T3 3.1.1 - 3.6.2 Business Behaviour And The Labour Market

3.1.1 SIZES AND TYPES OF FIRMS

3.1.1 SIZES AND TYPES OF FIRMS

Name the 5 key motivations for business growth (MPCRM)

Market power

Profit motive

Cost motive/competitive advantage

Risk motive

Managerial motives

Why is profit motive a key motivation for business growth

Increased profitability - better returns for shareholders

Stock valuation is influenced by expectations of future sales

Why is cost motive and gaining a competitive advantage a key motivation for business growth

Economies of scale increase productive capacity of leading businesses to lower average costs which helps to raise profit margins

Why is market power a key motivation for Business growth

Increased market share and brand recognition

Market dominance can be used as a barrier to entry for competitors in the long run

Monopsony power

Why is risk motive a key motivation for business growth

Diversification across products and markets helps reduce investor risk

If sales drop in one market, they still have another market to generate sales

Why is managerial motives a key motivation for business growth

Managers who’s objectives differ might accelerate business expansion to increase short run profit maximisation

What are the 3 reasons why some firms remain small

Owner objectives - some small business owners are content with satisfactory profits + do not want pressure of trying to run a larger firm

Lack of resources & access to finance - Raising finance to fund expansion can be a deterrent

Small Market size - Some markets very specialised and serve a small niche of customers

What are the 3 parties in The Principal-Agent Problem

The Principal - The owner (company’s shareholders)

The Agent - The manager (CEO) who is trusted to run the business on behalf of, and in the interests, of the shareholders

The Problem - That the manegament may run the business to maximise their own benefit, rather than shareholders

Why does this happen

Large organisations such as the FTSE 100 are complex entities and the shareholder cannot have sufficient information about the to have full knowledge of their operations. Therefore, the senior managers can persue their own personal goals provided the firm generates dividends which satisfy the shareholders

3.1.2 BUSINESS GROWTH

3.1.2 BUSINESS GROWTH

Name the two ways in which growth can be achieved

Internal growth

External growth

What is internal growth (Organic)

Opening new branches or a new product development

What is external growth

Mergers and takeovers

Name the 2 ways in which cost minimisation can be achieved

Internal contraction

External contraction

What is internal contraction

Delayering (removing layers of management in order to improve organisational efficiency)

What is external contraction

Selling off elements of the business

What is organic growth considered as being

The lowest risk form of growth (internal growth)

What 4 ways can organic growth come from

Investment in new capital and technology to increase existing production

Research and development of new products

Growing a customer base via marketing

Finding new markets

What is an example of a firm that has grown lots organically in the UK

Aldi (opened it’s 1000th UK store in Sept 2023

What is inorganic growth

External growth achieved via takeovers and mergers

What is the difference between a takeover and a merger

A merger is when two separate firms combine to make a new business (agreement)

A takeover is when one business acquires a controlling interest another firm (change of ownership which can be hostile)

What is diversification

Expanding into new markets with new products (Riskiest growth strat)

What are some key drivers of mergers and takeovers

Creative destruction in industries

Need to supply customers globally

Low demand in mature economies (need to have a presence in faster growing economies)

Access to more distribution networks

What are the Big 3 motives for acquisitions (SFM)

Strategic motives - (Exploit economies of scale)

Financial motives - (Make best use of financial resources for shareholders)

Managerial motives - Self interest of managers (not always in best interest of shareholders)

What are the two main managerial motives for why acquisitions occur

Personal ambition - boosts ego

Bandwagon effect / peer pressure - Pressures from advisors (investment bankers who stand to make millions from the deals)

What is horizontal integration

A merger between two firms at the same stage of production

What is vertical integration

Merger between firms at different stages of the production process within an industry

What are the two types of vertical integration

Forward vertical integration (at next stage of production process for example a brewery buying a pub)

Backward vertical integration (previous stage of the production process for example a petrol producer buying an oil extraction firm)

What is conglomerate integration

Merger between firms in entirely unrelated industries

Give two examples of horizontal integration occurring

Tata buying Jaguar Land Rover from Ford

Volkswagen buying Porsche

List the main advantages of horizontal integration

Exploit internal economies of scale

Wider range of products (diversification)

Reduces competition by removing key rivals

Buying well known brand can be cheaper than organically growing (makes entry barriers higher for potential rivals)

What is the main disadvantage of horizontal integration

Firms becoming more complacent once the rivals have been removed

Give 2 examples of vertical integration (forward or backward)

Brewers owning/operating pubs

Pig processing business buying a pig farm

List some advantages of vertical integration

Control of the supply chain (helps reduce unit costs)

Improved access to key raw materials

Removing suppliers and market intelligence from competitors can make the market less contestable

What are the 4 key constraints on business growth (RCSF)

Regulation - Firms with large market share may run into competition authorities

Competition - In contestable markets there is always the threat of entry from rival firms

Size of the market - Businesses achieving success in niche markets may find limits to scalability

Finance - Many small/medium businesses find it hard to access loans (lack physical assets to secure loan against)

Give 2 examples of horizontal integration

2015 - Mariott agrees £12Bn merger with Sheraton hotels to create one of worlds largest hotel chains

2016 - UK DIY chain homebase sold to Australian retial giant wesfarmers for £340m

Give two examples of vertical integration

2015 - IKEA buying Romanian and Baltic forests to control its raw materials (supply chain security)

