Optimal Size of a Firm
Optimal Size Of A Firm
The optimum size of a firm is a very subjective idea. The ways in which size can help or hinder a firm vary from which angle you a looking at the situation from. Size can have its benefits and its drawbacks, and each firm will have its own benefits and drawbacks that come from either increasing in size, or remaining small, and these will depend on the market in which the firm is in, the current economy, and in some cases the preferences of the manager(s).
For example a small firm may be small for many reasons. It may be small because it has just started out in business, and still has relatively little funds, so although the owner/manager may have aspirations of the business growing, at the present time, his main concern would be keeping the business afloat. Another small business may stay small due to the preference of the manager/owner, for example a corner newsagent's shop may remain a small retail business as the owner is making a profit from the business that he finds acceptable, and does not want the hassle of either expanding his current business, setting up new shops, or taking over another business.
The size of a business does however depend a great deal on the market which it is in. For example a business which makes specialist goods, or caters to only a very small number of people, will not be able to grow beyond the capacity of that market. This means that the optimum size for a business in a market with little growth and only a small number of prospective customers would be large enough to serve as many customers as it had market share for, but small enough to ensure that they don't over produce.
If there is a fairly large market for the product/service that a company is providing, then there is likely to be a large amount of competition in the market. This means that it would be fairly hard for the company to grow in that market unless they did one of three things. Firstly they could come up with a better and cheaper
The optimum size of a firm is a very subjective idea. The ways in which size can help or hinder a firm vary from which angle you a looking at the situation from. Size can have its benefits and its drawbacks, and each firm will have its own benefits and drawbacks that come from either increasing in size, or remaining small, and these will depend on the market in which the firm is in, the current economy, and in some cases the preferences of the manager(s).
For example a small firm may be small for many reasons. It may be small because it has just started out in business, and still has relatively little funds, so although the owner/manager may have aspirations of the business growing, at the present time, his main concern would be keeping the business afloat. Another small business may stay small due to the preference of the manager/owner, for example a corner newsagent's shop may remain a small retail business as the owner is making a profit from the business that he finds acceptable, and does not want the hassle of either expanding his current business, setting up new shops, or taking over another business.
The size of a business does however depend a great deal on the market which it is in. For example a business which makes specialist goods, or caters to only a very small number of people, will not be able to grow beyond the capacity of that market. This means that the optimum size for a business in a market with little growth and only a small number of prospective customers would be large enough to serve as many customers as it had market share for, but small enough to ensure that they don't over produce.
If there is a fairly large market for the product/service that a company is providing, then there is likely to be a large amount of competition in the market. This means that it would be fairly hard for the company to grow in that market unless they did one of three things. Firstly they could come up with a better and cheaper