South-Western College Publishing - Economics  
Schools Surf to Save
Subject Types of costs and cost curves
Topic Production and Costs
Key Words Intermediary, bids, online, benefit, costs, volume discounts, sales, savings, recruit
News Story

Some school districts are beginning to buy their supplies-from fish sticks to microscopes-over the Internet. Companies, like Epylon.com, act as the intermediary between school districts and suppliers. School district personnel can browse products and prices online, email pre-approved vendors to solicit bids, and order online.

The benefit for schools is that their administrative costs are reduced. Each purchase order costs about $125 in administrative time: Epylon says that it can reduce that figure to $25. Further, the system allows school districts to band together to gain volume discounts. Delivery times are being cut from a week to a couple of days. The intermediaries make their money by charging vendors approximately 1-2% of sales.

The implication is that school districts can use their staff to do more productive things, even to find other ways of containing costs. The savings could also be used to hire more teachers. Given that the 100,000 public schools spend about $84 billion on supplies each year, savings of 10 percent would generate enough money to recruit 150,000 teachers at $56,000 each.

(Updated May 1, 2000)

Questions
1. Costs can be fixed or variable. In the education industry, where the output is the number of students educated, what kinds of cost are:
  a) microscopes? Explain your answer.
  b) the administrative costs of purchase ordering? Explain.
2. Draw a diagram relating the number of students educated on the horizontal axis to dollar costs on the vertical axis. Add curves representing total fixed cost, total variable cost, and total cost.
  a) Illustrate what happens when the administrative costs of purchase ordering decrease.
  b) Draw a horizontal line representing the fixed budget of a school district. What happens to the number of students educated when administrative costs are reduced (assuming the budget is completely spent)?
3. Suppose that, instead, the savings are spent on more teachers.
  a) What kind of cost are teachers? Explain your answer.
  b) In another diagram, show the effect of hiring more teachers on the cost curves.
  c) What will happen to the student-teacher ratio, given a fixed budget?
Source Del Jones, "Some schools to surf Net to cut costs of supplies," USA Today, March 20, 2000.

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