firms ( economics )

Define primary sector firms

• Firms that extract raw materials from the earth.

• Examples:

  • Agriculture

  • Fishing

  • Mining

Define secondary sector firms

• Firms that:

  • manufacture goods, changing raw materials into finished products

  • construct buildings, roads and bridges

• Example: A factory turning cotton into clothing.

Define tertiary sector firms

• Firms that provide services to the general public and other firms.

• Examples:

  • Retail shops

  • Doctors

  • Schools

  • Hairdressers

  • Lawyers

  • Banks

  • Insurance companies

Define interdependence

Interdependence means that the primary, secondary and tertiary sectors depend on each other and cannot operate independently to produce goods and services.

This occurs because firms need goods and services from other sectors.

Define private sector

Economic activity involving private individuals and firms, with the main aim of earning profit for owners.

Define public sector

Economic activity directly involving the government, with the main aim of providing a service.

Examples of public-sector services:

• Education

• Healthcare

• Water

• Electricity

• Postal services

Firms can also be classified according to their relative size.

Ways of measuring size include: (4)

Number of employees

• The number of people employed by the firm.

Market share

• A firm’s sales revenue as a proportion of the industry’s total sales revenue.

Market capitalisation

• The stock-market value of a company.

• Calculated by:

Market capitalisation = Number of shares × Current share price

Sales revenue

• The amount of money a firm receives from selling its products.

Sales revenue = Price × Quantity sold

Why do small firms exist?

Small firms can survive alongside large firms because they can: (6)

• Provide specialised products that large firms do not offer.

• Serve remote areas where there may be little competition.

• Provide a more personal service.

• Adapt quickly to changing consumer tastes.

• Focus on niche markets.

• Provide custom-made products, such as bespoke clothing or furniture.

Advantages of small firms (5)

Easy to set up

• There are relatively few legal formalities.

• Start-up costs are usually lower.

2. Owner receives the profits

• The owner receives all profits.

• This can provide an incentive to work hard.

3. Flexibility

• The owner can make decisions quickly.

• There are fewer levels of management.

4. Personal relationships with customers

• Small firms can know customers personally.

• This may lead to better customer relationships.

5. Easier to manage

• There are fewer employees and less complicated organisational structures.

Disadvantages of small firms (5)

Limited finance

• Small firms may have difficulty raising finance.

• This makes expansion more difficult.

2. High risk of failure

• Small firms often face strong competition from other small firms and larger businesses.

3. Dependence on the owner

• The owner may have to manage finance, marketing and human resources.

• This increases workload and can reduce effectiveness.

4. Lack of continuity

• If the owner becomes ill or is unavailable, the business may struggle to operate.

5. Higher unit costs

• Small firms cannot benefit as much from economies of scale.

• Their average costs may therefore be higher than those of larger firms.

• This can make their prices less competitive.

Firms can grow through internal growth or external growth. Define both and give examples (3) of each .

Definition: Internal growth occurs when a firm expands using its own resources.

Examples:

• Increasing market share

• Opening more branches

• Expanding into new countries

• Selling products in more markets

The firm can use profits generated by the business to finance its expansion.

External growth occurs when a firm expands by becoming involved with another organisation.

Examples:

* Mergers

* Takeovers

* Franchising

What is a merger

A merger occurs when two or more firms join together to form one firm.

What is a takeover

A takeover occurs when one firm takes control of another firm, usually by buying a majority stake in it.

A takeover may be:

• Hostile — the target firm does not agree.

• Agreed — both firms agree to the takeover.

What is a franchise

A franchise involves a person or business buying a licence to trade using another firm’s name, logos, brands and trademarks.