Theme 3-Business behaviour and labour markets Flashcards
What are the different types of business growth?
- Organic growth-Expansion using internal resources (e.g reinvesting profits)
- Inorganic growth-Expansion via mergers and takeovers.
What are the advantages and disadvantages of organic growth?
Positive-less risky, easier to control.
Negative-Slower than mergers/takeover.
What are the advantages and disadvantages of inorganic growth?
Positive-Quick expansion, increased market share
Negative-Expensive, integration problems, culture clashes
What are the different types of integration?
Horizontal integration-merging with a firm in the same industry and stage of production
vertical integration-Merging with a firm at a different stage of production( backwards or forwards)
conglomerate integration- Merging with a firm in a completely different industry (e.g a food company buying a tech firm)
What are the benefits and drawbacks of horizontal integration?
positive-Economies of scale, increased market power.
Negative-less choice for consumer, risk of diseconomies of scale.
What are the benefits and drawbacks of vertical integration?
Positive-control over supply chain and reduces dependency on suppliers
Negatives-High costs of acquisition and lack of expertise in different stages of production
What are the benefits and drawbacks of conglomerate integration?
Positive-Diversifies risk(if one industry struggles the other might perform well) and access to new markets
Negative-Lack of expertise in new industries and difficult to manage different business sectors.
Why do some firms choose to remain small?
Niche markets-specialised products with limited demand
Lack of economies of scale-some industries not benefit from large scale production
Regulation-government restrictions may prevent expansions
personal preference-some owners prefer control over profits rather than expansion
What are the types of firms in the economy?
Private sector firms-operate for profit
Public sector firms-government owned
Non-profit organisations-focus on social objectives, not profit
What are the main business objectives?
Profit maximisation- MC=MR
Revenue maximisation- MR=0
Sales maximisation- AC=AR
satisficing-making enough profit to satisfy stakeholders rather than maximising it.
corporate social responsibility-Balancing profit with ethical and environmental concerns
Why might firms not profit maximise?
Principal agent problem-owners want profit but managers may have different goals
Market conditions-some industries focus on revenue/sales maximisation for market dominance.
Short term vs long term objectives- firms may sacrifice short term profit to build brand loyalty or invest in R&D
What is the principal agent problem?
A conflict between owners and managers because managers may prioritise personal goals over maximising shareholders profits
How can firms solve the principal-agent problem?
-Performance based pay
-shareholder activism (holding management accountable)
-stock options (giving managers shares in the company)
What are the three types of revenue?
1.Total revenue=PxQ
2.Average revenue=TR/Q3
3.Marginal revenue=ΔTR/ΔQ
What happens to revenue when demand is elastic vs inelastic?
Elastic demand-lower price=higher revenue
Inelastic demand-Higher price=Higher revenue
What are the different types of costs?
Fixed costs-Do not change with output
variable costs-change with output
Total cost=FC+VC
Average costs=TC/Q
Marginal cost=ΔTC / ΔQ
What are the three types of profit?
Normal profit-Minimum level of profit needed to stay in business(AC=AR)
Supernormal profit-Any profit above normal profit(AR>AC)
Loss-When AC>AR
What are economies of scale?
Cost advantages gained from expanding production
What are the types of economies of scale?
Technical-Larger firms can afford better technology
Managerial-Larger firms can hire specialist managers
Financial-Larger firms get cheaper loans
Marketing-Bulk advertising reduces costs per unit
Purchasing-bulk buying discounts
What are diseconomies of scale?
When costs per unit rise due to inefficiencies at large scales
What are the types of diseconomies of scale?
Communication issue-Harder to coordinate large teams
Bureaucracy-More rules slow decision-making
Motivation problems-Workers feel less valued in large firms
What are the four main market structures?
Perfect competition-Many firms, identical products, no barriers to entry.
Monopolistic competition-many firms, differentiated products, some price-setting power.
Monopoly-One firms dominates(over 25% market share in uk)
What are the characteristics of perfect competition?
-Many buyers and sellers
-no barriers to entry/exit
-Firms are price takers
-Homogenous products
-perfect information
What are the characteristics of monopolistic competition?
-Many firms
-Product differentiation
-some price-setting power
-low barriers to entry
