South-Western College Publishing - Economics  
Kodak Struggles To Learn From Its Past Mistakes
Subject Kodak tries to re-image itself as a digital photography leader, and move away from a print-picture market.
Topic Supply and demand; Product Markets; Profit Maximization and the Firm
Key Words

digital photography, Kodak, profits, film

News Story

Around 5 years ago, Kodak decided to move away from its core business of working with silver halide film, and enter the world of digital photography. It's learning that these may have been smart steps taken a little too late.

Since 2003, Kodak laid off 11,000 workers, and expects to eliminate 15,000 more by 2007. It is reinvesting all of its earnings into digital photography and allowing its former product, silver halide film, to fall by the wayside.

In some ways, Kodak has made great strides in the digital world. Its online photo service, EasyShare Gallery, is the market leader, with about 20 million members. It is already earning more money from its digital products than from film.

Life is not always so rosy, however. In 2003, the head of Kodak assumed that the US market would shrink by 10%, and by 6% worldwide. Those numbers this year are likely to be 30% in the US, and 20% worldwide. The digital photography world is changing faster than Kodak seems to be able to adjust to it.

Questions
1.

Using a graph of supply and demand, indicate what Kodak was facing in the market for silver halide film products.

2. If demand for digital cameras, for example, continues to increase by 5% per year, but the size of the market (the suppliers) falls by 20% worldwide, what would you expect to happen to the price of digital cameras? Why? Illustrate your answer with a graph of supply and demand.
3. Is the labor force adjustment mentioned in the article an example of long-run cost cutting, or short-run cost cutting? Support your answer.
Source "Another Kodak Moment." The Economist 12 May 2005.

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