Form 4 Economics Note on Chapter 11

After revising for chapter 11, you MUST be able to

Distinguish among different types of integration

Distinguish between integration and expansion

State the advantages / motives of different types of integration

General motives

Integration will increase the scale of production of the firm, then the firm can benefit from economies of scale. Its average cost will decrease.

Firms may combine to make more efficient use of resources.

Firms may combine to close some plants to lower cost and reduce loss.

After integration, the output of the firm may take up a large share of market output. The firm will have a greater market power and can influence market price.

Specific motives

1. Horizontal integration may enable a firm to turn its competitors into business partners. This can decrease competition and increase its market power.

2. Vertical backward integration may ensure a firm to have a steady supply of raw materials. The firm can have a better production plan.

3. Vertical forward integration may ensure a firm to have adequate market outlets for its products. And the firm can collect market information more easily.

4. Lateral / conglomerate integration may enable the firm to

a. diversify production / market and have more sources of income. This can reduce risk.

b. Extend its brand name to other production lines to earn more profit

c. Have a flexible use of resources as it can use its resources for producing other products more easily