Classification of Firms (Cambridge (CIE) IGCSE Economics)
Revision Note
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
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 e.g. the shares of Singapore Airlines are 55% government owned and 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 and 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, and Microsoft were the top three firms and had a market capitalisation in excess of $2trn each
Examiner Tip
Although most firms desire to grow, it is not always true that a bigger firm is better. They can become impersonal and lack a caring and considerate customer relationship. Smaller firms can often out compete them on quality, customer care and personalised product offerings.
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