Chap 20

Question 1

Define firm

Answer 1

A commercial enterprise, a company that buys and sells products and/or services to consumers with the aim of making a profit

Question 2

Define plant

Answer 2

A production unit or workplace such as a factory, farm etc.

Question 3

3 Classification of firms

Answer 3

1. Stage of Production they produce in
2. Who owns the firms
3. Size of the firms

Question 4

Define industry

Answer 4

A group of firms producing the same product

Question 5

Define the quaternary sector

Answer 5

Cover service industries that are knowledge-based

Involved with the collection, processing, and transmission of information (information technology)

Question 6

Define the 3 stages of production with an example

Answer 6

1. Primary Sector- involved in the extraction & collection of raw materials
   e. g. agriculture, coal mining, forestry
2. Secondary Sector- involved with the processing of raw materials into semi-finished and finished goods (capital & consumer goods)- manufacturing & construction
   e. g. building, clothing, steel
3. Tertiary Sector- producing services
   e. g. banking, insurance, tourism

Question 7

Measures of the size of the firm

Answer 7

1. Number of workers employed
2. Value of the output it produces
3. Value of the financial capital it employs

Question 8

The size of a firm is influenced by: (5)

Answer 8

1. The age of the firms: new firms that survive the market take time to grow
2. Availability of financial capital: Capability of growing will grow with the financial capital available increasing
3. Type of business organization: MNCs are larger than single-owned businesses
   Easier to sell shares & borrow money, etc. as an MNC
4. Internal economies & diseconomies of scale: If average costs decrease as the firm expands, it can decrease product prices to capture more market share
5. Size of the market: More demand –> Firm may grow to a large size

Question 9

Reasons for a firm to stay small:

Answer 9

1. Small market size: for expensive, luxury, designer products
2. Preference of consumers: for personal services
3. Owner’s preference: to avoid stress/fear of loss of control
4. Flexibility: can adjust to market changes quickly
5. Lack of financial capital
6. Location: local markets to reduce transportation costs
7. Cooperation between small firms
8. Specialisation: small firms may provide specialist products to larger firm s
9. Govt support: bc they provide jobs, develop skills & have the potential to grow

Question 10

Two ways a firm can increase in size

Answer 10

1. Internal Growth

2. External Growth

Question 11

Explain ‘Internal Growth’/ Natural/ Organic

Answer 11

An increase in the size of a firm resulting from it enlarging existing plants or opening new ones

E.g McDonalds growing by opening more outlets

Question 12

Explain ‘External Growth’

Answer 12

An increase in the size of a firm resulting from it merging or taking over another firm

Question 13

Types of Merger

Answer 13

1. Horizontal
2. Vertical
3. Conglomerate

Question 14

Define Horizontal merger

Answer 14

The merger of firms producing the same product and at the same stage of production

e.g. Two car producers

Question 15

Define Vertical merger

Answer 15

the merger of one firm with another firm that either

(a) provides an outlet for its products or
(b) supplies it with raw materials, components, or the product it sells

Question 16

Define Conglomerate merger

Answer 16

a merger between 2 firms producing different products

Question 17

Advantages of a Horizontal merger

Answer 17

1. Take greater advantage of economies of scale: Production at a lower average cost since the firm will be larger
2. Increase the market share: Direct competitor is eliminated
3. Rationalization: they can sell redundant resources

Question 18

Define rationalisation

Answer 18

eliminating unnecessary equipment and plant to make a firm more efficient

Question 19

Disadvantages of a Horizontal merger

Answer 19

1. May experience diseconomies of scale
2. Large firm can be difficult to control
3. May be difficult to integrate the 2 firms if they had different management and locations

Question 20

Define Vertical merger forwards

Answer 20

A merger with a firm at a later stage of the supply chain

E.g oil company buys a petrol station

Question 21

Define Vertical merger backwards

Answer 21

A merger with a firm at an earlier stage of the supply chain

e.g. tyre manufacturer merges with rubber producer

Question 22

Advantages of Vertical merger forwards

Answer 22

1. Ensures that they are sufficient outlets
2. Products are stored and displayed well in high quality outlets
3. Helps in the development and marketing of new products

