Chapter 20: Firms Flashcards
Primary sector
The first stage of production. Industries such as agriculture, coal mining, and forestry, involved in the extraction and collection of raw materials.
Secondary sector
Processing of raw materials into semi-finished and finished goods. Both capital and consumer goods.
Tertiary sector
Services such as banking, insurance, and tourism.
Quaternary sector
Service industries involved with the collection, processing, and transmission of information.
Measures for size of firms
- Age of firms
- Availability of financial capital
- Type of business organisation
- Internal economies and diseconomies of scale
- Size of the market
Reasons for small firms
- Small size of the market
- Preference of consumers
- Owner’s preference
- Flexibility
- Technical factors
- Lack of financial capital
- Location
- Cooperation between small firms
- Specialisation
- Government support
Growth of firms: Internal growth
An increase in the size of a firm resulting from it enlarging existing plants or opening new ones.
Growth of firms: External growth
An increase in the size of a firm resulting from it merging or taking over another firm.
Horizontal merger
The merger of firms producing the same product and at the same stage of production.
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.
Conglomerate merger
A merger between firms producing different products.
Rationilation
Eliminating unnecessary equipment and plant to make a firm more efficient.
Internal economies of scale
Lower long-run average costs resulting from a firm growing in size.
External economies of scale
Lower long run average costs resulting from an industry growing in size.
Internal diseconomies of scale
Higher long run average costs arising from a firm growing too large.
External diseconomies of scale
Higher long run average costs arising from an industry growing too large.
Internal economies of scale: Buying economies
Large firms that buy raw materials in bulk and place large orders for capital equipment usually receive a discount. This means that they pay less for each item purchased. They may also receive better treatment than small firms in terms of quality of the raw materials and capital equipment sold and the speed of delivery. This is because the suppliers will be anxious to keep such large customers.
Internal economies of scale: Selling economies
The total cost of processing orders, packing the goods and transporting them does not rise in line with the number of orders.
Internal economies of scale: Marketing economies
As output increases, the marketing costs are spread over more units of output.``
Internal economies of scale: Managerial economies
Large firms can afford to employ specialist staff in key posts as they can spread their pay over a high number of units. Employing specialist buyers, accountants, human resource managers and designers can increase the firm’s efficiency, reduce costs of production, and raise demand and revenue.
Internal economies of scale: Financial economies
Large firms usually find it easier and cheaper to raise finance. Banks tend to be more willing to lend to large firms because such firms are Cambridge IGCSE Economics177 well-known and have valuable assets to offer as collateral.
Internal economies of scale: Labor economies
Large firms can engage in division of labour among their other staff. For example, car workers specialise in a particular aspect of the production process.
Internal economies of scale: Technical economies
The larger the output of a firm, the more viable it becomes to use large, technologically advanced machinery. Such machinery is likely to be efficient, producing output at a lower average cost than small firms.
Internal economies of scale: Research and development economies
A large firm can have a research and development department, since running such a department can reduce average costs by developing more efficient methods of production and raise total revenue by developing new products.
Internal economies of scale: Risk-bearing economies
Larger firms usually produce a range of products. This enables them to spread the risks of trading. If the profitability of one of the products it produces falls, it can shift its resources to the production of more profitable products.
Internal diseconomies of scale: Difficulties controlling the firm
It can be hard for those managing a large firm to supervise everything that is happening in the business. Management becomes more complex. A number of layers of management may be needed and there may be a need for more meetings. This can increase administrative costs and make the firm slower in responding to changes in market conditions.
Internal diseconomies of scale: Communication problems
It can be difficult to ensure that everyone in a large firm has full knowledge about their duties and available opportunities, such as training etc. Also, they may not get the opportunity to effectively communicate their views and ideas to the management team.
Internal diseconomies of scale: Poor industrial relations
Large firms may be at a greater risk from a lack of motivation of workers, strikes and other industrial action. This is because workers may have less sense of belonging, longer time may be required to solve problems and more conflicts may arise due to the presence of diverse opinions.
External economies of scale: Skilled labor force
A firm can recruit workers who have been trained by other firms in the industry.
External economies of scale: Good reputation
An area can gain a reputation for a high quality production. For example, the Bordeaux region of France is well known for its high quality wine production and the Maldives has a reputation of being a popular holiday resort.
External economies of scale: Specialist suppliers of raw materials and capital goods
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.
External economies of scale: Specialist services
Universities and colleges may run courses for workers in large industries and banks, and transport firms may provide services specially designed to meet the particular needs of firms in the industry.
External economies of scale: Specialist markets
Some large industries have specialist selling places and arrangements such as corn exchanges and insurance markets.
External economies of scale: Improved infrastructure
The growth of an industry may encourage a government and private sector firms to provide better road links and electricity supplies, build new airports and develop dock facilities.
External diseconomies of scale: Specialist markets
With more and larger firms in an area, there will be an increase in transport with more vehicles bringing in workers and raw materials, and taking out workers and finished products. This may cause congestion, increased journey times, higher transport costs for firms and possibly reduced workers’ productivity. The growth of an industry may also result in increased competition for resources, pushing up the price of key sites, capital equipment and labour.