3.1.1 Sizes and types of firms

Why do firms grow

• Owners/Shareholders/Managers desire to run a large business

• to increase profits

• increasing market share and reduce competition

• reduce average costs by benefitting from economies of scale

• opportunities for product diversification

• larger firms have easier access to finance

• to get more power and be influential

• greater security

why does growth normally mean increased profits

experience economies of scale which will decrease costs of production and will also be able to sell more goods and therefore make more revenue

why do firms want to grow to increase market share

a larger firm will hold a greater share of their market allowing them to influence prices and restrict the ability of other firms to enter the market increasing profits for them,monopoloy power often means they have monopsony power and so will be able to reduce their costs by driving down prices of their raw materials

why does growth mean greater security

larger firm will have more security as will be able to build up assets and cash which can be used in financial difficulties,they are also likely to sell a bigger range of goods in more than one local/national market and so they will be less affected by changes to individual products or places

amazon growth example

many firms start small and will grow in large companies- amazon started in a garage now multinational

why do small firms exist

• They offer a more personalised service and focus on building relationships with their customers 

• unable to access finance

• provide a product in a niche market which is smaller market size but profitable

• Many small firms operate in mass markets with low barriers to entry

• Rapid growth can cause diseconomies of scale which are difficult to deal with so many owners choose to avoid these coordination and communication problems

• Owners goal is not profit maximisation but rather an acceptable quality of life (satisficing)

• regulation

divorce of ownership and control

• as firms grow the owners often appoint managers to run the business for them

• there is a seperation between the owners and the managers who control the day to day running of the busines

principal agent problem differing aims

• the owner will want to maximise the returns on their investment so will want to short run profit maximise

• however directors and mamagers are unlikley to want the same thing and may want to sales maximise as thats how they earn bonus 

what does principal agent problem elad to

profit satisfice

principal agent problem

Occurs when one group (the agent) makes decisions on behalf of another group (the Principal), often placing their priorities above the Principal's

exampe of princile agent problem

enron scandal-executives used loopholes to hide billion dollars of debt from the board of directors the shareholders filed a lawsuit to the firm and the executives when share prices fell fro nearly $100 to less than $1 in just over a year

public sector organisation

owned and controlled by government

goal of ublic sector organisations

not rofit maximisation but to rovide a service

examples of public sector organizations

• Corporations like the BBC and Channel 4

• National services such as State Schools and National Health Service Trusts

• Local services such as Transport for Greater Manchester

• Civil service departments such as Defence, Police, Education

• Regulatory bodies such as the General Dental Council

rivate secotr organisation

owned and controlled by private individuals

vary from sole trader to artners to comany shareholders

goal of rivate sector organisation

rofit maximisation so often more efficient with higher levels of roductivity

rofit organisations

almost all rivate sector organisatons are run to make a rofit and to maximise financial benefits for their shareholders they may not rofit maximise but long ter is to make money

not for rofit organisation

any profit they do make is used to support their aim of maximising social welfare and helping individuals and groups,exempt from paying tax

what are charities

not for rofit organisations regulated by uk charity commision