Chapter 20: Firms Flashcards
1
Q
Size of firms
A
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
2
Q
Reasons for small firms
A
- 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
3
Q
External growth
A
- 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
3
Q
Internal growth
A
- 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
4
Q
Horizontal merger
A
- 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
5
Q
Vertical merger
A
- 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
6
Q
Conglomerate merger
A
- 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
7
Q
Effect of merge on consumers
A
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
8
Q
EoS
Buying economies
A
- 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
9
Q
EoS
Selling economies
A
- 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
10
Q
EoS
Managerial economies
A
- Large firms can employ managers who have the skill to use resources more efficiently lowering the average total cost
11
Q
EoS
Labour economies
A
- Large firms can engage in division of labour among their staff
- Workers can specialise in a particular aspect
12
Q
EoS
Financial eocnomies
A
- 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
13
Q
EoS
Technical economies
A
- 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
14
Q
EoS
Research and development economies
A
- 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
15
Q
EoS
Risk bearing economies
A
- Larger firms usually produce a range of products
- Enables them to spread the risks of trading
- If the profitability of one of the product falls, it can shift its resources to the production of more profitable products
16
Q
DoS
Difficulties controlling the firm
A
- Hard for those managing a large firm to upervise everything that is happening
- Number of management may be needed and more meetings required
- Increased administrative costs make the firm slower in responding to changes
17
Q
DoS
Communication problems
A
- Difficult to ensure everyone has full knowledge about their duties and available opportuinties
- May not get the opportunity to effectively communicate their views and ideas to management
18
Q
DoS
Poor industrial relations
A
- Large firms may be at a greater risk from a lack of motivation of workers, strikes, and other industrial action
- 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
19
Q
External diseconomies of scale
A
- With more larger firms in an area, there iwll be an increase in transport with more vehicles which could cause congestion, increased journey times, higher transport costs, and possibly reduced worker productivity
- Growth of an industry may also result in increased competition for resources, pushing up the price of key sites, capital, and labour
20
Q
External economies of scale
A
- A skilled labour force
- A good reputation
- Specialist suppliers of raw materials and capital goods
- Specialist services
- Specialist markets
- Improved infrastructure
