Economics - 3.1.1 - Sizes and types of firms - A Level
Why do some firms remain small: Lack of motivation
-Sole traders may not want to give up leisure time in order to expand their business -Managers may not want to take the risk.
Why do firms grow: Satisfy managerial ambitions
Larger firms have higher profiles therefore good for the happiness and reputation of managers.
Examples of how managers may put their own needs first rather than the shareholders
- Award themselves large pay packages - Maximising size of company rather than profit to maximise bonus - May accept/reject a takeover based on the impact on themselves rather the impact on the shareholders
Why do some firms remain small: Lack of economies of scale / existence of diseconomies of scale
A small firm may already be exploiting all of the economies of scale and operating at the lowest AC (i.e. there is a low minimum efficient scale of production). An example of this is hairdressers.
Why do firms grow: Gain expertise
Buying a market leader with its existing expertise may give them a head start in a new area.
Why do firms grow: Reduce risk
By producing several products rather than one or two the firm is less vulnerable to fluctuations in demand (a key reason for conglomerate mergers).
Why do firms grow: Workers
Gives them more control over their market and maybe able to set prices to their benefit and reduce the threat from competition.
Why do some firms remain small: Government regulation
Government regulation may prevent firms from growing because the government wants to avoid monopolies developing.
Why do some firms remain small: Barriers to entry
If barriers to entry are low in a market, then it is easy for new firms to enter the market to stop monopolies developing.
Problems of divorce of ownership from control in large firms
In small firms, the owner is likely to run the business. In larger firms, the owners appoint directors and managers to run the business Therefore, in larger firms there is a divorce of ownership from control, this is an example of the principal-agent problem.
Why do firms grow: Increase sales
Large brand recognition and more sales.
Why do firms grow: Economies of scale
Larger firms often have lower average costs in LR (most likely through a horizontal merger).
The principal-agent problem
Occurs when one group, the agent, is making decisions on behalf of another group, the principal
Public sector organisations
Organisations owned and controlled by the state e.g. BBC, local authorities such as Oxford City Council
Private sector organisations
Organisations owned by individuals or companies and not the state e.g. Vodafone, Tesco
Not-for-profit organisations
Organisations that do not have making profit as a goal but instead any profit or surplus is used to support the activities of the organisation e.g. MCS
For-profit organisations
Organisations which have the goal of making profit e.g. Barclays Bank. This does not necessarily mean that they are at any one time profit-maximising.
Why do some firms remain small: Local monopoly
Some firms act in a form of local monopoly, with convenience being a premium. An example of this would be a corner shop.
Why do firms grow: Make the most of an opportunity
Some firms may have revenues they don't want to class as profit (to avoid tax) and so use them to acquire a new business.
Why do some firms remain small: Niche market
Some firms operate in very small sections of a market because the demand for the product is specialised and limited.
Why do some firms remain small: Costs for large scale producer
Sometimes, costs for larger firms can be greater. - - This is often due to productive inefficiency. This can be because large conglomerate firms can be poorly organised in what they see as unimportant areas of their business. - X-inefficiency may be present. - AC curve may vary because of regulation etc., for instance, it may be easier for a smaller firm to pay workers lower amounts because it works in a more informal market. - Smaller producers may be willing to accept lower returns on their capital.
