Competitive Markets: Small Firms & Large Firms (Edexcel IGCSE Economics)
Exam board Pearson Edexcel · IGCSEUpdated 2024-06-06
Measuring the Size of Firms
Spec point —
1.2.4c
- When considering the size of firms, several metrics are useful for comparison and analysis
- The number of employees: In 2021, Toyota had 366,000 employees whereas Hyundai had 75,000
- The percentage of market share in an industry: During the 1st quarter of 2022, Samsung had 23% of the global market share for smart phones
- The size of profits: in 2021, Apple made the highest level of profits for any firm, $58.4bn
- Market capitalisation: The market value of a company calculated by multiplying the number of shares issued by the share price e.g. if a firm issues 5 million shares which trade at £20 each, market capitalisation is 5 x £20 = £100 m
Evaluation of Large & Small Firms
Spec point —
1.2.4b
Evaluating Small and Large Firms
- Generally, small firms have fewer than 50 employees, medium firms have between 50 and 500 and large firms have more than 500 employees
- Some firms choose to maintain a small-scale, focusing on niche markets, personalised services, and close customer relationships
- Other firms aim to increase market share, achieve economies of scale and increase profits
An Evaluation of Small Firms
| Advantages | Disadvantages |
|---|---|
| - Small firms often provide highly customised goods and services, e.g. pet grooming in the customer's home - They often create personal relationships with customers, which helps generate customer loyalty and word-of-mouth advertising - They often provide unique products which are sold in small quantities at high prices; this can be very profitable - Smaller firms can respond quickly to changing market conditions | - Small firms are more susceptible to changes in the wider economy, especially during recessions - Fewer financial resources are available to them, including access to larger bank loans - some smaller firms are unable to access any loans at all - It is harder to recruit and retain staff as the wage & non-wage benefits are less competitive than those offered by larger firms - Owners may struggle to take a holiday/sick leave as revenue slows/stops when they stop working - Small firms struggle to generate economies of scale as the volume of output is significantly lower than that of larger firms, resulting in lower profit margins* |
An Evaluation of Large Firms
| Advantages | Disadvantages |
|---|---|
| - Increased economies of scale from increased output reduces cost per unit of output. This increases profit - Lower Prices Firms may pass on their cost savings (due to economies of scale) in the form of lower product prices - Large firms may earn greater profits and can use this to invest in research & development to innovative or improve the quality goods and services | - When a company grows too large, it may experience diseconomies of scale. It may face challenges in coordinating its various departments, managing its workforce, or maintaining quality control - Rapid growth may result in miscommunication. This may result in delays, errors, missed opportunities and impact on employee morale - A firm can take on more business than it can handle - E.g. A company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers |
Reasons Why Firms Grow
Spec point —
1.2.4c
- Many firms start small and grow into large companies or even multi-national corporations (Amazon started in a garage)
- Two firms can combine into a single business entity to form a merger which creates rapid growth
Reasons Why Firms Grow
| Reason | Explanation |
|---|---|
| Access to finance | - Larger firms often earn large profits. This improves the reputation of the company amongst its shareholders or banks - It can make it easier for the firm to access greater finance |
| Economies of scale | - Larger firms can take advantage of economies of scale to lower their average costs - With lower costs, firms can leave price levels the same and enjoy higher profits, or they can lower prices and pass on the cost benefits to their customers - Some industries have economies of scale that mean only one firm can operate efficiently - a natural monopoly |
| Desire to spread risk | - Growth provides opportunities for product diversification - Firms are able to increase the number of products that it offer and this reduces risk - if one product fails others may well still be successful |
| Take over competitors | - Firms merge or acquire their competitors as they desire stronger market power and fewer competitors - The Walt Disney Company and 21st Century Fox merged in 2018 to gain a higher market value and share (the new company achieved a market share greater than 90%) |
Reasons Firms Stay Small
Spec point —
1.2.4d
While many firms grow, some stay small or intentionally choose to remain small. They do this for the following reasons:
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Nature of the market : Small firms are often able to offer a more personalised service and focus on building relationships with their customers
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Size of market: They can provide innovative goods or services to a small section of a niche market
- E.g. custom-built bicycles for competitive cyclists is a smaller market but can be very profitable
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Aims of the entrepreneur: The owner's goal is not always profit maximisation but rather an acceptable quality of life or satisficing
- Making just enough profit to keep the owner/shareholders happy
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Lack of finance: They may be unable to access finance for expansion. They remain small to keep cost low
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Less managerial problems: A smaller firm will have fewer workers and easier lines of communication with employees
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Avoid rapid growth and diseconomies of scale which cause costs to rise
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Avoid investigation by Government
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Legislation and regulation can prevent firms from growing too large if deemed to be anti-competitive behaviour
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Merger activity is monitored to prevent a single firm gaining more than significant market share
- E.g. in July 2022 the CMA launched an investigation into the merger of two companies which produce foam used in bedding & cleaning products as they believed it would lead to higher prices & less choice
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