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Chapter 20 - Firms - CIE IGCSE/O Level Economics

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Published in: Economics
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Revision summary of Chapter 20 - Firms of the CIE IGCSE & O Level Economics syllabus.

Laurea C / Dubai

4 years of teaching experience

Qualification: Economics, Politics and Philosophy Graduate at the University of Warwick, Entrepreneur

Teaches: Economics, Business, IGCSE/AS/AL, IB Exam Preparation, Business Studies, Maths, Mathematics

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  1. FIRNS CHAPTER 20
  2. Learning Objectives Classification of firms describe the classification of firms in terms of sectors, ownership and size Small firms & growth • analyse the reasons for the existence of small firms • discuss the advantages and disadvantages of small firms • describe the causes of the growth of firms mergers discuss the advantages and disadvantages of horizontal, vertical and conglomerate mergers Economies & diseconomies of scale discuss how internal and external economies and diseconomies of scale can affect a firm/industry as the scale of production changes
  3. STAGES OF PRODUCTION classification of firms by sector PRI"ARY firms involved in the extraction and collection of raw materials. SECONDARY firms involved in the processing of raw materials into semi-finished and finished goods TERTIARY firms offering services (e.g. hair salon, law boutique) KNOWLEDGE/ ICT firms offering information and tech knowledge OWNERSHIP Market economy: most firms are in the private sector Planned economy: firms are state-owned Mixed economy: firms are both privately and state-owned
  4. As economies develop: PRIMARY SECONDARY —+ TERTIARY KNOWLEDGE/ICT Country/ Region Pakistan India China USA Hong Kong Primary % 21 17 8 Secondary % 20 30 41 19 7 Tertiary % 59 53 51 80 93 Table 20.1: Percentage contribution to selected countries' output by different industrial sectors
  5. REASURING THE SIZE OF FIRRS AGE new firms are established every year most new businesses fail, some remain small, very few grow to become very large CAPITAL the + capital available to finance growth, the larger the firm TYPE very large firms are typically multinationals in the private sector finance grow through sale of shares INTERNAL ECON & DISECON OF SCALE MARKET SIZE the larger the market (demand) the larger the firm can be
  6. WHY ARE ROST FIRRS IN ANY COUNTRY SHALL? small market size: e.g. the market for highly priced vintage art owner preference: an owner may wish to keep a business small (e.g., wants to keep it in the family), or maintain a low-stress lifestyle • flexibility: small firms may be better at adapting to trends than their larger counterparts - faster communication, small number of employees, not very expensive capital equipment... • lack of capital: apart from smaller profits, small firms find it harder to borrow large amounts and cant raise capital by means of shares specialisation: a firm may remain small if it decides to specialise in the production of a particular product or service
  7. TYPES OF EXTERNAL GROWTH firm merges with FORWARD seller (e.g., farm HORIZONTAL firms in the same CONGLOMERATE firms operating in diff sector and producing industries and the product merge producing diff (e.g. disney & pixar) products merge (e.g., VERTICAL BACKUARD firm merges with a supplier (e.g., coffee shop merger with coffee factory) pro: controls supply of raw materials con: lack of knowledge in the acquired/merged w/ sector merges with a food pro: coma5egutlets where competitor products are sold con: lack of knowledge in the acquired/merged w/ sector pro: rationalisation (cut back on costs by erasing duplicate workers, machines, spaces...) con: firm becomes too large it may experience diseconomies of scale amazon & wholefoods) pro: diversification con: logistically difficult to coordinate branding
  8. ECONOMES OF SCALE INTERNAL • buying economies of sale: it is cheaper bulk buy (less packaging and transport), and suppliers offer discounts • selling: similarly, it is cheaper to sell in bulk for the same reasons managerial: firm can afford to hire top management talent, which will reflect positively on the firm down the chain of command • financial: can borrow + easily and for cheaper, raise money through sale of shares technological: use of advanced machinery • risk-bearing: wider range of products produced, diversifying risk EXTERNAL • skilled labour firm can recruit workers who have been trained by other firms specialist suppliers: similarly, it is cheaper to sell in bulk for the same reasons • infrastructure: govt may invest in paving + roads, improving electricity reliability...
  9. DISECONONIES OF SCALE INTERNAL management issues: management becomes more complex, communication problems: larger chain of command makes communication less effective, less efficient and slower poor industrial relations: demotivation from the part of workers (Lack of self- actualisation), toxic workplace due to high competition levels EXTERNAL • increase in competition for Labour and resources • increase in transport time and costs
  10. You should know... • Industries consist of many firms producing the same products and firms may have a number Of plants. The three main stages of production are — primary (collecting and extracting raw materials), secondary manufacturing and construction) and tertiary (services). The key factors influencing the size Of a firm are its age, the availability of financial capital, the type of business organisation, output over which it will experience economies of scale, and (most significantly) the size of the market. Firms can grow internally by increasing their output or externally by merging with, or taking over, another firm. The three main types of merger are horizontal, vertical and conglomerate. Horizontal merger increases market share and may enable the new firm to take greater advantage of economies of scale. Vertical merger backwards secures supplies whilst vertical merger forwards secures outlets. The key motive behind a conglomerate merger is diversification.
  11. You should know... Despite the advantages of a large size, small firms continue to exist because of limited demand, consumers' preference for personal attention, the owner's disinclination to expand, flexibility, low or no barriers to entry, a Lack of financial capital required for expansion, role of suppliers of specialist goods or services to larger firms and government assistance. • Increasing output can reduce long run average costs. The savings made are referred to as economies of scale. • Internal economies of scale are falling long run average costs resulting from the growth Of a firm. Examples of internal economies of scale include buying economies, selling economies, managerial economies, labour economics, financial economies, technical economies, research and development economies and risk-bearing economies. • Internal diseconomies of scale are rising long run average costs, resulting from a firm growing too large.
  12. You should know... Examples of internal diseconomies of scale include difficulties controlling the firm, communication problems and poor industrial relations. External economies arise from the growth of the industry and include a skilled labour force to draw on, a good reputation, specialist supplies of raw materials and capital equipment, specialist services, specialist markets and improved infrastructure. External diseconomies of scale are caused by an industry growing too large and experiencing disadvantages like congestion and a rise in the cost of factors of production. • Internal economies and diseconomies of scale explain the usual U-shape of the long run average cost curve. • If the increasing size of the industry gives rise to external economies of scale, a firm's long run average cost curve will shift downwards. The creation of external diseconomies of scale will cause the long run average cost curve to move upwards.

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