Theme 3 Flashcards
Types of Firms
Sole Trader- One person owns and runs the business
Advantages- Flexibility/Easy to setup
Disadvantages- Unlimited Liability/Long working hours
Partnership- A business owned by between 2 and 20 people
Advantages- Problems can be shared/More skills and ideas
Disadvantages- Decisions may be conflicting/Unlimited liability
Ltd- A company with limited liability whose shares can be traded privately
Advantages- Limited liability means shareholders aren’t liable for debt/Better image for the company
Disadvantages- Shares can’t be sold to the public/May go into liquidation if it is unable to pay debts
PLC- A company with limited liability whose shares can be traded publicly
Advantages- Can sells shares to public to raise capital/Easier to grow
Disadvantages- May get overtaken/Shareholders may demand higher dividends which can drain profits
Why do Firms grow?
Synergy- The combined company is worth more than the sum of its parts
Economies of Scale- Better deals because of increased order size/Bulk buying discounts
Increased revenue and Market share- Allows for higher prices to be set
Cross-selling- The two companies involved in the deal sell each other products and services, increasing sales
Diversification- This helps smooth the earnings results of a company and reduce risk
International Expansion- Acquiring a foreign competitor helps to get over Culture issues, Government policy,
Internal Growth
Occurs when a firm increases their own scale of operation
Examples:
-Expanding existing production facilities
-Opening of new retail outlets
-Taking on more staff
-Investment in new technology
Advantages- Less risky than taking over other businesses/Allows the business to grow at a more sensible rate
Disadvantages- Growth may be dependent on the growth of the overall market/Slow growth (Shareholders prefer rapid growth)
External Growth
Occurs when a company expands through mergers, amalgamation or takeovers
Horizontal- Two businesses in the same industry at the same stage of production become one
Advantages- Internal economies of scale/Reduces competition by removing rivals
Vertical- Acquiring a business in the same industry but at a different stage of the supply chain
Forward Integration- A firm acquiring one of its distributors
Backward Integration- A firm acquiring one of its suppliers
Advantages- Control of supply chain (Reduces costs)/Can increase barriers to entry by preventing new entrants
Conglomerate Integration- A company buys another firm in an unrelated industry, often to spread risk
Advantages-Diversification/Good option if there is little growth in existing markets
Disadvantages:
-Combining cultures
-Costs of merger and integration issue
-Managing staff uncertainty
Constraints on Growth- Size of market, Owner objective, Regulation
Objective of Firms
Profit maximisation- Firms set price and output based on MR=MC
Maximisation of Sales- Firms set price and output based on AR=AC
Maximisation of Revenue- Firms set price and output based on MR=0
Satisficing- Managers of a firm ensure that they make enough profit for shareholders to be satisfied
Principal-Agent Problem-A conflict in priorities of objectives between the owners and managers
Perfect Competiton
Many sellers/Buyers
No barriers to Entry
Homogeneous products
Perfect information
Short run profit maximisation
Monopolistic Competition
Many sellers/Buyers
Low barriers to entry
Differentiated products
Imperfect information
Short run profit maximisation
Oligopoly (+Kinked demand curve)
A few Sellers
Barriers to entry exist
Differentiated products
Imperfect information
Firms are interdependent
High market concentration
Oligopoly Pricing/Non pricing
Price rigidity- If a firm raises the price it faces elastic demand. If it lowers the price it faces inelastic demand
Prefatory pricing-Pricing at a level below own cost with the aim of forcing a competitor out of business (EV- Illegal/Incur losses)
Limit pricing-Designed to prevent firms entering a market by setting price below AC (EV- Firms would lose profits in the short run)
Price leadership- Price is changed by dominant firms where its accepted by other firms (EV- Regulation)
Non pricing:
Marketing, Innovation, Loyalty card, After sales, Opening hours, Delivery, Customer service
Monopoly
One Firm
Barriers to entry exist
Differentiated products
Imperfect information
Short run profit maximisation
Efficiency
State efficiency- The efficiency of an industry at a point in time
Allocative- How efficient resources are allocated P=MC AR=MC
Productive- Production is as cheap as possible LOWEST AC
Dynamic efficiency- The efficiency of resources used over time i
X-Inefficiency- Not producing at the lowest possible cost
Monopsony
One dominant buyer
Profit maximisers
Buying power
Advantages- Lower buying costs mean that consumers may benefit through lower prices/ Allows for greater innovation
Disadvantages-Suppliers could be squeezed out of business/ Act as a barrier to entry
Labour Market
Demand for labour is derived demand
Labour productivity- Greater productivity means each worker becomes more valuable
Price of other factor inputs- Price of capital rises relative to price of labour, more labour is likely to be demanded
Price of good- Marginal revenue will determine each workers value
Supplementary labour costs- If non-wage costs of employing labour rise then demand for labour will fall
Elasticity of Demand will depend on: Substitutability, Elasticity of demand for products, Time
Labour Supply involves an opportunity cost (Wage vs leisure)
Income effect- As wages rise, people feel better off and therefore may not feel a need to work as many hours
Substitution effect- As wages rise, the opportunity cost of leisure rises so more hours are worked
Wage (Wage and bonus on jobs)
Substitute professions (Wages in other jobs)
Entry barriers (Higher qualification requirements)
Migration (Inflow of workers will increase supply}
Occupation mobility- Quality of transferable skills held by workers
Geographical mobility-Willingness of individuals to move
Extent of unemployment- Supply is more elastic when unemployment is high
Time- More time allows a greater response to employment trends
Wage differentials
Demand side:
-Different value of labour
-Resources of employers
-Age differences
-Employer discrimination
Supply side:
-Compensation (Higher pay for a reward for risk taking)
-Greater supply of labour
Trade unions- Raise wages but lower employment levels in a competitive labour and monopsony market
Labour immobility
Labour immobility- If there are barriers to labour being able to move between jobs then it is referred to as being ‘immobile’
Geographical immobility- When workers find it difficult to move jobs from one region to another (Lack of knowledge, Language barriers, Poor infrastructure
Policies to tackle it:
-Housing based solutions, Transport based solutions, Information solutions
Occupational immobility- When workers find it difficult to move from one occupation to another (Lack of skills, Long period of training)
Policies to tackle it:
-Improving education, Providing specific training, Work incentives
