Question

Please use the economics knowledge you have learned so far to analyze the case below. You can propose your own questions and then answer them. Remember, there is no absolutely correct answer to this exercise. Its purpose is to provide you an opportunity to demonstrate your ability to think like an economist by applying economic principles to interpret the logic of a real-world phenomenon.

Fluctuating Demand Helps—and Hurts—Intel and Other Firms

Intel is the world’s largest semiconductor manufacturer and a major supplier of the microprocessors and memory chips found in most personal computers. Because of its dependence on computer sales, Intel faces two problems. First, in recent years sales of personal computers have declined as consumers and businesses have switched to using tablets and smartphones. Second, Intel is vulnerable to the swings of the business cycle because sales of computers rise during expansions and fall during recessions. In 2015, Intel decided to lay off several hundred employees because businesses were only slowly increasing spending on computers and other information processing equipment. Intel and other firms experience swings in sales and revenue as a result of fluctuations in total spending, or aggregate expenditure, in the economy.

Answer 1

Microprocessors and memory chips work as complementary goods with computers. Hence, when sale of computers go down, demand for Microprocessors and memory chips also decreases.

Moreover, like all normal goods, sale of computers rises during expansions and falls during recessions hence Intel is vulnerable to the swings of the business cycle as its sale is dependent on sales of computers.

As revenue depends heavily on sales, and firms were only slowly increasing spending on computers and other information processing equipment, Intel experienced swings in its revenue and sales. Thus, it was not profitable for Intel to maintain its labour force, so it had to lay-off workers in 2015. Laying off workers would cut its costs and help the company remain afloat at a time where revenues were uncertain.