3.1.1 - Sizes and Types of Firms Flashcards
(28 cards)
Why do some firms tend to remain small? (5)
- To avoid diseconomies of scale.
- Barriers to entry may be high
- Small firms can be monopolists
- Lack of availability of funding
- Lack of managerial capacity
Give reasons for why some firms grow? (7)
- Economies of Scale
- Barriers to entry
- Increase market share and monopoly power to have more control over the market
- Increase profits through increased sales revenue
- Easy access to capital
- Diversification into a variety of markets to increase revenue
- Network effects (more valuable as more people use it)
Explain the principal-agent problem?
When the interest of owners are not aligned with the interests of those in control of the firm. These people may make decisions based on how it will benefit them instead of the shareholders/owners. Usually due to asymmetric information where the agents are more aware of the workings of the firm than the owners.
Who are the Principals?
Owners/Shareholders
Who are the Agents?
Those in control of the firm.
What is the divorce of ownership from control?
The larger the firm, the more likely it is that the owners are shareholders who are not involved in the day-to-day running of the firm. Instead they hire directors/managers to run the firm, giving them control.
How do shareholders appoint directors?
Shareholders have an Annual General Meeting (AGM) where they can vote directors on and off the board of directors of a company and pass resolutions.
Why are AGM’s often ineffective?
Most shareholders do not attend or vote and directors tend to ensure they have votes for their resolutions secured before the AGM.
Why do Agents act the way they do?
They may be unwilling to take risks that could benefit the firm, because they don’t want to risk their job security. Also, their pay and bonuses are fixed, so they may not work to improve the value of the company, so the shareholders’ company shares loses value.
What is a possible solution to the Principal-Agent problem?
To offer shares to managers so that they are motivated to profit maximise in order to benefit more from their shares, or for shareholders to implement performance-based pay and bonuses , or put in place monitoring and corporate governance to keep managers in check.
What are public sector organisations?
Organisations that are owned and controlled by the state.
What are private sector organisations?
Organisations which are owned by individuals or firms and not the state.
What are the main features of private firms? (4)
- Privately owned by firms, entities or shareholders
- Profit motivated
- Exists in free or mixed economies
- Influenced by the price mechanism and other competing firms
What are the main features of public firms? (3)
- Owned by the state or government
- Funded by the state through tax revenue or government funding
- Exists in command or mixed economies
What are benefits of public sector firms? (5)
- Merit good provision
- Reduces externalities
- Job provision and employment opportunities
- Aids affordability
- Prevents monopoly power
What are drawbacks of public sector firms?
- Over-reliant on government funding
- Lack of profit motive
- Reduced consumer choice
What are benefits of private sector firms? (5)
- Efficiency and innovation
- Meet demand better through consumer choice
- Responsive to change
- Tax revenue for governments
- Can increase exports
What are drawbacks of private sector firms? (3)
- Can cause market failure
- Form monopolies leading to higher prices
- Exacerbates income inequalities
What are profit-based organisations?
Firms or entities which are primarily motivated by generating revenue and producing profit for its investors, shareholders and owners.
What are not-for-profit organisations?
Firms or entities whose primary focus is not to generate profit but to provide social and public benefits for society.
What are the main features of profit firms? (3)
- Profit maximisation
- Privately owned by shareholders, owners or other entities
- Not given tax exemptions and must pay corporation tax
What are the main features of not-for-profit firms? (4)
- Meeting social or ethical aims
- Reinvesting surplus income into meeting objectives
- Benefit from some tax exemptions
- Owned by trustees, members and directors
How is ownership structured in profit/not-for-profit firms?
Profit: Shareholders, firms or individuals
Not-for-profit: Members, trustees, those with memberships
What is the main objective in profit/not-for-profit firms?
Profit: Profit maximisation
Not-for-profit: Social welfare and meeting aims
