2 - Objectives of Firms - Perfectly Competitive Market Flashcards
Total Revenue Formula
Units of output x price
If price remains the same, what happens to MR and AR?
They stay the same.
Are Price and AR the same or different?
Same.
What is MR?
The addition to revenue after adding one extra unit.
AR formula?
TR / Units Sold.
What can profits be used to judge?
Success of a firm
Where will a firm produce to maximise profit? (PROFIT MAXIMISATION)
Where MC = MR (shouldn’t produce beyond this else will be making loss)
If a firm s producing on MC = MR, what kind of profit are they making??
Normal Profit.
What is Normal Profit?
This is the when the firm is making just sufficient profit to continue producing that good/service.
What will a firm do if they are not making normal profit?
Leave market/transfer resources to a market where normal profit can be obtained.
What is supernormal profit?
More than the profit required that ensures the supply of a good
What is subnormal profit?
Less than that is required to ensure the supply of a good.
What are an economists view of normal profits?
1) covers the opp cost of all factors used in the process
2) Amount of profit necessary to keep factor in present occupation
What are an economists view of supernormal profits?
1) Returns are above NP’s
2) Provides incentive for firms to enter the industry
3) Signals to entrepreneurs to allocate more factors to that market.
What are an economists view of sub normal profits?
1) Indicates oversupply
2) Firms may reallocate resources elsewhere.
What is the traditional view of a firms interest and why has it changed?
Profit Maximisation
it has changed due to them having to consider things like environmental problems else they’ll lose consumers.
Role of shareholders? And what are the problems with managers?
They want to profit maximise and therefore appoint managers.
however these managers may have different objectives - their own salaries.
What is satisficing?
This is when a firm does not profit maximise and settles for a satisfactory return
Why may a firm satisfice?
- To avoid a hostile bid/takeover
- Because theyre being socially responsible (carbon footprint etc)
What is sales maximisation theory?
Producing to where MR=0 therefore revenues are being maximised.
(read flashcard about why firms do this._
Why may firms be unable to profit maximise?
There may be problems with the information the firm needs to profit maximise.
Eg time lag between processing info therefore decision may be made too late.
What is organisational theory?
Argues that a firm will satisfice when it purses a number of goals.
What is cost plus pricing?
Firm doesn’t aim to maximise
They set the price = AC (normal profit) plus a conventional mark up.
Therefore level of prices = AC + mark up.
Long Run Profit Maximisation ?
Sales and growth are key to future profits and managerial security.
Therefore firms wont embark on risky SHORT TERM ventures.
Why do firms need to focus on profit?
Keep Shareholders happy
Avoid a takeover bid by other firms.
How is profit achieved?
Lowering costs Reaching MES Exploiting EofS Increasing revenue Increasing market share
What are the 2 ways a firm can achieve growth?
INTERNAL
EXTERNAL
What is internal/organic growth ?
Firms use their profit to finance expansion therefore increasing their fixed and variable factors over time.
Some say creativity and innovation are key to organic growth.
What 2 ways can organic growth occur?
1) Expanding geographical reach
2) Introd new products to expand the reach of the market.
Disadvantages of organic growth?
Can be a slow process.
If firm doesn’t have sufficient profit, can hinder organic growth.
If market is saturated or the strength of comp is high, can be extremely slow process.
What is external growth?
Rapid way of expansion by merging or acquisitions or hostile takeover.
What is a hostile takeover?
When a firm is not making enough profit and become susceptible to attack from another firm buying them out from shareholder.
Why have a lot of mergers failed?
- Diseconomies of scale because firms cant work together well enough
- Poor leadership/communications
- Lack of ability to change and adapt.
What are the 4 types of mergers?
- Horizontal integration
- Vertical integration
- Conglomerate merger
- Lateral Merger
What is horizontal integration?
2 firms at the same stage of the production process combine operations.
What is vertical integration?
Firms at different stages of the production process combine.
1) Vertical backwards int - Firm combines with one at previous stage of production process.
2) Vertical forwards integration - Firm combines with firm at next prod stage.
What is a conglomerate merger?
2 firms with no obvious relationship combine to increase market size/ avoid exposure / increase diversity.
What is a lateral merger?
2 firms with some similarities merge.
eg Brewery and Pub
Type of horiz int.
Compare external and internal growth.
TIME CONSTRAINTS - Faster to externally grow than internally.
COST - Cheaper to buy out firms than invest
ASSET STRIPPING - possible with ext growth, then can sell assets for more than bought for, therefore fast profit.
EFFICIENCY - Supposedly as a merger firms can get more done
- Not def true due to managers ambitions being different (more income personally)
3 Components of technological change
Can produce more output with less input.
Completely new G/S become available.
Quality of goods increases.
Differentiate innovation and invention
Invention - Completely new idea that can be patented.
Innovation - Putting an invention into commercial use (converting knowledge into ideas)
Advantages to firms that innovate
- Lowers costs
- Have new products
- New production techniques
- Are dynamically efficient
- S curve shifts to right and prices decrease.
- Other firms may find it hard to compete due to higher costs
