Section A: Key terms and recall
Define the term 'sole proprietorship'. [2 marks]
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A business owned and managed by one person. [2 marks]
What is a partnership? [2 marks]
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A business owned and managed by two or more people. [2 marks]
Explain what a merger is. [2 marks]
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A merger is when two or more businesses combine to form a single new business. [2 marks]
What are economies of scale? [2 marks]
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Economies of scale are the cost advantages that a business can achieve as it grows and increases its scale of production. [2 marks]
Give one example of an economy of scale. [1 mark]
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Bulk buying of raw materials to get a discount. [1 mark]
What are diseconomies of scale? [2 marks]
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Diseconomies of scale are the cost disadvantages that a business can face as it grows too large and becomes less efficient. [2 marks]
Section B: Applying your knowledge
Imagine you are starting a small bakery. What type of firm would it be and why? [2 marks]
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It would be a sole proprietorship because it is owned and managed by one person. [2 marks]
A local café and a nearby bookshop decide to merge. What might be one advantage of this merger? [2 marks]
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One advantage could be increased customer base, as the merged business can attract both café customers and bookshop customers. [2 marks]
A clothing manufacturer increases its production and starts buying fabric in bulk. How might this lead to economies of scale? [2 marks]
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Buying fabric in bulk can lead to a discount from the supplier, reducing the cost of raw materials per unit of clothing produced. [2 marks]
A large factory becomes so big that it faces communication problems between departments. What might be one diseconomy of scale it is experiencing? [2 marks]
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Inefficiency due to poor communication and coordination between departments. [2 marks]
A tech startup is considering merging with a larger company. What might be one potential disadvantage of this merger? [2 marks]
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One potential disadvantage could be loss of independence and control over business decisions. [2 marks]
Section C: Explain and analyse
Explain how a firm might achieve economies of scale through specialisation. [4 marks]
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A firm can achieve economies of scale through specialisation by dividing the production process into smaller tasks and assigning each task to a worker who becomes highly skilled at it. This increases productivity and efficiency, as workers become faster and more accurate at their specific tasks. Additionally, specialised workers may come up with improvements to the production process, further increasing efficiency. [4 marks]
Analyse the potential advantages and disadvantages of a merger between two competing firms in the same industry. [6 marks]
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Advantages of a merger between two competing firms: - Increased market share and reduced competition. - Cost savings through economies of scale and combined resources. - Greater bargaining power with suppliers and customers. - Access to new technologies, products, or markets. Disadvantages of a merger between two competing firms: - Potential loss of key employees or customers due to uncertainty. - Integration challenges, such as differences in company culture or management styles. - Regulatory hurdles or antitrust concerns that may delay or prevent the merger. - Increased debt or financial instability if the merger is not well-managed. [6 marks]
Calculations
| Before | After | |
|---|---|---|
| Fixed Costs (£) | 10,000 | 12,000 |
| Variable Costs (£) | 5,000 | 4,000 |
| Output (units) | 1,000 | 2,000 |
Calculate the average cost per unit before and after the firm achieves economies of scale. Show your workings. [4 marks]
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Average cost per unit before economies of scale = (Fixed Costs + Variable Costs) / Output = (10,000 + 5,000) / 1,000 = £15 per unit [2 marks] Average cost per unit after economies of scale = (Fixed Costs + Variable Costs) / Output = (12,000 + 4,000) / 2,000 = £8 per unit [2 marks]
Challenge
Research and write a short report (around 200 words) on a recent merger that has taken place in your country. Discuss the reasons behind the merger, the potential advantages and disadvantages, and whether you think the merger will be successful in the long term. [6 marks]
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Model answer will vary depending on the specific merger chosen, but should include: - A brief introduction to the merging companies and the industry they operate in. - The reasons behind the merger, such as increased market share, cost savings, or access to new technologies. - The potential advantages of the merger, such as increased efficiency, greater bargaining power, or access to new markets. - The potential disadvantages of the merger, such as integration challenges, regulatory hurdles, or loss of key employees or customers. - A conclusion discussing whether the merger is likely to be successful in the long term, based on the advantages and disadvantages discussed. [6 marks]