3.1.1: Sizes & Types Of Firms Flashcards
Why do firms tend to remain small?
-Diseconomies of scale- large firms could face high costs if they grow too quickly.
-Owner objectives- some owners may enjoy the lifestyle of owning a small business and may not wish to grow.
-Small firm monopolies- monopoly power can be held by small firms through a more personal, local service.
Why do firms tend to grow?
-Economies of scale- steady growth decreases the costs of production, and they sell more goods and make more revenue.
-Profit motive- many firms are motivated by profit and revenue.
-Monopolies- larger firms can influence prices and restrict the ability of other firms to enter the market.
-Prestige: ‘status’- Tate.
What is the principal (principal-agent problem)?
The shareholders/owners.
What is the agent (principal-agent problem)?
The managers.
What is the objective of the principal?
To maximise profits for themselves.
What is the objective of the agent?
To maximise their own benefit.
What is the principal-agent problem (in full)?
The principal plays no part in the day-to-day running of a business, and delegates the role to the agent.
The principal expects the agent to maximise profits for the benefit of the principal.
However, the agent has the temptation to maximise their own benefit instead (e.g. giving themselves a bonus).
How can the principal-agent problem be overcome?
*Employee share ownership scheme- an incentive to make workers productive (e.g. John Lewis 3 years into employment, also encouraging loyalty).
*Long term contracts- encourages senior management to make decisions that are of the long term interests of the business.
*Performance evaluation and criteria ensures that workers perform at a high level if their ‘bonus’ depends on it.
What is the public sector?
Industries that are government-owned.
What is the private sector?
Industries that are owned by private individuals/groups.
What are examples of public sectors?
-NHS.
-Ministry of Defence.
What are examples of private sectors?
-Edexcel.
-Bristol City FC.
What is a profit organisation?
An organisation that aims to maximise the financial benefit of its owners/shareholders.
What is a not-for-profit organisation?
An organisation that aims to maximise social welfare.
What are examples of profit organisations?
-Auto World Norbury.
-TESCO.