A long-term contract

Question

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A long-term contract is when a firm is legally bound to purchase inputs from a particular supplier for a significant period of time. This is often seen in complex exchange environments where specialized investments need to be made, such as in the case of suppliers of raw materials or equipment. When a firm produces its own inputs, it may not need a long-term contract as it has control over the entire production process. Additionally, specialized investments typically lead to longer contracts, as both parties want to ensure a return on their investment.

A Long-Term Contract