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The Private Firm
4. The private firm as producer and employer
| Term | Definition |
|---|---|
| Sole Proprietor | A person that both owns and controls their own business. A sole trader may often operate using the help of a few employees. Most common legal structure adopted by UK businesses. Unlimited Liability. |
| Partnership | A legal agreement between 2 or more, usually no more than 20, to jointly own, finance and run a business and to share any profits. Unlimited liability. |
| Private Limited Company | Can only sell shares privately to people known to the existing shareholders. Shareholders own shares in company and are responsible for the payment of any debts. Limited liability. |
| Public Limited Company | Limited Companies, or joint stock companies, sell shares to investors on the stock market in order to raise money for improving the business further. Limited liability. |
| Co-Operative | Firm owned, controlled and operated by members for mutual social, economic, and cultural benefit. Limited liability. |
| Market Capitalisation | How much it would cost to buy the entire company (…to buy all shares) |
| Company sizes by… | Net profit, no. of customers, sales, employees, share prices, no. of countries, market capitalisation, number of stalls, factories, offices (buildings), value of assets, brand awareness, and land owned (area) |
| Why do we have small firms? | Less paperwork, no motivation to grow, new companies, flexible, niche markets, less costs, and personal service. |
| Horizontal Integration | strategy where a company creates or acquires production units for outputs which are alike - either complementary or competitive. |
| Backward Vertical Integration | A business model whereby a company takes direct control of how its products are supplied. |
| Lateral Integration | Lateral integration takes place when two businesses integrate that have related goods but they do not compete directly with each other. |
| Forward Vertical Integration | Forward vertical integration in business is when a manufacturer decides to perform distribution and/or retail functions within the distribution channel. |
| Conglomerate Integration | A process whereby a business acquires a substantial number of other unrelated businesses in order to form a large and highly diversified corporation |
| Internal Growth | the development of a company by growing its existing business with its own finances, as opposed to acquiring other businesses. |
| External Growth | the growth of a firm by buying other companies, rather than by expanding existing sales or products. |
| Economies of Scale | The reduction in long-run average and marginal costs arising from an increase in size of an operating unit (a factory or plant, for example). Read more: http://www.businessdictionary.com/definition/economies-of-scale.html#ixzz3AccfCyFY |
| Diseconomies of Scale | Diseconomies of scale are the forces that cause larger firms and governments to produce goods and services at increased per-unit costs. The concept is the opposite of economies of scale. |
| Internal Economies of Scale | A measure of how efficient a company is at making its products that the business has the ability to manage directly. |
| External Economies of Scale | The lowering of a firm's costs due to external factors. External economies of scale will increase the productivity of an entire industry, geographical area or economy. |
| Reasons for growth | survival, to gain economies of scale, and to make larger future profits |
| Unlimited liability | The responsibility of one or more owners of a business organisation to repay the total amount of debt that the business has, regardless of how much the owner or owners have invested. |
| Fixed Capital | Money invested in durable productive assets such as machinery and premises that are needed to start up and conduct a business activity. |
| Separate Limited Liability | A company that has a legal status independent from that of its owners. This means it can buy, sell, and own assets, borrow money, enter co9ntracts, and be taxed on its income in its own name and right. |
| Controlling Interest | Ownership of a sufficient number of shares with voting rights in a company such that the stock holder can control company policy by out-voting all other stock holders. |
| Nationalisation | The process of transferring a private sector corporation, industry or assets into government ownership by a national government. |
| Direct Investment | The receipt of money by a country rom companies or residents overseas for the purpose of purchasing durable productive assets to start up or expand a company in that country. |
| Variable Costs | Those costs that alter directly with output |
| Fixed Costs | Those costs that do not alter directly with output |
| Distribution | cost of transportation |
| Variable Costs Examples | Raw materials, ingredients, components, packaging, distribution, piece rate labour, and commission. |
| Fixed Costs Examples | Rents/mortgage, electricity bills, phone bills, water bills, internet bills, insurance, taxation, advertising, (drawing and dividends), distribution, and wages of employees. |
| Break Even | the point where a firm’s Total Costs equal their Sales Revenue. The firms makes no profit or loss. |
| Perfect Competition | In economic theory, perfect competition (sometimes called pure competition) describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. |
| Monopolistic competition | Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. |
| Oligopoly | An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists) |
| Duopoly | A true duopoly is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominant control over a market |
| Monopoly | A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. |
| Homogenous Goods | A product that competes in a market but has no difference from others. It competes with price or availability. |
| Perfect Knowledge | That is, assuming that all agents are rational and have perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. |
| Normal Profit | minimum profit required for production: the minimum level of profit that is needed to maintain long-term production of a particular product |
| Price-takers | firm accepting market prices: a firm operating in a competitive economy where it is necessary to accept the prevailing market price in order to sell goods |
| Why do firms compete? | to increase customer base, to increase sales, to expand market share, to achieve product superiority, to enhance image, and to maximise profits. |
| Competition pricing strategies? | penetration pricing, expansion pricing, market skimming, price wars, price leadership, destruction pricing |
| Penetration Pricing | Penetration pricing is a pricing strategy where the price of a product is initially set at a price lower than the eventual market price, to attract new customers. |
| Expansion Pricing | Uniform pricing policy that aims at a standard price - irrespective of the location - under which the customer absorbs associated charges such as freight, duties, and taxes. |
| Market Skimming | An approach under which a producer sets a high price for a new high-end product (such as an expensive perfume) or a uniquely differentiated technical product (such as one-of-a-kind software or a very advanced computer). |
| Price Wars | A price war may be used to increase revenue in the short term or as a longer term strategy to gain market share. |
| Price Leadership | setting of price by dominant producer: the setting of a price by the market leader at a level that competitors can match in order to avoid price cutting |
| Destruction Pricing | The act of setting prices low in an attempt to eliminate the competition. Predatory pricing is illegal under anti-trust laws, as it makes markets more vulnerable to a monopoly. |
| Types of competition | Price competition, non-price competition |
| Price competition | lowering of prices to attract business: a situation in which companies attempt to win customers away from their competitors by lowering the prices of their goods or services |
| Non-price competition | A way of competing between companies on factors other than just price. |
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