EDEXCEL ECONOMICS (A) KNOWLEDGE ORGANISER: THEME 3 Business growth
Types of firm Small firms
Firm: business enterprise that produces and sells goods/services; it turns • Most businesses in the UK are small or medium-sized ent
factor inputs into output • Developments in e-commerce has enabled the creation of
For profit organisation: a firm that aims to make profit businesses, with a relatively small online presence
Not-for-profit organisation: firm that operate commercially but aims to
improve social welfare & environmental goals; profits are reinvested for Why some firms stay small
social purposes • Selling to a niche (very small, specialist) market (low PED
Private sector business: firms owned by private investors rather than the for goods)
state • May act as a supplier/subcontractor to larger businesse
Public sector business: organisation owned and controlled by the state, specific component in the overall production line
e.g. the NHS, the Police, the Armed Forces • Focus on good customer service/product
differentiation/USP/quality/more personalised service/
Separation of ownership from control of firm
communication with customers
The nature of the ownership of firms changes as firms grow: • Enables more flexible response to changing market dem
Sole Trader: A business owned and operated by an individual who retains all profits.
Partnership: A business structure where two or more individuals own and manage more innovation
the business together, sharing the profits. Commonly found in professional services • Lack of resources/access to finance for expansion
such as lawyers and doctors. • Low minimum efficient scale (link to economies of scale
Private Limited Company: A type of company whose shares are not publicly traded • Lack of motivation/'easy life' option/ keep as a family bu
on a stock exchange. The ownership is limited to a specific number of shareholders, • To avoid higher business taxes
and shares are not available for public purchase.
• Allows access to informal/local labour markets
Public Limited Company: A company whose shares are listed on a public stock
exchange, allowing them to be bought and sold by the general public. Shareholders • Operating within a competitive market structure i.e. mo
have voting rights, typically exercised at the Annual General Meeting (AGM), but they competition
are not directly involved in day-to-day business operations. • May still benefit from external economies of scale
There may be a principal-agent problem when the shareholders (the • Avoids scrutiny from competition authorities e.g. the CM
principals) have different objectives from the managers (the agents). This • May avoid being taken over
is a form of information failure • Avoids internal diseconomies of scale
• Shareholder aim: to earn profit from dividends and increase their
shareholder value (capital gain) Why some firms grow
• Managers consider their own careers/job satisfaction; they may Successful businesses typically grow because there is an increa
sacrifice short term profit from long term profit; profit-satisficing demand for the product they are selling
,EDEXCEL ECONOMICS (A) KNOWLEDGE ORGANISER: THEME 3 Business growth
Types of business growth Advantages of growth of firms
Internal growth: also called organic growth – when a firm invests in new • Increased control of markets/resources
capacity to increase the business size • Increase control of sales/customer base
External growth: business grows by acquiring another business via • Gain internal economies of scale
merger or takeover • Helps ensure business survival/takeover competitors
Horizontal integration: a merger between two firms in the same industry • For managerial reward
at the same stage of production • Helps gain expertise
Vertical integration: a merger between two firms at different stages of • Increased productive and dynamic efficiency
production in the same industry • Synergy
Backwards vertical integration: business buys one of its suppliers e.g. car • Spreads risk; allows diversification
maker buys up a tyre company
Forwards vertical integration: business supplying a good merges with Why some mergers & takeovers fail
one of its buyers, e.g. car maker buys up a car dealership • High financial costs of during a takeover can leave a deb
Conglomerate merger: merger between two firms producing unrelated • Integrating different technology systems can be expensiv
products impossible
Lateral integration: merger between two firms in industries that are • Share price may fall if fresh equity needs to be raised via
somewhat related e.g. software company buying a games designer • Clash of corporate cultures/personalities
