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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

A small independent bakery chooses to remain small and serve a niche market of customers wanting hand-made products. Which factor best explains why small firms can survive alongside large firms in this way?

Small firms survive by serving niche markets with personalised or specialised products that large firms find unprofitable to supply. In such markets, customers value individual service over low price, so scale economies give large firms little advantage.

  1. ALarge firms never achieve economies of scale in the bakery industry
  2. BSmall firms can serve niche markets with personalised products that large firms find unprofitableCorrect
  3. CSmall firms always have lower fixed costs per unit than large firms
  4. DGovernment regulations prevent large firms from entering local markets

Explanation

Small firms survive by exploiting niches, offering personal service or specialised products where mass production has little advantage. Large firms can achieve economies of scale, and small firms do not generally have lower unit fixed costs. Regulation is not a general reason.

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