Chapter 4 Flashcards
Sole trader
Business owned and controlled by a single person
Partnership
Business owned by 2 to 20 people
Private limited company
Business owned by share holders, UNABLE to buy or sell shares without consent of other share holders
Public limited company
Business owned by share holders, able buy or sell shares freely on stock market
3 main measures of size of firms
- number of workers
- value of output
- value of financial capital employed
Factors affecting size of firm
- age of firm
- availability of financial capital
- type of business organization
- size of market
- internal economies and diseconomies of scale
Why do small firms exist
- small size of market
- consumer preference
- owner preference
- flexibility
- lack of financial capital
- technical factors
- specialization
- gov assistance
Internal growth
increase in size of existing firm by increasing market for current products or diversifying
External growth
increase size of firm by merger or takeover of another firm
Types of internal EoS
- purchasing/bulk buying
- technical
- financial
- managerial
- risk bearing
- marketing
- labour
- R&D
Internal DEoS
- difficulties controlling firm(many layers of management)
- communication problems
- poor industrial relations
External EoS
- skilled labour force
- good reputation
- specialist supplier of raw material
- improved infrastructure
- specialist services(universities offer courses)
External DEoS
- higher cost of transport
- higher cost of resources
Factors influencing D on capital goods
- price of capital goods
- increased profit levels
- cut in cooperation tax
- rise in disposable income
- cut in interest rate
- firms expectations about the future
- advances in technology
Why some producers use labour intensive methods
- large supply of labour
- too small to take advantage of capital
- labour can be more flexible, respond quicker to changes in market
- can provide feedback on how to improve production methods
- enable customers to receive personalized services
Why some producers use capital intensive methods
- enable firms to use mass production techniques(more output less time)
- can benefit from EoS
- reduces human error
- advances in technology makes them more affordable and productive as they do not engage in industrial action or get sick
Production
total output produced by a firm/unit time
Productivity
refers to output/input/unit time
e.g. output/worker/hour
Importance of higher productivity to the economy
- EoS
- higher profits
- higher wages
- increased competition
- economic growth
Why is profit important to a business
- provide incentive for entrepreneurs to take risks
- without profit firms would struggle to survive
- can be used to the invest in R&D
- easier to obtain external finance (shares or loans)
Increasing revenue
- improve quality of product diversified and be more responsive to changes in consumer demand
- advertising
- Setting price according to elasticity of demand
- offering more credit facilities than competing firms
Decreasing costs
- cheaper suppliers
- loans with lower interest-rate
- offer labor training to increase productivity of labor
- Buying capital to increase productivity And reduce wastes
- increasing size of firm by merger or takeover
Objectives of firms
- survival
- Growth
- social welfare
- profit maximization
Features of firms in competitive markets
- many buyers and sellers
- pressured to keep prices low
- free entry and exit from market
- perfect knowledge
- normal profit
Advantages of competitive firms
- promote efficiency
- consumers get better quality product
- competition brings greater choice higher output and more competitive prices
Features of monopoly
- Single supplier
- price maker
- imperfect knowledge
- high barriers to entry and exit
Disadvantages of monopoly
- lack of competition may lead to inefficiency
- lack of substitutes so produces will not respond to changes in consumer taste new products
- high barriers prevent new firms from entering market
- imperfect knowledge about prices so consumers may not make rational choices
Advantages of a monopoly
- could be relatively efficient and benefit consumers
- call have very high profits which they spend on the switch in development and introduce variation
- natural monopoly, eliminating wasteful duplication of resources
Rationalization
Avoid duplicates in administrative position, decreases AC
