Firms: Types, Mergers & Scale
Microeconomic Decision Makers
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).
Common exam question
Small firms against large firms
Question: Explain two advantages of a large firm, discuss whether small firms fail more often or benefit consumers (4–8 marks), or pick a small firm's advantage or drawback (1 mark, multiple choice).
Asked in 3 of the 11 structured papers. In the 4-mark Explain, each advantage earns a mark and its explanation another: economies of scale cutting average cost, easier bank loans, or a well-known brand. Two different economies of scale count as two. A Discuss needs both sides developed: small firms may have higher average costs, harder loans and less retained profit, yet thrive on flexibility, a personal service, a niche and less risk of diseconomies of scale; many small rivals can keep prices low.
Set in 4 of the 13 multiple-choice papers. A small firm gains communication and independence, not lower average cost, and lacks internal economies of scale (external ones depend on the industry). Small firms suit local markets, low entry costs and personal services.