Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

economics > 3.1 > Flashcards

3.1 Flashcards

1
Q

What is a firm?

A

A business organisation such as a corporation that produces and sells goods and services in markets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the 6 types of firms?

A
  • Non- profit organisation; businesses that are operated commercially but with social welfare and environmental aims in mind.
  • Public sector organisation; organisations that are owned and controlled by the state e.g. NHS
  • private sector organisation; owned by private investors rather than state.
  • private limited companies; corporations whose share are not listed on a public exchange e.g. McLaren
  • Co-operative producers; owned and run by their members e.g. john lewis/ waitrose
  • Social enterprise; profit is reinvested for social purposes rather than for the gain of private investors, e.g. National Trust
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How do smalls firms survive?

A
  • Act as suppliers to larger enterprises e.g. in construction and software/ coding
  • take advantage of low-price elasticity of demand and high income-elasticity of specialist products that can be sold at a higher price
  • can avoid international diseconomies of scale (rising long-run costs)
  • many run lifestyle enterprises where owners are looking to sacrifice not maximising profits
  • innovative and flexible in responding to changes in market demand
  • have benefited from online consumers- barriers to entry into the market have come down
  • keep overhead costs low e.g. smaller full-time staff
  • can benefit from external economies of scale, especially if located in cities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Why may good customer service be a business objective of a small firm?

A

May be due to the fact that the business owner is closely involved with the provision of customer service, so want to keep a good brand reputation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Give 6 reasons why a business would want to stay small.

A
  • product differentiation and having a unique selling point
  • flexibility in meeting customer needs
  • Deliver a high standard of customer service
  • Exploit opportunities from E-commerce
  • Avoid risks of higher unit costs from international diseconomies of scale
  • smaller firms can be more innovative/ creative and respond more quickly to changing market trends.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Why would product differentiation and having a unique selling point mean that a business would want to stay small?

A
  • Positioning a business as small can help differentiate against larger companies
  • consumer perception; may be an expectation of a better product from a business that ‘cares’.
  • more scope for adding value and charging a higher price through selling specialist expertise.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Why would flexibility in a market to meet customer needs mean that a business would want to stay small?

A
  • many small businesses talk to their customers regularly; sometimes every day
  • Small firms often communicate in the customers’ language which gives the impression to the customer that they are more in tune with their changing needs
  • it makes it easier to get consumer feedback
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Why does delivering a high standard of customer service mean that a company would want to stay small?

A
  • most small businesses operate in the service sector, so this is a key source of comparative advantage
  • employees in smaller firms are more likely to treat customer service as a priority
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a stakeholder in a business?

A

Any individual or organisation that has a vested interest in the activities and decision making of a business.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is a shareholder in a business?

A
  • own the business; they have an equity stake in the business
  • may also work day-to-day in the business
  • mainly interested in growing the value of their shareholding e.g. capital gain: an increase in the market value of a share, dividends- a share of the profits made by a business.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are shareholders/owners mainly interested in?

A

Return on investment and profits and dividends as a source of income
success and growth of the business
proper running of the business including meetings and standards of corporate governance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are managers/ employees mainly interested in?

A

Rewards, including basic pay and other financial incentives
Job security and improved working conditions
promotion opportunities and job satisfaction and status- motivation, roles and responsibilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are consumers mainly interested in?

A

Value for money, consumer surplus/ real purchasing power.
Product quality, performance and reliability of customer service including after-sales service

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the suppliers in the market most interested in?

A

continued, profitable trade with the business
financial stability- can the business pay it’s bills
minimising the problem of late payment to suppliers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are banks and other finance suppliers most interested in?

A

Can the business repay amounts loaned or invested?
Profitability and cash flows of the business
Growth in profits and value of the business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the government most interested in, in a business?

A

The correct collection and payment of taxes (e.g. VAT and national insurance)
Helping the business to grow, creating jobs e.g. in areas of above-average unemployment
Compliance with business legislation including environmental laws and health and safety.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the local community most interested in, in regards to a business?

