Constraints on Business Growth (why firms remain small) Flashcards
What do barriers to entry or exit ensure?
They are obstacles which ensure the continued monopoly power of firms in a market
Why MUST some firms remain small?
1) Regulation
2) Marketing barriers
3) Pricing barriers
4) Technical barriers
5) Size of the market
6) Lack of resources and access to finance
How many reasons are there for why firms MUST remain small?
6
Why do some firms CHOOSE to remain small?
1) Diseconomies of scale
2) Owner Objectives
3) Tax thresholds
How many reasons are there for why firms CHOOSE to remain small?
3
Why is regulation a reason as to why firms MUST remain small?
- government itself prevents entry/growth of firm
- acts of Parliament- allow monopolies to be formed and protected e.g. National Lottery
- patents (type of licence) give firms legal protection- 💡/processes protected from competiton
- other industries e.g. law and accountancy firms require licences/specific qualifications before firm can operate
Why are marketing barriers a reason as to why firms MUST remain small?
Imposed by businesses operating in industry- e.g. advertisement, branding- reestablishes brand- … difficult for new businesses to enter industry with already established firms that consumers know and recognise
Why are pricing barriers a reason as to why firms MUST remain small?
1) Limit pricing- firms already in market prevent entry of new firms- pricing at level low enough to discourage entry of new firms- price below what new firm be able to sustain
- exploits economies of scale that existing firm (growing) has in industry- allows for cost advantages
- ✖️ illegal
2) Predatory pricing- pricing below costs- drives out firms- short term loss BUT as other firms leave, prices ⬆️ to point higher than what would’ve been possible with competition (firm now monopoly- sole producer- dominates market)
Why are technical barriers a reason as to why firms MUST remain small?
- few large firms dominate industry due to size
- use technical expertise and economies of scale to ensure operation at lowest average cost
- … new firms entering industry find it impossible to compete
Why is the size of the market a reason as to why firms MUST remain small?
- niche market may not support expansion (little scope for growth) e.g. cricket 🏏 bat manufacturers expanded as far as market allows- ✖️ point for further growth or expansion
Why are a lack of resources and access to finance a reason as to why firms MUST remain small?
- owner of firm may lack knowledge, expertise, funds needed for expansion- as firm expands needs to comply with ⬆️ financial regulations etc or National Insurance returns- adds to costs and requires knowledge and expertise
- banks hesitant to lend to small businesses if business idea 💡 success doubtful- greater risk of lending- may ✖️ be able to pay back
Why is diseconomies of scale a reason as to why firms CHOOSE to remain small?
Worried 😟 about experiencing diseconomies of scale if they expand (occurs when business grows so large that costs per unit ⬆️)
Why are owner objectives a reason as to why firms CHOOSE to remain small?
- firm’s owners ✖️ want extra work and risks involved in expanding
- expansion involves sunk costs- ✖️ be recovered if expansion failure e.g. 💵 lost on marketing, capital, labour etc
- shareholders may ✖️ be willing to trade lost leisure or have the motivation to expand … remain small
- satisficing (satisfying- ppl 😊 and sufficing- enough profit so shareholders 😊)
Why are tax thresholds a reason as to why firms CHOOSE to remain small?
- small firms have access to training grants and other government financial support 💵
- e.g. firms with turnover less than £85,000 ✖️ pay VAT
- … arguable that better off to stay small and reap benefits
