Business Growth (3.1.1, 3.1.2 & 3.1.3)
- Horizontal integration = takeover with an industry in the same line of production. Benefit
from economies of scale, increased market share and monopoly power.
- Vertical integration = takeover with an industry in another part of the production process.
Forward integration (moving closer to retailers end of process) and backward integration
(moving closer to suppliers end of process).
- Conglomerate integration = takeover with an industry in a completely different industry.
Benefit = diversification (spreading the risk in different industries/widening product
range) e.g. Richard Branson and virgin (airlines, entertainment, media)
- Demerger = firm decides to split off into 2 separate firms. Reasons for demerger :
increased focus on core business, reduce costs due to diseconomies of scale, avoid
attention from regulatory bodies and increase returns for shareholders.
- Diseconomies of scale = increasing LRAC costs due to lack of synergy, culture clash
and communication problems.
- Benefits of integration for consumers = lower prices, improved product quality, better
customer service and more innovative products. EVAL: higher prices due to
diseconomies of scale or X-inefficiency as there is a lack of competition. Depends on the
actions of rival firms, whether they adopt pricing strategies like price wars.
- Problems of integration = diseconomies of scale leading to higher prices, lack of
competition, regulatory bodies constantly watching mergers, increased monopsony on
suppliers, EVAL: benefits of increased market share, SR and LR implications (in LR
enormous savings can be met)
- Why do few firms dominate in some industries compared to others: High barriers to entry
which makes it difficult for new firms to enter the market (high startup costs which can be
difficult to finance). Collusive behaviour, when firms adopt illegal methods in order to
benefit from stability and charge consumers higher profits (EVAL: can be caught through
regulatory bodies). PC market = price takers hence the price levels stay the same and
firms have no price making power, this enables them to make SNP in the SR, this
attracts new entrants causing supply to increase leading to a fall in price and NP being
made in LR. Use of price competition or non price competition powers = limit pricing,
predatory pricing. EVAL: market could be changing, use of technology could mean
barriers to entry are reduced. There are substitutes available and some firms may have
differentiated products. Diseconomies of scale. Regulation can mean bodies reduce
market share or power and make certain industries more contestable. Some firms may
have consumer loyalty.
- Why do some firms remain small and others grow: Access to finance, some firms are
able to get greater access to finance allowing them to expand on a larger scale than
those without finance. Niche market, those in a luxury market may have a low consumer
market which may reduce their ability to grow. Objectives, shareholders may not have an
objective to grow after a certain period (satisficing). Economies of scale, which reduce
firms CoP.
- Takeovers and efficiencies = Dynamic efficiency: likely to make large SNP allowing them
to invest in innovation and research + development. EVAL: depends, due to lack of
, competition firms may have no incentive to reduce costs hence may experience X-
inefficiency. Allocative efficiency: unlikely as a larger market share will enable firms to
hold greater monopoly power therefore they can charge higher prices. Productively
efficient: unlikely due to PM objectives. EVAL: diseconomies of scale, regulator bodies.
Business Objectives (3.2.1)
- Profit maximising point = output where MR=MC. Reasons: please shareholders, gain the
most amount of return
- Revenue maximisation = output where MR=0. Reasons: reduce prices in order to
increase market share, deter new entrants, get rid of principal agent problem
- Sales maximisation = output where AR=AC (Normal profits made). Reasons: In SR to
reduce prices and increase market share, to deter new entrants, get rid of principal
agent problem
- Profit satisfaction = when shareholders are happy to make a certain amount of profits
and dividends.
- Principal agent problem: Idea that shareholders and managers have different objectives.
Hence they have different influences on the actions of the business. Shareholders want
to PM whereas managers may want to increase commission.
EVAL: Thus to resolve this problem, shareholders can offer managers a stake in the
business which incentivises them to be PM (assets of the company) or shareholders can
change objectives to find a satisfying point where both parties benefit.
- Reasons for Revenue max rather than PM: Get rid of principal-agent problem. Revenue
maximisation may be less likely to draw regulatory attention. In order to reduce
competition and deter new entrants firms may adopt revenue maximisation. In order to
increase firms' market share. EVAL: PM can be more appropriate for smaller firms where
there is no separation of ownership, PM would be more appropriate for natural
monopolies or monopolies who have high barriers to entry.
Revenue, Costs & Profits (3.3)
- Revenue = sales x price
- Profits = revenue - costs
- AFC will fall as output increases, as the cost is spread out amongst a greater number of
output.
- Fixed costs = costs that remain constant even when output changes E.g. Rent. When
rent increases it does not affect prices as only the AFC rises, causing AC to rise. MC
does not rise. However although price remains constant, profits will fall (due to rise in
AC).
- Variable costs = costs that change as output changes
- Short run: when firms operate where at least one factor of production is fixed
- Long run: when firms operate where all factors of production are variable
- External economies of scale: a benefit to a firm when the whole industry is growing
- Economies of scale: fall in long run AC
