firms Flashcards
(32 cards)
what are the 3 types of economic sectors
primary, secondary, tertiary
describe the primary sector
this sector of the economy contains fi rms that extract raw
materials from the earth.
describe the secondary sector
manufacture goods, changing raw materials into fi nished products
describe the tertiary sector
this sector contains fi rms that provide services to the
general public and other firms
define interdependence
Interdependence means
that the three sectors of
industry depend on each
other, and cannot operate
independently to produce
goods and services
define private sector
The private sector refers to
economic activity of private
individuals and fi rms. The
private sector’s main aim
is to earn profi t for its
owners
define public sector
owners.
Public sector refers to
economic activity directly
involving the government. The
public sector’s main aim is
to provide a service
what are the different types of private sector firms
» sole trader — a business owned and controlled by a single person
» partnership — a business owned by between two and twenty people, with
share ownership and risk-taking
» private limited company — a business owned by shareholders, who are unable
to buy or sell shares without the consent of other shareholders
» public limited company — a business owned by shareholders, who can openly
and freely buy or sell their shares on a stock exchange.
The relative size of a fi rm can be measured in different ways. The following are
some examples:
- number of employees
- market share
- market capitalisation of a firm
- sales revenue by a firm
what are the benefits of small firms
- Few legal formalities exist. This means that sole proprietorships are quite easy
to set up. Start-up costs are also usually much lower than in setting up larger
types of business. - The sole trader is the only owner of a firm and therefore receives all of the
profits made by the business - small businesses are likely to know their customers on a more personal level
and this can lead to better relationships.
what are the reasons of how average cost maybe increased
Communication issues may arise when a fi rm becomes too large. There may be
too many branches to control and communicate with effectively
A merger between two fi rms may be unsuccessful due to a clash of
organisational cultures, so it may be beneficial to demerge
Workers within a large organisation may find it difficult to feel part of a large
firm, so this may lead to a lack of motivation
define diseconomies of scale
Diseconomies of scale
occur when average costs
of production start to
increase as the size of a
fi rm increases
what are the disadvantages of small firms
- Small firms have limited start-up capital, which makes it difficult for them to raise
finance to establish the business - The success of small firms very much depends on the abilities and commitment
of the owners\ - Small firms often suffer from a lack of continuity
There are several reasons why small fi rms co-exist with larger fi rms in the
economy:
the small grocery store may be located in a remote area and be the only local
seller of provisions
It may provide a personal shopping experience for customers, as compared to a
self-service style experience at large supermarkets
Smaller shops can also adapt quickly to changing consumer tastes
what are the causes of the growth of firms
- internal growth
- external growth
- mergers
- take overs
- franchising
what is internal growth
internal growth occurs when firms expand using their own resources. Firms can grow by increasing the number of branches within a particular country or by opening branches in different countries
what is external growth
External growth occurs when expansion involves another organisation, such as through mergers, takeovers and franchises
define merger
A merger occurs when two
or more fi rms join together
to form just one firm
define franchise
A franchise involves a
person or business buying
a licence to trade using
another fi rm’s name, logos,
brands and trademarks
define takeover
A takeover occurs when
a fi rm is taken over by
another fi rm. A takeover
may be hostile or the two
fi rms might have agreed to
the takeover
what are the three main types of mergers
horizontal, vertical and conglomerate
define horizontal merger
A horizontal merger occurs
when two or more fi rms in
the same economic sector
of industry integrate
what are the advantages of a merged firm
- having higher market share
- gaining skilled employees from each other
- operating with fewer employees
- taking advantage of economies of scale
what are the disadvantages of a merged firm
- There may be a duplication of resources, so some workers may lose their
jobs. - The newly formed, larger fi rm may face increasing costs arising from
diseconomies of scale - The new fi rm may suffer from culture clashes between the merged businesses
