3.1.1

Question 1

What are public limited companies?

Answer 1

Companies listed and traded on the stock market.

Question 2

What are private limited companies?

Answer 2

Shares are privately held and privately traded.

Question 3

What are nationalized corporations?

Answer 3

Businesses where the government is the main/sole shareholder.

(e.g. Network Rail, National Health Service)

Question 4

What are social enterprises?

Answer 4

Businesses whose profits are reinvested to help fund social projects

Question 5

What are Co-operatives and partnerships

Answer 5

Each member of the business has an equal stake. Partnerships are employee-owned firms.

Question 6

How do shareholders have limited liability?

Answer 6

Shareholders’ liability is limited to the amount they have invested in the company. Their personal assets are not at risk for the company’s debts or obligations.

Question 7

How do PLCs raise capital?

Answer 7

PLCs raise capital by issuing shares to the public which are listed on the stock exchange. This provides liquidity to the shareholders as they can sell their shares at any time on the open market.

Question 8

What is a disadvantage of PLCs?

Answer 8

PLCs are subject to stringent regulatory requirements including financial reporting, disclosure, and corporate governance standards.

Question 9

Why are nationalized businesses established?

Answer 9

These industries are often established to provide goods or services that are of strategic important or that are in the public interest.

Question 10

When does the principle agent problem happen?

Answer 10

The principle agent problem occurs when there is a divergence of interests between the principal (typically the owner or shareholder) and the agent (a person hired to act on the behalf of the principle).

Question 11

What is vertical integration?

Answer 11

Vertical integration is the integration of firms in the same industry but at different stage in the production process.

Merging towards supplier of a good, backwards integration.

Moving towards eventual consumer, forwards integration.

Main goal: to gain more control over the entire value chain.

Question 12

What is forward integration?

Answer 12

Forward vertical integration occurs when a company expands its operation by acquiring or controlling business that are close to the end-consumer.

Question 13

What is backward vertical integration?

Explain the benefit of backwards vertical integration?

Answer 13

A company acquires or takes control of businesses positioned earlier in the production or supply chain.

This allows the company to ensure a stable and reliable of raw materials. This is turn reduces dependency on external supplier, and achieve savings through economies of scale.

Question 14

How does forward vertical integration increase market power?

(ad)

Answer 14

A company can gain more control over distribution channels and access to final customers. This can increase market power and bargaining position with retailers or distributors.

Also, (different one)

By cutting out distributaries, you are increase the amount of the value chain that becomes profit for the manufacturer

Question 15

How does forward vertical integration enhance control over distribution?

(ad)

Answer 15

Forward integration allows a company to have control over its products are distributed and displayed to customers. This can lead to better brand representation,
consistent messaging, and improved customer experiences.

Question 16

Benefits of vertical integration

(in general)

Answer 16

You can control the supply chain - this helps to reduce unit costs and improve the quality of inputs into the production.

Question 17

What are the problems of vertical integration?

(in general)

Answer 17

-Mergers can often create new problems of communication and coordination within a bigger and more disparate firm. It can lead to diseconomies of scale where the new bigger firm is more efficient.

-Companies might lose the benefits of specialized expertise when they integrate various stages of the supply chain.

-Can raise competition concerns.

-With internal control over different stages, companies may become complacent and rely less on external innovation. Less innovation…

Question 18

What is horizontal integration?

Answer 18

Horizontal integration is the merger or takeover between two business in the same industry at the same stage of production.

(e.g. Sports Direct acquired Jack Willis in a horizontal merger in retailing).

Question 19

What are the general advantages of horizontal integration?

Answer 19

-You can internal economic of scale (leading to lower LRAC) - lower average costs can lead to increased profits. For example, less HR managers may be needed.

-Creates a wider range of products - (diversification) - this creates opportunities for economies of scope due to more profit streams.

-Reduces competition by removing one or more key rivals - this increases market share and long-run pricing power.

Question 20

What are the general disadvantages of horizontal integration?

Answer 20

-There is reduced flexibility the addition of more personnel and processes in the merged business means more legal accountability and extra red tape which can slow down the rate of business innovation.

