Different Types of Firms (Cambridge International IGCSE Economics)

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 operate in one or multiple economic sectors

• 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

• Many firms have operations in multiple economic sectors

  • For example Tata operates in all three

2. Public or private sector

• Public sector firms are owned and controlled by the government

• Private sector firms are owned and controlled by other firms and 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 and receive a share of the profits
  • For example, the shares of Singapore Airlines are 55% government-owned and 45% privately owned