Hi! I did IAL economics and received an A*, and I basically entrely
studied of model answers I made for every possible queston from
each secton of the syllabus, based on past papers and my own
thought up questons
These consist of defnitons, several points, evaluatons in blue) and
real world examples in red), although generally just 3 main points
and 2 strong evaluatons could do it.
these notes are based on 2. size of businesses of 3.3.1 in the IAL
syllabus and cover:
• organic growth
• merger/takeover forward and backward vertcal integratonn
horizontal
• integraton and conglomerate integraton).
• Constraints on business growth, including size of market, access
to fnances, owner objectves.
• Why some frms tend to remain small and others grow.
• Reasons for demergers.
, GROWTH
WHY FIRMS GROW(WHY NOT REMAIN SMALL)
Definition: Growth: expansion of business, either internal or external
ECONOMIES OF SCALE: -Financial EOS: as the firm grows they can obtain
larger loans for lower interest rates as they are owner risk borrowers with
more collateral to offer
-Purchasing EOS: A larger firm buys in bulk so receives discounts. Also, the firm
may acquire greater monopsony power and canthus demand a reduction in the price
of their supplies.
-Managerial EOS: Hiring specialist managers is more worthwhile due to larger output
so productivity and efficiency of workers may increase as they improve production
and marketing processes.
• MARKET POWER: As a firm grows their market size increases, and so market
power increases, giving them increased pricing/monopoly power.
-the market power may enable them to dictate terms to their suppliers and retailers,
thus reducing their cost of production and increasing profits
-In the long run market power can be used as a barrier to entry of new businesses,
to prevent competition and maintain market position.
• RISK DIVERSIFICATION: Firms that grow through conglomerate integration or
firms growing by entering new markets and developing new products spread risks,
making their firm more stable as losses made in one market can be made up for
through revenue and profits made in other markets.
Eg: Samsung- produces electronics, military hardware, apartments and ships. So
their survival is not dependant on a sole industry.
• BENEFITS OF SYNERGIES: if a firm grows by merging the new firm may be more
efficient than the sum of the individual firms as experts, Research & Development
teams, technology of both firms are combined, so they are able to learn from each
other and fill gaps in research and technology
Eg: Proctor and Gamble acquired Gillette in 2005 due to identified synergy
opportunities
Evaluation(benefits of remaining small)
I. DISECONOMIES OF SCALE: As a firm grows it may move beyond its minimum
efficiency scale, causing average costs to rise as certain aspects of production
become inefficient.
- the firm may become too bureaucratic with too many resources used up in
administration
- decision making becomes too slow with long communication channels and too
many managers
-becomes difficult to control and coordinate as horizontal and vertical
communication increases, so management and administration costs increase and
there is greater need for supervision.
studied of model answers I made for every possible queston from
each secton of the syllabus, based on past papers and my own
thought up questons
These consist of defnitons, several points, evaluatons in blue) and
real world examples in red), although generally just 3 main points
and 2 strong evaluatons could do it.
these notes are based on 2. size of businesses of 3.3.1 in the IAL
syllabus and cover:
• organic growth
• merger/takeover forward and backward vertcal integratonn
horizontal
• integraton and conglomerate integraton).
• Constraints on business growth, including size of market, access
to fnances, owner objectves.
• Why some frms tend to remain small and others grow.
• Reasons for demergers.
, GROWTH
WHY FIRMS GROW(WHY NOT REMAIN SMALL)
Definition: Growth: expansion of business, either internal or external
ECONOMIES OF SCALE: -Financial EOS: as the firm grows they can obtain
larger loans for lower interest rates as they are owner risk borrowers with
more collateral to offer
-Purchasing EOS: A larger firm buys in bulk so receives discounts. Also, the firm
may acquire greater monopsony power and canthus demand a reduction in the price
of their supplies.
-Managerial EOS: Hiring specialist managers is more worthwhile due to larger output
so productivity and efficiency of workers may increase as they improve production
and marketing processes.
• MARKET POWER: As a firm grows their market size increases, and so market
power increases, giving them increased pricing/monopoly power.
-the market power may enable them to dictate terms to their suppliers and retailers,
thus reducing their cost of production and increasing profits
-In the long run market power can be used as a barrier to entry of new businesses,
to prevent competition and maintain market position.
• RISK DIVERSIFICATION: Firms that grow through conglomerate integration or
firms growing by entering new markets and developing new products spread risks,
making their firm more stable as losses made in one market can be made up for
through revenue and profits made in other markets.
Eg: Samsung- produces electronics, military hardware, apartments and ships. So
their survival is not dependant on a sole industry.
• BENEFITS OF SYNERGIES: if a firm grows by merging the new firm may be more
efficient than the sum of the individual firms as experts, Research & Development
teams, technology of both firms are combined, so they are able to learn from each
other and fill gaps in research and technology
Eg: Proctor and Gamble acquired Gillette in 2005 due to identified synergy
opportunities
Evaluation(benefits of remaining small)
I. DISECONOMIES OF SCALE: As a firm grows it may move beyond its minimum
efficiency scale, causing average costs to rise as certain aspects of production
become inefficient.
- the firm may become too bureaucratic with too many resources used up in
administration
- decision making becomes too slow with long communication channels and too
many managers
-becomes difficult to control and coordinate as horizontal and vertical
communication increases, so management and administration costs increase and
there is greater need for supervision.
