hello again and welcome to my youtube channel in this video we will be explaining firms so what are firms i would always like you to remember this image that you can see so i have land labor capital i call all of these inputs or i can call them factors of production or in other words they are known to be resources so when i combine all of the resources or factors of production together they pass through a process of production and who decides how and what and for whom to use these resources it would be the entrepreneurs they are the ones that organize these resources and they determine how much do they need to produce so here this arrow i would say we would have the process of production in order to get the final good or service at the end which i can call it output so the definition of a firm is it combines land labor capital which are the inputs in order to make the final good end service how can i classify firms so economists will distinguish between different firms according to either industrial sector so is that a primary secondary or tertiary sector or whether they are privately or state-owned they are owned by the government or according to the scale of production let's start off by classifying the firms in terms of industrial sectors we will be explaining what primary secondary and tertiary sector mean so when i am talking about an industrial sector or the industry which is a group of firms specializing in similar goods and services or using similar production processes first i have the primary sector the primary sector it means extraction and production of natural resources as you can see in that image then i have the secondary sector which means it is the manufacturing or the construction so usually at secondary sector it is what happens in factories so manufacturing it means turning unprocessed natural resources and other unfinished products into goods into other goods then i have the tertiary sector which means it's personal and business services so i'm talking about intangible they are providing services so for example when i am talking about the educational sector or i'm talking about the banking cer uh banking sector these are providing us with services and not goods and there is one thing i would like you to know but you're not responsible for it's called the paternal resector which is the fourth type which means i am subsectioning the tertiary sector it covers the services industry but it only requires what is um knowledge based so this is an image about uh primary secondary and tertiary sectors so as you can see here we are having the extraction of natural resources so farmers grow sugarcane in brazil however in stage two it means the sugar cane is refined to make ethanol so here they are manufacturing or constructing and finally in the tertiary stage what they do is they sell the ethanol that they already produced and the secondary uh sector before now we would like to classify firms in terms of whether they are private or a public sector i would just like you to give you uh just like to give you a quick reminder when i am talking about private sectors it means i am talking about uh firms that are individually owned and usually they care about maximizing their profit and here we will be talking about different types of firms such as being a sole trader a partner or limited companies and we will explain it in a bit and then uh when i talk about the public sector it means i am talking about firms that are owned by the government and they aim at providing us with public and merit goods they are not not profit oriented okay and usually usually when i am talking about public sector firms i consider them they are natural monopolies so the government is the only one in the country that owns the electric sector the electricity sector that owns the water or the natural resources such as oil you do not find them owned by private individuals because otherwise they would be super expensive since i aim at maximizing my profit so when i am talking about privately owned businesses as we said my major aim is to make the maximum profit and i have different types of forms which is assault trader it means i'm talking about one owner so sole trader or sole proprietorship you have one owner for the business partnership on the other hand is when i want to expand my business a bit more you would find a minimum of two owners and maximum of 20 owners and then i have joint stock companies which are of two different types either they could be private limited companies or public limited companies and then i have a cooperative and finally i have a charity which aims at helping others so usually it relies on donations and then i have the state-owned enterprises that are operated by the government and any profit that they make they will be invested in improving the goods and services since the aim is not to make any profits if losses occur on the other hand it will have to be funded by how by taxing the people so they will be adding taxes in case they need money now i would like to highlight this common error candidates sometimes state that a public limited company is in the public sector no i'm not calling it a public corporation i am adding the word limited company so a public limited company is called public limited company because the public which means the people here it's referring to the people and not to the government the people living in a country can buy shares and such a company but the company itself it operates in a private sector so still its aim is to maximize profits it has nothing to do with the government privately owned firms uh when i want to explain them i need to highlight two key terms whenever i'm talking about uh private firms i have something called limited liability and i would like you to think of it as considering get limited losses so the liability of shareholders in a company is only limited to the amount that they invest so there is no risk of losing their personal belonging when they start up a business the maximum amount of losses that they would be losing here at that point it would be the money they invested in starting up that particular business however when i am talking about unlimited liability you will consider it as i'm talking about unlimited losses so i will not only lose the money i invested in the business i might be losing my personal belongings in order to cover up for the debt that i have so for example i started off with a business a sole trader um i needed a loan from the bank and the bank approved of my loan once i started that business i did not make any profit the business is losing so the bank would not forgive me and tell me oh it's okay don't worry about it you lost so uh you know what um you don't need to pay me back no way i would