These are my notes for the IAL edexcel economics unit 3: Business Behaviour. I got an A* in economics! I have crammed all the knowledge that helped me understand this unit, made the examiner happy with my answer and got me amazing marks ;)
The notes are provided as per the recent specification....
International A Level (IAL)
Edexcel Economics
Unit 3: Business Behaviour
Red - Applications
Green - Key words/phrases/important
Asterisk(*) - Questions from these topics/sections of topics commonly comes in the exam
, TOPIC 1 – TYPES OF BUSINESS
Private sector organisations
● Private sector organisations are organisations that are owned and run by individuals or
companies and not by the government. They usually aim to maximise profit.
● There are different types of private sector organisations:
➔ Sole trader: A business that is owned and controlled by one person only.
➔ Partnership: A business that is owned by two or more people. The owners share the
profits or losses, risks, responsibilities and capital of the business.
➔ Limited company: A business that has registered formally with the government to
have limited liability where the company and the owners are separate by law.
✔ Private limited company: A type of limited company where existing
shareholders have to agree on who can buy the shares resulting in usually
selling shares to family and friends.
✔ Public limited company: A type of limited company where shares can be
traded freely on the stock exchange so the public can buy shares in the
company.
State-owned enterprises (public sector)
● State-owned enterprises are organisations that are owned & controlled by the
Government. They are usually large in size.
● The profits made by these organisations are paid to the government.
● State-owned enterprises usually dominate the energy, water, transport and
telecommunication sectors.
● Network Rail in the UK is an example of a state-owned business.
For-profit and not-for-profit organisations
● For-profit organisations are those that aim to maximise profit or, at least, make some
level of profit. Most private sector organisations are for-profit organisations.
● Not-for-profit organisations do not have a profit-making goal; they aim to use any profits
generated to benefit society.
● Not-for-profit organisations have aims such as reducing poverty, slowing down climate
change, stopping deforestation, promoting gender equality, making education accessible to
everyone etc.
● Greenpeace is an example of a not-for-profit organisation that aims to protect the
environment and save marine life. Charities such as Red Cross is another example.
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,Co-operatives
● Co-operatives are businesses that are owned and controlled by members, who are usually
consumers, producers or workers, and each member has one vote on business decisions.
● Profits are shared equally among the members. Although, co-ops usually aim to provide
service rather than making profits.
● For example, the John Lewis Partnership is a co-operative made of its workers.
Joint ventures
● A joint venture is an agreement by two or more businesses to work towards a goal/ project
by combining their resources and expertise, and sharing risks and profits.
● For example, Honda and Nissan have launched a joint venture to share electric car
technology, such as components and software.
*TOPIC 2 – SIZES OF BUSINESSES
The size of businesses
● Small and medium-sized enterprises (SMEs) are firms that employ less than 250
employees and they are usually not owned by another large firm.
● Large corporations are those that employ more than 250 employees.
How businesses grow
● Organic growth refers to the growth that comes from within the business using its own
resources. For example, Patagonia sells sustainable clothing for outdoor activities and has
grown successfully by itself.
● Inorganic or external growth refers to expanding a business by either merging with or
taking over another business. A merger is when two or more firms join together to operate
as one e.g. Air India and Vistara merged in 2024 in hopes to make the loss-making
businesses profitable again. A takeover is when a firm buys another firm e.g. Coca-Cola
bought Costa Coffee from Whitbread in 2019 for around £4 billion. Mergers or takeovers
can be of 3 types:
➔ Vertical integration: When two or more businesses in the same industry but at
different stages of production join together (through a merger or a takeover). There
are 2 types of vertical integration:
✔ Forward vertical integration occurs when a business buys another business
in the next stage of production in the same industry e.g. an ice cream
manufacturer (producer) buying ice cream shops (retailer).
