MICROECONOMICS THEME 3 ALEVEL

Flashcards reviewing key vocabulary and concepts related to business objectives, costs, revenue, market structures, and efficiency. These flashcards are designed to help you prepare for your upcoming exam.

What are Economies of Scale?

Cost advantages that a firm can achieve as it increases its level of output, allowing firms to expand and grow.

What is Market Demand?

A factor that influences firm size; high demand leads to growth, while limited demand may cause firms to remain small.

What is Access to Capital?

The availability of funds, which plays a crucial role in a firm's ability to grow and expand.

What is Managerial Capacity?

The skills and resources available to entrepreneurs to effectively manage a large organization.

What are Government Regulations?

Regulatory barriers that can hinder or promote growth in specific industries.

What is the Principal Agent Problem?

Arises when the interests of the owner (principal) and manager (agent) of a firm do not align, leading to conflicts.

What are Misaligned Incentives?

Managers may prioritize personal gain over maximizing shareholder wealth.

What is Risk Aversion?

Managers may avoid taking risks that could benefit the firm but endanger job security.

What are Solutions to the Principal Agent Problem?

Mechanisms like performance-based pay, monitoring, and corporate governance used to align interests.

What is a Public Sector Organization?

An organization controlled by the government.

What is a Private Sector Organization?

An organization owned by individuals or entities.

What is the Profit Motive?

The primary aim of private sector firms to generate profits.

What is the Funding Source for Public Sector?

Public sector organizations are funded through taxes and government budgets.

What is the Funding Source for Private Sector?

Private sector organizations rely on investments, loans, and revenue.

What is Profit Orientation?

The goal of profit organizations to generate income that exceeds their expenses.

What is a Not-for-Profit Organization?

An organization that prioritizes its mission over profit.

What are Revenue Sources for Profit Organizations?

Profit organizations rely on sales and investments for revenue.

What are Revenue Sources for Not-for-Profit Organizations?

Not-for-profit organizations rely on donations and grants.

How do Profit Organizations distribute their surplus?

Profit organizations distribute surplus profits to shareholders or reinvest it.

How do Not-for-Profit Organizations distribute their surplus?

Not-for-profit organizations reinvest surplus for their missions.

What is Organic Growth?

The process of a business expanding its operations internally, relying on its own resources and increasing sales and revenue gradually over time.

What is Forward Vertical Integration?

Involves companies expanding its operations forward in the supply chains by acquiring distribution channels or retailers.

What is Backward Vertical Integration?

Involves companies expanding its operations backwards in the supply chains by acquiring suppliers or producers.

What is Horizontal Integration?

Occurs when companies acquire or merge with competitors or businesses in the same industry to increase market share and reduce competition.

What is Conglomerate Integration?

A company diversifying its operations by acquiring businesses in unrelated industries to spread risk and take advantage of opportunities in different markets.

What is an Advantage of Organic Growth?

Sustainable and controlled expansion, lower financial risk, and builds on existing strengths and expertise.

What is a Disadvantage of Organic Growth?

Slower growth compared to other strategies, limited in terms of rapid market capture, and requires time and patience to see substantial results.

What is an Advantage of Vertical Integration?

Increased control over supply chain, cost efficiencies through elimination of middlemen, and better coordination and quality control.

What is a Disadvantage of Vertical Integration?

High upfront costs for acquisitions, potential increased risk if integrated supply chain faces issues, and regulatory scrutiny and antitrust concerns.

What is an Advantage of Horizontal Integration?

Rapid market share expansion, elimination of competitors, and potential for economies of scale.

What is a Disadvantage of Horizontal Integration?

Integration challenges like cultural clashes, regulatory hurdles and antitrust concerns, and may divert management’s attention from core operations.

What is an Advantage of Conglomerate Integration?

Diversification across different industries, capitalizing on unrelated opportunities, and potential for higher returns in diverse markets.

What is a Disadvantage of Conglomerate Integration?

Complexity in managing unrelated businesses, limited synergies between diverse operations, and difficulty in achieving economies of scale.

What is the Size of the Market?

