Small Firms and Large Firms (Cambridge (CIE) IGCSE Economics): Revision Note

Comparing the size of firms

• When considering the size of firms, several metrics are useful for comparison and analysis

1. The number of employees

   • E.g. In 2021, Toyota had 366,000 employees, whereas Hyundai had 75,000

2. The % of market share in an industry

   • E.g. During the 1st quarter of 2022, Samsung had 23% of the global market share for smartphones

3. The size of profits

   • E.g. In 2021, Apple made the highest level of profits for any firm, $58.4bn

4. Market capitalisation

   • Calculated by multiplying the number of shares in existence by the share price

   • E.g. In October 2022, Apple, Saudi Aramco, and Microsoft were the top three firms and had a market capitalisation in excess of $2trn each

Advantages and disadvantages of large firms

• Large firms experience both benefits and drawbacks due to their scale and structure

Advantages

• Can achieve economies of scale, reducing average costs and increasing profit margins

• Have greater access to finance from banks and investors, allowing for more investment in technology, expansion and R&D

• Benefit from strong brand recognition and customer loyalty built through national or global presence

• Able to offer higher wages and more attractive non-wage benefits (e.g. pensions, training, bonuses) to recruit and retain skilled staff

• Can spread risk by operating across multiple product lines or regions

• More able to absorb economic shocks, such as recessions or changes in market demand

Disadvantages

• Can suffer from slower decision-making due to many layers of management

• May experience diseconomies of scale, where costs rise due to communication breakdowns or coordination issues

• Risk becoming detached from customer needs, with less personalised service than small firms

• May struggle with innovation or flexibility, especially in rapidly changing markets

• Subject to greater scrutiny from the public, media, and regulators (e.g., for environmental or employment practices)

• Can face negative publicity or legal challenges if accused of monopolistic behaviour or unethical practices

Advantages and disadvantages of small firms

Evaluating the pros and cons of small firms