-There is a risk of diseconomies of scale (which causes an increase in long run average cost) from the enlarged businesses especially if there are clashes of management style and corporate culture.

-Risk of attracting scrutiny from competition authorities who might be worries that merger might lead to lessening of competition which could lead to higher prices and a decline in consumer welfare.

Question 21

What is conglomerate integration?

Answer 21

A conglomerates has acquired many diversified businesses.

(e.g. Phillips, Tata Groups, Samsung).

Question 22

What is organic growth?

Answer 22

Organic growth is internal growth of a business which builds on a business’ own capabilities and resources rather than growth through merger & takeover.

Question 23

What are ways businesses can grow organically?

Answer 23

-Increasing existing production capacity through investment in new capital inputs & using cutting-edge technology?

-Development & launch of new products and extra sales channels.

-Finding new markets for example into emerging countries such as India, China, and countries in sub-Saharan Africa.

-Growing a customer base through marketing and getting many more people buying and using a product (market penetration).

Question 24

What is a de-merger?

Answer 24

When firm decides to split into separate firms. In a demerger, a company spins off one or more its divisions, subsidiaries, or businesses units as separate entities.

Question 25

What are the key reasons for de-mergers?

Answer 25

-To focus on core businesses to help cut average costs and therefore improve profit margins & and returns to shareholders. This reduces the diseconomies of scale by reducing the range of functions in a business, and achieve lower management costs.

-To raise money from assets sales (from sale of that part of the company) and return it to shareholders which in turn can lift the share price for shareholders.

-A defensive tactic to avoid to avoid the attention of the competition authorities such as the CMA who might be investigating monopoly power.

Question 26

What are the impacts of demergers on employees?

Answer 26

Employees may experience uncertainty about their job security, roles, and responsibilities following a demerger. Some positions might be duplicated or longer needed in new entities, leading to potential layoffs.

Question 27

What are impacts of demergers on customers?

Answer 27

There is a potential for disruption of products or services during the demerger process, as systems and operations are divided between the new entities. This may lead to customers experiencing a decline in the quality of service.

However, demergers can lead to increase competition between new entices. This can lead to lower prices and a better quality service.

Question 28

What is the impact of demergers on shareholders?

Answer 28

Stock price changes: Following a demerger, stock prices of the newly formed companies might experience changes as the market adjusts to new entities.

Question 29

When does profit maximization occur…

Answer 29

Occurs when marginal revenue = marginal cost

Question 30

What is marginal revenue?

Answer 30

The change in total revenue from selling an extra unit.

Question 31

What is marginal cost?

Answer 31

The change in total cost from producing an extra unit/

Question 32

If MR>MC…

Answer 32

selling and extra unit will add to profit.

Question 33

What is revenue maximization?

Answer 33

Revenues are maximized at an output level where marginal revenue = 0

MR = 0

The coefficient of price elasticity of demand when revenue is maximized is unity (1).

Question 34

What is sales growth maximization?

Answer 34

Sales maximization focuses on generating the highest possible level of sales with given a period perhaps as part of the wider objective of growing market share.

As sales increase, a businesses may be able to take advantage of economies of scale, leading to lower average costs. This could potentially enhances the businesses profitability in the long run.

Sales maximization occurs when price per unit = average cost.

Question 35

What is satisficing objectives?

Answer 35

Satisficing involves the owners of the business (shareholders) setting minimum acceptable levels of achievement of revenue and operating profits.

Question 36

What are environmental objectives?

Answer 36

Businesses are recognizing the importance of environmental and social objectives alongside traditional economic goals.

(e.g. Reducing carbon emissions, waste reduction, philanthropy).

Question 37

Conflicts of profit maximization.

Answer 37

Firms makes the highest profit thus increasing returns of shareholders.

Consumers :Higher prices and lower output lead to a lower level of consumer surplus.

Wider community: Profits provide funds for investment and more tax revenue for the government to spend.

Question 38

Conflicts of sales revenue maximization.

Answer 38

Profits are lower than with less maximization so less is then available for shareholder dividends.

Lower prices than with profit maximization - so probable gain in consumer surplus.

Likely to be nearer allocative and productive efficiency at a lower price and higher output, thus community benefits.