20-22 Firm Flashcards by Cristian Kim

Define industry

group of firms producing the same product

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Define the quaternary sector (2)

knowledge based service industries

information technology

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Determinants for the size of firms (5)

age of firms

availability of financial capital

type of business organisation

internal economies/diseconomies of scale

size of market

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Why firms may choose to stay small (6)

small size of market

consumer/owner preference

flexibility

lack of financial capital

location

government support

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Define internal growth

firm increase in size by firm enlarging existing plants/opening new ones

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Define rationalisation

eliminating unnecessary equipment to make firm more efficient

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Define external growth (2)

increase in firm size

caused by merging/taking over other firm

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Define a horizontal merger

merging with firm that produces same product at same stage of production

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Define a forward vertical merger

merging with firm further forward in supply chain

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Define a backward vertical merger

merging with firm backward in supply chain

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Define a conglomerate merger

merging with firm producing different products

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Advantages of vertical integration (3)

costs decrease

more control over their business (less reliant on other firms)

acquires highest profits when product sold to consumers

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Advantages of external growth (2)

immediate increase in market share/income/assets

gain skills of staff working for other firm

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Advantage of horizontal integration (5)

more promotion opportunities

market share increase (more customers gained)

increases potential economies of scale

increased assets

increased intellectual property

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Disadvantages of horizontal integration (3)

different business methods

decrease communication (cause diseconomy of scale)

employees can be fired

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Disadvantages of external growth (3)

differing business methods

more responsibility for owner

merge may be outside owner experience

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Advantages of internal growth (3)

owners understand strength/weakness of firm

less debt (uses own profits for growth)

workers more motivated - have been part of firm for long time

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Disadvantages of internal growth (4)

longer to grow

limited resources for growth

more time for competitors to exploit firm’s weaknesses

less opportunity for promotion

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Disadvantage of vertical integration (2)

lack of knowledge to operate acquired firm

no EoS (production process in each stage different)

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Advantages of conglomerate integration (3)

allows for risk diversion

gains synergies - different firms can benefit from each other

form of investment - profit can be used for investment

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Disadvantages of conglomerate integration (2)

lack of knowledge to operate acquired firm

increase in conglomerate size –> decreased competition –> monopoly

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Define internal economies of scale

lower long term average costs from firm growing in size

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Define external economies of scale

lower long term average costs from industry growing in size

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Define internal diseconomies of scale

higher long term average costs from firm growing too large

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Define external diseconomies of scale

higher long term average costs from industry growing too large

Define a purchasing economy of scale (2)

suppliers provide volume-based discounts on raw materials lowers average total costs

Define managerial economy of scale (3)

employing specialised managers managers more efficient lowers average total costs

Define financial economy of scale

banks charge lower interests rates to larger firms as they less risky

Define marketing economies of scale

marketing costs spread over more units of output

Define technical economies of scale

new machinery that lowers production costs

Define risk-bearing economies of scale (4)

produce wide range of products supply products in different locations spreads out risk of failure lowers average total costs

Causes of internal diseconomies of scale (3)

miscommunication lack of control decreased employee relations

Causes of external economies of scale (4)

skilled labour force good reputation improved infrastructure specialist suppliers of raw materials

Causes for external diseconomies of scale (3)

traffic of transport used by industry = increased traffic costs large industries may attract government regulation more demand for skilled labour = increased wages

Define production

process of turning resources into goods

Define productivity (2)

output per factor of production per hour measure of efficiency of FoPs

Define labour productivity (2)

average output per worker total output/number of workers

Define capital productivity (2)

average output per machine total output/number of machines

Factors influencing production decisions (5)

time/mobility of FoPs balance of FoPs productivity of FoPs cost of FoPs Risk of FoPs

Define labour intensive production

production process that uses high proportion of labour

Define capital intensive production

production process that uses high proportion of capital

Advantages of labour intensive production (4)

workers can provide new ideas can provide personal service to consumers can respond to consumer feedback number of workers can be changed with demand

Disadvantages of labour intensive production (3)

productivity can vary (absenteeism) shortages of skilled labour worker more costly as requires wage and non-wage benefits

Advantages of capital intensive production (4)

gains technical economies of scale more consistent production maintained for long time no industrial action

Factors influencing demand for capital (5)

price of capital goods price of labour interest rate technology expectations on future

Define fixed costs

costs not affected by output

Examples of fixed costs (2)

rent insurance

Shape of curve of fixed costs

horizontal

Define average fixed costs (2)

fixed costs per unit of output total fixed costs/output

Shape of curve for average fixed costs

downwards sloping exponential

Define variable costs

costs that change with output

Examples of variable costs (3)

steel raw materials workers

Variable cost curve

Upwards sloping graph

Define average variable costs (2)

variable cost per unit of output TVC/ouput

Average variable cost curve

U-shaped

Define total cost (3)

total amount spent on factors of production FC + VC ATC x output

Curve of Total costs (2)

same as TVC shifted up by TFC

Define revenue (2)

money earned from sales price x quantity sold

Define average revenue (2)

price money earned per unit sold

Firm objectives (5)

survival growth social welfare profit satisficing profit maximisation

Define profit satisficing (2)

Making just enough dividends to keep shareholders happy While pursuing other objectives

Define privatisation

sale of public sector firms to private sector