Karthikeyan

. Classification by Economic Sector

Firms can be grouped based on the type of activity they perform:

🔹 Primary Sector

• Extracts raw materials from nature

• Examples: fishing, mining, farming

🔹 Secondary Sector

• Converts raw materials into finished or semi-finished goods

• Also includes construction (roads, buildings, bridges)

🔹 Tertiary Sector

• Provides services to people and businesses

• Examples: doctors, teachers, shops, banks, transport

🔗 Interdependence of Sectors

• All three sectors depend on each other

• This connection is called the chain of production

• Example:

  • Primary → provides raw materials

  • Secondary → makes products

  • Tertiary → sells/distributes them

🏢 2. Public vs Private Sector

🔹 Private Sector

• Owned by individuals or shareholders

• Main aim: Profit

Types:

• Sole Trader – one owner

• Partnership – 2–20 owners

• Private Limited Company – shares not freely sold

• Public Limited Company – shares sold on stock exchange

🔹 Public Sector

• Owned and controlled by the government

• Main aim: Provide services

Examples:

• Education

• Healthcare

• Utilities (water, electricity)

• Funded through tax revenue

📏 3. Classification by Size of Firms

Firms can vary from small local shops to large multinational companies like Toyota.

📊 Ways to Measure Size

• Number of employees

• Market share

• Market capitalisation

• Sales revenue

🏪 4. Small Firms & Sole Traders

🔹 Small Firms

• Operate on a small scale

• Examples: local shops, bakeries

🔹 Why Small Firms Exist

• Provide personal service

• Can adapt quickly

• Serve special markets (niche markets)

• Located in areas where big firms are absent

👤 Sole Trader

• Owned and run by one person

• Owner takes all risks and profits

• Most common form of business

✅ Advantages of Small Firms

• Easy to set up (low cost, few legal rules)

• Owner keeps all profits

• Flexible decision-making

• Close relationship with customers

• Easier to manage

⚠️ Disadvantages of Small Firms

• Limited capital (money)

• High risk of failure

• Heavy workload on owner

• Lack of continuity (if owner absent)

• Higher costs than large firms

📈 5. Growth of Firms

Firms grow to increase size, profits, and market share

🔹 Internal Growth (Organic)

• Expansion using own resources

• Opening new branches

• Selling in new markets

🔹 External Growth (Inorganic)

• Growth by joining with other firms

Types:

• Mergers – two firms become one

• Takeovers – one firm buys another

• Franchising – selling the right to use a brand

🔗 6. Types of Mergers

🔹 Horizontal Merger

• Between firms in the same industry

• Example: two soft drink companies

🔹 Vertical Merger

• Between firms at different stages of production

Types:

• Backward Integration – firm joins with supplier

• Forward Integration – firm joins with distributor/retailer

🔹 Conglomerate Merger

• Firms in different industries combine

• Reduces risk through diversification

⚙️ 7. Economies of Scale

🔹 Meaning:

• Average cost decreases as firm grows

🔹 Internal Economies

• Bulk buying (cheaper materials)

• Better machinery (technical)

• Easier loans (financial)

• Specialist managers (managerial)

• Research & development

• Marketing advantages

🔹 External Economies

• Benefits from location:

  • Skilled workers nearby

  • Good transport

  • Nearby suppliers

  • Area reputation

⚠️ 8. Diseconomies of Scale

🔹 Meaning:

• When a firm becomes too large, costs start increasing

🔹 Causes:

• Communication problems

• Slow decision-making

• Low worker motivation

• Difficult management

• Over-diversification