Economics Revision Notes



Chapter 1: The objective and growth of firms

·      A firm is an organisation that brings together different factors of production, to produce a product or service, which it is hoped can be sold for a profit.

·      The personnel of a firm are divided into entrepreneurs, managers and workers.

·      The entrepreneur takes the risks and sets up the business.

·      They appoint the managers who run the firm on a day-to-day basis.

·      They hire and fire the workers.

·      Profit is a reward for entrepreneurs, whereas managers and workers earn wages.

·      Business ownership is split up into: Sole proprietor, partnership, private limited company, public limited company and transnational corporations.

·      Sole Proprietor is one person who owns and runs the business.

·      Partnerships are where at least one person is fully liable for all debts, usually between 2 and 20 people.

·      Private LC is where the risk and debt is shared equally between all shareholders so it is only the amount their share is worth.

·      Public LC is where ownership of shares is open to all via the stock exchange. Accounts are published in the national press.

·      TNCs are corporations which produce products in more than one country, sometimes referred to as multinational corporations (MNCs)

·      Profit maximisation is the main objective of a firm. It provides funds that can be re-invested in research and development.

·      Survival is an objective where the total revenue just covers the costs to ensure they survive.

·      Revenue maximisation is where they produce the most revenue, even if the costs are higher than the lowest point.

·      Sales maximisation is where prices are kept low and below profit maximising level to gain market share and brand loyalty.

·      Corporate social responsibility is when firms are ethical and takes into account their impact on the wider society, which may enhance the image of the company.

·      Firms may try to give themselves a competitive advantage over the competition e.g. using limit and predatory pricing.

·      Managerial objectives and the principle agent problem

o   Owners may be directly involved in the day-to-day running of some of the smaller ltd liability companies.

o   Public LCs have many thousands of owners who cannot take part in the running of the firm so a director is elected once a year.

o   Directors appoint managers who run the company with minimal intervention from the owners.

o   The principal-agent problem exists when there is a conflict between the objectives of the owners and the managers who run the company.

o   The owners may adopt a strategy of profit satisficing where managers produce just enough profit to keep the owners content even though they are not making the maximum profit.

o   X-inefficiency is where managers allow costs to rise above their most efficient…


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