EM 3 - Suppliers and Cost

Question 1

Willingness to Sell

Answer 1

WTS - minimum amount of money that a supplier is willing to accept in return for the input it sells
typically from the standpoint of the firm

Question 2

Value created by a firm

Answer 2

Difference between the WTP of the customer and the WTS of its suppliers.

Question 3

Value captured by a firm

Answer 3

The difference between the price it charges its consumers and the price it pays its supplies

Question 4

Value captured by consumer and supplier

Answer 4

Consumer - WTP - price
aka consumer surplus

Supplier - Cost and WTS
aka supplier surplus

Question 5

Fixed and variable costs

Answer 5

Fixed
costs that do not vary as quantity produced rises or falls

Variable
costs that vary with the level of production

Question 6

Sunk costs

Answer 6

Fixed costs that have already been incurred

should not impact decision making

Question 7

Opportunity cost

Answer 7

Value of the best alternative use of a resource

Question 8

Economic cost and Economic profit

Answer 8

Economic cost = Firm’s total cost of an activity - i.e. direct or explicit cost as well as opportunity costs

Economic profit = Measure of profit that also takes into account the opportunity cost of next best alternative

Question 9

Relative cost analysis

Answer 9

Analysis of how a firm’s costs compare to its competitors for each activity in its business.

Steps -

i. Understanding own costs;
ii. Understanding competitor’s costs; and
iii. Using relative costs to explore how decisions are affected.

Question 10

Supply curve

Answer 10

Relative cost analysis for all the firms in the industry.

Shows how much a supplies will be willing to provide at each price.

Question 11

Costs for entrants v incumbents

Answer 11

Incumbent - willing to sell at any price equal to or above variable costs

Entrant - will aim to cover both fixed and variable costs.

For feasible entry, the entrant’s average cost should be equal to or less than the incumbent’s marginal cost.

Question 12

Price war

Answer 12

Compare variable costs only to see who can win, if anyone can - about reducing losses rather than making profits.

But if it can’t match cost of production, might as well exit the industry.

Question 13

Fixed costs at scale

Answer 13

a burden in declining industries, great in growing industries

Question 14

Economies of scale

Answer 14

result of being able to spread fixed costs over larger units of production.

Question 15

Fixed costs and barriers of entry

Answer 15

Industries with high fixed costs are likely to have fewer competing firms, since they have a high minimum efficient scale.

Question 16

Where fixed costs reside

Answer 16

Important to consider where fixed costs exist for a firm/ industry, to consider whether there is economic benefit to be gained from expanding.