2.1

• Economies of scale


  Internal and external economies of scale
• Internal economies of scale

  Occur when the firm grows larger and average cost of production falls
• External economies of scale

  Occur within the industry
• Mnemonic "Really Fun Mums Try Making Pies"

  • Risk bearing
  • Financial
  • Managerial
  • Technological
  • Marketing
  • Purchasing
• Financial economies of scale

  When a firm grows larger, it is seen as less risky and so its eligible for larger loans from banks for lower interest rates
• Purchasing economies of scale

  As output increases, firms can bulk-buy meaning the cost per unit of output is reduced
• Economies of scale and diseconomies of scale are located on the graph

  
• Diseconomies of scale


  As the firm expands, some workers may feel alienated from their more important counterparts, and therefore demotivated to work hard
• Minimum efficient scale


  The lowest point on the LRAC curve
• Competitive advantage


  When a firm's goods/services are deemed better quality than its competitors by customers
• Inorganic growth


  When a business expands by merging and acquiring other firms
• Organic growth


  When a business grows by increasing output, expanding their customer base and developing new products
• Disadvantages of organic growth

  It takes time to grow this way, and in this time other firms may gain a competitive advantage over the market, which may become a problem for shareholders
• Vertical integration


  When a firm merges with or acquires another firm in the same industry but different step in the supply chain
• Backwards vertical integration is closer to the producer
• Horizontal integration


  Occurs when a firm marges with or acquires another firm in the same industry and same stage of production
• Horizontal integration benefits


  It gives them a competitive edge over the market as their market share increases, leading to increased output
• Conglomerate integration


  The joining of two firms with no common connection (i.e. two different industries)
• R&D (Research & Development)


  Investment in research with the intention of improving goods, introducing new ones and improving methods of production
• How R&D increases market power

  It differentiates products from their competitors, making them more unique and thus helps increase brand loyalty
• Why the state provides R&D funding

  The positive externalities of R&D are not always fully understood, so the state intervenes to ensure more investment in R&D
• A graph showing the product life cycle and describing each stage
• How price comparison sites benefit consumers

  They have helped reduce information gaps by increasing the quantity of knowledge consumers have about a good or service
• Viral marketing


  A form of marketing whereby the good/service is promoted on social media, where it can be shared with friends
• Micro-marketing


  This is where advertising is focused on a small group of consumers, rather than the market as a whole
• Long tail theory


  The long tail theory suggests consumers get a wider choice when it comes to online retailing
• Advantages of online stores over brick-and-mortar

  • Online businesses are not restricted to physical space, so can target customers worldwide
  • Online stores have lower costs, so can charge lower prices and therefore gain a larger portion of the market share
• USP


  Unique Selling Point
• Why small firms can't benefit from economies of scale

  Since they are small firms, they do not produce enough output to lower their average costs
• How small firms can act as monopolists


  They can create a local, more personal service and a niche market