Economics- Edexcel 3.1.1
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| Different types of firms | public sector organisations, private sector organisations, private limited company, co operatives/partnerships, social enterprises, not for profit organisations
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| Public sector organisations | owned and controlled by state
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| Private sector organisations | owned by private investors rather than the government
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| What percentage of jobs in the uk are in the private sector? | over 80 percent
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| Private limited company | corporations whose shares are not listed on a public exchange
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| Co-operatives / partnerships | businesses owned and run by their members
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| Examples of co-operatives / partnerships | Arla Foods, Co-op group, Richer Sounds, John Lewis/Waitrose, credit unions
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| Social enterprises | profit is reinvested for social purposes rather than for the gain of private investors
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| Examples of social enterprises | housing associations, national trust, university student unions
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| Not for profit organisations | businesses that are operated commercially but with social welfare and environmental aims in mind and profits are usually reinvested for social purposes
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| SMEs | small or medium-sized enterprises
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| Why do many businesses choose to remain small? | product differentiation & having a USP, deliver a high standard of customer service, exploit opportunities from e-commerce, more innovative and creative to respond to market trends
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| Why do many businesses choose to remain small?: product differentiation | customer perception, scope for adding value,flexibility, talk to customers (customer feedback)
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| Why do many businesses choose to remain small?: High standard of customer service | most small businesses operate in the service sector so key source of competitive advantage, treat customers as a priority
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| Why do many businesses choose to remain small?: Exploit opportunities from e-commerce | reach and sell to a broader customer base, easier to target niche segments
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| stakeholders | any individual or organisation who has an interest in the decision making of a business
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| Equity stake | the amount of ownership of a company owned by a person, organisation or group of owners
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| Stakeholders are mainly interested in what? | capital gain and dividends
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| Capital gain | increase in the market value of a share for a listed company
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| dividends | share of the annual profits made by a business
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| Divorce between ownership and control | when the owners of a business do not control the day-to-day decisions made in the business
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| Agency problem | originally identified by Adam Smith whereby agents managed companies in their own self-interest rather than that of their principals
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| Stakeholder conflict | occurs when stakeholders have different objectives, firms may have to choose between maximising one objective and satisficing(not profit maximising)
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| satisficing | a decision-making strategy that aims for a satisfactory or adequate result, rather than the optimal solution
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| What kind of problem is the principal agent problem? | asymmetric information problem
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| Principal agent problem | owners cannot observe directly day-to-day decisions of management and managers often have different business objectives such as revenue or sales maximisation
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| How to overcome the principal agent problem | employee share ownership schemes, long term employment contracts for senior management and long term stock commitment
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| Problem with employee share ownership schemes | offering stock options might lead to perverse behaviour among employees, like deliberate attempts to hike up share prices through illegal action
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| long term employment contracts for senior management | security of tenure might encourage managers to take pricing and investment decisions in the long-term best interests of the business rather than for short-term profit
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| long term stock commitment | apple requires senior execs at apple inc. to hold 3 times their annual base salary in stock and executives must keep this salary in stock for a minimum of 5 years to satisfy the requirement
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| Public sector organisations | wholly or partly owned and run by the state / government
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| Size of the state sector | shrunk over the years because of privatisation and due to the impact of years of government spending cuts
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| privatisation | the transfer of assets and ownership from the public sector to the private sector
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| Co ops are owned and run by | members, who can be customers, employees or groups of businesses
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| Examples of other co ops | community pubs, supporter-run football clubs and many foster clubs and local childcare providers
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| Co ops are run on what kinds of principles? | shared ownership, shared voice and shared profits
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| Social enterprise | a not-just-for-profit business created to address social problems where profits are reinvested for social purposes in the community, rather than the need to satisfy private investors
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| Examples of social enterprises | the big issue magazine and the eden project in cornwall
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| Not for profit businesses | charities, community organisations that are run on commercial lines
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| Example of a not-for-dividend company | network rail
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| Public sector enterprise example | BBC
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| Where does most of BBC’s income come from? | commercial activities such as hiring facilities at BBC studios and BBC selling programmes overseas
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