Size and Location of a Firm - Business Studies Form 3 Notes

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  • Firm refers to a single unit of business organizations that brings together the factors of production to produce any given commodity.

Factors to Determining Decision on what Goods and Services to Produce.

  1. Profitability
    - Businesses will produce goods and services that would yield maximum profit.
  2. Level of competition
    - A firm will produce goods that meet least competition such as goods that are either not available in the market or improvement on existing ones.
  3. Availability of resources
    - A firm will produce commodities that the resources for which is necessary to produce them are available .e.g. raw materials, appropriate labor, equipment and space.
  4. Government policy
    - A firm should produce commodities that are favored by government policy. For example the firm should not produce goods which are not illegal.
  5. Demand /market
    - A firm should produce commodities that have the highest demand. High demand leads to high sales volume.
  6. Cost of production.
    - A firm would normally produce for which production costs are low.

Factors Determining the Size of a Firm.

  1. The number of employees
    - Large firms always have a large number of workers compared to a small firms.
  2. Volume of outputs
    - A firm would be considered big if it has a large volume of output
  3. Floor area covered by premises
    - A firm may be considered to be large if the floor area covered by the premises is large.
  4. Capital invested
    - The larger the capital invested in assets the larger the firm.
  5. Production methods
    - Larger firms are associated with specialization and division of labor as compared to small firms
  6. Market served
    - A firm having many branches all over the country is said to be big
  7. Sales volume
    - The amount of sales also determines the size of the firm. The larger the sales volume the larger the firm.

Location of the Firm

  • Location of a firm is the selection of a place where the proposed firm will be established.

Factors that Influence the Location of Firms

  1. Availability of raw materials
    - If the raw materials are bulky and heavy to transport the firm would be located near the source of the raw. The nature of raw material, perishable raw material also determines the location of a firm.
  2. Market availability
    - A firm may be located near the market for its products to avoid the costs involved in transportation of the finished products. For example firms that deal in heavy and bulky commodities.
  3. Availability of human resource (labor)
    - Labour intensive firms should be located in areas where there are abundant and appropriate labour force.
  4. Appropriate transport and communication network
    - Good transport network for transporting raw materials to the firm and also finished products to the market is needed so the firm will be located in areas with good transport and communication networks.
  5. Adequate power and water supply.
    - Firms that requires a lot of power and water need to be located where there is adequate supply for power for running machines and clean water supply for cleaning, cooling and even as a raw material.
  6. Government policies
    - The government may encourage or discourage the development of firms in particular areas to create jobs and prevent congestion by using the following:
    • Offering free or cheap land.
    • Reduction of taxes.
    • Offering subsidies.
    • Offering direct financial assistance.
    • Improvement of infrastructure.
  7. Availability of security
    - Firms cannot be located in areas without securities compared to areas with maximum security

Localization and Delocalization of Firms.

Localization of Firms

  • This means the concentration of similar firms in one particular area or region.
  • Subsidiary industries usually develop around the main industries, either to use the by-products of the main industries or to supply them with component parts

Factors which Encourage Localization of Firms.

  • Well-developed infrastructure in an area.
  • Availability of large population which may provide both labour and a market for its products.
  • Government policy requiring firms to be located in a certain area.
  • Availability of raw materials in a certain area
  • Availability of support industries such as banks

Advantages of Localization.

  1. Establishment of support business
    - Encourages the established of support business enterprises such as banks, insurance companies and distributors.
  2. Employment opportunities
    - Employment opportunities is always generated in the areas they are located which benefits the people living in those areas.
  3. Development of infrastructure
    - Infrastructure such as roads, communication network, health and education facilities are likely to arise.
  4. Creation of Pool of labour
    - Encourages a pool of labour as people tend to migrate to that region in search of employment this enables the firms to meet their labour force requirements.
  5. Easy disposal of waste
    - Localized firms are able to easily dispose of their waste by either selling it to other firms for recycling or by jointly undertaking waste disposal projects.
  6. Arise of industries
    - Industries dealing in by products are likely to arise and the communities in those areas will be able to use the by-products.
  7. Security
    - When industries are closely related, these are few security problems experienced as compared to the dispersed industries.

