3.1.1

• Firms grow to gain money, monopoly power and greater security
• economies of scale is where the average cost of production per unit decreases as output produced increases
• growing firms will be able to experience economies of scale, which decreases their costs of production
• growing firms will be able to sell more goods and profit maximise if their production costs are low
• A larger firm holds a greater share of the market (monopoly power) giving them the ability to influence prices and restrict firms from entering the market
• larger firms have more security as they have assets which can be used during financial difficulties
• large firms are likely to sell a variety of goods in multiple markets - so are less affected by changed to individual products
• Some firms decide to remain small due to constraints on their growth (internal and external)
• monopsony power is when firms are able to reduce their costs by driving down the prices of raw materials
• internal constraints on growth include market size, access to finance, owner objectives and regulation
• firms in niche markets find it hard to grow, so they remain small
• limited access to finance/loans disrupt expansion plans
• some owners prioritise personal goals over growth - so those firms remain small
• competition laws or regulation on certain products can constrain growth
• external constraints on growth is competition
• threat from new firms arriving into the market forces firms to lower their prices (to stay competitive). This limits the amount of profit that can be made
• large firms have a separation of ownership and control
• shareholders own the firm but have no part in day to day running of the firm
• CEO and senior managers work for the firm and run decision making
• shareholders are represented by a board of directors -they can vote people on and off.
• board of directors are responsible to buy and sell shares
• principal agent problem caused when managers and shareholders have different aims
• shareholders want maximum returns on their invest (short term profit maximise)
• CEO + senior managers will want to maximise their own benefits because they are employees
• principal agent problem is where one group (agent) makes decision on behalf of the other group (principal)
• the agent SHOULD maximise benefits for both groups - but are tempted to maximise their own benefits only
• private sector is the part of the economy owned by individuals (like sole traders and PLCs)
• public sector is part of economy owned by the central government. Their purpose is to provide welfare to all citizens
• profit maximising is not the public sectors main aim. They may even make a loss, which is funded for by taxpayers
• Private sector is split into profit and not for profit organisations
• for profit organisations aim to maximise financial benefits for their shareholders in the long run
• not for profit organisations ‏aim to maximise social welfare