Microeconomic Decision Makers Flashcards

Question

Classification of Private Firms

Answer 1

SOLE TRADER: The firm is owned by a singular person, typically one involved in running the firm. Firms may have employees, but they don't own it. PARTNERSHIPS: 2-20 people form a firm. Profits must be shared and disagreements occur, but it reduces risk and gives you more resources to work with. PRIVATE LIMITED COMPANIES: Private limited companies can choose who to sell their stock to. PUBLIC LIMITED COMPANIES: Shares are sold publicly on the stock exchange. You cannot prevent public purchase. This means the company can be taken over if enough stocks are bought.

Answer 2

Number of Employees (Labour Intensive Firms) Market Cap ([Number of Shares * Share Price] This is more related to value than size) Market Proportion (Their proportion of revenue compared to the size of the market)

Answer 3

ADVANTAGES: - Legally easier to setup & maintain - Proportion of profit to the Owner is higher - Stronger Voice & Choice to the Owner - Personalised Service - Easier to Manage DISADVANTAGES: - Limited resources - Increased Risk (Less Diversified) - Owner capability is a determinant of success - Large commitment is needed - Doesn't benefit from Economics of Scale (EOS)

Answer 4

Internal Growth is growing to new markets, selling to more people, selling in new places, hiring more people, opening more branches External Growth is Mergers and Takeovers of other firms.

Answer 5

It is Cost savings brought about by an increase in the scale of production. This results in falling average costs. Average costs is the cost per unit of production.

Answer 6

Internal EOS is savings brought about by increase in scale of production in the firm. External EOS is savings brought about by an increase in the size of the market/industry.

Answer 7

Purchasing EOS: Larger firms can buy in bulk resulting in lower average costs. Financial EOS: Larger firms are more credit worthy and have more resources and credit history, so banks will give them lower interests rates and thus they can borrow larger amounts. Technical EOS: Large firms can justify and afford to purchase better equipment. This increases total cost but quantity increases by a large amount, decreasing average costs. Managerial EOS: Larger firms can afford to employ more efficient managers which boosts efficiency, lowering average costs. Small firms can't afford that sort of talent. Marketing EOS: Larger firms can attract better talent to market for them, increasing quantities sold. They can afford to market their products more widely too.

Answer 8

Recruitment EOS: Lower recruitment costs because there is more people working in the industry, therefore it is easier to hire people. Support Service EOS: Ancillary Services are easily available with a larger market, so a company doesn't need to try and find it. Competition between these support firms also lower cost. Infrastructure EOS: Larger market leads to more investment from the government into infrastructure, making it more efficient and lowering average costs.

Answer 9

Management DOS: If a firm grows too large, it will have a narrow leadership structure, reducing the ability of the firm to adapt, which could lead to its closure Miscommunication DOS: If a firm grows in size, it becomes harder to communicate effectively. This can lead to mistakes and higher average costs. Demotivation DOS: Leaders and owners are quite far away from entry level employees, which makes it hard to motivate staff. There is less job satisfaction because large firms are more mechanised. Productivity falls, and average cost increases

Answer 10

It is derived demand or demand that is derived from demand for goods & services, and can be determined by cost, quality and availability.

Answer 11

Labour intensive industries are industries where the total cost of labour is proportionately higher than the total cost of other FoPs. Capital intensive industries are industries where the total cost of capital is proportionately higher than the total cost of other FoPs. Labour intensive goods & services can be higher in price as machines produce goods at a lower average cost. However, these goods can also be more creative and personalised, therefore can be sold at a higher price. Capital intensive goods have high starting cost as machines are expensive. But because they are highly efficient, they can reduce average cost (technical EoS). In the long run this brings down price.

Answer 12

Production refers to the total output of G&S of a firm. Productivity refers to the efficiency of the usage of resources in the production process. Firms aim to be more productive so they are using resources more efficiently and thus lower Average Cost.

Answer 13

More investment in Capital (Machinery) Innovation (New Production methods) Skills, Education & expertise (Training) Competition (Prevents complacency)

Answer 14

Cost of Production is the payments made by a firm in the production process of goods & services. Fixed Costs are costs that are independent of output, e.g machinery price. Variable costs vary with output, e.g raw materials. Total Cost = Variable Cost + Fixed Costs

Answer 15

Revenue is the amount of generated from sales of G&S. Total Revenue = Price * Quantity Sold Average Revenue = Price

Answer 16

Profit Maximisation: The levels of output at which a firm reaches the largest amount of profit. I.e the greats difference between total revenue and total cost. Survival: When a firm produces at an output which enables them to remain in the market. Typically break even point, but could be loss-minimisation. (Key for new firms or in recession) Social Wellfare: Corporate Social Welfare, such as climate action or addressing poverty Growth: Beeg Company become beeeger.

Answer 17

Price Competition (Competing to have the lowest price) Non-Price Competition (When lowering price decreases profitability, they compete on branding, advertising and quality of products) The more firms in a market, the more competitive. This leads to lower prices, greater quality and more choice. On the other hand, less firms mean less innovation.

Answer 18

Firms in perfect competition have no market power (I.e cannot change price). Perfect competition has many buyers and sellers, as many sellers ensure low price and many buyers ensure that buyers cannot dictate price. Goods are homogenous, and there is no information asymmetry and no barriers to entry.

Answer 19

Branding: To get your product/company known in company known in comparison to other really big firms. Legal: Bars like medical licences or copyright and patenting rights. Anti-Competitive Practices: More established firms using resources to push burgeoning firms out. Domination of Resources: Resources have already been taken up by others. Economies of Scale: Starting out, you don't have infrastructure to mass produce at low cost, so you make stuff at a loss

Answer 20

A monopoly is when one or a a handful of firms have sufficient market power to restrict competition and influence the price & quantity in their favour. A pure monopoly means there is only one firm is the supplier of G&S. They can use this power opportunistically by restricting market supply to force a rise in prices and earn excess profit. This makes them the price maker.

Answer 21

ADVANTAGES: While firms could price gouge, their ability to achieve EoS often leads to lower prices. Not only that but larger profits can lead to higher investment & innovation. This can lead to legal monopolies, but there are limits on prices. This allows the company to develop infrastructure without opposition. DISAVANTAGES: There is less consumer choice due to restriction of competitors and lack of alternatives. This also means lower output, higher prices and lower quality. People have no choice but to buy it, especially if it is essential. These firms are also inefficient but lack of competition means they don't pick up the slack. Lastly, it requires regulation to prevent the firm from going wild, but this takes resources.

Answer 22

An Oligopoly is a market structure dominated by a few large firms. These firms are interdependent, and decisions to change price or other things always affect the other firms. So therefore, they usually end up in price rigidity and thus engage in non-price competition.

Microeconomic Decision Makers Flashcards

(46 cards)