Size and Types of Firms Flashcards
Reasons why Firms seek growth
Profit
Costs - Lower Unit Costs
Market Power
Diversification
Managerial Objectives
Define Diversification
Increasing the range of products or markets served by a business
Reasons why some Firms remain small
Worried about experiencing diseconomies of scale
Firms owners don’t want the extra work and risks involved in expanding
Legal Requirements - Differ by the size of a firm
Why do some firms remain small
Unable to finance expansion
Operate in a niche market which has a small customer base
Lack the skills, knowledge and expertise
Lack of resources to cope with additional regulations and bereaucracy
Types of Firms
Private Sector
Public Sector
Not for Profit
Private Limited Companies
Social Enterprises
Co-operatives / Partnerships
What is the Principal-Agent problem
Problems caused by the divorce of ownership from control
Who is the Principal
Shareholder or owner of a business
Who is the Agent
The person in charge of day-to-day running of the business
Why may the Principal-Agent occur
Principal is not fully aware of the actions of the agent
Principal has Insufficient Information - Asymmetric Information
Significance of small businesses for the UK economy
Contribute to 25% of total turnover for businesses in the UK and over half of employment
Define Stakeholder
Any individual or organisation who has an interest in the decision making of a business
Why may conflicts occur between stakeholders
The interests and objectives differ from types of stakeholders
What is the Agency Problem
Originally identified by Adam Smith
Agents managed companies in their own self interest rather than that of their principles
What is the Stakeholder conflict
Occurs when different stakeholders have different objectives
What type of problem is the principal agent
Asymmetric Information Problem
