The firm

Question 1

What is the transformation process of firms ?

Answer 1

Resources (Inputs) to outputs ( goods/services)

Question 2

What is creative destruction ?

Answer 2

Not being able to succeed in the modern market - going extinct

Question 3

What are the factors of production ?

Answer 3

1. Capital earns interest
2. Land earns rent
3. Labour earns wage
4. Entrepreneurship earns profit

Question 4

What does human capital mean?

Answer 4

The quality of labour

Question 5

What is the pivotal factor of capitalist production ?

Answer 5

ENTREPRENEURSHIP

Question 6

Types of growth?

Answer 6

Horizontal growth
Organic growth
Vertical growth
Diversified /conglomerate growth

Question 7

What is horizontal growth ?

Answer 7

When firms grow through their normal activity / business

Question 8

What is organic growth ?

Answer 8

The growth of a firm through its own resources

Question 9

What is vertical growth ?

Answer 9

When a firm expands by going into another part of production / market that it has interest in

Question 10

What is diversified /conglomerate growth /

Answer 10

When a firm enters another market / industry

Question 11

What is the definition of market structure ?

Answer 11

This characterises a market according to the degree of competition in it.

Question 12

What is a monopoly ?

Answer 12

This is when a firm has the ability to exclude competing firms to enter the market
A monopoly removes the incentive to innovate and leaves the firm less responsive to consumer interests

Question 13

What are transaction costs ?

Answer 13

Costs associated with undertaking business activities or other forms of economic exchange

Question 14

What is a multinational firm ?

Answer 14

A firm which owns and controls assets in more than one country

Question 15

Types of firms `/

Answer 15

1. sole proprietors
2. partnerships
3. companies

Question 16

What is unlimited liability ?

Answer 16

This is when personal wealth of the owner of the business is affected by failure in the business

Question 17

What is limited liability ?

Answer 17

This is when the personal wealth of an owner is treated as separate to the business

Question 18

Differences between sole p., partnerships and companies in terms of tax ?

Answer 18

Sole proprietors and partnerships are taxed once only

Companies are taxed twice - corporation tax and any dividends paid to shareholders are subject to income tax

Question 19

Differences between sole p. , partnerships and companies in terms of raising capital ?

Answer 19

Sole proprietors and partnerships have to raise capital themselves. The capital comes from the owners.
In a company, they raise capital from selling shares on the stock market

Question 20

What is consumer surplus ?

Answer 20

This is the amount consumers would be willing to pay for a good or service above the price that they actually pay

Question 21

What does economies of scale mean ?

Answer 21

This is when a firm produces a larger output without an increase in cost of sales e.g Google can produce their whole icloud infrastructure without raising costs of producing it

Question 22

What does economies of scope mean ?

Answer 22

This means that a firm can collectively produce a goood or service for a lower price than they would discretely

Question 23

what is resource allocation ?

Answer 23

The commitment of a society’s productive endowments (e.g. labour and machinery) to particular uses or patterns of use

Question 24

What is the valuation ratio ?

Answer 24

This is the market valuation of a firm expressed by the price of shares divided by the total net book value of asset

Question 25

What does factor intensity mean ?

Answer 25

this means the emphasis on the use of one particular factor

Question 26

What is the austrian view regarding entrepreneurship?

Answer 26

1. entrepreneurs anticipate rather than react to demand.
2. they equilibrate the market rather than operate in equilibrium
3. they are never satisfied with the state of affairs in the market
4. only alert entrepreneurs will promote changes to the markets (those who are motivated by profit and competition
5. equilibrium is always out of reach which means a free market

Question 27

What is the schumpeterian view regarding entrepreneurship?

Answer 27

Markets evolve with a constant state of disequilibrium because old failing businesses are being replaced

Question 28

What is the schumpeterian view ?

Answer 28

Innovation is key. Innovation competition is more important that price competition
no firm would be safe in the long run without using innovatino