Economics Theme 3 - Business Behaviour and Labour

Question 1

give three reasons why firms grow

Answer 1

1) Economies of scale - decrease cost of production leading to higher revenue and larger profit.

2) Profit - many firms are motivated by profit. Achieveing high levels or profit will allow a firm to reinvest for expansion

3) Diversification - opportunity to enter new markets as they are able to decrease risks through spreading across multiple products and markets. Eg. Samsung

Question 2

Three reasons why firms remain small

Answer 2

1) Avoid diseconomies of scale - rapid growth can cause lack of control and may not meet an objective of a certain firm

2) Firms operate in niche markets - hindering ability to have sufficient demand for their goods and services required for growth.

3) Low barriers to entry - difficult for small firms to enter big markets that are dominated with large firms.

Question 3

What causes Principal-agent problem?

Answer 3

Divergence of interests
As businesses grow there is a seperation of ownership and control causing different aims such as profit maximisation vs own benefits and objectives between the shareholders ( principals ) and agents ( managers who run the business day to day ).
Stems from asymmetric information

Question 4

How to overcome the Principal agent problem?

Answer 4

Place schemes like peformance based incentives or granting equity ownership to switch their objectives from sales maximisation to profit maximisation.

Question 5

What’s the difference between Public and Private organisations?

Answer 5

Public: organisations run by government
Private: Private sectors firms run by private inidivudals and are motivated by profit

Question 6

What’s the differece between Profit and Non-profit organisations:

Answer 6

Profit: maximising finianical benefits for shareholders as main aim and possibly maximising profits
Non profit: maximise social welfare and are excempt from certain taxes that profit organisations have to pay for.

Question 7

What are the two main types of growth?

Answer 7

Organic and Integration

Question 8

What is organic growth?

Answer 8

Expand internally rather than merging or taking over other businesses.

Question 9

How do firms grow organically?

Answer 9

Increasing output or expanding into international markets

Question 10

What is an example of a firm that grows organically?

Answer 10

LEGO - introduced new range of products and expanded customer base

Question 11

What are advntages and disadvantages of organic growth?

Answer 11

+ keep control over business and reduces risk
+ avoids diseconomies of scale
-time consuming for those who wish to maximise salaries
- slow growth

Question 12

What is integration?

Answer 12

A type of way for businesses to grow through merging or taking over another business.

Question 13

What are the 3 types of integration?

Answer 13

1) Vertical
2) Horizontal
3) conglomerate

Question 14

What is forward vertical integration and an example?

Answer 14

When a firm aquires or control businesses that a closer to the end-consumer/ dsitrubition side.
An example: In 2017, Amazon aquired Whole Foods market expanding its reach into the grocery industry

Question 15

What is backwards vertical integration and an example?

Answer 15

When a firm aquires or takes control of businesses positioned earlier in the production or supply chain. Ensuring stable and reliable sources of raw materials.
An examples: Nike owns its factories, gaining more control over the production and distribution of its products

Question 16

What are benefits of vertical integraion?

Answer 16

+ Increased market power as they gain more control over ensuring the quality of supplies and delivery is reliable. Reducing risks
+Increased potential for profit as they can capture a larger proportion of value chain

Question 17

What are disadvntages of vertical integration?

Answer 17

-lose benefits of specialised expertise when they integrate
-causes problems of coordination and communication, potentially leading to diseconomies of scale

Question 18

What is horizontal integraion?

Answer 18

• Taking over or merging of a firm at the same stage of production process and industry

Question 19

What is an example of horizontal integration?

Answer 19

2019, Walt Disney aquired 21st Century Fox’s entertainment assets such as film and television studios.

Question 20

What are advantages of horizontal integration?

Answer 20

+reduces competition by removing one or more key rivals
+diversification of products - creating opportunities for economies of scope
+exploit internal economies of scale - lower average costs can lead to increased profits

Question 21

What are disadvantages of horizontal integration?

Answer 21

-Reduced flexibility -addition of more personnel and processes in the merged businesses means more legal accountability ( slowing down rate of business innovation )
-Risk of diseconomies of scale - from enlarged businesses if there’s a clash and costs increase

Question 23

What is conglomerate integration?

Answer 23

Firms that takeover/merge with a business in another industry to what they’re in. Giving businesses the chance to expand into different markets which they may have struggled to compete in through organic growth.

Question 24

What is an example conglomerate integration?

Answer 24

Samsung - the outh Korean electronics giant - makes military hardware, apartments, ships and also operates an amusement park

Question 25

What are advantages of conglomerate integration?

Answer 25

+useful for firms where there may be no room for growth in the present market
+range of products reduces the risk of diseconomies of scale as it will allow for increased ooutput and experience benefits that are dervived from increased output such as lower borrowing costs

Question 26

What are disadvantages of conglomerate integration?