Size and types of firm

• What is a firm?

  An organisation which sells goods and/or services to consumers, usually with the aims of making a profit
• What is an economy of scale?

  A decrease in long-run average costs for a firm caused by an increase in the scale of production
• How does a very small market mean some firms remain small?

  If a firm is operating in a specialist area of a market, demand will be low and so the firm will remain small
• How does limited access to finance mean some firms remain small?

  Small firms might be regarded as high risk to banks, making them more unwilling to give loans to the firms
• How does owner objective to retain control of the business mean some firms remain small?

  Owners might want to retain complete control of their businesses, and so would be unwilling to expand
• How does a lack of economies of scale mean some firms remain small?

  There might be no incentive for a firm to grow if there are no potential cost savings
• How do individual, personalised services mean some firms remain small?

  Demand will be low because they offer a personal service, and customers only see one person
• How does a need for a service led firm mean some firms remain small?

  Firms which supply service led firms are often small as they only supply the one business and no others
• How is benefitting from economies of scale an incentive for firms to grow?

  Larger firms often have lower costs per unit of output in the long run
• How is increasing market share an incentive for firms to grow?

  A larger market share means that the threat of competitors is decreased, and larger firms have more market power, can control prices, and can retian consumer loyalty
• How is reducing risk an incentive for firms to grow?

  Larger firms might diversify to produce a range of products, as firms which specialise in one product face the risk of going out of business if there is a decrease in demand
• How is meeting marginal objectives an incentive for firms to grow?

  Firms might want to grow because the salaries of managers are related to sales revenue
• What are principals?

  Shareholders who own most large businesses, and who appoint agents to control these businesses on their behalf
• What are agents?

  Managers appointed by principals to control a business
• What is the principal agent problem?

  When the aims of the principals and agents conflict with each other, as principal aims are to maximise profits, wheras agent aims are often to increase sales at the expense of profit
• What are private sector firms?

  Firms in which the assets are owned by private individuals or groups, whose main aims are to make a profit due to not being able to operate otherwise
• What are public sector firms?

  Firms which are owned by the government, and who can operate without making a profit because the government provides revenue through taxation
• What are profit organisations?

  Organisations that aim to make or maximise profit
• What are non profit organisations?

  Organisations that have a different purpose than to make priavte profit, but who still have to cover their own costs