have to pay back the bank with interest so in other words in order and my business is losing it's not making any money in order to cover for my losses in the bank i might end up selling my own personal belongings such as my car my house any asset so anything that i own so here i would like to specifically explain what a sole trader is the characteristics of being a sole trader is that we are talking about one owner owner one owner only i'm sorry he is the only one that owns the business and at the same time he is responsible for all the debt so in case of of losses i would be the one covering up for my loss which we call it unlimited liability and again i might lack capital so in case i need more money i cannot ask from a partner the only thing that i can do is go to the bank and ask them for a loan and usually banks because they are profit oriented they do not trust sole traders because they are at a very high risk of losing in case they lose it is a hassle for the bank since they have unlimited liability however the good things about being a sole trader is um one of the advantages is i am my own boss i do not need to ask permission from anyone and i can't choose my own hours of work so it's either the morning shift or the night shift and i am the only one receiving all the profits i do not need to share it with anyone however in case of losses and i did not make a profit it becomes a disadvantage and this type of business since it is considered to be the oldest and the most popular form of a business it is so easy to set up the disadvantages are in case i was sick there is no one to cover up for me since i'm the only owner and as we said in case of losses i would have unlimited liability to in order to cover up their debts the loans that i have to pay and i have full responsibility of the business so in other words if the business loses it's my own responsibility i'm the one that made this decision and may lay capital we explained it already and part of the characteristics of a sole trader the second type of private sector businesses would be partnership and what does a partnership mean it is a legal agreement between two or more people more people it is a maximum of 20 to finance and run a business it is popular among professionals such as lawyers accountants and right now we will be talking about its characteristics so i would like you to have a look at it so two or more partners which is maximum 20 the partners are the ones owning the company but again i tell you it is not necessarily a 50 50 business if it's two partners so it depends on the legal agreement between us it might be 70 30 it depends on what we have the contract the between us and partners are the ones that make all the decisions and this might cause some of the disadvantages because partners might disagree with each other however this is a good thing because sometimes the more the merrier in other words the more the people that own the business or run a business the more ideas we have and again same as sole traders it might collect capital again it is a risky form for banks to um approve for a loan okay so please have a look at the advantages and disadvantages again here what i want to say that some partners have limited liability and others have unlimited liability because when i'm talking about partnership i want you to remember two different kinds of partners it's either the general partner which means he is the one making up all the decisions so he is the one that has unlimited liability because he's the one held responsible to all the decisions that he does and on the other hand i would have something called a silent or a sleeping partner this guy here he only cares about taking part of the prophet he has nothing to do with decision making therefore i say he is the one that has limited liability then the third type of businesses would be joint stock company or i can call them limited companies and they are of two different types private limited companies or public limited companies they are still under the private sector so they are still privately owned what i mean by that is they are allowed to sell shares so here i will be talking about shareholders so what are the characteristics of having a joint stock company these companies they sell shares in their ownership to raise capital to raise money and shareholders no matter how much they are and they can reach up to thousands of owners they are the ones that are the owners and shareholders and i imagine 1 000 owners are the decision makers it doesn't make sense it would be chaotic so what they do is the shareholders with the most amount of shares that they own usually they are the ones that affect the voting of who the board of directors will be so they vote for the board of directors and the board of directors it consists of a few owners and usually they are the ones with the most amount of shares and they are the decision makers so these firms are also known as corporations or limited companies because the shareholders have limited liability the maximum amount of money they would lose is the money that they invested which is the amount of money they paid in order to buy the share and become a shareholder okay now why do i call it a corporation because when i'm talking about corporations i'm talking about separate legal identity so they consider the firm as an entity and they consider the owner himself as an entity so in case the firm loses here the shareholder with the firm loses the shareholders would have nothing to do with that so he would not have to sell his personal belongings to cover up the debt khalas the maximum amount of money would lose is the money he invested all right so they consider them separate the owner and the firm so i will start off by explaining what are private limited companies when i'm talking about private limited companies these i'm talking about one or more more shareholders and as we said they could reach up to a thousand all of the shareholders are considered to be the owners and they receive the profits according to how much they uh how many shares they bought and they have limited liability and shareholders cannot be sued since it's considered to be a corporation which means a separate legal identity so if the company loses they sue the company and not their shareholders and shares are sold privately they cannot sell the shares on the stock market so how do they get more shareholders it is a word of mouth so people talk in the company oh the company is starting to sell shares whoever is interested he will start buying off the shares and may be required to publish annual accounts so they might be asked to put all the information about the company out to the public so how much loss profit and so on are they making so