Classification of Firms (CIE IGCSE Economics)

• 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

 
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
Their main goal is usually to provide a service Public sector firms can operate on a local, regional or national government level E.g. Transport for London (local);  Agricultural State Service in India (regional); Caribbean Airlines (national)	The objective of most private sector organisations is profit maximisation This often causes the private sector to be more efficient than the public sector with higher levels of productivity  Types of business ownership vary from sole trader to partnerships to company shareholders

3. The Relative Size of Firms
 

• When considering the size of firms, several metrics are useful for comparison & analysis

1. The number of employees: In 2021, Toyota had 366,000 employees whereas Hyundai had 75,000
2. The % of market share in an industry: During the 1st quarter of 2022, Samsung had 23% of the global market share for smart phones
3. The size of profits: in 2021, Apple made the highest level of profits for any firm, $58.4bn
4. 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