Existence of small firms in an economy

Business studies study module

As the firm grows in size, its scale of production increases.However, many firms remain small even though they face stiff competition from larger firms. Some of the reasons for existence of small scale firms include;

Size of the market

Large scale production can only be sustained a high demand for a product. If the demand for a product is low, it may not be advisable for a firm to produce on a large scale, hence it will remain small.

Nature of the product;

The nature of the product sometimes makes it impossible to produce in large quantities e.g. personal services e.g. hairdressing, painting or nursing can only be provided an individual or a small firm.

Simplicity of organization

Small firms have the considerable advantage of simplicity in organization. They avoid bureaucracy, wastage and managerial complexity associated with large scale organizations.

Where a firm intends to take advantage of simplicity, the proprietor may maintain its small firm.

Flexibility of small firms

Small firms are flexible i.e. one can easily switch from one business to another where an owner of a business wishes to maintain flexibility so as to take advantage of any new opportunity, he/she may have to maintain a small firm.

Quick decision making

In a situation where proprietors want to avoid delay in decision-making, they may opt to maintain a small business as this would involve less consultation.

Belief that a small firm is more manageable

Many small businesses have the potential of expansion, yet their owners prefer to have them remain small believing that big businesses are difficult to run.

Rising costs of production

In situations where production costs rise too fast, such that diseconomies of scale set is very early, the firm has to remain small.

Need to retain control

In order to retain control and independence, the owners of the firm may wish to keep it small.

Legal constraints/Government policy

In some situations, the laws may restrict the growth of a firm. In such circumstances the existing firms remain small.

Small capital requirements

As opposed to large scale firms, small firms require little amounts of capital to start and operate.



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