Firms, Growth, Costs & Productivity – Revision Flashcards

45 question–answer flashcards covering firm classification, reasons for small and large firms, types of integration, economies and diseconomies of scale, productivity, cost concepts, revenue and profit objectives from Chapters 20–22.

Into which four main sectors are economic activity classified?

Primary (raw materials), Secondary (manufacturing/ construction), Tertiary (services), Quaternary (R&D, IT, information).

How does the dominant sector of employment change as an economy moves from low to high income?

Low-income economies rely on the primary sector; middle-income economies shift toward manufacturing (secondary); high-income economies are dominated by the tertiary (service) sector.

Give two reasons why using only one measure to judge a firm’s size can be misleading.

Different firms are labour- or capital-intensive; markets vary in size, so measures like workforce, capital employed, output or market share can rank firms differently.

Name four common quantitative measures of firm size.

Number of employees, amount of capital employed, total output (sales/ revenue), and market share.

How can a firm’s age influence its size?

Most firms start small; surviving firms need time to accumulate capital, loyal customers and managerial experience to expand.

Why does plentiful access to finance encourage firm growth?

It allows investment in new plants, technology and marketing, enabling the firm to scale up output and enter new markets.

State three reasons why many businesses remain small even in developed economies.

Small or niche markets, owners’ desire to retain control/ reduce stress, and consumer preference for personal service.

List two advantages enjoyed by small firms.

Flexibility and quick decision-making; closer customer relationships leading to loyalty.

Give one disadvantage typically faced by small businesses.

Difficulty obtaining finance or benefiting from large-scale economies, causing higher average costs.

Identify five motives for business growth.

Higher profits, larger market share, economies of scale, greater market power (price control), and reduced risk of takeover.

What is internal (organic) growth? Give an example.

Expansion by opening new branches, shops or factories, e.g. a retailer adding stores in new towns.

Define external growth.

Expansion by merging with or taking over another firm, either in the same or a different industry (integration).

Differentiate a merger from a takeover.

Merger – agreed combination creating a new firm owned by both sets of shareholders; Takeover – one firm buys over 50 % of another firm’s shares to gain control.

What is ‘synergy’ in the context of integration?

The concept that the combined firm is worth more than the two separate firms due to efficiencies (2 + 2 = 5).

Explain horizontal integration and give one benefit.

Combination of firms at the same stage and industry (e.g., two soft-drink makers) to reduce competition and gain economies of scale.

What is backward vertical integration? State a benefit.

Acquiring a supplier (toward the source); secures inputs and can cut supplier profit margins.

What is forward vertical integration? State a benefit.

Acquiring a distributor/ retailer (toward the market); guarantees outlets and captures retailer margins.

Define a conglomerate merger.

Merger or takeover of firms in totally different industries to diversify risk (e.g., a food firm buying a media company).

Name two internal economies of scale with brief explanations.

Purchasing: bulk buying lowers input prices; Technical: investing in advanced machinery spreads high fixed costs across large output.

Give three examples of internal diseconomies of scale.

Poor communication in large hierarchies, managerial inefficiency, and higher motivation costs for a large workforce.

State two examples of external diseconomies of scale.

Traffic congestion raising transport times/costs; increased competition for local resources pushing factor prices up.

Distinguish between production and productivity.

Production = total output produced; Productivity = output per unit of input (efficiency measure).

Define labour productivity.

Output (or revenue) produced per worker per period of time.

Why does raising productivity tend to lower average cost per unit?

More output is produced with the same (or fewer) inputs, so total cost is spread over more units.

List four strategies a firm can use to raise productivity.

Employee training, performance-related pay, new technology/ machinery, improved work processes (e.g., division of labour).

What is a fixed input?

A factor whose quantity cannot be changed in the short run, regardless of output level.

Define fixed cost and give two examples.

Cost that does not vary with output, e.g., rent and salaried managerial wages.

Define variable cost with one example.

Cost that changes directly with output, e.g., raw materials per unit produced.

Provide the formula for average fixed cost (AFC).

AFC = \text{Total Fixed Cost} \div \text{Output}.

Why does average fixed cost curve always slope downward?

Fixed cost is constant, so spreading it over more units lowers cost per unit as output rises.

Define total variable cost (TVC).

The aggregate of all variable costs incurred to produce a given level of output.

What is the formula for Total Cost (TC) in terms of Total Fixed Cost (TFC) and Total Variable Cost (TVC)?

TC = TFC + TVC

What is average variable cost (AVC) and how does it typically behave as output rises?

AVC = TVC \div \text{Output}; it usually falls at first due to better utilisation, then rises as diminishing returns set in, creating a U-shape.

Define total cost (TC).

Sum of fixed and variable costs at each level of output (TC = TFC + TVC).

What is the formula for Average Total Cost (ATC) in terms of Average Fixed Cost (AFC) and Average Variable Cost (AVC)?

ATC = AFC + AVC

What is average total cost (ATC) and why is its long-run curve U-shaped?

ATC = TC \div \text{output}; falls with economies of scale then rises when diseconomies dominate, forming a U-shape.

Describe the relationship between Marginal Cost (MC) and Average Total Cost (ATC) or Average Variable Cost (AVC) curves.

When MC is below ATC (or AVC), the average cost curve is falling. When MC is above ATC (or AVC), the average cost curve is rising. MC intersects ATC and AVC at their minimum points.

At what point is a firm’s profit maximised?

Where the vertical distance between total revenue and total cost is greatest (or where MR = MC).

When output increases, which cost category must rise?

Variable costs (they vary directly with production).

How is average revenue (AR) calculated and what does it equal in perfect competition?

AR = \text{Total Revenue} \div \text{Quantity}; it equals the market price of the product.

What is the break-even point?

The output level where total revenue equals total cost, resulting in zero profit.

Give one reason industry growth might NOT raise individual firm profits.

New entrants increase competition, squeezing prices and market share.

Define profit satisficing.

Earning just enough profit to satisfy shareholders while pursuing other objectives (e.g., staff welfare, environmental goals).

Give two reasons why using only one measure to judge a firm’s size can be misleading.

Survival, growth, social welfare, and profit satisficing.