3.1.1 Sizes and types of firms Flashcards
(10 cards)
Reasons why some firms grow: Economies of scale
-Economies of scale - a growing firm is able to experience economies of scale which helps to decrease their costs of production.
-> This will increase a firms profit: many firms are motivated by profit
Reasons why some firms grow: Monopsony power
-Monopsony power (monopoly) - a larger firm will hold a greater share of their market. This gives them the ability to influence prices and restrict the ability of other firms to enter the market.
-> This makes firm]]~s able to reduce their costs by driving down the prices of raw materials.
Reasons why some firms tend to remain small: Barriers to entry
Factors which prevent new firms from entering a market.
-Brand loyalty - consumers attachment to existing products
-Patent - legal barrier to the copying of a product
-Economies of scale - existing firms benefit from lower average costs due to size
Reasons why some firms tend to remain small: Regulation
Regulatory barriers can hinder or promote growth in specific industries.
The principal agent problem
This problem arises when the interests of the owner (principal) and the manager (agent) of a firm do not align, leading to conflicts i.e. Shareholders (principal) interest in growing the value of shareholding may conflict with a managers (agent) objective to e.g. revenue maximise.
-> A prime example of this is the Enron Scandal (2001).The executives used loopholes to hide billions of dollars in debt from the Board of Directors. The shareholders filed a lawsuit to the firm and the executives when share prices fell from nearly $100 to less
than $1 in just over a year.
Overcoming the principal agent problem
Strategies involve trying to align the aims of these two different stakeholders:
-Employee share ownership schemes e.g. John Lewis and Waitrose have a well-regarded partnership model.
-Long-term employment contracts for senior management e.g. security of tenure might encourage managers to take pricing and investment decisions in the long-terms best interests.
-Long term stock commitment e.g. Apple requires senior executives to hold three times their annual base salary in stock - executives have to keep this salary in stock for a minimum of five years to satisfy the requirement.
Public sector organisations
The public sector refers to that part of the economy which is owned by local or central government e.g. British Nuclear Fuels plc. Met Office, Channel 4 television etc.
Private sector organisations
The private sector refers to that part of the economy that is owned by private individuals or entities e.g. British Gas (1986), British Airways (1987), British Telecom (1984) etc.
Profit organisations
Profit organisations aim to maximise the financial benefits for their stakeholders e.g. Apple, Google etc.
Not-for-profit organisations
Non-for-profit organisations aim to prioritise their mission over profit e.g. Producer co-operatives - Co-op, John-Lewis partnership etc. Social enterprises - Big Issue magazine and Eden Project Cornwall etc.
