For financial economies, large firms has an advantage as they have finance choices and therefore the it would be cheaper than the small firms as small firms are charged relatively high. Furthermore, the larger firms would have more security which qualifies the firms to borrow easily. Next, there is the managerial economies whereby the large firms employ very highly and experienced managers to manage every aspect of their business such as production, marketing, human resource, finance and many others. The managers will ensure there are no labour problems and ensure that the firm expands overtime with high productivity but with lower costs.
For internal economies of scale, it refers to the benefits enjoyed by the firm from the actions it takes. Economies of information where information is accessible and important through the internet, multimedia, government budget planning and so on. This helps to increase output and minimize the cost which will enjoy the economies of scale. There is also the economies line process, as the firms expand, they could diversify either forward or backwards to ensure a steady supply of raw materials, a steady market. This ensures the less interruption in the production and distribution.
When the large firms can reduce in the long run, they could sell the products at a lower price and therefore the firm is able to compete with the rivals by reducing the price. This captures a bigger market share and could gain bigger power as well. However, a firm does not have to grow through economies of scale only. It could grow through other methods such as internal and external growth whereby the profits would grow bigger. This is suitable for large firms such as banking, oil and gas companies and monopoly structure market. For example, the T&B who supplies electric to households in Malaysia. With that kind of structure, it is easier to enjoy economies of scale.
Furthermore, the large firms may suffer from diseconomies of scale because the large firms such as supermarkets, car companies and others may have shut down and this is an impact called decreasing returns to scale. This is because the large firms may not be able to change technology on time, for example when the firm is using the best machinery but a better one comes out, the firm may not be able to change it in time due to the time factor and cost factor. Other than that, they may also lose control due to the large quantity of the product and also the labour as it is difficult to control the large quantity.
Most firms prefer to remain small because of the market structure beause the market is not able to manage a large firm such as law firms. Other than that, there are also personal services such as hairdressings, caterings and so on which do not want to expand to a larger firm as they may get busier and they would not have the time to handle everything at once. Furthermore, there is the problem of specialized skills of the owners as not everybody would be able to reach to an expected level of the business.
There are also profits which the firms would like to retain. Small firms keeps their profits and does not share profits with anybody, this may able them to have full control of their business. Next, the small firms may not have enough capital to expand their firms because they lack of economies of scale and to enjoy economies of scale, they require a large quantity of the product or labour. Furthermore, there are small firm businesses whereby the owners may not plan to expand their business as they may lose control of the management to other people for example, family business.
In conclusion, firms prefer to stay small due to the fact that it is easier to handle and to manage unlike the larger firms which may have difficulties as they have a larger quantity of product and labour to manage.
by
magnificentoreox (student)
