Firms: Types, Mergers & Scale
Microeconomic Decision Makers · 3 question types
Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 5% of your exam marks.
New emphasis in the 2027 syllabus; types of firms, the definitions of horizontal, vertical and conglomerate mergers, and economies/diseconomies of scale are examined directly. Guidance based on specimen materials.
Some firms stay small, others grow large, and each has advantages and disadvantages.
| Advantages | Disadvantages | |
|---|---|---|
| Small firms | Flexible and quick to respond to changing tastes; can offer personal service; can serve niche markets too small for big firms; owner keeps full control | High average costs (cannot exploit economies of scale); harder to raise finance (less likely to get a loan from commercial banks, less retained profit); vulnerable to competition |
| Large firms | Lower average costs through economies of scale; easier access to finance and bulk-buying discounts; strong brand and market power; can spread risk across products | Risk of diseconomies of scale; harder to manage and coordinate; can be slow and bureaucratic; may lose the personal touch |
Many firms remain small by choice (the owner wants a manageable workload and full control) or because the market is small (a niche product, a personal service, low barriers to entry that keep many small rivals in the market).
Discuss whether a firm should stay small (8 marks)
What comes up: A "discuss whether or not small firms can survive / should grow" question (8 marks), or "analyse why some firms remain small" (6 marks).
Write — why a small firm may struggle / should grow: it may have high average costs, be unable to take advantage of economies of scale, be less likely to get a loan from a commercial bank, and have less retained profit to invest.
Write — why a small firm may do well / stay small: it is less likely to experience diseconomies of scale, can give a personal service, can serve a niche market, and stays flexible and easy to control.
Watch out: Two-sided "discuss" questions need a judgement at the end. Decide, for example, that survival depends on whether the firm operates in a niche where large rivals have no cost advantage.