Theme 3: Business Behaviour and the Labour Market Flashcards
Why do some firms decide to remain small?
Some remain small because of constraints on growth: the size
of the market, access to finance, owner objectives and regulation. Not all firms want to grow.
Why do some firms grow?
- By growing, a firm will be able to experience economies of scale which helps them to decrease their costs of production.
- A larger firm will hold a greater share of their market. This will give them the ability to influence prices and restrict the ability of other firms to enter the market, helping them to make profits in the long run.
- A larger firm will have more security as they will be able to build up assets and cash which can be used in financial difficulties
What is the Principal Agent Problem?
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the agent) takes actions on behalf of another person or entity (the principal).
What is the Public Sector?
The public sector refers to that part of the economy which is owned or controlled by local or central government.
What is the Private Sector?
The private sector refers to that part of the economy that is owned and run by individuals or groups of individuals, including sole traders and PLCs.
What is a Not-for-Profit Organisation?
Some private sector organisations are not-for-profit. Any profit they do make is used to support their aim of maximising social welfare and helping individuals and groups. These organisations include charities and smaller organisations who aren’t large enough to be classified as charities.
What is Organic Growth?
Organic growth is the process by which a company expands on its own capacity, increasing output and enhancing sales internally.
What is Vertical Integration?
Vertical integration is the integration of firms in the same industry but at different stages in the production process.
What is Forward Vertical Integration?
Forward integration is when the firm is moving towards
the eventual consumer of a good (up the supply chain).
What is Backwards Vertical Integration?
If the merger takes the firm back towards the supplier of a
good, it is backwards integration (down the supply chain).
What is Horizontal Integration?
This is where firms in the same industry at the same stage of production integrate.
What is Conglomerate Integration?
This is where firms in different industries with no obvious connections integrate.
What are some constraints of Business Growth?
- Size of the market
- Access to finance
- Owner objectives
- Regulation
What are some reasons for Demergers?
- Lack of synergies
- Value of the company/share price
- Focussed companies
- Avoid attention from competition authorities
What is the Profit Maximisation point?
MC = MR
Why might a firm Profit Maximise?
- Neo-classical economics assumes that the interests of owners or shareholders are the most important and therefore the goal of firms is to profit maximise in the short run, in order to maximise owners’ returns.
- By short-run profit maximising, firms can also generate funds for investment and to help them survive a slowdown during a recession.
What is the Revenue Maximisation point?
MR = 0
Why might a firm Revenue Maximise?
- William Baumol suggested managers are most interested in their level of revenue since this is what their salary depended on.
- Even when their salary is not directly connected to sales revenue, they knew that a growth in revenue was always likely to be a positive for the business. It increases their prestige and is used as a justification to shareholders for managerial rewards.
- A fall in revenue would be negative as it would not only reduce their salary but could signal the start of a downward spiral for the company.
- As a result, many firms may aim to revenue maximise as long as they provide some profit for the owners.
What is the Sales Maximisation point?
AC = AR
Why might a firm Sales Maximise?
- Robin Marris suggested that managers aim to maximise the growth of their company above any other objective. This is because their salary may be linked to the size of the company.
- It is often easier for people to judge the level of growth achieved rather than the level of profit. This will increase the prestige of the business.
- Growth will also increase market share, and may push other firms out of business. It will enable a firm to have more market power and more power over prices.
- This tends to be a short term strategy , and in the long term firms are more likely to profit maximise.
What is Profit Satisficing?
- Due to the principal-agent problem, owners and directors will have different goals. Directors will want to maximise their own benefits but will need to make a certain amount of profit in order to keep their jobs, receive benefits and avoid criticism from
shareholders/the press. - Therefore, managers are likely to follow the objective of profit satisficing: they will make enough profit to keep owners happy whilst following other objectives and not profit maximising.
What is Total Revenue (TR)?
The total amount of money coming into the business through the sale of goods and services. Quantity x Price .
What is Average Revenue (AR)?
Demand is equal to AR: total revenue / output .
What is Marginal Revenue (MR)?
The extra revenue that the firm earns from selling one more unit of production: change in total revenue / change in output .