private information and the board of directors are the that we voted for us shareholders they are the ones that run the company so these are the advantages and disadvantages i would like you to have a look at it right now i will be explaining public limited companies and as we said before do not think i'm talking about the government so it doesn't mean it is owned by the government public it means publicly the shares could be sold and bought so anyone in the world could be buying our shares because we uh what we do is shares can be sold publicly on the stock market they can announce their shares however in the private limited company that we explained before they cannot do that we said it relies on a word of mouth so again here it's very similar to private limited company but the only difference is the stock market thingy so these ones are allowed to sell their shares publicly however private limited companies no so as you can see it is the same as before um everything is the same except for publish annual accounts before we said they might be required to do that here they have to publish their annual accounts online and be accessible to everyone because people from japan could be buying shares from an american company or from an emirati company or whatever it is and also they hold agms which is annual general meetings to discuss what to be done and who runs the company it is the people they voted for the shareholders they voted for which i called their board of directors so please have a look at their advantages and disadvantages and right now this is like a quick summary of control and ownership in a public limited company so we have shareholders they may attend the annual general meetings in order to vote for the board of directors who make all the important decisions in the company so they are the ones in control and then they appoint managers for managers for day-to-day business decisions okay and these managers definitely they will be getting a salary so what are the risk ownership and limited liability summary please have a look at it when i'm talking about business organizations we have different types sole trader partnership private and limited companies together i can call them joint stock companies or limited companies because they have limited liability okay so please have a look at this summary that summarizes everything now the other type would be cooperatives what is a cooperative it is owned by its members for mutual benefit and there is a one month one vote policy we have two types of cooperatives it's the worker and the retail cooperative i'll start off by explaining what a worker cooperative is workers themselves they are the shareholders they are the ones owning the share and it is managed by them and also they have limited liability so the maximum amount of money they would lose is the amount of money they paid in order to become a shareholder and the workers themselves they shared any kind of profit that they would be making here again retail cooperative so it's about selling it is very similar to the worker cooperative however uh the thing is um it's owned by its members in order to buy um um the products in bulk so they would make it cheaper for them so when they are a group of people buying in bulk they would get a special discount so this is what i mean by a mutual benefit then i have the fifth type of private sector businesses it is the charity charity it is not owned okay because usually i don't aim at making profit out of it so it's not owned therefore i do not aim to make a profit what does it do it provides services for public benefits so they aim at helping others okay who runs it people that they trust therefore i call it board of trustees and how do they get the money in order to help the less fortunate people in a country they receive and they rely on gifts and donations from people and other organizations right now i would like to explain what i mean by a state state-owned enterprise and here i'm talking about literally public sector or government-owned organizations and i can denote it by soe so this happens through nationalization so it is when the government buys private sector businesses so who owns these state-owned enterprises uh what are some examples of it i mean they're owned by the government and some examples would be the railway the postal service the power company oil companies and they have public policy objectives which means they deliver electricity and sanitation they provide public and merit goods and they need to run by the central bank to discuss what are their revenues and what are the costs of starting such a project and governments at the same time they would be the ones providing subsidies to the state-owned enterprises since they aim at um taking care of all the people living in the country so they are concerned about the public the interest of the public which means the people so this is a division checklist make sure you know all of this now i will be explaining how can i classify firms in terms of size is it a small firm or a large firm so the size of firms i it is useful to group firms together according to whether they are large enterprises or small and medium-sized enterprises the size of the firm can be measured in different ways okay right now we will be discussing how can you measure how can you tell if this is a small or a large firm and they provide useful clues about the reasons why some firms grow into very large organizations while others prefer remaining small so these are some examples about large and small or medium-sized enterprises how can i measure the size of the firm i have four different measures the first one is according to the size of the workforce so how many workers do they have so but i need to keep in mind that some large firms are capital intensive and they might not require to um employ a lot of people but usually it if it is less than 50 workers then i consider the firm to be a small firm okay the second measure is internal organization so larger firms are divided up into different departments each specializing in a particular function so you have the management department the recruiting department the accounting department the um finance department okay purchasing and sales department so in smaller firms the owners and the employees all of them they tend to carry out these functions so they don't have a lot of departments the third measure would be what is the amount of capital that we employ so this is the amount of money invested in productive assets that generate revenue the more the more capital a firm invests in productive assets the more goods and services it can produce but production by some large firms again this might be they are labor intensive so they rely more on human workers