Chapter 1

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Firms have the following feature; ownership, management, goals, objectives, resources such as labor, knowledge, skills, organizational structure, and performance assessment, which is done by managers, shareholders, and business owners. A firm may be owned by shareholders, or members of the firm, and such are known as mutual firms while others are owned by the national and local government. Control of the firm is not necessarily a function of shareholders but senior management, and it depends on the size of the largest holding, the size, and distribution of remaining shares, and willingness of other shareholders to form a voting block, to be active and to vote against control groups.  Differences in shareholder ownership patterns determine the type of corporate governance system used by a firm, either insider system or outsider systems. Managerial discretion depends on external and internal constraints.

Chapter 2

Profit maximization is the goal of every firm. However, it is regarded to be a poor description of what many firms actually try to do, and it presents profit as a residual, and hence its outcomes are uncertain. The sales revenue maximizing firm is better placed in the market than the profit-maximizing firm as it increases the market share. Behavioral models are theories based on the differences between ownership and control and show that the internal structure of a firm influences a firm’s objectives. Firms that engage in corporate social responsibility are also ranked first in society and have a good reputation in the market instead of those that engage only in profit maximization.

chapter 3: Risk and uncertainty

Risk refers to where the likely future outcome is known from past practices while uncertainty there are know future estimates but their likelihood can not be attached. Some sources influence the level of uncertainty in the firm, such as: change in market demand, change in supply conditions, future invention and innovation, and change in government politics. The expected value and the statistical indicators of uncertainty can be calculated when the corporate planners allocate every pay-off a likelihood of occurrence. Decision-makers experience varying attitudes towards risk and uncertainty and are grouped as risk-neutral, risk-seeking and others will be risk-averse.


Chapter 4: consumer behavior

The indifference curve shows the consumer’s choices, thus helping economists analyse likely consumer reactions to a certain product, their prices, and income. The slope of the curve will depend on consumer urge to substitute one product for another. The curve analysis makes it possible for an economist to determine the impact in money income, prices of various substitutes, and consumers’ taste. However, the indifference curve analysis faces various criticisms from the process setting preferences to others arguing its static theory. Lancaster’s approach argues that consumers make choices for both distinct goods and similar goods. While the behavioural approach insists that consumers use decision routine when purchasing their product.

Chapter 5: Demand analysis

The projected number of products consumers will purchase depending on their prices, income, and preference result to demand.  The demand curve will represent the graph of the path consumers would select in purchasing various products and services different prices while other factors remaining constant. Market demand curve narrows down to one demand curve and analyze the quantity of a product it would cost consumers compared to possible substitute prices. With the demand curve calculating marginal and total revenue is possible since the price on the curve is the average revenue gained per every unit sold in that firm. The firm should consider various concepts of elasticity, such as; own price, cross-price advertising, and income when determining the firm’s price and advertising strategy.

Chapter 6: Estimation of the demand function

Firms find it costly to estimate the demand function for single products, resulting in traditional behavioral rules where managers make educated estimates based on past similar experiences. Demand function is estimated using interviews and survey methods, use of questionnaires, consumer experiments were done at consumer clinic and conducting market studies.  When using regression analysis, various challenges come up, including omission of a key determinant of demand and when a simultaneous change of one variable is not included. The signs and magnitude of the estimated variables should be paramount when analyzing regression calculation output. A case study of alcohol drinks in the UK was used to estimate log-linear demand functions.


Chapter 7: production and efficiency

Production is the process of transforming inputs to more useful final products to be consumed directly by consumers or used in making other products. Isoquant analysis can illustrate production function as it diagrammatically shows two factors can be combined to produce a desired level of output. A firm that is concentrating on maximizing profits will have to reduce the output cost of production. The consumer analysis budget line represents a line that shows how two products can be purchased for a certain amount. In the case study of estimating production function for retail chain labor was the dominant factor meaning that small businesses face competitive advantage from large companies.

Chapter 8: costs

The short-run cost curve involves two major elements that are fixed cost, which are constant and variable cost, which change depending on the output. Short-run cost depends on the technology used by the firm and managerial skills, whereas in long-run cost curves, all factors are variable. The cost curves are used in ascertaining whether a firm should expand or not. Cost also exploits diversification resulting to cost saving. Firms can learn to manage cost through awareness gained through benchmarking.