What is the formula for Total Costs (TC)?
Fixed Costs + Variable Costs
What is the formula for Average Total Cost (ATC)?
Total Costs / Output
What is the formula for Average Fixed Cost (AFC)?
Total Fixed Cost / Output
What is the formula for Average Variable Cost (AVC)?
Total Variable Cost / Output
What is the formula for Marginal Cost (MC)?
change in Total Cost / change in Output
What is the Short Run?
When at least one factor of production is fixed and cannot be changed.
What is the Long Run?
When all factors of production become variable.
What is Diminishing Marginal Productivity?
Diminishing Marginal Productivity means that if a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit.
What are Economies of Scale?
Economies of Scale are the cost advantages that firms obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of cost (production cost).
What are the some types of Economies of Scale
- Technical Economies of Scale
- Financial Economies of Scale
- Risk Bearing Economies of Scale
- Managerial Economies
- Marketing and Purchasing Economies of Scale
What are Diseconomies of Scale?
Diseconomies of scale occur when an additional production unit of output increases marginal costs, which results in reduced profitability.
What is the Shut Down point?
AVC > AR
What is Allocative Efficiency?
Allocative efficiency is a state of the economy in which production is aligned with the preferences of consumers and producers; in particular, the set of outputs is chosen so as to maximize the social welfare of society.
What is Productive Efficiency?
Productive efficiency: A firm has productive efficiency when its products are produced at the lowest average cost so the fewest resources are used to produce each product. The minimum resources are used to produce the maximum output. This can only exist if firms produce at the bottom of the AC curve, in the short run this is where MC=AC.
What is Dynamic Efficiency?
Dynamic efficiency: This is achieved when resources are allocated efficiently over time. It is concerned with investment, which brings new products and new production techniques.
- Dynamic efficiency will be achieved in markets where competition encourages innovation but where there are differences in products and copyright/patent laws.
What is X-Inefficiency?
X-inefficiency is a concept used in economics to describe instances where firms go through internal inefficiency resulting in higher production costs than required for a given output.
What are the features of Perfect Competition?
- There must be many buyers and sellers.
- There must be freedom of entry and exit from the industry.
- There must be perfect knowledge.
- The product must be homogenous.
What are the features of Monopolistic Competition?
- There must be a large number of buyers and sellers.
- There are no barriers to entry and exit.
- Differentiated goods.
What type of profit can Perfect Competition make in the Long Run?
Normal Profit.
What type of profit can Monopolistic Competition make in the Long Run?
Normal Profit.
What are the features of Oligopolistic Competition?
- Differentiated goods.
- High Concentration Ratio.
- Interdependent firms.
- Barriers to entry.
What is Collusive Behaviour?
Collusion is when firms make collective agreements that reduce competition . When firms don’t collude, this is a competitive oligopoly.
What is a Cartel?
A formal collusive agreement is called a cartel, which is a group of firms who enter into agreement to mutually set prices. The rules will be laid out in a formal document which may be legally enforced and fines will be charged for firms who break these rules.
What is a Barometric Firm Price Leader?
Where a firm develops a reputation for being good at predicting the next move in the industry and other firms decide to follow their leader.
What is Game Theory?
Game theory explores the reactions of one player to changes in strategy by another player. The aim is to examine the best strategy a firm can adopt for each assumption about its rival’s behaviour and it provides insight into interdependent decision making that occurs in competitive markets.
What is First-Degree Price Discrimination?
First-degree is when a seller charges all buyers the highest price and allows for reductions.
What is Second-Degree Discrimination?
Second-degree is when a seller changes price depending on the quantity purchased.
What is Third-Degree Price Discrimination?
Third-degree is when a seller charges different prices for different consumer groups based on a specific attribute.
What is a Natural Monopoly?
A natural monopoly is a type of monopoly in an industry or sector with high barriers to entry and start-up costs that prevent any rivals from competing.
- For example, London Underground.
What is a Monopsony?
This is where there is only one buyer in the market.
- For example, the NHS.
What are the features of a Contestable Market?
- Perfect knowledge.
- Freedom of entry and exit.
- No sunk costs.
- Low product loyalty.
