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microeconomics 2
3.1.1 types of firms3.1.2 business growth
large firms exist because of
economies of scale
barriers to entry for other firms
what helps a firm to grow
low barriers to entry make it easier for firms to grow
small firms can grow if they are a monopolist (complete or local)
monopolist - a firm that offers a product that no other firms offers
why firms stay small
avoid diseconomies of scale (small firms may be able to take advantage of high costs at larger firms due to deos)
serving as a monopolist
owner motivations
divorce of ownership from control
occurs when owners of firm arent actively involved in running the company
principal agent problem as the board of directors make decisions for the worker but they also have incentive to look
after themselves and shareholders
this is because shareholders have control through annual meetings but this is ineffective against directors
shareholders have limited influence but can buy and sell stocks to affect share price
principal agent problem
public vs private firms
public firms are government owned and provide services to UK citizens
private firms are owned by individuals for profits
not for profits are owned by individuals for a cause
constraints on business growth
small market
low access to finance
owner objectives
strict regulation
types of business growth
internal/ organic
external
conglomerate integration
reduce risk
easier to expand due to more finance raising options
asset stripping opportunity
-
firms dont have shared experience
microeconomics 2 1
, types of merger
horizontal
same industry, same stage of production
vertical
same industry, different stage of production
forward (supplier to buyer), backward (purchaser to supplier)
direction in relation to consumer
conglomerate
different industries/ no common interest
why do firms want to grow
to achieve eos
increase market share for market power , price control + reduced comp
larger firms are less exposed to risk
growth can have positive psychological effects
docs dives higher wages
pros and cons of growth
organic
+ -
easier mainly small firms
less risky than M+Ts slower than external
cant be used for all expansions, e.g. expansions into
foreign markets
vertical integration
+ -
cost saving firm make have low expertise in other firms industry
reduces risk and comp firm may overpay for another (increased FC)
forward gives more market control integration issues due to rising costs
diversification workers may leave
horizontal integration
+
reduce avg cost due to eos
reduce comp
one firm can use the others unique assets
increased market share
push out existing comp
deters new entrants
cannabalisation - when different products/ departments in a large firm start competing with each other
wastes resources
eg mars and snickers are both under mars inc
3.1.3 demergers
microeconomics 2 2
, occur when a firm splits itself into 2 or more firms
can occur because of
lack of synergies
increasing firm valuation
creating focused companies
impacts
on business
benefit for increased specialisation → greater efficiency
firms can cut costs and innovate
on workers
promotions may occur so each business has leaders
independence from other firms may allow branches to be more efficient and fire workers
on consumers
benefit if demerged firms are more efficient as costs and prices can fall
also benefit if new firms start innovating
loss if new firms move to focusing on price
3.2.1 business objectives
profit max - MC=MR
revenue max MR=0
sales max AC=AR
allocative efficiency S=D/ P=MC
productive efficiency AC min
profit satisificing mix of prof max, rev max and sales max
profit max
MR>MC - profit increase
MR<MC - profit decrease
stop when equal as it implies the maximum and no more increase
rev max
MR>0 - total revenue increase
MR<0 - total revenue decrease
stop at 0 as it implies the peak of total revenue
sales max
AR>AC supernormal profit
AR<AC subnormal profit
stop when equal to produce the max amount of goods without going into loss
profit satisficing - occurs due to principal agent problem and occurs between profit and sales max
owners want one thing while shareholders/ workers want another
leads to compromise - enough profit to satisfy all parties
owner wants sales max or rev max (increased brand recognition, growth), shareholder wants profit max (increase
returns/ dividends), workers want rev max (more to give as wages)
productive efficiency - firm producing at AC min shows efficient use of scare resources
allocative efficiency - produces product demands at price that reflects MC
no profit
microeconomics 2 3
microeconomics 2
3.1.1 types of firms3.1.2 business growth
large firms exist because of
economies of scale
barriers to entry for other firms
what helps a firm to grow
low barriers to entry make it easier for firms to grow
small firms can grow if they are a monopolist (complete or local)
monopolist - a firm that offers a product that no other firms offers
why firms stay small
avoid diseconomies of scale (small firms may be able to take advantage of high costs at larger firms due to deos)
serving as a monopolist
owner motivations
divorce of ownership from control
occurs when owners of firm arent actively involved in running the company
principal agent problem as the board of directors make decisions for the worker but they also have incentive to look
after themselves and shareholders
this is because shareholders have control through annual meetings but this is ineffective against directors
shareholders have limited influence but can buy and sell stocks to affect share price
principal agent problem
public vs private firms
public firms are government owned and provide services to UK citizens
private firms are owned by individuals for profits
not for profits are owned by individuals for a cause
constraints on business growth
small market
low access to finance
owner objectives
strict regulation
types of business growth
internal/ organic
external
conglomerate integration
reduce risk
easier to expand due to more finance raising options
asset stripping opportunity
-
firms dont have shared experience
microeconomics 2 1
, types of merger
horizontal
same industry, same stage of production
vertical
same industry, different stage of production
forward (supplier to buyer), backward (purchaser to supplier)
direction in relation to consumer
conglomerate
different industries/ no common interest
why do firms want to grow
to achieve eos
increase market share for market power , price control + reduced comp
larger firms are less exposed to risk
growth can have positive psychological effects
docs dives higher wages
pros and cons of growth
organic
+ -
easier mainly small firms
less risky than M+Ts slower than external
cant be used for all expansions, e.g. expansions into
foreign markets
vertical integration
+ -
cost saving firm make have low expertise in other firms industry
reduces risk and comp firm may overpay for another (increased FC)
forward gives more market control integration issues due to rising costs
diversification workers may leave
horizontal integration
+
reduce avg cost due to eos
reduce comp
one firm can use the others unique assets
increased market share
push out existing comp
deters new entrants
cannabalisation - when different products/ departments in a large firm start competing with each other
wastes resources
eg mars and snickers are both under mars inc
3.1.3 demergers
microeconomics 2 2
, occur when a firm splits itself into 2 or more firms
can occur because of
lack of synergies
increasing firm valuation
creating focused companies
impacts
on business
benefit for increased specialisation → greater efficiency
firms can cut costs and innovate
on workers
promotions may occur so each business has leaders
independence from other firms may allow branches to be more efficient and fire workers
on consumers
benefit if demerged firms are more efficient as costs and prices can fall
also benefit if new firms start innovating
loss if new firms move to focusing on price
3.2.1 business objectives
profit max - MC=MR
revenue max MR=0
sales max AC=AR
allocative efficiency S=D/ P=MC
productive efficiency AC min
profit satisificing mix of prof max, rev max and sales max
profit max
MR>MC - profit increase
MR<MC - profit decrease
stop when equal as it implies the maximum and no more increase
rev max
MR>0 - total revenue increase
MR<0 - total revenue decrease
stop at 0 as it implies the peak of total revenue
sales max
AR>AC supernormal profit
AR<AC subnormal profit
stop when equal to produce the max amount of goods without going into loss
profit satisficing - occurs due to principal agent problem and occurs between profit and sales max
owners want one thing while shareholders/ workers want another
leads to compromise - enough profit to satisfy all parties
owner wants sales max or rev max (increased brand recognition, growth), shareholder wants profit max (increase
returns/ dividends), workers want rev max (more to give as wages)
productive efficiency - firm producing at AC min shows efficient use of scare resources
allocative efficiency - produces product demands at price that reflects MC
no profit
microeconomics 2 3
