3.1

Question 1

Types Of Firms

Answer 1

-Public Limited Companies, they are listed on the stock market

-Privately Owned Firms, limited liability

Start up,

State-owned businesses, businesses where the government owns a large part of the company

Social enterprises, businesses set up looking for profits, but profits are re-invested into social projects

Co-operatives and partnerships, employee owned firms- John Lewis

Question 2

Organic growth/Internal growth

Answer 2

-when a business increases its own output naturally,

Question 3

How does organic growth form?

Answer 3

-may include adding to the capital stock, through investment

-Development and launch of new capital and products

-Finding new markets (exporting into new countries

-Growing a customer base through marketing

Question 4

examples of organic growth

Answer 4

-lego, it focuses on new product development and innovations

-Spotify, streaming revenues overtook those of music downloads in 2015, grew 19% in 2015 to 2.41 billion

-Twitter, monthly active users is now over 30 million

Question 5

Backward Vertical

Answer 5

-when a firm integrates with another firm further back in the supply chain,

Question 6

Forward Vertical

Answer 6

-when a firm integrates with another firm further down the supply chain

Question 7

Horizontal

Answer 7

-two firms integrate at the same level on the supply chain

Question 8

Lateral

Answer 8

-When firm buys another firm in a related field

-Google bought Youtube in 2006

Question 9

Conglomerate

Answer 9

-When two firms merge when they are in unrelated fields

Question 10

economies of scale

Answer 10

a reduction in LRAC as output increases

Question 11

causes of internal economies of scale (happen within a business)
equation + acronym

Answer 11

Average costs = Total Costs /Quantity, total costs are rising but quantity is rising much faster

REALLY FUN MUMS TRY MAKING PIES

(Risk bearing, they can spread their risk over a larger output rate)

(financial, as a business gets larger they can negotiate a lower rate of interest with the bank)

(management, as a firm gets larger they can employ specialist managers to boost productivity)

(technical, bringing in specialist machinery, employing more workers and specialising)

(marketing, a firm can bulk buy advertising, therefore they can negotiate discounts)

(purchasing, when a firm as they grow buy raw materials in bulk, therefore they can negotiate discounts)

Question 12

external economies of scale (outside the business)

Answer 12

-Better transport infrastructure

-component suppliers move closer

-Research and development firms move closer

Question 13

causes of diseconomies of scale (an increase in LRAC as output increases)

Answer 13

Average costs = Total costs / quantity, total costs are rising much faster than quantity is rising

-control, becomes difficult to control, people may slack off

-communication, much harder to spread messages

-coordination, much more difficult to coordinate

-motivation, workers may become less motivated

Question 14

profit equation

Answer 14

pi profit = total revenue - total costs

Question 15

total costs

Answer 15

(explicit) - total fixed costs, total variable costs

(implicit) - opportunity cost

Question 16

economic profit

Answer 16

considers both implicit and explicit costs
(total foxed cost + total variable cost + opportunity cost)

Question 17

accounting profit

Answer 17

considers only explicit costs

Question 18

normal profit

Answer 18

is the minimum level of profit required to keep factors of production in their current use

AR=AC

Question 19

supernormal profit

Answer 19

supernormal profit is any profit made above normal profit

AR>AC

Question 20

subnormal profit

Answer 20

subnormal profit is any profit made below the normal profit (a loss)

AR

Question 21

profit maximisation

Answer 21

occurs when Marginal Cost = Marginal Revenue

Question 22

benefits of profit maximisation

Answer 22

-re investment, they can invest into new capital, new technology and research and development

-dividends for shareholders, the owners of the company, without them there would be no company

-lower costs of production and lower prices consumers,

-rewards for entrepreneurs, a reward for the risk of starting a business

Question 23

why might businesses not profit maximise

Answer 23

-knowledge of MC=MR, firms may not know about MC=MR

-greater scrutiny, regulators may investigate which could lead to increased costs,

-key stakeholders could be harmed

-other objectives may be more appropriate

Question 24

why might businesses profit satisfice?

Answer 24

Profit satisficing → satisficing profit to satisfy as many key stakeholders as possible
shareholders,

managers,

consumers, harm consumers lead to a bad reputation

workers, may lead to a strike

government, investigate if they don’t like a business

environmental groups, wont like waste or pollution , protest

reputation is everything in the modern day

Question 25

why might firms use Revenue maximisation

Answer 25

Marginal Revenue = 0

why?

economies of scale

predatory pricing, when a firm undercuts its prices to drive off competetors

principle agent problem,

Question 26

why might firms use Sales maximisation

Answer 26

economies of scale

limit pricing

principle agent problem

flood the market

Question 27

other objectives

Answer 27

-survival (short term objective if firms have a product they believe in they might just want to stay in the market before looking to profit maximise)

-public sector organisations (maximise society interest and welfare)

-corporate social responsibility (giving to charities, environmental sustainability)

Question 28

allocative efficiency

Answer 28

-cost of production and the demands of consumers are taken into account to maximise welfare

-where resources follow consumer demand

-where society surplus is maximised

-where net social benefit is maximised

Demand = Supply or Price = Marginal Cost

Question 29

productive efficiency

Answer 29

-Occurs when a firm is operating at the lowest point on their AC curve

-full exploitation of economies of scale

Question 30

x efficiency

Answer 30

-when the average cost is higher than the lowest possible average cost

-minimising waste

-production above the AC curve

Question 31

dynamic efficiency

Answer 31

-Changes in technology and productive techniques over time will increase the productive potential of a firm

-re-investment of LR supernormal profit

Question 32

short run costs

Answer 32

-a period of time where at least one factor of production is fixed

Question 33

long run costs

Answer 33

-when all factors of production are variable

Question 34

fixed costs

Answer 34

BS RAIL

Business rates
Salaries
Rent
Asvertising
Interest
Loans

Question 35

variable costs

Answer 35

TRUW

Transport
Raw material prices
Utility bill
Wages

Question 36

total fixed costs

Answer 36

total fixed costs = total costs - total variable costs

or average fixed costs = quantity

Question 37

average fixed costs

Answer 37

average fixed costs = total fixed costs/ quantity

or average costs - average variable costs

Question 38

average variable cost

Answer 38

average variable cost= total variable costs / quantity

or average costs - average fixed costs

Question 39

average fixed costs

Answer 39

average fixed costs = fixed costs / output

average variable costs = variable costs / output

Question 40

marginal cost

Answer 40

marginal cost = percentage change in total cost / percentage change in quantity

Question 41

increasing returns to scale/economies of scale

Answer 41

percentage change in output is greater than the percentage change in input

Question 42

decreasing returns to scale

Answer 42

percentage change in output is lesser than the percentage change in input

Question 43

constant returns to scale

Answer 43

percentage change in output is equal to the percentage change in input