Ib 1.7 - Growth and Evolution
Review Questions 1.7 1. Outline four ways in which the size of a market can be measured.
Growth of a business refers to the expansion in size of its operations and this can be measured in several ways, including: * The value of the firm’s sales turnover (also known as the sales revenue) * The firm’s market share, i.e. the sales revenue of the business as a percentage of the industry’s sales * The value of the firm’s capital employed * The number of employees hired by the business 2. Why do businesses seek to grow in size? * To reap the benefits of larger scale production (This is known as economies of scale) * To gain a larger market share in order to gain better market standing and market power. This may allow the business to charge higher prices to its customers yet gain more profit at the same time * As a means of survival against rivals in the industry. Competitors are likely to aim for growth, so businesses may need to run faster to stay still, i.e. aim to grow in order to compete with their growing competitors * To spread risks by diversifying into new markets and industries. This helps to spread the risk of only focusing on a specific market. If there are detrimental changes in a particular market, then having operations in other different markets may help to safeguard the survival of the business 3. Using examples, explain the meaning of ‘economies of scale’.
One major reason why businesses aim to grow is so that they can benefit from economies of scale. Economies of scale refer to the lower average costs of production as a firm operates on a larger scale due to an improvement in productive efficiency. Economies of scale can help a business to gain a competitive cost advantage over smaller rivals because lower average costs can mean a combination of lower prices being charged to customers and higher profit margin being made on each unit sold.
Economies of scale fall into two main categories. Those that are
Growth of a business refers to the expansion in size of its operations and this can be measured in several ways, including: * The value of the firm’s sales turnover (also known as the sales revenue) * The firm’s market share, i.e. the sales revenue of the business as a percentage of the industry’s sales * The value of the firm’s capital employed * The number of employees hired by the business 2. Why do businesses seek to grow in size? * To reap the benefits of larger scale production (This is known as economies of scale) * To gain a larger market share in order to gain better market standing and market power. This may allow the business to charge higher prices to its customers yet gain more profit at the same time * As a means of survival against rivals in the industry. Competitors are likely to aim for growth, so businesses may need to run faster to stay still, i.e. aim to grow in order to compete with their growing competitors * To spread risks by diversifying into new markets and industries. This helps to spread the risk of only focusing on a specific market. If there are detrimental changes in a particular market, then having operations in other different markets may help to safeguard the survival of the business 3. Using examples, explain the meaning of ‘economies of scale’.
One major reason why businesses aim to grow is so that they can benefit from economies of scale. Economies of scale refer to the lower average costs of production as a firm operates on a larger scale due to an improvement in productive efficiency. Economies of scale can help a business to gain a competitive cost advantage over smaller rivals because lower average costs can mean a combination of lower prices being charged to customers and higher profit margin being made on each unit sold.
Economies of scale fall into two main categories. Those that are