Business growth Flashcards
types of firms
public limited companies - companies listed on the stock market eg tesco
privately owned - limited liability, shares are privately held and traded, eg JCB
startups - newly created businesses
state owned businesses - businesses operating in the public sector, government has significant/majority shareholding, eg network rail
social enterprises - commercial businesses whose profits are reinvested for social projects, eg Ian project in cornwall
cooperatives - each member of the business has equal stake
partnership - employee owned firms, john lewis
sizes of firms
1- 9 = micro business
10-250 = SME (small to medium)
why is profit maximisation the objective for firms
- reinvestment - large profits means they can reinvest into the business, could be in the form of capital, R&D
- to pay greater dividends to shareholders
- to reduce costs and allow lower prices for consumers (profit = rev - costs)
- to reward entrepeneurship
who are shareholders
owners of a company
when does profit maximisation occur
when MARGINAL COSTS = MARGINAL REVENUE
why does profit maximisation occur at MC = MR
- any point to the right means that costs are higher than revenue, reducing profit
- any point to the left is bringing in profit, but not the maximum amount, as any extra unit would generate more profit
why might businesses choose not to profit maximise
- Firms may not have accurate information about where MC = MR, making it difficult to identify the profit-maximizing point.
- to avoid scrutiny - limit profits to avoid government regulation or public scrutiny, especially in industries where high profits might attract negative attention or accusations of monopolistic behavior
- key stakeholders being harmed - firms may not maximise profit if it harms key stakeholders, such as employees, customers, or suppliers, to maintain good relationships, ensure long-term sustainability, or avoid negative public perception.
what is profit satisficing
sacrificing profit to satisfy as many key stakeholders as possible
what is a stakeholder
any person who has an interest in how the business is running
examples of stakeholders
- shareholders
- managers
- consumers
- workers
- govt
environmental groups
which of the stakeholders may be negatively affected because of profit maximisation
consumers - raising prices to increase revenue can lead to consumers paying more for goods and services
- To reduce costs, firms may cut corners on product quality, leading to inferior goods for consumers
- workers/trade unions - Firms may keep wages low to minimize costs and maximize profits, which can hurt workers’ earnings.
- might reduce staff or automate jobs to cut labor costs, leading to layoffs or increased job insecurity.
- To reduce expenses, firms might cut spending on employee benefits, safety, or training, leading to poor working conditions
government - Profit maximization can lead to wage disparities and wealth concentration, increasing income inequality
environmental groups - Profit-maximizing firms may cut corners on environmental protection measures, leading to higher pollution and resource depletion.
why is it bad to harm certain stakeholders
- Consumers: Harmed consumers may lose trust in the firm, leading to decreased sales and brand loyalty.
- Workers/Trade Unions: Unhappy workers can lead to lower productivity, strikes, or high turnover, affecting business operations.
- Governments: Poor relations with governments can result in stricter regulations or penalties, increasing costs for the firm.
- Environmental Groups: Negative environmental impacts can damage the firm’s reputation, leading to boycotts or costly legal actions.
why might companies want to maximise revenue
Economies of Scale: By maximizing revenue through higher sales, firms can increase output, allowing them to achieve economies of scale, which lowers average costs and enhances competitiveness.
Predatory Pricing: Firms may aim to revenue maximize by lowering prices aggressively (even below cost) to increase market share, drive out competitors, and later raise prices once market dominance is secured.
Principal-Agent Problem: Managers (agents) might pursue revenue maximization to show business growth and increase their job security or bonuses, even if this doesn’t align with the owners’ profit-maximizing goals.
what is predatory pricing
when a firm will undercut its rival on purpose, sacrificing profit to do so, in order to drive out competition
when does revenue maximisation occur
when MR = 0
when is there sales maximisation
when AC = AR
why might firms want to maximise sales
economies of scale:
- By maximising sales, firms increase their production levels, which can lead to lower average costs per unit due to bulk purchasing and operational efficiencies.
- can enhance competitiveness and improve profit margins in the long run as fixed costs are spread over a larger output
- limit pricing:
- Firms may set prices low enough to maximize sales and deter potential competitors from entering the market by signaling that they cannot sustain profitability at higher prices.
- established firms can maintain market dominance and reduce the threat of new entrants
- Principal - Agent problem:
- Managers might prioritize maximizing sales to demonstrate business growth, which can lead to performance bonuses or job security, regardless of the firm’s profitability.
- This behavior can result in a focus on immediate sales growth rather than long-term profit maximization, which may not align with shareholders’ interests.
- Flooding the market:
- Firms might aim to maximize sales by flooding the market with products to increase brand visibility and consumer recognition.
- A strategy focused on high sales volume can generate significant cash flow, which can be reinvested into the business for future growth.
- By saturating the market, firms can limit the space available for competitors, effectively reducing competition and establishing stronger market control.
