Unit 3B: Is profit maximisation the most important goal for entreprenuers?

Question 1

Define industrialisation

Answer 1

Industrialisation: A country moving from the primary sector to the secondary sector

Industrialised: All industries involved in the extraction and collection of natural resources

Question 2

Define the primary sector

Answer 2

The sector of the economy responsible for the extraction and collection of natural resources, to use in producing a good/supply raw materials. e.g. mining, fishing, farming, and logging businesses.

Question 3

Define the secondary sector

Answer 3

Consists of all businesses which manufacture and process materials which can be used by the end consumers. (e.g. construction, food, car manufacturing, textile processing)

Question 4

Define the tertiary sector

Answer 4

The process by which an economy is transformed from one based on agriculture to one based on primarily manufactured goods.
Consists of all businesses that sell a service. These include firms that sell firms that sell transportation, insurance, education, and healthcare services.

The sector of the economy which provides services to its consumers (e.g. banking, schools, restaurants, hair salons, etc)

Question 5

What are the 2 ways you can calculate the size of industrial sectors?

Answer 5

1. % of people employed in each sector
2. % of GDP produced by each sector

Question 6

Define the private sector

Answer 6

The part of the economy that includes all-for profit businesses that are not owned or operated by the government

Question 7

Define the public sector

Answer 7

The part of the economy consisting of organisations, whether services or enterprises, that are owned and funded by the government.

Question 8

Define a sole trader

Answer 8

A person who owns and runs a business as a single proprietor. He or she must takes all the risks, but also receives all profits made by the business.

• Sole traders maintain full ownership of their businesses.
• Sole traders have unlimited liability

Question 9

Define partnerships

Answer 9

Businesses that are owned and run by between 2 and 20 owners who pool funds and take risks together, but they must share profits amongst themselves. Partners have unlimited liability, clearing debts borne by the partnership extends to selling the partners personal assets if required.

Question 10

Define shareholder

Answer 10

Part owners of a limited liability company

Question 11

Define a private limited company

Answer 11

An organisation that has limited liability and cannot sell to the the general public. With a private limited company there are 2 or more owners who receive a proportion of any profits and they enjoy limited liability. A private limited company is neither listed on the stock exchange nor are they traded. It is privately held by its members only.

To sell private company stock—because it represents a stake in a company that is not listed on any exchange—the shareholder must find a willing buyer. In addition, a sale of private stock must be approved by the company that issued the shares.

Question 12

Define Public limited company

Answer 12

An organisation that has limited liability and is able to sell its shares for finance. A public limited company is a company listed on a recognized stock exchange and the stocks are traded publicly.

Question 13

Define public corporation

Answer 13

An organisation owned and funder by the government

Question 14

Define multinational corporations

Answer 14

Businesses with operations (/production) in more than one country.

Question 14

Define unlimited liability

Answer 14

Unlimited liability means that the business owner or owners are personally responsible for all of the debts of the business, no matter what the value.

Question 15

Define limited liability

Answer 15

Limited liability means that the business owner or owners are only responsible for business debts up to the value of their financial investment in the business. This means that a creditor can only take assets or finances belonging to the company.

Question 16

Define privatisation

Answer 16

A supply-side policy of selling off state-owned assets to the private sector.

Note: Supply-side policies are government attempts to increase productivity and increase efficiency in the economy.

Question 17

Define nationalisation

Answer 17

The process of taking assets from the private sector into state ownership.

Question 18

Attempt making a model breaking down the business organisations in the economy

Answer 18

Question 19

Define shareholders

Answer 19

Organisations are owned by stakeholders and run by directors (which may also be shareholders). Shareholders enjoy limited liability.

Question 20

Define multinational corporations (MNC)

Answer 20

A firm that operates in more than one country, but usually has its base of operations in its country of origin.

Question 21

Define a market share

Answer 21

The portion of the market controlled by a particular company or product

Question 22

What is a merger/amalgamation?

Answer 22

Occurs when two firms join together to form one firm.

Question 23

Define a takeover/acquisition

Answer 23

Occurs when one firm is taken over by another. This may be hostile, or it may have been agreed upon by the firms.

Question 24

Define internal growth/organic growth

Answer 24

This occurs when a firm expands its own operations rather than depending on mergers or takeovers. The firm expands its scale of production through the purchase of additional resources such as equipment and increasing the size of its premises.

Question 25

Define horizontal integration

Answer 25

Occurs when two firms in the same sector of the industry and the same industry merge. e.g. two cattle farms merge their operations.

Question 26

Define vertical forward integration

Answer 26

Occurs when a takeover or merger occurs from different sectors of the same industry. In the case of forward integration an example might be a cattle farmer taking over a milk production facility.