rather than on machinery the fourth measure is called market share and when i am talking about market share its large firms may dominate sales um and the markets they supply but not all markets are large firms serving small or niche markets will tend to remain small and now we will see the reasons why is this happening so why some small firms remain small in size i would like you to keep in mind when you are asked to measure the size of the firm you cannot measure it in four different ways so it's either the question tells you and what measure they are using or you will choose any measure of your own because remember these two contradict each other somehow whether if the firm is capital or labor intensive so here there is an example which firm is the largest so if i want to look at the amount of uh work force that they have or the number of employees this is the first measure let's say i would be choosing toyota motors because it has the largest number of employees however if i am to look at the number of machines or capital employed then it would be example if i was to look at the amount of output that they are producing then it would be again x and mobile if i want to look at the market share which means the percentage of revenue that they are generating it would be google so this is try this application explain the different ways in which the relative size of a firm can be measured so please test your knowledge see if you are capable of writing down the four different measures and explaining now please have a look at this quick recap okay this is what we expect and now what are the factors that influence the size of the firm so what makes it a small firm what makes it a large firm it is because of the following factors so the first one would be the age of the form how old it is does it have good customer base does it have enough capital what type of business organization is it does it have economies or just economies of scale and when i am saying economies of scale it means it is a situation where larger output can be produced at a lower unit cost we will explain it later with more details and finally it is according to the size of the market so right now we will be discussing small firms and why some small firms would want to remain small where the advantages and disadvantages of remaining small so why do they remain small we have four different reasons the first one is it may be because the market is already small or as we said before we call it a niche market so they're already specialized in a local area so it doesn't make sense for them to grow in size and pay more money and expand the business the second reason would be unable to raise enough capital in order to spend the bank is not giving them a loan so they cannot expand they don't have enough money in order to make their business bigger the third reason is new technology may have reduced the scale of production needed in some sectors so the demand on their product is not that high therefore no need for them to expand their business so therefore they would be remaining small in size and finally i can call that personal choice so the owner may prefer keeping the business small these are some other reasons so you are free to choose whatever you want just make sure you are capable of understanding and explaining four reasons why some small firms remain small in size okay um so we have um contracting out is just a new term that i would like you to know it is the transfer of responsibility for the provision of a product from one firm to one another okay so that particular firm has nothing to do with it anymore they hire another firm to do the provision of the product what are the advantages and disadvantages of small firms the first advantage is small firms can usually be set up super easily so in other words it doesn't require a lot of paypal paperwork they just need a few legal requirements in order to start up the business so it's easy and as we said usually small firms are sole traders okay also um it can be run from home you don't need big premises in order to run that small business it's not big so you can work remotely also um because it's small the government would help them out against big competition so they are the ones that would be receiving grants or i'll call it subsidies from the government the second advantage would be paid managers paid managers rather than business owners often run large firms it's very large and these owners they can afford hiring people to do their day-to-day tasks and managing the company so the owners of small firms they tend to run the business all by them all by themselves so they run the day-to-day tasks they are the main decision makers in the company okay and they prefer it to remain that way the second and now we will be starting with the disadvantages of small firms so because owners of small firms usually have full responsibility for running the day-to-day tasks so this is related to this so i can say this is the advantage however they need to keep accounts they need to be capable of advertising they need to be capable of recruiting and managing all this stuff so in other words guys what's happening is they need to have a big big big responsibility of job description they need to be capable of uh having the necessity skills to run this firm successfully okay they will also one of the disadvantages since i'm the only one running the business i would have to work for long hours also they may have to close their firms and lose revenue so this was one of the disadvantages of being a sole trader if i get sick and i close there would be no one to cover up my place let's continue these again are the continuation of the advantages and these are the disadvantages so the third advantage of running a small firm would be their owners so sorry small firms may be able to react to changes in economic and market conditions because they don't have a lot of machinery that they would need to change they're already small in size so they can adapt more quickly than larger firms let's continue now with the disadvantages this is the second disadvantage they may lack financial resources which means money because banks usually don't trust small firms as much as they trust large firms because they believe they are at a very high risk of not being capable of paying back the third disadvantage of being small um okay we already explained it the fourth one is the average cost of delivering a service is much more expensive than larger firms why because usually they do not have economies no economies of scale they are not massively producing in order to decrease their cost of production therefore the per unit cost of production is much more expensive than larger firms therefore you find when you buy