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A-Level Edexcel Economics A Unit 3 Summary Notes with Diagrams £12.49   Add to cart

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A-Level Edexcel Economics A Unit 3 Summary Notes with Diagrams

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Full, detailed summary notes on every topic in Unit 2 for Pearson Edexcel Economics A. Includes detailed summary notes and diagrams and can be used for A-Level Revision

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  • September 2, 2024
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Size and Types of Firms 3.1.1
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Why Firms Grow:
Increased profits

Reduce unit cost of production by benefitting from economies of scale

Increase market share and power to become a dominant force in the market

Reduce risks by diversifying into various markets

Managerial motives as senior managers may want to control larger businesses


Why Firms Stay Small:
Lack of finance for expansion

Avoiding diseconomies of scale

Providing niche products which have a low PED or high YED

To offer more personal service to consumers

May act as local monopolies - where in the local area that firm is the dominant
provider in that market


Types of Firms:
Producer Cooperatives:
Also known as Co-ops

Owned and run by their members, who can be customers, employees or
groups of businesses

Co-op Group in the UK is the biggest, followed by John Lewis Partnership

Businesses are founded and run on principles of shared ownership, shared
voice and shared profits



Size and Types of Firms 3.1.1 1

, Social Enterprises:
Not-just-for-profit business created to address a social problem

Profits are reinvested for one or more social purposes in the community

Examples include Fink Street Food, The Big Issue Magazine, Eden Project

Not-for-Profit & Not-for-Dividend Firms:
Charities, community organisations that are run on commercial lines

Network Rail as an example in the UK


Corporate Social Responsibility (CSR)
When companies integrate social and environmental concerns into business
operations on a voluntary basis

Reasons for CSR:

Altruism

Contracting benefits

Customer related motivation

Lower production costs

Risk management

Improved access to capital


Principal Agent Problem
An asymmetric information problem, where the owners of a firm cannot
observe directly the day to day decisions of management, thus having to hire
managers who have different objectives - this is called the Divorce of
Ownership and Control

When the owner/stakeholder of a firm (principal) have different objectives to
the managers of the firm (agent)

Trying to monitor the decisions of the agent becomes costly and difficult to
track



Size and Types of Firms 3.1.1 2

, Possible conflicts of interest that may result between shareholders (principal)
and the management (agent) of a firm

Solutions to The Principal Agent Problem:
Shareholders and management of a firm may have different interests in a firm

Aligning the interests of shareholders and management of a firm is a method
to overcome The Principal Agent Problem

For example:

Employee share ownership schemes

Long term employment contracts for senior management, where security
of tenure may encourage managers to take decisions in the long term best
interest of the business

Long term stock commitment, where senior management are offered a
percentage of their salary/bonus in the form of stock of the company, so if
the company does well the manager benefits as well


Privatisation
The transfer of assets from the public (state or government) sector to the
private sector of an economy

Examples of private sector firms:

Royal Mail

British Waterways

British Gas

British Aerospace

British Telecom

Examples of public sector firms:

Network Rail

Royal Bank of Scotland

The Met Office



Size and Types of Firms 3.1.1 3

, Outsourcing and Contracting Out:
When private sector businesses are used to provide public services, often
after a tendering or bidding process has been held

Examples of businesses that outsource: G4S and Serco


Advantages of Outsourcing: Criticisms of Outsourcing:
Opening public services up to Firms may sacrifice quality to
competition can save tax payer lower costs
money
Doubts over employment practices
Private sector businesses more of private firms e.g. low wage,
likely to be more efficient due to poor working conditions
profit incentive
Outsourcing requires regulation
May be more innovative, less which involves extra spending
hierarchical and less prone to
diseconomies of scale




Size and Types of Firms 3.1.1 4

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