3.1

Question 1

Why do firms grow ?

Answer 1

Gain economies of scale
Increase size > Decrease LRAC > Increase Productive Efficiency

Increase market share
Dominant in market > Set prices high/ higher bargaining power with suppliers

Diversify
Way of spreading risk

Owner objective
Want to see business grow > See it succeed > remuneration from the profits

Question 2

What is meant by the divorce of ownership of control

Answer 2

Where the people who own the business appoint mangers to run the business for them

Question 3

In relation to business, what is meant by the principal agent problem

Answer 3

Where the owners of the business have the main objective of profit maximising but the managers may have not profit objectives, e.g improving their working conditions.

Making decisions that don’t align with the owner

Question 4

Characteristics of the public sector

Answer 4

Funded by the government
No incentive to be efficient
Operate at a cost

Question 5

Characteristics of the private sector

Answer 5

Profit max objectives, driven by demand and supply

Funded by shareholders

Question 6

Whats an not for profit organisation

Answer 6

A business run to achieve ethical objectives rather than profit

Question 7

Whats organic growth, give some examples

Answer 7

Growth that occurs internal to the business, with out mergers/ acquisitions/ takeovers.

E.g. Product launches, new stores

Question 8

Advantages of organic growth

Answer 8

Less risk > no threat of a merger failing and losing capital

Business morale higher > less disruptive behaviour thus efficiency won’t be damaged

A lot cheaper > high admin costs associated with merging

Question 9

Disadvantages of organic growth

Answer 9

Slower > need to build up retained profit to grow

May lack as high EofS compared to rivals , lose competitive advantage

If market isn’t growing, then the business is limited