Chapter 4: The Private Firm as Producer and Employer (Part 3)

HideShow resource information
  • Created by: XanimangY
  • Created on: 25-05-14 06:51
What two categories are firms grouped into according to their sizes?
Large enterprises, or small and medium-sized enterprises (SMEs).
1 of 47
What are the ways to measure and compare the size of firms?
The number of workers they employ ; How they are organised ; The amount of capital they employ ; Their market share
2 of 47
How is Measure 2 (organisation) used to determine the size of a firm?
Large firms: different departments speacialising in particular functions ; Smaller firms: owners and employees tend to carry out all the various functions between them.
3 of 47
How is Measure 3 (capital employed) a way to measure and compare the sizes of firms?
More capital employed = more production = greater size / larger scale of production (with an exception of large labour intensive firms)
4 of 47
What does the term 'capital employed' mean?
The money invested in productive assets (Ex: machinery, factory, office buildings, stocks of materials and components, and money used to pay wages and other costs) in a firm that help it generate revenue.
5 of 47
How is Measure 4 (market share) used to compare the sizes of firms?
The larger the proportion of sale a firm occupies in the total sale of a product, the bigger it is. **however, a local hairdressing salon may be very small, but it is the only salon in town, so it has a very large share in this market.
6 of 47
What does 'market' mean in Ecnomics terms and how is its size meausured?
The market for any goods or service consists of all those consumers willing and able to buy it no matter where they might be located. Its size is measured by the total amount spent by consumers on that product per week, month or year.
7 of 47
What does 'market share' mean?
The share of the total market sales any one firm is able to capture; it measures the proportion of total sales revenue or turnover that's attricutable to that firm.
8 of 47
Scale of production
The volume and value of a firm's output.
9 of 47
Internal growth (/ organic growth)
Scale of production expanded through the purchase of additional equipment, increasing the size of its premises, and hiring more labout if needed. **however, this will increase fixed costs.
10 of 47
External growth
One or more firms join together to form a larger enterprise - INTEGRATION through MERGER or TAKEOVER
11 of 47
Merger
One or more firms agree to join together to form a larger enterprise.
12 of 47
Takeover (/ acquisition)
One company BUYS enough shares in the ownership of another so it can take overall control (with or without the owner's agreement)
13 of 47
Holding company
An entirely new company that's formed with the sole purpose of buying up shares in the ownership of a number of other companies.
14 of 47
Once companies are acquired by a holding company, what is the result?
The companies may keep their own names and management BUT their overall policies are decided by the holding company.
15 of 47
What are the three main types of integration?
Horizontal integration ; Vertical integration ; Lateral integration
16 of 47
Horizontal integration
Involves a merger or takeover of firms engaged in the production of the SAME TYPE of good or service.
17 of 47
What is the major criticism that horizontal integration receives?
Very large firms are formed which may dominate the market, and so may be able to raise prices and reduce competition by creating entry barriers (explained in Part 4) for new firms.
18 of 47
Vertical integration
Occurs between firms at DIFFERENT STAGES of production; consists of forward integration and backward integration.
19 of 47
Forward integration
TOWARDS services and revenue. Ex: A car manufacturer combining with a chain of car retailers - can be certain that there's a showroom to promote and sell its cars
20 of 47
Backward integration
BACK to foundation. Ex: A cheese maker combining with a dairy firm to ensure guaranteed supplies of milk.
21 of 47
Lateral integration (/conglomerate merger)
Occurs between firms in DIFFERENT INDUSTRIES in the same stage or different stages of production.
22 of 47
What are firms formed from a conglomerate merger called? and why?
Conglomerates. They produce a wide range of different products.
23 of 47
Internal economies of scale
The advantages or economies that firms bring, resulting from the decisions taken WITHIN the firms. -average cost of producing each unit will be reduced.
24 of 47
What are the five main types of economies of scale?
Purchasing economies ; Marketing economies ; Financial economies ; Technical economies ; Risk-bearing economies
25 of 47
Purchasing economies
Large firms need to buy in bulk, so suppliers will usually offer price discounts since it'll be cheaper for them to make one large delivery than many small ones.
26 of 47
Marketing economies
Can buy or hire their own vehicles -> Costs reduced for they don't have to pay a profit margin for another supplier. Reliability and efficiency of distribution may also increase.
