3.1.1 Size and types of Firms

Question 1

What is a firm

Answer 1

A business organisation such as a corporation that produces and sells goods and services in markets.

Question 2

What is a sole trader

Answer 2

Where the business and the owner are the same

Question 3

Advantages of a sole trader

Answer 3

Make all the decisions

Keep all the profits

Easy/Cheap set up

Doing something you want

Question 4

Disadvantages of sole traders

Answer 4

Hard to raise finances

Limited skills/knowlege

High pressure

Unlimited liability

Question 5

What is a partnership

Answer 5

Business with 2-20 people as owners

Business and owner are the same

Question 6

Advantages of a partnership

Answer 6

• More experience between individuals
• Greater finances than sole traders
• Shared responsibility

Question 7

Disadvantages of partnership

Answer 7

• Shared profits
• Possible conflict in decision making
• Unlimited Liability
• Joint limited liability

Question 8

What are the two types of companies

Answer 8

Public limited company (plc)

Private limited company (Ltd)

Question 9

What is a shareholder

And what are their main interests in the business

Answer 9

Own the business – they have an equity stake in the business

• Return on investment + profits and dividends as source of income, Success and growth of business, Proper running of the business

Question 10

What is a stakeholder

Answer 10

A stakeholder is any individual or organisation who has a vested interest in the activities and decision making of a business

Question 11

What are the key reasons why business may want to stay small

Answer 11

• Product differentiation & having a unique selling point
• Flexibility in meeting customer needs
• Deliver a high standard of customer service
• Exploit opportunities from e-commerce
• Avoid risks of higher unit costs from internal diseconomies of scale
• Smaller firms can be more innovative / creative and respond more quickly to changing market trends

Question 12

What is a divorce between ownership and control

Answer 12

owners of a business may not be the same as those people who are taking key day-to-day decisions such as pricing, investment and marketing

Question 13

What is the principle agency problem

Answer 13

• Possible conflicts of interest that may result between shareholders (principal) and the management (agent) of a firm
• principal agent problem is an asymmetric information problem.
• Owners of a firm often cannot observe directly the day-to-day decisions of management. The decisions and performance of agent are costly and difficult to monitor.

Question 14

how to overcome the principle agency problem

Answer 14

• Employee share the ownership scheme
• Long term employment contracts for senior management
• Long term stock commitment (production targets)

Question 15

What is a public sector organisation

Answer 15

organisation: Organisations that are owned and controlled by the state e.g. the NHS, social care,
state schools, the Police, HM armed forces.

Question 16

What is a private sector organisation

Answer 16

are owned by private investors rather than the state

(84% jobs in UK are private sector)

Question 17

What is a private limited company

Answer 17

Corporations whose shares are not listed on a public exchange

Question 18

What is privatisation

Answer 18

means the transfer of assets from the public (state/government) sector to the private sector of an economy

become a common feature of microeconomic reforms throughout the world

Question 19

What is a ‘Not for profit organisation’

Answer 19

Businesses that are operated commercially but with social welfare and environmental aims in mind

Typically, profits are reinvested for social purposes and social aims

are charities, community organisations that are run on commercial lines

e.g. Network rail, BBC

Question 20

What is a social enterprise?

Answer 20

Is a ‘not for profit’

Profit is reinvested for social purposes rather than for the gain of private investors

e.g. Big issue magazine, Eden project