Question 27

Define vertical backward integration

Answer 27

Occurs when a takeover or merger happens between two firms in different sectors of the same industry. In the case of backwards integration an example might be an owner of a chain of nightclubs and bars purchasing a brewery so that he/she can produce their own beer.

Question 28

Define conglomerate or lateral integration

Answer 28

Occurs when a merger or takeover occurs between two firms from unrelated areas of business. For example, a furniture manufacturer takes over a vineyard to start producing wine.

Question 29

Define diversification

Answer 29

The process of a company enlarging or varying its range of products so that if one product fails, they still have revenues coming in from the rest.

Question 30

Define economies of scale

Answer 30

Where long run average costs fall as a firm increases its scale of production (it makes and expects to sell more output)

Question 31

Define purchasing (or bulk buying) EOS

Answer 31

Occurs when the cost of raw materials falls when they are bought in large quantities; this reduces the average costs of production

Question 32

Define risk bearing EOS

Answer 32

Occurs as large firms tend to produce a range of products and operate in many locations to avoid over-dependance on one-product line.

Question 33

Define a monopoly

Answer 33

A firm where there is only one supplier of a good or service, the firm has the power to influence market supply or prices.

Question 34

Define technical economies of scale

Answer 34

Occurs as large firms can afford to purchase expensive pieces of machinery and automated equipment for the manufacturing process.

Question 35

Define financial economies of scale

Answer 35

Occurs as large firms are able to borrow money from banks and at lower interest rates than small firms because they are considered to be less risky in terms of their ability to pay back the loans.

Question 36

Define Managerial Economies of Scale

Answer 36

Occurs as large firms have the resources to employ specialists to undertake functions within the firms (e.g. accountants, engineers, human resource specialists, marketing specialists, and so on). Specialist managers are likely to be more efficient as they possess a high level of expertise, experiences and qualifications compared to a person in a smaller firm trying to perform all of these tasks.

Question 37

Define diseconomies of scale

Answer 37

Occurs as the average cost of production rises as the size of the firm increases

Question 38

Define mass market

Answer 38

Products with mass appeal are marketed on a large scale

Question 39

Define market niche

Answer 39

A small, specialised market for a particular product or service

Question 40

Explain the main four ways to measure and compare the size of firms

Answer 40

1. Size of workforce
   
   1. Some firms may be considered large due to the number of staff they employ, it is important however to take note of the fact that there are large firms that are capital intensive and thus their workforce wouldn’t be as large but the firm is quite large.
2. Internal organisation
   
   1. Large firms are usually divided up into lots of different departments to manage everything that the firm has to do e.g. Sales and Marketing could be a department. In smaller firms the owners and employees all tend to carry out all these functions.
3. Capital employed
   
   1. This is the amount of money invested in productive assets (e.g. machinery) that generate revenue. The more capital a firm can invest in, the more it can produce and the bigger it tends to be. Do take note that labour intensive firms wont have as much capital but are still quite large.
4. Market share
   
   1. Large firms may dominate sales in the markets they supply in and thus seem large. But not all markets are large. Firms in small or niche markets will still be quite small by dollar value of sales even if they own most of the shares in the market.

Question 41

Give 5 other ways to measure size of a firm

Answer 41

1. Number of outlets (e.g. no of shops)
2. Type of organisation/legal status
3. Sales revenue (or “sales” per year)
4. Corporation tax paid
5. Market value/ Market capitalisation

Question 42

Define external growth

Answer 42

When 2 or more firms join together (integrate) to form a larger enterprise. Integration involves the merger or takeover of 2 or more firms.

Question 43

What are the pros and cons of vertical backwards integration?

Answer 43

Advantages:

• This gives the new firm control over quality and delivery times of supplies.

Disadvantages:

• The new firm may lack the experience to manage the part of the firm that supplies them.
• The supplying side of the business may become complacent about having a guaranteed customer.

Question 44

what are the pros and cons of lateral integration?

Answer 44

Advantages:

• For the new firm, this diversifies the business from its original industry and markets to others to spread risk.

Disadvantages:

• The new firm may lack expertise in the new industry that it has now entered.
• There may be a lack of focus now that the firm is spread across different industries.

Question 45

What are the pros and cons of horizontal integration?

Answer 45

Advantages:

• For the firm that is instigating the merger, this will eliminate a competitor.
• This could achieve EOS for the new firm.
• (advantage to firm) For consumers, this may lead to a monopoly position where prices are fixed at over inflated levels.
• This could give the new firm the scope to rationalise production. (e.g. cut out 2 partly used assembly lines and just use one)

Disadvantages

• (disadvantage to customer) For consumers, this may lead to a monopoly position where prices are fixed at over inflated levels.
• For the new firm, rationalising may bring bad publicity (e.g. job losses)

Question 46

What are the pros and cons of vertical forwards integration?

Answer 46

Advantages:

• The new firm is now able to control the promotion and pricing of its products.
• This gives the new firm increased bargaining power over suppliers.

