3.1.1 sizes and types of firms

Question 1

Why do some firms remain small?

Answer 1

• lack of finance, no economies of scale = higher LRAC
• niche market, demand for the product may be specialised or limited, more personal service = low MES
• to avoid diseconomies of scale
• need for dynamic, responsive firm, they are able to react faster to changes in the market
• acts as a supplier
• already a local monopoly

Question 2

Why do some firms want to grow?

Answer 2

• to make more profit, sales or revenue
• economies of scale = larger firms have lower costs per unit
• increased market share = more market power, control of prices and increased consumer loyalty. Reduced threat of competition
• economies of scope = less exposed to risk than narrowly focused firms
• managerial factors = more job satisfiaction from working for a well-known brand with bigger profile. Status or salary of the manager may improve due to growth

Question 3

What is the divorce between ownership and control?

Answer 3

Firms are owned by shareholders (principal) who appoint directors and managers to control the business (agent).

Question 4

What are the problems of divorce between ownership and control?

Answer 4

Owners may have different objectives to managers.
- shareholders want maximised profits to increase dividends
- managers may aim to increase revenue or sales at the expense of profits

Question 5

How does the principal-agent problem occur when there is divorce between ownership and control?

Answer 5

When aims diverge and policies chosen conflict with other objectives. Managers make decisions on behalf of the shareholders, they have temptation to maximise their own benefits, rather than benefits of the shareholders.

Question 6

What is a private sector firm?

Answer 6

They are competitive and have to make a profit to survive. Profit will be a primary objective to some extent. Owned and run by individuals.

Question 7

What is a public sector firm?

Answer 7

They hold natural monopoly, can survive without making profit because the government make up any shortfall in revenues. Owned and run by governments. Their main aim may be to provide a service.

Question 8

What are profit organisations?

Answer 8

Aim to make a profit and maximise all financial benefits for shareholders.

Question 9

What are not-for-profit organisations?

Answer 9

Their primary objective is not to maximise profit, they may have to cover their costs. They are part of the private sector and usually aim to maximise social welfare

Question 10

What are the two kinds of private sector firms?

Answer 10

Profit and not-for-profit organisations