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9609 · 1.3.2

Significance of small businesses — practice questions

Practice and worked examples for 9609 Significance of small businesses. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

An independent bookshop competes with a large online retailer. Analyse the likely strengths and weaknesses of the small business in this context.

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Strengths:

  • Personalised Service: Staff can offer expert recommendations and build customer relationships.
  • Community Hub: Can host local author events, book clubs, and create a loyal local following.
  • Niche Curation: Can specialise in specific genres (e.g., local history, rare books) that larger retailers ignore.
  • Immediate Gratification: Customers can browse and take the book home instantly.

Weaknesses:

  • Higher Unit Costs: Cannot achieve purchasing economies of scale, leading to higher book prices compared to the online retailer.
  • Limited Range: Physical space restricts the number of titles they can stock.
  • Marketing Budget: Limited funds for advertising compared to the vast digital marketing reach of an online giant.
  • Convenience: Cannot compete with the 24/7 availability and home delivery of an online store.

Worked example 2

A small local bakery, 'Artisan Bakes', produces 2,000 loaves of bread per month. Its monthly fixed costs are $4,000 and the variable cost per loaf is $1.50. A large supermarket, 'MegaMart', produces 500,000 loaves per month with fixed costs of $400,000 and a variable cost of $0.60 per loaf. Calculate the unit cost for each business and briefly explain the difference.

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The formula for unit cost (Average Cost) is: Unit Cost=Total CostsTotal Output=(Total Fixed Costs+Total Variable Costs)Total Output\text{Unit Cost} = \frac{\text{Total Costs}}{\text{Total Output}} = \frac{(\text{Total Fixed Costs} + \text{Total Variable Costs})}{\text{Total Output}}

Step 1: Calculate the unit cost for Artisan Bakes (Small Business)

  • Total Variable Costs = Output × Variable Cost per unit
  • Total Variable Costs = 2,000 × 1.50=1.50 = 3,000
  • Total Costs = Fixed Costs + Total Variable Costs
  • Total Costs = 4,000+4,000 + 3,000 = 7,0007,000
  • Unit Cost = $7,000 / 2,000 loaves
  • Unit Cost for Artisan Bakes = $3.50 per loaf

Step 2: Calculate the unit cost for MegaMart (Large Business)

  • Total Variable Costs = 500,000 × 0.60=0.60 = 300,000
  • Total Costs = 400,000+400,000 + 300,000 = 700,000700,000
  • Unit Cost = $700,000 / 500,000 loaves
  • Unit Cost for MegaMart = $1.40 per loaf

Step 3: Explanation MegaMart's unit cost ($1.40) is significantly lower than Artisan Bakes' ($3.50). This is due to economies of scale. MegaMart benefits from:

  1. Purchasing economies: Buying raw materials like flour in bulk at a much lower price per unit (0.60vs0.60 vs 1.50).
  2. Technical economies: Spreading its large fixed costs ($400,000) over a massive output (500,000 units), resulting in a lower average fixed cost per unit compared to the small bakery. This cost advantage makes it very difficult for the small business to compete on price.
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