Business Growth | A-Level Economics Notes

These revision notes cover everything you need to know about Business Growth for A-Level Economics. They're designed for students studying Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

Why do some firms remain small?

Firms may choose to remain small:

1. to avoid diseconomies of scale
2. due to a lack of finance
3. offering a personal service and acting as a local monopoly

What are the four main types of business growth?

The four main types of business growth are:

1. Organic growth
2. Forward and backward vertical integration
3. Horizontal integration
4. Conglomerate integration

What is organic growth?

Organic growth is where a business grows by reinvesting profits or borrowing from banks.

😄 economies of scale

😄 lower costs from debt and interest

😦 diseconomies of scale

😦 firms may have a low market share due to slow growth

What is vertical integration?

Vertical integration is where two businesses in the same industry but different stages of production join together.

One example of vertical integration is the Ford Motor Company owning its own steel mines.

😄 lower costs of production due to greater contol over the supply chain

😄 improving quality due to the re-investment of increased profits

😦 diseconomies of scale

😦 differences in cultures or objectives

What is horizontal integration?

Horizontal integration is where two businesses at the same stage of production in the same industry join together.

One example of horizontal integration is that of Facebook (Meta) and Instagram.

😄 economies of scale

😄 rationalisation e.g. removing staff with duplicate roles

😄 higher market share and higher profits

😦 diseconomies of scale

😦 cultural differences

What is conglomerate integration?

Conglomerate integration is where two businesses in different industries merge.

One example of conglomerate integration is Tata making acquisitions in different sectors.

😄 spreading risk across multiple industries

😄 economies of scale and knowledge sharing

😦 unlikely to benefit from economies of scale

😦 cultural differences and diseconomies of scale

What is a demerger?

A demerger is when a business sells off one or more of the businesses that it owns into a separate company.

What are the reasons for demergers?

The main reasons for demergers:

1. To avoid diseconomies of scale
2. To raise finance
3. Cultural differences

What are the effects of demergers?

Workers

As firms are no longer able to reduce duplicate roles, staff have more job security and productivity can increase.

Firms

1. Firms can raise finance by demerging
2. Less diseconomies of scale

Consumers

Demergers mean that there is increased competition, which can lead to lower prices.

Summary questions

1. Why do some firms remain small?
2. What are the four main types of business growth?
3. Definitions, advantages, disadvantages of
   1. Organic growth
   2. Vertical integration
   3. Horizontal integration
4. What are the main reasons for demergers?
5. What are the effects of demergers on
   1. Workers
   2. Firms
   3. Consumers

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