Disadvantages:

• The new firm may lack retailing experience.

Question 47

Why do firms grow larger?

Answer 47

Question 48

What are the 3 ways an entrepreneur can consider increasing output?

Answer 48

1. By re-organising the work-force
2. By employing more labour
3. By employing more of all the factors of production

Question 49

The optimum size for a firm is where it can…?

Answer 49

reduce average costs to their lowest points in the long run

Question 50

On a graph, mark the point of output at which it would be best for a business to produce in the long run. You should decide on the correct axes title.

Answer 50

Question 51

Pros and cons of the sole trader business model

Answer 51

Advantages:

• A sole trader is his or her own boss
• They can choose their own work hours
• A sole trader receives all profits
• This type of business is easy to set up

Disadvantages:

• May lose revenue if off sick or on holiday
• Has unlimited liability to pay business debts
• Has full responsibility for the business
• May lack capital to finance business growth

Question 52

Pros and cons of the partnerships business model

Answer 52

Advantages:

• A partnership is easy to set up
• More partners means more capital
• Partners bring new skills and ideas
• Limited partners have limited liability
• Partners share responsibility for decisions

Disadvantages:

• Partners can disagree
• Partners share any profits
• General partners have unlimited liability
• Partners may lack capital to finance growth

Question 53

What are the pros and cons of private limited companies?

Answer 53

Advantages

• Shareholders have limited liability
• Shareholders receive dividends from profits
• Shareholders elect directors to manage the company
• The company has a separate legal identity
• It is a popular form of organization for sole traders and partnerships seeking to raise additional finance for business expansion.

Disadvantages

• Financial information may have to be disclosed
• Large shareholders can out-vote others
• Directors may run the business in their own interests rather than for stakeholders
• Shares can only be sold privately with the agreement of all other shareholders

Question 54

What are the pros and cons of public limited companies?

Answer 54

Advantages

• Shareholders have limited liability
• Shareholders receive dividends from profits
• Shareholders elect directors to manage the company
• Companies have a separate legal identity
• Shares can be advertised and sold publicly on the stock market to raise significant new capital

Disadvantages

• The legal costs of setting up can be high - Associated costs of company formation may also be higher, especially if the company’s requirements are complex. If the company’s shares are to be listed on an exchange, it will typically pay legal and investment professionals to advise and manage the listing process. There will be other costs associated with obtaining a listing.
• Annual financial accounts must be published
• Directors may run the business in their own interests rather than for shareholders
• The original owners may also lose control of their company if it is taken over by another company through the purchase of shares on the stock market

Question 55

What are the pros and cons of multinational corporations?

Answer 55

Advantages

• A multinational provides jobs and incomes
• It brings business knowledge, skills and technologies which can help other firms
• It pays taxes on its profits which help boost government revenues
• It increases export earnings from trade

Disadvantages

• A multinational can transfer their profits to other countries to avoid paying tax
• It may force local competition out of business
• It may exploit workers in low-wage economies
• It may use its power to secure generous subsidies and tax breaks from a government

Question 56

Explain internal economies of scale

Answer 56

When a firm expands its scale of production it can become more productive and lower its average cost of production. This is because it gives the owners a chance to re-organise how the firm is run and financed within the firm.

Question 57

Explain purchasing (bulk-buying) economies of scale:

Answer 57

As business grows, they need to order larger quantities of production inputs. As the order value increases, a business obtains more bargaining power with suppliers, and it may be able to obtain discounts which lowers average costs.

Question 58

Explain marketing economies of scale

Answer 58

Concept: Because large firms put so much more money into advertisements demand increases by so much, so output increases by so much. So the amount of output increases way beyond the increase in total cost caused by increased costs in marketing. So the average cost reduces.

Every part of marketing has a cost - such as advertising and running a sales force. Many of these marketing costs are fixed costs and, so, as a business gets larger it is able to spread the cost of of marketing over a wider range of products and sales - cutting the average marketing cost per unit.

Question 59

Explain external economies of scale

Answer 59

These occur when a firm benefits from lower unit costs as a result of the whole industry growing in size.

Question 60

Explain the 5 types of external economies of scale

Answer 60

1. Access to a skilled workforce
   
   1. Firms can recruit workers trained by other firms in their industries, thus reducing their own training costs.
2. Ancillary firms
   
   1. Firms that support other firms tend to locate close to each other and provide them with specialized equipment and business services they need. This can help the larger firms reduce their costs as they can more easily access high quality yet affordable suppliers close to their site.
3. Joint marketing benefits
   
   1. Marketing budgets can be trimmed eg firms in the same industry can locate close to each other and and share their reputation for producing high-quality output.
4. Shared infrastructure, eg improved transport and comms (communications) link
   
   1. The growth of an industry could convince a firm or the government to invest in new infrastructure such as airports or dock facilities, to meet increasing demand for these services. This could reduce their transportation costs.
5. Training and education becomes more focused on the industry
   
   1. Universities usually offer courses suitable for a career in an industry which has become dominant nationally, or in a region. This means that firms benefit from having a larger pool of appropriately skilled workers, recruitment training and labour costs could be reduced.

