The following points highlight the six factors determining the size of firm. The factors are: 1. Entrepreneurial Skill 2. Managerial Ability3. Availability of Finance 4. Availability of Labour 5. Nature of Business 6. Extent of the Market.
Factor # 1. Entrepreneurial Skill:
The most important factor is, of course, the skill, initiative and resourcefulness of the entrepreneur. Everything depends on his judgment and ability. An entrepreneur of outstanding requisite labour force and build-up a huge business. But an entrepreneur of moderate ability will run business on a moderate scale and a man of limited entrepreneurial skill will be content with a small business.
Factor # 2. Managerial Ability:
For running the routine part of the business, managers are appointed. If a firm is lucky enough to have a manager of exceptional ability, the size of the firm will grow to considerable dimensions. On the other hand, a mediocre manager will have a small sized firm to manage.
Factor # 3. Availability of Finance:
It is finance which lubricates the wheels of business machine. If ample funds are available it will help the entrepreneur to make his business grow to a big size. This requires the proper development of the banking system so that saving of the community can be effectively mobilised and utilised in the development of trade and industry.
Factor # 4. Availability of Labour:
Another factor on which the size of the firm depends is the availability of labour of requisite skill. After all what can the entrepreneur, even with large capital, do, if the labour is not available? What is required is efficient and skilled labour.
Factor # 5. Nature of Business:
Much also depends upon the nature of business. If the business obeys the law of increasing returns it will remain stunted and in the case of constant returns it will remain stagnant.
Factor # 6. Extent of the Market:
The size of the firm also depends on the extent of the market. If the commodity in which the firm deals or which it manufactures has a wide market, naturally the business will assume a large scale. But, if the demand for the commodity is limited, the size of the firm will continue to be small.
The Optimum Firm:
As output increases, within a given plant, production becomes more and more economical. This is due to economies of scale. After a stage, however, a point of minimum cost is reached and it becomes uneconomical to expand the business any further. At this point, the average cost of production is the lowest. This is regarded as the optimum level of production for the firm concerned. It is thus the ideal size of the firm with minimum cost per unit.