3.1.1 - Sizes and types of firms

Question 1

What are the reasons that firms seek growth ?

Answer 1

Profit
Cost
Market power
Diversification
Managerial objectives

Question 2

What is the relationship between growth and profits ?

Answer 2

As the size of a firm increases, they increase their sales which would boost revenue.

A higher revenue would mean more profit

Question 3

What could increased profit lead to ?

Answer 3

It could lead to increased investment

Question 4

What is the relationship between growth and costs ?

Answer 4

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

Question 5

What is the relationship between growth and market power ?

Answer 5

As a firm increases in size, they have more market power

Question 6

Define market power

Answer 6

Market power is the ability of a firm to raise prices and earn supernormal profit

Question 7

Define diversification

Answer 7

increasing the range of products or markets served by a business.

Question 8

What does the degree of diversification depend on ?

Answer 8

The extent to which those products or markets are different from the existing products and markets served by the business

Question 9

How is diversification beneficial to a firm ?

Answer 9

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

Question 9

What is the relationship between growth and managerial objectives ?

Answer 9

The objective of growth provides an incentive to managers to claim renumeration packages

Question 10

Why may managers want to increase the size of their firm ?

Answer 10

For renumeration packages

To satisfy their ego

Question 11

Why do firms choose to remain small ?

Answer 11

• 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

Question 12

When do diseconomies of scale occur ?

Answer 12

They occur when a business grows so large that the cost per unit increases

Question 13

How much regulation do smaller firms face compared to larger firms ?

Answer 13

They face little regulation

Question 14

Why do some firms have to remain small ?

Answer 14

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.

Question 15

Why are small firms sometimes unable to finance expansion ?

Answer 15

Banks generally see small firms as risky borrowers so only offer credit on strict terms or not at all.

Question 16

What are the different types of firms ?

Answer 16

• Private sector firms
• Public sector firms
• Not for Profit firms

Question 17

What are private sector firms ?

Answer 17

Private-sector firms are those that are not owned by the government.

They may be owned by shareholders

Question 18

What do private sector firms aim to do ?

Answer 18

Profit maximise to satisfy the demands of their owners

Question 19

Why may the government own certain businesses ?

Answer 19

Either because they could not survive without significant state funding or because the government wishes to determine the direction the business takes

Question 20

What are the businesses owned by the government called ?

Answer 20

Public sector firms

Question 21

What do not for profits consist of ?

Answer 21

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.

Question 22

What is the principal agent problem ?

Answer 22

• 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

Question 23

Who is the principal ?

Answer 23

The shareholder or owner of a business

Question 24

Who is the agent ?

Answer 24

The person in charge of the day to day running of the business