Unit 3b firms as microeconomic decision makers Flashcards
What are the 4 sectors of economy
primary, secondary, tertiary, and quaternary
what industries are in the primary sector
industry involved in the production or extraction of raw materials
examples of industries in the primary sector
agriculture, fishing and hunting, and mining and extraction
what industries are in the secondary sector
manufacturing and construction
what industry is in the tertiary sector
any industry that all economic activity that is aimed at providing services
examples of tertiary industry
retail and wholesale, finance and insurance, and transportation and communication
what industries is the quaternary sectory
an industry based on human knowledge involving technology, information, financial planning, research and development
examples of industries in the quaternary sector
research and development, information technology, and. profressional services, education
in what sort of countries would you see more of a primary sector industry focus
less developed traditional economies but essential basis for any economy
what improves the secondary sector
improvements of manufacturing equipment, technology, and techniques
Why has the tertiary sector grown so large
as the population has had a higher productivity and disposable income which enable more spending on luxury service items
what would happen if there was no quaternary sector
bc. its the sector where innovations which speed up and improve manufacturing processes economic development would be slow or non-existent
what sector makes countries more developed
the quaternary sector
What is the signifiance of small firms
they hire workers, buy supplies and offer g/s that larger firms may not choose to do
what are the advantages of small firm
they have a personal relationship with customars, creating loyalty within their customar and word to mouth advertising
they can create highly personalised products and services
they can can build a more environmentally friendly business unlike large firms increasing employee motivation and engagement
they can recieve and respond to changes or feedback fast
what are the disadvantages of small firm
difficult to take a loan to expand the business or to purchase capital
difficult to create economies of scale as the volume of output would be smaller than larger firms creating lower profit margin
they are more vulneruable to changes in the economy due to less financial resources
difficult to compete with wage and non wage benefits offered to larger firms making the human capital of their workers lower
why do small firms exist
they can’t scale up as it relies on owners expertise or knowledge
owner is satisfied with the level of profit and feel no need to grow
the market size of their product is small so they can’t grow
what’s the difference between public corporations and public companies
public corporations are the one in the public sector and public companies are actually in the private sector
what are public corporations
organizations that are fully owned by the government
why do public corporations exist
so the public has acesses to neccesity goods
to avoid wasteful compeition in basic services
to reduce employment as gov. are more likely to hire lots of people
to protect citizens and businesses with the police court systmes
what are the advantages of public corporations
there’s no financial worry to make profit as they’re funded by government tax money
related to the above company will continue to run even if total costs outweight total revennue
managed with a social goal not a strict focus on profits
disadvantages of public corporations
bc. there’s not a strict goal to make profit resource allocation may not be the most efficient
governments could interfere in business for political reasons
they’re heavily dependant on governement funding
what occurs in privatisation
a public sector organization is sold to a private sector. they will earn more money, but governments do create a body that monitor the performance of the business and the conduct of it as they will still have a large share.
what 4 organizations are in the private sector
sole traders, parternerships, private limited companies, and public limited companies
what’s a incorporated business
one where business and the owner are treated as two legal entities which create limited liability, taxes on business and not on owner,
what’s unincorporated business
where the owner and business are treated as the same legal entity, unlimited liability, taxes are done as personal income
what companies are considered incorporated
public limited company, private limited company, and ngos
examples of unincorporated businesses
sole traders and partnerships
what is unlimited liability
the ownersare responsible for all debt the business creates if their busiiness fails their property are at risk
whats limited liability
shareholders personal assets are not at risk of the business is in debt, their loss is limited to how much they invested in the company
what is profit margin
The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control costs.
how does a sole trader structure for a business work
they are unincorporated and have unlimited liability
it’s owned and operated by one person
they can employ others
they’re the most common form of business organizations
their owner and business are considered one legal identity so income tax can be put on sole traders
they control and manage the business and treat the profits gained for themselves
ability to borrow money is limited to the owners credit
advantages of sole trader structure
owner retains all profits
its easy to establish
they are their own boss
they have flexible hours
disadvantages of sole trader business structure
they have unlimited liability
they have less acesss to financial resources to grow and purchase capital
income tax is higher than corporation taxes
they have competition with larger firms
what is a partnership
when two to 20 people own and operate a business organization. it’s ulimited liability and unincorporation
what is the deeds of partnership
a legal document for partners in a partnership about how profits will be distributed, note that profits may not be distributed equally, how capital is invested by partner, their rights and responsibilities.
