SRJC H2 ECONS 9757 Q2 MS

2 As globalisation continues, the tearing down of trade barriers has provided some companies opportunities for growth while it has been harmful for others. Accustomed to dominant positions in protected markets, the influx of foreign competition often poses a threat to the survival of local companies. Source: Harvard Business Review (a) Explain the benefits that a firm enjoys when it grows in size. [10] (b) Evaluate the various strategies a firm can adopt to respond to the challenges posed by globalisation. [15] (a) Intro:  Clarify what “size” means to a firm / define : The idea of greater quantity of production or market share must be expressed  Firm’s objective: Benefits to a firm must be expressed in the idea of achieving profit maximisation  Direction statement: Benefits a firm enjoys comes in the form of cost savings from exploiting EOS or from revenue advantages that a firm may gain from being large. TS1: Firms can enjoy cost savings when they grow large through exploiting economies of scale. E1: One source of EOS that firms can enjoy comes from marketing EOS.  When firms are larger, they can enjoy lower average costs from purchasing inputs in bulk.  Larger firms are likely to make up a larger proportion of a supplier’s revenue stream and thus are more important customers than a smaller firm.  These larger firms will then have stronger negotiating power than smaller firms and can negotiate for discounts for bulk purchases of inputs.  The lower price that large firms pay for inputs will allow them to have a lower average cost of production E2: Another source of EOS that firms can enjoy comes from financial EOS  Larger firms are often considered more cr edit-worthy than smaller firms and are able to enjoy lower interest rates on loans.  Larger firms will often have more physical assets that they are able to offer as collateral in negotiating for a loan.  Larger firms also earn greater amounts of revenue and have more stable revenue streams and thus are considered to be more likely to be able to repay the loan.  Since large firms are considered more credit-worthy, banks are willing to offer lower interest rates for loans to large firms since the risk of defaulting on the loan is lower  Large firms are thus able to borrow at cheaper rates whether to purchase capital goods, inputs or even to finance expansion.  The lower costs of repaying loans allow for larger firms to have lower average costs.

TS2: Firms can enjoy revenue advantages when they grow sufficiently large. This can be from domination of the market OR from diversification into multiple markets. E1: When firms grow in size, this might involve the firm expanding into different markets. This can be expanding into different product markets or geographical markets.  This allows the firm’s revenue stream to be more stable in the face of changes.  If demand in a particular country / demand for a particular good falls, it can be mitigated by changes in the demand from other countries / for other goods E2: Firms that have large size can have greater market power and thus use that to maximize their revenue.  Firms that grow larger and take up a larger part of the market can better establish barriers to entry in the form of limit pricing / predatory pricing  When a firm has sufficient market power, they are able to influence the market price through increasing or decreasing their output  Large firms can then use limit pricing / predat ory pricing to prevent the entry of other firms into the market  This prevents competitors for entering t he market and taking away demand from the incumbent large firm thus ensuring that the revenue earned will continue to be high in the long run  Large firms that earn supernormal profits can also use these profits to invest in research & development to do product innovation thus differentiating their product  This makes other companies goods poorer substitutes, thus the XED of their good would be more inelastic.  This makes the demand for their good more stable in the face of competitor’s pricing strategies and the revenue more consistent. Level Marks Description L3 8-10  An answer that explores both costs AND revenue advantages of being a large firm  An answer that explains two sources of EOS OR provides a very detailed answer on one source of EOS  AND  An answer that explains one or more source of revenue advantage with economic theory  Total of 3 key ideas L2 5-7  One sided answer than only considers cost advantages OR revenue advantages without exploring the other  An answer that briefly explains the advantage without any economic theory or application to the context of a firm’s decisions  OR two-sided answer lacking in detail / rigour L1 1-4  Answer is generally descriptive with little or no economic analysis  Does not identify/explain any source of EOS  Vaguely understands the aim of achieving profits but does not consider profits as revenue/costs

(b) Intro:  Clarify and expand on definition of globalization  Identify main challenges of globalization: greater competition for consumers / greater competition for limited FOP  Direction statement: There are many strategies a firm can undertake to cope with the challenges of globalization. TS1: Globalisation poses a challenge to firms in the form of greater competition for consumers. This can reduce the demand / revenue / profits of the firm. Globalisation can also pose a challenge in affecting the costs of a firm. E1: Globalization poses a challenge to firms in the form of greater competition for consumers. This can reduce the demand / revenue / profits of the firm.  Continued globalisation involves the removal of trade barriers such as tariffs and quotas/restrictions on foreign imports of goods and services  This allows for imports to become more price competitive / allows for greater competition between imported goods and domestic goods  A firm that is in the domestic market will face a fall in demand due to the entrant of foreign company into the market  This will be reflected as a fall in the demand faced by an individual firm as more foreign companies enter the domestic market  Assuming the costs of the firm remain unchanged, the fall in revenue caused by a drop in demand would lead to lower profits earned  If the profits fall into subnormal profits, this can cause the firms to shut down in the long-run E2: Globalisation can also pose a challenge in affecting the costs of a firm.  The removal of barriers to trade can also result in the increase in the demand for exports of a country  The increase in demand for goods and servic es would lead to greater derived demand for factors of production such as labour  This greater demand for factors of production leads to a shortage and subsequently leads to higher price of FOP. The increase in FOP price leads to an increase in per unit costs of production ceteris paribus.  For firms that are not involved in the export sector and do not enjoy an increase in demand, the increase in costs would lead to a fall in the profits of the firm. TS2: Firms can respond to the challenges of globalisation by expanding in size.  In the face of globalisation, the firms can respond to the challenges by expanding. This can either be done through expanding their production, merging with other firms and entering foreign markets.  If the firm is able to take advantage of the lower barriers to trade by entering foreign markets, they are able to enjoy access to a larger market thus increasing the demand for their goods.  When there is greater demand, the firm can be justified in expanding to a larger scale of production thus allowing them to exploit greater EOS and lowering the average costs.

Evaluation:  The feasibility of such a strateg