Why do some firms grow in size?

Some firms grow in size because they want to maximize profits. Growing in size enables enjoy cost and revenue advantages for achieving this aim. This is also called economies of scale.

When the firm grows in size it means that it has expanded it scale of production: all factors of production has been increased. It does so in order to exploit potential economies of scale. These economies are cost-saving advantages that causes the cost per unit of good produced to fall downwards. For example,it may enjoy technical economies. Greater specialization of lab our increases lab our productivity. Other economies of scale are marketing, advertising, financial, economies of by-products, economies of research and economies of welfare.

As firm becomes bigger and bigger it may also enjoy external economies of scale. These may be technological improvements, economies of information, economies of concentration and economies of supporting companies. The effect of all these is the same , that is , the firm enjoys cost-saving advantages.

How does this enable the firm to achieve its objective of maximizing profits. Suppose the firm is in a PC market situation, then increasing the profit margin can only be achieved by lowering AC. It cannot raise the price because it is a price-taker in such a market. However, being able to lower the AC also enable it to lower the price! This enables the firm to increase its market share by drawing over its competitors’ customers. The market itself may grow in that present customers buy more and new customers come into the market; attracted by the lower prices. Finally , the firms enjoying economies of scale and lower AC , can lower prices to such a level that it squeezes other less efficient competitors out of the market.

Firms grow in size to make more profits and this is achieved by increasing the profit margin.This is achieved if increased scale lowers AC faster than AR (price) this is also achieved by selling a larger quantity, even if the profit margin is narrower. The total profit is still more.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There are different basis for comparing the size of the firms such as the amount of equity, the number of work, the amount of sales, and the market share of a firm.

There are different basis for comparing the size of the firms such as the amount of equity, the number of workers,the amount of sales and the market share of a firm.The most used measure of the size of firm is by comparing the amount of equity.The larger the equity ,the larger would be the firm concerned, and vice versa.Generally,the public-owned companies are larger because the equity are the contribution of many thousands of people through the issue of shares.

This can also be measured by the number workers employed although this is distorted when comparing between lab our -intensive firm and a capital-intensive firm, giving us an opinion that lab our -intensive firm is larger in size than capital-intensive firm but the conclusion might be otherwise. We may use the amount of sales revenue as an indicator of the size of a firm Generally it is true that the larger the sales revenue .the larger will be the firm .But it becomes invalid when we are comparing firms from different industries ,because sales revenues is dependent on the price and quantity of the product sold. A high value-added industry would definitely boost higher sales than one with a lower value added. Market share can also be used to compare the size of the firm. Generally ,if the firm in an industry has the largest market share, it would be said as the largest firm in the market for that product .But again ,comparison across industries using this method would not confirm that a firm with a market share of 90% in car manufacturing industry is larger than one with a market share 40% in rubber industry. We conclude that the comparison of the size of different firms cannot be based on one method. A firm`s size must be judged based on its equity size, market share ,number of employees ,scale of production and level of technology before a conclusion can really be reached

 

An account for the simultaneous existence of firms of different sizes within the same industry

 


The size a firm takes is dependent on many factors. The firm may not grow indefinitely due to the technological differences, management skills , geographical reason and resource constraint. given the imperfect knowledge in the market, a certain new technology which allows for mass production is available to some producers and not the others. This may account for the difference in the same industry. The differences in management skills and the risk-taking nature between the entrepreneurs in different firms make the difference in firm sizes. Geographical barriers may divide the county into different markets of different sizes these can be the mountain range or the width of rivers. That’s the firms of the same industry serving these markets are of different sizes. Also immobility of resources such as capital, raw materials and labor may account for different firm size. for example, a firm may want to expand its production capacity, but the immobilitity and inavailability of labor in the region may restrict it. Lastly the size of the market and the barriers to entry also affect the size of the firm. Take the case of the oligopoly`s price-leadership, a dominating firm with the ability to term monopoly chooses to stay only as price leader because of inability to bar small firms from entering the market . However, what is most important underlying all the above is the availability and size of the market. Any size of the firm boils down to the market it serves and shares. For personalized service, its market is segmented, small but specific. For most other non-personalized products, the limit to size is the extent of market shared. The larger the size of the market, hence the firm size, the more the economies of scale reaped and the higher the profits earned.

What else? Depending on the countries, industries, etc what are some of the basis for comparing the size of the firm?

 

 

 

 

SAMPLE AGENCY AGREEMENT

AN AGREEMENT made this———- day of———– 2014

BETWEENT ———– of——————————————–

(here in after referred to as “The Principal”) of the

——————– Of —————————————————–

WHEREBY IT AGREED AS FOLLOWS:

  1. The Principal appoints the Agent as his selling Agent to the exclusion of others in ———————– (hereinafter referred to as The Territory).

     

  2. (a) The Principal shall not ,during the currency of this agreement ,and any subsequent Agreement entered into with the Agent arising through the operation of this agreement , Appoint any other selling Agent , intermediary or middleman of any description having the power to sale , or arrange the sale or otherwise assist in the sale of any of the Principal’s goods which are subject to this agreement as listed in (3) below.

