Why do some firms grow in size?

Some firms grow in size because they want to maximize profits. Growing in size enables enjoy cost and revenue advantages for achieving this aim. This is also called economies of scale.

When the firm grows in size it means that it has expanded it scale of production: all factors of production has been increased. It does so in order to exploit potential economies of scale. These economies are cost-saving advantages that causes the cost per unit of good produced to fall downwards. For example,it may enjoy technical economies. Greater specialization of lab our increases lab our productivity. Other economies of scale are marketing, advertising, financial, economies of by-products, economies of research and economies of welfare.

As firm becomes bigger and bigger it may also enjoy external economies of scale. These may be technological improvements, economies of information, economies of concentration and economies of supporting companies. The effect of all these is the same , that is , the firm enjoys cost-saving advantages.

How does this enable the firm to achieve its objective of maximizing profits. Suppose the firm is in a PC market situation, then increasing the profit margin can only be achieved by lowering AC. It cannot raise the price because it is a price-taker in such a market. However, being able to lower the AC also enable it to lower the price! This enables the firm to increase its market share by drawing over its competitors’ customers. The market itself may grow in that present customers buy more and new customers come into the market; attracted by the lower prices. Finally , the firms enjoying economies of scale and lower AC , can lower prices to such a level that it squeezes other less efficient competitors out of the market.

Firms grow in size to make more profits and this is achieved by increasing the profit margin.This is achieved if increased scale lowers AC faster than AR (price) this is also achieved by selling a larger quantity, even if the profit margin is narrower. The total profit is still more.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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