ch 6 definitions.docx - Midterm: Chapter 1-6, short answers...

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Midterm:Chapter 1-6, short answers and calculations, 2 hours, similar to end of chapter questions.1. Procure inputs? 3 methods to obtain inputs.i) spot exchange: informal relationship between buyer and seller.ii) writingcontractswith input suppliers: formal relationship between buyer and seller.iii) vertical integration: firm produces input internallyspot exchangeAn informal relationship between a buyer and seller in which neither party is obligated to adhere to specific termsfor exchange.contractA formal relationship between a buyer and seller that obligates the buyer and seller to exchange at terms specified in alegal document.vertical integrationA situation where a firm produces the inputs required to make its final product.transaction costsCosts associated with acquiring an input that are in excess of the amount paid to the input supplier.1.The cost ofsearchingfor a supplier willing to sell a given input.2.The costs ofnegotiatinga price at which the input will be purchased. These costs may be in terms of the opportunitycost of time, legal fees, and so forth.3.Other investments and expenditures required tofacilitateexchange.relationship-specific exchange:A type of exchange that occurs when the parties to a transaction have made specialized investments.Specialized investment:An expenditure that must be made to allow two parties to exchange but has little or no value in any alternative use.Site specificity: when the buyer and the seller of an input must locate their plants close to each other to be able toengage in exchange.Physical-asset specificity: an input is designed to meet the needs of a particular buyer and cannot be readily adapted toproduce inputs needed by other buyers.Dedicated assets: general investment made by a firm that allow it to exchange with a particular buyer.Human capital: workers must learn specific skills to work for a particular firm. If these skills are not useful ortransferable to other employers, they represent a specialized investment.2. how to decide which input method to choose?depends on whether the input is specialized, transaction costs and the complexity of contracting environment.i) Spot exchangewhen the input is standardized. if there is no relationship specific investment, no transaction costs, noopportunism, no under investment.Advantage: the firm and the input manufacture get to specialize in doing what they do bestDisadvantage: won’t work for relationship specific exchange and specialized investmentIssues need to be addressed:Costly bargaining: because there is generally no “market price” for the input, so the bargaining process generally is costly, aseach side employs negotiators to obtain a more favorable price.

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Term
Spring
Professor
JEFFWARD
Tags
Economics, Douglas, rob, Air Liquide

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