A

Success of the business- particularly creating and retaining jobs
compliances with local laws and regulations, e.g. noise, pollution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Conflicts between which stakeholders will happen if jobs are cut to reduce costs?

A

It will likely be supported by shareholders and banks, but it may be opposed by employees and the local community.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Conflicts between which stakeholders will happen if extra shifts are added to increase factory capacity?

A

Likely to be supported by management and consumers and suppliers. Possibly opposed by the local community

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Conflicts between which stakeholders will happen if new machinery is introduced to replace manual work?

A

likely to be supported by customers and shareholders but may be opposed by employees.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Conflicts between which stakeholders will happen if prices are increased significantly to improve profit margins?

A

Its likely to be supported by shareholders and management but opposed by customers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Why does agency problem create a divorce between ownership and control?

A

Possible conflicts of interest that may result between shareholders (principal) and the management (agent) of a firm.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Why do stakeholders create a divorce between ownership and control?

A

In most businesses, there are many different stakeholders. These include customers, managers, employees, shareholders, debt holders and the government.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

When does stakeholder conflict occur?

A

When different stakeholders have different objectives. Firms have to chose between maximising one objective and satisfactorily meeting several stakeholder objectives, satisficing. It could cause divorce between ownership and control.

25
Q

What is the principle agent problem?

A

It’s an asymmetric information problem. Owners of a firm often cannot observe directly the day-to-day decision of management. The decisions and performance of agent are costly and difficult to monitor.

26
Q

How can you overcome the principle agent problem?

A

What is in the best interest of the management isn’t necessarily the same as the optimum interests of the shareholders. Strategies involving trying to align the aims of these two different stakeholders.

27
Q

Give 3 examples of how firms can overcome the principle agent problem?

A
  • Employee share ownership schemes; john lewis and waitrose have a well-regarded partnership model.
  • Long term employment contracts for senior management; security of tenure might encourage managers to take pricing and investment decisions in the long-term best interests of the business.
  • long term stock commitment; Apple requires senior executives at apple to hold three times their annual base salary in stock, and executives have to keep this salary in stock for a minimum of 5 years to satisfy the requirement.
28
Q

Give 3 examples of public sector organisations in the UK.

A

-Network rail
- Royal bank of Scotland
- Met office, ordnance survey

29
Q

What is privatisation?

A

Means the transfer of assets from the public sector to the private sector o fan economy- it causes change of ownership.
- It has led to a reduction in the size of the public sector in the UK
- State owned enterprises in Britain now contribute to less than 2% of GDP and 1.5% of employment
-It has become a common feature of microeconomic reforms throughout the world

30
Q

Give 4 examples of privatisation in the UK

A
  • British gas, 1986
  • British airways, 1987
  • The royal mail, was partially privatised in 2013, but was fully privatised in 2016
  • regional water companies
31
Q

Explain the business structure of the producer cooperatives.

A
  • The co-ops are owned and also run by their members, who can be customers, employees or groups of businesses.
  • The supermarkets-to-funerals Co-op group is the biggest.
  • Famers co-ops are also popular in the UK
  • These businesses are run on principles of shared ownership, shared voice and shared profits.
32
Q

What are social enterprises?

A
  • Its a not-just-for-profit business created to address a social problem
  • Profits are reinvested for social purposes in the community, rather than the need to satisfy investors
  • E.g. the big issue magazine and the Eden project in Cornwall.
33
Q

What is a Non for profit or a non for dividend firm?

A
  • They’re charities, community organisations that are run on commercial lines
    E.g. Network rail;
  • Its purpose is to deliver safe, reliable and efficient railway to Britain
  • Its a company limited by guarantee- whose debts are secured by the government
  • Its a not-for-dividend company- profits are invested into the network
34
Q

What is organic growth?

