Firms

Question 1

Define vertical integration?

Answer 1

A merger between firms at different stages of the production process within an industry.

Question 2

Benefits of horizontal integration? (2)

Answer 2

Increases market share

Benefits from EofS

Question 3

Benefits of vertical integration? (3)

Answer 3

Can increase barriers to entry
Can increase control over suppliers or market
Can ensure smooth production process

Question 4

Define conglomerate integration?

Answer 4

A merger between firms in entirely unrelated industries.

Question 5

Benefits of conglomerate integration? (2)

Answer 5

Can help to spread risk

Allow firms to cross subsidise and therefore develop in new industries

Question 6

4 developed money reasons firms grow?

Answer 6

Increase market share, tf dominate industry, gain monopoly, increase profits

Increase profits

Increase sales

Increase economies of scale tf reduce LRAC and increase productive efficiency

Question 7

4 developed non money reasons firms grow?

Answer 7

Gain power tf prevent takeovers and allow them to survive in a recession

Satisfy managerial ambitions - eg. Personal aim for successful career/increase shares tf personal gain

Make the most of opportunity - otherwise profits undergo corp. tax tf might aswell use them to acquire another business

Gain expertise - instead of slowly growing in a new area, just buy firm who’s already market leader and gain their expertise

Question 8

Overview reasons firms remain small? (8)

Answer 8

BALLMONT
Barriers to entry
Avoiding attention from buyers
Lack of resources
Lack of motivation
Minimum efficient scale
Other benefits
Niche market business
Tax thresholds

Question 9

Explain legal barriers to entry that would prevent a firm from growing? (3)

Answer 9

• nationalised utilities like water protected by law
• patents give firms legal protection from competition
• some industries require qualifications to join (eg. Law firm)

Question 10

Explain marketing, pricing and technical barriers to entry that would prevent a firm from growing? (3)

Answer 10

Due to powerful branding it can be difficult for firms to compete in certain industries

Firms kept out of a market through limit/predatory pricing

Large firms benefit from EofS therefore lower AC. Small firms can’t compete because their expertise and technology is not good enough to create low AC.

Question 11

Four barriers to entry for small firms?

Answer 11

Legal
Marketing
Pricing
Technical

Question 12

Define horizontal integration?

Answer 12

A merger between two firms at the same stage of production.

Question 13

Explain why it is hard for niche market businesses struggle to grow?

Answer 13

Because the demand for their product is quite small, such as cricket bat producers, who will only ever have a limited number of bats which they can sell due to lack of demand

Question 14

Explain why firms at their minimum efficient scale wouldn’t want to grow?

Answer 14

So they don’t get too large and reach diseconomies of scale

Question 15

Explain why firms wouldn’t want to grow due to tax or other benefits?

Answer 15

• no corporation tax on profits below £10000

- UK government loans to small businesses with ease if they have a turnover of less than £25mil

Question 16

Explain why lack of motivation may prevent a firm from growing? (2)

Answer 16

• manager may not want to risk his firm, if he takes a loan he can’t repay he could damage the firm
• manager not wanting to work longer hours

Question 17

Explain why demergers take place and their three benefits?

Answer 17

A larger firm may split up because they are experiencing higher LRAC and diseconomies of scale

Benefits:

• allows small no. of firms to concentrate on specialist area
• allows firms to maximise EofS
• allows firms to maximise profits