Micro Comprehensive Year 2

Question 1

What is a business objective?

Answer 1

Something a business wants to achieve.

Question 2

What does maximisation mean?

Answer 2

To make something large or as great as possible.

Question 3

What is profit maximisation?

Answer 3

When a business aims to have the greatest difference between total costs and total revenue, leading to the highest profit.

Question 4

What is sales revenue maximisation?

Answer 4

A firm aiming to have the greatest amount of money from sales as possible.

Question 5

What is sales volume maximisation?

Answer 5

When a business aims to sell as many units of a good or service as possible.

Question 6

What is growth maximisation?

Answer 6

When a firm aims to increase its size as much as possible.

Question 7

What is utility maximisation?

Answer 7

When the managers of a business aim to increase their own happiness as much as possible.

Question 8

Give an example of how a manager in a business might maximise their own utility.

Answer 8

Awarding themselves a wage increase or employing more people to have a bigger team **or **increasing the company car allowance.

Question 9

What is profit satisficing?

Answer 9

When a firm earns enough profit to keep the owners happy.

Question 10

What is social welfare as an objective?

Answer 10

When a business aims to make society better through its actions.

Question 11

What is CSR?

Answer 11

Corporate Social Responsibility

Question 12

What is the principal in the principal agent problem?

Answer 12

The owners or shareholders

Question 13

What is the agent in the principal-agent problem?

Answer 13

The managers

Question 14

What is the principal agent problem?

Answer 14

The conflict between the objectives of the principals (owners) and their agents (managers) who take decisions.

Question 15

How can the principal agent problem be overcome?

Answer 15

By improved monitoring of the agents’ decisions or by giving managers an incentive to focus on profits e.g. shares, dividend, profits.

Question 16

What is X-inefficiency?

Answer 16

When a firm is not operating at minimum cost.

Question 17

What is organic growth?

Answer 17

Where a firm grows in size due to being successful.

Question 18

What is a takeover?

Answer 18

Where a firm takes control of another firm with the aim of external growth.

Question 19

What is a merger?

Answer 19

A merger is the voluntary joining together of two companies into a new company.

Question 20

What is a conglomerate?

Answer 20

A large firm which owns and controls several different businesses.

Question 21

Short run

Answer 21

period of time when at least one factor of productions fixed in supply.

Question 22

Long run

Answer 22

the period over which the firm is able to vary the inputs from all the factors of production.

Question 23

Law of diminishing returns

Answer 23

when the firm increases the input from one factor while other factors remain fixed, eventually the return on the increased factor will reduce.

Question 24

Marginal physical product of labour (MPP)L

Answer 24

The additional quantity of output produced by an additional unit of labour.

Question 25

Total cost

Answer 25

The sum of all costs incurred in producing a given level of output.

Question 26

Average Cost

Answer 26

Total cost divided by quantity (unit cost)

Question 27

Fixed costs

Answer 27

Costs that do not vary with the level of output e.g. rent, management salaries

Question 28

Variable costs

Answer 28

Costs that do vary with the level of output e.g. labour, raw materials, energy

Question 29

Sunk costs

Answer 29

Costs which will not be recovered if a firm stops trading.

Question 30

Economies of scale

Answer 30

When a firm increases the scale of production and this leads to lowers long-run average costs.

Question 31

Technical economies of scale

Answer 31

Larger scale capital goods e.g. container ship of combined harvester.

Question 32

Marketing economies of scale

Answer 32

Fixed cost of advertising and marketing will be spread over larger number of units.

Question 33

Management economies of scale

Answer 33

The costs of management can be spread over larger number of units or more specialist staff can be employed in accounting, human resources etc.

Question 34

Financial economies of scale

Answer 34

Larger firms can borrow money at lower rates of interest.

Question 35

Purchasing economies of scale

Answer 35

Bulk buying raw materials can lead to a lower price.

Question 36

External economies of scale

Answer 36

Economies of scale which arise from the expansion of the industry in which a firm is operating.

Question 37

Internal economies of scale

Answer 37

Economies of scale which arise from the expansion of a firm.

Question 38

Concentration economies of scale

Answer 38

Where a firm is located close to other firms in the same industry.

Question 39

Technology and skills external economies of scale

Answer 39

Skilling of a pool of labour through a local college e.g. Burnley College to local businesses in Burnley.

Question 40

Economies of scope

Answer 40

Economies of scale to large firms who provide a range of products e.g. Nestle

Question 41

Diseconomies of scale

Answer 41

When a firm's increased scale of production leads to higher long-run average costs.

Question 42

Communication diseconomies of scale

Answer 42

It becomes more difficult to communicate across the organisation.

Question 43

Co-ordination diseconomies of scale

Answer 43

Becomes more difficult to co-ordinate production across a range of factories or countries.

Question 44

Motivational diseconomies of scale

Answer 44

Managers become demotivated in larger firms. This can lead to profit-satisficing and the principal-agent problem.

Question 45

Minimum Efficient Scale

Answer 45

The level of output at which long-run average cost stops falling as output increases. Bottom of the LAC.

Question 46

Constant returns to scale

Answer 46

Range where the minimum efficient scale is constant.

Question 47

Total Revenue

Answer 47

The revenue received by a firm from its sales of a good or service.

Question 48

Average revenue

Answer 48

The average revenue received by a the firm per unit of output. Total revenue divided by quantity. It is also price without taxes.

Question 49

Marginal revenue

Answer 49

The additional revenue received by the firm if it sells an additional unit of output.

Question 50

Normal profit

Answer 50

the return needed for a firm to stay in the market in the long run. Includes opportunity cost.

Question 51

Supernormal profit

Answer 51

Profit above normal profits.

Question 52

Accounting profit

Answer 52

Profit made by a business based on explicit costs incurred but excluding opportunity cost.

Question 53

Shut down price

Answer 53

The price below which a firm will choose to exit the market because it is not able to pay for its variable costs.