3.1 Flashcards
(28 cards)
Why do firms remain small?
-Lack of finance
-owners’ objectives
-avoid diseconomies of scale
-size of market
-regulation
What is the principle-agent problem?
when the agent makes a decision on behalf of the principle but the agent is inclined to act in their own interest rather than the principle leading to a divorce of ownershi
Why do some businesses choose to grow?
- Market power - big companies= more dominance = price setting power = barrier to entry
- Owners objectives
- Profit motive = grow =EOS = opportunity for increases profits
- Diversification- by growing = more products = reduces risk as business has something to fall back on
What is the public sector?
Sector controlled or owned by local/central government, e.g., education, healthcare.
What is the private sector?
Sector owned and run by individuals or groups, e.g., Ford, Tesco.
What is organic growth?
Using abnormal profits to grow naturally by increasing output.
What are the advantages of organic growth?
-Able to retain control of business; -integration is expensive and time-consuming.
What are the disadvantages of organic growth?
-Slow
-lose out on expertise
-difficult to bring new ideas.
What is integration?
Growth through merger or takeover.
What is a merger?
When two or more firms join together under common ownership.
What is a takeover?
A firm takes a majority stake in a company, e.g., 55% shares.
What is an acquisition?
One firm buys another firm completely, e.g., 100% shares.
What is vertical integration?
Integration of firms in the same industry but different stages in the production process.
What is forward vertical integration?
Integration closer to the consumer.
What is backward vertical integration?
Integration closer to the supplier.
What are the advantages of vertical integration?
- Control market- backwards int allows to control prices of suppliers for comp and themselves
- Allows for certainty, overproduction eg quality and price
- Gain EOS = decreased AC = decrease price for consumer
What are the disadvantages of vertical integration?
- Diseconomies of scale = inefficiency
- Vert int = barrier to entry created = limit new firms in market = inefficient markets as firms have less incentive to reduce AC when market share is high
What is horizontal integration?
Merger of two firms in the same industry and same stage of production.
What are the advantages of horizontal integration?
- Reduce comp as they are taken out = increases market share = more power
- Grow in a market in which they have expertise
- Increase output quick = EOS
What are the disadvantages of horizontal integration?
- Quick growth = monopoly power and inefficiency= higher prices
- Disagreements in objectives of 2 firms that merged
- Increased risk if market fails = a lot of time and money
What is a conglomerate?
A firm in different industries with no obvious connection that integrates.
What are the advantages of a conglomerate?
- Good for business where there is no room for growth in their market
- Range of goods= reduced risk as business can survive using other parts
What are the disadvantages of a conglomerate?
- Go into market with no expertise
- Risk of spreading product range too much = reduce quality and increases costs
What is a demerger?
When a large firm is separated into multiple smaller firms.
