3.1.1 Sizes and types of firms

What are the main reasons for growing a business?

More power over a market, increased revenue, more competitive pricing, and achieving a better reputation.

What are the main reasons against growing a business?

Quality can decrease, profits must be shared with increased employment, and production costs can rise.

What is a modern industrial economy?

An economy where countries have developed high standards of living and high GDP per capita, featuring both private and public ownership.

What is meant by the divorce of ownership from control?

When shareholders own a company but directors run it day-to-day, leading to conflict because shareholders want to maximize profits while directors want to maximize personal benefits.

What is the principal-agent problem?

A conflict that arises when it is difficult to get one party (the agent) to work in the best interests of the owner (the principal), often driven by information asymmetry.

What is a moral hazard?

Any situation where one person or entity makes decisions about how much risk to take while someone else bears the financial costs of those risks.

What are two common examples of moral hazard?

Insurance policies reducing the incentive to care for possessions, and governments promising bank bailouts which encourages banks to take greater risks.

What is the private sector?

The sector of the economy controlled by individuals rather than the government, including sole traders, partnerships, Ltds, and Plcs.

What is the public sector?

The sector of the economy controlled by the government, including state education, the army, and the NHS.

What is the primary purpose of the public sector?

It aims to provide essential public services that the private sector would not provide to society.

What is a sole trader?

An individual who runs their own business, must register with HMRC, and faces unlimited liability.

What is a partnership?

A business structure where two or more people share the costs, risks, and day-to-day responsibilities of running a business together.

What is a limited company?

A firm where the owners and the company are separate legal identities, separating personal finances from business finances and granting limited liability.

What is a Private Limited Company (Ltd)?

A company with one or more members that cannot offer shares to the public or raise capital on the stock market, meaning shares are only sold privately (e.g., John Lewis).

What is a Public Limited Company (Plc)?

A company whose shares are freely transferable to the public, allowing them to raise massive finance from investors while leaving them vulnerable to hostile takeovers.

What is a not-for-profit organization?

An organization with an objective to do good for society, where any surplus profit is strictly reinvested into achieving that specific goal (e.g., Cancer Research UK).

What is a mutual?

An organization that operates specifically for the well-being and benefit of its own members rather than outside shareholders.

What is the employee threshold for a micro firm?

A firm that employs between 1 and 9 people.

What is the employee threshold for a small firm?

A firm that employs between 10 and 49 people.

What is the employee threshold for a medium firm?

A firm that employs between 50 and 249 people.

What is the employee threshold for a large firm?

A firm that employs 250 or more people.