What is a firm?
A firm is a business that brings together the four factors of production (land, labour, capital and enterprise) to produce goods or services. Firms vary greatly in size. Size can be measured by the number of workers employed, the value of output, the capital invested, or the market share held. A small bakery and a national supermarket chain are both firms, but they operate on very different scales.
Remember
- Small firms often survive because they serve local markets, offer personal service, or fill niches large firms ignore.
- Many small firms cannot easily raise finance to grow.
Growth and integration
Firms grow internally (organic growth) by selling more and reinvesting profit, or externally by merging with or taking over another firm. External growth may be horizontal (two firms at the same production stage), vertical (a firm joins with a supplier or a customer), or a conglomerate merger (unrelated businesses).
Economies of scale
As output rises, average cost per unit can fall. These cost savings are economies of scale and include buying inputs in bulk, using specialised machinery, and spreading management costs over more units. If a firm grows too large it may face diseconomies of scale, where poor communication and slow decisions push average cost back up.
Example
A factory that doubles its machinery and workforce but produces more than double the output is enjoying economies of scale, so the cost of making each unit falls.