Firms' Decisions and Strategies Memory Pack I

Size of Firms and Industrial Concentration Measurement of Size of Firms Factor Small firms Big Firms Legal Formation One director Multiple directors Number of Shareholders Family and friends Hundreds/ thousands Size of Capital Assets Less than S$2 million Billions Number of Employees Less than 50 Thousands Sales Revenue Less than S$100 million Billions Market Share Less than 10% More than 25% Measurement of Industrial Concentration Factor Less Concentrated Industries More Concentrated Industries Concentration ratio 1 Less than 10% More than 25% Determinants of Size of Firms Demand Factors: Limited Market Size While there may be huge average cost savings to be reaped from expansion, expansion will not be economically efficient if the size of demand for the product is small. This is because with a small demand, the profit-maximising level of output, when marginal revenue (MR) is equal to marginal cost (MC) is also small, at Q0. As such, there is a lack of incentive for the farm to increase the scale of its production because despite average costs falling from C0 to C1 when output increases from Q0 to Q1, average revenue (AR) falls even more from R0 to R1. Hence, the firm may incur lower profits, or even subnormal profits should it decide to increase its scale of production, so the profit-maximising firm would not increase its scale of production. 1 The most commonly used concentration ratios measure the dominance of the 3, 5, or 7 largest firms, which examines the market share of the top 3, 5, or 7 largest firms in the defined industry. For example, if we are using employment as the measuring rod and the number employed by the 3 largest firms in the industry is 1 million while the total employment in the industry is 4 million, the three-firm employment concentration ratio is 25%. 1

Consumer Preference for Specialised Products or Services Expansion may also not be economically efficient if large scale production derives average cost savings from product standardisation, where mass produced goods lacking in individuality are churned out. Consumers demand a wide variety of styles, patterns, and designs in certain markets that are not available from larger firms. For example, firms in the markets for hand-sewn shoes, customised clothing or jewellery may be very small indeed but these small firms tend to cater well for niche