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Economics Unit 3 > Objectives of firms > Flashcards

Objectives of firms Flashcards

1
Q

total revenue d

A

what the firm receives for the sale of its product

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2
Q

how do you work out total revenue

A

price x number sold

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3
Q

how do you work out average revenue

A

total revenue divided by number sold

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4
Q

when is there profit

A

when total revenue is greater than total costs

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5
Q

marginal revenue d

A

the addition to total revenue from the production of one extra unit

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6
Q

which curve is the demand curve

A

average revenue

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7
Q

how do you work out MR

A

difference in total revenue divided by difference in output

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8
Q

what is the point of revenue maximisation

A

when MR = 0

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9
Q

why does total revenue fall beyond MR = 0

A

because marginal revenue is negative so extra units reduce total revenue

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10
Q

what is assumed about firms

A

that they always try to maximise profits

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11
Q

what is the point of profit maximisation

A

where MC = MR

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12
Q

why is MC = MR the point of profit max

A

because beyond that the addition of an extra unit adds more to costs than revenue so profits will fall

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13
Q

total profit d

A

total revenue minus total costs

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14
Q

normal profit d

A

the amount required to keep a factor employed in its present activity in the long run

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15
Q

what does normal profit include

A

opportunity cost of using any factor of production

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16
Q

supernormal profits

A

a return above normal profit, surplus payment

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17
Q

what are supernormal profits an incentive for

A

firms to enter the industry

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18
Q

what can supernormal profits indicate

A

a lack of competition in the industry

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19
Q

what can negative or falling profits indicate

A

oversupply

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20
Q

satisficing d

A

the firm is producing satisfactory but not maximum profit

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21
Q

what is in the interests of shareholders

A

keep costs as low as possible and maximise profits

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22
Q

what is the divorce of ownership and control

A

shareholders own the business and want to maximise profit however managers may have different interests

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23
Q

director d

A

an individual elected by a company’s shareholders to set corporate policies

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24
Q

what may directors and managers be more concerned with

A

job security, larger salary (size of business) and other ‘perks’

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25
Q

why may directors not just be focused on profit

A

income from the directorship will make a larger contribution to their income than dividends, salaries more determined by size of business than profit

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26
Q

dividends d

A

financial return from the ownership of shares

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27
Q

what is an evaluation point for divorce of ownership

A

activist shareholders becoming more common and shareholders have to be faced at AGM

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28
Q

annual general meeting d

A

annual meeting where shareholders can discuss the accounts and elect directors

29
Q

activist shareholders d

A

shareholders that will clamour for greater dividends and may mobilise other shareholders to oppose management

30
Q

what may a firm that is satisficing do

A

produce a range of outputs that are within its target level of profits

31
Q

can you show satisficing on a diagram

A

yes, quantity on x, profit on y, upside-down smiley face

32
Q

stakeholders d

A

firms, organisations or individuals with an interest in the firm

33
Q

what do some large businesses now include in their objectives

A

social responsibility

34
Q

what is social responsibility

A

caring more about stakeholders, carbon footprint, corporate citizenship

35
Q

corporate citizenship d

A

indicates that organisations embrace sustainable development

36
Q

why is social responsibility not always costly

A

good staff easier to attract so costs of staff turnover reduced

37
Q

what does sales maximisation theory say

A

managers want the firms they work for to be as large as possible because it is prestigious

38
Q

why would managers want to work for large companies

A

salary, share options as well as prestige and perks, sales-related bonuses

39
Q

why may a business not just maximise profit

A

may want increased market share and power

40
Q

why may managers not maximise profit

A

risky ventures may end in job loss, increase in sales leads to managerial security

41
Q

rational choice theory d

A

where all costs and benefits are considered before a decision is taken

42
Q

why may a firm be unable to maximise profit

A

firms lack the information required to know the optimum output. waste of time and resources experimenting to find optimal output

43
Q

what is cost plus pricing

A

where the firm sets its price equal to average cost plus a conventional mark up (say 25%)

44
Q

does cost plus pricing conflict with maximising profits

A

doesn’t have to if the mark up is set to maximise profits (however most firms don’t do at profit max)

45
Q

why may firms not react to every shift in the market

A

they may lose brand loyalty due to perceived avaricious behaviour, cost of changing price lists and brochures

46
Q

what is the concept of long run profit maximisation

A

sales are the key to growth and growth the key to future profits

47
Q

internal / organic growth d

A

using profits or loans to finance expansion by increasing the number of both fixed and variable factors within the firm

48
Q

what are the two ways a firm can grow internally

A

extending an organisation’s geographic reach and expanding into new products

49
Q

why may organic / internal growth be difficult

A

market may be saturated and lack of profit may impede growth

50
Q

external growth d

A

a way for firms to rapidly expand by acquisitions and mergers

51
Q

do firms always merge amicably

A

no there may be a hostile takeover where the management of the target firm resists the advances of the buyer but is forced to accept by its current owners

52
Q

what are the four main types of mergers

A

horizontal integration, vertical integration, conglomerate merger, lateral merger

53
Q

horizontal integration d

A

where two firms at the same stage of production combine

54
Q

example of horizontal integration

A

paddy power betfair

55
Q

vertical integration d

A

where firms at different stages of production combine

56
Q

example of vertical backward integration

A

a brewery integrating with hop growers

57
Q

what is vertical backward integration

A

where a firm combines with a firm in the previous process

58
Q

what is vertical forward integration

A

combining with the next process

59
Q

example of vertical forward integration

A

brewery taking over public houses

60
Q

conglomerate merger d

A

where firms with no obvious connection combine

61
Q

why may firms conglomerately merger

A

to diversify and reduce risk exposure

62
Q

lateral merger d

A

a type of horizontal merger where there are some similarities between the businesses

63
Q

are mergers often successful

A

no there are often diseconomies of scale in terms of people issues, such as leadership, poor communications and the company’s ability to change

64
Q

what may firms consider when growing externally

A

time constraints, cost, the acquisition of a brand which is only available through external takeover, asset stripping

65
Q

why may companies consider time constraints when considering growing externally as opposed to internal growth

A

external expansion is more rapid than internal growth

66
Q

why may companies consider cost when considering growing externally as opposed to internal growth

A

it may be cheaper to buy out another firm than to undertake new investment

67
Q

why may companies consider asset stripping when considering growing externally as opposed to internal growth

A

the predator may be able to sell the firm’s assets for more than it paid for them

68
Q

what are the three components of technological progress

A

more output produced with same inputs, existing outputs undergo improvements in quality, completely new products available

Economics Unit 3 (10 decks)

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