3.1.1 Size and types of Firms Flashcards
What is a firm
A business organisation such as a corporation that produces and sells goods and services in markets.
What is a sole trader
Where the business and the owner are the same
Advantages of a sole trader
Make all the decisions
Keep all the profits
Easy/Cheap set up
Doing something you want
Disadvantages of sole traders
Hard to raise finances
Limited skills/knowlege
High pressure
Unlimited liability
What is a partnership
Business with 2-20 people as owners
Business and owner are the same
Advantages of a partnership
- More experience between individuals
- Greater finances than sole traders
- Shared responsibility
Disadvantages of partnership
- Shared profits
- Possible conflict in decision making
- Unlimited Liability
- Joint limited liability
What are the two types of companies
Public limited company (plc)
Private limited company (Ltd)
What is a shareholder
And what are their main interests in the business
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
What is a stakeholder
A stakeholder is any individual or organisation who has a vested interest in the activities and decision making of a business
What are the key reasons why business may want to stay small
- 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
What is a divorce between ownership and control
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
What is the principle agency problem
- 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.
how to overcome the principle agency problem
- Employee share the ownership scheme
- Long term employment contracts for senior management
- Long term stock commitment (production targets)
What is a public sector organisation
organisation: Organisations that are owned and controlled by the state e.g. the NHS, social care,
state schools, the Police, HM armed forces.
What is a private sector organisation
are owned by private investors rather than the state
(84% jobs in UK are private sector)
What is a private limited company
Corporations whose shares are not listed on a public exchange
What is privatisation
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
What is a ‘Not for profit organisation’
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
What is a social enterprise?
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
