3.1 Business growth

Question 1

What determines the size of firms?

Answer 1

Factors include:
Economies of scale relative to market size
Diseconomies of scale
Small firms as monopolists
Profit motive
Market power
Diversification
Owners’ motives

Each factor plays a role in influencing whether firms choose to remain small or grow.

Question 2

What are economies of scale?

Answer 2

Cost advantages that firms experience as they increase their size and production levels, relative to market size.

Large firms may experience limited economies of scale in certain industries.

Question 3

What are diseconomies of scale?

Answer 3

Increased costs that larger firms may face due to factors such as poor organization or inefficiencies.

Examples include x-inefficiency and higher wages in large firms.

Question 4

How can small firms hold monopoly power?

Answer 4

By providing personal, local services and creating niche markets, which allows them to charge higher prices.

An example is a small café compared to a multinational corporation.

Question 5

What motivates firms to grow?

Answer 5

Opportunities to earn higher profits and take advantage of economies of scale.

Growth must be managed to avoid diseconomies of scale.

Question 6

What is market power?

Answer 6

The ability of large firms to dominate the market, set prices, and discourage new entrants.

Large firms may also gain monopsony power, allowing them to lower stock purchase prices.

Question 7

What is the benefit of diversification for firms?

Answer 7

It reduces the risk of significant losses by having multiple areas of the market to rely on.

This strategy helps firms stabilize their income.

Question 8

What motives might owners have for expanding a firm?

Answer 8

Larger bonuses, more holidays, and increased leisure time.

These personal incentives can drive managerial decisions.

Question 9

What is the principal-agent problem?

Answer 9

A situation where the agent makes decisions for the principal but may act in their own interests instead of the principal’s.

This often occurs between shareholders and managers.

Question 10

How does selling shares affect a firm’s ownership control?

Answer 10

The owner loses some control, potentially leading to conflicting objectives among stakeholders.

Managers may prioritize personal gains over shareholder dividends.

Question 11

What distinguishes public sector organizations?

Answer 11

Controlled by the government and may prioritize social welfare over profit.

Examples include the NHS and nationalized industries.

Question 12

What is a natural monopoly in the public sector?

Answer 12

A situation where a single firm provides a service efficiently, such as water supply.

Multiple firms would lead to inefficiencies and higher costs.

Question 13

What are the primary objectives of private sector organizations?

Answer 13

Profit maximization and efficient operation in the free market.

Private firms have incentives to meet consumer demands and improve allocative efficiency.

Question 14

What is the goal of a profit organization?

Answer 14

To maximize financial benefits for shareholders and owners.

The focus is on earning maximum profits.

Question 15

What characterizes a not-for-profit organization?

Answer 15

Aims to maximize social welfare without distributing profits to owners.

Any profits made are reinvested into the organization’s goals.

Question 16

What is organic growth?

Answer 16

Expansion through increasing output, widening customer base, developing new products, or diversifying range

Organic growth is also known as internal growth.

Question 17

What are some methods firms use for organic growth?

Answer 17

Research and development, technology investment, production capacity expansion

These methods allow firms to increase sales and output volume.

Question 18

What is inorganic growth?

Answer 18

Growth through merging with, acquiring, or taking over another firm

Question 19

List one advantage of organic growth.

Answer 19

Less risky than inorganic growth
Sustainable growth without building up debt
Existing shareholders retain control

Question 20

Disadvantages of organic growth.

Answer 20

Slower than inorganic growth
Competitors may gain market power in the meantime
Limited by market strength

Question 21

What is forward vertical integration?

Answer 21

Merging with or taking over a firm closer to the consumer, such as a distributor. Eg; Car manufacturer to a car sales

Question 22

What is backward vertical integration?

Answer 22

Merging with or taking over a firm closer to the producer, such as a supplier. Eg; Tesco acquiring a farm

Question 23

List one advantage of vertical integration.

Answer 23

Increased efficiency through economies of scale
More control over market prices
Certainty over production factors

Question 24

What are diseconomies of scale?

Answer 24

Disadvantages that can arise when a firm becomes too large, leading to increased average costs

Question 25

What is horizontal integration?

Answer 25

The merger of two firms in the same industry and at the same stage of production

Question 26

List one advantage of horizontal integration.

Answer 26

Rapid growth leading to competitive edge Increased output and economies of scale Shared expertise in the same industry

Question 27

What is conglomerate integration?

Answer 27

Combining two firms with no common connection

Question 28

List one disadvantage of conglomerate integration.

Answer 28

Risk of spreading product range too thinly Possible reduction in quality and increase in production costs

Question 29

What constraint does the size of the market impose on business growth?

Answer 29

Limited opportunities for expansion and innovation in small markets

Question 30

How does access to finance constrain business growth?

Answer 30

Smaller firms find it harder to obtain finance, limiting their ability to invest and grow

Question 31

What are owner objectives?

Answer 31

Different goals that owners may have, such as maximizing profits or social welfare

Question 32

What is a demerger?

Answer 32

A demerger is when a large firm is separated into multiple smaller firms.

Question 33

What is a synergy?

Answer 33

A synergy is when creating a whole company is worth more than each company on its own.

Question 34

Why might a firm demerge due to growth?

Answer 34

Each part of the firm could grow at different rates, and the faster growing part might be separated.

Question 35

What are diseconomies of scale?

Answer 35

Diseconomies of scale occur if the firm is so large that average costs rise with more output.

Question 36

Why would a firm choose to focus on fewer markets?

Answer 36

The firm might grow faster if it focuses on a few markets, rather than several.

Question 37

What might a firm do if it can no longer afford to invest in the business?

Answer 37

They might sell off a part of the firm.

Question 38

How can selling off part of a firm be financially beneficial?

Answer 38

Selling off part of the firm can raise valuable finance for investment in a more profitable part.

Question 39

What is one impact of demergers on businesses?

Answer 39

Firms can dispose of underperforming or loss-making parts of the firm.

Question 40

How do demergers allow firms to focus better?

Answer 40

They allow the larger firm and the new, demerged firm to focus on their core activities.

Question 41

What can result from eliminating diseconomies of scale?

Answer 41

It could lead to lower prices for consumers.

Question 42

What benefit might consumers experience from a demerger?

Answer 42

There could be a net welfare gain if the demerger results in a higher level of efficiency.

Question 43

What are the main reasons for a demerger

Answer 43

Lack of synergies, lack of growth, diseconomies of scale, lack of resources and limited access to finance