3.2 Buiness objectives Flashcards
(27 cards)
What means a firm is structurally “loss making”?
AC is above AR at all levels of production
What suggests that there is normal profit?
When AC = AR
What is normal profit?
The transfer earnings of the entrepreneur, the minimum reward necessary to keep them in the present industry.
When does ‘break-even’ happen?
When costs = revenue, you technically have enough profit to pay yourself
What are some of the environmental and social obligations that businesses pursue?
Reducing carbon emissions
Waste reduction and recycling
Philanthropy
Engagement with local communities
Why should a businesses profit maximise?
It provides greater wages and dividends for entrepreneurs.
Retained profits are a source of finance, which saves paying high interest rates on loans.
In the short run, the interests of the owners and shareholders are most important, since they likely want to maximise their gain from the company.
Profit maximising gives a stable price and output which consumers may prefer.
What is dynamic efficiency?
When a firm is able to adapt and improve it’s productivity over time, in response to changing markets, technologies and customer preference.
What are the reasons for avoiding profit maximisation?
Increasing market share at the expense of a rival by cutting prices
The aim may be long term profit maximisation which involves sacrificing short run profits.
It is hard for businesses to pin-point their profit maximising output.
When do economies of scale occur?
When an increase in output leads to a lower long run average costs.
What are the internal economies of scale?
Purchasing economies of scale
Managerial
Financial
Marketing
Risk-taking
Technical
The container principle
What is a monopsony?
A market condition in which there is only one buyer, the monopsonist.
What are diseconomies of scale?
Increases in the unit (average) cost of supply in the long run due to decreasing returns to scale.
Occurs when a business has moved beyond their optimum size in the long run.
What usually leads to diseconomies of scale?
Complexity and coordination - as an organisation grows it may become more complex with larger, more costly, layers of management.
Bureaucracy - larger organisations often develop bureaucratic structures to manage the increased complexity. Innovation may slow down as both employees and managers become risk averse.
Cultural and organisational issues - larger organisations can struggle to maintain a cohesive culture and this can impact employee moral and prouctivity.
What are internal economies of scale?
When the growth of the business itself leads to lower long-run average costs.
What are external economies of scale?
When the growth of an industry or a group of businesses lead to lower long run average costs.
What are agglomeration economies?
Benefits from concentrating output and housing in particular areas. If a area specialises, all firms can benefit from:
Good supply networks
Supply of trained workers
Infrastructure
What is the short run shut down condition?
When price per unit (AR) is less than average variable cost (AVC)
What is the short run shut down price?
The price of a product at which a firm would rather shut down some or all of their business than to continue producing. It is the point at which it is no longer profitable for a firm to keep producing and selling a product.
What is the long run shut down condition?
When price per unit (AR) < average total cost (ATC)
What is a partial shut down?
When firms shut down one division or one product line that is not profitable, while keeping other parts of the business running.
What is rationalising?
Streamlining and optimising a business to make it more efficient and profitable. e.g. shutting down certain operations
What are shut down costs for businesses?
Severance pay
Costs associated with closing facilities, like security, utilities and maintenance.
Disposal of inventory or assets - when selling quickly they are usually sold for a heavy loss.
Legal fees for negotiating contracts
Reputation damage
What are the different types of business ownership?
Public limited companies
Privately limited companies
Co-operatives
State-ownership corporations
Social enterprises
Partnerships
What are public limited companies?
Companies operating for profit with stocks/shares available.
They have limited liability - the shareholders liability is limited to the amount they have invested in the company.
They raise money by issuing shares to the public
