Small Firms (Cambridge International IGCSE Economics)
Reasons Why Small Firms Exist
Spec point —
3.5.2· The advantages and disadvantages of small firms, the challenges facing small firms and reasons for their existence.
- In 2015, 98.7% of firms in the European Union were considered to be small firms with less than 49 employees
- Some firms start small and will grow into large companies or even multi-national corporations (Amazon started in a garage)
- While many firms grow, others do not or they intentionally choose to remain small
Reasons Why Small Firms Exist
| Personalised service | Loans | Niche Market |
|---|---|---|
| - They offer a more personalised service and focus on building relationships with their customers | - Small firms are often unable to access finance for expansion | - They provide a product that is in a niche market - smaller market size but can be very profitable |
| Mass markets | Diseconomies of scale | The firms' objective |
| - Many small firms operate in mass markets with low barriers to entry | - Rapid growth can cause diseconomies of scale which can be difficult to deal with and so many owners choose to avoid these | - Owners goal is not profit maximisation but rather an acceptable quality of life (satisficing) |
Advantages and Disadvantages of Small Firms
Spec point —
3.5.2· The advantages and disadvantages of small firms, the challenges facing small firms and reasons for their existence.
Small Firms Experience Both Advantages and Disadvantages When Compared With Large Firms
| Advantages | Disadvantages |
|---|---|
| - They often provide highly customised goods/services e.g. pet grooming in the customer's home - They often create personal relationships with their customers which helps to generate customer loyalty and word-of-mouth advertising - They often provide very 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 | - More susceptible to changes in the wider economy than large firms, especially during recessions - Less financial resources 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/retain staff as the wage and non-wage benefits are less competitive than those offered by bigger firms - Owners may struggle to take a holiday/sick leave as revenue slows/stops coming in 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 |
Exam Hint Students are often examined in the Paper 2 structured questions on the reasons for differences in the size of firms. The question often takes the form of 'Analyse the main reasons for differences in the size of firms.'
While this sub-topic explains the reasons for the existence of small firms, large firms are usually driven by the profit maximisation objective which results in them exploring every opportunity available for growth. How firms grow, is covered in the next sub-topic and elements of that page can be included in answering this question.
Was this revision note helpful?
Build on this topic