WJEC (Wales) Economics A-level

Transcription

1 WJEC (Wales) Ecnmics A-level Micrecnmics Tpic 1: Csts, Revenue and Prfits 1.2 The grwth f firms Ntes

2 Why sme firms tend t remain small and why thers grw The size f firms can be determined by: Ecnmies f scale relative t market size: Large firms might nly experience small ecnmies f scale cmpared t their size, since the extent f ecnmies f scale might be limited in that industry. This culd make their csts higher than firms which chse t stay smaller. Disecnmies f scale: Larger firms culd face high csts because they have grwn t quickly. There culd be pr rganisatin, x-inefficiency r because firms in large, frmal markets tend t have t pay higher wages. Small firms as mnplists: Small firms culd hld sme degree f mnply pwer, since they prvide a mre persnal, lcal service. Their pening hurs might suit a small twn, such as thse f a crner shp, and sme cnsumer might prefer making smaller purchases, than the larger nes expected at bigger stres. Small firms might als create a niche market, where they can use their relatively price inelastic demand t charge higher prices. An example culd be a small café ver a multinatinal crpratin. Prfit mtive: By grwing, firms get the pprtunity t earn higher prfits. Grwing als allws firms t take advantage f ecnmies f scale, prviding they d nt grw s large that they experience disecnmies f scale. Market pwer: large firms have mre dminance ver the market, which allws them t gain price setting pwers and discurage the entrance f new firms. They might als gain mnpsny pwer, which can allw them t buy their stck at a lwer price. Diversificatin: By grwing and expanding the prduct range, firms reduce their risk f making huge lsses, since they have areas f the market t fall back n. Owners: Managers f the firm might have the mtive f larger bnuses, mre hlidays r mre leisure time, which encurages them t expand the firm. Hw businesses grw Organic grwth (als called internal grwth)

3 This is when firms grw by expanding their prductin thrugh increasing utput, widening their custmer base, by develping a new prduct r by diversifying their range. Firms might use market penetratin t sell mre f their prducts t existing cnsumers. They might als invest in research and develpment, technlgy, r prductin capacity. This will allw sales t increase and the vlume f utput t expand. Fr example, Apple has grwn thrugh creating new prducts such as ipads and iphnes. Firms can grw inrganically thrugh merging with, acquiring r taking ver anther firm. This is a lng term strategy, and it is significantly slwer than grwing inrganically. This culd mean cmpetitrs gain mre market pwer by expanding in the meantime. It culd als make sharehlders unhappy if they want faster grwth. Firms might rely n the strength f the market t grw, which culd limit hw much and hw fast their can grw. It is less risky than inrganic grwth. Firms grw by building upn their strengths and using their wn funds, such as retained prfits, t fund the grwth. This means that the firm is nt building up debt, and the grwth is mre sustainable. Mrever, existing sharehlders retain their cntrl ver the firm, which might reduce cnflicts in bjectives that are pssible when there is a takever. Frward and backward vertical integratin Vertical integratin ccurs when a firm merges with r takes ver anther firm in the same industry, but a different stage f prductin. Frward vertical integratin ccurs when the firm integrates with anther firm clser t the cnsumer. This invlves taking ver a distributr. Fr example, a cffee prducer might buy the café where the cffee is sld. Backward vertical integratin ccurs when a firm integrates with a firm clser t the prducer. This invlves gaining cntrl f suppliers. Fr example, a cffee prducer might buy a cffee farm. Firms can increase their efficiency, thrugh gaining ecnmies f scale, which culd reduce their average csts. This culd result in lwer prices fr cnsumers.

4 Firms can gain mre cntrl f the market. Backwards integratin can mean that firms can cntrl the price they pay fr their supplies, and they culd raise the price fr ther firms. This culd give them a cst advantage ver their cmpetitrs. Firms have mre certainty ver their prductin, with factrs such as quality, quantity and price. The disadvantages assciated with disecnmies f scale culd be cnsidered. Vertical integratin can create barriers t entry, which might discurage r limit the entrance f new firms. This culd lead t a less efficient market, since the firm has little incentive t reduce their average csts when their market share is high. Hrizntal integratin This is the merger f tw firms in the same industry and the same stage f prductin. Fr example, if a car manufacturer merges with anther car manufacturer, they will have hrizntally integrated. Firms can grw quickly, which can give them a cmpetitive edge ver ther firms in the market. Hwever, this culd lead t mnply pwer and there is the ptential f lwer inefficiency as a result. There culd be disagreements in the bjectives f the tw firms which merged. Firms can increase utput quickly, s they can take advantage f ecnmies f scale. The tw firms will have expertise in the same industry, s the merged firm can gain advantages, such as in marketing. Cnglmerate integratin This is the cmbining f tw firms with n cmmn cnnectin. Fr example, Assciated British Fds wns Primark and Patak s, which prduces curry pastes and pickles. It can help bth firms becme strnger in the market, than if they were individual. The cnglmerate can reach ut t a wider custmer base, and market cmpetitin culd be reduced. The advantages f ecnmies f scale, and particularly risk bearing ecnmies f scale, can be cnsidered. There is a risk f spreading the prduct range t thinly, and there might nt be sufficient fcus n each range. This might reduce quality and increase prductin csts.

5 Cnstraints n business grwth Size f the market A small market might nly have limited pprtunities fr business expansin, since firms can nly access a limited cnsumer market and there might be limited pprtunities fr innvatin and expansin. Larger markets, such as the market fr mbile phnes, have a much wider scpe fr innvatin, and firms can take advantage f huge selling pprtunities. Access t finance Smaller and newer firms tend t be less able t get access t finance than larger, mre established firms. This is because they are deemed riskier than established firms. Mrever, banks have becme mre risk averse since the glbal financial crisis, which has limited the number and size f lans n the market. Withut sufficient access t credit, firms cannt invest and grw, and firms cannt innvate as much. Owner bjectives Owners might have different bjectives. Philanthrpic wners might aim t maximise scial welfare, r have a strng Crprate Scial Respnsibility (CSR) with bjectives fr the envirnment in mind. Sme wners might aim t maximise prfits, whilst thers might a bigger persnal gain in the frm f bnuses and reputatin. Therefre, sme wners might nt have business grwth as an imprtant bjective. Regulatin (red tape) Excessive regulatin is als called red tape. It can limit the quantity f utput that a firm prduces. Fr example, envirnmental laws and taxes might result in firms nly being able t prduce a certain quantity befre exceeding a pllutin permit. Excessive taxes, such as a high rate f crpratin tax, might discurage firms earning abve a certain level f prfit, since they d nt keep as much f it. This might limit the size that a firm chses, r is able t, grw t. The UK gvernment has established the Red Tape Challenge, which aims t simplify regulatin fr businesses. This aims t make it cheaper and easier t meet envirnmental targets and create new jbs. Mre infrmatin n this can be fund here: