3.1.1 Sizes and types of firms

REASONS FOR GROWTH

• make more money

• gain monopoly power

• greater security

REASONS FOR GROWTH- MORE MONEY

• by growing, a firm will be able to experience economies of scale- helps them decrease costs of production

• will also be able to sell more goods so make more revenue

• will help a firm to make a larger profit

REASONS FOR GROWTH- GAIN MONOPOLY POWER

• larger firm will hold a greater share of their market

• will give them ability to influence prices and restrict ability of other firms to enter market, helping them to make profits in the long run

• monopoly power often means firms have monopsony power- so will be able to reduce costs by driving down prices of their raw material

REASONS FOR GROWTH- GREATER SECURITY

• will be able to build up assets and cash which can be used in financial difficulties

• 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

REASONS FOR STAYING FIRM SMALL

• some remain small because of constraints on growth:

  • size of market

  • access to finance

  • owner objectives

  • regulation

PRINCIPAL AGENT PROBLEM- SEPARATION OF OWNERSHIP AND CONTROL

• firms are owned by their shareholders, who play no part in day to day running of business

• chief executive and senior managers work for company and control day-to-day decision making

• shareholders are represented by a Board of Directors, who oversee the way the business is run

  • able to vote directors onto and off Board of Directors at AGM

• but this often makes little difference and shareholders have more power through buying and selling shares: if share prices drop significantly, board may be encouraged to change their strategy

PRINCIPAL AGENT PROBLEM- PROBLEMS CAUSED BY SEPARATION

• separation causes problems due to diff aims of two stakeholders:

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

• directors and managers are unlikely to want same thing: as employees, they will want to maximise their own benefits

PRINCIPAL AGENT PROBLEM

• one group, agent, makes decisions on behalf of another group, the principal

• in theory, the agent should maximise benefits for those whom they’re looking after but in practice agents have temptation to maximise their own benefits

  • for this reason that many firms are not run to profit-maximise but to profit satisfice

• issue could be overcome by giving managers shares in business or linking their bonuses to profits, this will mean that they personally will gain from higher profits

PRIVATE SECTORS

• refers to that part of economy that’s owned and run by individuals or groups of individuals, including sole traders and PLCs

PUBLIC SECTORS

• refers to that part of economy which is owned or controlled by local or central government

• purpose of these organisations is to provide a service for UK citizens and profit making is not their main aim, some may even make a loss which is funded for by the taxpayer

PRIVATE SECTORS- ORGANISATIONS

• profit

• not-for-profit

PRIVATE SECTORS- PROFIT ORGANISATION

• most private sector organisations are run to make a profit and to maximise financial benefits for their shareholders

• may not necessarily profit-maximise, but long term goal is to make money

PRIVATE SECTORS- NOT-FOR-PROFIT ORGANISATION

• any profit they do make is used to support their aim of maximising social welfare

• include charities and smaller organisations who aren’t large enough to be classified as charities