key terms

• Firm


  A production unit that transforms resources into goods and services.
• Public sector


  An industry that is under direct state control.
• Non-profit organisations


  do not earn profits for its owners. Usually charities or public sector organisations.
• Principal agent problem


  occurs when an agent has conflicting objectives to a principle. eg a worker aiming to maximise utility and an owner aiming to maximise profits.

  
  

  +seperation between ownership and control increases
• Reasons firms may want to grow

  -increased profits

  -to benefit from economies of scale

  -increase market share (aiming to form a monopoly?)

  -diversification
• Reasons firms may want to stay small

  -avoiding diseconomies of scale eg principal-agent problem

  -barriers to entry

  -avoid crowding in/out
• Solution to principal-agent problem

  -commission/performance-based pay

  -have workers watch each other eg HR departments

  -demerge

  -automation

  -give workers shareholders eg john lewis

  -give bonuses (increase utility at work)
• Organic/ internal growth


  A firm increasing its size through investment in capital and other factors of production.
• Merger/ integration/ take over


  The joining together of two or more firms under common ownership.
• Horizontal integration


  A merger between one or more firms in the same industry at the same stage of production.
• Forward vertical integration


  A merger where the supplier joins with one or more of its buyers.
• Backward vertical integration


  A merger where the buyer joins with one or more of its suppliers.
• Conglomerate integration


  A merger between firms in different industries, producing unrelated products.
• Advantages of organic growth

  •Less risk - sustainable

  •Builds on existing strengths

  •Financed through retained profits
• Disadvantages of organic growth

  •Slow growth

  •Market saturation

  •Loss of ownership (publicly traded, franchise)
• Advantages of horizontal integration

  •Reduces competition

  •Cost savings

  •Internal EofS
• Disadvantages of horizontal growth

  •Attract attention of regulators- CMA

  •No diversification

  •Internal DEofS
• Advantages of forward vertical integration

  -Reduced number of steps needed to make profit.

  - Can increase profits by cutting out the middle man
• Disadvantages of forward vertical intergration

  -Lack expertise

  -Principal-agent problem
• Advantages of backwards vertical intergration

  -Control supply chain

  -Make things difficult for competitors
• Disadvantages of backwards vertical intergration

  -Lack of expertise

  -Principal-agent problem
• Advantages of conglomerate integration

  -diversification
• Disadvantages od conglomerate integrations

  -Diseconomies of scale

  -Loss of focus
• Constraints on business growth

  -Diseconomies of scale

  -barriers to entry

  -regulation

  -access to finance

  -owner objectives
• demerger


  one firm splits into two or more independent buisnesses
• why may firms demerge?

  -to avoid diseconomies of scale such as the principal agent problem.

  -to specialise

  -due to regulating bodies
• impacts of demergers on firms

  -decreased costs

  -avoided diseconomies of scale
• impact of demergers on workers

  -loss of jobs
• impact of demergers on workers

  -lower costs
• Total revenue


  P*Q
• Average Revenue (AR)


  TR/Q
• MR


  change in TR/change in Q
• Draw the TR, MR, AR graph

  
• Short run


  when at least one fop is fixed.
• Long-run


  when all fop's are variable.
• TC


  TFC + TVC or AC*Q
• TFC


  TC-TVC or AFC*Q
• TVC


  TC-TFC or AVC*Q
• AC


  TC/Q or AFC+AVC
• AFC


  TFC/Q or AC-AFC