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Chapter 20
Firms 公司

3.5.1. classification of firms
3.5.2. small firms
3.5.3. causes and forms of the growth of firms
3.5.4. mergers
3.5.5. economies and diseconomies of scale

Match

Match the following

• classify

• Firm

• Merger

put in groups

business

two companies join

• put in groups

• business

• two companies join

Multiple Choice

Diseconomy is....

• An economic disadvantage 经济劣势

• An economic advantage 经济优势

Match

Match the following

multi-national corporation

Sole trader

Small business

• multi-national corporation

• Sole trader

• Small business

1ststage:

Primary sector is the first stage of
production involved in extraction and
collection of raw materials.

( agriculture, mining and forestry)

Multiple Select

What does raw mean?

• unrefined

• unprocessed

• exported

• extracted

2ndstage:

Secondary sector is involved with the processing
raw materials into finished goods. (manufacturing
and construction)

Multiple Select

Manufacturing

3rdstage:

Tertiary sector is service
industry such as banking,
insurance and tourism

Multiple Choice

Choose the service industry job below

• chef

• factory worker

• Waiter

Multiple Choice

Waiters are in the ________ industry

• service

• manufacturing

• skilled labor

Multiple Select

Which of these can you buy in a pharmacy

4thstage:

Quaternary sector covers
information technology industry
with collection, processing and
transmission of information

Multiple Choice

Pharmacies are in the _____ stage of production.

• primary

• secondary

• tertiary

• Quartenary

Multiple Choice

Public transport

— Firms in Private Sector are

owned by individuals and
shareholders

— Firms in Public Sector

(state-owned enterprises)
are owned by government

Main measures of firm’s size:

1)

Number of workers employed

2)

Value of the output it produces

3)

Value of financial capital

Multiple Select

Main measures of a firm's size

• Total amount of their cash and assets.

• Value of the goods it creates

• total Workforce

• Stock price

— The small size of the market

— Preference of consumers

— Owner’s preference

— Flexibility

— Lack of financial capital

— Specialisation

— Government support

Multiple Select

Hey wake up! Why do small firms exist?

• Lack of buyers

• Niche market

• Lack of access to funds

• Owner prefers it ( lifestyle reasons )

Match

Match the following

• advantage

• advantage

• advantage

• disadvantage

• disadvantage

more flexible

better communication with customers

better communication with employees

kimited resources

higher failure rate

• more flexible

• better communication with customers

• better communication with employees

• kimited resources

• higher failure rate

— Can quickly adopt changes

— Have direct communication

between business owners
and customers

— Have business owners who

are in close touch with their
employees

— Have limited resources

— Have a higher failure rate

— Difficult to finance project

— Higher average cost of

production

— Internal growth: a firm increasing market for its current

products or diversifying into other products by increasing
the size of existing production or by opening new ones

Multiple Choice

Diversify means....

• Different prices

• Different workforce

• Different products and services

• Different stock price

Match

Match the following

• Internal growth

• Internal growth

• external growth

• external growth

• external grwoth

hire skilled staff

increase efficiency

diversify products produced

partnerships with other companies

Merge with another company

• hire skilled staff

• increase efficiency

• diversify products produced

• partnerships with other companies

• Merge with another company

— External growth: an increase in the size a firm

resulting from it merging or taking over another firm

— Horizontal Merger: The

merger of two firms
producing the same
product at the same stage
of production

Possible advantage:

(1) take advantage of

economies of scale

(2) Increase market share

(3) Rationalisation by

eliminating
unnecessary
equipment and plant
to make a firm more
efficient

Possible disadvantage:

(1) diseconomies of scale

may occur if large firm is
too hard to control

(2) Greater market power may

reduce choices for
consumers and cause
higher price, lower quality
products

— A firm merge with

another firm involved
with the production of
the same product, but at
a different stage of
production

— Vertical merger

forwards: firm merge
with, or take over a firm
at a later stage of the
supply chain

Multiple Choice

Vertical merger

• Two companies at different stages of development merge

• Two companies with the same products merge

— Vertical merger backwards: firm

merge with a firm that is the source
of it supply of raw materials,
components or the products it sells

Possible advantage of vertical merger backwards

(1) Merger is to ensure manageable supply of good quality

raw materials with a lower cost in control.

(2) Merger restrict the access of the rival firms to the supply

Possible advantage of vertical merger forwards

(1) Merger is to ensure sufficient outlets, delivery and

storage

(2) Merger may help development and marketing of new

products

Possible disadvantage of vertical merger

(1) hard to integrate two firms with different management

problems

(2) Firms may have different sizes and market strategies

— Conglomerate merger:
Merger of two firms
making different products

Possible advantage:

(1) Firm may benefit from

diversification

(2) Merger spreads risks

and enable continue its
growth with declining
of one industry

Possible disadvantage:

(1) Merger may not

succeed due to reducing
specialization

Bigger
size of
store is,
lower
average
delivery
cost per
unit

Land

: lease contract and rent is fixed in short run

Labour

:

labour

contrac

t and wage is fixed

Capital

: number of equipment is fixed

Enterprise

: owner and management team is fixed

https://v.qq.com/x/page/i05166e2etx.html

— Internal economies of scale : lower long run average

costs resulting from a firm growing in size

— Internal diseconomies of scale : higher long run

average costs arising from a firm growing too large

— External economies of scale : lower long run average

costs resulting from an industry growing in size

— External diseconomies of scale : higher long run

average costs resulting from an industry growing in
size

— Example of internal economies of scale:

— Example of external economies of scale:

— As a result, long run average labour cost become lower

— Buying economies (large firms buy supply in bulk and receive discount)

— Selling economies (lower selling cost to process larger number of orders)

— Managerial economies

(larger firm can spread specialists’ cost over a higher number of units)

— Labour economies

(large firm can engage division of labour)

— Financial economies

(large firm can finance with lower interest rate and issue shares)

— Technical economies

( larger the output of a firm , more viable to use more advanced machine)

— Research and development economies

(larger firm can do research and development to increase innovation)

— Risk bearing economies

(larger firm has more diversification to spread risks of trading)

— Difficulties controlling the firm
-management become complex in large firm which cause higher
administrative cost and slower response to changes in market

— Communication problems
-Difficult communication between management team and staffs

— Poor industrial relations
-large firms have greater risk from industrial actions and strikes

— A skilled and productive labour force is trained in a large industry

— A good reputation of a large industry lower all types of costs

— Specialist suppliers of raw materials and capital goods

— Specialist services, like education and training for large industry

— Specialist markets, selling and exchange places for large industry

— Improved infrastructure provided large industries by public and

private sector

— A large industry increase competition for resources which

push up the prices of key factor of production and cost