3.1.1 Size and types of firms

Question 1

Reasons why firms grow

Answer 1

desire to reduce costs by benefiting from economies of scale

growth provides opportunities for product diversification

larger firms often have easier access to finance

Question 2

reasons why small firms exist

Answer 2

they offer a more personalised service and focus on building relationships with their customers

unable to access finance for expansion

rapid growth can cause diseconomies of scale which can be difficult to deal with and so many owners choose to avoid these

they provide a niche market - smaller market size but can be very profitable

The owner’s goal is not profit maximisation but rather an acceptable quality of life (satisficing)