Business Operations & Labour Markets - Year 2 Microeconomics Flashcards
term
definition
Why do firms grow in size?
- Experience economies of scale (cost cuts)2. Generate greater revenue and supernormal profits which can be used to re-invest into research and development3. Gain larger market share increasing their influence on prices and contestability, can lead to monopoly power4. Have more security by raising reserve cash in case of financial difficulties and diversifying risk by selling larger range of goods in more countries
Explain what is meant divorce of ownership and control.
As firms growth there is a seperation of ownership and control because firms are owned by their shareholders and seniors managers are hired to manage operations.
Formula for Average Revenue
AR = TR / Q = [P x Q] / Q = P
Why do some firms remain small (Constraints on business growth)?
- Market is small or is specialised and niche2. Limited access to finance, low revenue or credit crunch3. The owner may prefer to keep the business small to keep full control of the firm (P.A problem)4. Regulation may prevent large businesses from growing to allow competition to flourish ‘Competition Law’
Define the principle-agent problem, and explain why this is a problem of firms growing.
Divorce of ownership and control in firms leads to owners (Principle) hiring managers (Agent). Managers may prioritise personal gain over business interests, creating conflicts due to differing objectives, leading firms to profit satisfice rather than maximise.
What is the difference between the private and public sector?
The private sector is part of the economy that is owned and run by individuals or groups, usually with the aim of making a profit - includes sole traders, PLCs, LTDs etc.The public sector is part of the economy that is owned and controlled by the government. The purpose of public sector firms is to provide a service for citizens, not to make a profit.
What is the objective of not-for-profit firms?
Maximise social welfare and help individuals
Define organic growth.
When a firm grows by increasing their total level of output.
State three methods of organic growth.
- Opening new stores2. Product diversification (R&D)3. Investing in new technology
State two advantages to organic growth.
+Cheap relative to integration+Firm keeps control
State two disadvantages to organic growth.
-Takes a long time-Difficult to gain new ideas-Difficult to expand into new markets
Define external growth.
When a business grows through amalgamation, takeover or merger.
State three types of external growth.
- Vertical Integration2. Horizontal Integration3. Conglomerate Integration
What is horizontal integration?
Firms in the same industry at the same stage of production integrate.
State three advantages to horizontal integration.
+Reduces competition as a firm is taken out+Increases market share, so the firm has more power to influence markets and set prices+Business grows in a market where it has expertise+Economies of scale
State two disadvantages to horizontal integration.
-Increases risk for the business in case that market fails ‘Placed all their eggs in one basket’-Some admin staff will be made redundant as they will be duplicated
What is forward vertical integration?
When a firm integrates with another firm in the same industry at a stage of production closer to the consumer/final good.
State two advantages to forward vertical integration.
+Increased potential for profit as firm takes the potential profit from a larger chain of production+Improved coordination, communication and control over supply chain
State three disadvantages to forward vertical integration.
-High initial investment costs-Reduced flexibility in responding to changing market-Firms may lack expertise in the new sector
What is backward vertical integration?
When a firm integrates with another firm in the same industry at a stage of production further from the consumer/final good.
State two advantages to backwards vertical integration.
+Ensure deliveries are reliable and control quality, reduces risk+Can restrict access to resources to competitors
State three disadvantages to backwards vertical integration.
-High initial investment costs-Reduced flexibility in responding to changing market-Firms may lack expertise in the new sector
What is conglomerate integration?
Where firms in dfferent industries with no obvious connections integrate.
State two advantages to conglomerate integration.
+Risk diversification (risk-bearing economies of scale)+Useful where there is no room for growth in current market
State two disadvantages to conglomerate integration.
-Risky as the firm has no expertise in the new industry-Lack of synergies between diverse business units leading to inefficiencies-High initial investment costs
What is a joint venture partnership?
A business arrangement in which two or more firms agree to pool their resources for the purpose of accomplishing a specific task
What is a demerger?
When a single large firms is broken into multiple smaller firms, each to operate on their own, sold or dissolved.
Why do demergers occur?
- Lack of synergies2. Value of seperate parts of the company worth more than company combined3. Prevent diseconomies of scale4. Avoid attention from competition authorities5. If company is focused on individual markets they will be more efficient
What is the impact of demergers on workers?
+Seperate firms hire their own managers which can lead to promotions-Trying to maximise efficiency, firms may make jobs redundant
What is the impact of demergers on consumers?
+Gain from innovation and efficiency leading to higher quality products and cheaper goods-Demerged firms may lose economies of scale and instead raise prices, or reduce quality of goods
What is the impact of demergers on firms?
+Concentrating on a smaller business can make it more efficient and lead to greater innovation-Smaller business loses economies of scale and therefore reduced efficiency
Formula for Total Revenue
TR = P x Q
Formula for Marginal Revenue
MR = ΔTR/ΔQ
Define fixed costs and give examples
Fixed costs do not vary with output. EG: Worker salaries, rent, business license etc.
Explain the Law of Diminishing Marginal Returns.
As additional units of a variable input are added to a fixed input, the marginal product will eventually decrease as a result of other fixed factors of production.
Define variable costs and give examples.
Variable costs vary with output. EG: Wages, raw materials, delivery costs etc.
Formula for Total Costs
TC = TFC + TVC
Formula for Average Costs
AC = TC / Q
Explain the shape of the AC curve.
Initially, AC decreases as output increases, reaches a minimum point, and then rises due to diminishing marginal returns. Its lowest point intersects the MC curve.
Explain the shape of the MC curve.
Initially, as production increases, MC decreases, but it eventually rises due to diminishing marginal returns
Define economies of scale.
When increasing the level of production leads to a fall in average (unit) costs.
What is meant by Returns to Scale?
The change in output or production as a result of proportional changes in all inputs.
What is the Minimum Efficient Scale (MES)? How is the LRAC curve is used to demonstrate economies of scale.
The minimum level of output required to have fully minimised average costs.