Firms

• Types of firms
• Size of firms
• Economies of scale / Diseconomies of scale
• Firms / Production
• Cost / Profits / Objectives
• Market structure

Types of firms

Industry

• Primary (Raw materials)
• Secondary (Manufacturing)
• Tertiary (Services)
• Quaternary (Information)

Private sector

• Sole trader — Business owned and controlled by one person

  • Advantages
    • Get all profits
    • Easy to set up
  • Disadvantages
    • Full responsibility for the business (Unlimited liability)
    • Lack capital to finance business growth

• Partnership — A partnership is a legal agreement between two or more people to own, finance and run a business

  • Advantages
    • More capital than sole traders’
    • Limited partners have limited liability
    • Share responsibility for decisions
  • Disadvantages
    • Share profits
    • General partners have unlimited liability
    • Lack capital to finance growth

• Cooperative — A firm that exists for the benefits of its members

  • Worker cooperative
    • Workers own all the shares
    • Managed by its workers
    • Workers have limited liability
    • Workers share any profits
  • Retail cooperative
    • Owned by its members
    • Managers run the organization
    • Owners have limited liability
    • Members receive profits

• Private limited company — A business organization with limited liability which can only sell its shares with the approval of existing shareholders

  • Advantages
    • Shareholds have limited liability
    • Shareholders receive dividends from profits
    • The company has a separate legal identity
  • Disadvantages
    • Financial information may have to be disclosed
    • Directors may run the business in their own interests rather than for shareholders
    • Shares can only sold privately and with the agreement of all other shareholders

• Public limited company — A business organization with limited liability which sells its shares to the general public

  • Advantages
    • Shareholders have limited liability
    • Shareholders receive dividends from profits
    • The company has a separate legal identity
    • Shares can be advertised and sold publicly on stock market to raise significant new capital
  • Disadvantages
    • The legal costs of set up can be high
    • Annual financial accounts must be published
    • Directors may run the business in their own interests rather than for shareholders
    • The original owners may also lose control of their company if it it taken over by another company through the purchase of shares on the stock market

Public sector

• Public corporation — A business organization owned by the government which is designed to act in the public interest.

• Aim

  • Work in the public interest instead of seeking to make profits

• Ownership and Control

  • The chairman and board of managers are appointed by the government
  • They are accountable to government ministers
  • Committees monitor and investigate any irregularities and complaints

• Legal status — Each public corporation has a separate legal identity from its directors and governments

• Finance

  • Its finance comes from taxes, charges and other public revenues
  • It is also financed by any re-invested profits
  • Profits may be used by government to fund other public services and spending

• Advantages

  • Decisions based on the full costs and benefits involved
  • Can be used to influence economic activity
  • It would not abuse its market power
  • Ownership of whole industry by the governments makes planning and coordination easier
  • Ensure basic industries

• Disadvantages

  • Difficult to manage and control, large size, time-consuming
  • Lack of competition and cannot go bankrupt, inefficiency, low quality, less improvement
  • Need to be subsidized if making loss, opportunity cost to government

Multinational company

Firm that operates and produce in more than one country but will usually have its headquarters based in its country of origin

• Features of multinational
  • It has a huge global customer base and revenue potential
  • It can minimize transport costs locating plants across different countries to be near raw materials or large consumer markets
  • It can minimize wage costs by locating operations in low-wage economies
  • It has low average production costs from large-scale production
  • It can raise significant capital for business expansion, R＆D and to employ highly skilled labour

Privatization

The sale of public sector assets to the private sector

• Advantages
  • Confidence in market force, decision making by market
  • Incentive to be efficient in the form of profit and threat of bankruptcy, less regulation from government may reduce administrate costs and quick response
  • Greater choice to consumers, lower price and high quality
  • Less risk of underinvestment
• Disadvantages
  • Monopoly in certain industry
  • May not take into account the total costs and benefits the society