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Study Notes

Why do businesses grow?

AS, A-Level, IB, BTEC National
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 19 Dec 2018

There are many reasons that help to explain the motivations for businesses to grow over time.

2.Cost motive:

  • Economies of scale in the long run increase the productive capacity of the business whilst also leading to lower average costs (LRAC). Experiencing economies of scale help a business to raise their profit margins at a given market price

3.Market power motive:

  1. Firms may wish to increase market dominance giving them increased pricing power
  2. This market power can also be used as a barrier to the entry of new businesses in the long run
  3. Larger businesses can build and take advantage of buying power (also known as monopsony power)

4.Risk motive:

  1. Growth might be motivated by a desire to diversify production and/or sales so that falling sales in one market might be compensated by stronger demand in another sector.
  2. This is known as achieving economies of scope and is a feature of conglomerates

5.Managerial motives: Behavioural theories of the firm predict that business expansion might be accelerated by the demands of senior and middle managers whose objectives differ from major shareholders. Managers may want the power and kudos that comes from running larger corporations.

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