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37 Cards in this Set
- Front
- Back
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Define Private Sector |
The private sector refers to that part of the economy that is owned and run by individuals or groups of individuals, including sole traders and PLCs. |
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Define a limited company |
Have different managers and owners. Shareholders will own the company and will appoint directors to run the business on their behalf. These organisations are separate to a person so that if they go bankrupt, the person isn’t in debt (e.g. their house won’t be repossessed) |
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What’s the difference between a public limited company and a private limited company? |
Anyone can buy the shares in a public limited company whereas all the shareholder have to agree in a private limited company on selling a share. |
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Define Public Sector |
The public sector refers to that part of the economy which is owned or controlled by local or central government. The purpose of these organisations is to provide a service for UK citizens and profit making is not their main aim, some may even make a loss which is funded for by the taxpayer. |
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What are some examples of private sector firms? |
Southern Railway Whitgift School Uber Waterstones Shirley Oaks Hospital |
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What are some examples of public sector firms? |
St Helier Hospital London Underground Police Wallington Library WCGS |
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What 4 key business objectives are there? |
Profit Maximisation Profit Satisficing Revenue Maximisation Sales Maximisation |
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Define Profit Maximisation |
A firm’s profit is the difference between its total revenue (TR) and total costs (TC). A firm profit maximises when they are operating at the price and output which derives the greatest profit. Profit maximisation occurs where marginal cost (MC) = marginal revenue (MR). In other words, each extra unit produced gives no extra loss or no extra revenue. |
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Give four reasons why might a firm want to maximise profit? |
-The owners will want higher profits as some of the profits will he distributed as dividends -The prospect of dividends also increases demand for shares causing the share price to rise. This is popular with shareholders as they can make money on trading their shares. -Retained profits can be reinvested back into the business to fund research and development -Higher profits can be used to build up reserves in case of a recession. |
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What is Profit Satisficing? |
This is when a firm is making just enough money to keep its owners happy. This is due to the divorce of ownership from control, which leads to the Principal-Agent Problem. |
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Explain The Principal Agent Problem |
This is linked to the theory of asymmetric information.This is when the agent makes decisions for the principal, but the agent is inclined toact in their own interests, rather than those of the principal. For example, shareholders and managers have different objectives which might conflict. Managersmight choose to make a personal gain, such as a bonus, rather than maximise thedividends of the shareholders.
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Give three ways that the Principal-Agent Problem could be tackled and evaluate each of them. |
Profit-related pay however correlation may not mean causation. E.G. the CEO may be very effective but a recession may lead to losses Employee Share-Ownership Scheme however this could incentive's manager to focus on short term. Shareholder Scrutiny of Senior execs however shareholders may not have the expertise to do this. |
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Define Revenue Maximisation |
This occurs when MR = 0. In other words, each extra unit sold generates no extra revenue. This shows that firms are prioritising increasing the amount of money coming into the business rather than the amount of profit they are making.
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Give 6 reasons why a firm may maximise their revenue |
-They are closing down -They have temporary cash flow issues (don't have enough money to pay for their costs) -To trigger bonuses for managers (Who get paid before profit is calculated) - Stock is about to go out of date(avoid a sunk cost) - They need immediate funds to pay for a one-off investment or takeover -It is easier to calculate than the profit maximisation |
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Define Sales maximisation |
The maximum level of output which can be produced without making a loss. |
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Give 4 reasons why a firm might choose to maximise their sales? |
It is often easier for people to judge the level of growth achieved rather than thelevel of profit. This will increase the prestige of the business.
Size is often linked to security as it is believed large firms can survive rough periodsmuch easier and are less likely to get into financial trouble overnight. Growth will also increase market share, and may push other firms out of business. Itwill enable a firm to have more market power and more power over prices. Higher outputs can lead to economies of scale which can create profit in the long run. |
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What are the drawbacks of Revenue Maximisation? |
Despite good reasons in the short run, in the long term a firm needs profit to survive. |
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Give three drawbacks of Sales Maximisation? |
-It is unsustainable - eventually a firm will need to make a profit to satisfy the owners -The CMA may intervene if they think the firm has too much market power -If prices are set low the firm could be fired for anti-competitive behaviour |
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Define Economies of Scale |
The benefits of a firm growing in size (this normally leads to lower average costs. However at some point a firm can become too large and their average costs begin to rise, causing diseconomies of scale. |
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What are two types of economies of scale? |
Internal/External |
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Give 7 examples of internal economies of scale |
-Capital/Technical economies of scale -Risk Bearing -Financial Economies -Selling/Marketing economies -Purchasing/Buying economies -Managerial Economies -Volume based economies |
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Explain what Capital/Technical economies of scale are |
Larger firms can afford more expensive machinery which increases productivity |
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Explain what Risk Bearing economies of scale are Give an Example |
Larger firms can sell a variety of products which reduces their risk if consumer tastes change. E.g. Virgin |
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Explain what Financial economies of scale are |
larger firms have more assets and tend to be more trusted, making it easier to acquire loans |
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Explain what Selling/marketing economies of scale are |
Larger firms can spread the fixed costs of marketing across more stores. E.g. Subway |
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Explain what Buying/Purchasing economies of scale are |
Larger firms can buy in bulk which means that supplier are willing to give them discounts |
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Explain what managerial economies of scale are |
Larger firms can hire specialist employees whereas smaller firms have to hire generalists |
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Explain what volume based economies of scale are |
Larger firms move larger quantities of materials which is more efficient. This has helped fuel globalisation |
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What are four examples of external economies of scale? |
-Labour-Training -Infrastructure -Support/Ancillary services -Cooperation |
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Explain what labour-training economies of scale are |
If there are lots of firms in an area there are lots of suitably qualified workers available to hire. |
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Explain what infrastructure economies of scale are |
If there are lots of firms in an area the government will likely upgrade the quality of roads, broadband speeds etc. |
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Explain what support/ancillary services economies of scale are |
If there are lots of firms in an area then suppliers will locate close to ensure firms are well stocked |
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Explain what cooperation economies of scale are |
Firms can share resources e.g. share parking in a retail park |
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What are three examples of diseconomies of scale? State whether they are internal or external |
-Managerial (Internal) -Labour (internal) - Scarce Resources/Crowding Out (External) |
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Explain what managerial diseconomies of scale are |
Firms become too large and bureaucratic leading to inefficient communication and slow decision making |
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Explain what labour (internal) diseconomies of scale are |
Firms become too large and impersonal leading to worker demotivation |
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Explain what scarce resources/crowding out diseconomies of scale are |
When an industry becomes too large it can cause labour and material costs to rise due to high demand and scarcity. |
