ECON 2005 Lecture Notes - Lecture 23: Insourcing, Outsourcing, Bounded Rationality

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tanox42

4 Apr 2018

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Insourcing (making your inputs yourself) vs outsourcing (buying inputs from elsewhere: vertical integration (cid:862)i(cid:374)sour(cid:272)i(cid:374)g(cid:863, expansion into earlier/later stages of production, this lowers transaction costs and gives the firm more power, but: So, it is cheaper to buy than to make. Economies of scope: often it makes sense for firms to produce a wide variety of different products. When such a structure is more efficient, we say that the firm realizes (cid:862)e(cid:272)o(cid:374)o(cid:373)ies of s(cid:272)ope(cid:863) In such a case, it is cheaper to produce different items in one firm: average cost per unit falls as the firm supplies more types of products (as the scope increases) Market failure occurs when resources are misallocated or allocated inefficiently. The result is waste or lost value: there are four important sources of market failure: Lower price for a given quality find the best deal: better quality for a given price find the best product, the marginal benefit of more info decreases.

Related Questions

Firms experience economies of scale for several reasons. What is one such reason? A firm might experience economies of scale because

A. a firm's technology may make it impossible to increase production without a larger proportional increase input usage.

B. managers begin to have difficulty coordinating the operation of the firm.

C. workers become more specialized, enabling them to become more productive, as output expands.

D. as a firm expands it may have to borrow money at a higher interest rate.

E. large firms may be required to purchase inputs at higher costs than smaller competitors.

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True/False (Explain) (The explanation is the most important part no credit will be given for True/False answer alone)

1)There are very large numbers of restaurants in major cities such as Los Angeles and very large numbers of restaurant customers, so it is appropriate to use the supply and demand model to analyze the market for restaurants in this sort of city.

2) A particular firm has decreasing returns to scale at all levels of output. If it was divided into two smaller firms that each uses exactly half the amount of all inputs compared to the original firm, and prices remained constant, the combined profits of the two smaller firms would be greater than the profit of the original firm.

3) Competitive firms always earn zero profits because their marginal cost is equal to their marginal revenue at the optimal level of production.

4) An increase in the price of an input used by a firm leads to higher costs and lower profit at the original quantity produced; therefore, it should respond by increasing its quantity produced so that its revenue will increase.

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11-Short-run costs which increase and decrease as an output increases or decreases are called: a.Variable costs b.Secondary costs c.Derived costs d.Partial costs e.Potential costs 12.The addition to total cost resulting from the addition of the last unit of output is called the: a.Total variable cost b.Average variable cost c.Fixed cost d.Implicit cost e.Marginal cost 13.The fact that a single large factory may be more efficient than several smaller factories of the same total capacity is a reflection of: a.Increasing returns of scale. b.The law of diminishing marginal returns c.Comparative advantage d.The crowding-out effect e.Reproduction cost of assets 14.A possible reason for the existence of increasing return to scale is: a.The inability of a firm to increase all inputs proportionally b.Problems of coordination and control c.Higher input prices d.Larger fixed costs with a larger plant size. e.Greater specialization 15.The model of perfect competition is useful because: a.Most firms in the real world are perfectly competitive b.Perfectly competitive firms exert significant perfect competition. c.Government regulation is designed to eliminate perfect competition. d.It is a model of an ideal world which sheds much light on a market structureâs effects on resources allocation e.Advertising agencies are heavily dependent on the advertising dollars of perfectly competitive firms 16.A market consisting of many firms producing homogeneous products, having complete knowledge of relevant information, no power over the productâs market price, and low barriers to entry is characteristic of: a.Perfect competition b.Monopoly c.Monopolistic competition d.Oligopoly e.None of the above markets 17.A market consisting of many firms, low barriers to entry, some control over price, but considerable non-price competition is characteristic of: a.Perfect competition b.Monopoly c.Monopolistic competition d.Oligopoly e.None of the above. 18.A market consisting of a few firms producing similar products with significant barriers to entry is characteristic of: a.Perfect completion. b.Monopoly c.Monopolistic competition. d.Oligopoly e.None of the above

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ECON 2005 Lecture Notes - Lecture 23: Insourcing, Outsourcing, Bounded Rationality

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