The size and growth potential of the target market can limit a business’s expansion.

What is Access to Finance?

Availability of capital, including loans, investment and access to equity, which is crucial for expansion.

What are Owner Objectives?

The goals and risk tolerance of business owners or shareholders that can impact growth decisions.

What is Regulation?

Government regulations and industry-specific rules that can either facilitate or hinder growth.

What is Competition?

Intense competition in an industry that can make it challenging to gain market share and grow.

What is Technology and Innovation?

Staying competitive often requires investment in technology and innovation to prevent hindering growth potential.

What are Resource Constraints?

Limitations in Human Resources, production capacity or infrastructure that can constrain a company’s ability to meet increased demand or expand into new markets.

What are Economic Conditions?

Economic downturns, inflation and currency fluctuations that can impact a company’s ability to grow profitability.

What are Global Factors?

International expansion may be constrained by geopolitical instability, trade barriers and cultural differences.

What are Environmental and Social Factors?

Increasing attention to sustainability and social responsibility can influence growth strategies and investment decisions.

What is Strategic Focus (Demergers)?

Companies may opt for demergers to refocus their core operations by separating different business units.

What is Value Unlocking (Demergers)?

Demergers can help unlock the hidden value within a conglomerate, making individual business units more attractive to investors.

What is Enhanced Efficiency (Demergers)?

Demergers can lead to streamlined operations and cost reductions by addressing inefficiencies in larger organizations.

What is Financial Performance (Demergers)?

A demerger can isolate and address poor performance of a specific business unit within a company.

What is Market Pressure (Demergers)?

External factors like market conditions, regulatory changes, or shareholder demands can drive companies to consider demergers.

What is Risk Mitigation (Demergers)?

By separating different business units, a company can isolate certain risks and protect the overall organization.

What are Tax Benefits (Demergers)?

Demergers can offer tax advantages, such as tax-free spin-offs, that benefit both the parent company and the spun-off entities.

What is the Impact of Demergers on Businesses (Parent Company)?

Increased focus, improved financial performance, and a higher stock price if the demerger is executed well.

What is the Impact of Demergers on Businesses (Spun-off Entity)?

Opportunity to thrive independently, potentially attracting new investors and partners, but may face challenges in establishing operations and management.

What is the Impact of Demergers on Workers (Parent Company)?

Changes in their role, responsibilities, and working conditions as a result of the demerger, potentially leading to uncertainty and job cuts.

What is the Impact of Demergers on Workers (Spun-off Entity)?

Similar uncertainties to the parent company, but may also benefit from increased autonomy and focus of the new organization.

What is the Impact of Demergers on Consumers (Parent Company)?

May not notice immediate changes, but enhanced focus could potentially lead to better products or services in the long run.

What is the Impact of Demergers on Consumers (Spun-off Entity)?

Might see changes in branding, customer service, and product offerings, which can be positive or negative depending on the direction of the spun-off entity.

What is the Impact of Demergers on Investors (Parent Company)?

May initially see changes in stock prices, but long-term impact depends on the success of the demerger and the performance of the remaining business.

What is the Impact of Demergers on Investors (Spun-off Entity)?

Can experience fluctuations in stock prices and may have different expectations regarding the new company’s growth potential.

What is Profit Maximization?

To earn the highest possible level of net income to provide financial return to owners/shareholders, attract investors and capital.

What is Revenue Maximization?

To maximize total revenue from the sale of goods or services.

What is Sales Maximization?

To maximize the number of units sold regardless of profit.

What is Satisficing?

To achieve a satisfactory level of profit or performance rather than maximizing it.

What is Total Revenue (TR)?

Total amount of money a firm earns from selling a certain quantity of products at a given price. TR = P * Q.

What is Average Revenue (AR)?

Price per unit, it is average revenue generated by each individual unit sold. Calculated as AR = TR/Q = P.

What is Marginal Revenue (MR)?

Additional revenue generated by selling one more unit of a product. Calculated as MR = changeTR/CHANGEQ.

What is Price Elasticity of Demand (PED)?

