Theme/Unit 3 Revision notes that can be used to create flashcards and memorise key knowledge/theory that will help you get an A/A*. These notes cover all aspect of this theme and are very detailed, so you will know every specification point there is.
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3.1 Business Growth YOUR NOTES
3.1.1 Size & Types of Firms
Reasons for Growth & Reasons to Remain Small
Many firms start small & will grow into large companies or even multi-national
corporations (Amazon started in a garage)
Reasons Why Firms Grow
Owners/Shareholders/Managers Desire for stronger market
Owners/shareholders desire
desire to run a large business & power (monopoly) so as to
for higher levels of profit
continually seek to grow it increase profits
Desire to reduce costs by Growth provides
Larger firms often have easier
benefitting from economies of opportunities for product
access to finance
scale diversification
While many firms grow, others do not or they intentionally choose to remain small
Reasons Why Small Firms Exist
They offer a more They provide a product that is
personalised service & focus Unable to access finance for in a niche market - smaller
on building relationships with expansion market size but can be very
their customers profitable
Rapid growth can cause
Owners goal is not profit
Many small firms operate in diseconomies of scale which
maximisation but rather an
mass markets with low barriers can be difficult to deal with &
acceptable quality of life
to entry so many owners choose to
(satisficing)
avoid these
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Divorce of Ownership & Control YOUR NOTES
As firms grow, the owners (or shareholders) often appoint managers to run the business for
them
There is a separation (divorce) between the owners and the managers who control the
day-to-day running of the business
This divorce gives rise to the Principal-Agent problem
E.g. Shareholders want to maximise their profits, but workers want to maximise their
salaries
E.g. Shareholders want to maximise their profits, but managers may want to maximise
the number of sales over the value of the sales
The problem is exacerbated by information gaps in that the agents have a lot more
information than the owners and are often able to control the flow of that infromation
One way that Principals attempt to diminish the problem is by granting share options to
managers
If managers are shareholders, then they will be likely to align their interests more with
those of the owners
Public & Private Sector Organisations
Public sector organisations are owned & controlled by the Government
Their goal is not profit maximisation but to provide a service
There are a wide variety of government owned organisations in the UK
Corporations like the BBC and Channel 4
National services such as State Schools & National Health Service Trusts
Local services such as Transport for Greater Manchester
Civil service departments such as Defence, Police, Education
Regulatory bodies such as the General Dental Council
Private sector organisations are owned & controlled by private individuals
Types of ownership vary from sole trader to partners to company shareholders
The goal of most private sector organisations is profit maximisation
This often causes the private sector to be more efficient than the public sector
with higher levels of productivity
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Profit & Not-for-profit Organisations YOUR NOTES
Most firms In the private sector exist to make a profit, even if their goal is not profit
maximisation
If they do not make a profit then they are likely to go out of business
Exceptions to this are not-for-profit organisations which also operate in the private
sector
They exist to provide a service or meet a need
Many sell goods/services & use the profits they generate to further their objectives,
e.g. The British Heart Foundation
The government exempts them from paying direct taxes
All Charities are not-for-profit organisations and are regulated by the UK Charity
Commission
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