LS1 : Sizes and Types of Firms

Question 1

why do firms seek growth?

Answer 1

1. profit
2. costs
3. market power
4. diversification
5. managerial objectives

Question 2

why do firms seek growth due to profit?

Answer 2

increasing in size allows for increased production. increases sales which boosts revenue. higher revenue means higher profit which can allow for increased investment or more dividends.

Question 3

why do firms seek growth due to costs?

Answer 3

increasing firm size often results in lower unit costs. economies of scale.

Question 4

why do firms seek growth due to market power?

Answer 4

the larger a firm is, the more market power they have.

Question 5

what is market power?

Answer 5

the ability of a firm to raise prices and earn supernormal profit

Question 6

why do firms seek growth due to diversification?

Answer 6

diversification reduces risk. if one country is operating during a recession, the firm can rely on sales from other countries to prevent a large dip in sales.

Question 7

what is diversification?

Answer 7

increasing the range of products or markets served by business. the degree of diversification depends on the extent to which those products or markets are different from the existing products and markets served by the business.

Question 8

why do firms seek growth due to managerial objectives?

Answer 8

CEOs often receive bonuses for meeting sales targets. this provides incentives for managers to increase the size of their firm. also satisfies their ego, since leading a large firm can lead to respect and veneration.

Question 9

why do some firms choose to remain small?

Answer 9

1. risk of diseconomies of scale
2. extra work and risks involved in expanding
3. smaller firms have a more manageable regulatory framework

Question 10

why must some firms remain small?

Answer 10

1. unable to finance expansion. seen as riskier to lend credit to
2. operate in a niche market (luxury yachts, monster trucks)
3. skills, knowledge, expertise are lacking
4. lack resources to cope with additional regulations and bureaucracy

Question 11

what are the three types of firms?

Answer 11

1. private sector
2. public sector
3. not for profit

Question 12

what are private sector firms?

Answer 12

• those that are not owned by the gvt
• aim to make profit to satisfy the demands of owners
• includes sole proprietors, partnerships and PLCs

Question 13

what is a PLC?

Answer 13

public limited company. owned by shareholders and shares are traded on a stock market

Question 14

what is a sole proprietor?

Answer 14

private firms which are owned and run by one person, such as newsagents

Question 15

what is a public sector firm?

Answer 15

the gvt own certain businesses, because they could not survive without state funding or because the gvt wishes to determine the direction of the business. run on the basis that it will not make a profit for shareholders. eg. NHS, Network Rail

Question 16

what are not for profit firms?

Answer 16

consists of charities, known as the third sector or civil society. exist for provide services to local, national and international communities. do not see profit as the primary goal.

Question 17

what is the principal-agent problem?

Answer 17

the problem associated with divorce of ownership. the agent makes decisions on behalf of the firm which doesn’t match the direction in which the owners would like to go.

this is a problem if the principal is not fully aware of the actions of the agent, due to lack of information as a result of asymmetric information.

Question 18

who is the principal and agent in a firm?

Answer 18

principal - shareholder or owner of the business
agent - person in charge of day to day business. decision maker.