Classification of Firms | Economics for GCSE/IGCSE - Year 11 PDF Download

Criteria for Classifying Firms

• A firm is a business organization that 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.
• Classification helps in making comparisons between different firms.

Categories for Classifying Firms

Firms can be categorized based on:

• The sector of the economy in which they operate.
• Whether they are publicly (government) or privately owned.
• Their relative size in the market.

The Economic Sector

• Firms can be categorized based on the economic sector they operate in:
  • Primary Sector: Involves companies engaged in raw material production or extraction, such as fishing, farming, and mining. For instance, Tata Steel operates in the primary sector.
  • Secondary Sector: Comprises companies that process raw materials to manufacture goods, like car manufacturing. Kelloggs is a major player in the secondary sector.
  • Tertiary Sector: Encompasses firms providing services like car sales, banking, and travel bookings. Expedia, a prominent travel industry booking firm, is part of the tertiary sector.
• Economies often gauge the distribution of firms across sectors using two key metrics:
  • The percentage of workers employed in each sector. For example, in 2019, 84% of Singapore's workforce was in the tertiary sector.
  • The percentage of Gross Domestic Product (GDP) generated by each sector. In 2021, 38% of Ethiopia's GDP stemmed from primary sector activities.

2. Public or Private Sector

• Public sector firms: These entities are owned and regulated by the government.
• Private sector firms: Ownership and control of these businesses lie with other firms and private individuals, such as entrepreneurs and shareholders.
• Privatization: This process involves the sale of government-owned firms to the private sector. Many state-owned enterprises have undergone partial privatization, allowing the government to maintain a stake for influence and profit-sharing. For instance, Singapore Airlines is 55% government-owned and 45% privately owned.

3. The Relative Size of Firms
Various metrics are valuable for assessing and comparing the sizes of firms.

• The number of employees is a significant metric. In 2021, Toyota had 366,000 employees compared to Hyundai’s 75,000.
• Market share percentage within an industry is crucial. Samsung, for example, held 23% of the global smartphone market share in the first quarter of 2022.
• Profit size is also essential. Apple, in 2021, achieved the highest profit level among all firms, totaling $58.4 billion.
• Market capitalization, calculated by multiplying share price by the number of shares, is another key metric. In October 2022, Apple, Saudi Aramco, and Microsoft each surpassed $2 trillion in market capitalization.