Theme 3 Flashcards
Define internal economies of scale
When the average costs of production falls as output increases
Give examples of internal economies of scale
Really Fun Mums Try Making pies
- Risk-bearing
- Financial
- Managerial
- Technological
- Marketing
- Purchasing
Advantages of external (inorganic) growth
- Faster speed of access to new product or market areas
- Increased market share / increased market power
- Access internal economies of scale (perhaps by combining production capacity)
- Secure better distribution channels / control of supplies
- Acquire intangible assets (brands, patents, trademarks)
- Overcome barriers to entry to target new markets
- Defend a business against a takeover threat
- Enter new segments of an existing market
- To take advantage of deregulation in an industry / market
Define vertical integration
When a firm controls different stages of production
What are the 3 stages of vertical integration and use an example to explain each one
Production - brewing of beer
Distribution - beer transported to local markets
Retail - beer sold in pubs and shops
Define backwards vertical integration
When a firm merges with another firm that used to supply them with raw materials
e.g. a car firm buys another car firm that used to supply them with cars
Pro and Con of backwards vertical integration
Useful in securing reliable source of supplies
Harmful if it increases monopoly of power making it difficult for new competitors to access raw materials
Define forward vertical integration
When a firm merges with another firm at the next stage of production
e.g. to sell their product
Define conglomerate integration
When a company expands its operations into unrelated business areas or industries
Cons of conglomerate integration
- Increased complexity
- Difficulty in managing a diverse range of business units
Pros of conglomerate integration
- By diversifying operations, a company can spread its risks as it is not dependent on one particular market or product if it has a downturn
- Increased revenue
- Economies of scale
- cross selling opportunities - existing customers introduced to new markets/products
- flexibility
What are the 4 types of effciecy?
- Allocative
- Productive
- Dynamic
- Economic
Define allocative efficiency
When resources are distributed to the good and services that consumers want
Define productive efficiency
When firms produce at the lowest point on the average cost curve
Define dynamic efficiency
When resources are allocated efficiently over time and the rate of innovation is at the optimum level which leads to a fall in long run average costs
