Sizes and Types of Firms Flashcards
Why do firms choose to stay small
- Some firms prefer being a small localised business
- Some markets are too small and niche
- regulations
- Owners Objectives may not include growth
- Hard to access capital and finance needed for growth
Why do firms grow
- to increase profits
- to increase security
- to gain monopoly power
- to sell to more markets
why do firms grow to increase profits
Firms grow to increase ouptut which allows for more revenue to be made which increases profits, increasing output may experience economies of scale so costs are reduced and profit increased further
What is the MES and how is it shown on a graph
This is the minimum efficient scale and is when economies of scale is maximised as long run AC is minimised
What is economies of scale
Cost benefits companies can receive when improving their scale, being able to increase output
Why do firms grow to become monopoly powers
Larger firms have a larger market share which reduces competition and ability for other firms to enter the market, monopoly powers can also set prices and will often be monopsony’s to suppliers so can influence the price of their supply costs
Why do firms grow to increase security
Larger firms have more cash and assets so can survive financial difficulties. They also have multiple markets nationally and internationally if one market falters.
How is there separation between ownership and control in large companies
Shareholders will have ownership of a company and board members are shareholders who will have more control in the business. Executives and Directors are employed to control the business on the day to day
Principal Agent Problem
Conflict in priorities between owner of an asset or company and the person who has been delegated control, in theory the agent should be acting solely in the interest of the owner
How do the aims of shareholders and managers differ
Shareholders will want to maximise profit but managers will want to maximise their personal position and benefits
Enron Scandal 2001
Executives used loopholes to hide billions of dollars of debt from the board to maintain their positions. Eventually share prices fell from $100 to $1 in a year so shareholders filed a lawsuit
What is the less drastic most common result of the principal agent problem
Profit satisficing where firms won’t maximise because stakeholders have conflicting objectives, shareholders want more profit but enough money must be spent on keeping employees satisfied with wages.
How can Owners tackle the Principal Agent problem
- Make Executives and Directors buy shares in the company so they have the same interest
- Provide profit based incentives for executives
- Shareholders can vote to remove directors
Private Sector
Organisations that are run by Individuals and groups of individuals, usually more focused on profit
Public Sector
Organisations that are owned by the central government, focused more on social welfare benefit of the citizens than profit
