3.2-3 Business objectives; Revenues, costs + profits

Question 1

what is meant by economies of scale and diseconomies of scale

Answer 1

• EoS: cost advantages a firm experiences as it grows larger, leading to a decrease in average costs due to factors like bulk buying and specialisation
• DisEoS: cost disadvantages a firm faces when it becomes too large, causing average costs to rise due to factors like poor communication and management inefficiencies

Question 2

what are the 6 types of internal EoS

Answer 2

• risk-bearing: larger businesses are better equipped to manage certain types of risks more efficiently due to size
• managerial: firms employ specialists -> better management -> more investment + better communication
• financial -> larger firms are able to be credit worthy and secure loans with lower interest
• technical -> can access specialised equipment -> automated equipment reduces need for manual labour -> inc. speed of production
• purchasing -> can buy in bulk
• marketing -> cost of advertising may be lower since there is a larger product range

Question 3

reasons for external EoS

Answer 3

• knowledge + labour pool -> might be a concentration of skilled workers in a certain region
  -** infrastructure economies** -> industry cluster develops in a certain region, firms can benefit from this e.g. transportation networks
• supplier networks - clusters of related businesses -> strong supplier network e.g. Silicon Valley

Question 4

reasons for disEoS

Answer 4

• control - firm grows bigger -> makes it harder for those in higher positions to control the workers so objectives align
• communication - increased layers of hierarchy -> reduction in co-ordination -> flows of info are harder to implement and communicate
• motivation - workers feel demotivated -> work does not have a substantial or measurable impact due to the size of the firm

Question 5

firm shutdown condition in the SR

Answer 5

• firm may keep operating during a loss (depends on how revenue compares to its cost)
• firm will keep running if TR > TVC (anything above can be used to pay towards their fixed costs)
• if TR < TVC, firm will shut down immediately

Question 6

firm shutdown condition in the LR

Answer 6

if firm cannot make normal profit in the LR, it will shut down due to revenue not covering all economic costs

Question 7

what is the condition for revenue maximisation

Answer 7

• MR=0
• PED=1 (unitary)

Question 8

profit maximisation

Answer 8

MC=MR

Question 9

sales growth maximisation

Answer 9

AR = AC
(normal profit)
- businesses can take advantage of EoS -> lower LRAC -> increased profitability in the LR
- business sells as much as possible without making a loss

Question 10

what is meant by satisficing

Answer 10

owners of a business setting minimum acceptable levels of revenue and/or operating profits to managers
- combination of ‘satisfy’ and ‘suffice’ -> they settle for the minimum level of requirements or criteria