Week 2

Question 1

Where do lower costs come from?

Answer 1

• Cheaper factor inputs
  
  • Using market power or arbitrage strategies lower costs of labor and material.
• Economies of scale and scope
  
  • Using existing labor and capital more effectively

Question 2

Inputs of Production

Answer 2

• Labor
• Land and Infrastructure
• Physical capital
• Production inputs

Question 3

OEM – original equipment manufacturer

Answer 3

a company that produces parts and equipment that may be marketed by another manufacturer. For example, if Acme Manufacturing Co. makes power cords that are used on IBM computers, Acme is an OEM.

Question 4

Economies of scale

Answer 4

Cost savings realized from growing the volume of sales.

Question 5

Economies of Scope

Answer 5

Cost savings realized from growing the number of products a company sells - fixed costs are spread over larger quantities of production.

Question 6

Fixed Costs

Answer 6

Costs that don’t vary with the number of goods produced in the short run.

Question 7

Sunk Costs

Answer 7

Costs that can’t ever be recovered if production is interrupted - advertising or workforce training

Question 8

Variable costs

Answer 8

Costs that do vary with the number of goods produced in the short run.

Question 9

Price stickiness

Answer 9

Price Stickiness is broadly defined as resistance of a price (or set of prices) to change, despite changes in the broad economy that suggest a different price is optimal. “Sticky” is a general economics term that can apply to any financial variable that is resistant to change. When applied to prices, it means that the prices charged for certain goods are reluctant to change despite changes in input cost or demand patterns.

Question 10

Average cost

Answer 10

Total costs per unit produced

Question 11

Marginal costs

Answer 11

Change in total cost when another unit is produced.

Question 12

Diminishing returns

Answer 12

used to refer to a point at which the level of profits or benefits gained is less than the amount of money or energy invested.

One example of where there is no diminishing returns: the app store, tech industry. The more people that are part of the eco system – Google Play, Facebook etc. the better for its users and its creators…

Question 13

Economies of Scope v. Diseconomies of Scope

Answer 13

Question 14

Why go International?

Answer 14

• Extend a product’s life cycle
• Gain easier access to raw materials
• Opportunities to integrate operations on a global scale
• Opportunities to better use rapidly developing technologies
• Gain access to consumers in emerging markets
• Increase market size
• Economies of Scale and Learning
• Location advantages

Question 15

Choice of international modes of entry - as control increases, so does the risk associated with the venture

Answer 15