Chapter 20- Firms

Question 1

Industry

Answer 1

a group of firms producing the same product.

Question 2

Quaternary Sector:

Answer 2

covers service industries that are knowledge based

Question 3

Internal growth

Answer 3

Internal growth: an increase in the size of a firm resulting from it enlarging existing plants or opening new ones.

Question 4

External Growth

Answer 4

External growth: an increase in the size of a firm resulting from it merging or taking over another firm.

Question 5

Horizontal Merger:

Answer 5

Horizontal merger: the merger of firms producing the same product and at the same stage of production.

it is the merger of 2 firms producing at the same stage of production producing the same product. The main motives behind a horizontal merger are taking advantage of economies of scale which would allow firms to produce at a lower average cost and to increase market share(elimination of competition by merging). Rationalization is another benefit that may be caused by horizontal mergers where any excess redundant resources can be sold off and savings could be made on managerial staff. despite this there is a risk that the firm may experience diseconomies of scale where a firm grows too large

Question 6

Vertical Merger:

Answer 6

Vertical merger: the merger of one firm with another firm that either provides an outlet for its products or supplies it with raw materials, components or the products it sells.

this is when a firm mergers with another firm involved in the production of the same product but at a different stage of production. These can be backwards or forwards. Backwards is when a firm merges with a firm that is its source of raw materials components or the products it sells. Eg: supermarket can takeover or merge with a bakery. An aim of this would be to restrict the access of rival firms to supplies. Forwards is when a firm merges with or takes over a market outlet. Eg: an oil company takes over a chain of gas stations. They are carried out to ensure that products are stored and displayed well in high quality outlets. Another aspect this would aid in is the development and marketing of new products. There is the risk of managerial problems due to being different sizes or not being familiar with the industry.

Question 7

Conglomerate merger:

Answer 7

Conglomerate merger: a merger between firms producing different products

this involves the merging of firms making 2 different products. The main objective is diversification . It spreads a firm’s risks which enable it to continue its growth even if one of its product’s market is declining. Coordinating a firm that is producing a range of products can prove to be very challenging.

Question 8

Rationalisation

Answer 8

Rationalisation: eliminating unnecessary equipment and plant to make a firm more efficient.

Question 9

Vertical Merger Backwards

Answer 9

Vertical merger backwards: a merger with a firm at an earlier stage of the supply chain

Question 10

Vertical Merger Forwards

Answer 10

Vertical Merger Forwards: a merger with a firm at a later stage of the supply chain

Question 11

Internal Economies of Scale

Answer 11

Internal economies of scale: lower long run average costs resulting from a firm growing in size.

Question 12

External Economies of Scale

Answer 12

External economies of scale: lower long run average costs resulting from an industry growing in size.

Skilled labor force: recruiting workers with prior experience in the industry
good reputation: area can gain good reputation for high quality of production
specialist suppliers of raw materials and capital goods: ancillary industries providing needs for the industry
specialist services: educational institutes may run courses for workers in large banking firms or industries or transport firms may provide special services to meet the needs of firms in the industry
specialist markets: specialist selling places and arrangements like corn exchanges and insurance markets
improved infrastructure: encourage government and private sector firms to provide better roads electricity supplies, airports or dock facilities

when there are to many large firms in an area the amount of transport can increase causing congestion, increased journey time, higher transport costs and reduced worker productivity. Intense competition for resources would result in increased price of capital equipment, sites, and labor

Question 13

Internal Diseconomies of Scale:

Answer 13

Internal diseconomies of scale: higher long run average costs arising from a firm growing too large.

Question 14

External Diseconomies of Scale

Answer 14

External diseconomies of scale: higher long run average costs arising from an industry growing too large.

Question 15

Classification of Firms

Answer 15

Primary sector: includes industries such as agriculture, coal mining and forestry and others that are involved in the extraction and collection of raw materials

Secondary Sector: the processing of raw materials into finished or semi-finished goods and covers manufacturing and construction

Tertiary Sector: industries producing services like banking and tourism are in this sector

Quaternary Sector: subsection of the tertiary sector which covers industries involved in the collection, processing and transmission of information

Poor countries usually have a large proportion of output and labor being utilized and produced from the primary sector. As the economies develop secondary sector becomes more important and gradually tertiary sector accounts for most of their output and employment.

Question 16

Ownership of Firms

Answer 16

IN MES most firms are private sector, whereas in planned economic systems they are public sector

Question 17

Size of Firms

Answer 17

Age of Firms: usually older the bigger

Availability of Financial Capital: usually more the bigger

Type of Business Organization: MNC’s are larger than businesses owned by a single person

Internal Economies or Diseconomies of Scale: LARC decreases if firm is an economy of scale

Size of Market: larger the market the better

Question 18

Small Firms

Answer 18

Small Size of Market
Preference of Consumers
Owner's Preference
Flexibility
Technical Factors
Lack of Financial Capital
Location: high transport costs leading to local markets instead of national markets
Cooperation Between Small Firms
Specialization
Government Support

Question 19

Causes of Growth of Firms

Answer 19

Internal Growth: firm increasing market for its current products or diversifying into other products. This type of growth can occur through increasing the size of plants or opening new ones.

External Growth: This involves firms joining with other firms through mergers or takeovers. The 3 main types of mergers are vertical mergers, horizontal mergers and conglomerate mergers. This method allows firms to increase their size more quickly than internal growth. With internal growth there is more control on a firms size and with external growth it is possible that a firm might grow past its optimum size.

Question 20

Effect of Merger on Consumers

Answer 20

greater economies of scale which allow consumers to enjoy lower prices and also benefit from high quality products and innovation if the merger increases the efficiency of the firm

if the merger results in diseconomies of scale consumers may experience higher prices and lower quality. Horizontal mergers might also run the risk of reduced choice and increased prices as a result of the usage of market power

Question 21

Types of Internal Economies of Scale

Answer 21

Buying Economies: Large firms that buy raw materials in bulk and place large orders for capital equipment usually receive a discount. They may also receive better treatment than smaller firms in terms of quality, quantity and speed of delivery of raw materials as suppliers want such large customers

Selling Economies: The total cost of processing orders packing goods and transporting them doesn’t rise in line with the number of orders. A large volume can also reduce advertising costs as the total cost can e spread across more units along with the possibility of acquiring discounts.

Managerial Economies: employment of specialized staff by large firms in key posts that can increase efficiency reduce costs of production and raise demand and revenue

Labor Economies: division of labor among staff like specialization

Financial Economies: large firms find it cheaper to raise finance as banks will be more willing to lend to well-known firms which have valuable assets to use as collateral. Banks often charge large borrowers less in order to attract them. Large firms can also sell shares to raise funds (larger the firm, the more willing people are to buy them)

Technical Economies: use of large technologically advanced machinery which is likely to be efficient and produce at lower average cost than small firms

Research and Development economies: research and dev department for developing more efficient methods of production and new products that will reduce LARC

Risk Bearing Economies: spreading the risks of trading over a range of products so resources can be reallocated if the profitability of one of the products falls.

Question 22

Types of Internal Diseconomies of Scale

Answer 22

Difficulties in Controlling the Firm: hard for managers to supervise everything as layers of management increase causing an increase in administrative costs and reduce response time of the firm to changes in market conditions.

Communication Problems: difficult to ensure that everyone in a large firm has full knowledge of duties and available opportunities like training. Communicating ideas to the management team may also be an issue

Poor Industrial Relations: more prone to strikes, lack of motivation and industrial action from workers as they may feel a less sense of belonging and more time might be needed to solve issues as a result of diverse opinions.

Question 23

External Economies of Scale