The objectives of firms Flashcards
What are profits?
When total income or revenue is greater than total costs
What is total revenue?
What the firm receives from the sale of its product
Price x number sold
What is average revenue?
Total revenue/ number sold
What is marginal revenue?
The addition to total revenue from the production of one extra unit
What is average revenue equal to?
Price
What is total profit?
Total revenue minus total costs
What is normal profit?
The amount required to keep a factor employed in its present activity in the long run
What is profit maximisation?
Where a firm chooses a level of output where marginal revenue = marginal costs
What is supernormal profits?
A return above normal profit
What is sub-normal profit?
Profit below normal which should lead to firms leaving the industry
What is a director?
An individual elected by a companies shareholders to set corporate policies
What are dividends?
A financial return from the ownership of shares in a firm
What is satisficing?
The firm is producing satisfactory levels of profit
What is market share?
The percentage of the total market held by the company
What is market power?
When a firm has the ability to exert significant influence over the quantity of goods traded or the price at which they are sold
Where does sales maximisation occur?
MR = 0
In order to set prices, what must a firm need to know? (2)
Marginal cost of producing the good
Elasticity of demand
What is innovation?
Turning invention into commercial use; introducing a new product or process
How can a firm grow internally?
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
How can a firm grow externally?
Mergers
What is the divorce of ownership and control?
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
Why do managers want to work for a large firm?
Extremely prestigious position
What is rational choice theory?
Where all costs and benefits are considered
What is a public limited company?
A firm owned by a group of shareholders
What is cost plus pricing?
The firms sets its price equal to average costs, at normal capacity output, plus a conventional mark up
What is capital market discipline?
Where firms may be taken over by other firms if they appear to be making lower profits than their assets would suggest
How can a firm increase their profits? (2)
Reduce their costs -> reach the MES or exploit economies of scale
Increase revenue -> increase market share
How can internal growth occur? (2)
Extending an organisations geographic reach
Expanding into new products
What are the types of mergers? (4)
Horizontal
Vertical
Conglomerate
Lateral
What is horizontal integration?
Where 2 firms at the same stage of production combine
What is vertical integration?
Where firms at different stages of production combine
What is conglomerate integration?
Where firms with no obvious connection combine
What is lateral integration?
Where firms with similar but non competing products combine
What is vertical forward integration?
When a firm combines with another which is closer to the consumer
What is vertical backward integration?
When a firm combines with another which is closer to the raw material
When firms consider external growth, what might they consider? (3)
Time
Cost
Asset stripping
What is asset stripping?
The predator may be able to sells the firm’s assets
What are the 3 components of technical progress?
More output can be produced with the same inputs
Existing output undergoes an improvement in quality
New goods or services become available
What is invention?
Coming up with a completely new idea or concept
