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level: Firms

Questions and Answers List

level questions: Firms

Question	Answer
A company that buys and sells products and/or services to consumers with the aim of making a profit. > Firms are a business entity/business organisation > A group of firms producing the same product builds an industry	Firms
> Processing of raw materials into semi-finished and finished goods (both capital and consumer goods) > Covers manufacturing and construction	Stages of production- > Secondary Sector <
Includes all services	Stages of production- > Tertiary sector <
> First stage of production > Largely includes agricultural (farming, breeding, hunting, fishing) and mining companies	Stages of production- > Primary Sector <
> Sub section of the Tertiary Sector > Services involved with collection, transmission and processing of information	Stages of production- > Quaternary Sector <
> Poor countries have a large proportion of their output accounted for and the labour force employed in industries in the primary sector > As they develop, the secondary sector becomes more important and then gradually the tertiary sector accounts for most of their output and employment	Industrial structure- Poor countries
> Age of firm > The availability of financial capital > The type of business organisation > Internal economies and diseconomies of scale > The size of the market	Factors affecting size of the firm-
This is considered as some firms do not survive throughout the years. That’s why those who do take time in order to grow.	Size of firms- > Age of firms <
The more financial capital a firm spends on to finance its expansion the more capable the firm is of growing.	Size of firms- > Availability of financial capital <
If a firm experiences lower than average costs while expanding it can lower the prices of the products. This results in them capturing more market share. If a firm does not experience this(internal diseconomies) it might limit the growth of the firm.	Size of firms- > Internal economies and diseconomies of scale <
Is it owned by just one person(eg. A small shop) or is it a multinational company. If it is owned by only one person then it is unlikely that they will sell shares and will find it more difficult and more costly to borrow as compared to a private sector MNC which uses retained profits and borrow and sell shares to raise the finance to expand.	Size of firms- > Type of business organisation <
Adjust to change in market conditions quickly - As the group of employees is small, decisions are taken at a faster pace and are comfortable with the majority of the workers.	Reasons for small firms- > Flexibility <
If there is a large demand for the product then the firm will expand. This is a key factor influencing the size of the firms.	Size of firms- > Size of the market <
It is easy for new firms to emerge in industries that require no or little capital - lower the barriers to entry in an industry, larger the number of small firms there for that industry.	Reasons for small firms- > Technical Factors <
Small firms are less likely to emerge in secluded areas as the cost of production will rise due to additional transport costs, however, if they are located in a small town their might be more small firms as the transportation costs will be less or 0 majority of the time, making their costs of production lower.	Reasons for small firms- > Location <
Some firms want to expand but might fail to do so because of shortage of money.	Reasons for small firms- > Lack of financial capital <
The owners of a small firm might not want to grow as they might be worried about- > losing control of the firm > quality control of the products/services	Reasons for small firms- > Owner's preference <
Small firms may supply only specific services and goods and then further distribute them to larger firms. For example- training centres, the coaches provide training services for young entrepreneurs or other professions to prepare them for their future jobs.	Reasons for small firms- > Specialisation <
Firms with complimentary products and services might decide to join together and support each other. For example- Restraunt owners might	Reasons for small firms- > Cooperation between small firms <
Government might give additional support for small firms as- > they might see potential for them to grow > they create employment > help young entrepreneurs/ workers gain experience and learn new skills	Reasons for small firms- > Government Support <
Personal services - Caters to consumers on one to one basis making the service more personal and friendlier.	Reasons for small firms- > Preference of consumers <
Natural/Organic Growth > FIrms increasing the market for its product or diversifying into other products (Eg. Reliance) > May occur through increasing the size of the existing plants or by opening new ones (Eg. McDonald's)	Growth of firms- Internal growth
Firms joining with other firms through a merger or takeover > Allows firms to increase its size faster compared to internal growth	Growth of firms- External Growth
- H o r i z o n t al - - V e r t i c a l - - C o n g l o m e r a t e -	Types of mergers
Merger of two firms at the same level of production, producing the same good. Advantages- > Take greater advantage of the economies of scale (The size would increase and lower the average cost of production) > Increase the market share (A direct competitor is eliminated) > Rationalisation Disadvantages > Hard to handle a large firm and integrate the two firms > May experience diseconomies of scale	Mergers- > Horizontal Merger <
Merges with another firm producing the same product but at a different stage of production.	Mergers- > Vertical Merger <
Mergers with a firm that is the source of its supply of raw materials, components or the product it sells (merger with a firm at an earlier stage of the supply chain). -Main motives: to ensure an adequate supply of good quality raw materials at a reasonable price and restrict access of rival firms to the supplies	Vertical Merger Backwards
Merges or takes over a market outlet merger with a firm at a later stage of the supply chain). - Main motives: ensure that there are sufficient outlets and that the products are stored and displayed well in high quality outlets - Help in development and marketing of new products	Vertical Merger Forwards
Merger of two companies making different products. -Main motive: Diversification	Mergers- > Conglomerate Merger <