EconomicsNotes

    Defining a large business is not easy. Vladimir Lenin, who is not usually viewed as a business guru, did it by default when he wrote that a small business employed five people or fewer. [1] Most economists would point to a variety of metrics, including market share, capitalisation, the overall value of assets or profits, or both, or turnover. Economists argue that businesses want to grow however. This is because larger businesses benefit from economies of scale, either physically, internally, or externally. Larger businesses are thought able to lower long run average costs (LRAC) to their lowest point, the minimum efficient scale (MES), and can hold them there across a range of output. This means that they can ‘stretch out’ the moment of lowest LRAC. Eventually, diseconomies of scale set in as the business gets too big. There are too many managers, or company structures are too complicated, or the business is complacent and develops x-inefficiency and y-inefficiency...

    A firm is an economic entity engaged in business. Economic theory assumes that the firm, like the consumer, maximises its self-interest. This self interest is however the product of the interplay of market structure, business organisation, and chosen or required objective. So, for instance, some firms might choose to profit-maximise, some to profit satisfy, some to revenue maximise, and some to sales-maximise, or even engage in loss-leading predatory behaviours. Oligopoly firms might take their cue from other firms, and find that price-maximisation is only really possible if they can join a cartel; imperfectly competitive firms might sustain a loss in the short run, covering their variable costs and making a contribution to fixed ones, if they think that this will lead to ultimate survival in a temporarily tough market. These decisions often relate to the nature of the firms. A sole trader’s objective, for instance, may include the freedom and control that working for on...