Economics Theme 3 Flashcards
public sector
owned by the state , under direct control from the government
private sector
owned by individuals , not under direct control from the government t
what is organic (internal) growth
when a business expands its own operations
Advantages of organic growth (4)
- less risk than external growth
- financed through internal funds (profits)
- builds on businesses existing strengths
-grow at a more sensible rate in the long run
disadvantages of organic growth (3)
growth can be dependant on growth of overall market
- hard to build market share if business already leads
- slow growth. - shareholders may prefer more rapid growth of profits
what is external growth
grows through mergers or takeovers
what is horizontal integration
two business at same production stage join to become one.
e.g Volkswagen buying porsche
what is backwards vertical integration
where a company merges with another firm at a stage closer to the primary product
what is forwards vertical integration
where a company merges with another firm at a stage closer to the consumer
horizontal integration advantages (5)
improves profits and competitiveness - increased rates of internal economies of scale
lower costs. - rationalisation (cutting of employees)
justified by concept of synergies
diverisification of products. - reduces risks in business
removes rivals. - reduces competitors , increases market share and pricing power
what is meant by Synergy
when two companies together can produce more than two companies separate
e.g. 20 , 20. together make 60
rationalisation
making firm more cost efficient by removing uneccessay expenditure
Horizontal integration disadvantages (4)
risk of diseconomies of scale
reduced flexibility - more people to run by slows rate of innovation
risk destroying shareholder value. not make it
risk attracting investigation from regulators
vertical integration advantages (4)
control of supply chain - helps reduce CoP
improved access of raw materials - takes away from rival businesses
removes suppliers and market intelligence from competitors
better control over distribution channels
vertical integration disadvantages (5)
fewer economies of scale due to production being at different stages
create new problems such as communication / coordination
diseconomies of scale. - the bigger firm is more inefficient
create barriers to entry. - higher prices discouraging entry and competition
one off costs of purchase can be high
a conglomerate integration
process of merging/ acquiring companies which work in different industries
E.g
EBay and PayPal
Walt Disney and ABC
advantages of conglomerate integration. (2)
diversification. - spreading risk
cross selling and reaching customer - increases customer base
disadvantages of conglomerate integration. (2)
lack of experience. - has no experience of the industry
shift in focus - shift its focus onto a different business
total cost meaning
cost of producing a product. - fixed cost + variable cost
Average cost meaning
average costs of production per unit
total costs calculation
TC = TVC + TFC
Average costs calculation
AC = TC/Q
Marginal costs. meaning
cost of producing an extra unit of output
marginal costs calculation
Change in TC / change in Total output
