3.1.1

Question 1

Size of firms can be determined by:

Answer 1

• economies of scale relative to market size
• diseconomies of scale
• small firms as monopolists
• profit motive
• market power
• diversification
• owners

Question 2

Significance of the divorce of ownership from control: the principle- agent problem. What is it?

Answer 2

• the principle agent problem can be linked to asymmetric information
• this is when the agent makes decisions for the principal, but the agent is inclined to act on their own interests, rather than those of the principal

Question 3

Public sector

Answer 3

• this is when the government has control of an industry, such as the NHS

Question 4

Public sector facts

Answer 4

• could be natural monopolies in the public sector
• some public sector industries yield strong positive externalities
• public sector industries have different objectives to private sector industries (social welfare may be a priority of a public sector industry)
  Could lead to fairer distribution of goods

Question 5

Private sector

Answer 5

When a firm is left to the free market and private individuals eg, British airways

Question 6

Private sector facts

Answer 6

• free market economists argue that the private sector gives firms incentives to operate efficiently, which increases economic welfare
• competition might also result in lower prices
• firms operating in a free market have a profit incentive

Question 7

Profit organisation

Answer 7

A profit organisation aims to maximise the financial benefit of its shareholders and owners
The goal of the organisation is to earn maximum profits

Question 8

Not- for - profit organisation

Answer 8

This organisation has a goal which aims to maximise social welfare
They can make profits, but they cannot be used for anything apart from this goal and the operation of the organisation