<3.5 FIRMS> 

-Discuss whether consumers benefit from horizontal mergers. [8]-

• A horizontal merger is a merger between two firms at the same stage of production producing the same product (1).

Up to 5 marks for why it might:

• They may enable the firms to take greater advantage of economies of scale (1) example (1) this will reduce average cost of production (1) this may lower prices to consumers (1).

• They may enable the firms to earn more profit (1) which they can spend on research and development (1) increasing innovation (1) raising the quality of the product (1).

Up to 5 marks for why it might not:

• They may result in the firms experiencing diseconomies of scale (1) example (1) this will increase average cost of production (1) this may raise prices to consumers (1).

• The firms may gain greater market share (1) move it closer to monopoly (1) this may result in higher prices (1).

• Using the explanations above explain how your school could grow externally in each case and give at least one advantage this would give them.

• LARGER SCALE means it is now COST EFFECTIVE to utilise LARGER MACHINERY, which MAKES LABOUR MORE PRODUCTIVE, meaning AVERAGE LABOUR COSTS FALL. 

• For example, as a coffee shop expands in size it can upgrade its expresso machine which allows for faster preparation of coffee.

LARGER SCALE means more workers & managers will be employed allowing for GREATER SPECIALISATION which MAKES LABOUR MORE PRODUCTIVE, meaning AVERAGE LABOUR COSTS FALL.

• LARGER SCALE means the firm has MORE FIXED ASSETS that can act as COLLATERAL (SECURITY FOR LOANS), meaning banks view them as LESS RISKY, and therefore offer them LOWER INTEREST RATES, which in turn LOWERS AVERAGE DEBT-SERVICING COSTS.

Using the concept of 'economies of scale' explain how your school managed to lower its average costs after 'doubling' the size of its campus. (Use the 4x economies of scale mentioned above with examples)

• The LARGER the SCALE of a business the WIDER the SPAN OF CONTROL & the LONGER the CHAIN OF COMMAND which inevitably leads to a higher amount of DELEGATION which can INCREASE THE POTENTIAL FOR MISMANAGEMENT

• These issues could easily result in costly errors that would result in HIGHER AVERAGE COSTS.

• The LARGER the SCALE of a business the LARGER the NEED FOR COMMUNICATION required to coordinate its operations, hence the POTENTIAL for MISCOMMUNICATION ISSUES GROWS.

• This can be especially problematic for MULTINATIONAL COMPANIES that have to deal with DIFFERENT TIMEZONES, CULTURES, and LANGUAGES.

• These issues could easily result in costly errors that would result in HIGHER AVERAGE COSTS.

• The LARGER the SCALE of a business the MORE ISOLATED and UNIMPORTANT the WORKERS MAY FEEL which can affect their productivity, which in turn RAISES AVERAGE COSTS.

Continuing our example, use the concept of 'diseconomies of scale' to explain how your school suffered rising average costs after trebling the size of its campus. (Use the 3x diseconomies of scale mentioned above with examples)

• Analyse how an increase in the size of farms may affect the cost of producing food. 6

• Analyse how an increase in the size of a firm can increase its profit. 6

• Define ‘horizontal integration’. 2

• Analyse three advantages of small firms. 6

• Discuss whether the average cost of production always decreases when a firm increases the total output that it produces. 8

• Analyse two internal diseconomies of scale that a large firm may experience. 6

• Discuss whether consumers benefit from horizontal mergers. 8

• Identify who owns a public corporation and who owns a public limited company. 2

• Discuss whether a merger between two large firms in the same industry will increase the price of the product. 8

• Discuss the advantages and disadvantages of small firms. 8

• Discuss whether larger firms or smaller firms may benefit consumers more 8

• Define the ‘secondary sector’ and give an example. 2

• Analyse why demand for a product may become more elastic over time. 6

• Define ‘conglomerate integration’ 2

• Explained two influences on the size of firms.  4

• Define a state-owned enterprise. 2

• Explain, giving examples, the difference between vertical integration and horizontal integration. 4

• Define economies of scale.  2

• Discuss whether people would prefer to buy a product from a small firm or a large firm.  8

• Analyze the economies of scale from which a farm may benefit. 6

• Discuss whether or not a merger might make it easier for a firm to achieve its goals. 8

• What is the difference between the private sector and the public sector? 2

• Discuss whether or not small firms are likely to survive in the long run. 8

• Discuss whether or not a firm that produces a wide range of products can take advantage of economies of scale. 8