3.1.1: Sizes and Types of Firms

Question 1

What are some of the reasons that firms prefer to stay small?

Answer 1

• Firms operate in a niche market
• Avoid scrunity from gove pressure/ market
• Less corporation markets
• Highly competitive markets
• To focus on high quality product/ service

Question 2

What are some reasons that firms want to grow?

Answer 2

• Maximise profit
• Maximise market share
• Maximise scales
• Exploit economies of scale

Question 3

What are diseconomies of scale?

Answer 3

• When the expansion of output comes with increasing average unit costs.

Question 4

What are economies of scale?

Answer 4

• The cost advantages companies gain from increasing their output

Question 5

How is the size of a business determined?

Answer 5

• Economies of scale
• Diseconomies of scale
• Profit motive
• Size of market share
• Diversification (risk spread)

Question 6

What is market share?

Answer 6

• Market share is the percent of total shares in an industry generated by a particular company.

Question 7

What is the principal agent problem?

Answer 7

• It refers to the divorce of ownership between principal and agent.
• eg shareholders and managers have different objectives which may cause conflict.

Question 8

What is a possible solution to the principal agent problem?

Answer 8

• Managers become shareholders; they can receive a bit of their pay from shareholders.

Question 9

What is the public sector?

Answer 9

• Owned/ continued by government
• Merit goods
• Provides underprovided goods/ services
• Not necessarily profit driven

Question 10

What is the private sector?

Answer 10

• Owned by themselves (individuals/ groups of individuals) eg sole- traders and PLCs