💼 Private sector firms
Owned by individuals or shareholders. They usually aim to make a profit. Examples: a family restaurant, a phone company owned by shareholders. They survive only if their revenue covers their costs.
Firms » Types of Firms
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 3.4.1
- Sort firms into the primary, secondary and tertiary sectors
- Tell private sector firms from public sector firms
- Weigh up the advantages and disadvantages of small and large firms
- Explain why small firms survive next to big ones
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Unlock This CourseFirms by sector of production
A firm is a business that produces goods or services. There are millions of them, from a market stall to a global car maker. Economists sort them in a few simple ways. The first way is by what the firm does in the chain of production.
Key terms:
- Primary sector: firms that take natural resources from the land or sea, such as farming, fishing, mining and forestry.
- Secondary sector: firms that make things from raw materials, such as manufacturing, food processing and construction.
- Tertiary sector: firms that provide services, such as shops, banks, schools, hospitals, transport and tourism.
One product, three sectors
Follow one cotton shirt. A cotton farm in a made-up country called Sundale grows the cotton (primary). Halbrook Textiles turns the cotton into shirts in a factory (secondary). A high street shop sells the shirt to a customer (tertiary). Each firm adds something, and all three are needed.
🌾 Primary
A fishing business, a gold mine, a wheat farm, a forestry company.
🏭 Secondary
A bakery making bread, a car factory, a building company, a steelworks.
🛒 Tertiary
A supermarket, a bank, a taxi firm, a dentist, a hotel.
How the balance changes as countries develop
In many countries, a poor economy has most of its firms and workers in the primary sector. As incomes rise, the primary sector becomes less important, more firms move into manufacturing, and later services grow the most. So the tertiary sector is usually the biggest in richer countries. Differences between countries are covered in the lesson Development Gaps: Income, Productivity, Population and Sectors.
Private sector and public sector firms
Remember, the private sector is owned by individuals and groups, and the public sector is owned or run by the government. Firms follow the same split.
🏥 Public sector firms
Owned or run by the government. They often aim to provide a service for everyone, not only to make a profit. Examples: a state-run railway, a government hospital, a public water company. They may be paid for by taxes.
Do not mix this up with the three sectors above. A private firm and a public firm can both be in the tertiary sector. A hospital run by the government and a private clinic both provide services.
Small firms and large firms
Firms also differ in size. Size can be judged by the number of workers, the amount of sales or the value of the capital they own. A small firm has few workers and a small amount of sales, such as a corner shop. A large firm has many workers and large sales, such as a national supermarket chain.
✅ Small firms: advantages
The owner makes decisions quickly. The firm can change what it does easily. Staff know customers well and give personal service. Few workers means communication is simple.
❌ Small firms: disadvantages
It is harder to borrow money. They buy in small amounts so costs per unit are often higher. They find it hard to compete on price. One bad year can close them.
✅ Large firms: advantages
They can produce at a lower cost per unit (see the lesson Economies and Diseconomies of Scale). They find it easier to raise money. They can sell many products in many places, which spreads risk. They can afford advertising and research.
❌ Large firms: disadvantages
Decisions can be slow because many people are involved. Workers may feel unimportant, which can lower motivation. Customers may get less personal service. Running a very large firm can be hard and costly.
Why do small firms survive?
If large firms have lower costs, why are there so many small ones? There are several reasons.
- Small markets: some goods are wanted by only a few people, such as handmade jewellery. It is not worth a large firm making them.
- Personal service: many customers want a hairdresser, tailor or plumber who knows them.
- Local demand: a village needs a shop, but cannot support a big store.
- Low start-up cost: a person can start with little money and few workers.
- Supplying large firms: some small firms make parts or provide services that big firms buy.
Worked example
Sort each firm. (1) Orrin Fishing, a boat company catching tuna. (2) Marrow Motors, which assembles cars. (3) Tessa's Tailoring, one person who alters clothes for local customers.
Orrin Fishing is primary and private. Marrow Motors is secondary and private. Tessa's Tailoring is tertiary, private and small. It survives because it offers personal service to a small local market.
Common mistakes
1. Saying a farm is secondary. Growing food from the land is primary. Turning it into packaged food is secondary.
2. Thinking public sector means open to the public. Public sector means owned or run by the government.
3. Saying "small firms are bad". Small firms do some things better, such as flexibility and service.
4. Listing advantages with no reason. Always say why it helps the firm.
Exam-style question
Dorvik is a made-up country. Its government runs the railway. A small private bakery, Pella Bread, bakes bread in its own bakery and delivers it to cafes and homes nearby. The bakery owner uses flour from a nearby farm.
(a) State which sector Pella Bread is in. [1 mark]
(b) Identify one public sector firm in the passage. [1 mark]
(c) Explain two reasons why Pella Bread can survive even though large bakeries exist. [4 marks]
(d) Discuss whether it would be better for Pella Bread to become a large firm. [6 marks]
Model answer
(a) Secondary sector, because it makes a product from raw materials (1).
(b) The railway (1).
(c) One reason is local demand (1): people nearby want fresh bread close to their homes, and a large bakery may not serve them (1). Another is personal service (1): the owner knows the customers and can adapt to what they want (1).
(d) A large Pella Bread could have a lower cost per loaf (1) and find it easier to borrow money to expand (1). It could also sell in more places, which spreads risk (1). On the other hand, it might lose its personal service (1) and decisions could become slower (1). Overall, it depends on whether the owner values growth or the close link with local customers (1).
Exam tip
In a "Discuss" question, give a point for each side and a short conclusion that names the firm. Do not just list the advantages of size.