Classification of Firms (Cambridge (CIE) O Level 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 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 

3. The relative size of firms 

• When considering the size of firms, several metrics are useful for comparison and 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, and Microsoft were the top three firms and had a market capitalisation in excess of $2trn each