Unit 3B: Is profit maximisation the most important goal for entreprenuers? Flashcards

Question

Define internal growth/organic growth

Answer 1

This occurs when a firm expands its own operations rather than depending on mergers or takeovers. The firm expands its scale of production through the purchase of additional resources such as equipment and increasing the size of its premises.

Answer 2

Occurs when two firms in the same sector of the industry and the same industry merge. e.g. two cattle farms merge their operations.

Answer 3

Occurs when a takeover or merger occurs from different sectors of the same industry. In the case of forward integration an example might be a cattle farmer taking over a milk production facility.

Answer 4

Occurs when a takeover or merger happens between two firms in different sectors of the same industry. In the case of backwards integration an example might be an owner of a chain of nightclubs and bars purchasing a brewery so that he/she can produce their own beer.

Answer 5

Occurs when a merger or takeover occurs between two firms from unrelated areas of business. For example, a furniture manufacturer takes over a vineyard to start producing wine.

Answer 6

The process of a company enlarging or varying its range of products so that if one product fails, they still have revenues coming in from the rest.

Answer 7

Where **long run average costs** fall as a firm increases its scale of production (it makes and expects to sell more output)

Answer 8

Occurs when the cost of raw materials falls when they are bought in large quantities; this reduces the average costs of production

Answer 9

Occurs as large firms tend to produce a range of products and operate in many locations to avoid over-dependance on one-product line.

Answer 10

A firm where there is only one supplier of a good or service, the firm has the power to influence market supply or prices.

Answer 11

Occurs as large firms can afford to purchase expensive pieces of machinery and automated equipment for the manufacturing process.

Answer 12

Occurs as large firms are able to borrow money from banks and at lower interest rates than small firms because they are considered to be less risky in terms of their ability to pay back the loans.

Answer 13

Occurs as large firms have the resources to employ specialists to undertake functions within the firms (e.g. accountants, engineers, human resource specialists, marketing specialists, and so on). Specialist managers are likely to be more efficient as they possess a high level of expertise, experiences and qualifications compared to a person in a smaller firm trying to perform all of these tasks.

Answer 14

Occurs as the average cost of production rises as the size of the firm increases

Answer 15

Products with mass appeal are marketed on a large scale

Answer 16

A small, specialised market for a particular product or service

Answer 17

1. Size of workforce 1. Some firms may be considered large due to the number of staff they employ, it is important however to take note of the fact that there are large firms that are capital intensive and thus their workforce wouldn't be as large but the firm is quite large. 2. Internal organisation 1. Large firms are usually divided up into lots of different departments to manage everything that the firm has to do e.g. Sales and Marketing could be a department. In smaller firms the owners and employees all tend to carry out all these functions. 3. Capital employed 1. This is the amount of money invested in productive assets (e.g. machinery) that generate revenue. The more capital a firm can invest in, the more it can produce and the bigger it tends to be. Do take note that labour intensive firms wont have as much capital but are still quite large. 4. Market share 1. Large firms may dominate sales in the markets they supply in and thus seem large. But not all markets are large. Firms in small or niche markets will still be quite small by dollar value of sales even if they own most of the shares in the market.

Answer 18

1. Number of outlets (e.g. no of shops) 2. Type of organisation/legal status 3. Sales revenue (or “sales” per year) 4. Corporation tax paid 5. Market value/ Market capitalisation

Answer 19

When 2 or more firms join together (integrate) to form a larger enterprise. Integration involves the merger or takeover of 2 or more firms.

Answer 20

Advantages: * This gives the new firm control over quality and delivery times of supplies. Disadvantages: * The new firm may lack the experience to manage the part of the firm that supplies them. * The supplying side of the business may become complacent about having a guaranteed customer.

Answer 21

Advantages: * For the new firm, this diversifies the business from its original industry and markets to others to spread risk. Disadvantages: * The new firm may lack expertise in the new industry that it has now entered. * There may be a lack of focus now that the firm is spread across different industries.

