sizes and types of firms

Question 1

explain economies of scale relative to market size

Answer 1

large firms may only experience small economies of scale compared to their size. this will raise their costs making them higher than other firms that have decided to stay small.

Question 2

what are the reasons for diseconomies of scale

Answer 2

• poor organization
• x-inefficiency
• firms in larger and formal markets have to pay higher wages

Question 3

what is the main reason for small firms to be monopolies

Answer 3

creating a niche market

Question 4

what are the main reasons for growth

Answer 4

• profit motive
• market power
• diversification(spreads risk)
• owners have the motive of larger bonuses

Question 5

what comes with market power

Answer 5

• allows firms to have dominance over the market -> gain price setting powers and discourages entrance of new firms
• also allows them to gain MONOPSONY power which allows them to buy stock at lower prices

Question 6

example of principal agent problem

Answer 6

• the manager requires higher wages but shareholders demand large dividends. this is not possible due to limited funds.

Question 7

what are the objectives of public sector firms

Answer 7

• social welfare instead of profit

Question 8

what are the characteristics of private sector firms

Answer 8

• efficient operations(AE, PE, XE)
• higher quality goods(AE)
• lower prices (competition)
• profit incentive

Question 9

what is the difference between profit and non profit

Answer 9

profit - firms which aims to maximize the financial benefits of shareholders and owners.
non-for-profit - a goal to maximize social welfare

Question 10

do non-for-profit firms make profit

Answer 10

yes, but it it only used for their goal and the operation of the organization