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Year 2 content: micro > lesson 2 - business growth > Flashcards

lesson 2 - business growth Flashcards

1
Q

what are the two reasons why large firms dominate?

A

economies of scale

barriers to entry

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2
Q

what is a barrier to entry?

A

they prevent competition from coming in

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3
Q

what is an economies of scale?

A

cost advantages enjoyed by large firms

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4
Q

what are examples of barriers to entry?

A

heavy advertising and promotion to establish brand loyalty

patents so you own it

limit pricing

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5
Q

what is a patent?

A

when you own it

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6
Q

long run

A

all factors of production are variable

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7
Q

short run

A

we have at least one fixed factor of production

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8
Q

what does the profit incentive do?

A

encourages firms to grow

gain economies of scale

get a competitive advantage

so they can reinvest profit and grow

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9
Q

what are the two main ways firms grow?

A

organically (internal)

mergers and takeovers (external)

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10
Q

what is the example of internal growth?

A

organic growth

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11
Q

what is the example of external growth?

A

mergers and takeovers

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12
Q

what is organic growth?

A

firms investing in capital or labour to expand production from within

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13
Q

what is a merger?

A

two or more firms come together under common ownership with an agreement of shareholders

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14
Q

what is a take over?

A

one company buys another

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15
Q

what are the three types of merger?

A

horizontal integration

vertical integration

conglomerate integration

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16
Q

what is horizontal integration?

A

two firms
same industry
same stage of production
merge

17
Q

what is vertical integration?

A

two firms
same industry
different stages of production
merge

18
Q

what is a conglomerate integration?

A

two firms
not same industry
no common interest
merge

19
Q

what are the advantages and disadvantages of organic growth?

A

advantages:
- low risk, slow but sure approach
- financed through profit
- most small firms can grow without external growth (mergers or takeovers)

disadvantages:
- may take years to gain size required for new markets
- people may get frustrated at the slow pace of growth

20
Q

what are the advantages and disadvantages of vertical integration growth?

A

advantages:
- reduces costs and risk
- forward vertical integration may give control of the market

disadvantages:
- firms often pay too much
- integrating vertically means they may lack expertise in the new industry
- it might not be a successful integration and key staff may leave

21
Q

what are the advantages and disadvantages of horizontal integration growth?

A

advantages:
- economies of scales
- reducing competition by taking out a competitor
- safer to merge in an industry you have expertise in

disadvantages:
- firms may pay too much
- integration is complex and difficult especially is the company size is larger
- key staff may leave

22
Q

what are the advantages and disadvantages of conglomerate integration growth?

A

advantages:
- risks reduces as all your eggs are not in one basket
- may be easier to get finance
- assets might be stripped

disadvantages:
- firm buying may lack expertise in the industry
- asset stripping may be offering short term profits but its likely to be disadvantageous for staff

23
Q

what is forward growth?

A

a company buys control over the later stage of the supply chain eg selling the car

24
Q

what is backwards growth?

A

a company buys the earlier stage of the supply chain eg making the car parts

25
Q

what is an asset?

A

something valuable that a person or business owns and can use to generate income or benefits

26
Q

what are the four constraints on growth?

A

size of the market

access to finance

owner objectives

regulation

27
Q

why is the size of the market a constraint on growth?

A

some are small

specialised

offer no opportunity to become a big company

28
Q

why is access to finance a constraint on growth?

A

firms may growth by taking out loans but this might be difficult for small firms to get

29
Q

why is owner objectives a constraint on growth?

A

some are happy with local or small businesses and don’t want any extra stress or risk

30
Q

why is regulation a constraint on growth?

A

laws may prevent expansion

31
Q

what is a demerger?

A

firm splits itself up

32
Q

what is a limit price?

A

low prices to discourage firms from coming in

33
Q

what is the economies of scale that large firms have over smaller ones?

A

financial economies

34
Q

what are three types of economies of scales large firms may enjoy?

A

purchasing (bulk buying)

technical (specialised machines)

marketing economies (advertising)

35
Q

what does low and high barriers to entry mean for the structure of an industry?

A

high barriers - few firms dominate, difficult to enter so monopolies or oligopolies

low barriers - more competitive

36
Q

what is profit?

A

reward for entrepreneurs

37
Q

when do we breakeven?

A

TC = TR

Year 2 content: micro (7 decks)

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