3.1.1 Sizes and types of firms Flashcards
LS1
Why do firms seek growth?
- Profit
- Costs
- Market power
- Diversification
- Managerial Objectives
How does increasing firm size lead to increased profit?
- Increasing size enables firms to sell more goods and services
- Leads to increase in sales, which leads to higher revenue = higher profit
Profit beneficial to firms in several ways (increased investment)
How does increasing firm size lead to lower unit costs?
- Firms that increase in size often experience lower unit costs as a result of economies of scale
Beneficial as lower unit costs allow for higher profit
How does increasing firm size affect market power?
- The larger a firm becomes, the more market power they will have
Market power definition?
- The ability of a firm to raise prices and earn supernormal profit
Diversification definition?
- Increasing the range of products or markets served by a business
Degree of diversification depends on extent to which the those products/markets are diff to existing products/markets served by the business
How does increasing firm size lead to diversification?
- Firm can expand in size through entering a foreign market (like German firm Lidl opening its first UK store in 1994)
- OR by producing a new good/service (like Amazon providing groceries now)
How can diversification be beneficial to firms?
- Reduces risk
- Reduces vulnerabilities to recessions (if operating in multiple countries)
How do managerial objectives give firms a reason to seek growth?
- Managers often have renumeration packages that are determined by sales performance of their firms (like a CEO receiving bonuses for meeting sales targets)
- Managers may also seek to increase firm size to satisfy their ego (i.e. leading a large firm can command respect from others)
Why do some firms choose to be small?
- Worried about experiencing diseconomies of scale if they expand
- Firm’s owners may not want the extra work and risks (expansion involves sunk costs that can’t be recovered if expansion is a FLOP like the money lost on marketing, capital, labour etc)
- Smaller firms generally face less, more easily compliable regulations than larger firms so staying small can allow for a more manageable regulatory framework for firms
Why must some firms remain small?
- Unable to finance expansion as banks generally see small firms as risky borrowers
- Operate in niche market with small customer base (i.e. yachts)
- Skills, knowledge and expertise (human capital) required may be lacking
- Firms may lack the resources to cope with additional regulations and bureaucracy that expansion entails
Private sector firms?
- Firms not owned by the government
- May be owned by shareholders (PLC like M&S)
- Or family owned where shares are not traded on the stock market (like LEGO)
- Includes sole proprietors (owned and run by one person like a newsagent)
What is the aim of private sector firms?
- To make a profit to satisfy the demands of their owners
Public sector?
- Consists of government-controlled enterprises that run on the basis that it will not make profit for shareholders but instead will reinvest any surplus funds
For UK: NHS, Network Rail
Why does the government own certain businesses?
- Either because they could not survive without significant state funding
- OR because government wishes to determine the direction the business takes