Measures the responsiveness of the quantity demanded of a good to a change in its price. PED = %CHANGEQ/%CHANGE P.

What is Elastic Demand?

PED > 1. A small change in price leads to a relatively larger percentage change in quantity demanded.

What is Unitary Elastic?

PED = 1. % change in quantity demanded is exactly equal to percentage change in price. A change in price has no effect on total revenue.

What is Inelastic Demand?

PED < 1. When demand is inelastic, a change in price results in a relatively smaller percentage change in quantity demanded.

What is Total Cost (TC)?

Total Fixed Costs (TFC) + Total Variable Costs (TVC).

What are Total Fixed Costs (TFC)?

Remains constant regardless of level of production.

What are Total Variable Costs (TVC)?

Varies with the level of production.

What is Average Total Cost (ATC)?

Total Costs (TC) / Quantity (Q).

What is Average Fixed Cost (AFC)?

Total Fixed Cost (TFC) / Quantity (Q).

What is Average Variable Cost (AVC)?

Total Variable Cost (TVC) / Quantity (Q).

What is Marginal Cost (MC)?

Change in Total Cost (TC) / Change in Quantity (Q).

What is Diminishing Marginal Productivity?

As a firm increases its variable inputs while keeping some inputs fixed, the additional output generated by each additional unit of the variable input will decrease.

What is Total Product?

Total quantity of output produced as a function of variable input.

What is Marginal Product?

Change in total product resulting from an increase in one unit of variable input.

What is the Short Run (Costs)?

Firms have fixed inputs and can only vary variable inputs. Short run AC curves show cost of production under fixed variable constraints.

What is the Long Run (Costs)?

Firms have flexibility to adjust all inputs, including fixed inputs. Long run AC represents costs when firms can choose optimal combination of inputs and production techniques.

What is Long Run Average Cost (LAC)?

Represents an envelope of all Short Run Average Cost (SAC) curves.

What are Technical Economies of Scale?

Occur when a firm can produce goods or services more efficiently as it increases its scale of production.

What are Managerial Economies?

Larger firms may benefit from having specialized management teams, better coordination, and more efficient decision-making processes.

What are Marketing Economies?

As firms grow larger, they often have more resources to allocate to marketing and advertising efforts.

What are Financial Economies?

Larger firms may have access to more favorable financing options, including lower interest rates on loans and better terms from suppliers.

What are Risk Bearing Economies?

Larger firms may be better equipped to handle unexpected market fluctuations and risks, reducing the overall cost of risk management.

What are Managerial Diseconomies?

As firms become very large, the management structure can become overly complex and less efficient.

What are Coordination and Control Problems?

Larger firms often struggle to maintain effective control and coordination among various departments and divisions, leading to inefficiencies and higher costs.

What is Worker Alienation?

In very large organizations, employees may feel disconnected from the company’s goals and values, which can lead to lower productivity and higher turnover rates.

What are Communication Challenges?

With an increase in size, communication becomes more challenging, leading to misunderstandings and errors that can increase costs.

What is Minimum Efficient Scale (MES)?

The level of production at which a firm achieves the lowest possible LRAC per unit of output.

What are Internal Economies of Scale?

Cost advantages that a single firm can achieve as it grows in size and expands its production capacity.

What are External Economies of Scale?

Cost advantages that multiple firms in the same industry can collectively enjoy as the industry or region grows.

What is Normal Profit?

Minimum level of profit needed to keep a firm in the industry. TR = TC, including the opportunity cost of the resources used.

What is Supernormal Profit?

TR > TC. The firm is earning more than enough to cover all costs. Generally temporary, as it attracts competition.

What are Losses?

TC > TR. The firm can’t cover all of its costs. Can lead to a firm shutting down in the short run if it cannot cover its variable costs.

What is the Short Run Shutdown Point?

A firm should shut down in the short run if it cannot cover its variable costs.

What is the Long Run Shutdown Point?

In the long run, firms should exit the industry if they cannot cover total costs. Long run shut down point is when TR=TC.

What is Allocative Efficiency?

Occurs when resources are allocated in a way that maximizes overall societal welfare. P=MC.