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BUSINESS OBJECTIVES
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…

Page 2

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HOW FIRMS GROW

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…

Page 3

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SMALL FIRM SURVIVAL
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…

Page 4

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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…

Page 5

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Technical: more specific to transport. Buying specialist machinery to increase
efficiency
Managerial: employing specialist managers to increase efficiency
Purchasing: able to negotiate lower prices for raw materials (buying in bulk,
reputability)
External EOS:
When the entire industry benefits from EOS
When industry grows, firms tend to cluster together
Clustering can…

Page 6

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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
made
This will act as a
signal for firms to enter the
market
As new firms…

Page 7

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NATURAL MONOPOLY
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
it
Makes sense for only one firm to be
operating
Gas/water pipeline, rail network etc

Natural monopolies can exploit huge
economies of…

Page 8

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MC is vertical as it costs no extra to produce one more as fixed costs are so
high



Third degree/market segmentation: when there are
different elasticities of demand for different consumers e.g.
peak & off peak

Evaluation
Consumer surplus always suffers as a result (with the
exception of second degree)…

Page 9

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3. Many buyers & sellers
4. Non price competition
5. Firms ­ profit maximisation
6. Low barriers to entry and exit


In the SR, supernormal profits are made
This signals to firms to enter the market
In the LR, only normal profits are made as firms enter the
market
AC…

Page 10

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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…

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