The Objectives of Firms - Ch 2
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- Created on: 19-10-15 20:01
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- The Objectives of Firms
- Chapter 2
- MERGERS OR GROWTH:
- Horizontal integration: when 2 firms at the same stage of production combine.
- i.e. 2 cake shops
- Vertical integration: when 2 firms at different stages of production combine (forward and backwards).
- i.e. a farm and green grocers
- Conglomerate merger: when 2 firms with no obvious connection combine.
- i.e. a car company and a cake shop
- Lateral merge: when 2 firms with similarities combine. (A form of horizontal integration).
- i.e. a cake shop and a restaurant
- Horizontal integration: when 2 firms at the same stage of production combine.
- OBJECTIVES:
- Profit maximisation: where MR = MC.
- Inability to profit maximise:
- Firms are complex - marginal cost/information is not easily accessible.
- More likely to choose satisficing.
- Organisational Theory
- Firms might prefer to aim for a number of objectives (i.e. satisficing, increasing market share and increasing sales) over profit maximisation.
- Inability to profit maximise:
- Satisficing: aiming for a satisfactory level of profit.
- CSR (Corporate Social Responsibility): when firms integrate social, environmental and economical concerns into their business operations.
- Sales maximisation
- Profit maximisation: where MR = MC.
- WHY FIRMS WANT TO GROW
- Higher profits
- Increase market share/power
- Increase efficiency
- Reduce competition
- Benefit from economies of scale
- AGENCY THEORY:
- Divorce between ownership and control.
- When shareholders (who own the firm) and directors (who run the firm) have different objectives.
- i.e. shareholders: profit maximisation, low costs.
- Directors: job security, remuneration (salaries), other 'perks'.
- PROFITS:
- Supernormal: a surplus profit.
- Normal: minimum amount to keep a factor of production employed in it's current activity.
- Subnormal: profit below normal which should lead to the firm leaving the industry.
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