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Unit 3 summary- business behaviour and the labour market
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Full detailed book notes which helped me pass economics alevel with A*. Includes everything you need to know. All other units also published
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Business behaviour and the labour marketsBusiness growth
Size and types of firms:
Reasons why some firms tend to grow
• increase market share: becoming the dominant firm in a particular industry. May allow them to increase their profits or ensure that they are in a Stronger
position to dominate the market
• Benefit from greater profits: aims to maximise profits and achieve expansion
• Increase sales: larger brand recognition
• Increase economies of scale:
• Gain power: to prevent potential takeovers, big enough to survive on your own
• Satisfy managerial ambitions: managers seek to grow their business so that they can satisfy there desire
• Make the most of a opportunity
• Gain expertises: rather develop part of a business than establish themselves slowly
Why small firms survive:
Economies of scale may be very small relative to the market size
• changing technology such as the internet can allow small firms the same cost advantages as large firms
The costs of production for a large scale producer may be higher than for a small company
• larger firms may be poorly organised and may be forever to pay higher wages
• Smaller firms may be prepared to accept a lower rate of return
Barriers to entry may be low
• the cost of setting up in an industry
Small firms can be monopolists
• offering a product that isn’t available anywhere else
• Many small firms can survive because of offering local, flexible services and products / niche markets
Significance of the divorce of ownership from control: the principal agent problem
The day to day management of the business is delegated to aboard of directors and from them to their managers
The problem- the principal is the shareholder or owner of a business while the person in charge of the day to day running of the business is referred to as the
agent
In some cases the agent can make decisions on behalf of the business that do not necessarily match the direction in which owners would like to take
Can result in agent being dismissed
, Private, public and not for profit organisations
Private sector:
Firms that are not owned by the government. They may be owned by shareholders as with a PLC such as marks and Spencer which is trading on a stock
market and allows anyone to buy shares in it
They may be family owned where the shares are not traded on the stock market
Private sector firms also include sole proprietors which are owned and run by one person.
Private sector firms will aim to make a profit to satisfy the demands of their owners
Public sector:
The government may own certain businesses either because they could not survive without significant state funding or because the government
wishes to determine the direction the business takes
Example: national health service- relies on taxpayer funding and network rail which operates the Uks railway tracks but is owned by the government
and run on the basis that it will not make a profit for shareholders but instead reinvest any surplus funds
Not for profit:
Accounts for charities, sometimes known as the third sector or civil society
Exist to provide services to local, national, and international communities
These include well known charities such as oxfam and less well known organisations that act as local pressure groups or help in their local
communities
, How do businesses grow?
Organic growth:
Firms can grow by expanding the scale of their operations and gaining market share.
This is known as internal or organic growth and is achieved by investment within the firm by the firm. It is paid for either by ploughing back profits
within the firm or by borrowing (loans or issuing more shares)
Advantages of organic growth
• tends to be lowest risk form of growth and the control of the firm remains unchanged
• It means firms can build on existing strengths and continue with consumer expectations
• Organic growth can also be good for the workers morale and means there will be more job opportunities within the firm with increased scope
for management roles
Disadvantages of organic growth
• organic growth tends to be slow and building in the existing knowledge of current employees means that people might be unaware of new
ideas or innovations or unwilling to take on new ideas if they involve change
Forward vertical integration:
merger with a firm at the next
stage of production
Inorganic growth - integration of firms
Firms can also grow through takeovers (inorganic growth) of which there are a number of different types
Backward vertical integration:
merger with a firm at the
Horizontal integration:
previous stage of production
• merger between 2 firms at the same stage of production
( Morrisons buying potato farm)
• For example merge between supermarkets
• This kind of integration is often chosen to achieve economies of scale or to increase market share
Conglomerate merger: merger
between firms in unrelated
Vertical integration:
industries
• merger between firms at different stages of the production process in the same industry
• The reason for this kind of integration is to increase barriers to entry to increase control over suppliers or markets to ensure a smooth
production process
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