A

Its known as internal growth and happens when a business expands it’s own operations rather than relying on external takeovers. It builds on a companies own capabilities and resources. For most businesses, this is the only expansion method used.

35
Q

How can organic growth come about?

A
  1. Increasing existing production capacity through investment in capital and technology
  2. Development and launch of new products- to achieve economies of scope
  3. Finding new markets by exporting into emerging countries such as India and SA.
  4. Establish new distribution channels such as online sales platforms
  5. Growing a consumer base through marketing and adding new users of a product.
36
Q

What are the advantages of organic growth?

A

-Less risk than external growth- many takeovers failed to achieve expected gains.
- Can be financed through internal funds- using retained profits
- Builds on a businesses strengths
- Allows the business to grow at a more sensible and sustainable rate.

37
Q

What are the disadvantages of organic growth?

A
  • Growth achieved may be dependent of the growth of the overall market.
  • Hard to build extra market share if a business is already a leader
  • Slow growth- shareholders may prefer more rapid growth
  • Franchises( if used) can be hard to manage effectively.
38
Q

What is horizontal integration? give some examples.

A

Its between 2 businesses in the same industry at the same stage of production.
E.g. Amazon buying LoveFilm
Waterstones buying Foyles bookshops in 2018

39
Q

What are the advantages of horizontal integration?

A

1.Exploits economies of scale, including bulk buying, technical economies and financial economies.
2. Cost savings from the rationalisation of the business- often involves job losses
3. Potential to secure revenues synergies by creating a wider range of products. Creates opportunities for economies of scope .
4. Reduces competition by removing key rivals- increases market share and LR pricing power
5. Buying an existing and well-known brand can be cheaper in the LR than organically growing a brand- this can then make barriers to entry into a market higher for potential rivals.

40
Q

What are the disadvantages of horizontal integration?

A
  1. Risk of diseconomies of scale from enlarged businesses especially if there are clashes of management, culture ect.
  2. Reduced flexibility- the addition of more personnel and processes means the need for more transparency and therefore, more accountability and red tape. Can slow innovation
  3. Destroying shareholder value rather than creating it; happens because the synergies never materialise despite the potential benefits of the horizontal integration.
  4. Risk of attracting investigation from the competition authorities who might be worried that a horizontal merger might lead to a substantial lessening of competition in a market which could then lead to a fall in consumer welfare.
41
Q

What is vertical integration?

A

It involves acquiring a business in the same industry but at a different stage of the supply chain. Its the merger of 2 firms at a different stage of the same industry or process of production or same final product.

42
Q

What is forward vertical integration?

A

An integration of a business that is closer to final consumers e.g. a manufacturer buying a retailer, a wheat retailer buying a wheat farm. A good example is the UK is wholesale grocery firm booker buying Budgens and Londis.

43
Q

What is backwards vertical integration?

A

Business integration that is closer to the raw material in the supply chain e.g. a manufacturer buying a component supplier. Ikea buys Romanian and Baltic forests to improve control of their key raw materials.

44
Q

What are some advantages of vertical integration?

A
  1. control of the supply chain- helps reduce unit costs and improve the quality of inputs into the production process.
  2. Improved access to key raw materials perhaps at the expense of rivals who must then pay more for them
  3. Better control over retail distribution channels+ adding new channels to sales platforms to build business revenues.
  4. Removing suppliers and taking market intelligence away from competitors which then helps to make a market less contestable.
45
Q

What are the disadvantages of vertical integration?

A
  1. Mergers will have fewer economies of scale because most of the production is at a different stages of production.
  2. Mergers can often create new problems of communication and coordination within the bigger more disparate firm. It can lead to diseconomies of scale where the new bigger firm is more inefficient.
46
Q

How do mergers and takeovers fail?