Friendly takeover: Board of Directors of the target company recommend • Loss of customers/poorer customer service
shareholders accept takeover bid • Possible loss of skilled workers
Hostile takeover: Board of Directors of target company recommend • Businesses in competition to buy out a business may end
shareholders reject the bid; predator company has to buy 50% of shares much
in target company to take control • Bad/unlucky timing if the economic cycle changes course
Key constraints on business growth Why some firms de-merge
Market size: a firm will not grow if the demand is not there Demerger: when a firm splits into separate firms
Access to finance: a growing firm may need enough retained profit or a • To focus on its core business/core product
business loan to expand; the cost of finance may also affect its decision to • To provide better quality service
grow • To become more specialised
The objectives of the business owners: may not be profit-maximisers • To reduce the risk of diseconomies of scale
Regulation: large firms may gain monopoly power which could be • To raise money from the asset sale
investigated by the competition authorities • To avoid the attention of the competition authorities
, EDEXCEL ECONOMICS (A) KNOWLEDGE ORGANISER: THEME 3 Business objectives & revenue
Types of business objectives AR, MR and TR, for price-makers & price-taker
Profit-maximisation: firm aim to make the maximum profit possible (occurs Total revenue: quantity sold x price; TR = Q x P
where MC = MR; this is also the loss-minimising condition) Average revenue: revenue per unit sold; AR = TR/Q
Revenue maximisation: firm aims to maximise total revenue (occurs where Marginal revenue: the change in TR when one more unit is sol
MR = 0) in TR/change in Q
Sales (volume) maximisation: firm aims to have largest market share without Price-maker: a firm with some market power that can alter pri
running at a loss (occurs where AC = AR) Price-taker: a firm with no market power, selling at the market
Profit satisficing: managers aim to make enough profit to satisfy the
shareholders
Diagram showing different business objectives
Profit-maximisation occurs at
output Q1, where MC=MR
Revenue maximisation occurs
at Q2, where MR=0
Sales maximisation occurs are
Q3, where AC=AR
Profit satisficing
Managers can choose any
output between Q1 and Q2,
depending on their objectives,
For price makers: Marginal Revenue For price makers:
because between these (MR) is less than Average Revenue (MR) is equal to Av
output levels, there is enough (AR), because to sell additional units, because every un
profit to satisfy the the price of all units needs to be the same price. TR
shareholders. lowered. TR is max when MR = 0 with consta
Types of firm Small firms
Firm: business enterprise that produces and sells goods/services; it turns • Most businesses in the UK are small or medium-sized ent
factor inputs into output • Developments in e-commerce has enabled the creation of
For profit organisation: a firm that aims to make profit businesses, with a relatively small online presence
Not-for-profit organisation: firm that operate commercially but aims to
improve social welfare & environmental goals; profits are reinvested for Why some firms stay small
social purposes • Selling to a niche (very small, specialist) market (low PED
Private sector business: firms owned by private investors rather than the for goods)
state • May act as a supplier/subcontractor to larger businesse
Public sector business: organisation owned and controlled by the state, specific component in the overall production line
e.g. the NHS, the Police, the Armed Forces • Focus on good customer service/product
differentiation/USP/quality/more personalised service/
Separation of ownership from control of firm
communication with customers
The nature of the ownership of firms changes as firms grow: • Enables more flexible response to changing market dem
Sole Trader: A business owned and operated by an individual who retains all profits.
Partnership: A business structure where two or more individuals own and manage more innovation
the business together, sharing the profits. Commonly found in professional services • Lack of resources/access to finance for expansion
such as lawyers and doctors. • Low minimum efficient scale (link to economies of scale
Private Limited Company: A type of company whose shares are not publicly traded • Lack of motivation/'easy life' option/ keep as a family bu
on a stock exchange. The ownership is limited to a specific number of shareholders, • To avoid higher business taxes
and shares are not available for public purchase.
