Microeconomics
Theme 3: Business Behaviour and the Labour Market
, Business Growth
Why do Firms Grow?
- Maximise shareholder returns: This is to increase sales and brand recognition.
- Larger market share, more price setting power.
- Synergies: Firms coming together to produce cheaper goods. Pooling manufacturing and
knowledge.
- Satisfy managerial ambitions: High revenue/growth at expense of profit.
- Stability: Access to a new market so if one thing crashes the firm is still stable.
How to Firms Grow?
- Internal (organic) growth: When a firm grows by increasing output e.g., increased
investment or labour force.
- External growth: When a firm grows by joining with other firms by a merger or takeover.
o Horizontal merger: Two firms merging in the same point in the supply chain.
o Vertical merger: Two firms merging at different points in the supply chain.
o Conglomerate merger: Merging into a different market entirely.
Why do Some Firms Remain Small? (Constraints to Growth)
- Not so much demand from certain markets Niche markets.
- Profitability over growth, looking after shareholders.
- Barriers to entry: Government regulations preventing mergers or acquisitions.
- Low MES so no need to grow.
- Lack of motivation: Some traders may not want to give up leisure time to expand business.
Reasons for Demergers
- Lack of synergies: No benefit for both firms, could even be diseconomies of scale as senior
management have to divide time between two different firms.
- Price: The price of demerged firms (on stock exchange) may be greater than if they were
merged.
- Focussed companies: Recently, it’s been more fashionable to create firms focussing on one
or only a few markets as this means management can deliver higher profits and growth by
concentrating on limited markets.
Impacts of Demergers
- Businesses: Firms will benefit from demergers if the increased specialisation leads to
greater efficiency.
- Workers: Some senior managers will be promoted as more senior jobs open. Some workers
may lose jobs though as a firm doesn’t need so many workers anymore.
- Consumers: They will gain if the demerger leads to more efficiency but lose if the demerged
firms focus on increasing profits by raising prices.
, Revenue
Revenue – Receipts of money from the sale of goods and services over a period of time. Revenues can
be total revenue, average revenue, or marginal revenue.
Total Revenue, Average Revenue and Marginal Revenue
Total revenue – The total amount of money received from the sale of a quantity of output.
- Total Revenue = Quantity Sold x Average Price.
Marginal revenue – The addition to total revenue of an extra unit sold.
- Marginal Revenue = Change in Revenue / Change in Quantity.
Average revenue – The average receipts sold = Demand curve.
- Average Revenue = Price.
Revenue at Perfect Competition
At perfect competition (PED = ∞) price does not change with output:
- AR and MR are constant, while TR increases constantly as MR doesn’t change.
Price
TR
AR=MR=D
Quantity
Theme 3: Business Behaviour and the Labour Market
, Business Growth
Why do Firms Grow?
- Maximise shareholder returns: This is to increase sales and brand recognition.
- Larger market share, more price setting power.
- Synergies: Firms coming together to produce cheaper goods. Pooling manufacturing and
knowledge.
- Satisfy managerial ambitions: High revenue/growth at expense of profit.
- Stability: Access to a new market so if one thing crashes the firm is still stable.
How to Firms Grow?
- Internal (organic) growth: When a firm grows by increasing output e.g., increased
investment or labour force.
- External growth: When a firm grows by joining with other firms by a merger or takeover.
o Horizontal merger: Two firms merging in the same point in the supply chain.
o Vertical merger: Two firms merging at different points in the supply chain.
o Conglomerate merger: Merging into a different market entirely.
Why do Some Firms Remain Small? (Constraints to Growth)
- Not so much demand from certain markets Niche markets.
- Profitability over growth, looking after shareholders.
- Barriers to entry: Government regulations preventing mergers or acquisitions.
- Low MES so no need to grow.
- Lack of motivation: Some traders may not want to give up leisure time to expand business.
Reasons for Demergers
- Lack of synergies: No benefit for both firms, could even be diseconomies of scale as senior
management have to divide time between two different firms.
- Price: The price of demerged firms (on stock exchange) may be greater than if they were
merged.
- Focussed companies: Recently, it’s been more fashionable to create firms focussing on one
or only a few markets as this means management can deliver higher profits and growth by
concentrating on limited markets.
Impacts of Demergers
- Businesses: Firms will benefit from demergers if the increased specialisation leads to
greater efficiency.
- Workers: Some senior managers will be promoted as more senior jobs open. Some workers
may lose jobs though as a firm doesn’t need so many workers anymore.
- Consumers: They will gain if the demerger leads to more efficiency but lose if the demerged
firms focus on increasing profits by raising prices.
, Revenue
Revenue – Receipts of money from the sale of goods and services over a period of time. Revenues can
be total revenue, average revenue, or marginal revenue.
Total Revenue, Average Revenue and Marginal Revenue
Total revenue – The total amount of money received from the sale of a quantity of output.
- Total Revenue = Quantity Sold x Average Price.
Marginal revenue – The addition to total revenue of an extra unit sold.
- Marginal Revenue = Change in Revenue / Change in Quantity.
Average revenue – The average receipts sold = Demand curve.
- Average Revenue = Price.
Revenue at Perfect Competition
At perfect competition (PED = ∞) price does not change with output:
- AR and MR are constant, while TR increases constantly as MR doesn’t change.
Price
TR
AR=MR=D
Quantity
