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Business Economics &
Economic Efficiency
Edexcel A2 Economics: Unit 3…read more

Slide 2

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How do firms grow?
Firms can grow in a number of ways, including:
· Horizontal integration: a merger between two firms at the
same stage of production (eg. Lloyds & TSB merger)
· Vertical integration: a merger between two firms at different
stages of production in the same industry - can either be
forward vertical (eg. an oil extracting company taking over a
distribution company) or backward vertical (eg. a petrol
producer taking over an oil extraction firm)
· Conglomerate integration: a merger between firms in entirely
unrelated industries - this allows firms to spread risk of going
out of business…read more

Slide 3

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Why do firms grow?
· Increase market share
· Benefit from greater profits
· Increase sales
· Increase economies of scale
· Gain power
· Satisfy ambitions
· Make the most of an opportunity
· Gain expertise and experience…read more

Slide 4

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Why do some firms stay
· Barriers to entry: obstacles that ensure the continued
existence of monopoly power
· Niche market
· Lack of resources
· Minimum efficient scale: firm may have already exploited
economies of scale
· Lack of motivation
· Avoiding attention from potential buyers
· Tax thresholds…read more

Slide 5

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Why do some firms break up?
· Too large
· May have experienced diseconomies of scale
· Loss of focus
· Long run average costs increase
· Demergers…read more

Slide 6

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· Fixed costs: do not change with output (eg. rent), and
can only apply when one factor of production is fixed
· Variable costs: do change with output (eg. raw material
costs), can occur in short run and long run
· Marginal costs: extra cost of producing one more unit of
· Average fixed costs: total costs/output
· Average variable costs: variable costs/output…read more

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