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Econ T3
Business Growth
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Created by
Jeigo Fabreo
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Cards (30)
Firms grow to increase profits, gain monopoly power, and achieve greater
security
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Economies of scale reduce the costs of
production
for growing firms.
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A larger firm gains a greater
share
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Monopoly power allows firms to influence prices and restrict
market entry
.
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A larger firm builds assets and cash reserves to increase financial
security
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The principal agent problem arises from the separation of
ownership
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Steps in the governance of a firm
1️⃣ Shareholders elect Board of Directors
2️⃣ Board oversees management
3️⃣ Chief Executive and managers control operations
4️⃣ Shareholders can vote on directors
5️⃣ Buying and selling shares influences strategy
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The principal agent problem occurs when agents prioritize their own benefits over the
principal's
.
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The UK economy is divided into the private and
public
sectors.
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Organic growth involves increasing a firm's
output
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Integration
is often expensive, time-consuming, and high risk for firms.
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Vertical integration involves firms in the same industry at different stages of
production
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Tesco's takeover of Booker in 2018 is an example of
vertical integration
.
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Backward integration allows firms to control the quality of their
supplies
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Horizontal integration involves firms in the same
industry
at the same stage of production.
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Forward integration can reduce prices for
consumers
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Forward integration can restrict
competitors'
access to retail outlets.
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What type of integration occurs when firms in the same industry at the same stage of production merge?
Horizontal integration
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Horizontal integration increases market
share
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Horizontal integration reduces risk by diversifying into new markets.
False
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What type of integration involves firms in different industries with no obvious connections?
Conglomerate integration
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General Electric is a successful example of conglomerate
integration
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Conglomerate integration
allows individual parts of the business to expand more easily.
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Match the constraint on business growth with its description:
Size of the market ↔️ Limited customer demand
Access to finance ↔️ Inability to secure loans
Owner objectives ↔️ Desire to avoid risk
Regulation ↔️ Government restrictions on growth
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Retained profits are always sufficient for firms to finance growth.
False
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What is a common objective for owners who do not want their business to grow further?
Avoid extra risk
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A demerger involves breaking a single business into two or more
components
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Reasons for demergers
1️⃣ Lack of synergies
2️⃣ Increased company value
3️⃣ Focus on core business
4️⃣ Avoid competition authorities
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Why might a company choose to demerge to focus on individual markets?
Increase efficiency
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Demerging may lead to a loss of
economies of scale
for the business.
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