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economics IAL u3 > types and sizes of business > Flashcards

types and sizes of business Flashcards

types of business, size of business, business objectives

1
Q

what are the types of business (4)

A
  • private sector orgs
  • state-owned enterprises
  • for profit and not for profit orgs
  • joint ventures
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2
Q

different types of business in private sector (4)

A

sole traders, partnerships, limited companies and co-operatives

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3
Q

features of a sole trader business (3)

A
  • easy to set up
  • need little capital comparatively
  • few or no legal requirements
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4
Q

sole trader owners (3)

A
  • owners keep all the profit for themselves
  • have unlimited liability as the owner and business are considered the same
  • owners personal possessions can be taken off the owner to pay business debts
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5
Q

feature of a partnership (1)

A
  • two or more people can share the capital, risks and responsibility
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6
Q

partners in a partnership (3)

A
  • partners have full control
  • partners have unlimited liability
  • partners are liable for the action of other partners
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7
Q

limited companies features (2)

A
  • owners are multiple shareholders
  • owners are separated from the business by law
  • limited liability
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8
Q

shareholders in a limited company (2)

A
  • shareholders can only lose the amount of capital they have invested
  • shareholders are paid in shares of profit called dividends
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9
Q

difference between public and private limited companies

A
  • private limited company shareholders have to agree who can buy shares, and thus are only given to friends and family
  • public limited company shares are traded freely on the stock exchange, either local or international/foreign.
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10
Q

main aim of co-ops

A

provide service rather than earning profits

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11
Q

members in a co-op (2)

A
  • profits are shared out equally among the members
  • members have limited liability
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12
Q

types of co-op (3)

A

consumer
producer
worker

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13
Q

features of state owned enterprises (5)

A
  • may be owned fully or partly by state
  • state has significant control over business
  • separate legal identity
  • operates as a commercial enterprise
  • profit is paid to government
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14
Q

why is a joint venture set up?

A

so both parties can see advantages, like sharing resources or ideas

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15
Q

why do some governments only allow foreign company through joint ventures? (2)

A
  • to avoid exploitation of the country’s resources and people and to ensure a transfer of knowledge.
  • can also improve distribution of income in a country as local firms can gain a higher income from foreign countries.
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16
Q

why are joint ventures often set up between a global business and local business?

A

because the global business can gain knowledge of the local market, and the local business can learn efficiency and foreign culture from the global business.

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17
Q

3 main reasons why large firms exist

A
  • economies of scale
  • barriers to entry protects large firms from potential competitors
  • higher profits for owners to be able to spend privately
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18
Q

reasons why small firms survive (4)

A
  • economics of scale may be very small relative to market size
  • productive inefficiency of large firms
  • barriers to entry may be low
  • small firms can be monopolists
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19
Q

how can small firms be monopolists

A

small firms offer a local and flexible service, and some products may only need a few small firms to fulfill demand

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20
Q

factors that contribute to product inefficiency in large firms (4)

A

Overspecialization
Communication breakdowns
Decision-making delays
Loss of customer focus

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21
Q

main ways firms grow in size (2)

A
  • organic growth
  • external growth (growth through mergers or takeovers)
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22
Q

how can firms practice organic growth (4)

A

expanding their production through increasing output
by developing a new product
by diversifying their range
market penetration

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23
Q

how does market penetration help firms in organic growth (3)

A
  • increasing revenue and profitability
  • Strengthening market position
  • Building customer loyalty
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24
Q

how does market penetration help a firm strengthen market position?

A

As firms increase their market share, they can become more dominant in their industry and gain greater bargaining power with suppliers and customers.

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25
Q

types of merger (3)

A
  • horizontal integration
  • vertical integration
  • conglomerate integration
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26
Q

types of vertical integration (2)

A

forward vertical integration
backward vertical integration

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27
Q

advantages of organic growth over external growth (3)

A
  • less risky than inorganic growth
  • Firms grow by building upon their strengths and using their own funds, thus more sustainable growth
  • existing shareholders retain their control over the firm
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28
Q

how is organic growth less risky

A

evidence suggests unless significant changes occur, long term share price usually falls.

