Size and Types of firms
Size and Types of firms
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Why do firms want to grow?
- Increase market share – (percentage of market you own). Competition from other firms is reduced so a company with greater market share can control prices and retain consumer loyalty
- Profit motive – no guarantee they will make profit as they grow
– Ways firms can grow: merger or take over - Motivations of managers and workers – personal remuneration / bonuses. Managers’ statuses may improve and workers may be more motivated working for a larger company
- Economies of scale (cost per unit becomes cheaper as firms grow)
- Risk diversification -eg. Virgin started off as a record shop, if he had just stayed in that industry his business would have shut down; however , he had diversified his brand into a range of industries such as virgin mobile, airlines, insurance and space travel. However it comes with the risk that the new brands will not work
Why do firms remain small?
- Pay less taxes , eg corporation tax and personal income tax. Once a company has a turnover in excess of £85,000 they have to charge VAT.
- Focus on a niche market – these markets may have an inelastic demand (eg, Etsy products)
- Satisfied with their profit
- Pay less wages
- Satisficing – Different business objectives – decide on and pursue a course of action that will satisfy the minimum requirements necessary to achieve a particular goal – once you’re satisfied with what you have achieved so you do other things with your time
- Avoid principal-agent problem- In a large firm, owners have to delegate control to managers and workers who may not share the same motivation and goals of maximising interests of the firms. Managers and workers may engage in profit-satisficing – do enough to keep owners happy but then maximise other objectives, such as sales maximisation
- Local profile / independent businesses – people like the personal touch and like supporting independent local shops
Niche Market – specialised part of the marker tailored specifically to a business owner’s interest
Public and Private Sector
Private Sector
The part of the economy which is run and owned by individual groups of people – including sole traders and PLCs
Public Sector
The part of the economy which is run and owned by the Government, with the purpose of providing services that all citizens have access to
Profit and Not-For-Profit Organisations
The Private Sector is split into Profit and Not-For-Profit Organisations:
Profit Organisations
Most of the Private Sector consists of Profit Organisations which are designed to make a profit and to maximise the financial benefits for their shareholders
Not-For-Profit Organisations
These organisations make profit with the intention of maximising social welfare
Quick Fire Questions – Knowledge Check
- Define ‘Niche Market’ (2 marks)
- Identify and explain five reasons as to why firms want to go (10 marks)
- Identify and explain five reasons as to why firms may want to remain small (10 marks)
- Explain what the Principle-Agent problem is (4 marks)
- Distinguish between the Private Sector and the Public Sector (4 marks)
- Distinguish between the Profit Organisations and Not-For-Profit Organisations (4 marks)
Next Revision Topics
A Level Economics Past Papers
