3.1.1 - Sizes & Types Of Firms

Question 1

Why Do Firms Grow?
(6 Points)

Answer 1

~ Desire for higher profit.

~ Desire for stronger monopoly power to influence prices and restrict others from entering the market.

~ Benefit from EOS to reduce costs.

~ Satisfaction of growing.

~ Opportunities for product diversification and ability to sell more.

~ Larger a firm the easier the access to finance.

Question 2

Why Do Small Firms Exist?
(7 Points)

Answer 2

~ Offer a more personalised service.

~ Focus on building relationships with their customers.

~ Unable to access finance for expansion.

~ Provide a product that is in a niche market / smaller market.

~ Many firms operate in mass markets with lower barriers to entry.

~ Rapid growth can cause DEOS.

~ Owners goal is to profit satisfice.

Question 3

What Happens Between Managers & Owners As Firms Grow?

Answer 3

Owners often appoint managers to run the business for them.

Question 4

What Is The Problem With Managers Running A Firm As It Grows?

Answer 4

Divorce of ownership and control situation.

Question 5

What Is The Divorce Of Ownership & Control?

Answer 5

There is a separation between the owners and the managers who control the day to day running of the business.

Question 6

What Does The Divorce Of Ownership & Control Stem From?
(3 Points)

Answer 6

~ Differing aims of the two stakeholders.

~ Owners want to maximise returns on their investments so would want to SR profit maximise.

~ Directors and managers want to maximise their own benefits as they are employees.

Question 7

What Does The Divorce Of Ownership & Control Give Rise To?

Answer 7

The principle agent problem.

Question 8

What Is The Principle Agent Problem?

Answer 8

An asymmetric information problem that stems from the divorce of ownership and control.

Question 9

What Is The Issue With The Principle Agent Problem?

Answer 9

Leads to poorer decisions by the owners as their aims and objectives may not align with those of what the managers are aiming towards.

Question 10

How Do Firms Overcome The Principle Agent Problem?
(4 Points)

Answer 10

~ LT contracts for managers, so they make decisions in the LT best interest of the firm.

~ Employee share ownership, makes employees feel like they own part of the business.

~ LT stock commitments, to align interests.

~ Greater business transparency, for clear decisions.

Question 11

What Are Public Sector Organisations?

Answer 11

Organisations owned and controlled by the government.

Question 12

What Is The Goal Of Public Sector Organisations?

Answer 12

To provide a service.

Question 13

What Are Private Sector Organisations?

Answer 13

Organisations owned and controlled by private individuals.

Question 14

What Is The Goal Of Private Sector Organisations?

Answer 14

Profit maximisation.

Question 15

What Sector Of The Economy Has Higher Productivity & Why?
(2 Points)

Answer 15

~ Private sector.

~ Due to profit maximisation as their main goal.

Question 16

What Sector Of The Economy Does Not-For-Profit Organisations Operate In?

Answer 16

Private sector.

Question 17

What Is The Purpose Of Not-For-Profit Organisations?

Answer 17

To provide a service which meets a need.

Question 18

Do Not-For-Profit Organisations Pay Tax?

Answer 18

The government directly exempts them from paying direct taxes.

Question 19

What Type Of Organisation Are Charities & Who Regulates Them?
(2 Points)

Answer 19

~ Not-for-profit organisations.

~ UK charity commission.