1c_Cost - Suppliers and Cost ManEc 387 Economics of...

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Nile W. Hatch © 2002 – 2008 ManEc 387 Economics of Strategy Suppliers and Cost 1
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Rivalry between Competitors Nile Hatch © 1996 – 2008 Exploring Industry Structure Threat of Potential Entrants Customer Preferences Threat of Substitutes Bargaining Power of Suppliers 2
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Nile Hatch © 1996 – 2008 Production, Suppliers, and Strategy • Suppliers infuence our economic perFormance through our costs • ±irms incur costs as they use inputs to produce outputs (products or services) • Suppliers are the source oF inputs, and increase costs to the degree they can raise their prices • Their power is determined by our elasticity oF demand For their products 3
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Nile Hatch © 1996 – 2008 The Cost of Chocolates 4 4
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Nile Hatch © 1996 – 2008 Cost of Wrapped Chocolates 5 Total Costs Unit Costs Stop Labor X Q=f(x) FC VC TC AVC AFC ATC MC 1 2 8 8 2 2 10 10 3 2 15 13 4 2 20 15 5 2 25 13 6 2 30 10 7 2 35 6 Labor (wage rate)/stop $0.17 Cost of unwrapped chocolates $0.25 Price of wrapped chocolates $0.50 5
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Nile Hatch © 1996 – 2008 Elements of Cost Firms Incur Costs Using Inputs Total cost is an (always) increasing function of output and assumes that Frms produce efFciently. Variable cost is the cost of variable inputs (e.g., direct labor, raw materials, sales commissions) and varies directly with output. Fixed costs remain constant as output increases Q TC(Q) = VC(Q) + ±C VC(Q) ±C $ 6
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Nile Hatch © 1996 – 2008 Properties of Cost The properties of cost are determined by the shape of
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This note was uploaded on 04/22/2011 for the course MANEC 387 taught by Professor Crawford,l during the Fall '08 term at BYU.

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1c_Cost - Suppliers and Cost ManEc 387 Economics of...

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