Theme 2

Question 1

What are the objectives of growth for a firm? (5)

Answer 1

• Internal economies of scale
• External economies of scale
• Increased market power over consumers and competitors
• Increased market share and brand recognition
• Increased profitability

Question 2

What are some problems arising from growth? (3)

Answer 2

• Diseconomies of scale
• Potential skills shortages
• Corporate culture

Question 3

What are the two types of growth? (2)

Answer 3

• Organic growth

- Inorganic growth

Question 4

What is organic growth?

Answer 4

Expansion of a single business by extending its own operations rather than by merger or takeover.

Question 5

What is inorganic growth?

Answer 5

Expansion of a business by merger or takeover bringing sudden changes in business size.

Question 6

What are the examples of internal economies of scale? (6)

Answer 6

• Risk-bearing
• Financial
• Managerial
• Technological
• Marketing
• Purchasing

Question 7

What are economies of scale?

Answer 7

When the average costs of a firm falls as output increases

Question 8

What are external economies of scale?

Answer 8

occur within the industry e.g. local roads might be improved so transport costs for the local industries fall

Question 9

Why do diseconomies of scale take place?

Answer 9

When there is decreased: control, coordination, communication, so average costs increase.

Question 10

What are the advantages of organic growth by firms?

Answer 10

• Corporate culture can be maintained
• Greater probability that all stakeholders will be supportive
• Its safer to stick with a tried and tested business model
• Owner doesn’t lose control

Question 11

What are the disadvantages of organic growth by firms?

Answer 11

• slower build-up of assets and market share

- no new ideas from outside the firm to stimulate innovation

Question 12

What are the advantages of inorganic growth by firms?

Answer 12

• Fast growth after negotiations and purchase is agreed
• Removes a competitor + enhances market share
• potential for nationalisation (EOS)

Question 13

What are the disadvantages of inorganic growth by firms?

Answer 13

• Debt burden if takeover involves buying out shares
• Risks of culture clash and dilution of management focus
• Customers have less choice

Question 14

What is research and development? (R&D)

Answer 14

Investment in research to improve goods and services, introduce new ones, or improve production methods.

Question 15

What are the aims of R&D?

Answer 15

• Gain a competitive advantage
• Increase market power
• Product and process innovation

Question 16

Why does the state provide funding for R&D?

Answer 16

• Raise GDP and living standards
• decreased unemployment
• benefits of R&D tend to be limited as its too expensive for firms

Question 17

What are the aims of extension strategies?

Answer 17

• During the decline stage in the product lifecycle, sales of the product flatten out so firms decide whether to use an extension strategy.
• they aim to lengthen the useful life of a product by using marketing techniques (expensive)

Question 18

What is YED?

Answer 18

Income elasticity of demand

Question 19

What does YED measure?

Answer 19

• the responsiveness of quantity demanded given a change in income

Question 20

How do you measure YED?

Answer 20

% change in quantity demanded / % change in income

Question 21

What does a positive figure of YED tell us?

Answer 21

Normal Good

Question 22

What does a negative figure of YED tell?

Answer 22

Inferior Good

Question 23

What is capacity utilisation?

Answer 23

The extent to which the productive capacity of a business is used (total % of total capacity being achieved)

Question 24

How do you calculate capacity utilisation?

Answer 24

Actual level of output/Max. possible output x 100

Question 25

What are the benefits of capacity utilisation?

Answer 25

When a business is operating at a higher capacity -> AC of production fall -> firm becomes more competitive

Question 26

When is a firm operating at full capacity?

Answer 26

When all resources are being used to their maximum potential.

Question 27

What can improve the maximum capacity of a firm?

Answer 27

• Advancements in technology

- Increased levels of investment

Question 28

What happens when capacity is under-utilised?

Answer 28

• Raises unit costs because the fixed costs are spread across a lower level of production
• Profitability decreases and prices increase
• firms become less competitive

Question 29

What is under-utilisation of capacity?

Answer 29

When a firm isn’t operating at their full capacity so they have spare capacity (some resources not being used to their full potential)

Question 30

Why do some firms choose to operate below maximum capacity?

Answer 30

• If there are changes in the levels of demand in the economy, they can react quicker

Question 31

What are the disadvantages of operating at full capacity?

Answer 31

• quality is affected due to a rushed production process and workers become demotivated

Question 32

What is over-utilisation of capacity?

Answer 32

• the firm is trying to produce more than its capacity will allow
• may encounter rising costs due to inefficiencies (due to more breakdowns)

Question 33

What is Quality Control (QC)?

Answer 33

Involves checking finished products for any sign of defect or poor quality before it gets sold

Question 34

What is Quality Assurance (QA)?

Answer 34

Involves designing the production process so as to eliminate waste and ensure defects do not happen

Question 35

What is a developed economy?

Answer 35

A developed economy is one where the tertiary and quaternary sectors dominate so they have more imports than exports.