3.5 Firms

Monetary policy has changed in Ethiopia in recent years. The country\'s central bank now uses changes in the interest rate rather than controls on bank lending. It has also moved from operating a fixed exchange rate to a floating exchange rate. The Ethiopian Government uses a range of supply-side policy measures. The government has privatised some sugar processing firms, but most large firms are still state-owned.

c) Analyse how state-owned firms may benefit a country\'s population.

In the first half of 2022, Guyana's GDP grew by 36.4%. Most of this growth was due to higher output in the primary sector. The government used some of the tax revenue generated from this growth to fund long-run development projects such as infrastructure and education. However, in the short run, there was a rise in house prices.

a) Identify two examples of primary sector industries. [2]

Estonia's factor of production are employed in a range of industries including education. In 2022, the country experienced a shortage of teachers. The government increases teachers' wages to attract workers from other industries. Two of Estonia's other industries are building and clothing. Estonia's clothing industry has firms of different sizes. Estonia's firms were affected in 2022 by the government increasing the money supply.

c) Analyse how a small firm can compete successfully with a large firm in the same industry. [6]

In 2020, wages paid to Mexican workers, including those in the primary sector, fell. This fall contributed to a 9% rise in poverty in the country. In the same year, many small and medium-sized firms closed down. The country also suffered from traffic congestion. Its capital, Mexico City, is the world's most congested city.

a) Identify two possible opportunity costs of producing primary sector products. [2]

Since 2016, South Korea's population has declined, due to a falling birth rate, and a high proportion of its population is now aged over 64. The South Korean government has used tax revenue to give cash incentives to couples to have more children. However, many parents have chosen to have fewer children and spend more on each child to ensure they get a good education. South Korea now has fewer but larger schools.

c) Analyse the economies of scale a school may gain from an increase in its size. [6]

Some firms in Monaco have experienced external growth. Firms in Monaco pay high wages. Workers in Monaco benefit from fiscal policy which contributes to high employment. Their government does impose VAT on food, including fruit. Some economists have suggested that instead of taxing fruit, governments should provide free fruit to consumers.

a) Define external growth of firms. [2]

A third of the world's ski resorts are located in the Alps. Prices for holidays in the Alps are relatively higher than in other regions. The recent pandemic, however, reduced the revenues of many large and small firms in the tourism industry in the winter season of 2020/2021. Many blamed strict government regulations for this. However, government intervention also helped many firms to survive.

b) Explain two advantages of a large firm. [4]

In 2020, some firms in Suriname, a South American country, stopped production. This was because the firms could not cover their variable costs, as well as some of their fixed costs. The reduction in the country's output resulted in a rise in its unemployment rate. The government used supply-side policy measures to reduce unemployment. In 2021, the number of firms in some markets fell again, but this time it was when output was rising.

d) Discuss whether or not having fewer firms in a market will benefit consumers. [8]

In 2020, the largest Thai commercial bank merged with a smaller commercial Thai bank. It was expected that the merger would affect the price charged for bank services and the amount that would be lent. Thai commercial banks operate in the private sector. A growing private sector can move an economy towards a market economic system.

b) Explain two reasons why a merger may result in higher prices for consumers. [4]

In Greece, rich households spend more than the average household. The amount of spending in an economy influences whether its production point is on or inside its production possibility curve (PPC). In 2020, household spending in Greece fell. This affected some firms' plans to merge. It also increased unemployment. More than half of those unemployed in Greece had been unemployed for more than a year.

d) Discuss whether or not a government should encourage firms to merge. [8]

The number of Chinese restaurants in the UK fell by approximately 7% in 2020 compared to the year before. Reasons for this include falling demand for Chinese food and increasing competition from other types of food. Some small firms selling Chinese food are also unwilling to invest in the latest technology because of the possible opportunity costs.

a) Identify two challenges facing small firms. [2]

Medan is the third largest city in Indonesia by population. It is sometimes known as the city of a million shop-houses as many people start small firms at the street level of their homes. This has led to an increase in the market supply of industries such as cafes and clothes shops. Also, due to the growth in demand for food delivery, the unemployment rate has fallen. However, mobility of labour is limited both within Medan and within Indonesia.

c) Analyse the reasons for the existence of small firms. [6]

Some firms have social welfare as their main objective. Globally, the number of this type of firm is increasing. Consumers are also starting to change their spending patterns by moving towards environmentally friendly products such as solar energy. Environmentally unfriendly firms are less able to make profits and some of these firms must merge to survive.

b) Explain two types of merger. [4]

d) Discuss whether or not a merger can help a firm survive. [8]

New Zealand is a small country with a population of 5 million. Most New Zealand firms are relatively small and most do not experience diseconomies of scale. In 1894, New Zealand was the first country to introduce a national minimum wage. New Zealand experienced a rise in income per head every year between 2010 and 2019. During this period, 6% of New Zealand's households experienced absolute poverty.

a) Define diseconomies of scale. [2]

The money supply in Bangladesh increased every year from 2010 to 2018. Changes in the money supply and the foreign exchange rate can affect a government's macroeconomic policy aims, including full employment. There have been few mergers between commercial banks in Bangladesh, although its banks are larger than many of its other firms.

d) Discuss whether or not it is an advantage to keep a firm small. [8]

Mali is a low income and low productivity country in Africa. Its government is using fiscal policy to reduce poverty. The country's main industries are agriculture and gold mining. In recent years, however, there have been some changes in its resource allocation. The country is developing its iron ore industry. Globally, the iron ore industry is one which has experienced a significant number of mergers in recent years.

d) Discuss whether or not mergers benefit an economy. [8]

Business-friendly fiscal policy in the United States (US) has encouraged firms to produce more. The US government has also encouraged mergers, including firms in the gas and electricity industries. Even though there are significant regulations, entrepreneurs have found that mergers enable them to maximise their profits. However, this may make markets less competitive and some states have imposed a maximum price for gas and electricity.

b) Explain two types of mergers. [4]

In 2017, the Brazilian paper industry was booming. Its total revenue increased and it employed both more, and better quality, factors of production. Brazil's largest paper producer merged with an Indonesian paper-producing firm at the end of 2017. The performance of Brazil's coffee industry differed from its paper industry. Brazilian coffee experienced a fall in demand and a fall in total revenue.

c) Analyse the possible effects on consumers of a merger between two paper-producing firms. [6]

Farms in the USA are getting larger. One dairy farm in the state of Indiana has over 38000 cows. Farms in the USA compete with farms in both developed and developing countries. The value of the farms' exports of milk appears in the trade in goods section of the current account of the USA's balance of payments.

c) Analyse the economies of scale from which a farm may benefit. [6]

Swaziland is a small African country where six in ten people live in poverty and most firms are small and use little capital equipment. In October 2015 it opened a new airport. Some economists suggest that the building of the airport involved a high opportunity cost and caused a range of external costs. The building of the airport is part of the government's plan to turn the country from a developing into a developed country.

d) Discuss whether people would prefer to buy a product from a small firm or a large firm. [8]

South Africa has more than 700 state-owned enterprises, a number of which have engaged in vertical integration and horizontal integration. Some of the state-owned enterprises are monopolies, including a railway monopoly. A leading South African economist has argued that more of the country's resources should be devoted to building and operating new railway lines and stations.

b) Explain the difference between vertical integration and horizontal integration. Give an example of each. [4]