Answer 22

Advantages: * For the firm that is instigating the merger, this will eliminate a competitor. * This could achieve EOS for the new firm. * (advantage to firm) For consumers, this may lead to a monopoly position where prices are fixed at over inflated levels. * This could give the new firm the scope to rationalise production. (e.g. cut out 2 partly used assembly lines and just use one) Disadvantages * (disadvantage to customer) For consumers, this may lead to a monopoly position where prices are fixed at over inflated levels. * For the new firm, rationalising may bring bad publicity (e.g. job losses)

Answer 23

Advantages: * The new firm is now able to control the promotion and pricing of its products. * This gives the new firm increased bargaining power over suppliers. Disadvantages: * The new firm may lack retailing experience.

Answer 24

1. By re-organising the work-force 2. By employing more labour 3. By employing more of all the factors of production

Answer 25

reduce average costs to their lowest points in the long run

Answer 26

Advantages: * A sole trader is his or her own boss * They can choose their own work hours * A sole trader receives all profits * This type of business is easy to set up Disadvantages: * May lose revenue if off sick or on holiday * Has unlimited liability to pay business debts * Has full responsibility for the business * May lack capital to finance business growth

Answer 27

Advantages: * A partnership is easy to set up * More partners means more capital * Partners bring new skills and ideas * Limited partners have limited liability * Partners share responsibility for decisions Disadvantages: * Partners can disagree * Partners share any profits * General partners have unlimited liability * Partners may lack capital to finance growth

Answer 28

Advantages * Shareholders have limited liability * Shareholders receive dividends from profits * Shareholders elect directors to manage the company * The company has a separate legal identity * It is a popular form of organization for sole traders and partnerships seeking to raise additional finance for business expansion. Disadvantages * Financial information may have to be disclosed * Large shareholders can out-vote others * Directors may run the business in their own interests rather than for stakeholders * Shares can only be sold privately with the agreement of all other shareholders

Answer 29

Advantages * Shareholders have limited liability * Shareholders receive dividends from profits * Shareholders elect directors to manage the company * Companies have a separate legal identity * Shares can be advertised and sold publicly on the stock market to raise significant new capital Disadvantages * The legal costs of setting up can be high - Associated costs of company formation may also be higher, especially if the company’s requirements are complex. If the company’s shares are to be listed on an exchange, it will typically pay legal and investment professionals to advise and manage the listing process. There will be other costs associated with obtaining a listing. * Annual financial accounts must be published * Directors may run the business in their own interests rather than for shareholders * The original owners may also lose control of their company if it is taken over by another company through the purchase of shares on the stock market

Answer 30

Advantages * A multinational provides jobs and incomes * It brings business knowledge, skills and technologies which can help other firms * It pays taxes on its profits which help boost government revenues * It increases export earnings from trade Disadvantages * A multinational can transfer their profits to other countries to avoid paying tax * It may force local competition out of business * It may exploit workers in low-wage economies * It may use its power to secure generous subsidies and tax breaks from a government

Answer 31

When a firm expands its scale of production it can become more productive and lower its average cost of production. This is because it gives the owners a chance to re-organise how the firm is run and financed **_within the firm._**

Answer 32

As business grows, they need to order larger quantities of production inputs. As the order value increases, a business obtains more bargaining power with suppliers, and it may be able to obtain discounts which lowers average costs.

Answer 33

Concept: Because large firms put so much more money into advertisements demand increases by so much, so output increases by so much. So the amount of output increases way beyond the increase in total cost caused by increased costs in marketing. So the average cost reduces. Every part of marketing has a cost - such as advertising and running a sales force. Many of these marketing costs are fixed costs and, so, as a business gets larger it is able to spread the cost of of marketing over a wider range of products and sales - cutting the **average** marketing cost per **unit.**

Answer 34

These occur when a firm benefits from lower unit costs as a result of the whole industry growing in size.

