Size & Types of Firms (Edexcel A Level Economics A) : Revision Note
Reasons for Growth & Reasons to Remain Small
Many firms start small and will grow into large companies or even multi-national corporations (Amazon started in a garage)
Reasons Why Firms Grow
Owners/Shareholders/Managers desire to run a large business and continually seek growth | Owners/shareholders desire for higher levels of profit | Desire for stronger market power (monopoly) so as to increase profits |
Desire to reduce average costs by benefiting from economies of scale | Growth provides opportunities for product diversification | Larger firms often have easier access to finance |
While many firms grow, others do not or they intentionally choose to remain small
Reasons Why Small Firms Exist
They offer a more personalised service and focus on building relationships with their customers | Unable to access finance for expansion | They provide a product that is in a niche market - smaller market size but can be very 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 these avoid coordination and communication problems | Owners goal is not profit maximisation but rather an acceptable quality of life (satisficing) |
Divorce of Ownership & Control
As firms grow, the owners (or shareholders) often appoint managers to run the business for them
There is a separation (divorce) between the owners and the managers who control the day-to-day running of the business
This divorce gives rise to the Principal-Agent problem
E.g. Shareholders want to maximise their profits, but workers want to maximise their salaries
E.g. Shareholders want to maximise their profits, but managers may want to maximise the number of sales over the value of the sales
The problem is exacerbated by information gaps in that the agents have a lot more information than the owners and are often able to control the flow of that infromation
One way that Principals attempt to diminish the problem is by granting share options to managers
If managers are shareholders, then they will be likely to align their interests more with those of the owners
Public & Private Sector Organisations
Public sector organisations are owned and controlled by the Government
Their goal is not profit maximisation but to provide a service
There are a wide variety of government owned organisations in the UK
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
Private sector organisations are owned and controlled by private individuals
Types of ownership vary from sole trader to partners to company shareholders
The goal of most private sector organisations is profit maximisation
This often means the private sector is more efficient than the public sector, with higher levels of productivity
Profit & Not-for-profit Organisations
Most firms in the private sector exist to make a profit, even if their goal is not profit maximisation
If they do not make a profit, then they are likely to go out of business
Exceptions to this are not-for-profit organisations which also operate in the private sector
They exist to provide a service or meet a need
Many sell goods/services and use the profits they generate to further their objectives, e.g. The British Heart Foundation
The government exempts them from paying direct taxes
All Charities are not-for-profit organisations and are regulated by the UK Charity Commission
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