Large firms and small firms
Firms come in all sizes. A corner shop with two staff and a national supermarket chain both sell goods, but they work very differently. This lesson is examined on Paper 1 (Microeconomics and Business Economics). You can measure size in several ways, for example by the number of workers, the sales made or the profit earned.
Key terms:
- Growth of a firm: when a firm gets bigger, for example by selling more or by adding more workers and outlets.
- Takeover: when one firm buys another firm and gains control of it.
- Niche market: a small part of a market where customers want a specialised product.
- Entrepreneur: the person who takes the risks and organises a business.
Advantages and disadvantages of large firms
✅ Advantages of being large
- Lower average costs, because large firms gain economies of scale (see the earlier lessons on this).
- Strong finances. Large firms can borrow more easily and afford to spend on research and advertising.
- More market power. A large firm can set prices and win more customers than small rivals.
- Risk is spread across many products or places.
❌ Disadvantages of being large
- Diseconomies of scale can push average costs up if the firm gets too big.
- Poor communication. Messages take a long time to pass through many levels of staff.
- Less personal service. Customers can feel like just a number.
- Slower decisions, so the firm may react slowly to change.
Advantages and disadvantages of small firms
Small firms like this workshop can offer a personal service that big firms struggle to match
✅ Advantages of being small
- Personal service. The owner often knows the customers by name.
- Flexible. The firm can change quickly to meet what customers want.
- Easy communication, because there are few staff.
- Easier to set up, with lower start-up costs.
❌ Disadvantages of being small
- Higher average costs, because there are few economies of scale.
- Difficult to borrow money. Banks see small firms as risky.
- Limited power against large rivals, who can cut prices.
- All the risk sits in one product or one place.
Factors that help firms to grow
Five factors influence the growth of firms. Each one can help growth or hold it back.
📜 Government regulation
Rules can make growth harder. A firm may have to follow safety, pollution or competition laws, which add costs. Fewer rules or tax breaks for growing firms can make growth easier.
🏦 Access to finance
Growing costs money for new machines, shops and staff. A firm that can borrow or sell shares can grow faster. A firm that cannot get money is held back.
📈 Economies of scale
As a firm grows its average costs fall. It can then cut prices, win more customers and grow again.
🎲 Spreading risk
A firm that sells only one product could fail if people stop buying it. Growing into new products or new places means a problem in one area hurts less.
🤝 Taking over competitors
Buying a rival gives the firm its customers and sales at once. The firm also faces one rival fewer.
Governments can limit takeovers. How they do this is covered in the lesson on regulating competition.
Reasons firms stay small
A niche business serves a small market, one reason some firms choose to stay small
Not every firm wants to be big, and some cannot be. There are four reasons.
- Size of the market: if only a few customers live nearby, there are not enough sales to grow. A village hairdresser cannot become huge, because the village is small.
- Nature of the market (niche): some products are wanted by only a few people, such as handmade violins. Mass production is not possible, so the firm stays small.
- Lack of finance: without money to buy equipment or premises, the firm cannot expand.
- Aims of the entrepreneur: some owners do not want growth. They may prefer a quiet life, more time with family or to keep control of the firm. Growth means more stress and more workers to manage.
Worked example
Zafira runs a bike repair stall in a small town. She says she could open a second stall, but she would rather keep her hours short. Which reason for staying small is this? It is the aims of the entrepreneur. If she said the bank refused a loan, it would be lack of finance. If she said too few people in town own bikes, it would be size of the market.
Common mistakes
- Saying large firms are always better. Large firms can suffer from diseconomies of scale.
- Saying small firms stay small only because they fail. Many choose to stay small, or sell to a niche market.
- Giving only a list. Always say why a point matters, for example "it can borrow more easily, so it can afford new shops".
Exam-style question
Marlo Bakes is a small bakery in a seaside town. It sells handmade gluten-free cakes. A large supermarket chain has offered to buy it. The owner, Ines, is not sure. She has been refused a bank loan twice. She buys her flour and butter in small amounts.
(a) Identify two reasons why Marlo Bakes has stayed small. [2 marks]
(b) Explain one advantage to a large firm of taking over a competitor. [2 marks]
(c) Analyse one disadvantage for Marlo Bakes of being a small firm. [4 marks]
Model answer
(a) Lack of finance, because Ines has been refused loans (1). Niche market, because handmade gluten-free cakes are wanted by a small group of customers (1).
(b) It gains the competitor's customers and sales straight away (1), so it grows without building up sales slowly (1).
(c) A small firm has few economies of scale (1), so its average costs are higher (1). Ines buys ingredients in small amounts and so pays more for each one (1). This means she must charge more or earn less profit than a large rival (1).
Exam tip
In part (c), build a chain: the disadvantage, then what it causes, then what it means for the firm. Use the details given in the case.
Recap
- Large firms: lower costs and strong finance, but possible diseconomies of scale and poor communication.
- Small firms: personal service and flexibility, but higher costs and trouble borrowing.
- Growth is helped or held back by regulation, finance, economies of scale, spreading risk and taking over competitors.
- Firms stay small because of the size of the market, a niche market, lack of finance or the aims of the entrepreneur.