L1- Size and Types of firms

Question 1

reasons why firms seek growth

Answer 1

• profit
• cost
• market power
• diversification
• managerial objectives

Question 2

seek growth- profit

Answer 2

growth= productivity up= sales up= revenue up= profit up= increase investment

Question 3

seek growth- cost

Answer 3

growth= unit costs down (economies of scale)= profit up

Question 4

seek growth- market power

Answer 4

• size up= market power up (ability to raise prices and earn supernormal profit)
• if dominant= exercise control over price of its product, influence the market

Question 5

seek growth- diversification

Answer 5

growth by diversification: 1. entering foreign market 2.producing new good/service =reduces risk e.g.recession in one country, rely on sales from other

Question 6

seek growth- managerial objectives

Answer 6

• renumeration packages e.g. CEO receives bonus for meeting sales target= incentive to grow
• growth= satisfy ego e.g. respect

Question 7

why do some firms CHOOSE to remain small

Answer 7

• worried about diseconomies of scale (growth so large, costs per unit increase)
• firms owners do not want extra work and risk involved in expanding e.g. easier to manage 50 than 500, expansion involves sunk costs- cannot be recovered if expansion is failure
• smaller firms face less and more easily compliable legal regulations than larger firms- more manageable regulatory framework for firms

Question 8

why MUST some firms remain small

Answer 8

• unable to finance expansion- banks see smaller firms as risky borrowers- credit on strict terms or not at all
• operate in niche market- small customer base
• skills, knowledge, expertise lacking
• lack resources to cope with additional regulations and bureaucracy that expansion entails

Question 9

types of firms

Answer 9

• private sector
• public sector
• not for profit

Question 10

private sector firms

Answer 10

• not owned by govt.
• owned by shareholders- trading on stock market OR owned by family
• sole proprietors- owned and run by 1 person e.g. newsagent
• accountancy + legal firms form partnerships
• aim to make profit to satisfy owners demands

Question 11

public sector firms

Answer 11

• owned by govt.- could not survive w/o sig. state funding OR govt. wants to determine direction business takes
• e.g. NHS- taxpayer funding, Network Rail
• Network rail- surplus profit reinvested, no profit for shareholders

Question 12

not for profit firms

Answer 12

• charities
• provide services to local, national and international communities
• profit is not primary goal

Question 13

explain the principal- agent problem

Answer 13

• firms with large no. of shareholders- have board of directors to manage day to day runnings
• principal is shareholder/ owner of business, agent is in charge of day to day runnings
• agent may make decisions that go against the direction owners wish to take business
• problematic if principal is not aware of actions of agent- often case with large corporations/ result of asymmetric info
• agent may be dismissed