27 of 47
Financial economies
Large firms can borrow more money and at lower interest rates than smaller businesses.
28 of 47
Technical economies
Larger businesses have financial resources to available to invest in specialised machinery and equipment, to train and recruit highly skilled workers, + to research and develop new products and processes to increase efficiency.
29 of 47
Risk-bearing economies
Large firms have more customers,, sell into more markets at home and overseas, + offer a larger range of products (DIVERSIFICATION); therefore able to reduce the risk of losing a major customer, or a fall in demand.
30 of 47
Diversification
Producing a varied range of products and expanding into different consumer markets to reduce risk.
31 of 47
External economies of scale
Large firms may share this with rival producers as a result of their entire industry being large
32 of 47
How are ancillary firms included as an external economies of scale?
To provide large firms in particular industries with the specialised equipment and services they require.
33 of 47
Joint marketing benefits (example of external economies of scale)
Ex: firms in the same industry co-locating in the same area well known for producing high quality products may share an enhanced reputation.
34 of 47
How can firms experience an external economies of scale through shared infrastructure?
The growth of an industry may pursuade firms in other industries to invest in new infrastructure (Ex: dock facilities, power stations, airports) to meet increasing demand for these services; especially where firms are clustered in one area.
35 of 47
Can firms grow too much?
Yes. Many firms can experience problems if they try to expand their scale and size of production too much and too quickly => productivity may fall, average cost rises. Caused by DISECONOMIES OF SCALE.
36 of 47
Management diseconomies
Too spread out over many different locations, with many different levels of management->disagreements+communication hardship.Decision making slowed down, and may take longer for decisions to be acted on by employees at the bottom of the organisation.
37 of 47
Labour diseconomies
Workers operating machinery may become bored with repetitive tasks, de-motivated and less cooperative -> strikes and disputes.
38 of 47
Agglomeration diseconomies
When a company takes over or merges with too many other firms producing different products at different stages of production -> difficult to coordinate the different activities.
39 of 47
What can a firm do to increase output quickly or temporarily to meet an increase in demand?
Reorganise its existing production processes to make them more efficient ; Pay its existing labour to work overtime ; Motivate its existing workforce to increase productivity ; Hire additional labour on short-term contracts.
40 of 47
What is assumed in the SHORT RUN of reorganising and employing more labour to increase output?
Capital. It's assumed as a fixed factor of production and cannot be varied.
41 of 47
What can firms to in the LONG RUN?
Increase the amount of capital they employ to expand the scale of their production; some take more time than others.
42 of 47
Increasing returns to scale
Something that firms experience when they double all its inputs and is able to MORE THAN DOUBLE its output as a result.
43 of 47
Decreasing (/diminishing) returns to scale
When a company doubles its inputs but failed to double its outputs.
44 of 47
Constant returns to scale
When a firm doubles its inputs AND also doubles its output.
45 of 47
Optimum size (best size)
Where firms can reduce their average costs to their lowest point in the long run, at that level of output that corresponds with the lowest point on its U-shaped average cost curve in the long run.
46 of 47
Why do majority of firms remain small?
The size of their market is small ; Access to capital is limited (banks unwilling to lend money to small businesses) ; New technology has reduced the scale of production needed (online busi
47 of 47

Other cards in this set

Card 2

Front

The number of workers they employ ; How they are organised ; The amount of capital they employ ; Their market share

Back

What are the ways to measure and compare the size of firms?

Card 3

Front

Large firms: different departments speacialising in particular functions ; Smaller firms: owners and employees tend to carry out all the various functions between them.

Back

Preview of the back of card 3

Card 4

Front

More capital employed = more production = greater size / larger scale of production (with an exception of large labour intensive firms)

Back

Preview of the back of card 4

Card 5

Front

The money invested in productive assets (Ex: machinery, factory, office buildings, stocks of materials and components, and money used to pay wages and other costs) in a firm that help it generate revenue.

Back

Preview of the back of card 5
View more cards

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Unit 4.3 The Growth of Firms resources »