sizes and types of firms

why do firms grow?

- profit maximise
- higher sales
- incr revenue
- incr market share therefore power
- lower AC
- manegerial motives

why do firms remain small?

- lack of finance for expansion
- avoid diseconomies of scale
- niche products have low PED/high YED
- offer personal service
- acting as a supplier
- acting as a monopoly

stakeholder groups

- shareholders
- managers/employees
- customers
- suppliers
- banks and financial providers
- government
- local community

shareholders' (principal) motives

maximise profits to maximise dividends

managerial motives

increase sales and revenue at the expense of profits: a firm may grow larger than one aiming to maximise profits

principal agent problem: managers v shareholders

the separation of shareholders and managers causes differing objectives for a firms: owners want to maximise returns on , whereas managers and employees want to maximise their own benefit

principal agent problem definition

where one group (agents) makes decisions on behalf of another group (principals)

asymmetric information problem

owners cannot directly observe the day-to-day decisions of management. the decisions and performance of the agent are costly and difficult to monitor

overcoming the principal-agent problem

- employee share option schemes
- long term employment contracts for senior management
- long term stock commitment

public vs private sector

- public organisations are not competitive as they do not need to operate efficiently due to guaranteed funding
- classical economists promote the privatisation of firms in order to maximise productive and allocative efficiency