E3B Private Firms Flashcards
define PRIMARY sector
extracting raw materials
define SECONDARY sector
manufacturing raw materials into finished products
define TERTIARY sector
providing services to consumers/firms
# define PRIVATE sector define PUBLIC sector
PRIVATE: owned by private individuals to earn profit
PUBLIC: owned by govt to provide service
how do you measure the RELATIVE SIZE of firms?
market share
number of employee
revenue
stock market value
pros/cons of SMALL FIRMS
- *+ 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
# define INTERNAL growth define EXTERNAL growth
INTERNAL: expand using own resource (increase size/market share)
EXTERNAL: expand by merging/taking over other firms
# define HORIZONTAL integration what are the pros and cons?
firms in the SAME INDUSTRY merge
# define VERTICAL integration what are the pros and cons?
firms at DIFFERENT STAGES OF PRODUCTION merge
# define CONGLOMERATE integration what are the pros and cons?
firms buy UNRELATED areas
define EOS
large-scale operation reduces AVERAGE COP
types of INTERNAL EOS?
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
types of EXTERNAL EOS?
proximity to related firms → transportation → COP
reputation → attracts more skilled labor → productivity → PC + EG
types of DIS-EOS?
COMMUNICATION + MANAGERIAL PROBLEMS → hard to control, slow decision-making → productivity → COP
WORKER FEEL LESS INVOLVED → motivation → productivity → COP
explain influences on D for FOP?
- *PRODUCTIVITY** (generate more profit *but higher wage!)
- *COST** (wage)
- *DD** from the product they produce
define labor- and capital-intensive production
give examples of cost of each
LABOR: labor cost > other FOP
e.g. wages, bonuses, overtime-pay
CAPITAL: capital cost > other FOP
e.g. tools, machinery, repairment, depreciation
pros/cons of LABOR-intensive production?
- generally low productivity + output
- high unit cost
+ personalized, flexible
+ high productivity+output if skilled (but higher wage!
pros/cons of CAPITAL-intensive production?
+ 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…
choices between labor- and capital-intensive depend upon…
productivity
cost
firms’ objectives
what’s the difference between PRODUCTION and PRODUCTIVITY?
PRODUCTION = total output PRODUCTIVITY = how many output per unit of input (efficiency of production)
why do small firms exist?
limited D
limited financial/capital resource
owner’s objective
define FIXED cost
stay the same regardless of output
define VARIABLE cost
change with output
how do you calculate AVERAGE COST?
total cost / output
how do you calculate AVERAGE REVENUE?
total revenue / quantity sold
define TOTAL cost
fixed cost + variable cost
define MARGINAL COST
how do you calculate it?
cost of producing one more unit
∆Cost / ∆Quantity
identify OBJECTIVES of firms
survival, growth, profit maximization, social welfare
explain how firms can INCREASE PROFIT
- *CUT COP**
- increase productivity (tech, E&T…)
- increase output → EOS
- *RAISE REVENUE**
- increase D (improve quality, advertise, cut price if high PED…)
how do you calculate PROFIT?
total revenue - total cost
how do you calculate REVENUE?
Price x Quantity
define COMPETITIVE MARKET & MONOPOLY
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
pros/cons of MONOPOLY
- *- 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?
chain of analysis: effect of EOS
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
