3.1 Flashcards
Types Of Firms
-Public Limited Companies, they are listed on the stock market
-Privately Owned Firms, limited liability
Start up,
State-owned businesses, businesses where the government owns a large part of the company
Social enterprises, businesses set up looking for profits, but profits are re-invested into social projects
Co-operatives and partnerships, employee owned firms- John Lewis
Organic growth/Internal growth
-when a business increases its own output naturally,
How does organic growth form?
-may include adding to the capital stock, through investment
-Development and launch of new capital and products
-Finding new markets (exporting into new countries
-Growing a customer base through marketing
examples of organic growth
-lego, it focuses on new product development and innovations
-Spotify, streaming revenues overtook those of music downloads in 2015, grew 19% in 2015 to 2.41 billion
-Twitter, monthly active users is now over 30 million
Backward Vertical
-when a firm integrates with another firm further back in the supply chain,
Forward Vertical
-when a firm integrates with another firm further down the supply chain
Horizontal
-two firms integrate at the same level on the supply chain
Lateral
-When firm buys another firm in a related field
-Google bought Youtube in 2006
Conglomerate
-When two firms merge when they are in unrelated fields
economies of scale
a reduction in LRAC as output increases
causes of internal economies of scale (happen within a business)
equation + acronym
Average costs = Total Costs /Quantity, total costs are rising but quantity is rising much faster
REALLY FUN MUMS TRY MAKING PIES
(Risk bearing, they can spread their risk over a larger output rate)
(financial, as a business gets larger they can negotiate a lower rate of interest with the bank)
(management, as a firm gets larger they can employ specialist managers to boost productivity)
(technical, bringing in specialist machinery, employing more workers and specialising)
(marketing, a firm can bulk buy advertising, therefore they can negotiate discounts)
(purchasing, when a firm as they grow buy raw materials in bulk, therefore they can negotiate discounts)
external economies of scale (outside the business)
-Better transport infrastructure
-component suppliers move closer
-Research and development firms move closer
causes of diseconomies of scale (an increase in LRAC as output increases)
Average costs = Total costs / quantity, total costs are rising much faster than quantity is rising
-control, becomes difficult to control, people may slack off
-communication, much harder to spread messages
-coordination, much more difficult to coordinate
-motivation, workers may become less motivated
profit equation
pi profit = total revenue - total costs
total costs
(explicit) - total fixed costs, total variable costs
(implicit) - opportunity cost
economic profit
considers both implicit and explicit costs
(total foxed cost + total variable cost + opportunity cost)
accounting profit
considers only explicit costs
normal profit
is the minimum level of profit required to keep factors of production in their current use
AR=AC
supernormal profit
supernormal profit is any profit made above normal profit
AR>AC
subnormal profit
subnormal profit is any profit made below the normal profit (a loss)
AR
profit maximisation
occurs when Marginal Cost = Marginal Revenue
benefits of profit maximisation
-re investment, they can invest into new capital, new technology and research and development
-dividends for shareholders, the owners of the company, without them there would be no company
-lower costs of production and lower prices consumers,
-rewards for entrepreneurs, a reward for the risk of starting a business
why might businesses not profit maximise
-knowledge of MC=MR, firms may not know about MC=MR
-greater scrutiny, regulators may investigate which could lead to increased costs,
-key stakeholders could be harmed
-other objectives may be more appropriate
why might businesses profit satisfice?
Profit satisficing → satisficing profit to satisfy as many key stakeholders as possible
shareholders,
managers,
consumers, harm consumers lead to a bad reputation
workers, may lead to a strike
government, investigate if they don’t like a business
environmental groups, wont like waste or pollution , protest
reputation is everything in the modern day
why might firms use Revenue maximisation
Marginal Revenue = 0
why?
economies of scale
predatory pricing, when a firm undercuts its prices to drive off competetors
principle agent problem,
why might firms use Sales maximisation
economies of scale
limit pricing
principle agent problem
flood the market
other objectives
-survival (short term objective if firms have a product they believe in they might just want to stay in the market before looking to profit maximise)
-public sector organisations (maximise society interest and welfare)
-corporate social responsibility (giving to charities, environmental sustainability)
allocative efficiency
-cost of production and the demands of consumers are taken into account to maximise welfare
-where resources follow consumer demand
-where society surplus is maximised
-where net social benefit is maximised
Demand = Supply or Price = Marginal Cost
productive efficiency
-Occurs when a firm is operating at the lowest point on their AC curve
-full exploitation of economies of scale
x efficiency
-when the average cost is higher than the lowest possible average cost
-minimising waste
-production above the AC curve
dynamic efficiency
-Changes in technology and productive techniques over time will increase the productive potential of a firm
-re-investment of LR supernormal profit
short run costs
-a period of time where at least one factor of production is fixed
long run costs
-when all factors of production are variable
fixed costs
BS RAIL
Business rates
Salaries
Rent
Asvertising
Interest
Loans
variable costs
TRUW
Transport
Raw material prices
Utility bill
Wages
total fixed costs
total fixed costs = total costs - total variable costs
or average fixed costs = quantity
average fixed costs
average fixed costs = total fixed costs/ quantity
or average costs - average variable costs
average variable cost
average variable cost= total variable costs / quantity
or average costs - average fixed costs
average fixed costs
average fixed costs = fixed costs / output
average variable costs = variable costs / output
marginal cost
marginal cost = percentage change in total cost / percentage change in quantity
increasing returns to scale/economies of scale
percentage change in output is greater than the percentage change in input
decreasing returns to scale
percentage change in output is lesser than the percentage change in input
constant returns to scale
percentage change in output is equal to the percentage change in input
