The Objectives of Firms - Ch 2

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  • Created by: sammilaw
  • 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
    • 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.
      • 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
    • 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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