3.1.1 - Sizes and types of firms

• Reasons why firms grow:

  • economies of scale
  • profit motive
  • market power
  • diversification
• Reasons why a firm stays small:

  • Diseconomies of scale
  • Small firms as monopolists
  • Owners
• The principal-agent problem can be linked to the theory of asymmetric information. This is when the agent makes decisions for the principal, but the agent is inclined to act in their own interests, rather than those of the principal. For example, shareholders and managers have different objectives which might conflict
• A profit organisation aims to maximise the financial benefit of its shareholders and owners. The goal of the organisation is to earn maximum profits.
• A not-for-profit organisation has a goal which aims to maximise social welfare
• Public sector firms are owned by the government or state.
• Private sector firms are owned by private individuals such as entrepreneurs and shareholders