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•FIRMS
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Primary Sector
• The primary sector, also known as the agricultural
sector, is the economic sector that involves the
extraction or cultivation of raw materials directly from
the natural environment.
• This sector is the foundation of all other economic
activities, as it provides the basic raw materials that are
used to produce goods in the manufacturing sector and
resources for various services.
• The primary sector encompasses activities such as
agriculture, mining, and extraction of natural resources.
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Secondary Sector
• The secondary sector, also known as the industrial
sector or manufacturing sector, is a segment of the
economy that involves the transformation of raw
materials obtained from the primary sector into finished
goods.
• This sector plays a crucial role in adding value to raw
materials by processing, manufacturing, and
assembling them into products that are ready for use or
further distribution.
• The secondary sector is characterized by activities such
as manufacturing, construction, and utilities.
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Tertiary Sector
• The tertiary sector, also known as the service sector, is
a category of the economy that provides services to
businesses and consumers.
• The tertiary sector is primarily focused on services.
• Example – Retail, healthcare and tourism
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Quaternary sector
• It refers to the knowledge-based part of the economy. It
involves economic activities that focus on information
management, innovation, and the generation of
knowledge.
• The quaternary sector is sometimes also referred to as
the "knowledge sector" or the "intellectual services
sector
• It covers those service industries which are involved
with the collection, processing, transmission of
information
• Examples – Research and development and Information
technology
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Discuss

•Size of firms?
•Big or small?
•Depends on what
factors?
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Answer
• Age of the firms
• Availability of financial capital
• Types of business organisation
• Internal economies and diseconomies of scale
• Size of the market
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Why small firms?
• Number of reasons-
• Small size of the market
• Preference of consumers
• Owner’s preference
• Flexibility
• Technical factors
• Lack of financial capital
• Location
• Cooperation between small firm
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• Specialisation
• Government Support
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Firms can grow in 2 ways

1- Internal growth
2- External growth
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Internal growth
• This is also sometimes referred to as natural or organic growth. It
involves a firm increasing the market for its current products or
diversifying into other products.
• This type of growth may occur through increasing the size of existing
plants or by opening new ones.
• For example, McDonald’s, the US fast food chain, has grown to a large
size by opening more and more outlets throughout the world.
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External growth

•An increase in the size of a firm resulting

from it merging or taking over another
firm.
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Horizontal Merger
• A horizontal merger occurs when two companies
operating in the same industry and producing similar
goods or services combine their operations.
• Instead of expanding into new markets or diversifying
their product lines, these companies merge to achieve
economies of scale, increase market share, reduce
competition, and potentially improve efficiency.
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Vertical Merger
• A vertical merger occurs when a firm merges with another firm
involved with the production of the same product, but at a different
stage of production.

• It can take the form of vertical merger backwards or vertical merger

forwards
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Conglomerate merger
A conglomerate merger occurs when two companies
operating in completely unrelated industries merge
together to form a single entity.
These mergers are often pursued for diversification
purposes, allowing the merged entity to spread its risks
across different sectors of the economy and potentially
capitalize on synergies such as shared resources,
technology, or managerial expertise.
Conglomerate mergers can also provide opportunities for
companies to enter new markets and expand their
product offerings.
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Rationalisation
• Rationalisation refers to the process of restructuring or reorganizing a
business or its operations to improve efficiency, streamline processes,
and reduce costs.
• It typically involves eliminating redundancies, optimizing workflows,
and reallocating resources to focus on core activities or strategic
objectives.
• Rationalisation can include downsizing staff, consolidating facilities,
outsourcing non-core functions, or adopting new technologies to
enhance productivity. The goal of rationalization is to make the
organization more competitive, agile, and responsive to changes in the
market environment.
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Internal Economies of Scale
• Internal economies of scale refer to the cost advantages that a firm
experiences as it grows in size and expands its operations. These
advantages arise from factors such as increased specialization,
efficient use of resources, and the spreading of fixed costs over a
larger output.
• In brief, internal economies of scale allow a firm to produce goods or
services at a lower average cost as it increases its scale of production.
This can result in higher profits and competitive advantages for the
firm in the long run.
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•Types of internal
economies of scale
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Buying economies.
• These are probably the best known type. Large firms that buy raw
materials in bulk and place large orders for capital equipment usually
receive a discount. This means that they pay less for each item
purchased.

