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
What is a Vertical merger backwards?
When a firm merges with a firm that is the source of its supply of raw materials components or products it sells.
What are the advantages of Vertical Merger backwards?
Reduces the cost of production as middle man profits are eliminated
Lower costs make the firm more competitive
Greater control over the supply chain reduces risk as access to raw materials is more certain
Quality of raw materials can be controlled
What are the disadvantages of Vertical Merger backwards?
Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles
There can be a culture clash between the two firms that have merged
Possibly little expertise in running the new firm results in inefficiencies
The price paid for the new firm may take a long time to recoup
What is a Vertical Merger forwards?
When a firm merges with or takes over a market outlet.
What are the advantages of a Vertical Merger forwards?
Forward integration adds additional profit as the profits from the next stage of production are assimilated
Forward integration can increase brand visibility
What is a Conglomerate Merger?
The Merger of 2 firms making different products.
What are the advantages of Conglomerate Mergers?
Reduces overall risk of business failure
Increased size & connections in new industries opens up new opportunities for growth
Parts of the new business may be sold for profit as they are duplicated in other parts of the conglomerate
What are the disadvantages of Conglomerate Mergers?
Possible lack of expertise in new products/industries
Diseconomies of scale can quickly develop
Usually results in job losses
Worker dissatisfaction due to unhappiness at the takeover can reduce productivity
What is Economies of scale?
As a firm grows, it is able to increases its scale of output generating efficiencies that lower its average costs (AC) of production
These efficiencies are called economies of scale
What are the benefits of economies of scale?
Economies of scale help large firms to lower their costs of production beyond what small firms are able to achieve
What are diseconomies of scale?
As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) productivly efficent will start to increase
The reasons for the increase in the average costs are called diseconomies of scale
What is a minimum efficent scale?
The lowest production point that will minimize the long - run average costs?
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?
