Theme 3 - Test 23/05/19 Flashcards
What are some of the Objectives of firms?
– Maximise profits – survival – increase market share – Reduce costs - Operate ethically – Growth – innovation – Physical expansion of premises – recruitment of excellent staff
Why may a firm seek to maximise profits?
In order to give better dividends to shareholders
To make company shares more valuable
Improve expansion
Why might a firm want to maximise revenue?
– In order to break even
– Pay of staff in order to keep the business running
Why might a business want to sell seats (football stadium)?
- Important for cash flow
- Large Customer base
- Loyal customers + extra spending
- Price competitive
- Reputation
- Market Share
Why Profit maximise?
- Like Money greed
- Dividend Payments
- Retained Profits ( last years profit kept back for investment next year)
- Allows market domination
Why maximise sales?
- Sell more physical products = more market share
- Ensures all unsold stock gets sold (especially ‘out dates’ products)
–Greater good
In Economics what costs do you have?
- Capital Costs
- Labour Costs
What is meant by Fixed Costs?
Never change according to Output
What is meant by Variable Costs?
Directly linked to output and change accordingly
What is meant by Total Costs? TC
FC + VC ( Fixed Costs + Variable Costs)
What is meant by Average Costs?
Total Costs / Output
What is meant by Marginal Costs?
The cost of making the next product
In the short term is capital Fixed or Variable?
Fixed
In the short term is Labou Fixed and Capital?
Labour is Variable
In the long term is Capital Fixed or Variable?
Variable
In the long term is Labour Fixed or Variable?
Variable
What is the Total Costs Equation?
Total Variable Cost + Total Fixed Costs
What is the Average Fixed Cost Equation?
Fixed cost / Total Variable Cost
What is the Average Total Cost Equation?
Total Cost / Number of how many products you make
What do you think will happen to average costs over time?
Average costs will rise because they are producing more output, might cause greater inefficiency, Cost for extra labour is more, so is capital
What is meant by Marginal Cost?
The cost of an additional one
What does AC mean?
Average Cost
What does MC mean?
Marginal Cost
What does AVC mean?
Average Variable Cost
Where does MC cut AC?
At the lowest point of AC
What are we predominantly talking about when it comes to labour?
Talking about labour
What point is Profit maximisation?
MC = MR
What does MC = MR mean?
Profit Maximisation
What is meant by Marginal Revenue?
The revenue from selling the next one
What is the Total Revenue Equation?
Price x Quantity Sold
What is the Average Revenue Equation?
Total Revenue / Output
What is the Profits equation?
Total Revenue - Total Costs
What are the main economic objectives a firm may have?
- Maximise Profits
- Minimise Costs
- Sales Maximisation
- Revenue Maximisation
What is the Average Total Costs (ATC) Equation?
Total Costs (TC) / Number of products made
What is the Marginal Cost (MC) Equation?
New VC - Previous VC
Average costs [……..] as you increase output in the short term.
Fall
There is Diminishing Productivity as you add….
More workers
Average Costs fall as you increase output in the short term, eventually the average costs will then….
Start rising again
In the Long run are Labour and Capital Variable?
YES
Is Labour Variable in the short term?
Yes
What is meant by Economies of Scale?
Are the cost advantages that a firm can exploit by expanding their scale of production.
What is the effect of Economies of Scale?
Reduces the average unit costs of production
What is meant by Technical Economies of Scale?
Best technology to produce more
What is meant by Purchasing Economies Of Scale?
Negotiating discounts
What is meant by Specialisation of Labour?
Productive specialist staff
What is meant by Managerial Economies of Scale?
Specialist Functional Managers
What is meant by Financial Economies of Scale?
Negotiating lower rates of interest
What is meant by Risk Bearing Economies of Scale?
Benefits of diversifying into new products
What is meant by Diseconomies of Scale?
When the average costs increase again.
What can cause diseconomies of Scale?
- Miscommunication
- Inefficiencies
- Too many staff
- Poor Leadership
- Overworking
How to prevent Diseconomies of Scale?
- Prevent de-motivation use alternating staff jobs
- Invest in new machinery
- Miscommunication (try and and create more direct links from production managers to general managers)
- Bonuses and rewards
What is meant by External Economies of Scale?
When the industry experiences falling costs all together
Examples of External Economies of Scale?
- Development do research and development of facilities in local universities
- Spending by a local authority on improving the transport network
Firms maximise when marginal revenue = ????
0
What is meant by the term price takers?
Firms who are dictated to by the market
What is meant by the term Price Makers?
Firms who can set their own prices
Is the average revenue and the Demand curve the same thing?
Yes
What is the Total Revenue Equation?
Price x Quantity
What is the Total Costs Equation?
Cost x Quantity
What is the Profit Equation?
Total Revenue - Total Costs
What can Supernormal Profit also be called?
Abnormal Profit
Identify 2 reasons why a market price may fall (and the firm must follow it)?
- Competitors will change their prices
- Declining Market share
- Losing customers
When does a firm keep selling until?
The marginal Revenue and Marginal Costs intersect
When you shift the marginal cost do you also have to shift the average cost?
Yes
What is Fixed Costs on a graph?
Average Costs (AC)
What is Variable Cost on a graph?
Marginal Cost (MC)
How can a business grow Organically?
- Make new products
- making existing customers buy more
- Advertising
What is meant by External Growth?
Growing a business by either merging or taking over another company
What is meant by the term merger?
Two firms agree to join together
What is meant by the term Takeover/Acquisition?
When one firm goes and buys another firm on the Stock Exchange
What is meant by a Vertical Merger?
Backward and Forward (eg, brewery buys a chain of pubs)
Advantages of Mergers?
- Economies of scale – bigger firms more efficient
- More profit enables more research and development.
- Struggling firms can benefit from new management.
Disadvantages of Mergers?
- Increased market share can lead to monopoly power and higher prices for consumers
- A larger firm may experience diseconomies of scale – e.g. harder to communicate and coordinate.
What is meant by the term Demergers?
The separation of a large company into two or more smaller firms
What are some of the reasons to demerge?
– Focusing on core business to streamline costs and improve profit margins
– reducing the risk of diseconomies of scale, and diseconomies of scope by reducing the range of function in a business, lower management costs
– Raise money from asset sales and return to shareholders
– Defensive tactic to avoid attention of competition authorities investigate possible monopoly power
– Both firms have different objectives
– increase share price when they split
– disappointed at the success of original merger
What is meant by the term conglomerate?
Is a merger of firms that are involved in economically unrelated business activities
What are some of the reasons for compliments?
– Better sales revenue and cash flow
– cross selling products
– Investment opportunities
What are some of the reasons against conglomerates?
– No experience in other industry
– focus shift in business operations
– how to manage cultural values
What is meant by the term private sector?
Firms which are owned by shareholders and generally aim to make profit
What is meant by the term public sector?
Firms owned, funded and ran by the government on behalf of the public
What is meant by the term third sector?
The not-for-profit, social enterprises and charities
Why are private-sector firms more likely to help grow the economy?
– Create jobs
– increases trade
– provide goods and services to the poor
– generating tax revenue to fund basic public services
Why are private sector found is more likely to improve the balance of payments?
Private firms will export mobile phone prices, more accessible
Why are private sector phone is more likely to improve the unemployment figures?
Produce more so in ploy more people to help increase firms supply
