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Economics iGCSE > 3.5 - Firms > Flashcards

3.5 - Firms Flashcards

1
Q

Firm

A

An organisation that uses resources to produce a product, which it then sells

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2
Q
A
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3
Q

Classification of firms (2)

A
  • By sector: primary, secondary, tertiary
  • By owenership: public, private
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4
Q

Primary sector

A

Firms in industries within the primary sector of an economy specialise in the production or extraction of natural resources by growing crops, managing forests, mining coal etc.

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5
Q

Secondary sector

A

Firms within industries in the secondary sector of an economy will use unprocessed natural resources and other unfinished products to make other goods: manufacturing
- for example, oil is used in plastics, glass is made from sand, and paper is made from pulped wood

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6
Q

Tertiary sector

A

The distribution and sale of manufactured goods and the provision of services to consumers is the final stage in their production
- firms in the wholesale and retailing industries specialize in these activities

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7
Q

Public sector

A

A part of the economy that comprises all organizations that are owned and operated by the government

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8
Q

Private sector

A

The part of the economy that is run by individuals and companies for profit and is not state controlled

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9
Q

State-owned enterprise

A

A business enterprise where the government or state has significant control through full, majority, or significant minority ownership

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10
Q

Industrial sector

A

Contains firms that use similar production processes and specialise in the production of a similar range of products.

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11
Q

Through what characteristics can you measure the size of a business? (4)

A
  • The number of employees
  • Capital employed
  • Market shared
  • Sales turnover (revenue)
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12
Q

Small business

A

An independently owned business that usually has the owner as its manager and has only a small amount of employees

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13
Q

Advantages of small businesses (name 3)

A
  • Flexibility - can adapt to quick changes as the owner is more involved
  • Personal service - owners are easily accessible to offer customer service
  • Lower wages - no trade unions = employees has weak negotiating powers; owners are able to impose wages to the legal minimum wage
  • Better communication - since there are fewer employees, information can be reached easily
  • Innovation - faces more pressure to become innovative, hence they are more prepared to take risk as they have less to lose
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14
Q

Disadvantages of small businesses (name 3)

A
  • Higher cost - cannot exploit economies of scales; average cost will be higher than larger rivals = lack of competitive edge
  • Lack of finance- struggles to raise finance as choice of sources is limited
  • Staff - hard to attract experienced staff as they lack resources (not able to afford the wage, training required for a specific skill)
  • Vulnerability - when trading conditions fluctuate, it is hard to survive as they lack resources
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15
Q

Internal growth

A

Internal growth, also known as organic growth, occurs when a company uses its own tools and resources to expand.

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16
Q

Ways that internal growth can happen (name 3)

A
  • Developing new product ranges
  • Launching existing products directly into new international markets (e.g. exporting)
  • Opening new business locations - either in the domestic market or overseas
  • Investing in additional production capacity or new technology to allow increased output and sales volumes
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17
Q

Advantages of internal growth (name 2)

A
  • Incremental, even-paced growth
  • Provides maximum control
  • Preserves organisational culture
  • Encourages internal entrepreneurship
  • Allows firms to promote from within
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18
Q

Disadvantages of internal growth (name 2)

A
  • Slow form of growth
  • Need to develop new resources
  • Investment in a failed internal effort can be difficult to recoup
  • Adds to industry capacity
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19
Q

External growth

A

External growth usually involves a merger or takeover of another existing business.
* can be friendly (merger) or hostile (takeover)

20
Q

Advantages of external growth (name 2)

A
  • Reducing competition
  • Getting access to proprietary products or services
  • Gaining access to new products
  • Obtaining access to technical expertise
  • Gaining access to an established bran name
21
Q

Disadvantages of external growth (name 2)

A
  • Incompatibility of top management
  • Clash of corporate cultures
  • Operational problems
  • Increased business complexity
22
Q

Backwards vertical integration

A

When a firm merges/takes over their supplier, backwards in the supply chain

23
Q

Horizontal integration

A

When a firm merges/takes over their competitor in the same industry in the same sector

24
Q

Forwards vertical integration

A

When a firm merges/takes over their customer, forwards in the supply chain

25
Q

Conglomerate integration

A

When a firm merges/takes over a business in a completely different industry

26
Q

Economies of scale

A

When an increase in the scale of output results in a lower cost per unit (optimum size)

27
Q

Diseconomies of scale

A

When an increase in the scale of output results in higher costs per unit (the business is too big)

28
Q

Define internal economies of scale

A

Result of the growth in the scale of production within the firm

29
Q

Define external economies of scale

A

When there is an increase in the size of the industry in which the firm operates

30
Q

Examples of internal economies of scale (name 3)

A
  • purchasing economies
  • technical economies
  • financial economies
  • marketing economies
  • managerial economies
  • risk-bearing economies
31
Q

Examples external economies of scale (name 3)

A
  • Access to skilled workers
  • Job marketing benefits
  • Shared infrastructure
  • Specialist service providers (ancillary firms)
32
Q

Risk-bearing economies of scale

A

Large firms (high output) sell into different markets and produce a variety of products (diversification)
- business risks are spread over a wider range of products/markets - in case of market failure, other products can continue business

33
Q

Financial economies of scale

A

Banks more willing to lend to large firms, more financially secure in repaying loans (trust and good reputation)
- also likely to get lower rates of interest
- large firms can sell shares to raise capital
- more capital and lower costs

34
Q

Marketing economies of scale

A
  • afford their own vehicles to distribute products: cutting down costs
  • cost of advertising is spread over a much larger output in large firms
35
Q

Technical economies of scale

A

Large firms are financially able to invest in good technology, skilled workers, machinery etc.
- efficiency cuts costs for the firm

36
Q

Purchasing economies of scale

A

Large firm can buy raw material in bulk because of high scale of production
- supplier usually offer price discounts for bulk purchases, cut costs for the firm

37
Q

Access to skilled workers

A

Large workers can recruit workers trained by other firms
- efficiency and productivity of workers cuts costs

38
Q

Joint marketing benefits

A

Firms in the same industry are located close to each other: they can enhance reputation and customer base
- promote one-another / merge

39
Q

Shared infrastructure

A

Development in infrastructure of an industry / economy can benefit large firms
- e.g. more roads and bridges by govn. can cut transport costs

40
Q

Specialist service providers (ancillary firms)

A

They are firms that supply materials / services to larger firms (e.g. marketing, research etc.)
- if located located near a company, the company can cut costs by using their services more cheaply than other firms

41
Q

Examples of diseconomies of scale (name 3)

A
  • management diseconomies
  • skills shortages
  • supply constraints
  • labour diseconomies
  • regulatory risks
42
Q

Management diseconomies

A

Large firms have wide internal organisations (lots of managers and employees)
- makes communication difficult, decision-making slow
- gradually leads to inefficient running of firms: increases costs

43
Q

Skills shortage diseconomies

A

Firms are unable to attract skilled labour
- have to spend more on training and wages: increasing costs

44
Q

Supply constraint diseconomies

A

Too much output requires large supply of raw materials, power etc.
- shortages halt production, reducing profit and increasing costs

45
Q

Labour diseconomies

A

Large firms can use automated production (lots of capital)
- workers may feel bore during repetitive tasks: demotivation and lack of cooperation
- can lead to strikes: stopping production and increasing costs

46
Q

Regulatory risk diseconomies

A

Firms become so large that smaller firms cannot compete
- end up dominating supply and controlling market price
- governments may introduce laws to reduce the firm’s control

Economics iGCSE (27 decks)

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