3.1 Business growth

Question 1

3.1.1 sizes and types of firms:

why do firms wnat to grow - 3 reasons

what are 3 reasons explaining why all firms do not grow

principal agent problem,
what should agents do,
but what do they actually do
as a result, how does this affect firms objetives.

what is the public sector

what is the private sector

Answer 1

why do firms what to grow:
-firms will be able to experience economies of scale which decreases their costs of prodcution. also enbles them to sell more goods and services –> able to make more revenue. these combined will increse the firms profits
-a larger firm would hold a greater share of the market. gives firms the ability to influence prices and restrict the ability of other firms entering the market, helping them make profits in the long run.Monopoly power often means that the firm will achive monopsony power, allowing them to drive down their costs, by reducing the prices of raw materials.
-a larger firm will have more security as they will be able to build up assets and cash which can be used in financial difficulties. Likely to sell a greater range of goods in a range of different markets

why some firms do not grow:
-access to finance
-the size of the market
-owner objectives

Principal agent problem:
-occurs when trhere is a conflict of interest between a principal (owner) and agent (manager), who is supposed to act on the principal’s behalf
-the problem arises when the principal struggles to monitor the agents actions fully leading to decisions that don’t align with the principals best interest.
-agents shoud maximise the benefits for those whom they are looking after
-but in reality agents, have the temptation to maximise their own benefits
-it causes firms to not run to profit maximise, but rather to profit satisfice

private sector:
-the private sector refers to the part of the economy that is woned and run by individuals

public sector:
-refers to the part of the economy which is owned/controlled by local or central governement. the purpose of these organisations is to maximise social welfare.