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Economics Essay

Firms grow in size as the result of multiple strategies used, such as, horizontal integration, organic growth and many other ways. The reasons that give the firms the motivation to do this is to achieve economies of scales, business objectives, monopoly power and the minimum efficient scale in order to maximise their profit.

Firstly the strategy of horizontal integration refers to two firms that produce similar products, merging together to increase capacity, in order to increase the price elasticity of supply. In some cases this involves the owners of the two separate companies that merge together, becoming joint owners of the new company and splitting the profit evenly. In other scenarios a take-over occurs when one or a group of companies buy out the owners of another firm in a friendly, or hostile manner.

Another example of integration would be vertical integration, which involves two firms that produce the same product but at different stages of production merging together. Firms would do this to reduce costs, which would reduce prices, increasing output. There are two types of vertical integration, including backward vertical integration and forward vertical integration. Backward vertical integration is the joining with firms at previous stages of production, as forward vertical integration is joining with firms at a later stage of production.

Other methods of integration include lateral integration, which is when firms that make related but different products and conglomerate integration, when completely unrelated businesses join together.

Secondly another way firm’s increase in size would be organic growth. This refers to firms expanding in size internally by buying new factories, better machinery, employing more labour, or buying more storage space. This would be expensive for firms, however the motive is the opportunity cost as even though they may have a loss of production for a short period of time, the long-term...
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