Theme 2 Flashcards
What are the objectives of growth for a firm? (5)
- Internal economies of scale
- External economies of scale
- Increased market power over consumers and competitors
- Increased market share and brand recognition
- Increased profitability
What are some problems arising from growth? (3)
- Diseconomies of scale
- Potential skills shortages
- Corporate culture
What are the two types of growth? (2)
- Organic growth
- Inorganic growth
What is organic growth?
Expansion of a single business by extending its own operations rather than by merger or takeover.
What is inorganic growth?
Expansion of a business by merger or takeover bringing sudden changes in business size.
What are the examples of internal economies of scale? (6)
- Risk-bearing
- Financial
- Managerial
- Technological
- Marketing
- Purchasing
What are economies of scale?
When the average costs of a firm falls as output increases
What are external economies of scale?
occur within the industry e.g. local roads might be improved so transport costs for the local industries fall
Why do diseconomies of scale take place?
When there is decreased: control, coordination, communication, so average costs increase.
What are the advantages of organic growth by firms?
- Corporate culture can be maintained
- Greater probability that all stakeholders will be supportive
- Its safer to stick with a tried and tested business model
- Owner doesn’t lose control
What are the disadvantages of organic growth by firms?
- slower build-up of assets and market share
- no new ideas from outside the firm to stimulate innovation
What are the advantages of inorganic growth by firms?
- Fast growth after negotiations and purchase is agreed
- Removes a competitor + enhances market share
- potential for nationalisation (EOS)
What are the disadvantages of inorganic growth by firms?
- Debt burden if takeover involves buying out shares
- Risks of culture clash and dilution of management focus
- Customers have less choice
What is research and development? (R&D)
Investment in research to improve goods and services, introduce new ones, or improve production methods.
What are the aims of R&D?
- Gain a competitive advantage
- Increase market power
- Product and process innovation
Why does the state provide funding for R&D?
- Raise GDP and living standards
- decreased unemployment
- benefits of R&D tend to be limited as its too expensive for firms
What are the aims of extension strategies?
- During the decline stage in the product lifecycle, sales of the product flatten out so firms decide whether to use an extension strategy.
- they aim to lengthen the useful life of a product by using marketing techniques (expensive)
What is YED?
Income elasticity of demand
What does YED measure?
- the responsiveness of quantity demanded given a change in income
How do you measure YED?
% change in quantity demanded / % change in income
What does a positive figure of YED tell us?
Normal Good
What does a negative figure of YED tell?
Inferior Good
What is capacity utilisation?
The extent to which the productive capacity of a business is used (total % of total capacity being achieved)
How do you calculate capacity utilisation?
Actual level of output/Max. possible output x 100
What are the benefits of capacity utilisation?
When a business is operating at a higher capacity -> AC of production fall -> firm becomes more competitive
When is a firm operating at full capacity?
When all resources are being used to their maximum potential.
What can improve the maximum capacity of a firm?
- Advancements in technology
- Increased levels of investment
What happens when capacity is under-utilised?
- Raises unit costs because the fixed costs are spread across a lower level of production
- Profitability decreases and prices increase
- firms become less competitive
What is under-utilisation of capacity?
When a firm isn’t operating at their full capacity so they have spare capacity (some resources not being used to their full potential)
Why do some firms choose to operate below maximum capacity?
- If there are changes in the levels of demand in the economy, they can react quicker
What are the disadvantages of operating at full capacity?
- quality is affected due to a rushed production process and workers become demotivated
What is over-utilisation of capacity?
- the firm is trying to produce more than its capacity will allow
- may encounter rising costs due to inefficiencies (due to more breakdowns)
What is Quality Control (QC)?
Involves checking finished products for any sign of defect or poor quality before it gets sold
What is Quality Assurance (QA)?
Involves designing the production process so as to eliminate waste and ensure defects do not happen
What is a developed economy?
A developed economy is one where the tertiary and quaternary sectors dominate so they have more imports than exports.