Chapter 9 

Price setting is a primary function of firms as the set price influences the sales and profit made. In perfect competition firms produce homogeneous products and there are a large number of small firms with many  consumers and none is able to control the price. In monopolistic competition the seller determines the price and in oligopolistic competition firms must consider reactions of other firms when setting the price. However the largest firm in oligopoly market is the price taker and must agree to the price proposed by others.

Chapter 10.

Price setting is determined by structure of the market a firm operates in. A price is a charge made by a producer to a consumer for the right to be supplied with a good or service. Monopoly pricing aims at maximizing profits and using a single price to equate marginal revenue to marginal cost and set the appropriate price for that output. Price discrimination involves exploiting demand characteristics that allow the same product to be sold at various prices unrelated to the cost of supplies. Pricing in imperfect markets involve relating prices to cost of production or conditions of demand, position and slope of demand curve.

Chapter 11

Advertising is the cost incurred by firms to promote the sale of goods or services. It provides information to consumers and persuades them to purchase. Advertising kindles demands hence lowering the price elasticity of demand of a product. Advertising is an expense and may offset profits of a firm. Advertising is mainly done to product with low price elasticity which have a higher advertising-to-sales ratio than products with higher price elasticity. Advertising is influenced by the type of market structure. Branding involves giving a product a brand name by which consumers can easily identify.

Chapter 12

Investment appraisal involves the following steps; determining the goal of investment appraisal, finding options, recognizing the costs, benefits, timing and uncertainties, selecting the method of appraisal, selecting the cost of capital, test of feasibility, giving the outcomes. The value of money increases with time. Investment decisions are futuristic and are thereby faced by risks and uncertainties. These uncertainties may arise from changes in consumers’ preferences, new entrance into the market and technology advancement. Investment decisions require huge funding. Firms acquire funds either internally or externally which include retained earnings, investment loans, bonds, government grants and subsidies.



Chapter 13

Entrepreneurship is one of the factors of production. Entrepreneurs are innovative people who introduce new products, markets and identify gaps in existing markets. Entrepreneurs are motivated to start new businesses by various factors which include dissatisfaction with existing firms and their products or the need to make higher returns. Entrepreneurs face various difficulties while starting new businesses such as inadequate startup capital. Creators of early firms had similar features such as they were mainly men who had formal qualification and were in search of employment.

Chapter 14

There are various theories that explains the reasons as to why firms exist and their boundaries, they include; Coase’s theory of the firm which compared the role of resource allocation in the market and the firm whereby, according to him markets influence resource allocation through price signals and businesses respond through dominance of pricing mechanism. The ability of managers and entrepreneurs to absorb and handle information determines the kind of market structure they operate in either perfect or imperfect market. Also, the information available to buyers influences their agreements with buyers and when they have inadequate information adverse selection situations may arise. Opportunistic behavior is a common occurrence where one party to the agreement does not keep its parts of agreement and they do not disclose it to the other party.

Chapter 15

Growth raises profits, increase market power and share, reduce risks and uncertainties and reduce transaction cost. Sources of new finance include new equity, debt borrowing and retained income. Growth of the firm depends on the growth rate of demand of a firm’s product. Growth of a firm is also influenced by internal processes that increases production capacity as explained in endogenous theory. A firm’s resources may be classified into tangible and intangible, ability to combine these two resources and get maximum output is known as competences. There are various limitations to growth of new firms such as managerial constraints.

Chapter 16

A firm is vertically integrated if it decides to produce its own inputs. Various factors motivate firms to be vertically integrated which include to reduce distribution cost, avoid imperfect market, technological benefits and high quality input. Vertical integration avails various benefits to the firm which include efficient planning system resulting to high quality products and reduces uncertainties faced by a firm. It also increases monopoly power which enables firms to charge higher prices for their products. Success of vertical integration in mergers depends on the role of parent company’s influence on the new business.

