Firms-Business Economics and economic efficiency

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Edexcel Economics A2 Unit 3
Business Economics and economic efficiency
How do firms grow?
Expanding scale of operation & increasing market share
Horizontal: merger between 2 firms in the same stage of production
Vertical: merger between firms at different stages of the production
process (forward/backwards)
Conglomerate: merger between firms in entirely unrelated industries=
diversification, increase in range of goods/services & power in other
Why do firms grow?
Increase in market share= more profits & are better price makers
Greater profits=expansion enables increased sales, setting price & lower
costs of production
Economies of scale= exploit increased size to lower LRAC = more
productively efficient
Power= prevent competition
Satisfy managerial ambitions: seek to run a successful firm, leave a legacy
Make the most of an opportunity: avoid tax by using profits to acquire
another firm
Gain expertise: develop firms rather than trying to establish themselves
slowly= easier to become a market leader with expertise
Why do some firms remain small?
Barriers to entry
Legal barriers:
gov may prevent entry/growth of firms
nationalised industries can become monopolies e.g. post office/ TFL,
patents to make sure that firms develop products e.g. pharmacy products
licences to make sure that only the best firm offer services e.g. law &
Marketing barriers
imposed by existing firms

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Pricing barriers
Predatory: p is below costs to drive out other firms that cannot afford to
make such losses
Limit pricing: p at a low enough level to discourage entry of new firms
Technical barriers
Existing firms exploit their technical economies of scale meaning that new
firms can't compete with them because their AC will be so much higher at a
smaller scale
Unless new firms are big= HUGE losses
This type of market will not support expansion due to small scope for
growth…read more

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Tax thresholds & other benefits of remaining small
Small= access to grants & financial support, not liable for certain taxes
Why do some firms break up?
Too large=Diseconomies of scale
Growth of output= lose focus & control= LRAC increase
Break up to reduce these BAD impacts = smaller firms able to concentrate
on specialist areas…read more


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