businesses Flashcards
Why do some firms choose to profit maximise?
It provides greater wages and dividends for entrepreneurs.
Retained profits are a cheap source of finance, which saves paying high interest rates on loans.
In the short run the interest of the owners or shareholders are most important, since they aim to maximise their gain from the company.
Some firms might profit maximise in the long run since consumers d not like rapid price changes in the short run, so this will provide a stable price and output.
Principle agent theory
The agent makes the decision for the principal, but the agent is inclined to act in their own interests, rather than those of the principal. EG shareholders and mangers have different objective which might conflict, eg bonus for manager over dividend for shareholder.
Profit organisation
aims to maximise the financial benefits of its shareholders and owners. The goal of the organisation is to earn maximum profits.
Not-for-profit organisations
Has a goal which aims to maximise social welfare. They can make profits, but they cannot be used for anything apart from this goal and the operation of the organisation.
4 ways firms grow?
Organic growth (or internal)
Forward and backward vertical integration
Horizontal integration
Conglomerate integration
Organic growth
When firms grow through expanding their production through increasing output, widening their consumer base, by developing a new product or by diversifying their range.
Advantages of organic growth
less risky than inorganic growth
Firms grow through building on their strengths and using their own funds such as retained profits to fund the growth. So the firm is not building up debt and the growth is more sustainable.
Existing shareholders retain control so reduce conflicts in objectives that are possible in a takeover.
Weaknesses of organic growth
Slower which could allow another firm to out compete or upset shareholders.
Might rely on strength of market to grow which could limit how much and fast they can grow.
Forward vertical intergration
When a firm integrates with another firm closer to the consumer eg taking over a distributor. Such as a coffee producer taking over a café.
Backward vertical intergration
When a firm integrates with a firm closer to the producer. This involves gaining control of suppliers. For example, a coffee producer might buy a coffee farm.
Advantages of forward and backward vertical integration
increase efficiency, through gaining economies of scale, which could reduce their average costs. Resulting in lower costs for consumers.
Gain more control of the market. Backwards integration can mean that firms can control the price they pay for their supplies.
Firms can have more certainty over their production with factors such as quality, quantity and price.
Disadvantages of forward and backward vertical integration
Diseconomies of scale
Create barriers to entry which could discourage new entrants of new firms which could lead to a less efficient market.
Horizontal integration
Merger of two firms in the same industry and the same stage of production eg two car manufacturers.
Advantages of horizontal integration
Firms can grow quickly which can give them a competitive edge over other firms in the market.
Increase output quickly so they can take advantage of economies of scale.
The two firms have expertise in the same industry, so the merged firm can gain advantages, such as in marketing
Conglomerate intergration
The combining of two firms with no common connection.
