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• Week 1

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• What are the sources of economies of scale?

  1. Economies of scale due to spreading of Product-Specific Fixed Costs
  
  Example: lower fixed costs per unit, as the factory functions at a full level
  
  
  
  
  2. Economies of scale due to Trade-Offs among Alternative Technologies
  
  
  Example: Larger sales-a certain type of factory, Low sales-a different type of factory
  Short-run economies of scale: reduction in average costs due to increases in capacity utilization
  Long-run economies of scale: reductions due to adoption of a technology that has fixed costs but lower variable costs

• How can production be and give explanation?

  -Capital intensive: where the cost of productive capital such as factories and assembly lines represent a significant percentage of total costs.
  In this case, substantial product-specific economies of scale are more likely
   
  -Material or Labor intensive: where production expenses go to raw materials or labor.
  In this case, minimal product-specific economies of scale are likely, because materials and labor are divisible, they change in proportion to changes in output, with the result that average costs do not vary much with output. 

• What are the sources of diseconomies of scale?

  1.Labor costs and firm size
  Large firms have to pay a premium for their workers (for less interesting job, higher skilled worker)
  
  
  2.Spreading Specialized Resources Too Thin
  If a specialized input is a source of advantage for a firm, and that firm attempts to expand its operations without duplicating the input, the expansion may overburden the specialized input.
  
  
  3.Bureaucracy
  Information becomes slow. Incentives within large firms may be muted. 

• What represents the learning curve?

  Refers to advantages that flow from accumulating experience and know-how. It refers to reductions in unit costs due to accumulating experience over time and can be independent of the current scale of activity. It involves cumulative output rather than marginal.

• What are the costs of "Buying"?

  It is harder to coordinate the production flows
  
  
  Private information may be leaked when an activity is performed by an independent market firm.
  
  
  There are higher transaction costs 

• What is Vertical Foreclosure?

  Use vertical integration in order to tie up channels

• What are the reasons preventing complete contracting?

  1.Bounded Rationality
  2.Difficulties specifying or measuring performance
  3.Asymmetric information

• What is a relationship specific investment?

  (RSI) the amount of your investment that you cannot recover if your company does not do business with that specific company. 

• What is a rent?

  The profit that you expect to make when you build the plant, assuming all goes as planned

• What are the alternative forms of organizing transactions?

  1.Nonintegration: The two firms are independent, each set of managers has control over its own assets
  2.Forward integration: The upstream company owns the assets of the downstream company
  3.Backward integration: The downstream company owns the assets of the upstream company