AQA Economics UNIT 3 - Growth of Firms

Basic presentation for study notes on the growth of firms - tailored to AQA spec. 

Please note that presentation may appear incomplete due to page references. These references always refer to diagrams you can find in copies of the AQA Economics A2/AS textbooks - I just couldn't be bothered to find the diagram for my own revision. 

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Key terms
· Firm
­ A business that sells its output commercially in a
market
· Managerial theory
­ Firms wish to maximise managerial objectives
rather than profit
· Organisational theory
­ A firm is a coalition of different groups such as
shareholders, managers and workers…read more

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The principal/agent problem
­ The shareholders have a different objective to the
managers resulting in conflict and satisficing
­ Leads to divorce of ownership and control
· Satisficing
­ Achieving a satisfactory objective acceptable to all the
competing member groups of the coalition that
makes up the firm
· Entrepreneur
­ A risk-taker and decision maker within a firm…read more

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Internal growth
­ When a firm invests in new capacity. E.g.
factories/offices/new machinery
· External growth
­ Growth by acquisition. A.k.a - a takeover or a merger
· Vertical growth
­ When a firm grows by expanding back up its supply
chain or forward along its distribution chain
­ These firms become vertically integrated…read more

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Why firms grow
· The theory of the firm assumes that a firm's
ultimate objective is profit maximisation
· However if a firm wants to profit maximise in
the long-run, this may require substantial
business investment. If this results in lower
profits in the short-run, a firm may decide not
to grow (profit maximise in long-run)…read more

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Alternative objectives
· Other than the traditional theory of the firm,
there are others. These are the:
­ Managerial theory of the firm
­ Organisational theory of the firm…read more

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