Chapter 20: Firms

Question 1

Primary sector

Answer 1

The first stage of production. Industries such as agriculture, coal mining, and forestry, involved in the extraction and collection of raw materials.

Question 2

Secondary sector

Answer 2

Processing of raw materials into semi-finished and finished goods. Both capital and consumer goods.

Question 3

Tertiary sector

Answer 3

Services such as banking, insurance, and tourism.

Question 4

Quaternary sector

Answer 4

Service industries involved with the collection, processing, and transmission of information.

Question 5

Measures for size of firms

Answer 5

• Age of firms
• Availability of financial capital
• Type of business organisation
• Internal economies and diseconomies of scale
• Size of the market

Question 6

Reasons for small firms

Answer 6

• Small size of the market
• Preference of consumers
• Owner’s preference
• Flexibility
• Technical factors
• Lack of financial capital
• Location
• Cooperation between small firms
• Specialisation
• Government support

Question 7

Growth of firms: Internal growth

Answer 7

An increase in the size of a firm resulting from it enlarging existing plants or opening new ones.

Question 8

Growth of firms: External growth

Answer 8

An increase in the size of a firm resulting from it merging or taking over another firm.

Question 9

Horizontal merger

Answer 9

The merger of firms producing the same product and at the same stage of production.

Question 10

Vertical merger

Answer 10

The merger of one firm with another firm that either provides an outlet for its products or supplies it with raw materials, components or the products it sells.

Question 11

Conglomerate merger

Answer 11

A merger between firms producing different products.

Question 12

Rationilation

Answer 12

Eliminating unnecessary equipment and plant to make a firm more efficient.

Question 13

Internal economies of scale

Answer 13

Lower long-run average costs resulting from a firm growing in size.

Question 14

External economies of scale

Answer 14

Lower long run average costs resulting from an industry growing in size.

Question 15

Internal diseconomies of scale

Answer 15

Higher long run average costs arising from a firm growing too large.

Question 16

External diseconomies of scale

Answer 16

Higher long run average costs arising from an industry growing too large.

Question 17

Internal economies of scale: Buying economies

Answer 17

Large firms that buy raw materials in bulk and place large orders for capital equipment usually receive a discount. This means that they pay less for each item purchased. They may also receive better treatment than small firms in terms of quality of the raw materials and capital equipment sold and the speed of delivery. This is because the suppliers will be anxious to keep such large customers.

Question 18

Internal economies of scale: Selling economies

Answer 18

The total cost of processing orders, packing the goods and transporting them does not rise in line with the number of orders.

Question 19

Internal economies of scale: Marketing economies

Answer 19

As output increases, the marketing costs are spread over more units of output.``

Question 20

Internal economies of scale: Managerial economies

Answer 20

Large firms can afford to employ specialist staff in key posts as they can spread their pay over a high number of units. Employing specialist buyers, accountants, human resource managers and designers can increase the firm’s efficiency, reduce costs of production, and raise demand and revenue.

Question 21

Internal economies of scale: Financial economies

Answer 21

Large firms usually find it easier and cheaper to raise finance. Banks tend to be more willing to lend to large firms because such firms are Cambridge IGCSE Economics177 well-known and have valuable assets to offer as collateral.

Question 22

Internal economies of scale: Labor economies

Answer 22

Large firms can engage in division of labour among their other staff. For example, car workers specialise in a particular aspect of the production process.

Question 23

Internal economies of scale: Technical economies

Answer 23

The larger the output of a firm, the more viable it becomes to use large, technologically advanced machinery. Such machinery is likely to be efficient, producing output at a lower average cost than small firms.

Question 24

Internal economies of scale: Research and development economies

Answer 24

A large firm can have a research and development department, since running such a department can reduce average costs by developing more efficient methods of production and raise total revenue by developing new products.

Question 25

Internal economies of scale: Risk-bearing economies

Answer 25

Larger firms usually produce a range of products. This enables them to spread the risks of trading. If the profitability of one of the products it produces falls, it can shift its resources to the production of more profitable products.

Question 26

Internal diseconomies of scale: Difficulties controlling the firm

Answer 26

It can be hard for those managing a large firm to supervise everything that is happening in the business. Management becomes more complex. A number of layers of management may be needed and there may be a need for more meetings. This can increase administrative costs and make the firm slower in responding to changes in market conditions.

Question 27

Internal diseconomies of scale: Communication problems

Answer 27

It can be difficult to ensure that everyone in a large firm has full knowledge about their duties and available opportunities, such as training etc. Also, they may not get the opportunity to effectively communicate their views and ideas to the management team.

Question 28

Internal diseconomies of scale: Poor industrial relations

Answer 28

Large firms may be at a greater risk from a lack of motivation of workers, strikes and other industrial action. This is because workers may have less sense of belonging, longer time may be required to solve problems and more conflicts may arise due to the presence of diverse opinions.

Question 29

External economies of scale: Skilled labor force

Answer 29

A firm can recruit workers who have been trained by other firms in the industry.

Question 30

External economies of scale: Good reputation

Answer 30

An area can gain a reputation for a high quality production. For example, the Bordeaux region of France is well known for its high quality wine production and the Maldives has a reputation of being a popular holiday resort.

Question 31

External economies of scale: Specialist suppliers of raw materials and capital goods

Answer 31

When an industry becomes large enough, it can become worthwhile for other industries, called ancillary industries, to set up providing for the needs of the industry. For instance, the tyre industry supplies tyres to the car industry.

Question 32

External economies of scale: Specialist services

Answer 32

Universities and colleges may run courses for workers in large industries and banks, and transport firms may provide services specially designed to meet the particular needs of firms in the industry.

Question 33

External economies of scale: Specialist markets

Answer 33

Some large industries have specialist selling places and arrangements such as corn exchanges and insurance markets.

Question 34

External economies of scale: Improved infrastructure

Answer 34

The growth of an industry may encourage a government and private sector firms to provide better road links and electricity supplies, build new airports and develop dock facilities.

Question 35

External diseconomies of scale: Specialist markets

Answer 35

With more and larger firms in an area, there will be an increase in transport with more vehicles bringing in workers and raw materials, and taking out workers and finished products. This may cause congestion, increased journey times, higher transport costs for firms and possibly reduced workers’ productivity. The growth of an industry may also result in increased competition for resources, pushing up the price of key sites, capital equipment and labour.