Firms

3.5
 Learning Outcomes
● Classify firms in terms of primary/secondary/tertiary

● Classify firms in terms of public & private sector

● Understand the advantages and disadvantages of small firms

● Understand the causes of growth of firms

● Discuss the different types of merger

● Understand economies & diseconomies of scale

 Classification of Firms
1. Firms can be classified according to the economic sector in which they
operate:

a. Primary Sector
b. Secondary Sector
c. Tertiary Sector

https://www.youtube.com/watch?v=tFhj9fwAOzw
 Classification of Firms
The primary, secondary and tertiary sectors of an economy are
interdependent (they depend on each other).

This is because a firm cannot operate without using goods and

services from all 3 sectors of industry to make and sell its goods or
services to the final customer.
Firms in the 3 sectors are linked through a process called the chain of
production
 Private & Public Sectors
2. Firms can be classified according to whether they operate in the private
or public sector.

Private Sector are owned by private individuals and owners with the aim of
making profit.

❖ Sole trader
❖ Partnership
❖ Private limited company
❖ Public limited company
 Private & Public Sectors
Public Sector firms are owned by the government with the aim to provide
a service to the general public. They are funded by tax revenues.

For example education & training, healthcare, infrastructure

 Classification of Firms
3. Another way to classify firms is according to their relative size.
The relative size of the firm can be measured in the following ways:

a. Number of employees
b. Market share - measuring a firm's sales revenue as a proportion of the industry’s sales
revenue.
c. Market capitalisation of the firm - the stock market value of the company
d. Sales revenue of the firm - measured by multiplying the unit price of a product by the
quantity sold
 Small Firms
There are several reason why small firms co - exist with larger firms in the
economy:

1. A small grocery store has to find a way to compete with larger ones
(speciality goods)
2. Small grocery store may be located in a remote area and be the only
option for people
3. May provide a personal shopping experience
4. Smaller shops can adapt quickly to changing consumer tastes
 Sole Trader
Now you are going to explore small firms in more detail with a focus on sole traders.

Click on this link and complete now

https://docs.google.com/document/d/1E_Qz858-jwZsU-AYGlUCsmT5ty1n-WGf4QB3H2L
Y3GQ/edit?usp=sharing
 Advantages of Small Firms
● Easy to set up - few legal formalities

● Receives all the profits

● You are your own boss - decisions, flexibility, working hours

● More personal shopping experience for customers

● Easier to manage and control

Disadvantages of Small Firms
● Limited start up capital making it challenging to raise finance
● Trying to expand can be problematic
● Large risk of business failure
● Threat of survival from other larger competitors
● Can be stressful and demanding (own accounts, hire staff, marketing)
● Suffer from a lack of continuity (if the owner is not on site)
● Higher costs of production , unable to exploit large scale production,
higher prices charges
 Causes of Growth of Firms
Firms can grow in 2 ways:

1. Internally - organic growth (more natural process)

2. Externally- inorganic growth (occurs when expansion involves another

organisation
 Internally - Organic Growth
Occurs when a firm can grow by increasing the number of branches(Kn)
within a particular country or by opening branches in different
countries(Kn).

Occurs when a firm expands by selling their products in a greater

number of countries(Kn) and can finance their expansion using
profits(Kn)earned within the business

https://www.youtube.com/watch?v=GiEIYhFc6bc
 Externally - Inorganic Growth
Occurs when expansion involves another organisation such as through mergers,
takeovers and franchises
Merger: when two or more firms join together to form just one firm
Takeover: when a firm is taken over by another
Franchise: when an individual or firm purchases a licence from another firm to
trade using the name of the parent company (starbucks, KFC)
https://www.youtube.com/watch?v=vyHEFGIrdxE
https://www.youtube.com/watch?v=bijmG99JJIg
 Types of Merger
1. Horizontal

2. Vertical

3. Conglomerate

https://www.youtube.com/watch?v=zV5Ar5Xd4GI

https://www.youtube.com/watch?v=KrwbjL0RGsQ
 Types of Merger
So what did you learn from the clips about
types of merger?

*Worksheet
 Economies of Scale
These are the cost saving benefits of large scale operations(Kn)
which means a reduction in the average costs of production(An).
As a result that they get a cost advantage over smaller firms(An).
 Economies of Scale
They can be internal & external economies of scale

Internal economies of scale are cost savings that arise from within the
business as it grows.

External economies of scale are economies that arise due to location

of the firm.
 Economies of Scale examples
Internal External
● Bulk buying ● Proximity to related firms
● Technical economies of scale ● Availability of skilled labour
● Financial economies of scale ● Reputation of geographical area
● Managerial economies of scale
● Access to transportation
● Risk bearing economies of scale
networks
● Research & Development of scale
● R & D economies of scale
● Marketing economies of scale
 Diseconomies of Scale
This occurs when a firm gets too large(Kn) so its average costs of
production start to rise as output increases(An).As a result the
disadvantages of growth start to outweigh the advantages(An).
 Reasons for the increased average costs of production
1.

Communication issues may arise when a firm becomes too large.(KN)

This means that there maybe too many branches to control &
communicate with effectively.(AN)

As a result decision making maybe slow due to the large communication

chain and so lead to increased costs of production.(AN)
More reasons for the increased average costs of production
2. A merger between two firms may be unsuccessful due to organisational
culture clashes thus creating a demerger.

3. Might be necessary to employ more staff or build a new factory to

accommodate increased levels of production leading to costs rising.

4. Workers may find it difficult to feel part of a large firm, may lead to
demotivation and reduced productivity and average costs will tend to rise.

5. Business may become too diverse and start to operate in areas where
there is less expertise.
Exam Style Questions Practice
EXTENSION TASK: Discuss the advantages & disadvantages of the merger
between the two telecommunication firms? (8m)