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By the end of these notes, you should be able to:
Firms — that is, businesses — come in all shapes and sizes. Some are tiny local shops with one or two employees. Others are enormous global companies with hundreds of thousands of workers. Why does this difference in size exist?
Some industries naturally suit small firms. For example, a local hairdresser or a plumber serves a small, local community. The demand for their service is limited, so there is no need for the business to become very large. On the other hand, industries like car manufacturing or oil refining require massive factories, complex machinery, and huge investment — conditions that naturally push firms to become large.
As a firm grows, it can often produce each unit of its product at a lower cost. This is called enjoying economies of scale (cost advantages from producing on a larger scale). Large firms benefit from bulk buying, spreading fixed costs over more units, and using specialist machinery. This rewards growth. However, if a firm grows too large, it can become difficult to manage, and costs may actually start rising again — this is called diseconomies of scale. Diseconomies of scale can act as a natural limit to how big a firm wants to grow.
A firm can only be as large as the demand for its product allows. If a baker makes speciality cakes that only a small number of people want, the business will stay small. If a company makes a product that millions of people buy every day — like fizzy drinks or smartphones — the potential to grow is much larger.
Growing a business costs money. Large firms can often borrow more easily from banks or raise money by selling shares to the public. Small firms may struggle to access this finance, which limits how much they can expand.
Not every business owner wants to grow. Many small business owners value being their own boss, maintaining close relationships with customers, and keeping the business manageable. These owners may deliberately choose to stay small, even if expansion were possible.
Some industries are heavily regulated by governments. For example, governments may place restrictions on how large a firm in a particular market can become, to prevent monopoly power (where one firm completely dominates and controls a market). This can cap the size of firms.
In some industries, it is very expensive or difficult for new firms to enter the market (high barriers to entry — obstacles that make it hard for new businesses to compete). This can allow existing firms to grow large and dominate. In other industries, entry is easy and competition is fierce, which keeps firms smaller.
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