3.1.1 - Sizes and Types of Firms Flashcards
Reasons for large firms, reasons for small firms, divorce of ownership and control, public and private sector organisations, profit and not-for-profit organisations. (23 cards)
How does Profit Motive create Large Firms? (1)
- Larger firms sell more, thus greater potential for profit.
What are Economies of Scale and how do they create large firms? (2)
- EoS is when Lower costs are achieved through producing more output on a larger scale
- Thus there is a profit motive to expand market share and gain EoSs
Why do Barriers to Entry create Large Firms? (2)
- Firms in the market are protected from potential competition due to, e.g., high fixed costs in the industry
- Thus allowed to occupy large portions of market share easily
What is Risk Diversification and how does it create Large Firms? (2)
- Idea that there is less risk if a large firm is involved in several industries or markets
- Provides incentive for single market firms to expand into other industries into order to gain multiple streams of revenue.
How do the motivations of Senior Managers create Large Firms. (1)
Managers may strive for company growth/expansion in hopes of getting better salaries, etc.
How does a Lack of Barriers to Entry create small firms? (2)
- Difficult to keep new entrants out of the market (market more contestible)
- Market may become characterised by many small firms
How does New Technology create Small Firms? (2)
- Innovation has reduced start-up costs/barriers to entry
- Market made more contestable for new entrants/small firms
How does a Lack of Economies of Scale create small firms? (2)
- Little opportunity for firms to benefits from EoSs, thus little incentive to expand market share
- Also means that large firms do not have significant cost advantages over smaller firms, allowing the survival/existence of small firms in the market
What are Diseconomies of Scale and how do they create small firms? (2)
- The idea that costs rise when a firm is too big as it becomes difficult to co-ordinate and communicate within a large firm
- In some markets, firms may reach this point at an earlier stage (e.g. service sector firms and other labour based industries).
How does the presence of other Business Objectives create small firms?(2)
- Profit Maxing (i.e. increasing size of firm) may not be the objective of certain firms.
- e.g. non-profits
How does the presence of Monopsony Power in a Market create small firms? (3)
- Potential for small suppliers to grow is stunted in Markets where Monopsony power dominates
- Powerful buyers can push down prices of suppliers, limiting rev. / profits thus preventing organic growth
- e.g. small suppliers to large retailers operating at just below normal profit
Why do Small Scale Monopolies exist? (2)
- Some Markets may have limited potential for growth as that market is for a local area, or is for a niche service.
- Means that a firm could become a monopoly within this market, and yet remain small in size
What is the Divorce between Ownership and Control? (2)
Idea that the people who own the firm ( e.g. shareholders) may not be the people who run the firm (e.g. managers).
In PLCs, firms listed on stock exchanges, managers are required by law to maximise profits for shareholders, unless clearly instructed to do otherwise.
What is the Public Sector? (1)
When the Government has control of an industry, such as the NHS.
What are Natural Monopolies and how do they justify the existence of Public Sector firms? (2)
- Natural Monopolies occur when it’s most efficient for only one company to serve the market due to high infrastructure costs or other factors.
- Economists argue that government control is best for natural monopolies to protect consumers from exploitation.
How can Positive Externalities justify the existence of public sector firms? (2)
By using Public Transport, road congestion and pollution are reduced
Govt. may provide these services to solve under-provision problem caused by positive externality, ther
How can the different objectives of Public Sector Firms justify their existence? (3)
- Different objectives to private sector industries (mainly profit driven).
- Social Welfare might be a priority for public sector firms.
- PS firms may aim to distribute resources more fairly.
What is the Private Sector? (2)
- When a firm is left to the free market and private individuals.
- e.g. British Airways
How do free market economists view the private sector’s incentives? (1)
The Private sector, through profit incentive, can make firms operate efficiently, increasing economic welfare.
What do free market economists say about the goods and services provided by private sector firms? (1)
Private sector firms must produce goods and services that consumers want, leading to allocative efficiency and potentially higher quality.
How does competition in a free market affect prices, according to free market economists? (1)
Competition might result in lower prices because firms have a profit incentive, unlike public sector firms.
What are the aim(s) of Profit Organisation? (2)
- Aims to Maximise the financial benefit of its shareholders and owners.
- The goal of the organisation is to earn maximum profits.
What are the Aim(s) of Not-For-Profit Organisations? (2)
- Has a goal which aims to maximise social welfare.
- Can make profits, but they cannot be used for anything apart from this goal and the operation of the organisation.
