Microeconomics A2 LS1-3 Flashcards
Why do firms grow?
- Profit (increase size, produce more, potential for more sales, higher revenue, more profit)
- Costs (increase size means more raw materials, bulk buy, lower unit costs, more profit)
- Market Power (increase size means more market share, can increase prices, more profit)
- Diversification (increase range of products, less risks)
- Managerial objectives (for own ego, or for bonuses so keep as target)
Why do firms choose to stay small?
- Diseconomies of scale
- More risk involved with expansion and extra work
- Legal requirement
Why must firms remain small ?
- Can’t finance growth
- Operate in niche markets with lower customer base
- Skills, knowledge, expertise lacking
What is a private sector firm?
- not owned by government
- sole traders, partnerships, shareholders, family owned
-aim to make profit to satisfy owners demands
What is the public sector?
Government may own certain business as it wishes to determine direction it takes
NHS
Not make profit for shareholder but instead reinvest any surplus funds
What is not for profit?
Charities
Don’t see profit as primary goal
Who is principal?
Shareholder or owner
Who is agent?
Manager or person in charge to run business day to day
What is principal agent problem?
In case of many shareholders, day to day business delegated to managers who make decisions on behalf of business that don’t match shareholders direction. Problem if principal not fully aware of agents actions. Leads to managers being dismissed as behaving in way that conflicts with principal
What is organic growth ?
-Grow simply by being successful, internal growth
-Choose to borrow in order to finance, issuing shares
What is inorganic growth ?
-Grow by merging with or takeover of other firms
-takeover may be hostile
- merger coming together or two equals
What are the three types of mergers ?
Horizontal, vertical, conglomerate
