A LEVEL ECONOMICS
NOTES
Evaluate the reasons why some firms tend to remain small
Point 1: Lack of access to finance
Small firms are unable to get large loans from the bank and are charged with very higher interest
payments on these small loans=
This is because they are deemed more risky borrowers due to the lack of collateral and low
revenues=
As a result, small firms are unable to exploit financial economies of scale=
This makes borrowing more expensive and thus the rate of return on their investments are much
lower so small firms may not want to invest=
This leads to low levels of investments by small firms and so they cannot afford to increase the capital
stock within their firm=
As a result, they have to rely on high costing labour instead of capital machinery which may be more
productively efficient=
Therefore, they have higher unit labour costs and as a result they have lower long-run productivity so
their long-run average costs are high=
NOTES
Evaluate the reasons why some firms tend to remain small
Point 1: Lack of access to finance
Small firms are unable to get large loans from the bank and are charged with very higher interest
payments on these small loans=
This is because they are deemed more risky borrowers due to the lack of collateral and low
revenues=
As a result, small firms are unable to exploit financial economies of scale=
This makes borrowing more expensive and thus the rate of return on their investments are much
lower so small firms may not want to invest=
This leads to low levels of investments by small firms and so they cannot afford to increase the capital
stock within their firm=
As a result, they have to rely on high costing labour instead of capital machinery which may be more
productively efficient=
Therefore, they have higher unit labour costs and as a result they have lower long-run productivity so
their long-run average costs are high=
