LS1 - Size & Types Of Firms

Question 1

Reasons why firms seek growth

Answer 1

• profit
• costs
• market power
• diversification
• managerial objectives

Question 2

Profit

Answer 2

• increase in size - produce more goods and services so higher sales and revenue
• higher revenue means higher profit
• beneficial for firms e.g. can receive higher profits

Question 3

Costs

Answer 3

• as size of firm increases, they often have lower unit costs - economies of scale
• lower costs means higher profits

Question 4

Market power

Answer 4

• large a firm is, the more market power they have
• market power is the ability of a firm to raise prices & earn supernormal profit

Question 5

Diversification

Answer 5

• increasing range of products/markets served by a business - the degree depends on the extent to which those products/markets are different from the existing one
• can either enter foreign market or produce a new good/service
• reduces risk as if one market goes into recession, can rely on other to prevent large sales loss

Question 6

Managerial objectives

Answer 6

• managers often have remuneration packages - determined by sales performances e.g. bonuses for meeting sales targets
• incentivises them to increase the firm, also may do so due to ego - leaving a large firm gets respect from others

Question 7

Reasons why some firms remain small

Answer 7

Due to choice or necessity
choice
- diseconomies of scale
- extra work
- legal requirements
necessary
- financing expansion
- lack skills
- lack resources
- niche market

Question 8

Diseconomies of scales

Answer 8

• some firms don’t expand as worried about experiencing Diseconomies of scales
• when firm too large so costs per unit increase

Question 9

Extra work

Answer 9

• some owners don’t want extra work/risks involved in expanding
  E.g. easier to manage 50 staff vs 500
• expansion also has sunk costs - can’t be recovered if it’s a failure

Question 10

Legal requirements

Answer 10

• differs by firm size
• smaller firms face less, more easily compliable regulations then larger ones
• so small can lead to more manageable regulatory framework for firms

Question 11

Finance expansion

Answer 11

• some can’t do this
• banks see small firms as risky borrowers si only offer credit on strict terms or don’t offer it

Question 12

Niche market

Answer 12

• may operate in niche market with small customer base e.g. luxury yachts

Question 13

Lack skills

Answer 13

• skills, knowledge & expertise required may be lacking
• not every business has entrepreneurs with the ability to steer a business through successful expansion

Question 14

Lack resources

Answer 14

• firm may lack resources to cope with additional regulations & bureaucracy that expansion entails

Question 15

Types of firms

Answer 15

• private sector
• public sector
• not for profit

Question 16

Private sector

Answer 16

• not owned by government, can be by shareholders as a PLC (public limited company) which trades on stock market & anyone can buy shares
• can be family owned - shares are not traded on stock market
• includes sole proprietors - owned & run by 1 person
• accountancy & legal firms have partnerships - owned by the partners
• aim to make profit & satisfy owner’s demands

Question 17

Public sector

Answer 17

• gov owned - couldn’t survive without significant state funding or the gov wishes to determine the direction it takes
  E.g. NHS & network rail
• network rail runs on the basis it won’t make a profit for shareholders but reinvest surplus funds

Question 18

Not-for-profit

Answer 18

• includes charities (known as 3rd sector or civil society)
• provides services to local, national & international communities - don’t see profit as primary goal

Question 19

Divorce of ownership

Answer 19

• when there are many shareholders, dat to day management is the board of directions and then the managers
• their can be problems with the divorce of ownership - principal agent problem

Question 20

Principal

Answer 20

Shareholders/owner of business

Question 21

Agent

Answer 21

Person in charge of day-today running of business

Question 22

Principal-agent problem

Answer 22

• agent may make decisions for business that don’t match the direction the owners would like to take business
• can be problem if principal isn’t aware fully of agent’ actions - often in large corporations as they lack sufficient information due to asymmetric information