Theme 3.1.3

Question 1

Explain the effects of a demerger on workers

Answer 1

Workers will benefit from reduced cultural conflicts between different divisions with different attitudes. This will reduce tension, increase productivity and job satisfaction.

However, workers will suffer from lower job security. They won’t know which new division they’ll join after the demerger and if one of the division is sold to raise funds, workers may lose their jobs entirely.

Question 2

Explain the effects of demerger on consumers

Answer 2

Firstly, after emerging, each new smaller firm can specialise in their job, increasing efficiency , reducing costs and prices, but also increasing quality. This will benefit consumers.

However , if the demerged are too small, it might reduce E.O.S , increase LRAC, so firms will have to put their prices up

(Diagram of E.O.S in relation to LRAC)

Question 3

Define demerger

Answer 3

When a company splits into 2+ separate businesses

Question 4

Give the reasons for a demerger

Answer 4

Focus on Core Business:
Firms split to concentrate on their main products or services, improving efficiency and performance.

Improve Efficiency:
Large businesses may become too complex or bureaucratic, so demerging can reduce costs and improve decision-making.

Regulatory Pressure:
Competition authorities may force demergers if the firm is seen as too dominant.

Raise Funds:
Selling off parts of the business can raise cash for debt repayment or investment elsewhere. (Dynamic efficiency)

Question 5

Explain why a firm may demerge to reduce diseconomies of scale

Answer 5

Each firms’ output would be lower than before-> reducing diseconomies of scale because smaller firms experience less alienation, bureaucracy and better communication- decrease LRAC = increased profits.

Question 6

Explain the impact of demergers on businesses

Answer 6

Allows them to focus on their core activities, which can improve efficiency and profitability. However, they may also lose economies of scale, meaning costs per unit could rise as the business becomes smaller.

Decision-making can become quicker and more flexible because the firm is now less complex, but the demerger process often involves high one-off costs such as legal fees and restructuring expenses.