The Growth of Firms

Question 0

What is capital employed?

Answer 0

Capital employed is the money invested in those productive assets in a firm that help it generate revenue. e.g. Machinery, factories, office buildings

Question 1

In what ways can you measure and compare the size of firms?

Answer 1

• how many workers they employ
• how they are organised
• how much capital they employ
• their market share

Question 2

What is market share?

Answer 2

Market share is the proportion of the total shares of a product that is attributable to a single firm who supplies that product.

Question 3

What are the two main ways in which a firm can expand its scale of production?

Answer 3

• internal/organic growth: through the employment of additional factors of production
• external growth: through the takeover of, or merger with, another organisation

Question 4

What are the three main types of integration between firms?

Answer 4

• horizontal integration
• vertical integration (forwards/backwards)
• lateral integration

Question 5

What is horizontal integration?

Answer 5

This occurs when two or more firms producing similar goods or services at the same stage of production combine to form a larger enterprise.

Question 6

What is vertical integration?

Answer 6

A merger between two or more firms at different stages of production of the same product.

Forward integration is merging with a firm at the next stage of production, backward integration is merging with a firm at the previous stage of production.

Question 7

What is lateral integration?

Answer 7

Also known as conglomerate merger, this is the combining of two or more firms in different industries into a single enterprise known as a conglomerate, as it produces a variety of products.

Question 8

What are internal economies of scale?

Answer 8

These are reductions in unit costs of production enjoyed by a firm as it grows in scale due to decisions taken within the firm.

Question 9

What are the five main types of internal economies of scale?

Answer 9

• purchasing economies
• marketing economies
• financial economies
• technical economies
• risk-bearing economies (diversification)

Question 10

What are external economies of scale?

Answer 10

These are cost advantages enjoyed by all the firms in the same industry as a result of the scale of the industry being large.

Question 11

What are some external economies of scale enjoyed by firms?

Answer 11

• access to a skilled workforce
• ancillary firms providing specialised equipment and services
• joint marketing benefits
• benefits from shared infrastructure e.g. roads, power stations, airports

Question 12

What are diseconomies of scale?

Answer 12

These are problems that cause average unit costs to rise as a firm expands beyond its optimum size.

Question 13

What are some diseconomies of scale firms can experience?

Answer 13

• management diseconomies
• shortages in land and capital
• shortages in labour, rising wages
• labour diseconomies as workers get bored
• outgrowing the market
• disputes between new and old owners
• agglomeration diseconomies

Question 14

How can firms increase their output in the short run? How about in the long run?

Answer 14

Short run: employ more labour, make labour more productive, reorganise processes to be more efficient Long run: employ more capital

Question 15

Define: increasing returns to scale

Answer 15

Increasing returns to scale are experienced by firms if the rise in outputs following an increase in productive scale is proportionally more than the increase in inputs.

Question 16

Define: decreasing/diminishing returns to scale

Answer 16

Decreasing returns to scale are experienced by firms if the rise in outputs following an increase in productive scale is proportionally less than the increase in inputs.

Question 17

Define: constant returns to scale

Answer 17

Constant returns to scale are experienced by firms if output rises in the same proportion to an increase in inputs.

Question 18

Why might some firms choose to remain small?

Answer 18

• the size of their market is small
• access to capital is limited
• new technology has reduced the scale of production needed
• some business owners may simply choose to stay small