MGEC40H3 Lecture Notes - Simultaneous Game, Economic Equilibrium, Sequential Game

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If you outsource, the company you"re buying from may have a cost advantage when producing your supplies because they make plastics for toys, cars, etc. they have a much higher lever of production scale economies. It could also be scope economies, they make a variety of products. Scope economies often lowers their average cost curve because they"re resources are spent more efficiently, sometimes there"s a byproduct can aid other production of goods, such as the by product of heat encourages agricultural growth. Economies of scope often creates synergy; thus encouraging consumers to buy other goods. The company has been producing say ink for a very long time, so they have the leading ink production technology. And there is enough competition between the suppliers, this will help drive down the price. If it was perfect competition, then price will be average cost. These are direct reasons for why the suppliers charge at this price.

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