     

     

     

    (b)Neither shall the Principal attempt to sell direct to the parties within the territory nor to buying offices located anywhere else in the world which he knows to be purchasing goods for sale within the territory. In this latter case the Agent is solely empowered to approach the buying office on the Principal’s behalf.

     

    (c)All enquiries received direct from the territory by the Principal will be referred to the Agent.

     

    (d)The Agent will be entitled to receive , as detailed in(5)below on all sales of the Principal’s goods within the territory, howsoever arising.

  3. The Principal manufacturers —————–and the Agent shall have the sole selling rights to all such goods in the territory.
  4. The agreement shall run for ——————-,the specific date of commencement being ————–.During this period each party shall be able to terminate the agreement providing he gives the other party three months notice in writing at the address or addresses indicated in this contract ,of the intended date of such termination .upon the natural expiry of the initial period ,the Agreement shall be renewed at yearly intervals thereafter, each party having the right to determine that agreement during such period provided he gives the other party six months notice in writing at the address or addresses indicated in this contract of such intended termination .Notice of termination under this contract must be sent to the other party by registered letter post.
  5. The Agent shall be entitled to commission of ——————— (%) of the net invoice value of each order placed with the Principal arising from the territory whilst this agreement is current and also to commission at the same rate on all goods ordered from the Principal outside the territory but with the intention that these goods be sold within the territory.
  6. (a) Payment of commission by the Principal to the Agent will ,in each case ,be to an address or account nominated by the Agent and will be in the form of ————–.Such payment will be made each and every ————————-.

    (b) The Principal undertakes to supply to the Agent at ——————–intervals with a written statement of the commission ,if any, due to the Agent. Such statement will provide a detailed account as to why commission is due , demonstrating the basis for calculated figure.

    (c) Upon termination of this agreement ,or any subsequent agreement ,unless the parties state otherwise in writing the Agent shall be entitled to commission at the rate above indicated and on the above basis on all other orders placed up to the date termination becomes effective.

  7. The Agent shall exercise all reasonable care and skill in the performance of his duties and shall act faithfully on behalf of the Principal. The Principal will do all things reasonably necessary to enable the Agent to earn his due commission and will supply him with all such information as he may reasonably require.
  8. (a) The Principal will provide the Agent with all necessary sample pattern, demonstration models, catalogues , price lists and sales literature generally to enable him to conduct the agency , and the Agent shall not be liable for any loss or damage to such samples or other of the aforesaid items whether or not caused or contributed to by the negligence or default of the Agent.

    (b) The Principal shall pay carriage, freight, customs and excise duties, insurances ,and other payments reasonably necessary in respect of the said samples and other items ,including the cost delivery to the Agent in the first place and their returns to the Principal or as the Principal may order on the termination of the Agency.

    (c) The Agent shall have a lien on any such samples or other items in his possession in respect of any moneys outstanding from the Principal by way of commission or expenses or any other sums due to him from the Principal.

  9. The Agent will forward to the Principal all enquires he may receive and shall not (without express authority in writing) enter into any contract on behalf of the Principal nor bind or attempt to bind them in way. Nor shall the Agent (without express authority in writing) receive any cheques or money on behalf of the Principal.
  10. The Principal shall forward all goods which they agree to sell to customers in the said area direct to such customers together with invoices and other documents in respect of any such sale but they will at all time of sending the customers any such invoices or other documents sent to the Agent a duplicate or copy thereof and they will also send a copy or duplicate of every order when received to the Agent.
  11. (a) The Agent may upon presentation of any account in respect of commission by the Principal request an extract from the account and other books of the Principal relating to such commission , and the principal shall deliver to the Agent an extract from all such relevant books

    (b) where the Principal fails to deliver such an extract or where the accuracy of such extract is disputed by the Agent ,the Agent shall be entitled either personally or by his accountant or other representative acting on his behalf , to inspect the relevant books and accounts of the Principal.

  12. The Agent shall not be entitled to commission on the amount of any invoice if such amount shall be wholly or partly lost by the reason of the insolvency of the customers, and in the event of any commission having already been paid in respect of such amount the same shall be refunded by the Agent to the Principal.
  13. (a) In the event of the agency lawfully being terminated by the Principal for any reason other than willful misconduct on the part of the Agent, the Agent shall be entitled to an amount to be paid to him by the Principal by way of compensation for loss of goodwill suffered by the Agent.

    (b) Such compensation shall be an amount equal to the average annual sum earned by the Agent in respect of commission under the agency during the five years immediately preceding the said termination.

    (c) In the event of the agency having subsisted for a shorter period than five years , the amount of the compensation shall be average annual sum of the entire period of the agency.

    (d) Where the Agent has completed more than five years as Agent to the Principal the amount in compensation shall be increased by 2.5% in respect of each completed year of service.

    (e) Such compensation is payable three months after the termination of the agency.

  14. The Agent shall not be liable to the Principal for any default on the part of the buyer.
  15. This agreement drafted in accordance with Laws of —————————– and any dispute must be settled in the ————— .

    In witness whereof the parties to the Agreement have signed their names below.

     

     

     

    Signature———————————– signature ———————————-

    For the Principal For the Agent