Micro L1 & 3 Flashcards
1
Q
Reasons why firms seek growth:
A
1) Higher profit
2) Lower unit costs
3) Greater market power
4) Diversification
5) Managerial objectives
2
Q
How does a firm increasing in size lead to higher profit?
A
More production of goods and services leads to higher sales, revenue and profit
3
Q
Market power:
A
Ability of a firm to raise prices and earn supernormal profit
4
Q
Diversification:
A
Increasing range of products served by a business
5
Q
What does the degree of diversification depend on?
A
How different the products are from the existing ones served by the business
6
Q
How is diversification positive?
A
Reduces risk
7
Q
How are managerial objectives a reason for growth?
A
Incentive to increase the size eg bonuses
8
Q
Reasons why some firms remain small:
A
- Worried about experiencing diseconomies of scale
- Do not want the extra work and risks involved in expansion
- Legal requirements differ by firm size
9
Q
When do diseconomies of scale occur?
A
When a business grows so large that costs per unit increase
10
Q
Reasons why some firms are forced to remain small:
A
- Unable to finance expansion
- Operate in niche market w/ small customer base
- Skills and knowledge required may be lacking
- Lack resources to cope w/ additional regulations
11
Q
What are the different sectors of an economy?
A
- Public
- Private
- Civil society
12
Q
Private sector firm:
A
A firm that is not owned by gov
13
Q
Who are private-sector firms owned by?
A
- Shareholders
- With a PLC
- Family ownerd
- Partner-owned (eg law firms)
- Sole proprietors
14
Q
PLC:
A
- Public limited company
- Trading on stock market, where anyone can buy shares
15
Q
Family owned firm:
A
Shares are not traded on stock market
16
Q
Sole proprietor:
A
Owned and run by one person
17
Q
Why may the government own certain businesses?
A
- Cannot survive without significant state funding
- Want to determine the direction of the business
18
Q
Civil society:
A
Not for profit sector eg charities
19
Q
Principal:
A
Shareholder/Owner of a business
20
Q
Agent:
A
Person in charge of day-to-day running of the business
21
Q
What is the principal-agent problem?
A
The agent can make decisions on behalf of the business, which may be incorrect due to asymmetric info. This could lead to their dismissal
22
Q
What are the two types of growth?
A
- Organic
- Inorganic
23
Q
Organic growth:
A
Growth based on the firm’s own resources
24
Q
Advantages of organic growth:
A
- Lowest risk
- Positive for worker morale
25
Disadvantages of organic growth:
- Slow
- Lack of new ideas and innovation
26
Inorganic growth:
Growth involving merging with other firms
27
Advantage of inorganic growth:
- Instant access to increased economies of scale and market share
28
Disadvantages of inorganic growth:
- Increasing market share attracts regulator's attention
29
Equity:
Issuing shares
30
Types of mergers:
- Horizontal merger
- Vertical merger --> forward and backward integration
- Conglomerate merger
31
Horizontal merger:
Merger between firms operating in SAME industry and SAME stage of production process eg two car assembly firms
32
What is the result of a horizontal merger known as?
Horizontal integration
33
Advantage of horizontal merger:
Affects degree of market concentration, as there are now fewer independent firms operating, which increases market power held by new firm
34
Backward integration:
Merging w/ firm involved in earlier stage of production process eg car company merging w/ component supplier
35
Forward integration:
Merging w/ firm involved in latter stage of production process eg car assembly plant merging w/ large distributor
36
Advantage of vertical integration:
- Greater control over supply chain
37
Conglomerate merger:
Merging of two firms operating in very different markets
38
Advantage of conglomerate merger:
Diversified portfolio of production leaves firm less vulnerable to recession
39
Disadvantage of conglomerate merger:
May be managerial diseconomies if management team doesn't understand all aspects of new business
40
Disadvantages of mergers (general):
- Cost of integrating management may have been underestimated
- Production systems may not be compatible
- Corporate cultures may collide
41
Why may a firm decide to demerge?
- Experiencing diseconomies of scale --> higher long-run avg costs
- Reduce its monopoly power (for govs)
42
Possible advantages of demerger:
- More promotions available
- Lower prices and more choice for consumers
43
Possible disadvantages of demergers:
- If firms are more efficient, possible job losses
- Short-term issues for consumers
44
What is the short-run defined as?
The period when there is at least one fixed factor of production
45
What is the long run defined as?
The period over which all factors of production are variable
46
Give an example each for a variable and fixed factor:
Fixed: Capital, land
Variable: Labour
47
Hence, what is the only way to increase output in the short-run?
