firms Flashcards
sole trader
1 person, unlimited liability
partnerships
2 people, unlimited liability
Private Limited Companies (LTD)
have shareholders, in private sector, limited liability
Public Limited Companies (PLC)
have shareholders, in public sector, limited liability
what does having shareholders mean
the value of losses of shares is limited to what the shareholders have put in - is low risk because people and company disconnected
difference between short and long run
short run - one FoP is fixed
long run - unconstrained and able to vary FoPs
product meanings
TP = total product
AP = average product = TP/input (FoP is input)
MP = marginal product of labour = how much each extra input adds to Tp = ΔTP/ΔQL
what does the law of diminishing marginal returns say
adding an additional factor of production results in smaller increases in output
law of diminishing marginal returns on graph
plotted tp y and ql x, gradient is MP
when AP MP plotted, when MP>AP, AP rises
MP<AP, AP falls.
MP = AP = Turning POint for AP
fixed and variable costs
fixed = independent of output
variable = dependent on output
total = fixed + variable
(2 parallel lines on graph - total and variable, fixed is a horizontal line)
average costs
AC = TC/output = AVC+AFC
AFC = fc/output
AVC = vc/output (smily face)
marginal costs
cost of producing one more product
ΔTC/ΔQ
= ΔFC/ΔQ (=0) + ΔVC/ΔQ
therfore = MVC = MC
small firm metrics
- market share - output
- number of employees
- revenue
- market cap
what does market capitalisation mean
number of outstanding shares x share price (measure of size)
characteristics of small firms
- small market share
- personally managed, making it flexible and independent
- vulnerable to changes in the market - demand, inflation, shocks, interest rates
- workers rarely unionised
what is a trade union
a single seller for labour which increases bargaining power for better working conditions and better pay
what is a monopsony
a single buyer in a market, example NHS for medical staff
advantages of being small firm
- not always aiming to profit maximise - proiritising other things, such as ‘satisficing’, promoting own objectives like green, or focus on customer loyalty
- agility in making decisions, as management anf staff close by, so no large layers of bureaucracy and consultancy
disads of veing small firm
- vulnerable to economic climate changes - shocks
- cant benefit from EoS
- harder access to skilled labour
-do not diversify and create conglomerates
types of EoS
Risk Bearing
Financial
Managerial
Technical
Marketing
Purchasing
why firms grow
- to achieve EoS
- to gain market share and influence over a market
- to be able to diversify and spread risk
what does satisficing mean
prioritising and satisfuing own firm’s needs - rather than overexerting to find optimal solution, rather put in pragmatic and helpful own effort
minimum efficient scale
point on EoS LRAC that when the unit cost is at its lowest possible point while the company is producing its goods effectively
Constraints on Business Growth
- The size of the market
- Access to finance: small firms find it harder to access loans as they are considered to be more risky than larger firms.
- Owner objectives: Many owners desire to grow a business to a point that provides a certain lifestyle or standard of living - and not beyond.
- Regulation: Large firms are often constrained by competition regulation that aims to limit monopoly power. Firms that sell demerit goods also find growth can be limited by government policies such as age restrictions, minimum prices & indirect taxes
