business growth

Question 1

What is organic growth?

Answer 1

Growth of a company by internal growth - increasing factors of production eg hiring more workers, larger factories

Question 2

What are the advantages of organic growth?(3)

Answer 2

firms owner keeps ownership and control so the owner can enjoy all the profits
No principle agent problem - can pursue social objectives

Question 3

What are the disadvantages of organic growth?

Answer 3

Internal growth can be slow and expensive

- if grows by selling lots of shares than the owner will lose some control leading to a conflict of objectives

Question 4

What is vertical integration?

Answer 4

firms in different stages of production combining together of the same product eg leather manufacturer buying a shoe factory

Question 5

What is forward integration?

Answer 5

The firm takes over another firm further forward in the production process

Question 6

What is backward integration?

Answer 6

The firm takes over another firm further back in the production process

Question 7

What are the advantages of vertical integration?

Answer 7

More control of the production process
Can lead to monopoly power
Maybe to maintain a higher quality or more efficiency

Question 8

What are the disadvantages of vertical integration?

Answer 8

Can create barriers to entry - harder to access suppliers or retailers
diseconomies of scale
lack of expertise

Question 9

What is horizontal integration?

Answer 9

Combining of firms at the same stage of production process

Question 10

What are the advantages of horizontal integration? (3)

Answer 10

Increase economies of scale
reduce competition
Lead to rationalisation cutting variable costs

Question 11

What are the disadvantages of horizontal integration?

Answer 11

Create a monopoly

Narrow competitive market

Question 12

What is conglomeration?

Answer 12

Merging 2 firms that have an unrelated market

Question 13

What are the advantages of conglomeration?(3)

Answer 13

Spreading of risk - if one market is failing profit can be compensated for
Profits gained from one market can be invested into another
Leads to risk-bearing economies of scale

Question 14

What are the disadvantages of conglomeration?

Answer 14

risk losing focus
- lack knowledge leading to inefficiency
-

Question 15

Explain 5 factors which may constrain the growth of a firm which might want to grow

Answer 15

in a contestable market always new competition
Finance - getting loans, no debt
It May be harder to grow in niche markets
Skills shortages
businesses grow so do legal requirements

Question 16

what is satisficing

Answer 16

business is making enough profit to keep shareholders happy

Question 17

why a business may not be just pursuing profit maximisation (3)

Answer 17

• growing market share will allow for a strong position to dominate the market and invite more workers
• A firm may also be concerned about the welfare of its stakeholders – suppliers, workers and customers. For example, giving training and long-term job security to its workers
• A firm may not be motivated by money but may seek to offer a service to the local community.

Question 18

Benefits of profit maximisation 3

Answer 18

• can lead to higher wages for workers
• More money for research and development
• If profit is low, shareholders may be disappointed in the low level of dividends and willing to sell to a takeover bid. You could argue this incentive to be profitable is good for consumers because the firm has incentives to be efficient and cut costs, which can lead to lower prices for consumers.

Question 19

The disadvantage of profit maximisation 3

Answer 19

• Higher prices for final consumers reduces their real incomes / purchasing power and means a lower level of consumer surplus.
• not allocatively effecient at MC=P . Welfare is not maximised
• High profits might act as an incentive for new firms to enter the market – depending on how contestable it is – which in the longer term might reduce the returns to shareholders as competition intensifies

Question 20

price maker

Answer 20

ability of a company to set the market price of goods or services

Question 21

price taker

Answer 21

no power to influence prices

Question 22

3 causes of a buisness facing price inelastic demand

Answer 22

• small percent of income
• monopoly power
• short run

Question 23

strategy a firm might use to make the demand inelastic

Answer 23

• gain a larger market share

Question 24

factors that influence revenue

Answer 24

• Higher competition
• State of the economy
• Advertising
• reduce variable and fixed costs

Question 25

Total fixed cost

Answer 25

Total cost of production that doesnt change with output

Question 26

marginal cost

Answer 26

cost added by producing one additional unit

Question 27

example of variable costs

Answer 27

• wage
• cost of raw materials
• Shipping fees
• electricity costs

Question 28

example of fixed costs

Answer 28

• salary
• rent
• capital

Question 29

3 changes in government policy influencing cost of business

Answer 29

• corporation tax
• business subsidies
• crowding out

Question 30

the recent corporation tax rise

Answer 30

25% increase after 50 years

Question 31

How productive efficiency can be improved

Answer 31

• increased training
• better capital equipment
• improved motivation

Question 32

MES

Answer 32

firm first reaches the lowest point on the LRAC

Question 33

the industry with external economies of scale

Answer 33

• car industry for formula one, suppliers,engineering,design firms
• science cities - technology digital and creative companies

Question 34

external diseconomies of scale causes

Answer 34

• increase in price of raw materials

Question 35

diseconomies of scale causes internal (2)

Answer 35

• bigger warehouses means wastage of raw materials

- difficult to coordinate between different divisions