products from small firms therefore you would find that sometimes super expensive it's more expensive than larger firms because they cannot afford selling it at a lower price okay so this is a big summary uh please have a look at it pause the video and read it in the form of a table and this is the recap of what we just did regarding small firms so this is like the summary again pause the video and have a look at it now in order to test your knowledge and be capable of uh understanding the this objective i need you to try and explain two advantages and two advantages to disadvantages of being small in size now what happens is i wanna start something new let's say the small firm decided they want to expand they don't want to remain small in size so what they can do is they can merge with other firms so right now what we will be doing we will be discussing mergers and the causes and forms of the growth of firms why firms would want to grow in size so the growth of firms can become can come about through two different ways either they will grow internally or externally so when i'm talking about growth it could be either internal growth and we will explain in a moment or external growth external growth it means i'm talking about merger merging with someone else or they take over another company or they acquire another company which i call acquisition so firms may wish to grow in size for a number of different reasons they may be able to reduce the costs of production by benefiting from something called economies of scale so their cost of production is decreasing because they are massively producing mass output the second reason might be they may be able to gain a larger share of the market so their market share is increasing market share they may be able to develop a new and improved product because they have the money they have the capital so they can do something called the research and development and this research and development is for the product that they are manufacturing how they can make it better they may be able to sell to new markets since they're big and probably when i'm talking about new markets i'm talking about exporting their own goods to other countries and because they're large definitely they are much stronger than smaller firms and they have higher chances of remaining in the market and not losing and when they are increasing their market share and when they are decreasing their cost of production they will be achieving the major aim of all businesses which is to maximize profits okay so how firms grow as we said they have two different ways and this is what i will be explaining now i want you to take notes of it it's either internal or another term for it i can call it organic growth and it is when a firm expands its scale of production through the purchase of additional equipment and increasing the size of its premises and but i need you to keep in mind this word when they are doing that this would increase their fixed cost which might be rent so the firm is growing internally only so for instance when ais decided to open another campus this was considered internal or organic growth all right they got a new premises they started producing more they opened ib the american system it's not only ig or the british system okay another way of the firm to grow in size i can call it external growth which is integration so when i'm talking about external growth it is when two or more firms join together to form a larger enterprise okay and as we said this would be known as integration it involves what is integration it could be as we said before either merging of two different firms or one firm takes over the other firm which is the acquisition okay so external growth can come in different ways it could be through merging it could be through taking over or it could be through the last thing is acquisition okay one thing i need you to know regarding internal growth uh it comes in different ways it is i would either reinvest [Music] some of my profits back in the firm in order to expand my business or i would ask the shareholders to put more money more capital in the business itself or probably i would be operating a franchise which is arrangement where the firm allows another business to use its business idea so when you have more than one um franchise of that particular business it's under the same name under the same set of skills and qualifications however it might be run by someone else so i might be opening more stores and malls and i have my name and okay so this is how i can talk about how firms grow in size in two different ways internally or externally this is one exam tip make sure that you are able to distinguish clearly between internal and external growth and i care a lot about giving examples okay this is a recap and try to apply that please so this is like a summary of what we just explained which of the following is an example of internal growth is it acquisition no because acquisition we said it is an external growth is it when they franchise yes merging can take over no these are external growth so when they want to grow through either merging or takeover so specifically i am talking about external growth how can they achieve that and they can achieve that in three different ways either i call it horizontal integration and horizontal integration guys it happens between firms that are producing the same good or service and they are in the same stage of production so if i take a look at these two companies both of them when if they want to merge with each other both of them as you can see are producing chemicals right so they are producing the same type of good and service and both of them are in the secondary stage of production which is manufacturing as you can see they are creating pollution then i have another type of integration i can call it lateral integration or another term for it is the conglomerate merger as you can see here these firms are of absolutely different industries but they are in the same stage or they could be in different stages of production so as you can see they are absolutely producing different goods this one is producing furniture this one is producing chocolate and this one is producing paint why would they integrate obviously this company here probably would have the best advertisement system so they have a lot of customers these they know how to decrease their costs of production so each one of them is specialized at a certain area if they merge together they will grow and they will be capable of producing and larger amounts and therefore increasing their profits the last type of integration is vertical integration and as you can see it has different stages of production so for example as you can see here i'm talking about