Costs, revenue and profit:
Efficiency:
- Productively efficient. When output is at the lowest point on the AC curve. Consumers:
lower prices which maximise consumer surplus. Firms: more production at a lower cost,
higher profits, increase market share.
- Allocatively efficient. When when price = MC. Consumers: resources follow consumer
demand, lower prices = maximise consumer surplus, high choice, high quality. Firm: increase
market share, stay ahead of rivals, increase profits.
- X efficiency. Production with no waste. Producing on AC curve. Often for firms that are small
and aren’t able to reach lowest point on AC curve. Consumers: low prices increase consumer
surplus. Firms: lower costs, higher profit and increased market share.
- Dynamic efficiency. When supernormal profits can be used to invest. Consumers: new
products, lower prices over time because of innovation will increase consumer surplus.
Firms: long run profit maximisation by continuing to innovate, lower costs over time,
increase market share and stay ahead of rivals
Growth of firms:
- Organic growth. Also known as internal growth. Happens when a firm expands its own
operations rather than relying on takeovers and mergers. Comes about through: investment,
product development, finding new markets, marketing.
- Inorganic growth. External growth of a firm. This can be done through mergers of takeovers.
Types of integration:
Horizontal. When two firms at the same stage of production merge. Eg Guinness and
Heineken.
, Forward vertical. When a firm merges or takes over another firm at the next stage of
production. Eg car manufacturer buys car sales room.
Backwards vertical. When a firm merges with or takeover another firm at the
previous stage of production. Eg clothes retailers merges with clothes manufacturer.
Conglomerate. Merger or takeover between two unrelated firms.
Horizontal:
- Advantages. Increases market share, reduces competition, economies of scale.
- Disadvantages.regulation authorities and competition and markets authority monitoring,
less flexibility.
Vertical:
- Advantages. Greater efficiency and reduced costs
- Disadvantages. Large initial cost.
Conglomerate:
- Advantages. Diversifies business, improves customer base, economies of scale.
Disadvantages. No past experience, shifts focus.
Market structures:
Market structure is the way in which different industries are classified based on their degree and
nature of competition for goods and services.
Market Number of Concentration Barriers to Product Price taker or Examples
structure firms ratio entry maker
Perfect Very high Low Very low Homogeneous Taker Fruit and veg
competition stall
Monopolistic High Low Low Slight Taker Coffee shops
competition differentiation
Oligopoly Few 3-5 High High Branded and Maker Supermarkets
differentiated
Pure monopoly 1 Very high Very high Unique Maker Water
Business objectives:
- Profit maximisation. When MC = MR. Advantages: re invest profits to become more efficient,
dividends for shareholders, lower costs = lower prices for consumers. Why it may not be an
objective: firms don’t know what their MC and MR are, scrutiny from CMA, other objectives
may be more important, too much focus on profit may neglect other stakeholders.
- Profit satisficing. When a firms sacrifices profit to satisfy as many key stakeholders as
possible. Effect of profit maximisation on stakeholders:
Shareholders. Positive. Receive high dividends.
Managers. Positive. Bonuses and higher incomes.
Consumers. Could suffer if prices are higher
Workers. Negative. Wages could be low.
Government. Wont be happy if wages are low and excess prices for consumers.
Environment. Negative. In an effort to cut costs, pollution could increase.
- Revenue maximisation. When MR = 0. Why is this an objective:
Efficiency:
- Productively efficient. When output is at the lowest point on the AC curve. Consumers:
lower prices which maximise consumer surplus. Firms: more production at a lower cost,
higher profits, increase market share.
- Allocatively efficient. When when price = MC. Consumers: resources follow consumer
demand, lower prices = maximise consumer surplus, high choice, high quality. Firm: increase
market share, stay ahead of rivals, increase profits.
- X efficiency. Production with no waste. Producing on AC curve. Often for firms that are small
and aren’t able to reach lowest point on AC curve. Consumers: low prices increase consumer
surplus. Firms: lower costs, higher profit and increased market share.
- Dynamic efficiency. When supernormal profits can be used to invest. Consumers: new
products, lower prices over time because of innovation will increase consumer surplus.
Firms: long run profit maximisation by continuing to innovate, lower costs over time,
increase market share and stay ahead of rivals
Growth of firms:
- Organic growth. Also known as internal growth. Happens when a firm expands its own
operations rather than relying on takeovers and mergers. Comes about through: investment,
product development, finding new markets, marketing.
- Inorganic growth. External growth of a firm. This can be done through mergers of takeovers.
Types of integration:
Horizontal. When two firms at the same stage of production merge. Eg Guinness and
Heineken.
, Forward vertical. When a firm merges or takes over another firm at the next stage of
production. Eg car manufacturer buys car sales room.
Backwards vertical. When a firm merges with or takeover another firm at the
previous stage of production. Eg clothes retailers merges with clothes manufacturer.
Conglomerate. Merger or takeover between two unrelated firms.
Horizontal:
- Advantages. Increases market share, reduces competition, economies of scale.
- Disadvantages.regulation authorities and competition and markets authority monitoring,
less flexibility.
Vertical:
- Advantages. Greater efficiency and reduced costs
- Disadvantages. Large initial cost.
Conglomerate:
- Advantages. Diversifies business, improves customer base, economies of scale.
Disadvantages. No past experience, shifts focus.
Market structures:
Market structure is the way in which different industries are classified based on their degree and
nature of competition for goods and services.
Market Number of Concentration Barriers to Product Price taker or Examples
structure firms ratio entry maker
Perfect Very high Low Very low Homogeneous Taker Fruit and veg
competition stall
Monopolistic High Low Low Slight Taker Coffee shops
competition differentiation
Oligopoly Few 3-5 High High Branded and Maker Supermarkets
differentiated
Pure monopoly 1 Very high Very high Unique Maker Water
Business objectives:
- Profit maximisation. When MC = MR. Advantages: re invest profits to become more efficient,
dividends for shareholders, lower costs = lower prices for consumers. Why it may not be an
objective: firms don’t know what their MC and MR are, scrutiny from CMA, other objectives
may be more important, too much focus on profit may neglect other stakeholders.
- Profit satisficing. When a firms sacrifices profit to satisfy as many key stakeholders as
possible. Effect of profit maximisation on stakeholders:
Shareholders. Positive. Receive high dividends.
Managers. Positive. Bonuses and higher incomes.
Consumers. Could suffer if prices are higher
Workers. Negative. Wages could be low.
Government. Wont be happy if wages are low and excess prices for consumers.
Environment. Negative. In an effort to cut costs, pollution could increase.
- Revenue maximisation. When MR = 0. Why is this an objective:
