LS1 - Size & Types Of Firms Flashcards
1
Q
Reasons why firms seek growth
A
- profit
- costs
- market power
- diversification
- managerial objectives
2
Q
Profit
A
- 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
3
Q
Costs
A
- as size of firm increases, they often have lower unit costs - economies of scale
- lower costs means higher profits
4
Q
Market power
A
- large a firm is, the more market power they have
- market power is the ability of a firm to raise prices & earn supernormal profit
5
Q
Diversification
A
- 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
6
Q
Managerial objectives
A
- 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
7
Q
Reasons why some firms remain small
A
Due to choice or necessity
choice
- diseconomies of scale
- extra work
- legal requirements
necessary
- financing expansion
- lack skills
- lack resources
- niche market
8
Q
Diseconomies of scales
A
- some firms don’t expand as worried about experiencing Diseconomies of scales
- when firm too large so costs per unit increase
9
Q
Extra work
A
- 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
10
Q
Legal requirements
A
- 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
11
Q
Finance expansion
A
- some can’t do this
- banks see small firms as risky borrowers si only offer credit on strict terms or don’t offer it
12
Q
Niche market
A
- may operate in niche market with small customer base e.g. luxury yachts
13
Q
Lack skills
A
- skills, knowledge & expertise required may be lacking
- not every business has entrepreneurs with the ability to steer a business through successful expansion
14
Q
Lack resources
A
- firm may lack resources to cope with additional regulations & bureaucracy that expansion entails
15
Q
Types of firms
A
- private sector
- public sector
- not for profit
16
Q
Private sector
A
- 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
17
Q
Public sector
A
- 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
18
Q
Not-for-profit
A
- includes charities (known as 3rd sector or civil society)
- provides services to local, national & international communities - don’t see profit as primary goal
19
Q
Divorce of ownership
A
- 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
20
Q
Principal
A
Shareholders/owner of business
21
Q
Agent
A
Person in charge of day-today running of business
22
Q
Principal-agent problem
A
- 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
