Do you agree that large rms are always better than small rms?
Justify your answer. (25 marks)
Large rms can experience certain advantages that small rms cannot
achieve thus can be argued to be better; however this may not always
be true as they may also face disadvantages for example from
diseconomies of scale. Furthermore the market is fundamental to
determine if large rms are better than small rms, as perfectly
competitive and monopoly markets varies the advantages and
disadvantages of being a small or large rm.
Large rms tend to bene t more due to several factors from economies
of scale; this means that the rm can bene t from falling average costs
in the long run – however small rms cannot achieve such bene ts.
For example purchasing bene ts whereby large rms are able to bulk
buy raw materials as they are producing on a larger scale thus are
able to receive discounts and therefore reducing production costs. Or
they may experience technical economies whereby investment in more
advanced machinery or larger premises will allow rms to experience
increasing returns to scale where output is greater than input thus
improving productive ef ciency through division of labour and
specialisation resulting again in lower costs. Economies of scale can
be illustrated in diagram 1, whereby when output increases (Q to Q1),
cost decreases (C to C1). Minimum ef cient scale is illustrated at the
constant part of the LRAC labeled QA rms are operating at the
optimum point experiencing constant long run average costs where
economies of scales are exhausted; the rm therefore is operating at
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Justify your answer. (25 marks)
Large rms can experience certain advantages that small rms cannot
achieve thus can be argued to be better; however this may not always
be true as they may also face disadvantages for example from
diseconomies of scale. Furthermore the market is fundamental to
determine if large rms are better than small rms, as perfectly
competitive and monopoly markets varies the advantages and
disadvantages of being a small or large rm.
Large rms tend to bene t more due to several factors from economies
of scale; this means that the rm can bene t from falling average costs
in the long run – however small rms cannot achieve such bene ts.
For example purchasing bene ts whereby large rms are able to bulk
buy raw materials as they are producing on a larger scale thus are
able to receive discounts and therefore reducing production costs. Or
they may experience technical economies whereby investment in more
advanced machinery or larger premises will allow rms to experience
increasing returns to scale where output is greater than input thus
improving productive ef ciency through division of labour and
specialisation resulting again in lower costs. Economies of scale can
be illustrated in diagram 1, whereby when output increases (Q to Q1),
cost decreases (C to C1). Minimum ef cient scale is illustrated at the
constant part of the LRAC labeled QA rms are operating at the
optimum point experiencing constant long run average costs where
economies of scales are exhausted; the rm therefore is operating at
fi fi fifi fi fifi fi fifi fifi fi fi fi fi fi fifi