the my final good that i am producing is the cheese but the cheese when they are selling it in the shop this is the tertiary stage of production when they are manufacturing this cheese in the factory this is the secondary stage of production when they are milking the cow this is the primary stage of production so as you can see what happens is the cheese shop or the deli store he integrates with the with marae and marai is integrating with the farm so all of them are integrating with each other in order to decrease their stages of production now if the cheese shop is the one that decided to do the integration with the primary sector i would call that backwards integration if this guy here the primary stage of production they are the ones that decide to integrate with the cheese shop i would call that forward vertical integration so again we have four different types of integration one horizontal forward and backward integration they are known as vertical integration and finally we have the conglomerate or i can call it lateral integration okay so right now we will be talking about a new section which is economies and this economies of scale however i would like to start by explaining what are economies of scale and it means i'm talking about decreasing the cost of production however this economies of scale it means we are increasing the cost of production but right now i will start only by explaining what are economies of scale economies of scale could be of two different types either they could be internal or they can be external when i'm talking about internal economies of scale there are cost advantages which means they are decreasing their cost of production that a particular firm only is the one gaining from its own increase in output however when i am to talk about external economies of scale again it is the decrease in cost of production or the cost advantages that all firms in an industry gain so it is affecting the industry as a whole okay what are economies of scale so again i need to explain that graphically here when i have the cost per unit and here i have the number of units produced which is the total output to me as a firm from my point of view i would like to achieve the lowest cost possible and at that point it would be this one the minimum average cost so the minimum average cost let's say it was per unit of production it was 15 and they were producing 20 output so that point here is what all firms would try to achieve this means this is the cost saving from increasing the scale of production now you might be wondering they are increasing their cost how they are increasing their output how come their average cost starts to increase again because later on it means that workers probably start wasting time they start getting bored the work is becoming redundant so you reach a point where you should be satisfied with the amount that you are producing and it's definitely much cheaper than only producing one unit okay so to produce 20 as a whole it means it is a lower cost lower average cost so it is per unit of production all right so internal economies of scale as we said i'm talking about cost saving from the firm's point of view and here i'm talking about the industry cost saving for the industry as a whole let's see the different types of economies of scale that we can reach first of all we have marketing economies marketing you need to relate it directly to the term advertising so they are not only advertising for one product or in one particular area they are doing something called mass advertising okay they have their own advertising network their own distribution network sorry so this is how they could be saving their costs another one it's managerial economies the term managerial it's from managing so here large firms are capable of employing specialist staff and this will reduce their cost okay because everyone is specialized in his own specific skills so here again i want you to remember what we explained previously the advantages of being specialized labor then i have labor economies labor economies i can also related to specialization because here they would be putting departments they are dividing labor okay so here i have the vision of labor among their other staff the fourth type of internal economies would be financial the term financial what does it relate to money so because they're large they are capable of borrowing more their chances of borrowing are better than smaller firms and they could get better interest rates then i have the technical economies and technical it's from technology so i would be relating it to machines and large firms are capable to afford and employ advanced machinery or equipment then i have the research and development economies since it is a large firm they can assign one department that their only thing to do is to research about that product how can they develop it and make it better how can they decrease its price how can they do some innovation on that particular product and increase their sales and then finally i have the risk-bearing economies which is the risk spreading so large firms can spread their risks in various ways including product diversification so they are not only producing one type of product they will be diversifying their products doing different products in case one product is not selling properly with them they have other things to cover up for um for this loss of a product okay so let's say a company would not only be specialized in the production of jackets it would be a producing jackets jeans pants shirts dress shirts dresses and so on in case one is not working out they can afford to sell other things or probably it's not only selling clothes it's also selling perfumes it's selling chocolates so they will minimize their risks of losing because they have a diversification of products now i want to talk about the external economies of scale which is affecting the industry as a whole what are the different types of external economies i have the transport so when i am talking about transport you guys i need you to think about the improved transport links such as a new airport will improve transport links for all firms in an area cutting down the distribution cost so how they are going to move their products from one place to another then another type would be education so when i am talking about education i am talking about improved educational facilities such as colleges [Music] such as providing courses that are relevant to the local economy and that will benefit the area as a whole the there is a new course that would help the workers and they're not talking about workers only in that specific firm it's workers that have that specific skill they can take that course and they will improve the