3.5 - Firms Flashcards
What influences the size of a particular firm?
Age of firms - Most firms start small. Every year new firms are set up, but not all of them survive. Those that do may take time to grow in size.
Availability of financial capital - The more financial capital a firm has to draw on to finance its expansion, the larger its capable of growing
Type of buisness organisations - MNC’s are larger than a shop owned buisness. Private sector MNC’s can use retained profits borrow sell shares to raise the finance to expand. A buisness owned by one person is unlikely to be able to sell shares more difficult to borrow
Size - This is the key factor in determining the size of a firm. If there is a large demand for a product, it is possible for a firm to grow to a large size
What is a firm?
A firm is a business organisation which sells or produces a good/service
All firms require factors of production as inputs
They add value to these inputs in producing a good/service
They sell the good/service, ideally at a price higher than their cost of production
What are public sector firms and their main goals?
Public sector firms are owned & controlled by the Government
Their main goal is usually to provide a service
Public sector firms can operate on a local, regional or national government level
What is a private firm and what are their main goals?
Private sector firms are owned & controlled by other firms & private individuals
The objective of most private sector organisations is profit maximisation
This often causes the private sector to be more efficient than the public sector with higher levels of productivity
Types of business ownership vary from sole trader to partnerships to company shareholders
Why does a firm chose to remain small/
Market size : If demand for the product is small a firm producing will not be large.
Consumer preference : Small firms can cater to individual requirements and an provide more personalised service
Owner preference : Some people want to avoid the stress of running large buisnesses an worried about expanding may lead to loss of control.
Flexibility : Small firms may survive because they can adjust to changes in market conditions
Lack of financial capital : Some firms may want to expand but they may lack the finance required to do so or it may be difficult to raise
What are the advantages of small firms?
They often provide highly customised goods/services
They often create personal relationships with their customers which helps to generate customer loyalty & word-of-mouth advertising
Smaller firms can respond quickly to changing market conditions
What are the disadvantages of small firms?
More susceptible to changes in the wider economy than large firms, especially during recessions
Less financial resources available to them, including access to larger bank loans - some smaller firms are unable to access any loans at all
It is harder to recruit/retain staff as the wage & non-wage benefits are less competitive than those offered by bigger firms
What is internal Growth?
An increase in the size of a firm resulting from it enlarging existing plants or opening new ones
What is External Growth?
An increase in the size of a frim resulting from it merging or taking over another firm.
What is Organic Growth?
Organic growth is usually generated by
Gaining greater market share
Product diversification
Opening a new store
International expansion
Investing in new technology/production machinery
What is Inorganic growth?
Inorganic growth usually takes place when firms merge in one of three ways
Vertical integration (forward or backwards)
Horizontal integration
Conglomerate integration
Why do Buisnesses want to grow?
To increase the financial rewards to shareholders/owner/workers
Reduce the risk of failing
To survive
Satisfy ambitions
To have greater market power
What is a Horizontal merger?
Merger of two firms at the same stage of production producing the same product
What are the Advantages of a Horizontal Merger?
Rapid increase of market share
Reductions in the cost per unit due to economies of scale
Reduces competition
Existing knowledge of the industry means the merger is more likely to be successful
Firm may gain new knowledge or expertise
What are the disadvantages of a Horizontal Merger?
Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles
There can be a culture clash between the two firms that have merged
How are economies of scale, minimum efficent scale and diseconomies of scale represented on a diagram?
With relatively low levels of output, the firms average costs are high
As the firms increases its output, begins to benefit from economies of scale which lowers the average cost per unit.
At some level of output a firm not able to reduce costs any further called productive efficiency.
Beyond this level of output average cost begin to rise as a result of Diseconomies of scale.
What is financial economies of scale?
What is Managerial economies of scale?
What are Marketing economies of scale?
What is Purchasing economies of scale?
What is technical economies of scale?
What is risk bearing economies of scale?
