Economics Notes Theme 3 Nikhil Patel
THEME 3 NOTES
The Aim of a Firm:
• Increase Market Share
• Make Supernormal Profit
• Increase Sales
• Increase Economies of Scale
Growth of a Firm:
• ORGANIC GROWTH: The growth of a firm driven by increasing the
production scale and gain of market share. Financed by the firm (re-
investment).
• INORGANIC GROWTH: This is the growth of a firm through takeovers
✓ HORIZONTAL INTEGRATION: This is a MERGER of two firms that
perform the same role within an industry. Chosen to increase
economies of scale or market share.
▪ EG: The merger of two mobile networks.
✓ VERTICAL INTEGRATION: This is a merger of two firms that perform
different roles in the supply chain of an industry. It is used to increase
barriers to entry, as new entrants will be limited in suppliers, or have to
pay a start-up cost to use the supplier. May be anti-competitive.
▪ Backward Vertical Integration is merging with the previous
production stage.EG: Ikea buying Baltic forests for raw materials
▪ Forward Vertical Integration is merging with the next stage of
production. EG: Iron mining firms owning steel factories.
Constraints on the Growth of a Firm:
• REGULATION: This is government intervention to prevent the entry or growth
of a firm.
✓ This can be done by eliminating sunk costs, patents, introducing
licenses, codes of practice, or even creating entry barriers by
nationalising monopolies for industries such as rail or lottery.
• TAXATION
• PRICING STRATEGIES: Pricing strategies set by incumbent firms in the
market to force out new or existing entrants.
• TECHNOLOGICAL BARRIERS: Some firms dominate an industry due to
their large economies of scale or their technological advancements.
• BARRIERS ON ACCESS TO RESOURCES
• MINIMUM EFFICIENT SCALE: A firm in the long-run may move past it’s
optimum point of minimum efficient scale, and therefore begin to operate at
diseconomies of scale meaning their costs are increasing as output increases.
Revenue:
• Total Revenue is calculated by price x quantity.
• Average Revenue is the revenue per unit when producing at a certain output.
✓ Calculated by Total Revenue/Output.
THEME 3 NOTES
The Aim of a Firm:
• Increase Market Share
• Make Supernormal Profit
• Increase Sales
• Increase Economies of Scale
Growth of a Firm:
• ORGANIC GROWTH: The growth of a firm driven by increasing the
production scale and gain of market share. Financed by the firm (re-
investment).
• INORGANIC GROWTH: This is the growth of a firm through takeovers
✓ HORIZONTAL INTEGRATION: This is a MERGER of two firms that
perform the same role within an industry. Chosen to increase
economies of scale or market share.
▪ EG: The merger of two mobile networks.
✓ VERTICAL INTEGRATION: This is a merger of two firms that perform
different roles in the supply chain of an industry. It is used to increase
barriers to entry, as new entrants will be limited in suppliers, or have to
pay a start-up cost to use the supplier. May be anti-competitive.
▪ Backward Vertical Integration is merging with the previous
production stage.EG: Ikea buying Baltic forests for raw materials
▪ Forward Vertical Integration is merging with the next stage of
production. EG: Iron mining firms owning steel factories.
Constraints on the Growth of a Firm:
• REGULATION: This is government intervention to prevent the entry or growth
of a firm.
✓ This can be done by eliminating sunk costs, patents, introducing
licenses, codes of practice, or even creating entry barriers by
nationalising monopolies for industries such as rail or lottery.
• TAXATION
• PRICING STRATEGIES: Pricing strategies set by incumbent firms in the
market to force out new or existing entrants.
• TECHNOLOGICAL BARRIERS: Some firms dominate an industry due to
their large economies of scale or their technological advancements.
• BARRIERS ON ACCESS TO RESOURCES
• MINIMUM EFFICIENT SCALE: A firm in the long-run may move past it’s
optimum point of minimum efficient scale, and therefore begin to operate at
diseconomies of scale meaning their costs are increasing as output increases.
Revenue:
• Total Revenue is calculated by price x quantity.
• Average Revenue is the revenue per unit when producing at a certain output.
✓ Calculated by Total Revenue/Output.
