3.1.1 Size And Types Of Firms

Question 1

Why do firms grow?

Answer 1

• Profit
• Costs
• Market power
• Innovation
• managerial motives

Question 2

Why do firms grow: profit

Answer 2

To generate more profit to give shareholders a better return (on investment)

Question 3

Why do firms grow: costs

Answer 3

To benefit from economies of scale, resulting in lower unit costs of production

Question 4

Why do firms grow: market power

Answer 4

To become a more dominant force in their market/large market share & power

Question 5

Why might firms want more market power?

Answer 5

• more market power/more monopoly power = less competition = the ability to change its prices (without losing customers)

Question 6

Why do firms grow: innovation?

Answer 6

To reduce risk, firms might invest in innovation = new products = new markets. This diversifies them so that if sales drop in one market, they have another market to generate sales

Question 7

Why do firms grow: managerial motives

Answer 7

Managers have self interest; reputation. Senior managers may wish to grow in order to control a large business

Question 8

Why firms may remain small?

Answer 8

• lack of finance for expansion
• avoiding diseconomies of scale - can occur when a business grows
• providing niche products = low PED or high YED
• acting as suppliers
• acting as local monopolies at specific times

Question 9

The significance of the divorce of ownership from control

Answer 9

• Principal-agent problem
• Shareholders own the business & appoint directors & managers to run it on their behalf
• the shareholders do not control te day to day decisions

Question 10

Principal agent problem

Answer 10

When one groups make decisions on behalf of another group, often placing their priorities above the principals.

Question 11

Aim of shareholders

Answer 11

Maximise profit to maximise their dividends

Question 12

Aim of manager

Answer 12

Increase sales and revenue at the expense of profit (maximise the no. sales over the value), power & prestige & status

Question 13

Aim of workers

Answer 13

Maximise salaries

Question 14

Causes of the principal agent problem

Answer 14

Divorce of ownership from control
- this creates lots of information gaps in that the agents (managers) have a lot more information than the owners & are often able to control the flow of it
- e.g pension fund managers can’t dictate what CEOs and CFOs of businesses decide to do & Senior executives may have little knowledge of what their managers are doing

Question 15

Ways to deal with the divorce between ownership & control

Answer 15

• granting share options to managers/offering financial rewards so they will be more likely to align their interests with the owners
• company legislation ensuring that Directors are accountable for their actions to shareholders

Question 16

Private sector

Answer 16

The part of the national economy that is not under direct state control

Question 17

Private sector example

Answer 17

British airways

Question 18

What do free market economists believe about private sectors?

Answer 18

• they argue that the private sector gives firms incentives to operate efficiently = increases economic welfare. Firms have to produce g/s the way consumers want = increases allocative efficiency = higher quality.
• competition = lower prices. This is because firms operating on the free market have a profit incentive, which public sector firms do not.

Question 19

Public sector

Answer 19

the part of the economy composed of both public services and public enterprises

Question 20

Public sector example

Answer 20

NHS

Question 21

Public sector explanation

Answer 21

• There could be natural monopolies in the public sector. E.g, only one firm will provide water because it is inefficient to have multiple sets of water pipes.
• Some public sector industries yield strong positive externalities. E.g, by using public transport, congestion and pollution are reduced.

Question 22

Public sector goals:

Answer 22

Public sector industries have different objectives to private sector industries, which are mainly profit driven. Social welfare might be a priority of a public sector industry. It could also lead to a fairer distribution of resources.

Question 23

The % fall in businesses from 2020 to 2021

Answer 23

6.5% fall from 2020 to 2021 due to the decline in employees

Question 24

Small business

Answer 24

small business is a business with 10-49 employees

Question 25

Micro business

Answer 25

Micro business is 0-9 employees

Question 26

The % of UK businesses have<10employees

Answer 26

95% (micro)

Question 27

The % of UK businesses have >250 employees

Answer 27

0.1% (large)

Question 28

Employment by sector give the % by way of the primary, secondary, and tertiary sectors

Answer 28

• Primary (production of goods): 3%
• Secondary (the manufacturing of goods): 18%
• Tertiary (the services): 79%

Question 29

Which sectors are most likely to be led by women?

Answer 29

Health sector

Question 30

Profit organisation

Answer 30

Aims to maximise the financial benefit of its shareholders & owners/earn maximum profits
- if they do not make profit, then they might go out of business

Question 31

Not-for-profit organisation

Answer 31

Aims to maximise social welfare. Many sell g/s & use profits they generate to further objectives (e.g Cancer Research)
- all charities are not-for-profit
- government exempt them from paying taxes

Question 32

What type of market structure is the hand wash car industry?

Answer 32

Monopolistic competition