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Business in the real world 2 (Economies of Scale (Being larger means that…
Business in the real world 2
Sectors
Primary sector
Produces raw materials and natural resources
Resources can be extracted from the ground
Resources can be grown
Resources can be collected
Secondary sector
Manufactures goods, turn the raw materials into goods
Building and construction industries also in this sector
Tertiary sector
Provides services
Some provide services to other businesses
Some provide services to consumers
Financial services like banking are used by businesses and consumers
Characteristics of entrepreneurs
Hardworking - In the beginning they often work alone so they will have to do all the tasks themselves which could involve long hours
Organised - They should be able to keep on top of day to day tasks and be planned for the future
Innovative - They need to come up with new ideas and solutions to problems
Willingness - They should be willing to take a risk as there are lots of unknowns in business
Factors of production
Land
Non renewable resources
Renewable resources
Materials extracted by mining
Water
Animals
Labour
Work done by people in the production process
How valuable people are depends on their education, experience and training
Capital
Equipment, factories and schools that help produce goods or services
Capital has to be made first
Enterprise
Refers to the people who take risks and create things from the other factors
Opportunity cost
Benefit that's given up to do something else
Doing one thing means missing out on the other
Puts a value on the product or business decision in terms of what the business had to give up to make it
Costs
Fixed and variable
Fixed costs don't vary with the output
Variable costs change with the output
Total costs = variable + fixed costs
Average Unit
How much each product costs to make
Average unit cost = total cost/output
Economies of scale causes this to fall as a firm expands
Profit and Revenue
Revenue = Sales x price
Profit = Revenue - costs
Location
Location of raw materials - Closer the materials the less the transport costs
Labour Supply - Being close to an area of high unemployment means low wages, good selection of workers and local colleges may be able to provide training
Competition - Being close to competition could mean that it is easy to find skilled labour, local suppliers are available and customers will know where to go, but you may lose out on sales
Location of the market - Some firms have to pay more to transport their finished product so may move near the consumers, services want to be accessible and global businesses may set up in countries where they have a large market
Cost - Cost of labour varies in countries wages are low in places like China and India, some areas are more expensive to rent or buy, sometimes the government will give grants or tax breaks for those locating in areas of high unemployment
Diseconomies of Scale
Bigger the firm the harder and more expensive it is to manage properly
More people, the harder it is to communicate and decisions take time to reach the whole workforce
Workers at the bottom of the hierarchy can feel insignificant and may get demotivated
Production process can become more complex and difficult to coordinate
Different departments may work on very similar projects without knowing
Economies of Scale
Being larger means that the average unit cost falls
Purchasing economies of scale - Large firm buys supplies in bulk which means lower unit price
Technical economies of scale - Large firm can afford to buy and operate more advanced machinery
Benefits of being big
Law of increased dimensions - A factory that's ten times as big will not be ten times as expensive
Firms can make more profit due to lower average unit cost
Customers can be charged less as the unit costs are lower
Internal Expansion
When a business grows by expending its own activities
It is relatively inexpensive at is less likely to go wrong as the firm is doing what they're good at
It is slow goeth so it's easy to make sure quality doesn't fall and that new staff are well trained
Methods of organic growth
E-commerce
Selling products via the internet
Gives access to a much larger market
Cheaper than setting up and running a new store
Technology has to be updated as problems dissatisfy customers
Opening new stores
Low risk way of increasing sales
Lots of extra costs
Outsourcing
Paying another firm to do a job for them
The firm they outsource might be quicker, cheaper and higher standard
The business may lose control as the other business may not prioritise the work being outsourced to them
Could get a bad reputation if the firm they outsource to has low standards
External expansion
Merger - When two existing firms join
Takeover - Existing firm expands by buying more than half of shares in another firm
Helps grow quicker than internal growth
Less than half of mergers and takeovers are successful
Management styles may differ in the businesses and staff may become unmotivated
Takeovers can leave an air of hostility and make them unpopular
Often lead to cost cutting so tension and uncertainty may be around in workers due to chance of redundancy
Franchising
Where a company expands by giving other firms the right to sell its products or use its trademarks in return for a fee or % of profits
The manufacturers are the franchisors and the people selling them are the franchisees
Some franchises have their own name but instead advertise that they sell the franchisors products
Branded franchises have franchisees buy the right to trade under the name of the franchisor
Increases franchisors income, market share and brand awareness
No risks and costs of running new outlets as franchisee is responsible
If a franchisee has poor standards the franchisor could have a bad reputation
Methods of external expansion
Supplier - A firm may take control of a supplier to control the supply, cost and quality of materials
Competitor - If a firm joins with a competitor then they benefit from economies of scale and a higher market share
Customer - Owning the retail outlets for the products make it easier to sell
Unrelated firm - The firm will diversify into new markets and reduces the risks of relying on few products