Size of firms Flashcards
Number of employees:
less than 50 –> small firm. However, they can still produce a lot of output using capital
Size of firms (4)
1) Number of employees
2) Organisation (number of departments)
3) Capital employed
4) Market share
Market share formula
firm’s revenue / total market revenue
Total market revenue definition
Revenue made by all firms in this industry
diversification definition
Having different types of goods/services produced by one firm
internal (organic) growth definition
Firms grow by increasing output produced.
external growth definition
Firms joining together to form a larger firm –> integration
- Merger (voluntary)
- Take over/Acquisition (involuntary)
Horizontal integration definition
Merger/take over of firms of the same type of good/service
Vertical integration definition
Merger/take over of firms at different stages of production (primary, secondary, tertiary)
Forward integration definition
Firm taking over other firm in the next stage of production
Backward integration definition
Firm taking over other firm in the previous stage of production
Reasons for integration with other firms (6)
1) Increase market share (take over customers)
2) Eliminating competition
3) Taking over assets and tech from other company
4) Ensuring stable supply of raw materials (backward vertical integration)
5) Ensuring places to sell their own products
6) Economies of scale –> Reducing average total costs by becoming bigger
ATC determines what?
ATC determines the price of the product. Low ATC –> low price –> more customers
Economies of scale definition
A decrease in average costs (unit costs) due to an increase in output produced. The larger the firm gets, the lower the average costs.
Bulk discount definition
The more you buy, the more likely you are able to bargain for a lower price
Internal economies of scale definition
Decreasing unit costs due to firm growing internally
External economies of scale definition
Decreasing unit costs due to whole industry/market growing
Purchasing economies definition
Lower costs because firm buys in bulk quantities and recieves discount
Marketing economies definition
Advertising costs are lower because it’s spread over large output
Financial economies definition
Large firms can borrow more at lower interest rates because banks trust them more
Technical economies definition
Large firms have more money to hire researchers and buy better equipment. These lower average prod. costs
Risk-bearing economies definition
Large firms produce a large amount of different goods and services (diversification). The loss on one good can be compensated by profits on other goods
Skilled workforce (External EOS) definition
If the industry grows more, skilled workforce will be available and it will be cheaper to find skilled labour. When the industry is small, firms have to train labour themselves
Ancillary firms (External EOS) definition
If the industry grows, supplying firms will be attracted to grow as well e.g. automobile industry and tire manufacturers
Joint market benefits (External EOS) definition
If one firms becomes extremely popular, other companies supplying the same good will become popular as well? e.g. Samsung & other andriod smartphone producers
Shared infrastructure (External EOS) definition
If the industry grows, investement in infrastructure grows and other firms benefit from this e.g. roads
Diseconomies of scale definition
Average costs increase due to an increase in output
3 consequences of diseconomies of scale:
1) Management difficultes
2) Motivation difficulties
3) Supply problems (happens mostly when industry grows)
Why do some firms remain small? (5)
- Market size is small e.g. wedding dress industry
- Access to financial capital is limited. Difficult to raise money to expand
- New tech. Firms don’t have to grow because new machines can produce more output
- Small firms are better able to provide personalised/custom goods/servcies
- Firm owner prefers to stay small
- Fear of diseconomies of scale
- Easier to manage
