This case mentions the following:
Raw material is an extremely commoditized good (milk has a fixed price in the market).
Therefore, the cost of milk cannot be decreased.
I'm confused by this statement, specifically the term “extremely commoditized good".
Since milk has a certain price demanded by the seller, can't the milk be purchased in e.g. bulk quantities to reduce the price further? Why can't the price go down because it's just a commodity?
Hi there!
Basically, a commodity is a good that is virtually the same everywhere.
Like water. Or oats. Or milk.
Because it's virtually the same everywhere, according to neoclassical economics, the price has already been driven down to it's ‘optimal’ level. There's little that you can do to bring it down further.
Hope this clarifies your point.
Sharing also a guide that contains all the common terms you're likely to come across during casing:
Best,
Cristian
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Hi there,
A commodity in economics is something that exists in essentially a purely competitive market.
That means that prices are set by market dynamics (supply and demand), that products are homogenous (no differentiation) and therefore there are no (or minimal) price differences across suppliers.
Think oil. If I buy 100 barrels versus 1,000 barrels does the price per barrel change? Nope!
Now, you could reduce transport/distribution/import/tarrif/tax/storage costs with bulk. But the unit price economics of the milk would not change in this situation.
Make sense?
P.S. is milk actually a commodity? No. I disagree with this case. However, if a case/interviewer states a fact/piece of info, you have to accept it (you can lightly question/check, but ultimately they are giving you info you have to accept)
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