Understanding Fair Price Concept

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Questions and Answers

What is the primary characteristic of a 'fair price' according to the text?

The highest price a buyer is willing to pay, ensuring maximum profit to the supplier.

The lowest price that ensures a continuous supply of the needed quality when and where needed. (correct)

The price set by the buyer after negotiations to get the best deal.

The price that equals the production cost plus the supply cost, and nothing more.

Even if a particular item in a supplier's line does not contribute its ‘full share’, what cost should the price normally cover?

The cost plus a predetermined profit margin.

The total costs incurred by the supplier for all products.

The average cost across all items in the supplier's line.

Only the direct costs incurred in producing that specific item. (correct)

Why might a 'fair price' for one seller be different from a 'fair price' for another seller for the same or substitute item?

Because some sellers manipulate their prices to artificially inflate them.

Because the buyer prefers to pay different prices to different sellers.

Because different sellers might have different cost structures and desired profit margins. (correct)

Because of collusion between the buyer and certain sellers.

Under what circumstances should a prevailing price NOT be considered a 'fair price'?

When the price is artificially influenced by either monopolistic actions, or 'black' or 'gray' markets. (C) Signup and view all the answers

What does a supply manager use to determine what a 'fair price should be'?

Past experience, knowledge of production processes, associated costs and logistics costs. (B) Signup and view all the answers

Which statement most accurately describes the relationship between a supplier's costs and price?

A fair price should, at minimum, cover direct costs, with long-term sales contributing to overall costs and a reasonable profit. (B) Signup and view all the answers

A company’s buyer purchases similar items from two different suppliers, paying varying prices. How can both be considered fair from the buyer’s perspective?

If each price ensures a continuous supply of the required quality, where and when needed, both prices can be fair, reflecting each supplier’s specific costs. (A) Signup and view all the answers

What is the direct implication of a price being established through a monopolistic or collusive selling agreement?

Such a price does not inherently make it unfair or excessive, but must be evaluated for appropriateness. (C) Signup and view all the answers

Under what circumstance should a prevailing market price be questioned to determine the fairness?

If it results from monopolistic practices or is a black market price. (B) Signup and view all the answers

Which action is most crucial for a supply manager when determining a 'fair price'?

Exercising judgment based on past experiences and knowledge of production and logistics costs. (C) Signup and view all the answers

What is the best description of a 'fair price' for an item?

The lowest price that ensures a continuous supply of the appropriate quality where and when needed, allowing the supplier a reasonable profit. (A) Signup and view all the answers

Why is a supplier's profit necessary when looking at a fair price?

To ensure their continued supply of goods and services in the long run. (C) Signup and view all the answers

How does the concept of a 'fair price' account for different suppliers of similar items?

It acknowledges that fair prices can vary based on each supplier's costs. (B) Signup and view all the answers

What role does knowledge of production and logistics costs play in determining a fair price?

They provide a baseline for judging the appropriateness of a price. (C) Signup and view all the answers

If a particular item in a supplier's line does not meet its expected 'full share', what must the price at least still cover?

All direct costs incurred in producing that item. (B) Signup and view all the answers

Study Notes

Fair Price Definition

A fair price is the lowest price ensuring a continuous supply of the right quality, at the right time, and in the right place.
Continuous supply depends on the supplier making a reasonable profit.
A supplier's total costs, including profit, must be covered by total sales in the long run.

Factors Determining Fair Price

An individual item may not always fully contribute to cost recovery over a specific period.
Even for these items, the price paid should cover the direct costs incurred.
Fair prices for the same item or a substitute may vary between suppliers. Both prices can be fair to the buyer, who might purchase both simultaneously.
A price set by a monopolist or through seller collusion doesn't automatically mean it's unfair or excessive.
Prevailing market prices aren't always fair, especially black/grey market prices or those manipulated by monopolies/coercion.

Supply Manager's Role

Supply managers need to assess fair prices, considering various factors.
Experience and thorough understanding of goods/service production processes, associated costs, and related logistics (storage, transportation, delivery, etc.) are vital in determining fair price.

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Description

Explore the definition and factors determining fair price in supply chains. This quiz delves into what constitutes a fair price for suppliers and buyers and addresses the complexities involved in price setting.