Chapter 6, Problem 1CACQ

To determine

To explain: The optimal method of procuring inputs along with the primary advantages and disadvantages of acquiring inputs with examples.

Explanation of Solution

An economic decision taken by the manager of the firm for the procurement of inputs in least possible costs. There are various approaches which can be used by the manager for producing the final product. These approaches are mainlydepending upon the nature of the product and the benefits get from the specialization. If the inputs used in the production of product have well defined and proper quality specifications and also requires highly specialized investments then the optimal procurement method would be 'contract'.

The advantages of this method are that the buyers and sellers both are tie up together because of the specific investment made to facilitate the exchange between them. Also, the chance of supplier taking the benefit of the manufacturer is nullified due to the enforcement of legal obligations.

The disadvantage of this method is that this will increase the opportunism which will increase the transaction costs as manufacturer would not able to take benefit of any fall in the market rate.

The example of this method can be explained as lets there is a local pizza manufacturer who need the dough for the base every morning at a particular time. As commitment for the production has already made, there is specialized investment which is made in advance. The supplier can threaten the manufacturer for not supplying the dough unless they will paythe payment. The supplier may also supply the dough with inferior quality. Hence, with this behavior of supplier,the manufacturer will find it so costly when supplier show opportunism.