Chapter 20- Firms

Question 1

What is a firm?

Answer 1

A firm is a commercial enterprise, a company that buys and sells products and/or services to consumers with the aim of making a profit

Question 2

What is an industry?

Answer 2

An industry is a group of firms producing the same/ similar products
Eg: car industry

Question 3

What are the stages of production? Describe each one

Answer 3

Primary- first stage of production- eg raw materials
Secondary- processing of raw materials- eg building, clothing and steel industry
Tertiary- producing services- eg tourism and banking
Quaternary- sub-section of tertiary- covers service industries that are knowledge and tech based

Question 4

Ownership of firms- describe it for all 3 types of economies

Answer 4

market economic system- private sector (owned by private firms, individuals- profit based)
planned economic system- public sector (owned and operated by the government and exist to provide services for its citizens)
mixed economic system- private and public sector

Question 5

size of firms (5 factors)

Answer 5

age of firms- firms grow with age/ over time
availability of financial capital- bonds, assets, loans and shares
type of business organisation- MNCs or small firms
internal economies and diseconomies of scale- LRACs
size of the market- niche/ broad marketplace

Question 6

small firms (10 points)

Answer 6

small size of the market- customised products, requirements are fulfilled
preference of consumers- consumers prefer a smaller market
owner’s preference- taxes, management etc
flexibility- adjusts to market changes quickly and more easily
technical factors- little or no capital needed- don’t suffer a cost disadvantage
lack of financial capital- equity, shares, bonds etc
location- emergence of local markets/ transportation costs cut down
cooperation between small firms- easier to cooperate
specialisation- smaller firms can supply specialised products
government’s support- subsidies received from the government

Question 7

causes of growth of firms (4 points)

Answer 7

internal growth- an increase in the size of the firm resulting from expansion of plants or opening new ones (organic/ natural)
external growth- an increase in the size of a firm resulting from it merging or taking over another firm
merger- agreement that unites two existing companies into one new company
takeover- acquisition

Question 8

horizontal mergers

Answer 8

• same stage of production/ same product
• eg: car
• key motives: economies of scale, market shares
• advantages: rationalisation, eliminates competition, economies of scale
• disadvantages: diseconomies of scale, difficult to handle, adapt to the new system

Question 9

vertical merger

Answer 9

• same product production but at different stages
• vertically backward merger- moves backwards in terms of the sectors
• vertically forward merger- moves forwards in terms of sectors

Question 10

conglomerate merger

Answer 10

• 2 firms who have nothing in common, come together
• risk divided/ spread amongst many industries and variety of products
• revenue system divided
• leads to monopolisation

Question 11

Definition of LRAC

Answer 11

• long run average cost

- curve which adds up all the SRACs

Question 12

EOS definition

Answer 12

advantages in the form on LRACs of producing on a larger scale

Question 13

DOS definition

Answer 13

disadvantages in the form of LRACs of producing on a larger scale (cost of FOP rise)

Question 14

Internal EOS

Answer 14

lower LRACs resulting from a firm growing in size

Question 15

external EOS

Answer 15

lower LRAC resulting from an industry growing in size

Question 16

exte

Question 17

Effect of mergers on consumers

Answer 17

advantages-
greater EOS= lower prices
high quality products and innovation if efficiency of the firm increases

disadvantages-
DOS= higher prices, poor quality
horizontal merger could mean reduced choice for consumers

Question 18

types of internal economies of scale:

1. buying economies

Answer 18

buying in bulk cuts down the cost price

Question 19

types of internal economies of scale:

2. selling economies

Answer 19

selling in bulk (packaging, transportation etc)- cost lowered because its sold in bulk

Question 20

types of internal economies of scale:

3. managerial economies

Answer 20

larger firms can appoint specialist staff which increases output and reduces costs

Question 21

types of internal economies of scale:

4. labour economics

Answer 21

specialisation- usually seen in larger firms

Question 22

types of internal economies of scale:

5. financial economies

Answer 22

easily financed because their share prices are higher, gets loans at lower rates etc

Question 23

types of internal economies of scale:

6. technical economies

Answer 23

the larger the output of the firm is, the more they can invest in capital, technology etc

Question 24

types of internal economies of scale:

7. research and development economies

Answer 24

reduces average costs as more efficient methods of producing are found

Question 25

types of internal economies of scale:

8. risk bearing economies

Answer 25

larger firms usually produce a range of products- spreads the risk of trading

Question 26

Reasons for internal DOS:

1. difficulty controlling the firm

Answer 26

a large firm can be hard and expensive to supervise

Question 27

Reasons for internal DOS:

2. communication problems

Answer 27

internal lack of communication or miscommunication

Question 28

Reasons for internal DOS:

3. poor industrial relations

Answer 28

large firms may be at a greater risk from a lack of motivation of workers, strikes and other industrial action

Question 29

reasons for external EOS:

1. skilled labour force

Answer 29

firms can recruit workers who have been trained by other firms in the industry

Question 30

reasons for external EOS:

2. a good reputation

Answer 30

known for high quality production

Question 31

reasons for external EOS:

3. specialist suppliers of raw materials and capital goods

Answer 31

When an industry becomes large enough, it can become worthwhile for other industries, called ancillary industries, to set up providing for the needs of the industry. For instance, the tyre industry supplies tyres to the car industry.

Question 32

reasons for external EOS:

4. specialist services

Answer 32

special courses for workers of an industry

Question 33

reasons for external EOS:

3. specialist markets

Answer 33

specialist selling places and arrangements

Question 34

reasons for external EOS:

4. improved infrastructure

Answer 34

growth of an industry may encourage the development of new/ better infrastructure