3.1.1 Size and types of Firms Flashcards
What is the private sector?
Made up of firms that are owned by private individuals
What is the public sector?
Made up of firms that are owned by the state
Give 3 reasons why a firm may want to grow within a market?
- economies of scale
- influence prices
- build up assets
Why would economies of scale benefit a firm that wants to grow?
By a firm increasing their economies of scale, they can reduce their costs of production meaning they are able to sell more goods and therefore make more revenue. This will increase profits
Why would influence over prices mean a firm may want to grow?
A larger firm will hold more market share. This will give them the ability to influence prices and restrict the ability of other firms to enter the market.
Why would a building up of assets and cash mean a firm will want to grow?
So they can use the built up money in financial difficulty. Moreover, doing this they are able to sell a larger range of goods to national and international markets
What are the reasons for why a firm may want to remain small?
- the size of the market
- access to finance
- owner objectives
- regulation
What is the principal agent problem?
When one group, the agent, makes decisions on behalf of another group, the principal. Agents want to maximise their own benefit, compared to the principal who wants to profit maximise
Explain the principal agent problem…
Firms are owned by their shareholders and run by the CEOs. The problem is the owners will want to profit maximise (to get a greater return on their investments), but CEOs will want to do what will maximise their own benefit i.e. profit or sales maximising
What is a ‘for profit’ organisation?
When a firm wants to maximise the financial benefits for their share holders.
What is a ‘not for profit’ organisation?
When a firm wants to maximise social welfare by helping individuals and groups
