Economics IGCSE Edexcel - Firms

Small firms:

Advantages:

1. Flexible - can adapt quickly.
2. Personal service.
3. Lower wages as no trade union.
4. Better communication with staff and therefore better control.
5. Under pressure to innovate.

Disadvantages:

1. Cannot exploit economies of scale so higher costs.
2. Lack of funds and finance.
3. Difficulty attracting experienced staff as cannot afford the wages.
4. Vulnerable to take overs and also are high risk as they lack resources.

Large Firms:

Advantages:

1. Can enjoy economies of scale meaning their costs will be lower.
2. Can dominate the market with their huge profits.
3. Have the resources to fulfil large scale contracts.

Disadvantages:

1. Diseconomies of scale are really the only disadvantage to large firms.

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The Growth the Firms:

Why?:

1. Economies of scale.
2. Increase profits.
3. Increase market share.
4. Reduce risk.

How?:

Internal growth:

1. Building new premises.
2. "Taking on" more people.
3. Innovation.

External Growth:

1. Merger - two firms join together and have equal ownership.
2. Takeover - one firm buys another firm and has ownership over it.

Types of merger/takeover:

1. Horizontal - similar goods and/or services.
2. Vertical - similar sector but different stages of production.
3. Lateral - similar products but not in competition.
4. Conglomerate - diversification to reduce risk.

Limitations to growth of firms:

1. Limited market - if there is no space for the firm to grow into then it cannot grow.
2. Lack of finance.
3. Aim of the entrepreneur - some owners are not prepared to grow the business.
4. Low barriers to entry - fierce competition prevents the growth of firms.
5. Diseconomies of scale means firms do not want to grow.

Note: when a merger or takeover occurs, a process called rationalisation normally occurs where because some resources are duplicated, some managers and workers may be fired.