3.1.1 Sizes and Types of Firms Flashcards
Why do some firms seek growth?
- Increased profit
- Lower unit costs (economies of scale)
- Market power
- Diversification
- Managerial objectives
Why do some firms choose to remain small?
- Worried about diseconomies of scale (costs of production can increase if firm grows very large)
- Owners do not want extra work
- Higher risk with expanding
- Legal requirements are higher with expansion
Why do some firms have to remain small?
- Unable to finance expansion
- Operate in a niche market with small customer base
- Lacks skills, knowledge and expertise
- Lack resources to cope with additional regulations that expansion requires
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
What is the principal-agent problem?
A conflict which arises when the interests of the principal and the agent of a firm do not align
Causes for the divorce of ownership from control
- misaligned incentives
- risk aversion
How can we solve the principal-agent problem?
- performance-based pay (stocks and bonuses)
- monitoring
- corporate governance
Who owns public sector organisations?
The government
Who owns private sector organisations?
Private individuals/entities
Which one of public or private sector organisations have a profit incentive?
Private sector organisations
How are public sector organisations funded?
- taxes
- government budget
How are private sector organisations funded?
- investments
- loans
- revenues
What are the aims of profit organisations?
To generate income that exceeds their expenses
What are the aims of not-for-profit organisations?
To prioritise their mission over profit
