Unit 3 entire course notes

Notes and examples on the entire course with March 2016 stats at the end 

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  • Created on: 24-05-16 18:19
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May be conflicting short term and long term goals
In LR, may want to profit maximise, but they may need to rev maximise in the SR to
drive out competition
Could sales max in order to benefit from EOS & create barriers to entry in LR
1. Profit maximisation
Satisfies shareholders (Google's increase in profits increased the value of shares)
Can reinvest profits back into business ­ better than taking out loans due to
Implies greater efficiency due to minimising costs
May not have knowledge of MC = MR (more likely to use cost plus)
Greater risk of investigation if supernormal profits (costly to firm)
Other objectives
2. Profit satisficing
Level of profit that satisfies all stakeholders
Divorce of ownership & control
Conflict between what stakeholders want ( consumers, owners, managers, workers)
Owners may want to profit maximise (ownership), managers may want to sales
maximise (control)
Survival: Short term objective (in industries with high fixed costs, very competitive
3. Revenue maximisation
MR = 0
Predatory pricing to drive out competition
Price decrease, quantity increase due to higher demand
Firms may benefit from economies of scale
4. Sales maximisation
Selling as much as possible, no profits being made
Maximising size of business ­ short term objective
Allows to fully exploit economies of scale
In long run, may act as a barrier to entry
In transport industry, one service may be making a loss so profits of another service
will allow for breakeven (cross subsidisation)

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Internal growth:
When a firm expands its own operations rather than relying on external growth from
takeovers/mergers e.g. Under Armour (growing at 20% per year)
1. Increasing existing production capacity through investment in capital & technology
2. Development and launch of new products
3. New emerging markets (India and South Africa)
4. Growing a customer base through marketing
External growth:
1.…read more

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Collective Dairy
Median profit of small & medium sized businesses in UK was £8,000
1. Many smaller businesses act as a s upplier/subcontractor to much larger
businesses e.g. construction industry
2. May take advantage of l ow price elasticity of demand and high income elasticity
for specialist niche products which can be sold at higher prices
3. Smaller businesses can a void diseconomies of scale
4. Many business owners are seeking a s atisfactory return rather than profit
5.…read more

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Only in the short run
When variable FOP are added to a fixed FOP, total product will initially rise, before
falling due to restraints of these fixed factors
If labour added to underutilised fixed capital, will eventually begin to be a constraint
and decrease productivity
Initial increase in productivity also due to: specialisation & division of labour
Short run: atleast one FOP is fixed
Long run: all FOP are variable
In the long run, firms have the means to buy more
capital & land
Long…read more

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Technical: more specific to transport.…read more

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No barriers to entry/exit
Firms ­ profit maximisation (long run AC = AR = D)
Consumers utility maximisers
If AC is below P being charged in a perfectly
competitive market, supernormal profits will be
This will act as a
signal for firms to enter the
As new firms enter the market, demand will
shift to the right
This will reduce equilibrium price, eliminating
supernormal profits
If AC is above P being charged, l osses
(subnormal) are being made (opposite occurs)
Efficiency in a…read more

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When there is a huge cost advantage to
those that first enter the industry
Extremely high fixed costs
Wasteful for other firms to try and duplicate
Makes sense for only one firm to be
Gas/water pipeline, rail network etc
Natural monopolies can exploit huge
economies of scale
Takes a long time to reach MES , so
unlikely they will experience diseconomies
of scale
Tend to provide important service for
public, so profit maximisation is restricted by regulation
Produce at the
allocative…read more

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MC is vertical as it costs no extra to produce one more as fixed costs are so
Third degree/market segmentation: when there are
different elasticities of demand for different consumers e.g.…read more

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Many buyers & sellers
4. Non price competition
5. Firms ­ profit maximisation
6.…read more

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Concerned with predicting the outcome of g ames of strategy in which the firms have
incomplete information about the others intentions
Prisoner's dilemma: even if firms rationally follow their own selfinterest, the best
outcome is hard to reach when they don't/cant cooperate
Dominant strategy: best strategy no matter what the other firm decides (pricing low
High Low
A High £2m, £2m £1m, £2.2m
Low £2.2m, £1.5m, £1.…read more


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