Business behaviour - Growth; - Unit 1

Question 1

What is the product market?

Answer 1

• The product market is the marketplace in which final goods or services are offered for purchase by consumers, businesses, and the public sector
• Focusing on the sale of finished goods, it does not include trading in raw or other intermediate materials

Question 2

(7) Benefits of a product market:

Answer 2

• lower prices
• more choice
• competition
• increased resource allocation efficiency
• wider range of suppliers
• helps increase productivity
• lead to larger markets for goods

Question 3

(7) Limitations of a product market:

Answer 3

• monopoly power
• availability of resources
• extent of economies of scale
• scarcity and choice
• rising costs as factors of production become more scarce
• competition
• market failure

Question 4

(6) What are reasons for growth?

Answer 4

• To aid survival
• Personal ambition of the owners
• To increase profits
• To spread risk
• To gain market share and power and reputation
• To gain from economies of scale

Question 5

(5) What are the costs of growth?

Answer 5

• May result in diseconomies of scale (ie rising average costs)
• may overstretch the company’s management resulting in poor performance
• may result in culture clashes (where takeovers/mergers are involved)
• may result in boredom for workers (if more specialisation)
• loss of close customer relationships.

Question 6

What is a merger?

Answer 6

when two firms join together to become one larger firm with a new combined Board of Directors

Question 7

What is a take-over?

Answer 7

when one firm (usually larger) takes control of another firm – purchasing its assets and incorporating it into its existing business

Question 8

What is horizontal growth?

Answer 8

When a firm joins with another at the same stage in the chain of production

Question 9

What is forward vertical growth?

Answer 9

When a customer is taken over

Question 10

What is backward vertical growth?

Answer 10

When a supplier is taken over

Question 11

What is diversification?

Answer 11

joining with another firm in an unrelated industry

Question 12

(5) Why might external growth be undertaken?

Answer 12

• to increase profitability
• increase market share and hence monopoly power
• increase reliability/security of outlet or supplies
• achieve economies of scale
• spread risk through diversification

Question 13

What is internal growth?

Answer 13

Internal growth is where the firm grows organically, by increasing its factors of production over time perhaps by introducing new products, or selling into new markets, building new factories & employing more staff

Question 14

What is economies of scale?

Answer 14

The reduction in average costs as the scale of the business increases

Question 15

(4) What types of economies of scale are there?

Answer 15

• Managerial - specialist staff
• Financial - larger loans are cheaper
• Technological - more efficient large scale machinery
• Marketing - bulk buying

Question 16

How do firms benefit from economies of scale?

Answer 16

lower average costs

Question 17

How do specialised workers

generally benefit from EofS?

Answer 17

Job security if the business is profitable

Question 18

How do manual workers loose out due to EofS?

Answer 18

They get replaced by machinery

Question 19

How do consumers benefit from EofS?

Answer 19

• Lower prices

- Increased innovation

Question 20

What is diseconomies of scale?

Answer 20

The rise in average costs as the scale of the business increases

Question 21

What are the three C’s that exhaust economies of scale?

Answer 21

• Communication difficulties
(so mistakes happen)
• Coordination difficulties (need managers managing managers!)
• Cooperation difficulties (morale may suffer – as relations are less personal in a large organization – this could reduce productivity)

Question 22

What is external economies of scale?

Answer 22

The reduction in average costs as the industry grows

Question 23

(6) How do small firms attempt to compete?

Answer 23

• May specialise in small volume goods (ie where significant economies of scale don’t exist)
• May produce high quality goods
• May supply large firms
• May operate in a protected market (eg protected against imports)
• May have a localised monopoly – so offering convenience eg local store
• May offer personalised service