3.1.1 - Sizes and types of firms Flashcards
What are the reasons that firms seek growth ?
Profit
Cost
Market power
Diversification
Managerial objectives
What is the relationship between growth and profits ?
As the size of a firm increases, they increase their sales which would boost revenue.
A higher revenue would mean more profit
What could increased profit lead to ?
It could lead to increased investment
What is the relationship between growth and costs ?
A firm that increases in size often experiences lower unit costs as a result of the economies of scale
This could allow for higher profit to be made
What is the relationship between growth and market power ?
As a firm increases in size, they have more market power
Define market power
Market power is the ability of a firm to raise prices and earn supernormal profit
Define diversification
increasing the range of products or markets served by a business.
What does the degree of diversification depend on ?
The extent to which those products or markets are different from the existing products and markets served by the business
How is diversification beneficial to a firm ?
It reduces risk
If one country in which a firm operates experiences a recession, the firm can rely on sales from other countries to prevent a large dip in sales
What is the relationship between growth and managerial objectives ?
The objective of growth provides an incentive to managers to claim renumeration packages
Why may managers want to increase the size of their firm ?
For renumeration packages
To satisfy their ego
Why do firms choose to remain small ?
- They are worried about experiencing diseconomies of scale if they expand.
- A firm’s owners do not want the extra work and risks involved in expanding
- Legal requirements differ according to the size of a firm
When do diseconomies of scale occur ?
They occur when a business grows so large that the cost per unit increases
How much regulation do smaller firms face compared to larger firms ?
They face little regulation
Why do some firms have to remain small ?
They are unable to finance expansion.
They operate in a niche market which has a small customer base
The skills, knowledge, and expertise required may be lacking.
The firm may lack the resources to cope with additional regulations and bureaucracy that expansion entails.
Why are small firms sometimes unable to finance expansion ?
Banks generally see small firms as risky borrowers so only offer credit on strict terms or not at all.
What are the different types of firms ?
- Private sector firms
- Public sector firms
- Not for Profit firms
What are private sector firms ?
Private-sector firms are those that are not owned by the government.
They may be owned by shareholders
What do private sector firms aim to do ?
Profit maximise to satisfy the demands of their owners
Why may the government own certain businesses ?
Either because they could not survive without significant state funding or because the government wishes to determine the direction the business takes
What are the businesses owned by the government called ?
Public sector firms
What do not for profits consist of ?
The not-for-profit sector consists of charities, sometimes known as the third sector or civil society, which exist to provide services to local, national and international communities, and do not see profit as the primary goal.
What is the principal agent problem ?
- In such cases the agent can make decisions on behalf of the business that do not necessarily match the direction in which the owners would like to take the business.
- This can be a problem if the principal is not fully aware of the actions of the agent, as is often the case with large corporations, or they lack sufficient information, as a result of asymmetrical information
Who is the principal ?
The shareholder or owner of a business
Who is the agent ?
The person in charge of the day to day running of the business