Increase labour
48
Law of diminishing returns:
If a firm increases input of variable factor whilst holding another factor constant, it will derive less additional output per unit of labour for each further increase
49
What assumption does the Law of Diminishing Returns make?
Capital is fixed
50
Why does the Law of Dimishing Returns state that output initially increases before falling?
Labour productivity increases due to:
- Specialisation is occurring
- Underutilisation of fixed factors eg capital
51
Why does the Law of Diminishing Returns state that output falls after an initial increase?
Labour productivity falls due to:
- Fixed factors of production constrains production
52
When marginal product is zero, what happens to total product?
TP is maximised
53
2 types of costs:
1) Explicit costs --> require payment
2) Implicit costs (opportunity cost)
54
What are the 2 types of explicit costs?
1) Fixed
2) Variable
55
Fixed costs:
Costs that do not vary w/ output
56
Examples of fixed costs:
- Rents
- Salaries
- Interest on loans
- Advertising
- Business rates
57
What is the difference between wages and salaries?
- Wages are paid hourly
- Salaries paid in fixed increments throughout year
58
Variable costs:
Costs that vary w/ output
59
Example of variable costs:
- Wages
- Utility bills
- Raw material costs
- Transport costs
60
Sunk costs (w/ example):
Costs that the firm cannot avoid paying even if it chooses to produce no output eg leasing machinery
61
Equation for total costs:
Total costs = total variable costs + total fixed costs
62
What does the total fixed cost curve look like?
Horizontal
63
What common assumption is made about total costs in the short-run?
At very low levels of output, total costs will rise at a lower rate than output, however total costs will accelerate as diminishing returns set in
64
Equation for avg fixed cost:
Avg fixed cost = Fixed costs/Output
65
Why does AFC fall as output increases?
Fixed cost is being spread across greater output
66
Avg variable cost equation:
Avg variable cost = Variable costs/Output
67
What does the average variable cost look like and why?
- Positive quadratic
- Due to Law of Diminishing Returns
68
Avg total cost equation: (2)
1) AFC + AVC
2) Total cost/Quantity produced
69
Marginal cost:
Change in total cost when one additional unit of output is produced
70
Equation for marginal cost:
- Gradient of total cost curve
- Change in TC/ Change in Quantity
71
What points does marginal cost curve always go through?
Minimum point of AVC and AC curve
72
Why does the gap between AC and AVC get smaller as output increases?
- AFC (the gap) falls as output rises
- AVC rises because of law of diminishing returns
73
Revenue:
Payments firms receive when they sell the goods and services they produce over a given time period
74
Total revenue equation:
TR = P x Q
75
Marginal revenue:
Additional revenue arising from the sale of an additional unit of output
76
Marginal revenue equation:
Change in total revenue/Change in quantity
77
Average revenue:
Revenue per unit of output sold
78
Average revenue equation:
Total revenue/Quantity
79
What is AR always equal to?
- Price
- Demand
80
What is the relationship between MR and AR?
MR is twice as steep as AR
81
Why does the analysis of revenues vary for different firms?
Dependent on whether or not the firm has any control over prices
82
What factor determines whether the firm has control over prices?
The amount of competition:
- firms under high (perfect) competition cannot influence prices
- firms under less competition can influence prices
83
Conditions of high (perfect) competition:
1) Many buyers and sellers
2) They are price-takers
3) Homogenous goods
4) No barriers to enter/exit market
5) Perfect information
6) They are profit maximisers (MC = MR)
84
Conditions of revenue where firm has some control over price (imperfect):
1) Few buyers and sellers
2) They are price-makers
3) Differentiated goods
4) High barriers to enter/exit market
5) Imperfect information
85
Conditions of revenue where firm has no control over price:
- P = MR = AR (horizontal curve)
- TR is fixed linear curve
86
Conditions of revenue where firm has some control over price:
- TR --> Quadratic curve
- Linear MR
- P = AR = D
87
What is the average revenue curve equivalent to?
D curve
88
When demand is price elastic, what happens to total revenue when price increases and decreases?
Opposite always happens:
- Price increase causes decrease in total revenue
- Price decrease causes increase in total revenue
89
When demand is price inelastic, what happens to total revenue when price increases and decreases?
Same thing happens:
- Price increase causes increase in total revenue
- Price decrease causes decrease in total revenue
90
What half of a graph is elastic and inelastic?
- Top half = Elastic
- Bottom half = Inelastic
