IGCSEEconomicsCIERevision Notes3. Microeconomic Decision Makers3.5 Firms3.5.2 Small Firms

Small Firms (CIE IGCSE Economics)

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Steve Vorster

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Economics & Business Subject Lead

Reasons Why Small Firms Exist

  • In 2015, 98.7% of firms in the European Union were considered to be small firms with less than 49 employees
  • Some firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)
  • While many firms grow, others do not or they intentionally choose to remain small

 
Reasons Why Small Firms Exist

Personalised service Loans Niche Market

They offer a more personalised service & focus on building relationships with their customers 
Small firms are often unable to access finance for expansion
They provide a product that is in a niche market - smaller market size but can be very profitable
Mass markets Diseconomies of scale The firms' objective

Many small firms operate in mass markets with low barriers to entry
Rapid growth can cause diseconomies of scale which can be difficult to deal with & so many owners choose to avoid these
Owners goal is not profit maximisation but rather an acceptable quality of life (satisficing)

Advantages & Disadvantages of Small Firms

Small Firms Experience Both Advantages & Disadvantages When Compared With Large Firms


Advantages
Disadvantages

  • They often provide highly customised goods/services e.g. pet grooming in the customer's home
  • They often create personal relationships with their customers which helps to generate customer loyalty & word-of-mouth advertising
  • They often provide very unique products which are sold in small quantities at high prices - this can be very profitable
  • Smaller firms can respond quickly to changing market conditions

  • More susceptible to changes in the wider economy than large firms, especially during recessions
  • Less financial resources available to them, including access to larger bank loans - some smaller firms are unable to access any loans at all
  • It is harder to recruit/retain staff as the wage & non-wage benefits are less competitive than those offered by bigger firms
  • Owners may struggle to take a holiday/sick leave as revenue slows/stops coming in when they stop working
  • Small firms struggle to generate economies of scale as the volume of output is significantly lower than that of larger firms resulting in lower profit margins

Exam Tip

Students are often examined in the Paper 2 structured questions on the reasons for differences in the size of firms. The question often takes the form of 'Analyse the main reasons for differences in the size of firms.'

While this sub-topic explains the reasons for the existence of small firms, large firms are usually driven by the profit maximisation objective which results in them exploring every opportunity available for growth. How firms grow, is covered in the next sub-topic & elements of that page can be included in answering this question.

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    Steve Vorster

    Author: Steve Vorster

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.