Ch5 P2 Flashcards
What are diseconomies of scale?
Rising long-run average costs as a business expands beyond its minimum efficient scale.
What are economies of scale?
The reduction in average cost per unit as the business grows in size.
What are external economies of scale?
The cost reductions available to all businesses as the industry grows.
What is meant by ‘inability’ in economics?
The physical inability of economic appropriates of running a machine or some other piece of equipment at below its optimal operational capacity.
What is inorganic growth?
A business growth strategy that involves two or more businesses joining together to form one large business.
What are internal economies of scale?
The cost reductions experienced by one business as it grows.
What is minimum efficient scale?
The output that minimizes long-run average costs.
What is organic growth?
A business growth strategy that includes the business growing gradually using its own resources.
What is a sole trader?
A business organization which has a sole trader.
What is a venture capitalist?
Provider of funds for small or medium-sized companies that may be considered too risky to other investors.
What does it mean when a business is growing?
It means more revenue, profit is being generated, and the business has more assets and uses more resources.
What are the benefits of growing a business?
- Higher revenue
- Increased market power
- Economies of scale
What is the relationship between large businesses and market share?
Larger businesses generally have higher market share.
What is the significance of economies of scale?
It allows businesses to lower average costs as output increases.
What are internal economies of scale?
Benefits of growth within a firm that lead to productive efficiency.
What are purchasing and marketing economies?
- Better deals when buying components
- Selling administration costs do not rise proportionally with sales size
What are technical economies?
The capital and running costs of plants do not rise in proportion to their size.
What is the law of averages in production?
Refers to the ability to switch to mass production as output increases.
What are managerial economies?
Employing skilled workers can improve efficiency and reduce mistakes.
What are financial economies?
Ability to raise extra funds, sell shares, and borrow at lower interest rates.
What are external economies of scale?
Opportunities for businesses to diversify product range and conduct research and development as they grow.
Fill in the blank: The minimum effective scale is reached when output _______.
[reaches a level where average costs cannot be reduced further]
True or False: Only large businesses can take advantage of economies of scale.
True
What happens to a business’s market power as it grows?
It increases, making the business more dominant.
What is the effect of increased market power on rivals?
Rivals are left with a smaller market share.
What can a dominant business do regarding customer pricing?
Charge higher prices due to limited competition.
How does a dominant business affect customer choices?
Customers may be forced to pay higher prices due to less choice.
What is a consequence of a dominant business not having to innovate?
It may not meet the costs of innovation.
How can a business exert pressure on suppliers?
By forcing down the cost of materials through large quantity purchases.
What happens to market share as a business grows?
It is likely to grow as well.
What are some advantages of increased market share?
- Greater brand recognition
- Brand awareness
- Ability to charge higher prices
- Creation of customer loyalty
- Development of a strong image
- Attraction of media attention
Fill in the blank: A dominant business can create _______ among its customers.
customer loyalty
True or False: A business with increased market power is less likely to attract media attention.
False
What is defined as a benefit of growth?
Profitability
Profitability refers to the ability of a company to generate profit relative to its revenue, expenses, and investments.
What is the relationship between profits and retained earnings?
Higher the profits, higher the returns
Retained earnings are the portion of net income that is retained by the company rather than distributed as dividends.
What does ‘organic growth’ refer to?
Internal growth through selling more products
Organic growth is achieved by increasing sales through existing operations, without mergers or acquisitions.
What does ‘inorganic growth’ involve?
Mergers and acquisitions
Inorganic growth occurs when a company increases its market share and resources by acquiring or merging with other companies.
Fill in the blank: Organic growth is also referred to as ______.
Internal growth
Fill in the blank: Inorganic growth can involve ______ and ______.
Mergers and takeovers
What are some characteristics of organic growth?
- Uses its own resources
- Takes more time
- Less risky
- More knowledge acquired
Organic growth often allows a company to build on its existing capabilities and customer relationships.
What are some characteristics of inorganic growth?
- Involves more branches
- Merging and takeovers
- Gradually grows
- More risky
Inorganic growth can lead to rapid expansion, but it often comes with significant risks and challenges.
True or False: Organic growth is generally considered less risky than inorganic growth.
True
True or False: Inorganic growth does not require the use of external resources.
False
