econ igcse

• Classification of firms

  • Production Stage of the Firm
  • Ownership of Firms
  • Size of Firms
• Industry


  A group of firms producing the same product
• Firm


  A business entity / business organization
• Plant


  A production unit / workplace
• Classification of firms - Production stage


  • Primary Sector
  • Secondary Sector
  • Tertiary Sector
  • Quaternary Sector
• Primary Sector


  The primary sector of industry is concerned with the extraction of raw materials or natural resources from the land
• Secondary Sector

  The secondary sector of industry is concerned with manufacturing. This would involve taking the raw materials from the primary sector and converting them into new products (Processing of Raw materials into semi or finished goods)
• Tertiary Sector


  The tertiary sector of industry is concerned with providing a service. Services are activities that are done by people or businesses for consumers.
• Quaternary Sector


  Sub-section of the tertiary sector. Covers the service industries which are involved with collection, processing and transmission of information. Basically Information Technology
• As economies grow, their industrial structure changes. Poorer countries will have a large proportion of their output accounted for labor force employed in industries in the primary sector. As countries develop the secondary sector becomes more important and gradually the tertiary sector accounts for most of their output and employment.
• Ownership of Firms


  • Private Sector
  • Public Sector (state owned enterprises SOE)
  • Mixed Economic System
• Why some firms remain small


  • small market size (niche market)
  • Consumer Preference (hair dressers - tailors)
  • Owner's preference (Avoid the stress of running a large firm / fear of loss of control)
  • Flexibility (Smaller firms are easier to change decisions without having to consult with anyone)
  • Lack of Financial Capital
  • Location: Transport costs can form a high proportion of total costs
  • Cooperation between small firms
  • Specialisation
  • Government Support
• Internal Growth


  An increase in the size of the firm resulting from it enlarging existing plants or opening new ones. Also known as Natural or Organic Growth.
• External Growth


  Growth through mergers and acquisitions
• Mergers


  • Horizontal Merger
  • Vertical Merger
  • Vertical Merger Backwards
  • Vertical Merger Forwards
  • Conglomerate
• Horizontal Merger


  Merger of Firms producing the same product and at the same stage of production
• Vertical Merger


  Merger of one firm with another firm that either provides an outlet for its products or supplies it with raw materials
• Vertical Merger Backwards


  A merger with a firm at an earlier stage of the supply chain
• Vertical Merger Forwards


  A merger with a firm at a later stage of the supply chain
• Conglomerate


  Merger of one firm with another firm that produces extremely different products
• Mergers - Advantages


  • Greater economies of scale means lower prices for consumers
  • Better quality products because of an increased efficiency of the firm
• Mergers - Disadvantages


  • If a merger resulted in diseconomies of scale, consumers may experience higher prices and poorer quality
• Organic Growth


  Also known as internal growth. It happens when a business expands its own operations rather than relying on takeovers and mergers.
• Organic Growth can come about from


  • Increasing existing production capacity through investment in new capital & technology
  • Development & launch of new products
  • Finding new markets for example by exporting into emerging countries
  • Growing a customer base through marketing
• Advantages of External Growth of a Business


  • 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
• Horizontal Integration (Merger)


  An example would be between two car manufacturers or drinks suppliers
• Advantages of Horizontal Integration (Merger)


  • It increases the size of the business and encourages internal economies of scale – lower long run average costs – improved profits and competitiveness
  • One larger merged firm may need fewer workers, managers and premises than two – a process known as rationalization designed to achieve cost savings
  • Mergers often justified by the existence of "synergies"
  • Creates a wider range of products - (i.e. diversification). Opportunities for economies of scope
  • Reduces competition by removing industry rivals – increases market share and pricing power
• Vertical Integration (Merger)

  Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain. The supply chain is the process by which production and distribution gets products to the customer.
• Forward Vertical Integration


  Closer to the final consumers of the product e.g. a manufacturer buying a retailer
• Backward Vertical Integration


  Closer to raw materials in the supply chain e.g. a steel firm buying a coal mine
• Advantages of Vertical Integration (Merger)


  • Control of the supply chain – this helps to reduce costs and improve the quality of inputs into the production process
  • Improved access to key raw materials perhaps at the expense of rivals who must then pay more
  • Better control over retail distribution channels e.g. pub companies who ensure that their beers and wines are sold in tenanted pubs and clubs
  • Removing suppliers, and crucial information from competitors which helps to make a market less contestable
• Conglomerate


  Conglomerate mergers occur when two companies that offer different services, or are engaged in different types of business, merge. Usually a conglomerate merger is meant to make both entities stronger than they would be individually, and it occurs between two large-scale companies.
• Advantages of a conglomerate merger


  • Increased market
  • Diversification
  • Economies of scale
• As the U.S. Federal Trade Commission points out on its website, many mergers benefit competition and consumers by allowing firms to operate more efficiently. However, some mergers can lead to monopolistic positions, which can then lead to higher prices, decreased innovation or a drop in the quality or availability of goods or services.
• Economies of scale


  The cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average (unit) costs of production.
• Types of economies of scale

  • Buying Economies
  • Selling Economies
  • Managerial Economies
  • Labour Economies
  • Financial Economies
  • Technical Economies
  • Research and Development Economies
  • Risk Bearing Economies
• Internal economies of scale


  Internal economies of scale arise from the growth of the business itself.
• Diseconomies of scale


  Diseconomies of scale occur when a business grows so large that the costs per unit increase. As output rises, it is not inevitable that unit costs will fall. Sometimes a business can get too big!
• Diseconomies of scale


  • Difficulties controlling the firm
  • Communication Problems
  • Poor industrial Relations
• External economies of scale


  External economies of scale occur within an industry