Chapter 20: Firms Flashcards
Size of firms
Measured:
- Number of workers
- Value of output it produces
- Value of the financial capital it employs
Infleunced by:
- Age of firms
- Availability of financial; capital
- Type of business organisation
- Interal 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 (decisions are quicker, small firms can adjust to changes in market conditions quicker)
- Technical factors (Little or no capital needed, lower barriers to entry)
- Lack of financial capital
- Location
- Cooperation between small firms
- Specialisation
- Government support
External growth
- Involves firm joining with another firm/firms to form one firm through a merger or takeover
- Allows a firm to increase its size more quickly than intenal growth
- However, internal growth, there is more control over the size of the firm
- There is risk tat external growth may take a firm past its optimum size
Internal growth
- Natural or organic growth
- Involves a firm increasing the market for its current products or diversifying onto other products
- May occur throug increasing the size of existing plants or by opening new ones
Horizontal merger
- Merger of two firms at the same stage of production, producing the same product
- Motives: To take greater advantage of economies of scale and to increase market share
- Rationalisation ( eliminating unnecessary equipment and plants to make a firm more efficient
- Can save on managerial staff
- Risk of diseconomies of scale
- Difficult to control large firm
- May be difficult to integrate two firms if they initially had different management structures and locations
Vertical merger
- Firm merges with another firm involved with the production of the same product at different stages
- Management issues - managers unfamiliar
- Firms may have been of different sizes and this may require some adjustment
Conglomerate merger
- Merger of two firms makign different products
- Motive is diversification
- Spreads a firms risks and enables it to continue its growth even if the market of one is declining
- Can be challenging
Effect of merge on consumers
Advantages:
- If there are economies of scale, there are lower prices
- Better quality
- Innovation
Disadvantages:
- If there are disconomies of scale, there may be higher prices
- Poorer quality
- Reduced choice for consumers
- Use of market power by merged firms to push up prices
EoS
Buying economies
- Large firms that bulk buy materials and place large orders for capital equipment usually recieve discount
- Pay less for each item purchased
- May also recieve better treatment in terms of quality and speed of delivery
- Suppliers anxious to keep large customers
EoS
Selling economies
- Total cost of processing orders, packing goods, and transport does not rise in line with number of orders
- Total cost of an advertising campaign can be spread over more units and discounts may be secured
EoS
Managerial economies
- Large firms can employ managers who have the skill to use resources more efficiently lowering the average total cost
EoS
Labour economies
- Large firms can engage in division of labour among their staff
- Workers can specialise in a particular aspect
EoS
Financial eocnomies
- Easier and cheaper to raise finance
- Banks tend to be more willing to lend to firms because they are well known and have valuable assets as collateral
- Banks often charge large borrowers less to attract them
- Selling shares
- The larger and better known the companies are, the more willing people are to buy shares
EoS
Technical economies
- Larer the output, the more viable it becomes to use technologically advanced machinery
- More efficient producing output at a lower average cost than small firms
EoS
Research and development economies
- Large firms can have a research department which can reduce average costs by developing more efficient methods of production and raise total revenue by developing new products
