chapter 20-23 Firms Flashcards
Define industry
group of firms producing the same product
What are the 4 stages of production (4)
primary sector
secondary sector
tertiary sector
quaternary sector
Define primary sector
The extraction and collection of raw materials. THe first stage of production
Examples of primary sector (4)
agriculture
mining
forestry
fishing
Define secondary sector
THe processing of raw materials into finished and semi-finished goods. Manufacturing and construction.
Examples of secondary sector (3)
clothing
steel
electronics
Define tertiary sector
Producing services
Examples of tertiary sector (4)
Banking
insurance
tourism
hospitality
Define quaternary sector
covers service industries that are knowledge based
Examples of quaternary sector (2)
software
social media
Who owns the public sector firms?
Government
Who owns the private sector firms?
individuals (owner, shareholders)
What are the three main measures of the size of a firm? (3)
number of workers employed
value of the output it produces
value of financial capital it employs
Factors that affect the size of a firm (5)
age of the firms
availability of financial capital (investors, loans)
type of business oganisation (one owner or multi national corporation)
internal economics and diseconomies of scale
size of the market
Why may firms choose/forced to stay small? (7)
small size of market
preference of consumers
owner preference
flexibility
Unique services + goods
government support
easier to manage and control
Why will the small size of the market force a firm to be small? (2)
If demand for product is small, a firm producing it cannot be large
Demand for very expensive items may be small as it may be for individually designed items
Why might preference of consumers make the firm stay small?
For some personal services, firms can cater to teir individual requirements and can provide a friendlier and more personal service
Disadvantages of small firms (5)
hard to raise finance
firm dependent on owner
vulnerable to recession
small number of employees
less ability to take advantage of EoS
What are the two types of growth of firms
Internal growth
external growth
Define internal growth
An increase in the size of a firm resulting from it enlarging existing plants or opening new ones
Define external growth
an increase in the size of a firm resulting from it mergings or taking over another firm
What are the 3 types of mergers
vertical integration
horizontal integration
conglomerate
Define vertical integration
Meger with a firm at a different stage in the supply chain
What are the two types of vertical integration + definition (2)
Vertical integration forwards (a merger with a firm at an earlier stage of the supply chain)
vertical integration backwards (a merger with a firm at a later stage of the supply chain)
Define horizontal integration
merger with a company producing the same product at the same stage of production
Define conglomerate
merger between two firms which produce unregelated products
Advantages of internal growth (2)
less risky, growth is incremental and owner retains a high degree of control
Growling slow allows owners to unedrstand strength and weakness of firm
Disadvantages of internal growth
limited resource
slower growth - more opportunity for competitor to exploit firm’s weakness
Advantages of external growth (3)
Gain skills of the staff that have been working for the acquired firm
firm gains knowledge that the other firms acquired
Growth is rapid
What is the main disadvantage of external growth + elaborate (3)
Higher level of risk
- more financial capital involved
- impossible to know everything about the new firm acquired
- greater management required
Advantage of vertical integration (3)
production cost may decrease (supply chain move streamlined)
gains ability to control quality at each stage of the process
Gaurantees access of raw materials
Disadvantages of vertical integration(2)
Reduced ability to switch suppliers
usually does’t generate economies of scale as the production process in each stage are different
Advantage of horizontol integration(2)
Gain more market share
-gain monopoly power
- charge higher prices
Increase in potential for EoS
Disadvantages of horizontal integration(2)
Possible slow communication
Hard to integrate differing business processes, may be a “culture clash”
Advantages of conglomerate(2)
Firms gain synergies, the different firms can benefit from each other
spread risk, cross subsidise (using profits from another part of business during hard times)
Disadvantages of conglomerate(1)
owners may lack knowledge/experience of new industry/sector
Define economies of scale
cost advantages gained by firms as a result of increase in the scale production, leading to lower long-run average costs
Define diseconomies of scale
cost disadvantages suffered by firms as a result of increase in the scale production, leading to a higher long-run average cost
Define Internal economies/diseconomies of scale
When long-run average costs are lowered/increased by the FIRM increasing its scale of prodction
Define external economies/diseconomies of scale
When long-run average costs are lowered/increase by growth within the wider industry
Name and explain the different types of internal economies of scale (6)
Purchasing economy of scale - often reffered to as bulk-buying discounts. As a firm increases its output, its suppliers will often provide volume based discounts for the raw materials purchased. The larger the quantity, the higher the discount and the lower the ATC
Managerial economy of scale - As the firm grows it can employ specialised managers who have the skills to use resourcesmore efficiently and this lowers ATC
Financial
Name and explain the different types of internal economies of scale (6)