Disadvantages of Localization

  1. Cause pollution
    - Emission from firms may cause both air and water population which have negative effects on the environment.
  2. Regional imbalance
    - Imbalance in development is experienced because areas of industrial concentration tend to enjoy provision of social amenities such as roads schools while other areas may suffer.
  3. Rural to urban migration
    - People migrate from rural to urban areas in search of jobs and better living conditions, these movements cause unemployment in urban areas and labour deficiency in rural areas.
  4. Increase social evils
    - Increased population in areas of industrial concentration leads to series of problems such as congestion, increased rate of crimes.
  5. Economic depression during times of war or calamities
    - Localization of firms may be risky because if any undesirable thing happens to the region it may destroy the country‟s economic and industrial base.
  6. Leads to widespread unemployment
    - A fall in demand for products produced by localized firms, would result in wide spread unemployment in the affected area.

Delocalization of Firms

  • Refers to establishment of firms in different parts of the country

Advantages of Delocalization

  1. Employment opportunities
    - Creates employment opportunities for people living in rural areas
  2. Reduces rural to urban migration
    - Rural to urban migration is reduced due to the spread of industries to all parts of the country which creates employment to those parts.
  3. Balanced regional development
    - Due to the spread of industries a balanced regional development is achieved in all the areas where the industries are located.
  4. Increased accessibility of produced goods.
    - The local communities are able to get the produced goods without necessarily travelling very far.
  5. Provision of market
    - Provides a market for locally produced raw materials.

Disadvantages Of Delocalization

  1. Spread of pollution
    - When industries are spread to many parts of the country, they also spread the pollution to those parts of the countries.
  2. Inadequate skilled manpower
    - Skilled man power may not be available in rural areas where the industries are spread.
  3. Security
    - Some areas especially rural areas may lack proper security and some areas such as slums are generally insecure.
  4. Lack of service industry.
    - Service industries like banks may not be available in rural areas such as banks and many others.
  5. Production of substandard products.
    - Continued protection of firms from foreign competition by the government may make the firm to continue producing sub- standard products.
  6. Burden to tax payers
    - Incentives offered by government are an added burden to the taxpayer.

Economies and Diseconomies of Scale.

  • The advantages of expansion of industries is called economies of scale while the disadvantages are called diseconomies of scale.

Economies of Scale

  • Divided into two types
    • Internal economies of scale
    • External economies of scale


Internal Economies of Scale

  • These are advantages that accrue to a single firm as its production increases, independent of what happens in the other firms in the industry.
  • They include the following:
    1. Marketing economies
      - A firm that buys in large quantities is likely to get benefits such as large trade discounts and they also incur less cost per unit in transporting the goods bought.
    2. Financial economies
      - A firm with strong financial base can obtain loans at a low interest rates against their assets.
    3. Risk bearing economies
      - Large firms can reduce the risks involved in market failure through diversification of products or markets. This can be done so that failure of one product is offset by the success of the other products.
    4. Managerial economies
      - Large firms are able to practices division of labour which leads to specialization hence an overall increase in the firm‟s outputs.
    5. Technical economies
      - These refers to benefits which accrue to a firm due to specialization of both labour and machinery. This is because large scale firms are able to hire specialized labour and machinery more economically than small scale firms.
    6. Research economies
      - Research is very important in production but it's always very expensive and only firms large firms can afford to raise the needed finance to carry it out.
    7. Staff welfare economies:
      - Large firms can easily provide social amenities to their employees including recreations, housing, education, canteens and wide range of allowances. These amenities work as incentives to boost the morale of the employees to work harder and increase the quality and quantity of output. This leads to higher sales and profits.
    8. Inventory economies
      - A large sized firm can establish warehouses to stock raw materials and therefore enjoy large stocks of raw materials for use when the raw materials are in short supply.Thus, the firm can avoid production stoppages that can be occasioned by shortages of the raw materials. The suppliers of such material may be sold at a higher price to realize profit

External Economies of Scale

  • These are those benefits that accrue to a firm as a result of the growth of the whole industry.
  • They include the following:
    • Skilled labour force.
    • Ready market may be available from the surrounding industry.
    • Easy disposal of waste products
    • Improved infrastructure.

