3.1.1- Size And Types Of Firms Flashcards
What are the types of legal business ownership?
-sole trader
-partnership
-public limited company
-private limited company
How many partners can there be in a partnership?
2 to 80
Who is a public limited company owned and controlled by?
Owned by shareholders who buy shares on the stock market and controlled by MD and board of directors
Who is a private limited company owned and controlled by?
Owned by shareholders who are known to the owners and controlled by MD and board of directors
Why do firms want to grow?
-economies of scale
-increased power
-greater security
-social objectives
Why does increased power mean a firm wants to grow?
-monopoly power over consumers means the firm can influence prices as they have a higher market share, so consumers have less options, so PED is inelastic therefore prices can be increased
-monopsony power over suppliers so can drive down prices of raw materials, increase the period of trade credit to improve cash flow, and can force them to increase the quality of raw materials
Why does greater security mean a firm wants to grow?
-can build up assets and cash to use in financial difficulties
-can avoid a hostile takeover
-can spread the risk of failure over multiple markets
Why do social objectives mean firms want to grow?
- more growth means they have the ability to help more
What is an example of a firm having social objectives?
Ben and Jerrys brownies are made by ex prisoners
Why may firms stay small?
-to avoid excessive administrative/legal costs
-niche markets
-division of ownership and control
-diseconomies of scale
-loss of agility and flexibility
-threat of regulation and legislation
-constraints
Why does niche markets mean the firm may stay small?
-can hold onto niche status and charge a higher price
-niche may be so small that they dominate the market already so can’t grow
What is division of control and ownership?
When owners of a firm are no longer the day to day controllers of the firm
What is the principal agent problem?
Owners want to profit maximise and directors want to maximise their own benefits
What’s an example of the principal agent problem?
Enron scandal (2001) where executive hid billions of dollars in debt from the board of directors
What type of constraints are there that would prevent a firm from growing?
Capital, raw materials, labour