Chapter 17

Diversification occurs when a firm decides to engage in new areas either connected or unconnected to its existing activities. This can be done through entering new markets or creation of new models of products. A diversified firm produces various products whereas undiversified firms are limited to producing one product. Diversification arises from a firm’s need for profitability which is determined by a firm’s current market position. Diversification is interconnected to synergy; synergy is working as whole rather than as a part resulting to higher profit margins. Synergy arises from economies of possibility. Diversification gives a firm various benefits such as cost advantage and revenue scope.

Chapter 18

Undiversified firms may eventually leave the market, this is known as market exit, especially when their revenues cannot cover operating cost. Firms also exit oligopolistic markets especially when they are unable to finance their operations, to manage their losses or a firm may be forced to leave such a structure for the survival of other firms. A firm may be encouraged to leave a market by various factors such as decrease of demand, low profits, huge debts and stiff competition. Demand changes over time either gradually or rapidly and this affect a firm’s decision to exit markets.

Chapter 19

Formation of mergers is a strategy to grow and develop businesses. A merger is an entity made up of more than two businesses to serve a common purpose and under one ownership. Mergers are formed because of the following reasons; need to raise the growth rate of a business or need to increase returns by stockholders. Mergers increase the market power of a firm by making its existence felt in the market. Mergers enable a firm to take advantage of diversification benefits, cost savings, acquiring competences, defensive benefits and opportunistic gains. The following are some of the indicators of the success or failure of a merger eg profitability rates, dividends to shareholders and efficiency benefits.

Chapter 20

The principal agent analysis is a relationship between an owner of a business who is referred to as the principal and their manager who is referred to as the agent. The agent is normally an employee of the principal and he is paid wages or salaries for work done however, the principal does not have total control on the agent and thus cannot fully measure the agent’s work or production. The principal and agent have different objectives, the principal focuses on present value of the business while agent focuses on maximizing on the goals, aims and functions of the business. The reward structure adapted by the principal towards the agent determines the agent’s attitudes and efforts towards work. Firms should have reward schemes aligned to performance so as to motivate the principal and agent to produce more.

Chapter 21

Stagecoach is a company founded in 1980 and gives good guidelines on how to use regulations for a company’s growth. Government regulated the bus industry through licenses under the road traffic Act. The demand for the buses decreased due to the coming of car ownership which resulted to reduction passengers. Expenditure of the bus included fuel, road use charges, garage and maintenance charges. The bus industry was able to cope with the regulations of the government and worked with the government proposed fare prices.Stagecoach has also partaken of the benefits of diversification where they linked passengers to the new railway and airport terminuses. The bus industry expanded internationally as it started operating in various countries.


Chapter 22

Government regulation is where the government places restrictions on firm’s activities for the interest of the general public. Government regulates businesses through price mechanism investment control, instilling standards and licensing. Regulation acts as a control of competition and hence reduces unfair and destructive competition. Competition policies formulated by the government aims at preventing monopoly and mergers from engaging in abusive and anti-competitive practices.

Chapter 23

Public sector production aims at serving the community and its members. They are firms owned by the state. Producing in the public sector ensures that consumers have the whole benefit of a product. However, when the consumers do not receive the whole benefits a phenomenon known as externalities and they could be negative or positive arises. Goods produced in the public sector may be merit goods or bad goods and private goods or public goods. Reasons for engaging in public sector production are inadequate private supply imperfect information and a decreasing cost function.

Chapter 24

Decision making in public sector is not guided by prices, production in this sector is also funded by government grants and it acts as a monopoly. The management of this sector is heavily bureaucratic. The government uses collective decision making techniques to determine consumer taste and preference, however, this system is faced by free riders issue who do not want to pay for services unless they are forced to do so. Consumers express their views through voting systems, this could be direct voting or representative democracy. Quasi markets accrue the following benefits such as greater responsiveness to consumer needs and fair charges for consumption.

Chapter 25

Public and private sector investment has various differences in terms of revenue, expenditure, discount rate and test of feasibility. The welfare criteria is made up of value-based pronouncements that are widely accepted by the society and the notion of compensation test.Cost benefit measures the total cost and rewards in monetary word. Public sector investment projects results to development of social infrastructure which may bring other indirect benefits. It also results to technological transfers which may help businesses to advance. Public investment projects increases the value of time and of life for example good roads will ensure a faster means of transport with reduced accidents hence saving lives.


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