Summary
Firms vary in size due to factors like market niche, specialization, and growth potential, with small firms often thriving in service sectors and large firms pursuing economies of scale and market dominance. Growth can be internal, through reinvestment, or external, via mergers and acquisitions, with integration methods including horizontal, vertical, and conglomerate strategies. Cartels are agreements to limit competition, while the principal-agent problem arises from misaligned interests between decision-makers and owners.
Exam Tips
Key Definitions to Remember
- Internal Growth — Expansion through reinvestment of profits.
- External Growth — Expansion through mergers or acquisitions.
- Horizontal Integration — Merger of firms in the same industry.
- Vertical Integration — Expansion into different stages of production.
- Conglomerate — A firm with diverse business interests.
- Cartel — Agreement among firms to limit competition.
- Principal-Agent Problem — Conflict between decision-makers and owners.
Common Confusions
- Confusing internal growth with external growth.
- Misunderstanding the difference between horizontal and vertical integration.
Typical Exam Questions
- What is most likely to increase the principal–agent problem? Ensuring the actions of agents are known by the managers.
- Which of these is the most likely reason why small firms are able to compete with larger firms in the same industry? Small firms are able to supply a highly differentiated product.
- Define what is meant by a cartel. A formal agreement among firms to limit competition.
What Examiners Usually Test
- Understanding of different growth strategies of firms.
- Ability to explain integration methods and their consequences.
- Knowledge of the principal-agent problem and its impact on firm growth.