Cambridge IGCSE Economics 0455
Syllabus points
- Explain the classification of firms by size and sector.
- Explain the causes and effects of the growth of firms.
- Explain why some firms stay small and why some merge.
Classifying firms
Firms differ in size (small, medium, large) and in which sector they operate:
- Primary sector — extracting natural resources (farming, mining, fishing).
- Secondary sector — manufacturing and construction (turning raw materials into goods).
- Tertiary sector — services (retail, banking, healthcare).
Firm size is measured by number of workers, output, capital employed or market share.
Key definitions
| Term | Definition |
|---|---|
| Merger | When two firms join to form one larger firm. |
| Integration | Firms combining, either at the same or different stages of production. |
| Economies of scale | Falling average costs as a firm grows larger. |
How firms grow
- Internal (organic) growth — expanding output, opening new branches.
- External growth (merger/takeover) — joining with another firm:
- Horizontal integration — firms at the *same* stage (two car makers).
- Vertical integration — firms at *different* stages (a car maker buys a tyre supplier).
- Conglomerate — firms in *unrelated* industries.
Firms grow to gain higher profits, larger market share and economies of scale (lower average costs).
Why some firms stay small
- The market is small or local.
- Personal service is valued (e.g. a hairdresser).
- Owners want to keep control.
- Limited access to finance to expand.
Worked example
A supermarket chain buys a rival chain (horizontal integration). It gains a larger market share and can buy stock in bulk more cheaply (economies of scale), lowering average costs. However, less competition may lead to higher prices for consumers — a possible downside regulators watch for.
Common exam mistakes
- Mixing up horizontal (same stage) and vertical (different stage) integration.
- Assuming all firms want to grow — many stay small for good reasons.
Exam technique
Learn the three sectors and the types of integration precisely, and link the growth of firms to economies of scale (topic 3.6) and market power (topic 3.8).
Quick revision
- Sectors: primary, secondary, tertiary.
- Growth: internal, or external via horizontal/vertical/conglomerate integration.
- Firms grow for profit, market share and economies of scale.