3.1.1 Sizes + types of firms

Question 1

why do companies choose to stay small?

Answer 1

• operating in a niche market; EoS may be very small compared to the market size
• lack of EoS; avoiding DisEoS
• focus on customer service
• firm might have regional monopoly
• lack of finances for expansion

Question 2

why do companies grow?

Answer 2

• EoS
• inc. market share + influence on price
• economies of scope
• to reduce risk
• manager’s objective

Question 3

define economies of scale

Answer 3

the cost advantages a company gains from increasing their output

Question 4

define economies of scope

Answer 4

when producing two or more goods together results in lower marginal costs compared to if they were sold separately

Question 5

define diseconomies of scale

Answer 5

this is the cost disadvantages when a company inc. their output

Question 6

define ‘divorce of ownership from control’

Answer 6

when the ownership of a company is separate from control over the company’s operations + decision-making
- may lead to conflicting objectives, leading to the principal-agent problem

Question 7

what is the ‘principal-agent problem’?

Answer 7

when there is a divergence of interests between the ‘principal’ (owner/shareholder) and the ‘agent’ (manager)
- incentives may not align, leading to potential conflcits

Question 8

what are the solutions to the principal-agent problem?

Answer 8

1. effective corporate governance e.g. board of directors to play a crucial role in overseeing management’s actions + decisions
2. granting stock options/equity ownership to employees + managers -> encourages them to work towards inc. shareholder value in the LR

Question 9

what is the difference between public + private sector companies?

Answer 9

PUBLIC: owned + controlled by the gov., profit isn’t the main aim
PRIVATE: owned by individuals OR companies; aim to make profit

Question 10

what is a ‘not-for-profit’ organisation?

Answer 10

seek to maximise welfare; can make profit