3.1.1 sizes and types of firms

Question 1

a firm is …

Answer 1

a production unit that transforms resources into goods and services

Question 2

public sector

Answer 2

an industry that is under direct state control

Question 3

principal-agent problem

Answer 3

when one agent can make decisions that impacts another entity

Question 4

reasons a firm may want to grow

Answer 4

1. economies of scale
2. market share
3. brand loyalty
4. diversification
5. shareholder motives
6. managerial motives

Question 5

reasons a firm may want to stay small

Answer 5

1. avoid diseconomies of scale
2. niche market but dynamic firm
3. barriers to entry

Question 6

how might performance-based pay be a solution to principal agent problem

Answer 6

through dividends, commission, bonuses that link wages to effort

Question 7

how might observing effort be a solution to principal-agent problem

Answer 7

appraisals, good HR department

Question 8

how might demerging be a solution to the principal-agent problem

Answer 8

prevents the problem from arising in first place

Question 9

how might automation be a solution to the principal-agent problem

Answer 9

substitute labour for capital so there is no free riding

Question 10

how might performance-based pay become an issue

Answer 10

unintended consequences as workers may take more risks

Question 11

how might demerging become a problem

Answer 11

sacrificing other profits

Question 12

how can automation become an issue

Answer 12

high short-run fixed costs

Question 13

organic growth is when

Answer 13

a firm increases its size through investment in capital and other factors of production

Question 14

merger or integration is when

Answer 14

there is a joining of two or more firms under common ownership

Question 15

horizontal integration is when

Answer 15

there is a merger between one or more firms in the same industry at the same stage of production

Question 16

forward vertical integration is when

Answer 16

a merger where the supplier joins with one or more of its buyers

Question 17

backward vertical integration is

Answer 17

a merger where the buyer joins with one or more of its suppliers

Question 18

conglomerate integratin

Answer 18

a merger between firms in different industries, producing unrelated products

Question 19

note 3 examples of organic growth

Answer 19

1. dominos
2. apple
3. costa coffee
4. lego
5. poundland

Question 20

2 examples of horizontal integration

Answer 20

1. ladbrokes + gala coral
2. disney + fox

Question 21

2 examples of forward vertical integration

Answer 21

1. ford + dealerships
2. google + motorola

Question 22

2 examples of backward vertical integration

Answer 22

1. ford (tyres + steel plants)
2. ikea + baltic forests

Question 23

2 examples of conglomerate integration

Answer 23

1. amazon
2. microsoft
3. samsung

Question 24

2 advantages of organic growth

Answer 24

1. less risk so more sustainable
2. builds on existing strengths

Question 25

2 advantages of horizontal integration

Answer 25

1. reduces competition 2. integrate and specialise 3. internal economies of scale

Question 26

2 advantages of forward vertical integration

Answer 26

1. sells directly to consumer 2. cuts out 'middle-man' as firms avoid paying fees which educes overall costs and increases profit margins

Question 27

2 advantages of backward vertical integration

Answer 27

1. controls supply chain 2. makes things difficult for competitors as firms can sell unique or high quality inputs at a greater price

Question 28

an advantage of conglomerate integration

Answer 28

diversification as firms operating in multiple unrelated industries have reduced risk and stable revenue streams, increased market opportunities

Question 29

3 disadvantages of organic growth

Answer 29

1. slow growth 2. market saturation as there's fewer new customers to attract due to increased competition 3. principal-agent problem

Question 30

3 disadvantages of horizontal integration

Answer 30

1. attracts attention 2. no diversification 3. principal-agent problem

Question 31

2 disadvantages of forward vertical integration

Answer 31

1. lack expertise 2. principal-agent problem

Question 32

2 disadvantages of backward vertical integration

Answer 32

1. lack of expertise 2. principal-agent problem

Question 33

2 disadvantages of conglomerate integration

Answer 33

1. principal-agent problem 2. loss of focus

Question 34

constraints on business growth

Answer 34

1. principal-agent problem 2. niche market 3. barriers to entry 4. managerial motives 5. regulation 6. access to finance

Question 35

list the different types of integration

Answer 35

forward vertical, backward vertical, conglomerate, horizontal, organic growth

Question 36

demerger is

Answer 36

when one firm splits into two or more independent businesses

Question 37

partial-demerger

Answer 37

where parent company retains a stakeholder in the daughter company

Question 38

why might specialisation be a reason to demerge

Answer 38

so firms can focus on core business

Question 39

why might diseconomies of scale be a reason to demerge

Answer 39

reduces the risk of diseconomies of scale and prevent the principal-agent problem

Question 40

why might a firm demerge (money)

Answer 40

to raise money from asset sales

Question 41

what might a defensive tactic be to demerge

Answer 41

to avoid the attention of competition authorities

Question 42

why might competition regulation be a reason to demerge

Answer 42

to selloff parts of business by competition authorities

Question 43

describe walmart demerger case

Answer 43

walmart, a us-based retail giant, stated an aim to sell a majority stake in asda following uk regulators' decision to block a proposed merger with asda

Question 44

describe paypal demerger

Answer 44

paypal splitting from eBay in 2014

Question 45

2 advantages firms have from demerging

Answer 45

1. reduces costs as diseconomies of scale are avoided 2. can specialise and focus

Question 46

an advantage workers have from demerging

Answer 46

new roles and opportunities created

Question 47

an advantage consumers have from demerging

Answer 47

more competition may reduce prices

Question 48

2 disadvantages firms have from demerging

Answer 48

1. increases costs as economies of scale are lost 2. loss of market share and consumers

Question 49

disadvantage for workers from demerging

Answer 49

expected job losses as firms reduce in size

Question 50

disadvantage for consumers from demerging

Answer 50

higher costs may increase prices