Theme 3.2.1 - Growth

Question 1

What are the key reasons for growth?

Answer 1

• Increasing profits: a key objective for many firms
• Achieve economies of scale: by growing scale of output, can achieve a lower unit cost, improving their competitiveness
• Increase market power: larger firms may have a greater bargaining power over suppliers and/or consumers to gain a competitive advantage
• Increase market share and brand recognition: increase in market share and brand recognition = increase in profits
• Grow business and shareholder value: larger businesses are generally more valuable

Question 2

Definition of economies of scale

Answer 2

Economies of scale arise when unit costs fall as output increases

Question 3

Formula for average cost per unit

Answer 3

total production costs in period / total output in period

Question 4

What is internal economies of scale?

Answer 4

Arise from the increased output of the business itself

Question 5

Examples of internal economies of scale

Answer 5

• Purchasing economies: buying in greater quantities usually results in a lower price
• Technical: use of specialist equipment or processes to boost productivity
• Managerial: specialist managers can be employed to help reduce unit costs and boost efficiency
• Marketing: spreading a fixed marketing spend over a large range of products, markets and customers
• Network: adding extra customers or users to a network that is already established
• Financial: larger firms benefit from access to more and cheaper finance

Question 6

What is external economies of scale?

Answer 6

Arise from the industry as a whole - all competitors benefit

Question 7

Definition of diseconomies of scale

Answer 7

When the expansion of output comes with increasing average unit costs

Question 8

Problems that may arise from growth

Answer 8

• Diseconomies of scale: caused by a lack of control, communication and/or cooperation
• Internal communication: rapid growth may strain communication channels which may result in delays, errors and missed opportunities
• Overtrading: occurs when a business takes on more than it can handle, leading to a strain on its resources or an inability to meet its financial obligations