Question 23

Disadvantages of Vertical merger forwards

Answer 23

1. Management problems

2. Adjustments due to potential size difference

Question 24

Advantages of Vertical merger backwards

Answer 24

1. Assured supplies or outlets

2. Restrict access of the rival firms to the supplies

Question 25

Advantages of Conglomerate merger

Answer 25

1. Diversification: spread's risks & can continue growing even if one products market is declining

Question 25

Disadvantages of Conglomerate merger

Answer 25

1. Hard to manage -> can lead to a demerge

Question 26

Advantages of a merger on consumers

Answer 26

1. High quality products 2. Innovation 3. Greater economies of scale --> lower prices

Question 27

Disadvantages of a merger on consumers

Answer 27

1. Diseconomies of scale -> Higher prices & poorer quality

Question 28

Explain the different ownerships of firms

Answer 28

Public sector: owned & operated by govt and exists to provide services to citizens ^ Planned Eco System Private Sector: individually owned ^ Market Eco System

Question 29

Define economies of scale

Answer 29

The advantages, in the form of long run average costs (LRAC) of producing on a larger scale

Question 30

Types of economies of scale

Answer 30

Internal EOS: Lower LRAC resulting from a firm growing in size External EOS: Lower LRAC resulting from an industry growing in size

Question 31

Define diseconomies of scale

Answer 31

Disadvantages, in the form of long run average costs (LRAC) of producing on a larger scale

Question 32

Types of diseconomies of scale

Answer 32

1. Internal diseconomies of scale: Higher LRAC resulting from a firm growing too large 2. External diseconomies of scale Higher LRAC resulting from an industry growing too large

Question 33

Explain the usual LRAC U-shaped curve

Answer 33

Average costs fall till it reaches an optimum point and then it rises (EOS-DEOS)

Question 34

Types of internal economies of scale

Answer 34

1. Buying economies: bulk=discount & better treatment 2. Selling economies: once a transportation system is set up, costs are constant large volume of output reduces advertising costs 3. Managerial economies: employ specialist staff; increase efficiency, reduce COP, raise demand and revenue 4. Labour economies: division of labour to increase efficiency 5. Financial economies: easier to get granted a loan as a big company & can sell shares 6. Technical economies: more viable to use advanced machinery (output at lower avg cost) 7. Research and development economies: seperate dept for finding efficient ways to lower avg cost and raise revenue 8. Risk bearing economies: spreads the risks of trading by producing diff types of products (can reallocate according to demand)

Question 35

Types of internal diseconomies of scale

Answer 35

* Difficulties controlling the firm: Management required as firm growns which will increase administrative costs and makes the firm slower in responding to changes in market conditions. * Communication problems: Everyone may not get the opportunity to effectively communicate their views and ideas to the management team. * Poor industrial relations: Large firms may be at a greater risk from a lack of motivation of workers, strikes and other industrial action

Question 36

How can an industry enable the firms to reduce their average costs?

Answer 36

1. A skilled labour force 2. A good reputation (for a high quality production) 3. Specialist suppliers of raw materials and capital goods: when an industry becomes large enough, it can become worthwhile for other industries (ancillary industries) 4. Specialist services: firms may provide services specially designed to meet the particular needs of firms in the industry 5. Specialist markets: Some large industries have specialist selling places and arrangements such as corn exchanges 6. Improved infrastructure: government and private sector firms may provide better road links and electricity supplies, build new airports and develop dock facilities

Question 37

Types of External diseconomies of scale

Answer 37

With more and larger firms in an area, there will be an 1. Increase in transport with more vehicles bringing in workers and raw materials, and taking out workers and finished products (congestion, increased journey times, higher transport costs for firms and possibly reduced workers’ productivity) 2. Increased competition for resources (pushing up the price of key sites, capital equipment and labour)

Question 38

Difference bw Takeover & Merger

Answer 38

Takeover: a company acquires ownership & control of another company by purchasing its shares Merger: two or more firms agree to form an entirely new company & issue new shares