A
  1. Huge financial costs of funding takeovers, including deals that have relied on loan finance- this leaves a big debt overhang after the deal which incurs heavy interest costs.
  2. Integrating systems- companies might have different technology systems that are expensive or impossible to marry i.e. skype and ebay
  3. Share price; the need to raise fresh equity through a rights issue to fund a deal which can have a negative impact on a company’s share price
  4. Many mergers fail to enhance shareholder value because of clashes of corporate cultures and key personalities
  5. The business may suffer a loss of customers and skilled workers post acquisition.
  6. Over-paying; companies pay over the odds to take control of a business- particularly the case with takeovers driven by management egos.
  7. Bad timing- mergers and takeovers that take place towards the end of a sustained boom can often turn out to be damaging to both businesses.
47
Q

What are joint ventures?

A

Occur when businesses join together to pursue a common project
the businesses remain separate in legal terms
joint ventures are becoming common as firms want to benefit from collaborative work in reaching a mutually- agreed strategic target e.g. a joint research project to share fixed costs of higher risk research.

48
Q

Give 3 examples of joint ventures.

A

-Vodafone and Telefonica agreed to share their mobile network
- BMW and Toyota cooperate on research into hydrogen fuel cells and ultra-lightweight materials
- Google and NASA developing Google Earth.

49
Q

Give examples of constraints on business growth.

A

Regulation
Competition
finance
size of the market

50
Q

How does regulation constrain business growth?

A
  • Growing businesses winning significant market share may come to attention of the competition authorities e.g. amazon
  • In the UK, the competition and markets authority may decide to block a merger between 2 firms if they find sufficient evidence that the merger / takeover would lead to substantial lessening of competitive pressure in a market.
51
Q

How does competition constrain business growth?

A
  • In contestable markets, there is always the threat of entry from rival firms; technological change has in many cases had the effect of reducing barriers to entry into markets.
  • Firms that are dominant in an industry but operating inefficiently and charging monopoly prices may find that challenger firms are able to enter the market and compete away some of their market share and their supernormal profits.
52
Q

How does finance constrain business growth?

A
  • Many small-medium sized enterprises run up against finance constraints including limited access to loans and risks and costs of raising equity in capital markets.
  • In the aftermath of the global financial crisis, commercial banks are more risk-adverse when it comes to lending to businesses.
53
Q

How does the size of a market constrain growth?

A

Businesses achieving success in local or niche markets may find limits to scalability. There is simply not enough regular consumer spending. Other businesses successfully leverage their brand to enter new markets.
- Niche markets target smaller groups of consumers, they’re often highly profitable because suppliers can charge a premium price, but have limited opportunities foe economies of scale to be exploited.

54
Q

What are some other constraints on the growth of a business?

A
  • Human capital weakness/ skill shortages; e.g. businesses struggle to recruit the skilled personnel they need.
  • Bureaucracy and red tape; as a business grows, so too does the legal requirements e.g. auto-enrolment of staff into a pension scheme, filing regular tax returns and meeting health and safety requirements.
  • Cost of recovering late payments; has a damaging effect on the cash flow of a business and perhaps threaten their survival
    -Insufficient funds to train employees and money to put aside for innovation/ research
  • High costs of raising fresh funding; commercial banks often charge much higher interest rates to smaller businesses even if they have proven and viable business model and are generating solid revenues and profits.
55
Q

What are some reasons for demergers?

A
  1. focusing on core business to cut costs and improve profit margins/ returns to shareholders
  2. Reduce risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business, and achieve lower management costs.
  3. Raise money from asset sales and return it to shareholders
  4. defensive tactic to avoid the attention of competition authorities who might be investigating market power.
56
Q

Give some recent examples of demergers

A

-Pfizer selling their infant nutrition business to Nestle
- Paypal splitting from ebay in 2014
- Sports direct selling their Dunlop brand

57
Q

What are the impacts of demergers on businesses?

A

-Long term; higher returns
-short term; costs of selling off a part of their business

58
Q

What are the impacts of demergers on employees?

A
  • Expected job losses if demerger is driven by a desire to control costs- although new jobs might be created
  • opportunities for manages of newly demerged businesses

economics (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions