The Growth of Firms Flashcards

0
Q

What is capital employed?

A

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

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1
Q

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

A
  • how many workers they employ
  • how they are organised
  • how much capital they employ
  • their market share
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2
Q

What is market share?

A

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

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3
Q

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

A
  • internal/organic growth: through the employment of additional factors of production
  • external growth: through the takeover of, or merger with, another organisation
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4
Q

What are the three main types of integration between firms?

A
  • horizontal integration
  • vertical integration (forwards/backwards)
  • lateral integration
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5
Q

What is horizontal integration?

A

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

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6
Q

What is vertical integration?

A

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.

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7
Q

What is lateral integration?

A

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.

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8
Q

What are internal economies of scale?

A

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

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9
Q

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

A
  • purchasing economies
  • marketing economies
  • financial economies
  • technical economies
  • risk-bearing economies (diversification)
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10
Q

What are external economies of scale?

A

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

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11
Q

What are some external economies of scale enjoyed by firms?

A
  • 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
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12
Q

What are diseconomies of scale?

A

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

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13
Q

What are some diseconomies of scale firms can experience?

A
  • 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
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14
Q

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

A

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

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15
Q

Define: increasing returns to scale

A

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.

16
Q

Define: decreasing/diminishing returns to scale

A

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.

17
Q

Define: constant returns to scale

A

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

18
Q

Why might some firms choose to remain small?

A
  • 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