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CIPS Exam L4M5 Topic 1 Question 57 Discussion

Actual exam question for CIPS's L4M5 exam
Question #: 57
Topic #: 1
[All L4M5 Questions]

In a commercial negotiation, a procurement professional believe that the larger the order quantity from buyer, the lower the supplier's average costs. Is this assumption true?

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Suggested Answer: B, D

A perfectly competitive market is one with the following features:

- There are many firms producing identical or very similar (homogeneous) goods or services

- There are no barriers to entry to the market or exit from the market - anyone can enter or leave easily

- Both producers and customers have perfect knowledge of the market place, prices, costs of production and influences on demand and supply

Under these conditions, the price and quantity will always tend toward equilibrium as any producer that sets a price above equilibrium will not sell anything at all, and any producer that sets a price below a equilibrium will obtain 100% market share in theory. The demand curve is perfectly elastic, which means that it will be horizontal. In a perfectly competitive market, it is difficult to increase profits through pricing, and suppliers instead must focus on their cost structure. As these conditions imply, there are few if any examples of perfectly competitive market.

LO 2, AC 2.2


by Elbert at Apr 22, 2024, 09:24 PM

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Antione
25 days ago
Hah, the supplier's pet hamster eats all the profits? Now that would be a wild answer choice. But in all seriousness, I think D is the way to go here.
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Amos
26 days ago
This question is a real head-scratcher. I'm just hoping I don't get a 'trick' answer like 'the supplier's pet hamster eats all the profits' or something.
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Louann
11 days ago
A) No, because supplier's average costs will rise as the buyer's demand increases
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Josphine
1 months ago
Profit is not the same as lower average costs. Just because the supplier makes more money doesn't mean their costs per unit go down. I'm going with B.
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Carey
2 months ago
I think the correct answer is D. Larger order quantities will allow the supplier to take advantage of economies of scale, which should lower their average costs.
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Lelia
That's true, investing in new facilities could actually increase their average costs.
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Audria
1 days ago
But what if the supplier needs to invest in new facilities to meet the demand?
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Anika
7 days ago
I agree, larger orders can help suppliers reach economies of scale.
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Jerry
2 months ago
I agree with Harley, the supplier may need to invest in new facilities to meet the demand.
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Elinore
2 months ago
Hmm, I'm not sure about this one. The supplier's average costs could actually rise if they need to invest in new facilities to meet the larger demand. But I guess it depends on the specific circumstances.
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Simona
1 months ago
D) Yes, because larger order quantity will always enable the supplier to reach its economy of scale
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Joaquin
1 months ago
Hmm, that makes sense. It's important to consider the additional costs that may come with meeting a larger order quantity.
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Sabrina
1 months ago
B) No, because the supplier may need to invest in new facility to meet buyer's demand
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Lauran
1 months ago
A) No, because supplier's average costs will rise as the buyer's demand increases
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Harley
2 months ago
I disagree, the supplier's costs may actually rise with higher demand.
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Fabiola
3 months ago
I think the assumption is true.
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