3.1

Question 1

reasons for business growth

Answer 1

Economies of Scale: Decrease production costs by increasing output.

Monopoly Power: Influence prices and restrict market entry.

Greater Security: Build up assets and cash, sell a range of goods in multiple markets.

Question 2

constraints on business growth

Answer 2

Size of Market: Limited consumer base for mass production.

Access to Finance: Difficulties in obtaining retained profits or loans.

Owner Objectives: Some owners prefer stability over growth.

Regulation: Government restrictions on market dominance.

Question 3

principle-agent problem

Answer 3

Separation of ownership (shareholders) and control (managers).

Problem: Differing aims—shareholders want profit maximisation; managers seek personal benefits.

Solutions: Giving managers shares or linking bonuses to profits.

Question 4

types of intergration

Answer 4

Vertical Integration: Merging firms at different production stages.

Backward Integration: Merging with suppliers.

Forward Integration: Merging with distributors/retailers.

Horizontal Integration: Merging with firms at the same production stage.

Conglomerate Integration: Merging with firms in different industries.

Question 5

demergers

Answer 5

Splitting a business into separate entities.

Reasons: Lack of synergies, higher individual value, focus on core markets, avoid competition authority.

Impact:

Workers: Possible job losses or promotions.

Businesses: More focused, potential loss of economies of scale.

Consumers: Improved products/efficiency or higher prices/reduced quality.

Question 6

What is assumed to be the main objective of most private sector organisations

Answer 6

The main objective of most private sector organisations is to maximise profits by operating at an output where marginal costs (MC) = marginal revenue (MR).