advantages to partnership
business losses are shared
capital investment from all partners income
they can be specialized in different areas
disadvantages of partnerships
all partners are bound to decisions made by one partner
profits are shared
threr’s unlimited libaility
and imporsibble to raise capital from selling shares
what’s a private limited company
a company owned by shared holders but managed by a director who could be a share holder. owner and busniess are 2 legal entitiess so limited liability. also incorporated
what happens with company shares in private limited companies
they are not sold on the open market they are sold on a more personal basis friends family
what are the advantages of a private limited company
they’re able to raise capital from sale of shares to family, friends, and employees
they have limited liability
and taxes are corporation taxes on profits
what are the disadvatnages of private limited companies
there’s a extensive legal process to undergo when setting up
shares may not be sold without agreement of other shareholders
can’t sell shares on open market reducing the capital possible for expansion
what is public limited companies
they’re owned by private individuals not government owns their stocks are sold publically on open markets. they are incorporated llimited liability
what are the advanttages of public limited companies
limited liability
no restriction on buying, selling, and transfer of shares encouraging investors
opportunity to raise high sums of capital bc. of shares
what are the disadvantages of public limited companies
share prices fluctuate without control fo the owner
shareholds have minimal control over the running of companies
more government regulations and controls
complicated legal process of setting up
aims of nationalisation
to benefit public
protect employment
improve economic conditgions
to maximise social benefit by charging lower prices
why would small firms have desire to expand
to meet growing demand from customars as they want to maximise profits
desire to achieve economies of scale to lower costs per unit increasing profit margins
to become a monopoly or increase market power
what are the 2 forms of growth for firms
internal and external
what is internal growth for firms
when firms grow slowly using previous profits to expand and increase market share over time
what is external growth
where firms takeover competion merge with other industries which under a short period of time increase their size and market share
advantages of internal growth
using retained profits reduce the external debt
workers are more commited and motivated if they see the growth process
growing slowly allows owners to understand the strength adn weakness of the firm
disadvantages of internal growth
there could be limited resources to grow the firm
bc. the long time it takes to grow it could give compeitition opportunities to exploit their weakness
workers could become demotivated as chance of promotion is smaller
advantages of external growth
when merging with another company their assets, market share, and inome are inherited
they gain the intellectual knowledge and human capital from the other firm
disadvantages of external growth
the mergin with another company may be in a industry which the owner has little to no experience over
they may have different working cultures that create a clash
it requires greater mangagemnet skills from the owner now managing more people and assets
what is merging in economics
when firms come together voluntarily to form a new firm each firms directors agreeing on it they will transfer money or shares to each other depending on value of each firm, if they are a public limited company they will issue new shares in the name of another firm or one firm will buy shares to incoroporate
what is a takeover
a much more agressive form where one firm buys up the shares of another firm as soon as they hit 50% they have taken over the management of that firm
what’s horizontal integration
when two firms in the same industry merge or same stage of production
advanatanges of horizontal integration
increases market share with gain the customar loyalty of another firm
they icnrease assets intellectual property
they have a higher chance of economies of scale
disadvantages of horizontal inegration
there could be people being fired due to duplications of jobs
communication could slow leading to diseconomies of scale
cultural clash between workers
what’s vertical integration
when a firm merges with naother industryustry but a different stage of production
what’s vertical backward integration
where a firm merges with another firm at a earlier stage in the production process
what’s vertical forward integration
where firms merge with a firm at a later stage in production process
advantages of vertical integration
back integration reduces cost of production as profits from that firm also belong to them
forward integration profit increase as profit are highest in retail
they have more control over their business as they’re now less reliant on other firms
they have more control over their g/s’s quality
disadvantages of vertical integration
there still be a lack of knowledge on how to operate it sucesfully
it doesn’t make economies of scale as production process at each stage is different
difficult to mangage the different business activites
expensive as firms could need to ask for loans for this merge and thus puts presure on management
what is conglomerate integration
when firms merge with another firm in a unrelated industry
advantages of conglomerate integration
risk diversification, by having different markets as one market doing poorly and the other will be doing well reducing business failure
cross subsidisation if one business isn’t doing well the firm can use profits from the other section to subsidise the business
the firm gains sygergies where they benefit each other
it’s also a form of investment
disadvantages of conglomerate integration
lack of knowledge on the new industry the firm enters
its difficult to focus as it will tend to allocate resources based on the business that needs it the most
if it becomes too large they will squeeze competition in different industries creating monopolies a negative for consumers as prices will increase
what’s economies of scale
situations where as businesses expand you will experience a lower cost per unit produced. or cost advantages from increased production resulting lower per unit costs
why does economies of scale occur
commonly due to fixed costs,
what are fixed costs
is costs that producers still have to pay even if they halt production
why do firms want to achieve economies of scale
as production volume increases the cost, production efficiency increases creating economies of scale, as businesses expand they can negotiate better prices from suppliers saving costs and FOP costs, a firm that achieves economies of scale are able to grow and expeand market share
what is internal economies of scale
internal changes in the firm such as specialisation of labor or investments in capital which lead to cost savings
what are the 2 types of economies of scale
internal and external economies of scale
what;’s external economies of scale
changes firms have no control over like government subsideis or improved supply transport which lead to cost savings
what are 5 ways firms can achieve internal economies of scale
buying in bulk the more firms purchase the more likely suppliers are willing to offer discount
specialisation of labor better division of labor allows specialisation which makes employees more efficient and increase productivity
technological economies the more techonologically advanced capital they use they become more efficent
selling economies the more output or the more firms sell the cheaper it is to sell in terms of marketing, packaging, and transport as they can negotiate the price
managerial economiels hiring experienced and specialised managers increase efficency
finanical economies the larger the company the easier and cheaper it is to raise finance as banks are more likely to lend as they have more credit
what are examples of how external economies of scale occur
infrastructure improvements
increases in human capital of labor force
also reputation if it has a better reputation they can achieve economies of scale
what diseconomies of scale
an increase in the average cost per unit as firms increase its scale of production
whatt is internal diseconomies of scale
the inefficiencies and increased costs that arise within a firm as it grows and expands its production scale.
