3.1.1

Question 1

what is the distinction between a private sector/public sector organisation?

Answer 1

• private: when a firm wishes to maimise profits or seeks to raise awareness
• public: orgnaisations owned/ controlled by the government

Question 2

what is the principle agent problem?

Answer 2

when objectives of the agent differ from the objectives of the principle. eg: profit maximsation vs revenue maximsiation

Question 3

why is divorce of ownership from control a bad thing?

Answer 3

decisons taken not in the best intrest of the firm
* Managers may avoid taking risks that could benefit the firm but endanger their job security.
Managers may resist long-term investments in research and development due to the uncertainty involved.
* Managers may prioritize personal gain over maximizing shareholder wealth.
Example: CEOs receiving large bonuses even if company performance declines, leading to shareholders losing value.

Question 4

why do some firms tend to remain small?

Answer 4

• niche market
  demand is low
• lack of access to finance
• regulatory barriers

Question 5

what is divorce of ownership and control?

Answer 5

When the owners of a business do not control key day-to-day decisions such as pricing, investment and marketing

Question 6

what is the distinction between profit and not for profit firms?

Answer 6

A not-for-profit organisation is typically run on commercial lines but has strong social welfare and/or environmental aims rather than existing to generate a profit for private investors.

Question 7

why do firms want to grow?

Answer 7

• profit motive:
  better return for shareholders, stock valuation influenced bu future sales and profits
• cost motive
  economies of scale, less LRAC, increasing profit margin
• market power
  increasing market power gives them more pricing power.
  increases barriers to entry in market keeeping competition low
  reduced risk of hostile takeovers