The objectives of firms

Question 1

What are profits?

Answer 1

When total income or revenue is greater than total costs

Question 2

What is total revenue?

Answer 2

What the firm receives from the sale of its product

Price x number sold

Question 3

What is average revenue?

Answer 3

Total revenue/ number sold

Question 4

What is marginal revenue?

Answer 4

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

Question 5

What is average revenue equal to?

Answer 5

Price

Question 6

What is total profit?

Answer 6

Total revenue minus total costs

Question 7

What is normal profit?

Answer 7

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

Question 8

What is profit maximisation?

Answer 8

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

Question 9

What is supernormal profits?

Answer 9

A return above normal profit

Question 10

What is sub-normal profit?

Answer 10

Profit below normal which should lead to firms leaving the industry

Question 11

What is a director?

Answer 11

An individual elected by a companies shareholders to set corporate policies

Question 12

What are dividends?

Answer 12

A financial return from the ownership of shares in a firm

Question 13

What is satisficing?

Answer 13

The firm is producing satisfactory levels of profit

Question 14

What is market share?

Answer 14

The percentage of the total market held by the company

Question 15

What is market power?

Answer 15

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

Question 16

Where does sales maximisation occur?

Answer 16

MR = 0

Question 17

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

Answer 17

Marginal cost of producing the good

Elasticity of demand

Question 18

What is innovation?

Answer 18

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

Question 19

How can a firm grow internally?

Answer 19

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

Question 20

How can a firm grow externally?

Answer 20

Mergers

Question 21

What is the divorce of ownership and control?

Answer 21

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

Question 22

Why do managers want to work for a large firm?

Answer 22

Extremely prestigious position

Question 23

What is rational choice theory?

Answer 23

Where all costs and benefits are considered

Question 24

What is a public limited company?

Answer 24

A firm owned by a group of shareholders

Question 25

What is cost plus pricing?

Answer 25

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

Question 26

What is capital market discipline?

Answer 26

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

Question 27

How can a firm increase their profits? (2)

Answer 27

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

Question 28

How can internal growth occur? (2)

Answer 28

Extending an organisations geographic reach | Expanding into new products

Question 29

What are the types of mergers? (4)

Answer 29

Horizontal Vertical Conglomerate Lateral

Question 30

What is horizontal integration?

Answer 30

Where 2 firms at the same stage of production combine

Question 31

What is vertical integration?

Answer 31

Where firms at different stages of production combine

Question 32

What is conglomerate integration?

Answer 32

Where firms with no obvious connection combine

Question 33

What is lateral integration?

Answer 33

Where firms with similar but non competing products combine

Question 34

What is vertical forward integration?

Answer 34

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

Question 35

What is vertical backward integration?

Answer 35

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

Question 36

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

Answer 36

Time Cost Asset stripping

Question 37

What is asset stripping?

Answer 37

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

Question 38

What are the 3 components of technical progress?

Answer 38

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

Question 39

What is invention?

Answer 39

Coming up with a completely new idea or concept