Chapter 3.2 - The Birth of Firms

Question 1

What are the benefits of growth to firms?

Answer 1

1. Economies of scale
2. Increased market share
3. Greater profits
4. Gain monopoly/market power
5. Increased pay, status and job security for managers

Question 2

Define ‘internal growth’.

Answer 2

Internal growth involves the firms increasing its output and labour force, opening new offices and factories.

Question 3

Define ‘external growth’.

Answer 3

External growth involves firms merging and taking over other firms.

Question 4

What are the 3 ways in which firms can grow?

Answer 4

1. Horizontal integration
2. Vertical integration
3. Conglomerate integration

Question 5

Define:

i) ‘horizontal integration’
ii) ‘vertical integration’
iii) ‘conglomerate integration’

Answer 5

i) Horizontal integration is where two firms in the same industry and at the same stage of the production process merge.
ii) Vertical integration is where two firms in the same industry but at different stages of the production process merge.
iii) Conglomerate integration is where two unrelated firms merge to diversify and spread the risk.

Question 6

Identify and explain the 2 types of vertical integration.

Answer 6

1. Forward vertical integration is where two firms in the same industry and at the same stage of the production process merge, moving closer to the market.
2. Backward vertical integration is where two firms in the same industry but at different stages of the production process merge, moving closer to the production.

Question 7

Why do some firms remain small?

Answer 7

1. Niche market/local monopoly
2. Lack of economies of scale
3. Lack of finance for expansion
4. Lack of demand
5. Heavy government regulation

Question 8

Define ‘demerger’ and give 3 reasons as to why firms may demerge.

Answer 8

A demerger is when a firm is divided into 2 or more parts to:

1. increase the focus of the firm
2. avoid diseconomies of scale
3. increase the share price of the new firm

Question 9

Identify 6 ways that firms can be formed.

Answer 9

1. Demerger
2. Recession
3. Economic climate
4. Level of entrepreneurial talent
5. Technological development
6. Government assistance/policy