Firms and Its objectives

• What determines the size of firms?

  Economies of scale relative to market size
• How can large firms experience small economies of scale?

  Economies of scale might be limited in that industry
• What can cause larger firms to face high costs?

  Rapid growth leading to poor organization
• Why might small firms hold monopoly power?

  They provide personal, local services
• How can small firms create a niche market?

  By offering unique products with inelastic demand
• What is the profit motive for firms?

  Opportunity to earn higher profits through growth
• How does market power benefit large firms?

  It allows price setting and discourages new entrants
• What is the benefit of diversification for firms?

  It reduces risk by expanding product range
• What motivates managers to expand a firm?

  Desire for larger bonuses and more leisure time
• What characterizes the public sector?

  Government control of an industry
• Why might natural monopolies exist in the public sector?

  It is inefficient to have multiple providers
• What are strong positive externalities in public sector industries?

  Reduced congestion and pollution from public transport
• How do objectives differ between public and private sector industries?

  Public sector prioritizes social welfare over profit
• What is a characteristic of the private sector?

  Firms operate in a free market
• What do free market economists argue about the private sector?

  It incentivizes efficiency and increases economic welfare
• What is the goal of a profit organization?

  To maximize financial benefit for shareholders
• What is the aim of a not-for-profit organization?

  To maximize social welfare, not profits
• What is the principal-agent problem?

  Conflict of interest between shareholders and managers
• How does selling shares affect control of a firm?

  Owners lose some control over the firm
• What is profit maximization?

  Maximizing the difference between revenue and costs
• When does a firm break even?

  When total revenue equals total costs
• How is profit maximization achieved?

  When marginal cost equals marginal revenue
• What happens when marginal revenue exceeds marginal cost?

  Profits increase
• Why do PLCs focus on profit maximization?

  To keep shareholders satisfied with dividends
• What occurs at the point of revenue maximization?

  Marginal revenue equals zero
• What is sales maximization?

  Aiming to sell as much as possible without loss
• What is organic growth in businesses?

  Growth through expanding production and customer base
• How can firms achieve organic growth?

  By increasing output and developing new products
• How did Amazon's Kindle launch exemplify sales maximization?

  They sold many Kindles to gain market share
• What strategy might a firm use to sell more products to existing consumers?

  Market penetration
• What is the role of research and development in organic growth?

  It allows firms to innovate and increase sales
• What is satisficing in business objectives?

  Earn enough profits to satisfy shareholders
• Why does satisficing occur?

  Due to the divorce of ownership and control
• What is inorganic growth?

  Growth through merging or acquiring other firms
• What is a disadvantage of organic growth?

  It is slower than inorganic growth
• Why might shareholders be unhappy with organic growth?

  They may want faster growth rates
• What is a risk associated with relying on market strength for growth?

  It limits how much and how fast firms grow
• How does organic growth compare in risk to inorganic growth?

  It is less risky than inorganic growth
• What funding sources do firms use for organic growth?

  Retained profits
• What is forward vertical integration?

  Integrating with a firm closer to the consumer