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Economics Unit 3 > The objectives of firms > Flashcards

The objectives of firms Flashcards

1
Q

What are profits?

A

When total income or revenue is greater than total costs

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2
Q

What is total revenue?

A

What the firm receives from the sale of its product

Price x number sold

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3
Q

What is average revenue?

A

Total revenue/ number sold

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4
Q

What is marginal revenue?

A

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

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5
Q

What is average revenue equal to?

A

Price

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6
Q

What is total profit?

A

Total revenue minus total costs

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7
Q

What is normal profit?

A

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

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8
Q

What is profit maximisation?

A

Where a firm chooses a level of output where marginal revenue = marginal costs

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9
Q

What is supernormal profits?

A

A return above normal profit

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10
Q

What is sub-normal profit?

A

Profit below normal which should lead to firms leaving the industry

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11
Q

What is a director?

A

An individual elected by a companies shareholders to set corporate policies

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12
Q

What are dividends?

A

A financial return from the ownership of shares in a firm

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13
Q

What is satisficing?

A

The firm is producing satisfactory levels of profit

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14
Q

What is market share?

A

The percentage of the total market held by the company

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15
Q

What is market power?

A

When a firm has the ability to exert significant influence over the quantity of goods traded or the price at which they are sold

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16
Q

Where does sales maximisation occur?

A

MR = 0

17
Q

In order to set prices, what must a firm need to know? (2)

A

Marginal cost of producing the good

Elasticity of demand

18
Q

What is innovation?

A

Turning invention into commercial use; introducing a new product or process

19
Q

How can a firm grow internally?

A

Through the use of profits or loans to finance expansion over a period of time by increasing the number of both fixed and variable factors within the firm

20
Q

How can a firm grow externally?

A

Mergers

21
Q

What is the divorce of ownership and control?

A

Shareholders own the firm - want profit - benefit from dividends
Directors control the firm - want sales - benefit from commission - high status working in a big firm

22
Q

Why do managers want to work for a large firm?

A

Extremely prestigious position

23
Q

What is rational choice theory?

A

Where all costs and benefits are considered

24
Q

What is a public limited company?

A

A firm owned by a group of shareholders

25
Q

What is cost plus pricing?

A

The firms sets its price equal to average costs, at normal capacity output, plus a conventional mark up

26
Q

What is capital market discipline?

A

Where firms may be taken over by other firms if they appear to be making lower profits than their assets would suggest

27
Q

How can a firm increase their profits? (2)

A

Reduce their costs -> reach the MES or exploit economies of scale
Increase revenue -> increase market share

28
Q

How can internal growth occur? (2)

A

Extending an organisations geographic reach

Expanding into new products

29
Q

What are the types of mergers? (4)

A

Horizontal
Vertical
Conglomerate
Lateral

30
Q

What is horizontal integration?

A

Where 2 firms at the same stage of production combine

31
Q

What is vertical integration?

A

Where firms at different stages of production combine

32
Q

What is conglomerate integration?

A

Where firms with no obvious connection combine

33
Q

What is lateral integration?

A

Where firms with similar but non competing products combine

34
Q

What is vertical forward integration?

A

When a firm combines with another which is closer to the consumer

35
Q

What is vertical backward integration?

A

When a firm combines with another which is closer to the raw material

36
Q

When firms consider external growth, what might they consider? (3)

A

Time
Cost
Asset stripping

37
Q

What is asset stripping?

A

The predator may be able to sells the firm’s assets

38
Q

What are the 3 components of technical progress?

A

More output can be produced with the same inputs
Existing output undergoes an improvement in quality
New goods or services become available

39
Q

What is invention?

A

Coming up with a completely new idea or concept

Economics Unit 3 (15 decks)

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