Criteria for Classifying Firms
- A firm is a business organisation which sells or produces a good/service
- All firms require factors of production as inputs
- They add value to these inputs in producing a good/service
- They sell the good/service, ideally at a price higher than their cost of production
- It is useful to classify firms into categories so that we can make comparisons between them
- These categories are
- The sector of the economy in which they operate
- Publicly (government) or privately owned
- Their relative size
1. The Economic Sector
- Firms can be classified according to which economic sector they operate in
- The primary sector includes firms involved in the production or extraction of raw materials e.g. fishing, farming, mining (Tata Steel is a large firm in the primary sector)
- The secondary sector includes firms that process raw materials in order to manufacture goods e.g. car manufacturing (Kelloggs is a large firm in the secondary sector)
- The tertiary sector includes firms which provide services e.g. car sales, banking, travel bookings (Expedia is a large booking firm in the travel industry)
- Economies usually measure what proportion of firms are active in each sector
- Two useful metrics are
- The % of workers employed in each sector e.g in 2019, 84% of workers in Singapore worked in the tertiary sector
- The % of gross domestic product (GDP) which each sector generates e.g in 2021, 38% of the GDP in Ethiopia was generated from primary sector activity
- Two useful metrics are
2. Public or Private Sector
- Public sector firms are owned & controlled by the Government
- Private sector firms are owned & controlled by other firms & private individuals (entrepreneurs and shareholders)
- Privatisation occurs when government-owned firms are sold to the private sector
- Many government owned firms have been partially privatised
- The government retains a share in them so they can influence decision-making & receive a share of the profits e.g. the shares of Singapore Airlines are 55% government owned & 45% privately owned
Public Sector Firms |
Private Sector Firms |
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3. The Relative Size of Firms
- When considering the size of firms, several metrics are useful for comparison & analysis
- The number of employees: In 2021, Toyota had 366,000 employees whereas Hyundai had 75,000
- The % of market share in an industry: During the 1st quarter of 2022, Samsung had 23% of the global market share for smart phones
- The size of profits: in 2021, Apple made the highest level of profits for any firm, $58.4bn
- Market capitalisation: Calculated by multiplying the number of shares in existence by the share price e.g. in October 2022, Apple, Saudi Aramco, & Microsoft were the top three firms & had a market capitalisation in excess of $2trn each
Exam Tip
Although most firms desire to grow, it is not always true that a bigger firm is better. They can become impersonal & lack a caring & considerate customer relationship. Smaller firms can often out compete them on quality, customer care & personalised product offerings.