A2 Economics Unit 7 Objectives of firms and why firm grows

(a)   growth: when a firm grows internally by reinvesting profits or borrowing from banks. (External or Internal)

(a)   merger / takeover between two firms at the same stage of production in the same industry. (horizontal, vertical , lateral)

(a)   vertical integration: a process under which a firm merges with a firm that is involved in an earlier part of the production chain. (backward, forward, lateral)

(a)   problem: a problem arising from conflict between the objectives of the owner and those of the managers who take decisions on their behalf.

A (a)   maximising firm will produce more output than a profit-maximising one, and will need to charge a lower price in order to sell the more output at the peak of the TR curve (which is also the point at which MR = 0)

A (a)   maximising firm will produce more output than a profit-maximising one, and will need to charge a lower price in order to sell the more output regardless if the firms make normal profit (AC=AR). This is done to flood the market to build brand loyalty as barriers of entry.

This objectives occurs when AR<AC (firm loss)  in a very competitive market (a)  

Survive SR = if AR>AVC (if selling price can still cover the avg variable cost)

Shutdown SR = if AR<AVC (if selling price cannot cover the avg variable cost)

In the shortrun, if a firm experience  AR<AC (firm loss), but P>AVC

they need to (a)   in the short-run to cover the sunk cost / fixed cost. Because if they immediately shutdown, the loss would have been higher. (survive or shutdown)

In the shortrun, if a firm experience  AR<AC (firm loss), and P<AVC

they need to (a)   in the short-run because there's no point to survive at all. (survive or shutdown)

[Check the slide] The motives (why) behind a large firm’s growth include (a)