Topic 5.3 Big or small?

Chapter 11: Why do businesses grow?

1. State three reasons why businesses may want to grow.
2. What is meant by the term market power?
3. Define the term economies of scale.
4. A business has the following cost information.
Variable costs = 5 per unit
Fixed costs = 500 per month
Production = 100 units per month
Calculate the average cost of production.
5. Using an example, explain the term bulk-buying economies of scale.
6. Using an example, explain the term technical economies of scale.
7. Identify three problems a business might face if it grows too large in size.
8. Identify two possible disadvantages for customers if a business has too much
market power.
9. Explain one way in which a business with a large market share can affect rival
businesses.
10. Large businesses can suffer from diseconomies of scale. Explain one strategy a
business can use to overcome the problem of diseconomies of scale.

Pearson Education Ltd 2009

Edexcel GCSE Business Studies

page 1

Topic 5.3 Big or small?

Suggested answers
1.

Any three from: higher sales and therefore profits; economies of scale; improved chance of
survival; reputation etc.

2.

Market power is a measure of the influence of a business over consumers and suppliers.

3.

Economies of scale are the factors which cause the average or unit cost of producing
something to fall as output rises.

4.

Average costs = Total costs Amount of production

Average costs = 1000 100 = 10 per unit

5.

Bulk-buying economies of scale occur when businesses can gain discounts on large orders
from suppliers, and therefore help to reduce the average cost of producing larger levels of
output. For example, an ice cream producer buys 100 litres of milk per week and is charged
100, which is 1 per litre. However, when output is increased and the producer needs 10,000
litres per week, they negotiate a price of 1,000, which is 10p per litre.

6.

Technical economies of scale occur when reductions in average costs are achieved when
production is increased due to the use of more advanced machinery. For example,
companies which use automated telephone systems to handle calls are able to reduce costs
by not having to employ switchboard operators.

7.

Three possible problems include: poor communication; difficult to co-ordinate the actions of
a large number of workers; lack of motivation by workers (who feel they are a small cog in a
big machine) and so on.

8.

Any two from: ability to charge high prices; poor customer services; little product
development, limited choice and so on.

9.

A business with a large market share may have the ability to attract custom away from
smaller rivals as it is likely to be more well-known. Having a recognised brand name is a big
advantage in improving competitiveness.

10. Diseconomies of scale are factors which cause average costs of production to increase as
output increases. They can occur as communication becomes more difficult and decisions
may be misunderstood by employees. This can lead to inefficiency. One possible solution to
this problem is to improve communication. This can be achieved by introducing ICT systems
such as email or web-conferencing. This will improve the chances that information is passed
on quickly and efficiently and will help to reduce the possibility of misunderstanding and
speed up decision-making.

Pearson Education Ltd 2009

Edexcel GCSE Business Studies

page 2