Purchasing economy of scale - often reffered to as bulk-buying discounts. As a firm increases its output, its suppliers will often provide volume based discounts for the raw materials purchased. The larger the quantity, the higher the discount and the lower the ATC
Managerial economy of scale - As the firm grows it can employ specialised managers who have the skills to use resourcesmore efficiently and this lowers ATC
Financial economy of scale - commercial banks charge lower interest rates on loans to larger firms, who they consider to be less risky
Marketing economy of scale - Marketing costs can be high. As output increases, the marketing costs are spread over more units of output
Technical economy of scale - As a firm increase sits scale it can often install new machinery that lowers the cost of production. the firm may also use existing machinery more efficiently
Risk-bearing economy of scale - Large firms can produce a wide range of products and supply them in many geographical locations. This spreads the risk of failure for each section of the firm and in doing so lowers the ATC
Name and explain the Type/causes of internal diseconomies of scale
Lack of coordination
- Difficult to coordinate the different supply chains or legal requiremetns in each country in which the firm operates
- Firms may be spread over large geographical area that is difficult to coordinate with team members in differen timezones
Lack of control
- As firms merge, the connetions between different parts of the business may become increasinly loose and difficult to maintain
- The larger the organisation, the easier it can be for workers to hide and productivity to decrease
Miscommunication
- Communications may also slow down between departments and it may take a long time for emssages to be passed back and forward
- Leads to wasteful duplication of tasks
How does diagram of economies and diseconomies of scale look like
YOU SHOULD U SILLY GOOSE!!
How does diagram of economies and diseconomies of scale look like for CAPITAL INTENSIVE industry
check notebook silly
How does diagram of economies and diseconomies of scale look like for LABOUR INTENSIVE industry
check ntoebook silly goose
Name and explain the types of external economies of scale (5)
A skilled labour force - firms can recruit workers who have been training by other firms in the industry. More universities may start to offcer coureses developing the necessary skills
specialist suppliers of raw materials - suppliers will set up organisations geographically close to the expanding industry/ THey will adjust their services to suit the needs of the industry
Specialist services - universities may run courses for workers in large industries and banks, and tranpsport firms may provide services speciallly designed to meet the particular needs of firms in the industry
Specialist markets - some large industries have specialist selling places and arragnements such as corn exhcanges and insurance markets “access to wide consumer base”
Improved infrastructure - The growth of an industry may encourage a government and private sector firms to provide better road links and electricity supplies, biild new airports and develop dock facilities etc
Name and explain the types of external diseconomies of scale
Larger firms may attract goevrnment regulation
congestion/traffic of transport used by industry
Land + property prices increase
Infasture become over-burdened
more demand for skilled laour/raw materials and capital (wages up leading to up cost)
What causes a shift in the economies and diseconomies of scale diagram
changes in external Internal and diseconomies of scale
Define production
the process of turning factor inputsinto output
Define productivity
The output per factor of production per hour- a measure of efficiency of the factor of production
Equation for labour productivity
labour productivity = total output/ number of workers
Equation for capital productivity
Capital productivity = total output/ number of machines
Name and explain the factors firms consider when making decisions about production
Time frame
combination/balance
productivity
expense and relative cost of different factors
risk
Define labour intensive
The production process requires a high proportion of labour
Define capital intensive
production process requires a high proportion of capital
Advantages of labour intensive production (4)
workers can generate new ideas or provide feedback to management on how improvements can be made
workers can connect better and provie a personal level of service to consuemrs in such way that it helps build customer loyalty
workers can respond to costomer deedback and modify the product to suit them
the number of workers hired cna fluctuate with demand for the product/move workers between different tasks
Advantages of capital intensive production (4)
Firm can gain technical economies of sacle and reduce the average total costs
Human error is avoided and quality remains high and mre consistent
Machines do not need regular breaks
machnes have no rights
Define fixed costs
costs that do not vary with output
Define average fixed costs
fixed costs per unit of output
Define variable costs
costs that change with output.
Define average variable costs
variable costs per unit of output
Define total cost
total amount spent by a firm on the factors of production used to produce an output
Define average total cost
total costs per unit of output
Equation for average revenue
total revenue/quantity sold
How does graph look in perfectly competitve market
book
What are the different objectives of firms (5)
profit maximsation
survival
growth
social welfare
profit satisficing
What are the different objectives of firms (5)
profit maximsation
survival
growth
social welfare
profit satisficing
What are the different objectives of firms (5)
profit maximsation
survival
growth
social welfare
profit satisficing
2 ways of increasing profit (2)
reduce costs of production
raise revenue
