chapter 5: Businesses in economy Flashcards
what do business goals represent?
preference of owners and managers, the lvel of competition in the industry, state of economy, legal structure of the firm and most importantly profit maximisation
legl structure, state of eco, preference, competition and profit max
A firm’s production decision - What to produce?
skills and business - a business operator is more likely to be most successful in an industry that they know well, where they understand demands, nature and quality contacts are also viable
consumer demands - demand is a primary indicator of what to produce
business opportunities - eg there are not many pharmacies in a rural area, hence good opportunity to have one there
capital - eg mortgage to gain collateral to enable them to have some form of capital to start the business
capital formation - how much money you have in order to achieve target ie ur market inventory
(skills, demand, bus opps, capital, capital formation)
A firms production decision - How much to produce?
based on level of consumer demand and its ability to turn hat demand into sales by commissioning market research
producing too much - waste
producing too little - cant provide goods to potential customers
new businesses challenges:
firms that eruqire large production runs in order to maximise efficiency risk lack of capital and waste
difficult to anticipate the impact of changes in external conditions on consumer demand eg covid and masks
A firm’s production decision - How to produce?
when u already determine how much to produce. production process involves using inputs to create outputs using any combination of the factors of production (land, labour capital and ent training erprise)
what businesses contribute to economy
string growth in sales for a large no# of businesses boost the overall growth rate of eco. eg AUS’s mining boom in 2000s fuelled large increases in exports
higher employment
growth in individual businesses increasing eco’s productive capacity and hence outward shift in ppf
greater competition and living standards
govs assist businesses throughstreamlined business proposals, grants, rebates, subsidised training and export assistance eg in 2022, the export market development grants (EMDG) helped more than 5000 small businesses get exposure in international markets
identifyt eh goals fo the firm
maximising profits (multiple choice)
meeting shareholder expectations (essay)
increasing market share
maximising growth
satisficing behaviour
goals of the firm: maximising profits
biggest possible profit/smallest possible loss
profit = total revenue ie (output sold x price) - total cost of production
goals of the firm: meeting sharehodler expectations
overriding concern of most business managers. Shareholers are often interested in maximising short term returns but are likely to reduce a firm’s value in long term (thus causing conflict)
goals of the firm: increasing malret share
as the entrepreneurial function of larger businesses is split b/w owners (shareholders) and paid managers, the goal of profit maximisation may not always be highest priority
market share of consumer’s preference of a firm over its competitors
competitive advantage
greater market capitalisation - consumers switching from competitors beneficial in long run but may reduce profits in short run/ increasing market share by lowering prices to attract away form competitor
goals of the firm: maximising growth
happens at the expense of porfits due to using a lot of resources when expanding the company 9eg overseas branches)
In short, the firm is operating at a very marginal profit
goals of the firm: satisficing behaviour
generate minimmum profit for a business to survive (to sustain) but not to the point where u put ppl at risk
not attempt to maximise any particular objective but seeks to achieve what is regarded as an adequate lvl of attainment in each area
aim for satisfactory lvl of profit (acceptable by shareholders)
if excessive amt of profit it invites new competitors and more gov regulations
efficiency and production process: define production vs productivity
productivity refer to how much we produce with given resources per unit of time
production refers to the total amt of goods and services produced
we can increase production by simply increasing the amt of resources we use eg a bakery hires another person to bake bread
To increase productivity, we need to increase production proportionately more than increase in inputs of resources eg if baker can triple no# of loaves when double amt of labour used
how does productivity contribute to an improvement in our standard of living in several ways?
less wastage of scare resources - as we use resources more efficiently, it allows eco to use the resources not used
lower production costs and higher profit for firms - ecourages eco activity and provides greater incentive for entrepreneurs to increase ouputs and invest in capital equipment
a lower inflation rate - bcos of lower production costs firms dont have to increase orice but can reduce price
higher incomes - since labour more productive, firms can afford to payer higher wages without increasing prices
improved international competitiveness - lower orices allow firms to be more price competitive in international markets
how do firms increase productivity?
one main way firms increase productivity is specialisation where factors of production are used more intensely for a smaller number of production processes.
outline the different types of specialisation
division of labour(specialisation of labour) - occurs when production process is broken down into sub-processes, allwoing workers to specialise in a particular part of the process eg assembly line and workers more efficient
location of infustry (specialisation of land) - ovcurs when skmilar businesses congregate in the same area to reduce operating costs by sharing common infrastructure requirements eg industrial estate
large scale production (specialisation of capital - occurs when businesses grow so large they can use highly specialised capital equipment in their production processes eg a large wine producer that uses specialised machines to bottle, cap and label wines
