3.1.1 - Sizes and types of firms

Question 1

Name the reasons why some firms remain small

Answer 1

• Avoid internal diseconomies of scale
• Operate in niche markets – Some businesses may operate in a niche market and therefore don’t have sufficient demand for the goods/services that they sell in order for their business to grow.
• Barriers to entry – e.g regulation and rules. This may make it difficult for firms to expand in to different markets and therefore grow
• Lack of finance to expand.

Question 2

Name the reasons why some firms grow

Answer 2

• More profits
• To experience internal economies of scale, which will help them decrease cost of production. Increase sells and make larger profits.,
• Increased market share - As businesses grow they’re are likely to experience increased sales revenue and therefore their market share will increase (the sales revenue they make as a percentage of the total sales revenue within the market).
• Diversification – Increased growth gives businesses the opportunity to enter into new markets as they have more money to expand. This allows them to diversify their product portfolio, helping to spread risk across multiple markets and products. Therefore, if one product fails then it has a reduced impact on the firm, thus increasing chances of survival.
• Managerial motives – It may be the owner’s ambition to own a large business or to receive the benefits that come with owning a large business e.g. larger salaries or increased leisure time (bigger businesses can hire managerial directors).

Question 3

What is the principal agent problem ?

Answer 3

• Managers want to maximies their own benefits. e.g sales bonuses
• Shareholders want to maximise their dividends.
• The principal-agent problem is when the agent (e.g. the manager who runs and controls the business) pursues different objectives to the principal (e.g. the shareholders who own the business).

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Question 4

Blurt everything you know about the distinction between public and private sector organisations

Answer 4

• Public sector organisations are owned & controlled by the Government
  Their goal is not profit maximisation but to provide a service. (NHS)
• Private sector firms are run by private individuals, their aims are profit maximisation. This can lead to higher levels of productivity.

Question 5

Blurt everything you know about the distinction between profit and non-profit organisations

Answer 5

• Non-profit organisations aim to provide a service or meet a need.Maximising social welfare. Many sell goods/services & use the profits they generate to further their objectives, e.g. The British Heart Foundation, Oxfam or bernardos.
• Profit organisations aim to maximise profits.