Step 1 : Introduction


In every economy, there are firms of different sizes, most of which compete with each other. Several factors should be taken into consideration when determining whether small firms can survive in the long run.


Step 2: Discuss how small firms are more likely to survive in the long run.


There are several reasons why small firms are likely to survive in the long run.

➤ 2.1 Small firms may produce specialised products.

For example, small grocery stores have to find a way to compete with supermarkets and they do so by providing a range of goods which cannot be bought in a supermarket, such as speciality cheeses and wines.

➤ 2.2 The firm may be a local monopoly in a good location and may not face competition in the area.

For example, a small grocery store may be located in a remote area and be the only local seller of provisions.

➤ 2.3 Small firms may provide a personal service and may have greater contact with their customers.

For example, a small grocery store may provide a personal shopping experience, as compared with the self -service style of a supermarket.

➤ 2.4 Smaller shops can also adapt quickly to changing consumer tastes.

For example, a small bakery may make more brown bread to cater for an increase in demand, and a small, independently run, magazine shop will order titles for individual customers. Small firms tend to focus on smaller markets and may cater to specific tastes and for people with higher incomes. Examples of products and services provided by small shops are made-to-measure clothing and custom-made furniture.


Step 3: Discuss why small firms are less likely to survive in the long run.


There are several reasons why small firms are not likely to survive in the long run.

➤ 3.1 Smaller firms may sell at higher prices than larger firms.

This is because small firms do not benefit from economies of scale and have a higher cost of production. Larger firms, on the other hand, can take advantage of economies of scale such as research and development and a large advertising budget. Thus small firms may not be able to compete with larger firms.

➤ 3.2 Large firms may take over or merge with smaller firms in order to gain market power in order to take advantage of economies of scale.

➤ 3.3 The government may provide subsidies only for a short amount of time.

When small firms no longer receive subsidies, their cost of production will rise and they will not be able to compete with other firms.

➤ 3.6 Some small firms may cease to exist when their owners retire. For example, sole traders.

➤ 3.5 Small firms have less capital available or may have difficulties in raising capital. Banks are less likely to give loans to small firms. This makes it difficult to purchase high-quality equipment and to invest in research and development.


Step 4: Conclude whether or not small firms are likely to survive in the long run.


To conclude, it is possible for small firms can survive in the long run in certain cases. Small firms which target a niche market and provide a personalised service will have an advantage over large firms. They can quickly adapt to the customer’s taste and preferences compared to larger firms. However, it will be more difficult for small firms to survive in the long run if they are in sectors such areas such as retail or selling of branded products. This is mainly because large companies benefit from economies of scale and can afford large marketing campaigns. This will drive customers away from small firms.