Answer 35

1. Access to a skilled workforce 1. Firms can recruit workers trained by other firms in their industries, thus reducing their own training costs. 2. Ancillary firms 1. Firms that support other firms tend to locate close to each other and provide them with specialized equipment and business services they need. This can help the larger firms reduce their costs as they can more easily access high quality yet affordable suppliers close to their site. 3. Joint marketing benefits 1. Marketing budgets can be trimmed eg firms in the same industry can locate close to each other and and share their reputation for producing high-quality output. 4. Shared infrastructure, eg improved transport and comms (communications) link 1. The growth of an industry could convince a firm or the government to invest in new infrastructure such as airports or dock facilities, to meet increasing demand for these services. This could reduce their transportation costs. 5. Training and education becomes more focused on the industry 1. Universities usually offer courses suitable for a career in an industry which has become dominant nationally, or in a region. This means that firms benefit from having a larger pool of appropriately skilled workers, recruitment training and labour costs could be reduced.

Answer 36

1. Communication 1. As a firm grows too large, communication issues may arise due to the amount of people in the communications chains. This leads to inefficiencies which raise average costs (eg important message is misinterpreted) 2. Coordination 1. As the size of a firm grows coordinating complex processes is difficult. Furthermore the division of responsibility may become unclear leading to different departments fulfilling the same tasks leading to increased average costs. 3. Control 1. Monitoring how productive each worker is in a large firm is both imperfect and costly (can lead to productive ineffeciency). Furthermore workers may feel a sense of alienation as they think they have no impact on the direction of a firm, leading to them being less motivated, less productive, increasing average costs.

Answer 37

* The govt helps smaller firms * Subsidies * Low interest rates on govt loans * Low corporate tax * Demand in the industry is low so large scale production is not required. * They can provide a personal and flexible experience. * Capital is limited so owners find it difficult to expand * Personal choice: owners decide that operating a small firm suits them * They can co-operate with other small firms thus benefiting from economies of scale and being price competitive. * They can respond quickly to consumer wants and provide variety, not just standardised products as larger firms tend to * They can still be profitable by offering unique premium goods at high prices and attaining high profit margins.

Answer 38

* Perfect competition * Monopolistic competition * Oligopoly * Monopoly

Answer 39

A market structure where **many** firms and buyers exist. No one single economic unit can dictate behaviours or prices in the market

Answer 40

A market structure where there is a single supplier. The firm IS the industry.

Answer 41

Homogenous products are considered to be homogenous **when they are perfect substitutes and buyers perceive no actual or real differences between the products offered by different firms**.

Answer 42

A cost that does not change with an increase or decrease in the amount of goods/services produced or sold

Answer 43

A cost that varies directly with the level of output

Answer 44

**the sum of all costs incurred by a firm in producing a certain level of output**.

Answer 45

TC: Total Cost TVC: Total Variable Cost TFC: Total Fixed Costs

Answer 46

Boost total revenue, thereby boosting total profit * Increase quantity sold by… * Increase the selling price Reduce total costs, thereby boosting profit * Reduce fixed costs per unit by * Reduce variable costs per unit by

Answer 47

* Quality of product increase = innovation = increased expenditure on R&D * Price of goods may decrease if monopolies pass on cost savings to consumers * Prices may go up as the firm is the sole seller and can adjust the price * Quality goes down = limited choice = monopolies become complacent

Answer 48

* May merge with monopoly and become internationally competitive (assuming it is not a worldwide monopoly) * Able to improve on the quality of products as monopolies share its innovations and research * Hard to compete with monopoly especially with high barriers to entry

Answer 49

* High control of price = can practice price discrimination = and earn higher profits * Benefits from EOS * Lack of competitors = allows it to make higher profits * However as firms get bigger they may soon experience diseconomies of scale & become inefficient * Govt may regulate the monopoly by increasing its taxes or imposing anti-trust law

Answer 50

https://www.youtube.com/watch?v=qYKJdooEnwU