29
Q

how is it better if shareholders retain control over the firm instead of opting for a takeover

A

which might reduce conflicts in objectives that are possible when there is a takeover.

30
Q

disadvantages of organic growth over external growth / reasons to opt for takeovers (3)

A
  • a long term strategy, and it is significantly slower than growing inorganically.
  • Firms might rely on the strength of the market to grow
  • takeovers and mergers allow a firm to have more information about a market previously unexplored by them
31
Q

why is a long term strategy for growth sometimes not favorable (2)

A

This could mean competitors gain more market power by expanding in the
meantime. It could also make shareholders unhappy if they want faster growth.

32
Q

advantages of vertical integration (5)

A
  • Firms can increase their efficiency thro economies of scale
  • Firms can gain more control of the market.
  • Firms have more certainty over their production, with factors such as quality, quantity and price
  • reduces risk from suppliers as they can’t favor other firms or freeze suppliers
  • reduces risk from buyers and they will not buy from other firms.
33
Q

how does backward integration provide a cost advantage

A

firms can control the price they pay for their supplies, and they could raise the price
for other firms. This could give them a cost advantage over their competitors.

34
Q

how does forward integration provide a control advantage (2)

A

firm can decide what price to sell the product being produced and in what markets,
it could also better control branding of the product

35
Q

disadvantages of vertical integration (4)

A
  • the firm being bought could perform much worse as the firm making the merger or acquisition might not have enough knowledge of that production process
  • firms often pay too much for takeovers, leading to falling share prices.
  • there can be difficulties in seamlessly merging firms together
  • key workers in the firm taken over might leave, taking valuable knowledge of the production process with them.
36
Q

advantages of horizontal integration (4)

A
  • reductions in average costs due to economies of scale
  • can reduce competition for firm
  • firm has increased ability to control market prices
  • allows business to grow in a market where it already has knowledge and expertise
37
Q

disadvantages of horizontal integration (4)

A
  • firms may pay too much for the firm they are buying
  • can be badly managed as the operation increases in size very suddenly
  • key workers may leave
  • could be disagreements in the objectives of the two firms which merged
38
Q

advantages of conglomerate integration (4)

A
  • reduces risk for the company itself as it is diversifying its product range
  • conglomerates can reduce their reliance on any single market or product
  • conglomerates can achieve economies of scope by sharing resources cross their various businesses
  • can be an opportunity for asset stripping
39
Q

disadvantages of conglomerate integration (3)

A
  • firms usually dont have expertise in the market
  • asset stripping only benefits the conglomerate itself, not the employees, customers or even the local economy
  • risk of spreading the product range too thinly, and there might not be sufficient focus on each range
40
Q

constraints on business growth (SAGO)

A
  • size of market
  • access to finance
  • government regulation
  • owner objective
41
Q

why is size of market a constraint

A

A small market might only have limited opportunities for business expansion, since firms can only access a limited consumer market and there might be limited
opportunities.

42
Q

why is access to finance a constraint

A

banks have become more risk averse since the global financial crisis, which has limited the number and size of loans on the market.

Without sufficient access to credit, firms cannot invest and grow, and firms cannot innovate as much

43
Q

why is Owner objectives a constraint

A

some owners might not have business growth as an important objective

44
Q

why is government regulation a constraint

A

“red tape” can limit growth as certain regulations, like environmental or excess taxes, might lead firms to either not not be able to produce due to pollution limits or go above a certain level of profit

45
Q

what is excessive government regulation called

A

red tape

46
Q

why some firms decide to grow (4)

A
  • economies of scale
  • a larger company may be able to control the market more and become a price maker
  • larger companies can reduce risk by diversifying or simply being “too big to fail”
    -earn higher profits.
47
Q

why some firms decide to stay small

A
  • diseconomies of scale
  • there is increased risk in managing a larger firm
  • niche markets dont allow for growth
  • small firms are monopolists often
  • owners may lack knowledge to grow the firm
48
Q

why do some firms decide to stay in niche market

A

they can use their relatively price inelastic demand to charge higher prices.

