Business Growth and Objectives

• Theme 3 explores business behaviour and the labour market, focusing on how firms operate and interact

Business Growth

• Organic growth involves a company expanding its own operations, such as opening new stores or increasing its product line.
• External growth occurs through mergers and acquisitions, where companies combine to increase market share or gain synergy
• Horizontal integration is when a firm merges with or takes over another firm in the same industry and at the same stage of production.
• Vertical integration involves a company acquiring suppliers (backward) or distributors (forward) to control more of the supply chain.
• Conglomerate integration is when a company merges with or acquires firms in unrelated industries.
• Constraints on business growth include limited access to finance, the size of the market, increased regulation, and internal organizational issues.

Business Objectives

• Businesses aim for various objectives, including profit maximization, revenue maximization, sales maximization, and cost efficiency.
• Corporate Social Responsibility (CSR) involves businesses acting ethically and considering the impact of their decisions on stakeholders and the environment.
• Satisficing is when a business aims for a satisfactory level of profit rather than the maximum possible.
• Survival is a primary objective, particularly for new or struggling businesses, focusing on maintaining viability in the market.
• Objectives can change as businesses evolve and as market conditions fluctuate, such as a shift towards sustainability or increased market share.

Revenue, Costs and Profit

• Total revenue is calculated by multiplying the price per unit by the quantity sold.
• Average revenue is the revenue per unit sold, calculated by dividing total revenue by quantity.
• Marginal revenue is the additional revenue gained from selling one more unit of a product.
• Fixed costs do not change with output, such as rent or salaries.
• Variable costs change directly with the level of output, such as raw materials or direct labor.
• Total costs are the sum of fixed costs and variable costs.
• Average fixed cost (AFC) is total fixed cost divided by output.
• Average variable cost (AVC) is total variable cost divided by output.
• Average total cost (ATC) is total cost divided by output.
• Marginal cost (MC) is the cost of producing one additional unit of output.
• Normal profit covers the opportunity costs of the resources used and is included in the cost curves.
• Abnormal profit is any profit above normal profit.

Market Structures

• Perfect competition features many buyers and sellers, homogeneous products, free entry and exit, and perfect information.
• Monopolistic competition involves many firms selling differentiated products, with relatively easy entry and exit.
• Oligopoly is dominated by a few large firms, with high barriers to entry.
• Monopoly is characterized by a single seller dominating the market, with significant barriers to entry.
• Concentration ratios measure the percentage of total market share controlled by a specified number of the largest firms.
• Barriers to entry prevent new firms from entering a market and include factors like high start-up costs, patents, and brand loyalty.

Perfect Competition

• Homogeneous products mean that the products offered by different firms are identical.
• Price takers are firms that must accept the market price because they are too small to influence it.
• Demand curve is perfectly elastic, because firms can sell as much as they want at the market price.
• In the short run, firms can make abnormal profits or losses.
• In the long run, firms only make normal profits due to the ease of entry and exit.
• Allocative efficiency is achieved because price equals marginal cost (P=MC).
• Productive efficiency is achieved in the long run because firms produce at the lowest point on their average total cost curve.
• Dynamic efficiency is unlikely due to lack of profit for investment in research and development.

Monopoly

• A single seller dominates the market
• High barriers to entry, such as patents, high start-up costs, and exclusive access to resources.
• Price maker has the power to set prices, but faces a downward-sloping demand curve.
• Can make abnormal profits in both the short run and the long run due to barriers to entry.
• Allocative inefficiency occurs because price is greater than marginal cost (P>MC).
• Productive inefficiency may occur due to lack of competition.
• Dynamic efficiency may be higher than in perfect competition due to the potential for abnormal profits to be reinvested in research and development.

Monopolistic Competition

• Many firms selling differentiated products, giving them some control over price.
• Relatively low barriers to entry and exit.
• Firms use advertising and branding to differentiate their products.
• Demand curve is more elastic than a monopoly but less elastic than perfect competition.
• Can make abnormal profits in the short run, but only normal profits in the long run due to ease of entry.
• Allocative inefficiency occurs because price is greater than marginal cost (P>MC).
• Productive inefficiency occurs because firms do not produce at the lowest point on their average total cost curve.
• Dynamic efficiency may occur through product innovation and differentiation.

Oligopoly

• Dominated by a few large firms, leading to interdependent decision-making.
• High barriers to entry, such as economies of scale, brand loyalty, and legal restrictions.
• Products may be homogeneous or differentiated.
• Firms often engage in non-price competition, such as advertising and product development.
• Kinked demand curve model explains price rigidity, where firms match price cuts but not price increases.
• Collusion occurs when firms cooperate to fix prices or restrict output.
• Cartels are formal agreements between firms to collude.
• Game theory is used to analyze strategic interactions between firms, including the prisoner's dilemma.
• Concentration ratios measure the percentage of total market share controlled by the largest firms.
• Allocative inefficiency occurs because price is greater than marginal cost (P>MC).
• Productive inefficiency may occur, depending on the intensity of competition.
• Dynamic efficiency may be high due to potential for abnormal profits to be reinvested in innovation.

Contestable Markets

• A market where there is the threat of new entrants.
• Low barriers to entry and exit.
• Incumbent firms behave competitively to deter entry
• Hit-and-run competition occurs when firms enter a market to take advantage of short-term profits and then exit.
• Sunk costs are costs that cannot be recovered upon exit, such as specialized equipment.

Labour Market

• The labour market involves the interaction between employers (demand) and workers (supply).
• Demand for labour is derived from the demand for the goods and services that labour produces.
• Factors affecting the demand for labor include wage rates, productivity, and the demand for output.
• Supply of labour is the number of workers willing and able to work at various wage rates.
• Factors affecting the supply of labor include wage rates, skills, education, and non-wage benefits.
• Wage elasticity of labour supply measures the responsiveness of the quantity of labour supplied to changes in wage rates. Perfectly inelastic when Wage elasticity of labour supply = 0

Wage Determination

• Competitive labour markets determine wages through the interaction of supply and demand.
• Minimum wage laws set a legal minimum wage that employers must pay.
• Collective bargaining involves negotiations between employers and trade unions to determine wages and working conditions.
• Factors affecting wage differentials include skills, experience, education, job risk, and discrimination.

Trade Unions

• Organizations that represent workers to improve wages, working conditions, and job security.
• Collective bargaining
• Strike action
• Can increase wages for their members, but may also lead to unemployment if wages are set above the market equilibrium.
• Can improve job security and working conditions.

Government Intervention

• Policies to correct market failures, such as minimum wages, employment laws, and training programs.
• Employment laws protect workers' rights and ensure fair treatment.
• Training programs improve skills and increase employability.
• Policies to reduce unemployment, such as fiscal and monetary policies.

Inequality

• Income inequality refers to the uneven distribution of income among individuals or households.
• Wealth inequality refers to the uneven distribution of assets, such as property and investments.
• Causes of inequality include differences in skills, education, access to opportunities, and discrimination.
• Government policies to reduce inequality include progressive taxation, welfare programs, and education initiatives.

Mobility of Labour

• Occupational mobility refers to the ability of workers to move between different occupations.
• Geographical mobility refers to the ability of workers to move between different locations.
• Factors affecting labour mobility include skills, education, housing costs, and family ties.
• Government policies to improve labour mobility include training programs and housing assistance.