Diseconomies of Scale

  • These are problems which a firm experience due to expansion.
    1. Internal diseconomies of scale.
      - These are problems a firm experiences as a result of large – scale production arising from its persistent growth.
      - They include:
      • Managerial diseconomies
      • High overhead costs.
    2. External economies of scale
      - These are the demerits that a firm experience as a result of growth of the entire industry.
      • Scramble for raw materials.
      • Non-availability of land for expansion.
      • Scramble for available labour.
      • Competition for available markets.
      • Easy target especially in times of war.

Reasons for the Continued Existence of Small Firms in an Economy

  1. Flexibility
    - It is easier for small scale retailers to change from one form of business to another location compared to large scale firms.
  2. Size of the market
    - If the demand for a product is not high, large scale production may not be necessary and it's only appropriate for such a market to be served by small firms.
  3. Nature of the product
    - Nature of the product may make it very difficult to be produced in large quantities, such as personalized services as painting which can only be provided by one individual.
  4. Need to retain control
    - The owners of the firm may wish to keep it small in order to retain control and independence.
  5. Simplicity of organization
    - Where the firm intends to take advantage of simplicity to avoid the bureaucracy, wastage and management complexity associated with large scale organizations, it may chose to remain small.
  6. Quick decision making
    - In a situation where the founders want to avoid delay in decision making they may opt to maintain a small business as this would involve less consultations.
  7. Rising cost of production
    - In situations where production costs rise so fast, such that diseconomies of scale set in very early, the firm has to remain small.
  8. Legal constraints
    - The law may restrict the growth of a firm hence the existing firms has to remain small.

Implication of Production Activities on Environmental and Community Health

- As production activities take place in a given area, the environment and the health of the community around may be adversely affected by these activities.
- Some of these effects include:

  • Air and water pollution from factories.
  • Destruction of environment.
  • Solid waste pollution.
  • Noise pollution



Past KCSE Questions on the Topic

Paper 1

  1. State disadvantages of concentrating industries in one area within a country. (4mks)
  2. Highlight four circumstances under which a firm would be located near the market for its product. (4 marks)
  3. Outline four ways in which land influences the location of industries. (4 marks)
  4. State four circumstances under which a firm would be located near the market for its Products. (4 marks)
  5. State four advantages of locating a firm near the source of raw materials. (4 marks)
  6. Identify four problems that tend to limit the growth of small –scale retail business in rural Kenya. (4 marks)
  7. Highlight four measures a government may take to attract firms to an area. (4 marks)
  8. State four disadvantages of locating a business away from other related business. (4 marks)
  9. State four disadvantages of delocalization of industries to a country. (4 marks)
  10. State four factors which influence the location of business enterprises. (4 marks)
  11. State four measures that local authority could take in order to attract investors to locate their industries within its boundaries. (4 marks)

Paper 2

  1. Outline five benefits that country would get by encouraging businessmen to locate new industries in rural areas. (10 marks)
  2. Discuss the factors that have led to the survival of small scale retailers despite competition from supermarkets. (10 marks)
  3. Discuss the economic benefits to a community that may result from the concentration of industries in an area. (10 marks)
  4. Explain five circumstances that may influence a firm to locate its operations near the source of raw materials. (10 marks)
  5. Explain five measures that a government may take to encourage establishment of industries in rural areas. (10 marks)
  6. Highlight five advantages of having a business enterprises located in an area. (10 marks)
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