3.1.1 - sizes and types of firms

Question 1

why do some firms grow and some stay small

Answer 1

Firms grow for a number of reasons: to make more money, to gain monopoly power and for greater security.
● By growing, a firm will be able to experience ​economies of scale which helps them to decrease their costs of production. They will also be able to sell more goods and therefore make more revenue​. Together, these will help a firm to make a ​larger profit​: and many firms are motivated by profit.
● A larger firm will hold a greater share of their market. This will give them the ability to influence prices and ​restrict the ability of other firms to enter the market, helping them to make profits in the long run. Monopoly power often means firms have monopsony power​, and so will be able to reduce their costs by driving down the prices of their raw materials.
● A larger firm will have more security as they will be able to ​build up assets and cash ​which can be used in financial difficulties. Moreover, they are likely to sell a bigger range of goods in more than one local/national market and so they will be less affected by changes to individual products or places.

however they may stay small due to avoiding less work, taxes and paying extra costs

Question 2

what is the principal agent problem

Answer 2

occurs when the shareholders have no control over the firm as the managers have the control. the managers will operate the firm at a level that satisfies their utility not the shareholders expectations to maximise profits

Question 3

what are the distinctions between the public and private sector

Answer 3

In the UK, the economy is split into private and public sector:
● The private sector refers to that part of the economy that is ​owned and run by
individuals or groups of individuals,​ including sole traders and PLCs.
● The public sector refers to that part of the economy which is owned or controlled by local or central governmen​t. The purpose of these organisations is to provide a service for UK citizens and profit making is not their main aim, some may even make a loss which is funded for by the taxpayer.

Question 4

what are the distinctions between profit and non profit organisations

Answer 4

The private sector can be split into for profit and not-for-profit organisations:
● Almost all private sector organisations are run to make a profit and to ​maximise the financial benefits for their shareholders​. They may not necessarily profit-maximise, but their long term goal is to make money.
● Some private sector organisations are not-for-profit. Any profit they do make is used to support their aim of ​maximising social welfare and helping individuals and groups​. These organisations include charities and smaller organisations who aren’t large enough to be classified as charities.