Business Studies: Economies of Scale, Small Firms, and Mergers

Comprehensive review flashcards covering internal and external economies of scale, the advantages and challenges of small firms, and the advantages and disadvantages of horizontal mergers.

How does purchasing economies of scale lower average costs for large firms?

Buying raw materials, components, or finished goods in large quantities allows firms to get lower prices.

How do large firms benefit from technical economies of scale?

Large firms can afford expensive machinery and automated equipment, spreading the high cost over a large output to reduce average costs.

Why do large firms experience financial economies of scale when borrowing money?

They are seen as less risky by banks, allowing them to borrow money more easily and often at lower interest rates.

In what way does managerial economies of scale improve a firm's productivity?

Large firms can employ specialist managers, such as accountants, engineers, and HR managers.

How can large firms achieve risk-bearing economies of scale?

By spreading risks through selling different products and operating in different locations or countries.

How does marketing economies of scale reduce the cost per unit for large businesses?

Large firms can spread advertising costs over a large number of sales, reducing the average marketing cost per unit.

How do research and development (R&D) economies of scale help large firms become market leaders?

Large profits enable firms to fund R&D, innovate, and create products that establish them as market leaders.

How does proximity to related firms act as an external economy of scale?

Having suppliers and other related businesses located nearby reduces transport costs and saves time.

What benefit does the availability of skilled labour provide when many firms in the same industry cluster together?

A large pool of skilled workers develops in the area, making it easier and cheaper for firms to recruit employees.

How does the reputation of an area benefit the firms located there?

A place known for a particular industry provides free publicity and attracts customers and workers.

Why is a good transport network considered an external economy of scale?

Access to good roads, railways, ports, and airports makes transporting raw materials and finished goods easier and cheaper.

Why is a small firm relatively easy to set up?

There are few legal formalities and low start-up costs.

What advantage does receiving all the profits give to a small business owner?

It provides the owner with a strong incentive to work hard.

What operational advantages come from being your own boss in a small firm?

It gives freedom and flexibility in decision-making and working hours, as well as making the business easy to manage and control.

How do personal relationships with customers benefit small firms?

They can lead to better customer service and increased customer loyalty.

Why do small firms face limited finance challenges?

The owner mainly depends on personal savings and borrowing, which makes it difficult to expand the size of the business.

What causes the high risk of business failure for small firms?

Intense competition from larger firms.

Why do small business owners often experience a heavy workload?

The owner may have to personally manage multiple business functions, including finance, marketing, and employees.

What leads to a lack of continuity in a small business or sole trader structure?

If the sole trader is absent for a long period, such as due to serious illness or death, the business may struggle to continue.

Why do small firms often have higher unit costs than larger competitors?

They have lower output and cannot benefit fully from economies of scale, making their prices less competitive.

What defines a horizontal merger?

An integration between two or more firms in the same industry/economic sector and at the same stage of production.

What are the market share and profit advantages of a horizontal merger?

Sales combine to create higher market share, and higher profits allow firms to spend on research, development, and investment to raise product quality and economic growth.

How can a horizontal merger lead to lower operational costs?

Duplicate departments, such as finance, may no longer be needed, and economies of scale can be achieved through higher output and lower average costs.

Why might a horizontal merger lead to job losses and reduced morale?

Some resources and employees are duplicated, which leads to redundancies that can lower staff morale and productivity.

What organizational challenge can arise from culture clashes after a merger?

Differences between the two corporate cultures can cause communication and organizational problems.

How can a horizontal merger negatively affect consumers in the market?

Reduced competition gives consumers fewer choices, and firms may become reluctant to innovate, reduce product quality, or charge higher prices.

Why might diseconomies of scale occur following a horizontal merger?

The newly formed firm may become too large to manage efficiently, increasing average costs.