Theme 3 Flashcards
The size of firms in the UK?
Although production in the UK is dominate by large firms, there are many industries where small and medium-sized enterprises play a significant role.
Why do large firms exist?
Economies of scale and barriers to entry
Why might the costs of production for a large scale producer be higher than for a small company?
- It could be due to productive inefficiency - a large firm operating within its average cost curve boundary e.g. may be poorly organised in what they see as small unimportant segments of the market (called market niches)
- Or X-inefficiency may be present
- Average cost curve of a large producer may be higher in certain markets than for a small producer
How businesses grow?
Organically or internal growth
- firms increasing their output - increased investment or labour force
External growth through merger, amalgamation or takeover
- A merger or amalgamation is the joining together of two or more firms under common ownership
- A takeover implies that one company wishes to buy another company. May lead to hostile takeover when needs more than 50% of shares to win and the control.
Reasons for growth?
Profit maximising companies are motivated to grow in size for a number of reasons:
- may be able to exploit EOS
- more able to control its markets. Reduce competition and exploit market better
- be able to take more risk
5 different types of mergers?
Horizontal integration - merger of two firms in same industry at same stage of production
Vertical integration - in same industry but at different stages of production
Forward production integration - involves a supplier merging with one of its buyers
Backward vertical integration - involves a purchases buying one of its suppliers
Conglomerate integration - is the merging of two firms with no common interest
Whats a social enterprise?
Profits reinvested for social purposes
Whats a small - medium enterprise (SME)
Fewer than 250 employees - 99% of UK businesses
Whats a PLC?
A private sector business that trades it shares publicly on stock exchange with a minimum share capital of £50000
Whats a Ltd?
Shares are held privately and are not traded on the Stockmarket. Limited means that the amount investors have in share capital are only liable for the value of it.
Whats a partnership?
A business structure where partners share responsibility for the business (2-20)
Why small firms are likely to survive?
- Subcontracted by larger firms
- Provide niche goods and services that are highly price inelastic in demand, leading to high profits
- Can avoid diseconomies of scale
- Lifestyle enterprises - not profit maximising but profit satisfying (“enough”)
- Can be innovative and flexible in responding to changes in the market.
- Easy to sell online, eBay Etsy and amazon without incurring costs of having physical stores.
5 reasons why a firm may want to expand and grow?
- EOS (lower long run unit costs)
- Build and sustain your market power
- Improve shareholder returns from higher operation profits
- Reduce the risk of a hostile takeover
- Pursuit of managerial objectives
Whats a demerger?
why?
When a firm decides to split into separate firms
- Reduce risk of diseconomies of scale
- Raise money for shareholders
- Focus on streamline costs and improve profit margins
- diversify risk - focus on markets
What is profit maximising?
Profits are maximised at an output where marginal cost = marginal revenue
What is revenue maximisation?
Revenues are maximised at an output where marginal revenue = zero
What is sales maximisation?
Producing the largest amount possible consistent with earning normal profits
Whats satisfying behaviour?
Satisfying behaviour involves the owners of a business (shareholders) setting minimum acceptance levels of achievement in terms of revenue and profitability.
What is total revenue?
This is the total income a firm receives. Price x quantity
What is average revenue (AR)?
TR/Q
Marginal revenue (MR)?
The extra revenue gained from selling an extra unit of a good
Profit?
Total revenue (TR) - total costs (TC)
or
(AR-AC) x Q
Whats fixed costs?
The costs which don’t vary with changing output. Fixed costs stay the same even with relation to output.
What are variable costs?
Costs which depend on the output produced