industry as a whole then i will be talking about suppliers when i am talking about suppliers i'm talking about ancillary firms would become established to provide the necessary components to all firms in that particular area and the fourth one would be amnesties what do i mean by enmities it's improved housing and social ammunities will encourage workers to move to that particular area it's becoming more um more advanced um more social for the people so people wouldn't mind moving to that particular area workers moving to that particular area and working there so it improved the whole industry the group of firms in general and the final one would be associated services within which is uh for example the development of appropriate banking and insurance services that will benefit all firms okay so please have a look at these notes so i wrote some notes for you here so you can pause the video and take a look at that slide now when i want to talk about this economies of scale i want you to remember that this is a situation where the more i produce the higher my unit cost so there is an increased cost of production again here i would be thinking about it in two different ways i have internal dis economies of scale and i have external dis economies of scale let me give you a quick brief what do we what do we mean by internal diseconomies of skin so what is the cost disadvantages so the increase in cost that a particular firm experience from its own increase in output however when i am talking about external diseconomies i'm talking about the increase in cost or the cost disadvantages that all firms in the industry is are experiencing so let's have a quick look at that how can the firm itself face the increasing cost of production so the internal the different types of internal diseconomies of scale the first one is management problems so sometimes if a firm grows too large management of the firm may become less effective then i have something called the technical problems again this is related to machines so a large firm may also experience technical problems as it buys new capital and equipment and the third one failure to sell the output so they produced all of this output but they have no access to distribution access to it no one is buying it so if a firm is producing more than it can sell the proportion of advertising cost may become too high and thus this would increase the average cost of production the fourth one is industrial relation disputes so and such as for example when i am talking about strikes and strikes are more likely to occur in larger firms and strikes we explained it in the previous video which was trade unions now the external this economies of scale what are the different types the first type would be the cost of labor and other factors so i would like you to think of here it is possible that as an industry growth the cost of labor could increase so cost of labor increases as the supply of skilled and specialized labor is becoming less also the cost of land may also increase as the demand exceeds supply and this would increase the rent the second one would be congestion there will be an increase in transport so which would increase congestion traffic leading to higher transport costs as journey time is increased so for example it usually takes me from abu dhabi to do by an hour and a half but because of the congestion that we are facing and the traffic it would be taking more time it would it might take me three hours so this would be an extra cost and then i have the pollution there may be more pollution both in terms of noise pollution and even air pollution finally so this is not affecting only me it's affecting all the firms in that particular industry then i have more expensive housing which means the cost of housing may increase putting workers off relocating to an area where it is much cheaper now firms want to grow they were small and they want to grow in size but the question is are they capable of growing too large can they become super large firms i would like you to think of firms can experience problems if they expand their scale of production too quickly and thus this would lead to something called this economies of scale and now we will be explaining the different types of this economies of scale which is management diseconomies the firm becomes too large to have control over all the firms that they have they would be facing communication problems there might be disagreements between managers and different departments and a large firm may suffer from internal communication and coordination problems especially especially if it has different or many locations and many managers and different points of views and activities then i have something called when i'm talking about this economies of scale in general and we have labored this economies which is when the firm may become too large and it cannot afford to keep up with the wages to attract the proper skilled over and specific number of workers that they need so at that point what might happen are the industrial disputes that we explained which is strike for instance or overtime ban or work to rule or go slow then i have the supply constraints which means if a large firm may run out of supplies of or parts or materials so they cannot keep up with the production they might find skill shortages it is a large firm remember so they need to attract a lot of workers so one of the problems they might face they are not capable of attracting enough skilled labor then we have finally the last one is their regulatory risk remember smaller firms cannot compete with the large firms so as a result governments what they do as we discussed earlier and one of the advantages of small firms is that they will help and give a grand order subsidy to the small firm and not to the big one so at that point governments will introduce laws and regulations that control the prices of big firms they don't allow them to sell at a high price and they start producing at that point when the firms are not capable of increasing their prices what would they do they would start producing low quality products in order to decrease their cost of production and therefore they will be increasing their profits so guys this is a quick recap remember we explained internal and external economies of scale and we explained what it means remember it's always about the decrease in cost of production however when i am talking about the diseconomies of scale whether it was internal or external this means my cost of production has become more okay try to apply this try to see if you were able to give different examples among internal or external economies of scale thank you guys that would be it for today i hope you like the video have a lovely day