CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS
Topic worksheet 36.1 answers
Why do firms grow?
1 Analytical point Evaluative point
1 The firm has to take on more debt. The debt It depends on how the growth has been financed. It may
will have to be repaid over time. be internal growth and reinvested profit.
2 It reduces risk because it enters new markets. It depends on the market share that those firms already in
the market have.
3 It leads to internal economies of scale. It may lead to diseconomies of scale if the level of growth
goes beyond the minimum efficient scale.
2 Analytical point Evaluative point
1 Lower prices if the firms benefits from It could lead to higher prices if the firm becomes
economies of scale a monopoly.
2 Greater choice and higher quality If the firm becomes a monopoly then there might be
less choice, and there would less competition to drive
quality standards.
3 Households that own shares in the firm may see It could lead to wealth inequality if shares are
an increase in the value of their assets. concentrated in high-income households.
3 Analytical point Evaluative point
1 Smaller suppliers may lose their contracts if The supplier could grow with the firm at the same time.
the firm chooses to change the way it buys Or, they could merge (vertical integration).
its inputs.
2 The firm may switch to a foreign supplier if it Opportunity for growth into a new market for the
expands its operations overseas. original supplier
4 Analytical point Evaluative point
1 Greater tax revenue collected by the Larger firm may be able move its profit overseas if it has a
government if the firm makes larger profits foreign supply-chain.
2 Increase in employment Depends if the firm expands overseas. If it does, then
there may be job losses at home.
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Cambridge International AS & A Level Economics – Vlachonikolis, Collins & Croft © Cambridge University Press 2021
