6EC03 - Firms

Question 0

What is an industry?

Answer 0

Collection of firms operating in same production process

Question 1

What is a firm?

Answer 1

A production unit (transforms resources into goods & services)

Question 2

What is the private sector?

Answer 2

Involves assets owned by individuals or groups, not the government
e.g Bupa hospital, funded by private payments from individuals or companies

Question 3

What is the public sector?

Answer 3

Involves assets owned by society as a whole, provided through the government
e.g NHS hospital, funded mainly through taxation

Question 4

How do firms grow?

Answer 4

1) Internal/ Organic growth

2) External/ Inorganic growth (takeovers)

Question 5

What is internal/ organic growth?

Answer 5

Simply where firms increase their output,
Increasing existing production capacity through investment,
Development and launch of new products,
Finding new markets (exporting)
Increasing customer base (marketing)

Question 6

List the 3 main ways a firm can grow.

Answer 6

1) Horizontal integration
2) Vertical integration
3) Conglomerate integration or diversification

Question 7

What is horizontal integration?

Answer 7

Firm joins another at the same stage of the production process
e.g lloyds tab & halifax bank of Scotland or t-mobile & orange both in 2009

Question 8

What are the benefits of horizontal integration?

Answer 8

Increased market share,
Leads to internal economies of scale,
Reduced competition

Question 9

What are the costs of horizontal integration?

Answer 9

Unknown costs,

Loss of jobs

Question 10

What is vertical integration?

Answer 10

Where one firm joins with another at a different stage of the same production process e.g eBay taking over PayPal

Question 11

What is forward vertical integration?

Answer 11

Firm buys up a firm nearer the customer e.g a distributor american apparel buying design components

Question 12

What are the benefits of forward vertical integration?

Answer 12

Greater access to customers,
Removal of competing suppliers,
Better market knowledge

Question 13

What are the costs of forward vertical integration?

Answer 13

Lack of expertise,
Over exposure,
High start up costs,
Dilution of brand

Question 14

What is backward vertical integration?

Answer 14

Where a firm buys up a supplier,

Guarantees suppliers or access to the market e.g Miller yoghurt taking over a dairy farm

Question 15

What are the benefits of backward vertical integration?

Answer 15

Assured supplies,
Widening expertise,
Increased market share

Question 16

What are the costs of backward vertical integration?

Answer 16

Lack of expertise,

Over-exposure

Question 17

What is conglomerate integration?

Answer 17

Where a firm buys up anther firm in a different industry,

e.g Richard Branson at Virgin: airplanes, wifi, trains, telecoms or cigarette company buys up chocolate company

Question 18

What are the benefits of conglomerate integration?

Answer 18

Greater spread of risk,
Widening range of output to reduce expedite to any one market,
Allows firms to use funds to cross-subsidise investment in new areas takes chance to innovate without losing revenue,
Increase job security,
Widens brand awareness

Question 19

List 8 reasons firms grow.

Answer 19

1) Increased market share
2) Benefit from greater profits
3) Increase sales
4) Increase economies of scale
5) Gain power
6) Satisfy managerial ambitions
7) Gain expertise
8) Make the most of an opportunity

Question 20

What are the benefits of growth?

Answer 20

Economies of scale - firm able to exploit its increased she and approaching minimum point of LRAC so firms moving closer to productive efficiency
Increased market share - become dominant firm in particular industry allow to increase profits or ensure in stronger position to dominate market it set prices to their benefit
Economies of scope/ reduce risk - larger firms less exposed to risk that firms may have if narrowly focused especially in recession
Psychological factors - managers may gain more job satisfaction from working for well-known brand or working for more people responsibility etc

Question 21

Why do some firms break up/ demerger?

Answer 21

Lack of synergies - one part of firm having no impact on the more efficient/ profitable part of the firm
Diseconomies if scale - growth of output managers may lose focus & control over day-to-day management so LRAC increase
Price - the merged firms price might be higher than price of single larger firm e.g on a stock exchange

Question 22

What are mergers, amalgamations, integration or takeovers?

Answer 22

The joining together of 2 or more firms under common ownership

Question 23

What is synergy?

Answer 23

When 2 or more activities or firms put together can create greater outcome than the sum of the individual pars (2 + 2 = 5)

Question 24

What is a demerger?

Answer 24

When a firm splits into 2 or more independent businesses

e.g ‘Fosters’ Australia’s best-selling larger after 15 years with treasury wine estates demerged in 2011

Question 25

Why do some firms remain small?

Answer 25

Niche market - some firms operate in v.small corners of market because demand for product is specialised & limit
Lack of economies of scale - sometimes say firm has a small minimum efficient scale e.g doctors dentist can only operate certain caseload therefore small practice
Need for dynamic, responsive, service-led firm - firms involved in design small & quick to respond to need of larger firms who buy their services
Heavy government regulation - government wants to prevent monopolies developing e.g commercial banks in the US.
Lack of resources - firm may lack knowledge, expertise or funds to expand
Lack of motivation - satisficing
Avoiding attention from potential buyers - growth and increased profits may result in unwanted overtures from larger firms wishing to buy out sole trader
Tax thresholds - get access to additional training grants from government, not liable for corporation tax if profits below £10,000

Question 26

What are barriers to entry?

Answer 26

Obstacles that prevent a firm setting up, or extending its reach into new markets

Question 27

What are barriers to exit?

Answer 27

Any factors which prevent firms leaving a market,
Or make it more unprofitable to leave than stay in business, even if operating at a loss,
e.g sunk costs

Question 28

What are legal barriers?

Answer 28

Government may prevent entry or growth of a firm,
Patents - will also give firms legal protection to ensure ideas or processes are protected from competition,
Licences - needed for some industries before firm or industry can operate e.g law

Question 29

What are marketing barriers?

Answer 29

Those imposed by businesses currently operating in an industry,
Branding or advertisement,
Investment in marketing cannot be recouped if campaign fails: sunk costs

Question 30

What are pricing barriers?

Answer 30

Limit pricing

Predatory pricing

Question 31

What are technical barriers?

Answer 31

Often only few firms dominate industry thanks to their size,
Smaller & newer firms unable to compete with larger firms as they’re able to use their knowledge & expertise to produce goods & services at lower cost,
New firms find impossible to compete as AC will be much higher

Question 32

What are sunk costs?

Answer 32

Costs of production which are not recoverable if a firm leaves the industry