Cambridge International as and a level Economics Ebook

174
Cambridge International A Level Economics

---

This is at the heart of successful entrepreneurship. 
Sometimes they can use the same production facilities 
so keeping the costs down. These benefits are called 
economies of scope
.
■
To capture the resources of another business. Sometimes, 
firms may realise that resources are being underutilised in 
another firm and that the real value of the firm is currently 
above its accounting valuation. The resulting takeovers and 
mergers can lead to the firm being brought back into profit 
or being broken up. This is because the sum of the parts sold 
separately is greater than the current valuation of the whole 
enterprise. It is sometimes called ‘asset stripping’ and the 
cash may be ploughed back into improving the core business.
Economies of scope: 
reduction in ATC made possible by a 
firm increasing the diff erent goods it produces.
KEY TERM
How do firms grow?
Firms can grow in two main ways. Th
ese are through:
■
Internal growth: A firm decides to retain some of the profit 
rather than pay it out to the owners. It is ploughed back 
in the form of new investment in order to increase the 
productive capacity. This is most likely to occur in capital-
intensive activities where the market is expanding. The 
timing will be influenced by the stage of the business cycle, 
most investment occurring when the national economy is 
approaching a boom period.
■
External growth: The business expands by joining with 
others via takeovers or mergers. The objective in a takeover 
bid is to buy suff icient shares from the owners of the firm 
to get 51% of the total and therefore have control of the 
business. A merger oft en has the same result, a new larger 
legal entity, but the name implies less of a struggle and that 
both parties have agreed to the action. Mergers may be 
more numerous when there is a downturn in the economy 
or where there is a shrinking market and firms are left with 
excess productive capacity.
In practice, both types of growth can be going on at the same 
time. External growth may be a quicker and cheaper route 
for fi rms than internal growth, especially when there are 
high fi xed costs. For example, it may be cheaper for one oil 
company to buy the assets of another than to expand existing 
operations, unless there are large recoverable reserves.
A further and common way in which fi rms grow 
is through