Sizes and Types of Firms (3.1.1) Flashcards
What are reasons for why firms grow?
-Owners/Shareholders/Managers desire to run a large business and continually seek growth
-Reduce average costs by benefiting from EofS
-Higher levels of prodit
-Product diversification
-Stronger Market power
-Easier access to finance
What do Economies of Scale look like on a graph?
Slide 3
What are reasons for why firms remain small?
-More personalised service and focus on building relationships with their customers
-Mass markets with low barriers to entry
-Unable to access finance for expansion
-Rapid growth can cause DEofS which are difficult to deal with
-Provide a niche market that can be more profitable even if smaller
-Owners goal isn’t profit maximization but rather an acceptable quality of life (satisficing)
What is Satisficing?
Making enough money to keep the owner/shareholders happy but not seeking to maximise profits
What do Diseconomies of Scale look like on a graph?
Slide 4
As firms grow who do owners hire to run the business for them?
Managers who control the day-to-day running of the business
There is a separation (divorce) between the owners and the managers which gives rise to what?
The Principal-Agent problem
What is the Principle-Agent Problem?
Occurs when one group (the agent) makes decisions on behalf of another group (the Principal), often placing their priorities above the Principals. Differing aims of the two stakeholders. Shareholders want profit + CEO’s may want other things but CEO’s are decision-makers and take control despite not being the owners of the firm.
What are examples of the Principle-Agent Problem?
Shareholders want to maximise their profits, but workers want to maximise their salaries
or
Shareholders want to maximise their profits, but managers may want to maximise the number of sales over the value of the sales
What are CEO Motives?
-Higher Sales
-Greater Market Share
-Green Technology
-Expansion
-Higher Salaries
What are the 6 different Types of Firms?
- Private Limited Company (LTD)
- Public Limited Company (PLC)
3.Private Sector Organisations - Public Sector Organisations
- For-Profit Organisations
- Not-For-Profit Organisations
What is a Private Limited Company (LTD)?
Owned by shareholders but shares aren’t advertised for sale, you must be invited to buy them from current shareholders
What is a Public Limited Company (PLC)?
Owned by shareholders and shares are advertised on the stock market, meaning anyone can buy shares in the firm
What is a Shareholder?
Entities who buy shares in a firm. Firms are typically owned by the Shareholders.
What are Public Sector organisations?
Owned and controlled by the Government. Their goal is not profit maximisation but to provide a service. There are a wide variety of government owned organisations in the UK (NHS+ BBC)
What are Private Sector organisations?
Owned and controlled by private individuals. Types of ownership vary from sole trader to partners to company shareholders. The goal of most private sector organisations is profit maximisation. This often means the private sector is more efficient than the public sector, with higher levels of productivity
Are Private Sector or Public sector firms more efficient?
Private Sector firms are more efficient. This is because they are more motivated by profit to reduce costs and improve their efficiency.
What are the exceptions to the businesses in the private sector who exist to make a profit called?
Not-for-Profit organisations
What do Not-For-Profit organisations exist for?
They exist to provide a service or meet a need. Many sell goods/services and use the profits they generate to further their objectives. The government exempts them from paying direct taxes. All Charities are not-for-profit organisations and are regulated by the UK Charity Commission
What are For-Profit organisations?
Profit Maximising Firms
What are examples of For-Profit firms?
LTD’s and PLC’s