• Allows access to informal/local labour markets
Public Limited Company: A company whose shares are listed on a public stock
exchange, allowing them to be bought and sold by the general public. Shareholders • Operating within a competitive market structure i.e. mo
have voting rights, typically exercised at the Annual General Meeting (AGM), but they competition
are not directly involved in day-to-day business operations. • May still benefit from external economies of scale
There may be a principal-agent problem when the shareholders (the • Avoids scrutiny from competition authorities e.g. the CM
principals) have different objectives from the managers (the agents). This • May avoid being taken over
is a form of information failure • Avoids internal diseconomies of scale
• Shareholder aim: to earn profit from dividends and increase their
shareholder value (capital gain) Why some firms grow
• Managers consider their own careers/job satisfaction; they may Successful businesses typically grow because there is an increa
sacrifice short term profit from long term profit; profit-satisficing demand for the product they are selling
,EDEXCEL ECONOMICS (A) KNOWLEDGE ORGANISER: THEME 3 Business growth
Types of business growth Advantages of growth of firms
Internal growth: also called organic growth – when a firm invests in new • Increased control of markets/resources
capacity to increase the business size • Increase control of sales/customer base
External growth: business grows by acquiring another business via • Gain internal economies of scale
merger or takeover • Helps ensure business survival/takeover competitors
Horizontal integration: a merger between two firms in the same industry • For managerial reward
at the same stage of production • Helps gain expertise
Vertical integration: a merger between two firms at different stages of • Increased productive and dynamic efficiency
production in the same industry • Synergy
Backwards vertical integration: business buys one of its suppliers e.g. car • Spreads risk; allows diversification
maker buys up a tyre company
Forwards vertical integration: business supplying a good merges with Why some mergers & takeovers fail
one of its buyers, e.g. car maker buys up a car dealership • High financial costs of during a takeover can leave a deb
Conglomerate merger: merger between two firms producing unrelated • Integrating different technology systems can be expensiv
products impossible
Lateral integration: merger between two firms in industries that are • Share price may fall if fresh equity needs to be raised via
somewhat related e.g. software company buying a games designer • Clash of corporate cultures/personalities
Friendly takeover: Board of Directors of the target company recommend • Loss of customers/poorer customer service
shareholders accept takeover bid • Possible loss of skilled workers
Hostile takeover: Board of Directors of target company recommend • Businesses in competition to buy out a business may end
shareholders reject the bid; predator company has to buy 50% of shares much
in target company to take control • Bad/unlucky timing if the economic cycle changes course
Key constraints on business growth Why some firms de-merge
Market size: a firm will not grow if the demand is not there Demerger: when a firm splits into separate firms
Access to finance: a growing firm may need enough retained profit or a • To focus on its core business/core product
business loan to expand; the cost of finance may also affect its decision to • To provide better quality service
grow • To become more specialised
The objectives of the business owners: may not be profit-maximisers • To reduce the risk of diseconomies of scale
Regulation: large firms may gain monopoly power which could be • To raise money from the asset sale
investigated by the competition authorities • To avoid the attention of the competition authorities
, EDEXCEL ECONOMICS (A) KNOWLEDGE ORGANISER: THEME 3 Business objectives & revenue
Types of business objectives AR, MR and TR, for price-makers & price-taker
Profit-maximisation: firm aim to make the maximum profit possible (occurs Total revenue: quantity sold x price; TR = Q x P
where MC = MR; this is also the loss-minimising condition) Average revenue: revenue per unit sold; AR = TR/Q
Revenue maximisation: firm aims to maximise total revenue (occurs where Marginal revenue: the change in TR when one more unit is sol
MR = 0) in TR/change in Q
Sales (volume) maximisation: firm aims to have largest market share without Price-maker: a firm with some market power that can alter pri
running at a loss (occurs where AC = AR) Price-taker: a firm with no market power, selling at the market
Profit satisficing: managers aim to make enough profit to satisfy the
shareholders
Diagram showing different business objectives
Profit-maximisation occurs at
output Q1, where MC=MR
Revenue maximisation occurs
at Q2, where MR=0
Sales maximisation occurs are
Q3, where AC=AR
Profit satisficing
Managers can choose any
output between Q1 and Q2,
depending on their objectives,
For price makers: Marginal Revenue For price makers:
because between these (MR) is less than Average Revenue (MR) is equal to Av
output levels, there is enough (AR), because to sell additional units, because every un
profit to satisfy the the price of all units needs to be the same price. TR
shareholders. lowered. TR is max when MR = 0 with consta
