3.1.1 Sizes and Types of firms

Economics theme 3 (paper 2)

Why do firms tend to remain small?

a small market, limited access to finance, the choice of not wanting to grow

Why do firms tend to grow?

to meet objectives, respond to external and internal forces, gain competitive advantage, economies of scale

The principal agent problem

when the agent makes the decisions on behalf of the group (principal) favouring what the agent wants

Moral Hazard

when the individual is willing to take risks because the impact of failure is felt more by the owner

Sole trader

an individual who owns and runs their own business

features of a sole trader

any profit is classed as income, has unlimited liability

Partnerships

2 to 20 people share the costs, risks and responsibilities of being in a business together

features of partnerships

has unlimited liability, each partner has a share of profit, most of each partner has a share in decision making

Divorce of ownership from control

Firms are owned by shareholders who have no control running day to day tasks. Chief execs and managers run the business.

Private sector

Owned and run by individual or groups of individuals, including sole traders and PLCs.

Public sector

Owned or controlled by local or central government.

Profit organisations

To make profit and maximise financial benefits for shareholders.

Not-for-profit organisations

All profit made is used to support their aim of maximising social welfare to help individuals and groups (charities).

Limited companies

Exist in their own rights. The owners and the company are separate legal entities.

PRIVATE limited companies

Have Ltd. Can have one or more members (shareholders) but can't sell shares to the public.

PUBLIC limited companies

Publicly quoted. Shares are freely transferable and anyone can buy them.