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Micro Economics > 3.1 > Flashcards

3.1 Flashcards

1
Q

Why some firms remain small

A

They operate in a niche market

Profit satisficing

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2
Q

Why firms grow

A

Meet objectives e.g. profit maximisation, sales maximisation.
Gain competitive advantages - economies of scale
External/internal forces

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3
Q

The divorce of ownership from control

A

Those who earn a firm (shareholders) are not the same people who control the business daily. This can lead to conflicts between objectives.

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4
Q

Principal agent problem

A

When there is a difficulty in getting one party (managers) to work in the best interest in the principle (shareholders) parties best interest.

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5
Q

Moral Hazards

A

When the individual is willing to take risks because the impact of failure will be felt more by the owner than the individual - can be caused by the principle agent problem.

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6
Q

Private sector

A

The sector of the economy owned and controlled by individuals rather than the government

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7
Q

Public sector

A

The sector of the economy owned and controlled by the government

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8
Q

Internal growth

A

Organic e.g. opening new stores/ product development.

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9
Q

External growth

A

Outside the business e.g. mergers/takeovers

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10
Q

Internal contraction

A

Delayering/ closing down stores

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11
Q

External contraction

A

Selling off elements of the business

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12
Q

Advantages of internal growth

A

Less risky
Greater consistency
Less loss of control
Less threat of brand dilution

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13
Q

Disadvantages of internal growth

A 
Missed opportunities from acquisitions
Potential for growth may be more limited
Can take a long time
Lack of shared expertise
Dissatisfaction from shareholders
Missed opportunities for greater economies of scale
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14
Q

Integration

A

The bringing together of two or more firms

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15
Q

Merger

A

When 2+ firms agree to integrate to form one firm under joint ownership.
An agreement

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16
Q

Takeover

A

When one firm gains control over another and becomes the owner. Buying 50%< of the shares.
Can be hostile

17
Q

Horizontal Integration

A

When two firms at the same stage within a process integrate.

e.g. two hotels integrate

18
Q

Vertical integration

A

When two firms at different stages within a process integrate.

19
Q

Forward vertical integration

A

When a firm takes over another firm ahead of it in the process.
e.g. a farmer takes over a retailer.

20
Q

Backward vertical integration

A

When a firm takes over another firm behind it in the process

e.g. a retailer obtains a farm

21
Q

Conglomerate integration

A

When two unrelated firms integrate

e.g. a car manufacturer merges with a bookstore.

22
Q

Advantages of vertical integration

A 
Secure supplier
secure outlet
gain foothold in a market
benefit from expertise
brand recognition 
synergy
Achieve corporate objectives
23
Q

Disadvantages of Vertical Integration

A

Finance required
Clash of culture
can impact on focus of the business
Can impact economies of scale as different processes
Diseconomies of scale can occur due to communication problems

24
Q

Advantages of Horizontal Integration

A 
Gain monopoly power
Benefit from expertise
Remove competition from the market
Achieve economies of scale
Synergy
Achieve corporate objectives
25
Q

Disadvantages of Horizontal Integration

A
  • Finance required
  • Clash of cultures
  • Decentralised leading to less tight control of businesses taken over
  • Diseconomies of scale with communications and coordination problems between the business and that taken over.
26
Q

Advantages of conglomerate integration

A

Spreads risk
Allows for growth in new markets
Cross selling of goods in different markets through brand recognition
Market research can be shared across different markets

27
Q

Disadvantages of conglomerate integration

A

Finance
Lack of market understanding
Can reduce focus from core business
Diseconomies of scale e.g. communication problems.

28
Q

Constraints on business growth

A

Size of the market
Accessing finance
Owners objectives
Regulations

29
Q

Why would demergers occur

A

Economies of scale at lower levels of output
Realise capital from the demerger
Specialise in different fields
Focus on core business

30
Q

Demerger

A

When a business is split up into separate components

31
Q

Impact of demergers

A

Dispose unwanted elements
Focus on core business increases
Improved economies of scale (decreased diseconomies of scale)
Workforce might feel threatened - fall in production

Micro Economics (9 decks)

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