✔ Backward vertical integration occurs when a business buys another
business in the previous stage of production in the same industry such as a
restaurant (producer/ seller) buying farms (suppliers). E.g. Amazon (and its
streaming service Prime Video) made a takeover for MGM studios (a media
company that produces films) in 2022. Amazon can stream the films under
MGM studios in Prime Video.
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, ➔ Horizontal integration: When two or more firms in the same stage of production
and in the same industry join together (through a merger or a takeover) e.g. Just Eat
bought HungryHouse (both are online food ordering businesses) in 2017 to limit
competition.
➔ Conglomerate integration: When two or more firms from completely different
industries and with no common interest join together. E.g. Unilever (a fast-moving
consumer goods company) bought Paula’s Choice (a skin care brand) in 2021.
Advantages and disadvantages of each type of merger/ takeover
● Vertical integration:
➔ Advantages:
✔ Reduces cost of production as middleman profits are removed e.g. if a car
manufacturer buys a supplier, then the price that the supplier would have
charged for car parts is reduced to only the cost of the parts → reduced costs
→ profits that the supplier would have generated is transferred to the car
manufacturer → increasing profits.
✔ Gives more control of the supply chain → allows firms to make sure the
quality of raw materials is better (backward integration) or ensure that there
are sales platforms for the firm’s products (forward integration) → increase
sales and revenue.
➔ Disadvantages:
✔ The cultures of the firms may be too different → cultural clash → the two
groups of workers not able to work together → conflicts among workers →
reduce productivity of workers → lower output and increased unit labour costs
→ profit margins fall.
✔ The cost of the merger or the price paid for a takeover may be too high →
drain resources → cash flow problems → difficult for the new, larger firm to
operate → firm might collapse. This is especially worse when the price of
buying another company is so large that there are limited resources for
integrating the two firms, let alone for daily operations, and so the takeover
may fail.
✔ Extra layers of management may be needed to control the larger company/
two managers may be needed for the same department/ higher administrative
costs/ slow communication → diseconomies of scale → cost per unit may rise
→ reduced profits.
✔ Vertical merger or takeover → the firm buying another company (the predator
company) does not have enough expertise in the industry of the company it is
buying (the target company) or the firms merging together do not have
expertise in each other’s industry → e.g. the firm may not know the market
and the marketing campaigns that will attract customers in the market of the
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, firm it bought or merged with → it can lead to poor performance and reduce
sales.
✔ Merger or takeover → usually leads to job losses to prevent duplication of
jobs → increase redundancy costs whilst reducing the productivity of
remaining workers since their motivation will be low with poor job security →
overall, costs may rise.
● Horizontal integration:
➔ Advantages:
✔ Economies of scale in the long-run → productive efficiency → average costs
may fall due to a rise in output (now that the company is larger) → the firm
can operate at the lowest point of the average cost (AC) curve → supernormal
profit may rise with a fall in costs.
✔ Supernormal profit → dynamic efficiency as the profit can be invested back
into the business for innovation, research and development (R&D) and new
technology → better products can be produced and updated technology can
reduce costs → further increased sales and profits.
✔ Reduces competition in the market as one of the competitors is removed (by
merging with it or buying it). Less competition → less advertising costs would
be incurred in trying to gain market share → reducing costs.
✔ Market shares of the two firms are combined → market share of the new firm
will increase → higher sales and revenue → the firm may become more
dominant and have more price-making power → higher prices → higher
profits.
✔ It is less risky as a firm is merging or making a takeover in the market where it
already has expertise which means the merger is more likely to be successful.
➔ Disadvantages:
✔ It can attract the attention of competition authorities (e.g. the CMA in the UK)
if the merger/ takeover has the potential to reduce competition in the market
significantly and exploit consumers. This means that the merger/ takeover can
be blocked from proceeding or the integration will only be allowed under some
conditions such as the firms selling some of their assets.
[The disadvantages of vertical integration above are also the disadvantages for horizontal
integration, except for the 4th point.]
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