• They may also receive better treatment than small firms in terms of
quality of the raw materials and capital equipment sold and the speed
of delivery. This is because the suppliers will be anxious to keep such
large customers.
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Selling economies
• The total cost of processing orders, packing the goods and transporting
them does not rise in line with the number of orders. For instance, it
costs less than twice as much to send 10 000 washing machines to
customers than it does to send 5000 washing machines. A lorry that can
transport 40 washing machines does not cost four times as much to
operate as four vans which can carry 10 washing machines each. A large
volume of output can also reduce advertising costs.
• The total cost of an advertising campaign can be spread over more units
and, again, discounts may be secured. A whole-page advertisement in a
newspaper or magazine is usually less than twice the cost of a half-page
advertisement. Together, buying and selling economies of scale are
sometimes referred to as marketing economies
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Managerial Economies
• Large firms can afford to employ specialist staff in key posts as they
can spread their pay over a high number of units. Employing specialist
buyers, accountants, human resource managers and designers can
increase the firm’s efficiency, reduce costs of production, and raise
demand and revenue
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Labour Economies
• Large firms can engage in division of labour among their other staff.
For example, car workers specialise in a particular aspect of the
production process.
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Financial Economies of Scale
• Large firms usually find it easier and cheaper to raise finance. Banks
tend to be more willing to lend to large firms because such firms are
well-known and have valuable assets to offer as collateral.
• Banks often charge large borrowers less, per $ borrowed, in order to
attract them and because they know that the administrative costs of
operating and processing large loans are not significantly higher than
the costs of dealing with small loans.
• Large firms can also raise finance through selling shares, which is not an
available option for sole traders and partnerships. Public limited
companies can sell to the general public. The larger and better known
the companies are, the more willing people are to buy their shares
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Technical Economies of Scale
• The larger the output of a firm, the more viable it becomes to use
large, technologically advanced machinery. Such machinery is likely to
be efficient, producing output at a lower average cost than small firms
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Research and Development purpose only

Economies
• A large firm can have a research and development department, since
running such a department can reduce average costs by developing
more efficient methods of production and raise total revenue by
developing new products.
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Risk Bearing Economies
• Larger firms usually produce a range of products. This enables them
to spread the risks of trading. If the profitability of one of the
products it produces falls, it can shift its resources to the production
of more profitable products
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•INTERNAL
DISCECONOMIES OF
SCALE
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Difficulties controlling the firm
• It can be hard for those managing a large firm to supervise everything
that is happening in the business. Management becomes more
complex.
• A number of layers of management may be needed and there may be
a need for more meetings.
• This can increase administrative costs and make the firm slower in
responding to changes in market conditions.
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Communication problems
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Poor industrial relations
• Large firms may be at a greater risk from a lack of motivation of
workers, strikes and other industrial action.
• This is because workers may have less sense of belonging, longer time
may be required to solve problems and more conflicts may arise due
to the presence of diverse opinions.
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External economies of scale
External economies of scale refer to the cost advantages
experienced by firms within an industry as a whole,
rather than within an individual firm.
These cost advantages arise due to factors such as
increased specialization, improved infrastructure and
enhanced supply chains that benefit multiple firms
operating within the same industry or geographical area.
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A larger industry can enable the firms in that industry to reduce
their average costs in a number of ways including developing :
• A skilled labour force- A firm can recruit workers who have been
trained by other firms in the industry.
• A good reputation. -An area can gain a reputation for a high quality
production. For example, the Bordeaux region of France is well known
for its high quality wine production and the Maldives has a reputation
of being a popular holiday resort.
• Specialist suppliers of raw materials and capital goods- When an
industry becomes large enough, it can become worthwhile for other
industries, called ancillary industries, to set up providing for the needs
of the industry. For instance, the tyre industry supplies tyres to the car
industry.
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• Specialist services.- Universities and colleges may run courses for
workers in large industries and banks, and transport firms may
provide services specially designed to meet the particular needs of
firms in the industry.

• Specialist markets.- Some large industries have specialist selling places

and arrangements such as corn exchanges and insurance markets.

• Improved infrastructure.- The growth of an industry may encourage a

government and private sector firms to provide better road links and
electricity supplies, build new airports and develop dock facilities
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External diseconomies of scale
• 1) Traffic congestion

• 2) Pollution

• 3) Increased competition for resources

• 4) Pressure on infrastructure

• 5) Overcrowding
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Answer (b)
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