos are just
just keeping it real enough No we love doing good 00:03:14.905 --> [endTime] bye