Microeconomics 3.1 business growth

Why do firms grow?

To gain market power and increase profits.

Economies of scale

Lower average costs from higher output.

True or False: All firms aim to grow.

False. Some prefer to stay small.

Why stay small?

To offer personalised service or focus on quality.

Principal-agent problem

Conflict between owners and managers.

Public sector organisation

Government-owned and controlled.

Private vs public sector

Private = privately owned. Public = government owned.

Main private sector aim

Maximise profits (MC = MR).

Not-for-profit organisation

Operates to serve, not for profit.

True or False: Not-for-profits can’t sell.

False. They can sell to fund goals.

Profit satisficing

Earning enough profit for a good lifestyle.

Fixing principal-agent issue

Give managers share options.

Organic growth

Growth from within (new stores, staff, tech).

Inorganic growth

Growth via mergers, takeovers, etc.

Forward vertical integration

Joining with a later-stage firm.

Backward vertical integration

Joining with an earlier-stage firm.

Horizontal integration

Joining same-industry, same-stage firm.

Conglomerate integration

Joining unrelated businesses.

Advantage of organic growth

Slower, controlled expansion.

True or False: Vertical integration cuts costs.

False. May raise average costs.

Advantage of horizontal integration

Fast market share growth.

Market size limits growth?

Niche markets = fewer customers.

Disadvantage of conglomerate

May lack expertise.

Owner objectives limit growth?

Owners may limit growth for comfort.

What is a demerger?

Splitting a firm into separate parts.

Diseconomies of scale

Higher average costs from overgrowth.

Why demerge?

To cut diseconomies of scale.

Demergers and business focus

Narrower focus can boost profits.

True or False: Culture causes demergers.

True. Cultural clashes are common.

Demerger effect on workers?

May cause job losses.

Demerger effect on consumers?

Can improve quality/service.

Financial gain from demerging?

More liquidity and dividends.

Demerger and efficiency?

Can lower costs and raise efficiency.

Why forced to demerge?

Ordered by competition authority (e.g., CMA).

True or False: Demergers = job loss.

False. Can create promotion chances.

Demerger and product range?

Can reduce product variety.