MISC Flashcards
GVC-CH 3
- Input factors such as L and K are available worldwide
- Technology spillover: GVC allows technology flows between countries and firms, especially between lead firms and suppliers of key components.
- Increasing returns to scale
-If part of the GVC, customers all over the world will buy products, more people buy = bigger factories = more efficiency
Sunk Cost-CH 4
Sunk Costs must satisfy:
-1. Cost has to be incurred
Ex: “I plan to spend 10 million, not a sunk cost since not incurred”
-2. Cannot be recovered
Sunk cost is not equal to fixed cost
Ex: You paid $10 and can resell for $20, not a sunk cost
- -Can result in entry/exit barriers
- -OC are zero
LR Cost Advantages (3)-CH 4
- Economies of scale
- Learning Curve
- Economies of scope
Transaction Costs- CH 4
Market is not as perfect: lots of transaction costs in the market
Ex: Signing contracts (lawyer needed):
If cost is too high, better for a firm to internalize transaction cost, supplier and buyer merge
Firm may substitute the market- sideeffcts arise
- Optimum size of firm (minimize transaction cost): As a firm expands, transaction costs will increase, but its optimum if transaction cost in firm is less than market
- You stop when cost for firm internal = cost in market
Transaction costs for using the market- CH 4
- Coordination costs: Arise when products have components that must relate to each other in a precise way. Slight delays in delivery may result in large delays in production
- Information leakage: When an external supplier also supplies competitors or is capable of forward integration.
- Transaction costs in contracting: Arise when it is costly to research, write and enforce contracts.
- Information costs (pre-contact search costs)
- Contracting costs (writing the contract)
- Enforcement costs (post-contract monitoring and settlement)
Transaction costs within a large integrated firm- CH 4
1.Agency costs
When workers and managers knowingly do not act in the best interests of their firm: manager might misallocate resources
These are costs associated with monitoring and minimizing these problems: increasing overhead costs
2.Influence costs
Costs of activities aimed at influencing the distribution of benefits within a firm
Williamsson Chart To make Decisions- CH 4
Frequency: If you have to contact supplier frequently, transaction costs will be higher
Asset Specificity: How specific is the asset, if you need something in particular (special), transaction cost will be high since it’s hard to find a supplier
Types of Market Failures - CH 5
Market failures are said to exist when:
Monopoly power is present
Transactions occur under conditions of incomplete or asymmetric information
There are significant transaction costs
All costs and benefits are not fully reflected in input and output prices (externalities)
There are public goods (goods which are non-rivalrous in consumption and non-excludable)
Positive Externalities
If actions bestow positive benefits on others (like education), it will show up in the demand curve
If actions lessen costs for others (like pollination), it will show up in the supply curve
Negative Externalities
Actions impose costs on others (like pollution to the environment), it will show up in the supply curve
Actions lessen benefits for others (like cigar smoking), it will show up in the demand curve
Public Good two Characteristics - CH 5
-Non-rivalrous in consumption: it costs little or nothing to provide the good to an additional consumer (marginal cost of provision is zero)
Ex: Street light, you benefit, someone else benefits. No competition
-Non-excludable in consumption: costly to exclude anyone.
Free Rider Problem
Everyone prefers someone else to pay and enjoy it for free
Government will say: everyone contributes their income tax to pay for the public good
