E3B Private Firms

Question 1

define PRIMARY sector

Answer 1

extracting raw materials

Question 2

define SECONDARY sector

Answer 2

manufacturing raw materials into finished products

Question 3

define TERTIARY sector

Answer 3

providing services to consumers/firms

Question 4

# define PRIVATE sector
define PUBLIC sector

Answer 4

PRIVATE: owned by private individuals to earn profit
PUBLIC: owned by govt to provide service

Question 5

how do you measure the RELATIVE SIZE of firms?

Answer 5

market share
number of employee
revenue
stock market value

Question 6

pros/cons of SMALL FIRMS

Answer 6

• *+ easy to set up and manage**
• *+ owner gets all profit** → incentive → productive
• *+ owners directly in touch with employee** → better relation + motivation → productive
• *+ owners directly in touch with consumer** → personalized, flexible (responsive to changes in D)
• *- limited capital** → hard to get external fund → limited financial resource → hard to expand
• *- no EOS** → higher COP → less profit, less price-competitive

Question 7

# define INTERNAL growth
define EXTERNAL growth

Answer 7

INTERNAL: expand using own resource (increase size/market share)
EXTERNAL: expand by merging/taking over other firms

Question 8

# define HORIZONTAL integration
what are the pros and cons?

Answer 8

firms in the SAME INDUSTRY merge

Question 9

# define VERTICAL integration
what are the pros and cons?

Answer 9

firms at DIFFERENT STAGES OF PRODUCTION merge

Question 10

# define CONGLOMERATE integration
what are the pros and cons?

Answer 10

firms buy UNRELATED areas

Question 11

define EOS

Answer 11

large-scale operation reduces AVERAGE COP

Question 12

types of INTERNAL EOS?

Answer 12

Purchasing - bulk buying leads to discount + low average cost

Technical - large output spreads machinery cost

Financial - more capital means easier + lower IR to borrow from banks

Managerial - specialist managers

Market - advertising budget

Risk-bearing - a range of products + locations

Research & Development - fund innovation

Question 13

types of EXTERNAL EOS?

Answer 13

proximity to related firms → transportation → COP

reputation → attracts more skilled labor → productivity → PC + EG

Question 14

types of DIS-EOS?

Answer 14

COMMUNICATION + MANAGERIAL PROBLEMS → hard to control, slow decision-making → productivity → COP

WORKER FEEL LESS INVOLVED → motivation → productivity → COP

Question 15

explain influences on D for FOP?

Answer 15

• *PRODUCTIVITY** (generate more profit *but higher wage!)
• *COST** (wage)
• *DD** from the product they produce

Question 16

define labor- and capital-intensive production

give examples of cost of each

Answer 16

LABOR: labor cost > other FOP
e.g. wages, bonuses, overtime-pay

CAPITAL: capital cost > other FOP
e.g. tools, machinery, repairment, depreciation

Question 17

pros/cons of LABOR-intensive production?

Answer 17

• generally low productivity + output
• high unit cost

+ personalized, flexible
+ high productivity+output if skilled (but higher wage!

Question 18

pros/cons of CAPITAL-intensive production?

Answer 18

+ never get tired, no rest/holiday → high productivity + output
+ technical EOS → low unit cost
+ no human error → high quality

• high set-up cost, replace/repair, depreciation…

Question 19

choices between labor- and capital-intensive depend upon…

Answer 19

productivity
cost
firms’ objectives

Question 20

what’s the difference between PRODUCTION and PRODUCTIVITY?

Answer 20

PRODUCTION = total output
PRODUCTIVITY = how many output per unit of input (efficiency of production)

Question 21

why do small firms exist?

Answer 21

limited D
limited financial/capital resource
owner’s objective

Question 22

define FIXED cost

Answer 22

stay the same regardless of output

Question 23

define VARIABLE cost

Answer 23

change with output

Question 24

how do you calculate AVERAGE COST?

Answer 24

total cost / output

Question 25

how do you calculate AVERAGE REVENUE?

Answer 25

total revenue / quantity sold

Question 26

define TOTAL cost

Answer 26

fixed cost + variable cost

Question 27

define MARGINAL COST

how do you calculate it?

Answer 27

cost of producing one more unit

∆Cost / ∆Quantity

Question 28

identify OBJECTIVES of firms

Answer 28

survival, growth, profit maximization, social welfare

Question 29

explain how firms can INCREASE PROFIT

Answer 29

• *CUT COP**
• increase productivity (tech, E&T…)
• increase output → EOS
• *RAISE REVENUE**
• increase D (improve quality, advertise, cut price if high PED…)

Question 30

how do you calculate PROFIT?

Answer 30

total revenue - total cost

Question 31

how do you calculate REVENUE?

Answer 31

Price x Quantity

Question 32

define COMPETITIVE MARKET & MONOPOLY

Answer 32

COMPETITIVE:
many firms compete → none has significant market power → high PED → price taker

MONOPOLY:
one supplier dominates market → significant market power → low PED → price maker

Question 33

pros/cons of MONOPOLY

Answer 33

• *- inelastic D** due to lack of substitute/competition → restrict output, higher P
• *+ EOS** → lower COP → lower P
• *- lacks incentive** to improve quality/innovate/be efficient due to no competition
• *+ financial resource to invest** in R&D to improve quality and innovate → PC

exploit supplier+worker (pay low price + low wage)

***depends upon:
• sector/objective? (public sector monopoly can eliminate wasteful competition + consider full cost/benefit)
• contestable market?
• govt regulation?

Question 34

chain of analysis: effect of EOS

Answer 34

output → price, choice, revenue, jobs, income…

• *COP** → price → competitive → D for X → X → X revenue → AD+CA
• *COP** → profit → expand + I → AD+PC

productive → competitive → D for X → X → X revenue → AD+CA