Final answer:
Purchasing components rather than producing them can lower the production costs for businesses, particularly in industries like car manufacturing due to specialized suppliers. However, external factors such as natural conditions, input prices, technology, taxes, and market dynamics also play a crucial role in the overall impact on cost and must be considered in the cost-benefit analysis.
Step-by-step explanation:
Lowering the cost of production by purchasing rather than making some of your components may lead to a variety of outcomes that can impact a business. For instance, the costs involved in producing cars will look very different from the costs in producing computer software, haircuts, or fast-food meals. The production costs for complex goods like cars might decrease due to specialization and economies of scale in component manufacturing, which can be more efficiently executed by suppliers.
However, certain factors could potentially increase the overall costs for a business, such as poor natural conditions for production, a rise in input prices, a decline in technology (although not common), or higher product taxes/more costly regulations. Additionally, market dynamics such as changes in consumer income levels, anticipated product price increases, shifts in the number of buyers, or a decrease in the availability of related products could have complex impacts on the overall cost structure and sales volume.
When making the decision to purchase components instead of producing them in-house, a cost-benefit analysis should include consideration of these external and internal factors, aside from the mere comparison of production costs.