3.1.1 Sizes and types of firms

• Reasons for business growth

  -Higher profits

  -Economies of scale

  -Market power

  -Reducing risk

  -Managerial motives
• Why do some businesses remain small?

  -Lack of finance for expansion

  -Wish to avoid diseconomies of scale (↑output -> ↑unit costs).

  -The firm may operate in a niche market

  -To offer a more personal service
• Divorce of ownership from control:


  Large companies are often owned by shareholders. The shareholders appoint managers and directors to run the business on their behalf.
• Principle-agent problem:


  When a principle (e.g. shareholders) appoints an agent (e.g. managers) to make decisions on their behalf.
• Why is the divorce of ownership from control a problem?

  Shareholders and managers may have different objectives. Shareholders want the business to maximise profits, managers want to maximise their own pay; this may result in them taking actions which results in the firm making less than max profit.
• Public sector organisations:

  Owned and controlled by the government (e.g. the NHS).

  -The purpose of these organisations is to provide a service to consumers.

  -Profits are mainly not the main objective
• Private sector organisations:

  Owned by individuals and aim to make a profit.

  E.g. McDonalds
• Not-for-profit organisations:

  Private sector organisations that do not aim to make a profit for their owners, e.g. charities.