What is a firm?
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What is a firm?
A firm is a business organisation that sells goods and services or produces a product.
Define the term primary sector.
The primary sector involves the production or extraction of raw materials.
True or False?
The secondary sector includes firms that process raw materials.
True.
The secondary sector includes firms that process raw materials. They take raw materials and manufacture products from them.
State the meaning of the term tertiary sector.
The tertiary sector is the sector of industry that mainly focuses on the provision of services.
What is a public sector firm?
A public sector firm is one that is owned and controlled by the government.
Define the term private sector firms.
Private sector firms are those that are owned and controlled by other firms and private individuals.
How is privatisation defined?
Privatisation occurs when government-owned firms are sold to the private sector.
What is meant by the term market share?
Market share is the percentage of an industry's total sales that is earned by a particular firm.
Which metric is calculated by multiplying the number of shares by the share price?
Market capitalisation is calculated by multiplying the number of shares in existence by the share price.
What does the term profit mean?
Profit is the difference between a firm's total revenue and total costs.
State the meaning of the term employees.
Employees are individuals who work for a firm in exchange for wages or salaries.
How many employees are there in a small firm?
A small firm is a firm with less than 49 employees.
How do small firms offer personalised service?
Small firms often provide highly customised goods or services for their customers.
True or False?
Small firms find it easy to access loans for expansion.
False.
Small firms are often unable to access finance for expansion.
Define the term niche market.
A niche market is a small but profitable segment of the market.
What does the term mass market mean?
A mass market is a market with a large number of potential customers.
True or False?
Rapid growth can cause diseconomies of scale, which can be difficult for small firms to deal with.
True.
Rapid growth can cause diseconomies of scale, which can be difficult for small firms to deal with.
State the meaning of satisficing.
Satisficing refers to the goal of achieving an acceptable quality of life, rather than seeking profit maximisation.
What are the advantages small firms can offer?
Advantages small firms can offer include:
Personalised service
Loyalty to customers
Unique products
Quick responses to market changes
List three challenges small firms face.
Three challenges small firms face include:
Susceptibility to economic changes
Limited financial resources
Difficulty retaining staff
An inability to achieve economies of scale
How do small firms create customer loyalty?
Small firms often create personal relationships with their customers, which helps generate customer loyalty and word-of-mouth advertising.
State the formula for profit margin.
Formula.
Profit margin = (Total revenue - Total costs) ÷ Total revenue
What is word-of-mouth advertising?
Word-of-mouth advertising is the passing of information about a business or product from person to person by oral communication.
Define the term organic growth.
Organic growth is the internal growth of a firm through means such as gaining market share, product diversification, or opening new locations.
What is inorganic growth?
Inorganic growth is external growth and occurs when firms merge or acquire other firms.
How is forward vertical integration defined?
Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain, e.g. an ice cream manufacturer purchasing a retail ice cream outlet.
State the meaning of backward vertical integration.
Backward vertical integration involves a merger or takeover with a firm further backward in the supply chain, eg when an ice cream manufacturer purchases a dairy farm.
What does horizontal integration mean?
Horizontal integration is a merger between two firms in the same industry and at the same stage of production, e.g. when a jewellery retailer purchases another jewellery retailer.
Define the term conglomerate integration.
Conglomerate integration occurs when there is a merger between firms operating in different industries.
How do firms benefit from organic growth?
Organic growth is manageable, less risky, avoids diseconomies of scale, and allows management to understand every part of the business as it grows.
What are the disadvantages of organic growth?
Disadvantages of organic growth include:
Growth can occur at a slow pace
The firm may face limited access to finance
There is an inability to achieve economies of scale
True or False?
Vertical integration reduces the cost of production.
True.
Vertical integration reduces the cost of production as middle-man profits are eliminated.
State the advantages of horizontal integration.
The advantages of horizontal integration include:
Rapid increase of market share
Instant reductions in cost per unit
Reduced competition
What does the term diseconomy of scale mean?
A diseconomy of scale occurs when a firm reaches a point where the cost per unit increases as the level of output increases.
What is an economy of scale?
An economy of scale is a cost advantage that a firm experiences as it grows larger. The cost per unit decreases as the level of output increases.
Define the term diseconomy of scale.
A diseconomy of scale is a cost disadvantage that a firm experiences as it grows larger. The firm reaches a point where the cost per unit increases as the output increases.
How are internal economies of scale defined?
Internal economies of scale occur as a result of the growth in the scale of production within the firm.
State the meaning of productive efficiency.
Productive efficiency is the point at which a firm cannot reduce the cost per unit any further by increasing output.
What are financial economies?
Financial economies refer to cost advantages related to financing, such as the ability to obtain loans at lower interest rates.
Define managerial economies.
Managerial economies refer to cost advantages related to management, such as the ability to hire specialised managers.
How are marketing economies defined?
Marketing economies refer to cost advantages related to marketing and advertising, such as the ability to spread promotional costs over a larger output.
State the meaning of purchasing economies.
Purchasing economies refer to cost advantages related to the purchase of inputs, such as the ability to obtain bulk discounts.
What are technical economies?
Technical economies refer to cost advantages related to the production process, such as the ability to use specialised equipment.
Define risk-bearing economies.
Risk-bearing economies refer to cost advantages related to the ability to spread risk over a wider product portfolio. This is one reason why conglomerates develop.
How are external economies of scale defined?
External economies of scale occur when there is an increase in the size of the industry in which the firm operates. The cost per unit is lowered as service firms relocate to the area to better serve the industry.
State the formula for calculating average cost (AC).
Formula.
Average cost = total cost ÷ total output