The Private Firm

Sole Trader

A business that is owned by a single person is known a sole trader business. The owner may employ other people to work in the company but they have no ownership of the firm. Usually small in size and has low set up costs.

Typical examples are plumbers, electricians and gardeners.

Benefits

• the owner gets to keep the profit and make any decisions.
• They be responsive the consumers demands and also establish good customer relationships.

Disadvantages

• the owner is usually liable for any debts that the company has.
• Having a single owner may limit the range of skills and ideas in the decision making processes.
• The amount of capital/money that a single person can raise is also likely to be relatively small low.

Partnership

These are companies that have 2 or more owners (partners) and usually not more than 20. Common examples of partnerships may are dentists, accountants, solicitors and doctors practices.

Benefits

• Increased capital injections,
• Wider range of skills and ideas in the decision making processes
• Liability is shared between more people.

Disadvantages

• Profits are shared between the partners.
• There may disagreements about the decisions made.
• Between the partners there is still liability for any debts.

Private Limited Company (Ltd)

Private Limited Companies are owned by several people through the sale of shares. The shares are not available to the public through the stock exchange, but sold privately to friends and family. Private Limited companies must publish annual reports for their shareholders giving details about the company’s performance.

Advantages

• Ability to raise more capital (although it is limited to the finance that friends and family have and are willing to invest).
• The company itself is liable for any losses and this means the share holders only have limited liability.
• Shareholders can only lose the value of their shares

Disadvantages

• They tend to remain relatively small since the levels of capital that can be raised from friends and family is usually fairly low.

Public Limited Company (Plc)

Public Limited Companies are listed on a stock exchange and their shares are available for anyone to buy through a stockbroker. They are often relatively large in size.

To become a Plc, the company must publish information about its operations and accounts in a prospectus to inform any potential investors about the company, its direction and financial health. Each year reports must also be sent to all its investors about the previous year’s performance, accounts and future direction.

Advantages

• They can usually raise large sums of capital due to the global supply of investors.
• They can grow quickly and/ or invest in the necessary capital.
• Shareholders have limited liability and can vote at meetings about the decisions being made.

Disadvantages

• Higher administrative costs of informing all investors about extraordinary meetings and publishing yearly reports.
• The owners of the company may lose control of the decision making since all investors can vote at the AGM (annual general meeting) if they are not happy with the performance or decisions being taken.

Cooperative

These are organizations that are owned jointly by their members and run in the members’ interests. There are several types of co-operatives:

Trading co-operatives

Formed when a group of producers team up to become a cooperative. This is common in agriculture; coffee farmers may form co-operatives to share equipment (reduce costs) and to have more influence in the market place due to controlling a larger supply.

Consumer co-operatives

They buy in bulk to benefit from reduced prices, this is then passed on to their members as cheaper prices.

Public Corporations

These are government run organizations and tend to be large in size. They are funded by the government and are not profit orientated. Their main aim is to provide the best service to the public. Utility and train operations are often state run (nationalized), in the UK the BBC (British Broadcasting Corporation) is a public corporation.

Advantages

• Making the decisions that are in the public’s interest rather than for profit maximization.
• In some situations such as railways and public water infra-structure it makes economic sense to just have one set of rails and pipes rather than duplicating them for different private companies.

Disadvantages

• Inefficiencies since the corporation will be subsidized if it fails to cover its costs.
• The lack of competition may lead to lower levels of innovation and possibly quality.
• The size of public corporations can often lead to inefficient communication within the company.

Revenue

Revenue: This is the total amount of money a firms recieves from selling goods (before costs are deducted).

Average Revenue: Total revenue/output

Productivity

The output per worker is known as productivity.

Firms aim to maximise the productivity of their workers in an effort to increase profits. There are several ways in which they may aim to achive this:

• Investing in training should increase the speed or skill of the workers.
• Mechanising some of the processes.
• specialize their workforce in certain stages of production.

Diminishing returns to labour

Increasing the labour force can initially bring increased productivity as many jobs are made quicker through specialization. There are limits though to these benefits and at some point adding additional workers will lead to decreases in productivity.

If workers get in each other’s way, have to wait for shared machinery or cannot communicate effectively, their productivity will diminish, this is known as the Law of Diminishing Marginal Returns.

Perfect Competition

• Firms in perfect competition cannot compete on price. In this type of market situation the price elasticity of demand is perfectly elastic. If a firm raises its price consumers will not buy from it.
• Products are identical and consumers have complete knowledge of the other suppliers prices they will all buy from somewhere else.
• Firms make what is known as ‘normal profit’ in the long-run.
• They are unable to reduce their price since this would result in them making a loss.
• Firms must accept the market price which is set by the forces of supply and demand.
• Perfect competition makes the best use of resources since it reallocates the resources to the production of goods that are in demand and profitable. Inefficient producers will quickly go out of business.
• If there is an increase in the demand then in the short run the suppliers will make higher than normal profits (super-normal profits). Others quickly join this market which will increase the supply and push the price back down to a point at which normal profit is again being made.
• If there is a decrease in demand then the price will fall. This will quickly result in some suppliers leaving the industry and switching to something that is more profitable. This wil redcue the supply.

Monopolies

Monopoly situations occur when there is a single firm that is the sole supplier. In some cases it makes sense to have a single supplier since duplicating the infra-structure would be inefficient and wasteful. These industries are known as natural monopolies and include water companies, some rail companies (if they own the track) and electricity suppliers.

Characteristics

• The firm has 100% share of the market.
• High barriers to entry.
• The firm controls supply and subsequently the price level

Monopolies might have complete control over the supply and therefore be able to set prices, but they cannot control the demand. This leaves them with an important choice. They can either:

1. Decide the price level they want to achieve and supply the quantity that would achieve this.
2. Decide the quantity they want to sell and accept the market price.

Disadvantages of monopolies

• Inefficiency: the lack of competition allows monopolies to operate less efficiently than companies in a competitive market would.
• Lack of innovation/poor quality: they can offer a poorer service/product without losing many customers.
• Higher prices: they can set the price and earn super-normal profit levels.