Unit 3 Economics Flashcards
(46 cards)
State-owned enterprises ( Public sectors such as; Emirates, Ethihad airways)
Large organizations that are created by a countries government to carry out commercial activities
For-profit and Non-profit organizations
For-profit organizations: Organizations that have making a profit a goal
Non-profit organizations: Organizations that don’t have making a profit as a goal but may use any profit they generate to support their aims
Co-operatives
A firm operated and owned by a group of members where each member has one vote on a major business decision. Its main aim is to provide a service
Joint venture
Where a separate business entity is created by two or more parties. It involves sharing ownership, profits, and risks of the new project
Why some firms tend to remain small and why others grow
Small - (1) The owners might lack expertise/finance and are happy to remain small.
(2) Firms may operate in a niche market and so demand may be too low to expand
(3) Owners don’t want to take extra risks
Big - (1) Profit motive; By growing, firms get the opportunity to earn higher profits and potentially achieve economies of scale
(2): By growing and expanding the product range, firms reduce their risk of making huge losses
(3) Market power: large firms have more dominance over the market, which allows them to gain price-setting powers and discourage the entrance of new
firms.
Organic Growth
A firm increasing in size through investment in capital equipment and increased labor force
Merger & takeovers (External growth)
Mergers; The joining together of two or more firms under common ownership ( google and android)
Takeovers: when one company makes a bid to require another company
Vertical integration
Is the joining together of two or more firms at different production stages in the same industry.
Foward - supplier merging with its buyer (primary to secondary)
Backward - Purchaser mergers with one or more of its suppliers (secondary to primary)
Vertical integration - Adv and dis
Adv: 1) Cost savings
2) Reduces risk as firms can deny competitors the source of raw materials
3) Foward integration, gives firms more control over their market by deciding prices, feedback, etc.
Dis: 1) High costs, merging together two firms will require extra layers of management and a newly formed team, which will significantly increase the costs
2) Lack of work expertise when collaborating with another firm
3) Key workers may leave taking with them much of the expertise of the business
Horizontal integration
Is the joining together of two or more firms in the same industry at the same stage of production
Adv - 1) Allows reduction of costs, therefore economies of scale
2) Reduces competition, by reducing the number of competitors
3) Increased ability to control prices
Dis - 1) Expensive
2) Badly managed in the short run, which could lead to business failure
Conglomerate integration
Is the merging together of two or more firms in different industries producing unrelated products
Adv: 1) Spreads risk, potentially achieving risk bearing economies of scale
2) Easier to expand, as there are more options to obtain finance
Dis: 1) Lack of expertise could lead to failure
2) Expensive
Demergers
When a firm splits into two or more independent businesses
Reasons for demergers
synergies - when two or more activities can lead to greater outcomes
Lack of synergies - where one part of the firm is having no impact compared to the profitable side of the firm.
Value of the firm- The value of a demerged firm can be valued at a higher price compared to one large firm
Focused companies - some companies would only want to focus on one aspect to boost performances
Profit maximization
Revenue Maximisation
Sales maximization
Profit maximisation (MC=MR) Revenue Maximisation (MR =0) Sales maximisation (AC =AR)
Profit satisfaction
Making sufficient profit to satisfy the demands of owners /shareholders
Reasons businesses Revenue Maximisation
In other words, each extra unit sold
generates no extra revenue.
i) Economies of scale
ii) Predatory pricing - (occurs when a firm sells a good or service at a price below cost (or very cheaply) with the intention of forcing rival firms out of business.
iii) Principal-agent problem
Reasons businesses Sales maximize
i) Economies of scale
ii) Limit pricing (Limits competition)
iii) Principal-agent problem
iv) Flood the market
v) Build customer loyalty
Divorce of ownership control
Occurs when the managers and directors are separate from the owners of the business
Principal-agent problem
Managers revenue/sales max to justify perks in the job
Formula for :
- total revenue
- avg revenue
- marginal revenue
- total cost
- total fixed cost ( rent, salaries, interest )
- total variable cost (wages, utility bills, transport costs)
- avg total cost
- avg fixed cost
- avg variable cost
- marginal cost
^ - CHANGE SIGN
total revenue = P x Q
avg revenue = TR / Q
marginal revenue = ^TR / ^Q
total cost = FC + VC
total fixed cost = TC - TVC
total variable cost = TC - TFC
avg total cost = TC / Q
avg fixed cost = TFC / Q
avg variable cost = TVC / Q
marginal cost = ^TC / ^ Q
Short-run costs vs long-run costs
Short-run costs: When there is at least one fixed factor of production available
Long-run costs: When all factors of production are variable
Economies of scale -
[Really fun moms try making pancakes]
As output increases LRAC decreases.
Risk bearing - Diverse product range Financial - Easier access to loans, lower interest Managerial - Specialist manager Technical - Investment in technology Marketing - Better advertisement Purchasing - Bulk buying
External economies of scale
Skilled labor
Better infrastructure
Diseconomies of scale
As output increases LRAC increases
Co-ordination problems
Conflicts
Demotivation for workers
