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:
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:
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 ouput
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