Question 61

Explain the 3 ways in which diseconomies of scale could be caused:

Answer 61

1. Communication
   
   1. As a firm grows too large, communication issues may arise due to the amount of people in the communications chains. This leads to inefficiencies which raise average costs (eg important message is misinterpreted)
2. Coordination
   
   1. As the size of a firm grows coordinating complex processes is difficult. Furthermore the division of responsibility may become unclear leading to different departments fulfilling the same tasks leading to increased average costs.
3. Control
   
   1. Monitoring how productive each worker is in a large firm is both imperfect and costly (can lead to productive ineffeciency). Furthermore workers may feel a sense of alienation as they think they have no impact on the direction of a firm, leading to them being less motivated, less productive, increasing average costs.

Question 62

Explain the 8 reasons why there are small firms in an economy

Answer 62

• The govt helps smaller firms
  
  • Subsidies
  • Low interest rates on govt loans
  • Low corporate tax
• Demand in the industry is low so large scale production is not required.
• They can provide a personal and flexible experience.
• Capital is limited so owners find it difficult to expand
• Personal choice: owners decide that operating a small firm suits them
• They can co-operate with other small firms thus benefiting from economies of scale and being price competitive.
• They can respond quickly to consumer wants and provide variety, not just standardised products as larger firms tend to
• They can still be profitable by offering unique premium goods at high prices and attaining high profit margins.

Question 63

What are the 4 things that make up the competitive spectrum (in order)?

Answer 63

• Perfect competition
• Monopolistic competition
• Oligopoly
• Monopoly

Question 64

Define perfect competition

Answer 64

A market structure where many firms and buyers exist. No one single economic unit can dictate behaviours or prices in the market

Question 65

Define a monopoly

Answer 65

A market structure where there is a single supplier. The firm IS the industry.

Question 66

What are the characteristics of perfect competition vs monopolies

Answer 66

Homogenous products are considered to be homogenous when they are perfect substitutes and buyers perceive no actual or real differences between the products offered by different firms.

Question 67

Define fixed cost

Answer 67

A cost that does not change with an increase or decrease in the amount of goods/services produced or sold

Question 68

Define variable cost

Answer 68

A cost that varies directly with the level of output

Question 69

Define total cost

Answer 69

the sum of all costs incurred by a firm in producing a certain level of output.

Question 70

Define a break even point

Answer 70

Question 71

Define profit maximisation

Answer 71

Question 72

Draw a graph showing the concept of variable,fixed, and total cost

Answer 72

Question 73

State what ATC, AVC, and AFC stand for

State what TC, TVC, and TFC stand for

Answer 73

TC: Total Cost

TVC: Total Variable Cost

TFC: Total Fixed Costs

Question 74

Draw the proper igcse econs graph for total, fixed, and variable costs with a break-even point

Answer 74

Question 75

What are a few alternative goals to profit maximisation

Answer 75

Boost total revenue, thereby boosting total profit

• Increase quantity sold by…
• Increase the selling price

Reduce total costs, thereby boosting profit

• Reduce fixed costs per unit by
• Reduce variable costs per unit by

Question 76

What are the advantages to consumers of monopolies?

What are the disadvantages?

Answer 76

• Quality of product increase = innovation = increased expenditure on R&D
• Price of goods may decrease if monopolies pass on cost savings to consumers
• Prices may go up as the firm is the sole seller and can adjust the price
• Quality goes down = limited choice = monopolies become complacent

Question 77

What are the advantages to other producers of a monopoly?

What is a disadvantage?

Answer 77

• May merge with monopoly and become internationally competitive (assuming it is not a worldwide monopoly)
• Able to improve on the quality of products as monopolies share its innovations and research
• Hard to compete with monopoly especially with high barriers to entry

Question 78

What are the advantages to a monopoly of its own monopoly?

Answer 78

• High control of price = can practice price discrimination = and earn higher profits
• Benefits from EOS
• Lack of competitors = allows it to make higher profits
• However as firms get bigger they may soon experience diseconomies of scale & become inefficient
• Govt may regulate the monopoly by increasing its taxes or imposing anti-trust law

Question 79

READ THE PAPER FLASHCARDS FOR THIS UNIT THEY ARE BETTER THAN THESE

Question 80

WATCH THIS VIDEO ON THE GRAPH OF COSTS (although do some more searching about graphing marginal costs)

Answer 80

https://www.youtube.com/watch?v=qYKJdooEnwU