Theme 3: Business Behaviour and the Labour Market Flashcards
(55 cards)
Why do some firms decide to remain small?
Some remain small because of constraints on growth: the size
of the market, access to finance, owner objectives and regulation. Not all firms want to grow.
Why do some firms grow?
- By growing, a firm will be able to experience economies of scale which helps them to decrease their costs of production.
- A larger firm will hold a greater share of their market. This will give them the ability to influence prices and restrict the ability of other firms to enter the market, helping them to make profits in the long run.
- A larger firm will have more security as they will be able to build up assets and cash which can be used in financial difficulties
What is the Principal Agent Problem?
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the agent) takes actions on behalf of another person or entity (the principal).
What is the Public Sector?
The public sector refers to that part of the economy which is owned or controlled by local or central government.
What is the Private Sector?
The private sector refers to that part of the economy that is owned and run by individuals or groups of individuals, including sole traders and PLCs.
What is a Not-for-Profit Organisation?
Some private sector organisations are not-for-profit. Any profit they do make is used to support their aim of maximising social welfare and helping individuals and groups. These organisations include charities and smaller organisations who aren’t large enough to be classified as charities.
What is Organic Growth?
Organic growth is the process by which a company expands on its own capacity, increasing output and enhancing sales internally.
What is Vertical Integration?
Vertical integration is the integration of firms in the same industry but at different stages in the production process.
What is Forward Vertical Integration?
Forward integration is when the firm is moving towards
the eventual consumer of a good (up the supply chain).
What is Backwards Vertical Integration?
If the merger takes the firm back towards the supplier of a
good, it is backwards integration (down the supply chain).
What is Horizontal Integration?
This is where firms in the same industry at the same stage of production integrate.
What is Conglomerate Integration?
This is where firms in different industries with no obvious connections integrate.
What are some constraints of Business Growth?
- Size of the market
- Access to finance
- Owner objectives
- Regulation
What are some reasons for Demergers?
- Lack of synergies
- Value of the company/share price
- Focussed companies
- Avoid attention from competition authorities
What is the Profit Maximisation point?
MC = MR
Why might a firm Profit Maximise?
- Neo-classical economics assumes that the interests of owners or shareholders are the most important and therefore the goal of firms is to profit maximise in the short run, in order to maximise owners’ returns.
- By short-run profit maximising, firms can also generate funds for investment and to help them survive a slowdown during a recession.
What is the Revenue Maximisation point?
MR = 0
Why might a firm Revenue Maximise?
- William Baumol suggested managers are most interested in their level of revenue since this is what their salary depended on.
- Even when their salary is not directly connected to sales revenue, they knew that a growth in revenue was always likely to be a positive for the business. It increases their prestige and is used as a justification to shareholders for managerial rewards.
- A fall in revenue would be negative as it would not only reduce their salary but could signal the start of a downward spiral for the company.
- As a result, many firms may aim to revenue maximise as long as they provide some profit for the owners.
What is the Sales Maximisation point?
AC = AR
Why might a firm Sales Maximise?
- Robin Marris suggested that managers aim to maximise the growth of their company above any other objective. This is because their salary may be linked to the size of the company.
- It is often easier for people to judge the level of growth achieved rather than the level of profit. This will increase the prestige of the business.
- Growth will also increase market share, and may push other firms out of business. It will enable a firm to have more market power and more power over prices.
- This tends to be a short term strategy , and in the long term firms are more likely to profit maximise.
What is Profit Satisficing?
- Due to the principal-agent problem, owners and directors will have different goals. Directors will want to maximise their own benefits but will need to make a certain amount of profit in order to keep their jobs, receive benefits and avoid criticism from
shareholders/the press. - Therefore, managers are likely to follow the objective of profit satisficing: they will make enough profit to keep owners happy whilst following other objectives and not profit maximising.
What is Total Revenue (TR)?
The total amount of money coming into the business through the sale of goods and services. Quantity x Price .
What is Average Revenue (AR)?
Demand is equal to AR: total revenue / output .
What is Marginal Revenue (MR)?
The extra revenue that the firm earns from selling one more unit of production: change in total revenue / change in output .
