A2 microeconomics notes
3.1- Business growth
3.1.1- Sizes and types of firms
a) Why firms stay small or grow
Depending on the type of market, only a few firms may be needed to satisfy the total demand.
Therefore, if a few firms exploit the economies of scale in the market then there will be very little
room for new, smaller firms in the market. On the other hand, small firms are often able to thrive in
markets because they do not come across the same diseconomies of scale as large firms do. For
example, as firms grow, they become increasingly hard to manage and will be less able to control the
actions going on within the firm.
b) The divorce of ownership from control
This is an example of the principal-agent problem. Senior managers and directors should be acting in
the best interest of the shareholders; however, they are more likely to make decisions about the firm
based their own interests. For example, instead of maximising profit, managers and directors may
choose to grow the firm as large as possible because this affects how large their bonus is likely to be.
This is far less likely to happen if the owner of the firm is also in control of the day-to-day decisions
made in the firms.
c) Distinctions between private and public sector organisations
Public sector organisations are owned and controlled by the state. Some UK examples include the
Ministry of Defence, Westminster City Council, the BBC and the NHS. Public organisations tend not to
be aimed towards making profit, as their primary aim is to provide a service for UK citizens.
Private sector organisations are owned individuals or companies. Almost all private sector
organisations aim to make profit and exactly how much profit is made depends on the internal
organisation of the firm and the objectives of its owners and staff.
d) Profit and not-for-profit organisations
These are both private sector organisations however not-for-profit organisations are not aiming to
make profit from their customers however any excess profit they do make may be used to support
their aims. Most non-profit organisations are charities such as the NSPCC.
3.1.2- Business growth
a) How businesses grow
Organic growth- This is also known as internal growth and is when a firm increases its size through
investment in capital equipment or an increased labour force.
Vertical integration- This is when firms join with one or more other firms in the same production line.
For example, a buyer joining together with one of its suppliers is known as backwards vertical
integration.
Horizontal integration- When two or more firms in the same market at the same stage of production
join.
3.1- Business growth
3.1.1- Sizes and types of firms
a) Why firms stay small or grow
Depending on the type of market, only a few firms may be needed to satisfy the total demand.
Therefore, if a few firms exploit the economies of scale in the market then there will be very little
room for new, smaller firms in the market. On the other hand, small firms are often able to thrive in
markets because they do not come across the same diseconomies of scale as large firms do. For
example, as firms grow, they become increasingly hard to manage and will be less able to control the
actions going on within the firm.
b) The divorce of ownership from control
This is an example of the principal-agent problem. Senior managers and directors should be acting in
the best interest of the shareholders; however, they are more likely to make decisions about the firm
based their own interests. For example, instead of maximising profit, managers and directors may
choose to grow the firm as large as possible because this affects how large their bonus is likely to be.
This is far less likely to happen if the owner of the firm is also in control of the day-to-day decisions
made in the firms.
c) Distinctions between private and public sector organisations
Public sector organisations are owned and controlled by the state. Some UK examples include the
Ministry of Defence, Westminster City Council, the BBC and the NHS. Public organisations tend not to
be aimed towards making profit, as their primary aim is to provide a service for UK citizens.
Private sector organisations are owned individuals or companies. Almost all private sector
organisations aim to make profit and exactly how much profit is made depends on the internal
organisation of the firm and the objectives of its owners and staff.
d) Profit and not-for-profit organisations
These are both private sector organisations however not-for-profit organisations are not aiming to
make profit from their customers however any excess profit they do make may be used to support
their aims. Most non-profit organisations are charities such as the NSPCC.
3.1.2- Business growth
a) How businesses grow
Organic growth- This is also known as internal growth and is when a firm increases its size through
investment in capital equipment or an increased labour force.
Vertical integration- This is when firms join with one or more other firms in the same production line.
For example, a buyer joining together with one of its suppliers is known as backwards vertical
integration.
Horizontal integration- When two or more firms in the same market at the same stage of production
join.