what are causes of internal diseconomies of scale
as employees increase managers may become ineffective leading to poor decisions being made and reduced produtivity
communications break down With more employees and departments, communication can become slower and less effective, leading to mistakes and inefficiencies.
increased transport and storage costs
what is external disinconomies of scale
when a whole industry grows larger causes negative externalities
causes of diseconomies of scale
if there’s an overly industrial concentration in one area increases the strain on infrastructure leading to congestion and a loss of man hours
higher factor prices if a industry is up and rising there will be a rising demand for a g/s causing prices to go up. which increases facotr prices and average costs of production
how is demand for factors of production determined
What FOPS are required
if demand for the g/s is increasing FOP demand will increase
combining FOP if there’s 10 capital and not enough land you will equlize it
demand for capital goods
demand for land
what determines demand for capital goods for.a frim
price of capital goods
profit margins
corporaton tax increase or decrease
confidence levels in future economy
interest rates if they’re low more capital goods are purchased
advances in tech
what demand is demand for factors of production
a derived demand it will increase in demand bc. of the increase of demand for something else
derived demand def
Derived demand refers to the demand for a particular product or resource that is driven by the demand for another product or resource. In other words, the demand for one item is derived from the demand for another item that is connected in the production or distribution process.
what two types of production can a firm have
labour intensive and capital intensive
whyy would demand for fops shift
if the prices of substitue factors of production change as firms are looking to minimise price as much as possible they will have high demand
what does labour intensive production suggest
requires repetitive technical skills that can’t be easily automated or require high levels of customar interactions
advantages of labour intensive production
workers can connect to customars and build customar loyalty
workers are responsive to feedback and modify fast
workers hired also change with demand saving costs
disadvantages of labor intensive production
producitivity varies with worker health and energy
shortages of skilled labour that is required
workers require a wage and a non wage benefit which make labour technically more expensive than capital
what is a capital intensive poroduction
where there’s a replacement of labour with capital
advantages of capital intensive production
there’s the creation of technical economies of scale and thus reduce the total cost
human error is avoided and quality of g/s is consistent
production can be long term and there will no longer be shortages of skilled workers
disdvantages of capital intensive
the cost to purchase and install are high
unresponsive to feedback as theres a low level of customisation
whats productivity
a measure of efficiency that calculates the amountof outputs produced per unit of input
what are the objectives of a firm
profit maximisation by producing new products
merging with a compeititor
or economies of scale
social welfare focus on social oriented goals these are goals of public corporations
growth, they want increase size of business expand sales and increase production by economies of scale ocean a new outlet
survival if they’re in a highly compeititve market or having short term difficulty they will focus on cost reduction, creating sales making sure there is money flowing in and less money flowing out they might reduce selling price use cheaper FOPS
what is a fixed cost
a cost which firms must pay which remains the same even if there’s no output
what is a vvariable cost
a cost that varies when level output changes
examples of fixed costs
factory rent staff salaries
examples of variabel costs
delivery costs, raw materials, e.t.c
how to find average total cost
it’s total cost of production divided by the quanitity of output it’s the cost per unit of g/s
how to find average revenue
total revenue divided by total quanitty sold
how to find revenue
price multiplied by quanitty sold
what is total revenue
Total Revenue (TR) is the total amount of money earned by a firm from the sale of its goods or services during a specific period of time, such as a month, quarter, or year. It represents the total amount of revenue generated by a firm’s sales.
what’s sale revenue
money firm recieves from selling g/s
how to find average revenue
totalrevenue divided by quanitty sold
define average revenue
Average Revenue (AR) is the total revenue earned by a firm divided by the total quantity of goods or services sold. It represents the average amount of revenue generated per unit sold.
