3.1 Flashcards
Why Do Some Firms remain small?
Why do some firms remain small?
the size of the market, access to finance, owner objectives and regulation. Not all firms want to grow
Why do some firms grow?
Greater sales so more profit. Economies of scale. For security. Monopoly power. Greater market share allows to control market prices therefore make it harder for competitors to enter market.
What is the principle agent problem?
When the shareholders have different aims to what a director might have. E.g. SH want more profit but director gets bonuses on revenue or sales.
What is the distinction between a public and private firm?
Public is government run and aims for wellbeing.
Private firm is owned privately and aims for max profits.
What’s the difference between a profit and non-profit firm?
Most private sector firms are for profit, they’ll try to make SH happy but will aim for max profits in the long term.
Non-profit is when a firm will reinvest all of its profits into helping causes and improving wellbeing.
What are the 4 types of growth?
Organic growth, vertical integration, horizontal integration, Conglomerate growth.
What is organic growth?
internal growth from things like opening new branches and innovation.
What is conglomerate growth?
When a business diversifies into other kinds of products/industries.
What is vertical and horizontal integration?
Vertical integration is going ahead or behind a step of production the business is in i.e. a farm
Horizontal integration is getting businesses within the same level of production the business is in i.e another shop.
What are the advantages and disadvantages of organic growth?
+Keep control
+Don’t have the cost of mergers/acquisitions
-Much slower
-Difficult to innovate
What are the advantages and disadvantages of Vertical integration?
+Control over supply chain
+Reduces costs-> higher profits
+control over quality and more reliable supply
+other producers can limit output
-communication/co-ordination issues
-Lack of experience in field/industry
What are the advantages and disadvantages of Horizontal integration?
+Economies of scale
+Greater market share
+Greater market power
+Reduce competition
- Regulators
-Risk if market fails (lack of diversification)
What are the advantages and disadvantages of Conglomerate growth?
+Diversification->more products->recession proof->reduce risk +Synergies(cost savings from types of economies of scale)
-Diseconomies of scale from higher output
-May not have expertise in field/industry
What are the advantages of mergers/acquisitions for consumers and producers?
Consumer:Lower prices due to economies of scale and dynamic efficiency. Also better service/products
Producer:Economies of scale->lower costs. Dynamic efficiency
What are the disadvantages of mergers/acquisitions for consumers and producers?
Consumers:Higher prices and lead to less choice
Producers:Diseconomies of scale inefficiencies
What do mergers depend on?
Culture: How easy is it to merge?
Industry? Types of integration? Circumstances surrounding merger, for survival or growth?
Is the market saturated?
What are the four constraints on business growth?
Size of market
Access to finance
Owner(s) objectives
Regulations
