2.1.1 growth

Why do firms aim to grow?

Firms grow to reduce average costs, increase profits, gain market power, and build brand recognition. Growth allows firms to exploit economies of scale and become more competitive in the long run.

What are internal economies of scale?

Internal economies of scale occur when a firm becomes larger and average costs fall as output increases, due to efficiencies within the firm itself.

Why do internal economies of scale reduce average costs?

As output rises, fixed and operating costs are spread over more units, and firms can specialise, negotiate better deals, and use technology more efficiently.

What is risk-bearing as an internal economy of scale?

Larger firms can diversify their products and markets, spreading risk. If one product fails, others can support profits.

What is an example of risk bearing

Amazon sells cloud services (AWS) as well as retail, reducing reliance on one income stream.

How do financial economies of scale benefit large firms?

Banks view large firms as less risky, so they can borrow at lower interest rates, reducing costs of investment.

Why do managerial economies of scale lower costs?

Large firms can hire specialist managers, improving efficiency and decision-making, which lowers average costs per unit.

What is an example of managerial economies of scale lower costs?

Tesco uses specialised logistics and HR managers to improve productivity.

How do technological economies of scale reduce costs?

Large firms can afford advanced machinery and automation, increasing productivity and lowering costs per unit.

Wha is an example of technological economies of scale reduce costs?

Car manufacturers like Toyota use robotics on production lines.

What are marketing economies of scale?

Advertising costs can be spread over large output, reducing the average cost of marketing per unit.

What is an example of marketing economies of scale?

Coca-Cola’s global advertising benefits millions of sales.

Why do purchasing economies of scale reduce costs and what is an example?

Large firms can bulk-buy inputs, gaining discounts from suppliers.

Example: Supermarkets like Aldi negotiate lower prices from farmers than small shops.

What are external economies of scale?

External economies of scale occur when average costs fall due to growth of the industry, not the firm itself.

Why do external economies of scale lower costs and what is an example.

Industry growth leads to better infrastructure, skilled labour pools, and shared R&D, benefiting all firms.

Example: Silicon Valley firms benefit from shared tech talent and research facilities.

Why does the LRAC curve fall at first?

Average costs fall because firms are exploiting economies of scale as output increases.

Why does the LRAC curve rise after a certain point?

After optimal size, diseconomies of scale set in, such as poor communication and control, increasing costs.

What is minimum efficient scale (MES)?

MES is the lowest point on the LRAC curve, where average costs are minimised and economies of scale are fully exploited.

How does growth increase market power and what is an example?

Larger firms can set prices, deter new entrants, and gain monopsony power over suppliers.

Example: After Kraft took over Cadbury (2009), brand dominance increased and competition reduced.

Why does growth improve brand recognition and what is an example?

Larger firms can invest more in advertising and reputation, making consumers more loyal.

Example: Nike’s branding makes demand more price inelastic.

What is competitive advantage?

Competitive advantage exists when a firm is perceived as superior due to price, quality, cost efficiency, or niche appeal.

Why is cost competitive advantage hard to maintain and why is an example?

Rivals can copy technology or access cheaper inputs, so firms often combine low prices with branding or service.

Example: Ryanair pairs low costs with strong brand recognition.

Why does growth increase profitability?

Growth allows firms to lower costs via economies of scale, increasing profit margins — as long as diseconomies are avoided.

What are diseconomies of scale?

Diseconomies of scale occur when average costs rise as output increases beyond a certain point.

Why do control and coordination problems cause diseconomies?

Large firms struggle to monitor workers, coordinate departments, and communicate effectively, reducing productivity.

How can skills shortages limit growth and what is an example?

When skilled labour is scarce, firms must raise wages, increasing costs and reducing international competitiveness.

Example: UK engineering and healthcare sectors face skills shortages.

What is corporate culture?

Corporate culture refers to shared values, beliefs, and behaviours that shape how employees work within a firm.

Why can strong corporate culture improve productivity and what is an example?

Happy employees are more motivated, productive, and loyal, reducing staff turnover and training costs.

Example: Google’s employee perks improve long-term performance.