Pearson Edexcel A-level Economics Unit 3
Complete Revision Notes(WEC13)
Class Notes
UNIT 3: BUSINESS BEHAVIOUR – COMPLETE NOTES
Topic 1: Business Growth
1.1 Sizes and Types of Firms
Private Sector Organisations (profit-seeking, privately owned)
Type Ownership Liability Finance Profit Control
Personal
Sole Trader One person Unlimited Keeps all Full
savings, loans
Partnership 2–20 partners Unlimited Partners’ capital Shared Shared
Private Ltd Shareholders (often Private share Directors
Limited Dividends
(Ltd) family/friends) sale manage
Public Ltd Public share Board of
Anyone via stock market Limited Dividends
(PLC) issue directors
Unlimited liability – Owner’s personal assets at risk if business fails.
Limited liability – Shareholders only lose what they invested.
Public Sector Organisations (government owned)
, • Central government departments – NHS England, Department for Transport.
• Local authority services – schools, waste collection, libraries.
• Public corporations – historically: British Rail, Post Office (now privatised in part).
• Objective – Provide public goods (defence, street lighting) and merit goods (health, education). Do not aim
for profit.
Non-Profit & Mutual Organisations
Type Example Objective
Charity Oxfam, British Heart Foundation Social/environmental mission
Housing Association L&Q, Clarion Affordable housing
Building Society Nationwide Savings & mortgages for members
Co-operative The Co-operative Group, John Lewis Member benefit (workers or consumers)
Community Interest Company (CIC) Jamie Oliver’s Fifteen Social purpose with trading activity
The Principal-Agent Problem (Separation of Ownership & Control)
• Principal = Shareholder (wants profit maximisation → higher dividends, share price).
• Agent = Manager (may pursue revenue maximisation, perks, job security, empire-building).
• Why it matters – Managers have better information than shareholders (asymmetric information).
• Solutions – Performance-related pay, share options, non-executive directors, threat of takeover.
1.2 Business Growth
Types of Growth
Type Definition Advantage Risk
Expanding through own investment Controlled, less risky, Slow, may miss
Organic (internal)
(new stores, products, markets) preserves culture market opportunities
, Type Definition Advantage Risk
Horizontal Merge with firm at same stage of Economies of scale, Clash of cultures,
integration production reduced competition regulatory scrutiny
Vertical integration Control over inputs, cost Reduced flexibility,
Merge with a supplier
(backward) certainty large capital outlay
Vertical integration Secure outlets, capture Different business
Merge with a distributor/retailer
(forward) retail profit skills needed
Conglomerate Risk diversification, No core expertise,
Merge with unrelated business
integration cross-subsidisation difficult to manage
Example – Amazon: organic (new product lines) + vertical (buying Whole Foods – forward integration) + conglomerate
(acquiring Twitch – gaming streaming).
Motives for Growth
• Economies of scale – lower LRAC.
• Increased market power – ability to raise price.
• Risk diversification (conglomerate).
• Managerial motives – salary, power, prestige often correlate with firm size.
• Survival – in declining industries, growth may be essential.
Constraints on Growth
• Size of market – small market limits expansion.
• Access to finance – banks may be unwilling.
• Regulation – competition authorities may block mergers.
• Owner objectives – lifestyle business vs aggressive growth.
1.3 Demergers
A demerger = when a single business is split into two or more independent firms (opposite of integration).
Complete Revision Notes(WEC13)
Class Notes
UNIT 3: BUSINESS BEHAVIOUR – COMPLETE NOTES
Topic 1: Business Growth
1.1 Sizes and Types of Firms
Private Sector Organisations (profit-seeking, privately owned)
Type Ownership Liability Finance Profit Control
Personal
Sole Trader One person Unlimited Keeps all Full
savings, loans
Partnership 2–20 partners Unlimited Partners’ capital Shared Shared
Private Ltd Shareholders (often Private share Directors
Limited Dividends
(Ltd) family/friends) sale manage
Public Ltd Public share Board of
Anyone via stock market Limited Dividends
(PLC) issue directors
Unlimited liability – Owner’s personal assets at risk if business fails.
Limited liability – Shareholders only lose what they invested.
Public Sector Organisations (government owned)
, • Central government departments – NHS England, Department for Transport.
• Local authority services – schools, waste collection, libraries.
• Public corporations – historically: British Rail, Post Office (now privatised in part).
• Objective – Provide public goods (defence, street lighting) and merit goods (health, education). Do not aim
for profit.
Non-Profit & Mutual Organisations
Type Example Objective
Charity Oxfam, British Heart Foundation Social/environmental mission
Housing Association L&Q, Clarion Affordable housing
Building Society Nationwide Savings & mortgages for members
Co-operative The Co-operative Group, John Lewis Member benefit (workers or consumers)
Community Interest Company (CIC) Jamie Oliver’s Fifteen Social purpose with trading activity
The Principal-Agent Problem (Separation of Ownership & Control)
• Principal = Shareholder (wants profit maximisation → higher dividends, share price).
• Agent = Manager (may pursue revenue maximisation, perks, job security, empire-building).
• Why it matters – Managers have better information than shareholders (asymmetric information).
• Solutions – Performance-related pay, share options, non-executive directors, threat of takeover.
1.2 Business Growth
Types of Growth
Type Definition Advantage Risk
Expanding through own investment Controlled, less risky, Slow, may miss
Organic (internal)
(new stores, products, markets) preserves culture market opportunities
, Type Definition Advantage Risk
Horizontal Merge with firm at same stage of Economies of scale, Clash of cultures,
integration production reduced competition regulatory scrutiny
Vertical integration Control over inputs, cost Reduced flexibility,
Merge with a supplier
(backward) certainty large capital outlay
Vertical integration Secure outlets, capture Different business
Merge with a distributor/retailer
(forward) retail profit skills needed
Conglomerate Risk diversification, No core expertise,
Merge with unrelated business
integration cross-subsidisation difficult to manage
Example – Amazon: organic (new product lines) + vertical (buying Whole Foods – forward integration) + conglomerate
(acquiring Twitch – gaming streaming).
Motives for Growth
• Economies of scale – lower LRAC.
• Increased market power – ability to raise price.
• Risk diversification (conglomerate).
• Managerial motives – salary, power, prestige often correlate with firm size.
• Survival – in declining industries, growth may be essential.
Constraints on Growth
• Size of market – small market limits expansion.
• Access to finance – banks may be unwilling.
• Regulation – competition authorities may block mergers.
• Owner objectives – lifestyle business vs aggressive growth.
1.3 Demergers
A demerger = when a single business is split into two or more independent firms (opposite of integration).