2002 - PayPal being acquired by eBay

Give 3 examples of joint ventures

BMW and Toyota cooperate on research into hydrogen fuel cells

Google and NASA developing Google Earth together

Vodafone and Telefonica agreed to share their mobile network

3.1.3 Demergers

3.1.3 Demergers

What are some reasons why many mergers/takeovers fail

Huge financial costs of funding takeovers (can involve loan finance which leaves debt)

Difficulty integrating systems (companies might have very different technology systems)

Clashes of corporate culture and priorities

Overpaying for a takeover

Bad timing (mergers and takeovers that take place towards the end of a sustained boom)

What are some reasons for Demergers

Firms may grow too large

They may experience diseconomies of scale

How may some firms decide to reduce the impact of diseconomies of scale

By breaking up (to demerge)

When do diseconomies of scale happen

When a company or business grows so large that the costs per unit increase as ouput increases

What is the minimum of the long run average costs (LRAC) curve called

Minimum efficient scale (Where the firms are working most effectively)

When can Demergers be required

On direction of the competition and markets authority (CMA) due to the business being seen as acting against public interest (monopoly)

What are some reasons for de - mergers

Focusing on core businesses to improve profit margins

A defensive tactic to avoid the attention of the (CMA)

What impacts do Demergers have on firms

Make them smaller (Reduction in market share)

Could become more profitable (if efficiency improves)

Less monopoly power

What impacts can Demergers have on workers

Workers may be forced to move location

Workers may be laid off

Remaining staff may have better job security

What are some impacts of Demergers on consumers

Lower prices due to more competition in the market

More choice

3.2.1 BUSINESS OBJECTIVES

3.2.1 BUSINESS OBJECTIVES

What are all firms assumed to be

Profit maximisers

What are the 4 different types of business objectives

Profit maximisation

Revenue maximisation

Sales maximisation

Satisficing

At what point are profits at their highest

When MC = MR

When does revenue maximisation occur

When a firm seeks to make as much revenue as possible

Firms are willing to sell products until the last unit sold adds nothing to total value

Until when do revenue maximising firms sell

Until MR = 0

MR is marginal revenue

Why do firms want to maximise revenue

To gain more market share

To drive a rival out of the industry

3.5.1 DEMAND FOR LABOUR

3.5.1 DEMAND FOR LABOUR

Where does the demand for labour come from

Firms

What type of demand is the demand for labour

A derived demand (based on the demand for goods and services)

Where is the supply of labour from

Households

What does the interaction of supply and demand determine with labour

The wage rate

What is the relationship between demand for labour and the market wage rate

An inverse relationship

What is labour productivity

The output per worker

What is the marginal productivity of labour

The extra output a business gets when it hires one more worker, while keeping all other inputs the same

What can firms do to labour to increase their productivity

Substitute it for capital

Why might some firms in certain economies specialise in capital intensive processes

Because labour is highly skilled and expensive

What are some factors that can cause a shift in the Labour demand curve (in either direction)

Rise in demand for consumer goods

Change in the price of the good

Increase in the productivity of labour

An employment subsidy

What are some factors that can cause an inward shift in the demand curve

A recession

Falling business profits

What happens to elasticity of demand when Labour costs are a high % of total costs

Labour demand is more elastic

What happens when Labour costs are a smaller % of total costs

Labour demand is more inelastic

What does price elasticity of demand of THE FINAL PRODUCT determine

Wether a firm can pass on higher labour costs to consumers in the form of increased prices

What is the formula for marginal revenue product

Marginal revenue product = Marginal physical product x Price of the product

What is the substitution effect

If capital becomes too expensive, firms will employ more labour

What happens to the Labour demand curve during a recession

It will shift inwards

What is the MRP (marginal revenue product)

Marginal physical product x Price of the product

Define the marginal revenue product of labour (MRPL)

MRPL is defined as the extra revenue generated when an additional worker is employed

What does MPP stand for

Marginal physical product (productivity of worker)

What does MR stand for

Marginal revenue of good (depends on the price)

What does MRPL act as

A firms’ demand curve

This is because if adding an extra worker produces 5 more pieces of output each (MPL) sold at £10 (MR) this would mean the MRPL is £50

This means that the workers should be payed up to £50

What happens once more workers are added

MRPL falls and therefore so does the MRPL curve which acts directly as the firms demand curve for labour

3.5.2 SUPPLY OF LABOUR

3.5.2 SUPPLY OF LABOUR

Define the supply of labour

The Labour supply is the number of workers willing and able to to work, multiplied by the hours they are willing and able to work

What is the supply of labour determined by

The wage rate

Why does the supply of labour curve slope upwards (with wage on the y axis

Because as a workers wage rises, more workers are willing to supply their labour

Who is part of the potential Labour supply

Inactive workers

What type of people may be inactive workers

Looking after family

Short and long term sickness

Students

Retired

Who counts as part of actual labour supply

Those who are economically active (Employed and Unemployed)

Who counts as employed

Self employed

Employees

On Gov schemes

Unpaid workers

What are some factors that shift the supply curve

The size of the working population

Migration

People’s preference for work (if people prefer more work then the supply of labour increases)

Work and leisure

Barriers to entry

Tax and benefit rates

Wages

Trade unions

What are some non monetary advantages of work that can affect labour supply

Improvements in working conditions

Job security

Holiday entitlement

Promotion prospects

How are work and leisure linked

They are substitutes for eachother

Why is part time work increasingly attractive

Because it gives the advantage of increased leisure