49
Q

impact of growth on businesses (2 adv, 1 disadv)

A
  • will benefit from merger if eos leads to greater efficiency
  • greater efficiency will allow them to survive in more competitive markets
  • however, cld be diseconomies of scale
50
Q

impact of growth on workers (1 adv, 1 disadv)

A
  • some workers may get promotion or other facilities, like managers
  • some workers may get laid off because the other firm already has all the workers / increased competition for their job
51
Q

impact of growth on consumers (positive) 2

A
  • if efficiency leads to price cuts
  • if new innovation
52
Q

impact of growth on consumers (negative) 3

A
  • less competition, less choices
  • if shares increase, firms may increase prices to keep new shareholders happy
  • diseconomies of scale might lead firm to have to increase prices, or decrease quality
53
Q

reasons for demerger (3)

A
  • lack of synergies, lower efficiency, diseconomies of scale
  • price of demerged firms might be higher than the whole firm together
  • to create focused companies / specialization that can excel in its own market
54
Q

impact of demergers of businesses (1 adv, 2 disadv)

A
  • will benefit if specialization leads to greater efficiency and if share prices increase
  • will lose out of previous internal economies of scale, like easy access to loans
  • could be run poorly
55
Q

impact of demerger on workers (1 adv, 1 disadv)

A
  • new workers might be needed as previously one worker could oversee one business, now another is needed to oversee the second firm
  • some workers might lose job if firm is focused on efficiency
56
Q

four main business objectives

A

profit maximization
revenue maximization
sales volume maximization
profit satisficing

57
Q

why do neo classical economists assume that most firms want to profit maximize (4)

A

profit is needed to
- reinvest in firm
- dividend to shareholders
- lower cost can be passed down to consumers as lower prices
- reward entrepreneurship

58
Q

why is profit maximizing not always a good idea

A
  • most firms don’t have knowledge of MR=MC
  • greater scrutiny as regulators may suspect foul play and enforce regulations
  • key stakeholders may be harmed
59
Q

how can be key stakeholders be harmed if profit is maximized

A

stakeholders like environmental groups might not like how further production is leading to more pollution, when stakeholders aren’t happy they might cause disruptions to business that harms brand reputation and even pauses business activities for some time.

60
Q

public limited companies have short run profit maximization as an objective - why?

A

because they could lose their shareholders if they do not receive a high dividend.

61
Q

why would a firm revenue maxx (3)

A
  • economies of scale as more quantities need to be produced when compared to profit max
  • predatory pricing
  • principle agent problem
62
Q

why is revenue maximization a result of principle agent problem

A

When the interests of the agent (e.g., a manager) are not aligned with those of the principal (e.g., the owners), agents may prioritize their own interests, leading to behaviors that can result in revenue maximization even if it harms overall profitability. This can include short-term focus, shirking, and excessive perks to the agent.

63
Q

what can shirking lead to (3)

A

reduced productivity
lower quality of work
increased costs for the principal

64
Q

why does shirking occur (2)

A

Moral hazard
Adverse selection

65
Q

why would a firm choose to sales maximize (4)

A
  • eos
  • limit pricing
  • principle agent problem, divorce of ownership and control
  • flood the market
66
Q

why do firms choose to flood the market

A

when the goods you produce is everywhere in a market, it is more likely for consumers to notice your brand and develop brand loyalty. firms then can change their objective, and increase prices to make higher profits instead of highest sales.

67
Q

profit satisficing objective

A

when it is earning just enough profits to keep its shareholders happy.

Shareholders want profits since they earn dividends from them. Managers might not aim for high profits, because their personal reward from them is small compared to
shareholders.

68
Q

Divorce of ownership from control

A

the separation between those who own a company (shareholders) and those who manage it (managers

69
Q

disadvantages of divorce of ownership from control (3)

A
  • can lead to agency problems, where the interests of managers may not align with those of shareholders.
  • Managers may prioritize their own private benefits, such as maximizing their executive compensation or perquisites, over the long-term shareholder value
  • rewards or performance based schemes are also implemented by managers, making reward based solutions obsolete

economics IAL u3 (3 decks)

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