ECONOMICS

Managerial Economics

Name: Mohammad Zaki

Student # 9262648

UAE Course Assessment 1

Assessment Reference - ME/Jul13/1

Abstract

Apple, one of the largest firms in the world today, provides a new way on how firms operate today in a vertically integrated manner. Technology has been changing and also the way the supply chain is changing too. Apple controls most of its value chain and also outsources some of the chain to others. The business model and the strategy apple are taking allows it to build on it proficiencies and minimize transaction costs.

Managerial Economics

Introduction

The definition of the firm and its existence in regards to transaction cost economics represents the firm as a profit maximization entity as mentioned in the Neo-classical theory. In this context, this paper shows the benefits and the cost of using the market versus the firm, relationship specific asset, contract feasibility, and ownership needed to mitigate contracting problems. This will give a clear view of whether a firm to integrate.

Vertical integrations help to bring upstream and downstream property and production under the umbrella of unified ownership and control. Vertical Integration inculcates the supply chain in which preparation of intermediate goods is made through the input of raw materials, which complements the final productions and ultimately reaches to consumers through the retail channel. This can happen either by merger or through insider growth. Vertical integration, as a matter of fact, enhances the market reach but does not stimulate competitive concerns. Vertical integration is possible through acquiring assets from the other firm, which are highly productive; however, vertical integration by dint of merger does give boost to competitive concerns (Riordan, 2005, p. 5).

Firms take the path of vertical integration to achieve transaction cost economics related to transacting with outside parties. The risks include incomplete contracting, production flows through the vertical chain, leakage of private information, and transaction costs. Besides all these, vertical integration gives a new dimension to the existing business without unnecessarily arousing competitive concerns.

Discussion

Firm Boundaries and Benefits and Costs of Using the Market

The firm needs to define its boundaries, which include vertical, Horizontal, and corporate. The three boundaries are highly significant when someone wants to look at the integrated firms, the transaction cost economics, and make or buy decision.

Market firms can be more cost effective by achieving economies of scale in comparison to the in-house department. Market firms are also more innovative as they are more focused than in-house department due to the competition that arises between different market firms if any. If the firm cannot reach the minimum efficient scale, it would be more cost effective to use the market rather than vertical integrate. The minimum efficient scale is the minimum efficient quantity of output that at which average cost is minimized. Economist John Johnston examined production costs for various industries and concluded that the average cost curve is L shaped, so average costs decline once the minimum efficient scale of production is achieved (Riordan, 2005, p. 5).

On the other hand, the costs of using the market firms are coordination of production flow ...