Exam code: 0455 & 0987
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Define firm.
A firm is a business organisation which sells or produces a good or service.
What are the essential requirements for a firm to operate?
All firms require factors of production as inputs, add value to these inputs to produce a good or service, and aim to sell their output at a price higher than the cost of production.
Why is it useful to classify firms into categories?
It is useful to classify firms so that we can make comparisons between them based on different characteristics such as sector, ownership, and size.
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Define firm.
A firm is a business organisation which sells or produces a good or service.
What are the essential requirements for a firm to operate?
All firms require factors of production as inputs, add value to these inputs to produce a good or service, and aim to sell their output at a price higher than the cost of production.
Why is it useful to classify firms into categories?
It is useful to classify firms so that we can make comparisons between them based on different characteristics such as sector, ownership, and size.
Define primary sector.
The primary sector consists of firms involved in the production or extraction of raw materials, such as farming, fishing, and mining.
Define secondary sector.
The secondary sector is made up of firms that process raw materials to manufacture goods, such as car manufacturing.
Define tertiary sector.
The tertiary sector comprises firms which provide services, such as banking, travel bookings, and car sales.
What is the difference between public sector and private sector firms?
Public sector firms are owned and controlled by the government, while private sector firms are owned and controlled by private individuals or other firms.
What is privatisation in the context of firms?
Privatisation occurs when government-owned firms are sold to the private sector, transferring ownership and control from the public to the private sector.
Define market capitalisation.
Market capitalisation is the value of a company calculated by multiplying the number of shares in existence by the share price.
What are three common metrics used to compare the size of firms?
The three common metrics are the number of employees, market share percentage in an industry, and the size of profits.
True or False?
Small firms can quickly respond to changing market conditions.
True.
Small firms often have the advantage of being able to adapt quickly to changing market conditions.
Define customer loyalty.
Customer loyalty is when customers repeatedly choose a business due to positive experiences or personal relationships, often resulting in repeat purchases.
A disadvantage for small firms is that they are more susceptible to in the wider economy, especially during recessions.
A disadvantage for small firms is that they are more susceptible to changes in the wider economy, especially during recessions.
What is one reason small firms may struggle to recruit and retain staff?
Small firms often offer less competitive wage and non-wage benefits compared to larger firms, making recruitment and retention harder.
Name two advantages large firms have over small firms.
Large firms can achieve economies of scale and have greater access to finance, allowing for more investment and expansion.
Large firms can offer higher wages and more attractive to recruit and retain skilled staff.
Large firms can offer higher wages and more attractive non-wage benefits to recruit and retain skilled staff.
True or False?
Large firms always have lower costs per unit than small firms.
False.
While large firms can achieve economies of scale, they may also suffer from diseconomies of scale where costs per unit rise due to coordination or management issues.
Define diseconomies of scale.
Diseconomies of scale occur when a firm grows too large and its average costs increase due to inefficiencies such as communication breakdowns or poor coordination.
Small firms may offer very products in small quantities at high prices, which can be very profitable.
Small firms may offer very unique products in small quantities at high prices, which can be very profitable.
What is a disadvantage large firms may face compared to small firms in terms of customer service?
Large firms may become detached from customer needs and provide less personalised service compared to small firms.
Define internal (organic) growth.
Internal (organic) growth is when a business expands by using its own resources, such as reinvested profits, to grow its operations.
What are two main categories of business growth?
The two main categories of business growth are internal (organic) growth and external (inorganic) growth.
A business grows organically by increasing share or by opening new .
A business grows organically by increasing market share or by opening new outlets.
Define external (inorganic) growth.
External (inorganic) growth is when a business expands by joining with or buying other businesses through mergers or takeovers.
What is a takeover in business?
A takeover occurs when one company purchases another company by buying a controlling stake (>50%) in its shares and gains control of its operations.
A occurs when two companies combine to form a new company, while a is when one company buys another.
A merger occurs when two companies combine to form a new company, while a takeover is when one company buys another.
Define vertical integration.
Vertical integration is when a firm merges with or takes over another firm at a different stage of the supply chain, such as a supplier or distributor.
What is the difference between forward and backward vertical integration?
Forward vertical integration is when a business merges with or takes over a firm further forward in the supply chain (closer to the customer), while backward vertical integration is merging with or taking over a firm further back in the supply chain (closer to raw materials).
True or False?
Vertical integration can help a firm gain more control over the quality of its raw materials.
True.
Vertical integration allows firms to control more of their supply chain, ensuring more reliable access to raw materials and better quality control.
For example, Nestlé's backward integration into coffee and cocoa farming gives it better supply control.
Define horizontal integration.
Horizontal integration is when a firm merges with or takes over another firm at the same stage of the production process, often a competitor.
An example of horizontal integration is when acquired Instagram in 2012.
An example of horizontal integration is when Facebook acquired Instagram in 2012.
Define conglomerate integration.
Conglomerate integration is when a firm merges with or takes over another company in an unrelated industry, as a diversification strategy.
What is one advantage of conglomerate integration?
Conglomerate integration reduces risk by spreading business operations across unrelated industries, so poor performance in one sector may be offset by success in another.
Define economies of scale.
Economies of scale occur when an increase in the scale of output leads to a lower cost per unit.
Define diseconomies of scale.
Diseconomies of scale occur when an increase in the scale of output leads to a higher cost per unit.
At what point does a firm achieve productive efficiency?
A firm achieves productive efficiency when it cannot reduce its average costs any further, usually at the lowest point on the average cost curve.
As a firm increases its , it may reach a point where its start to .
As a firm increases its scale of output, it may reach a point where its average costs start to increase.
True or False?
Large firms can always keep reducing their average costs as they grow.
False.
There is a point where firms cannot reduce costs any further (productive efficiency), and beyond this, further growth can lead to diseconomies of scale and increasing average costs.
Define internal economies of scale.
Internal economies of scale are cost advantages that arise from the growth in the scale of production within a firm, leading to lower average costs.
What are financial economies of scale?
Financial economies of scale occur when large firms can borrow money at lower interest rates and have access to a wider range of finance sources because they are seen as less risky.
Hiring specialist managers as a firm grows is an example of , which can lead to .
Hiring specialist managers as a firm grows is an example of managerial economies, which can lead to improved productivity.
How do purchasing economies of scale help reduce costs for large firms?
Purchasing economies of scale allow large firms to buy inputs in bulk, enabling them to negotiate lower prices and better terms with suppliers, thus reducing average costs.
Define external economies of scale.
External economies of scale are cost benefits that arise when the industry as a whole grows, allowing individual firms to enjoy lower average costs due to factors outside the firm.
How do geographic clusters reduce costs for firms?
Geographic clusters bring together ancillary firms and suppliers near major manufacturers, which reduces travel time and enables faster collaboration, lowering average costs for firms in the cluster.
Government support such as and can make it more cost-effective for firms to operate, leading to external economies of scale.
Government support such as grants and tax relief can make it more cost-effective for firms to operate, leading to external economies of scale.
What is a communication diseconomy of scale?
A communication diseconomy of scale occurs when a large firm struggles to communicate efficiently due to multiple management layers or geographic spread, leading to slower responses and higher average costs.