Economics Theme 3 Flashcards
What is the principal-agent problem?
Passing responsibility onto another person.
The problem is that there can be a conflict of interests
Principal - Owner
Agent - Manager
What is organic growth?
When a business grows internally
What is inorganic growth?
When a business grows externally
What are the advantages of organic growth?
Less risky
Generally sustainable
Uses retained profits
What are the disadvantages of organic growth?
Slow process
Depends on growth of the market
What is vertical integration?
When 2 firms at different stages of the production process integrate
What is horizontal integration?
When two or more firms from the same market and the same stage of production integrate
What is conglomerate integration?
When a company has merged with a variety of businesses with no relationship to each other
What are some constraints to business growth?
Size of market
Access to finance
Owner objectives
Regulation
What are reasons for demerging?
Downsizing
Shifting focus
Government regulation
Correction
What impacts does demerging have on businesses?
Allows them to narrow ideas
By selling a part of the business, they can raise funds
May be removing loss making parts of the business
What impacts does demerging have on workers
Remaining workers may have increased job security
Reduced culture conflicts
What impacts does demerging have on consumers
Increased competition, which encourages innovation and efficiency = lower prices
As firm is able to focus more on business, it will be able to meet consumer needs better
How do you calculate total revenue?
Total revenue = price x quantity
How do you calculate avarage revenue?
Average revenue = total revenue / quantity
