3.1.1 sizes and types of firms Flashcards
identify and explain three reasons why firms grow
- profit motive
- to spread risk (protect themselves from the risk of one of their markets failing)
- managerial motive
identify three reasons why businesses stay small
- some firms operate in a niche market (insufficient customer demands for their product, e.g. eyebrow stations)
- family run businesses
- diseconomies of scale - no cost or efficiency reasons to expand
what is a PLC
a public limited company is one where shares are sold on a public stock exchange for anyone to buy.
define the divorce of ownership from control of a firm
the owners of the company are the shareholders, but the control over the firm’s day to day decisions is with the managers and directors.
what problems can occur if there is a divorce of ownership and control in a firm?
. the firm is not profit maximising and there can be a lack of accountability between the owners and the managers as the owners are not involved in the day to day running of the business
define the principal agent problem
the principal is the owner of the business and the agent is the manager. it is where there is a lack of information by the principal on the actions being taken by the agents and whether they are making decisions with the interests of the principals at heart. there is also a weak control mechanism meaning that the principals do not have effective control over what the managers are doing.
how does the principal agent problem affect the behaviour of firms
it leads to objectives other than profit maximising.
what is meant by a public sector organisation
when the organisation is owned and controlled by the government.
what is meant by a private sector organisation
when the organisation is owned by private individuals or shareholders
distinguish between a not for profit, and a profit making organisation
a not for profit organisation is charities, where they dont aim at making profit. a profit making organisation aims to make profit, like a normal business
