Classification of firms

Production is classified into three sectors based on the stage of activity:

1. Primary sector — extracting natural resources.

• Farming, fishing, forestry.
• Mining, quarrying.
• Oil and gas extraction.
• Hunting (in some economies).

Examples of primary firms: a wheat farm, a coal mine, an oil drilling company.

2. Secondary sector — manufacturing.

Converting raw materials into finished goods. Adds value through processing.

• Factories making cars, electronics, food, clothing.
• Construction.
• Energy generation.

Examples: Toyota factory, a bakery, a steel mill.

3. Tertiary sector — services.

Providing intangible services rather than physical goods.

• Banking and finance.
• Retail and wholesale.
• Healthcare and education.
• Transport, hospitality, tourism.
• IT, communications, media.

Examples: a hospital, a bank, a school, a supermarket.

The sectoral shift in development.

As economies develop, employment and output typically shift FROM primary, THROUGH secondary, TO tertiary.

Stage	Dominant sector	Example country today
Pre-industrial	Primary	Many least-developed countries
Industrial	Secondary	China (transitioning), Vietnam
Post-industrial	Tertiary	UK, USA, France, most developed countries

Cambridge tip. Mark schemes for "sectors of production" questions credit (a) naming each sector, (b) defining each precisely, (c) giving an example. Bonus marks for noting the sectoral shift in development.

Public sector. Owned and operated by the GOVERNMENT.

• Aims to provide public services rather than maximise profit.
• Funded primarily through taxation.
• Examples: National Health Service (UK), state schools, the army, public broadcasting (BBC), public utilities (in many countries).

Private sector. Owned by PRIVATE INDIVIDUALS or PRIVATE COMPANIES.

• Aims to maximise profit (or sometimes other private goals).
• Funded through revenues, investment, and borrowing.
• Examples: Tesco, Toyota, Apple, McDonald's, almost all small businesses.

The mixed-economy implication. Most economies have BOTH sectors. The public sector typically provides public goods (defence) and merit goods under-provided by the market (healthcare, education). The private sector produces most consumer goods and services.

Privatisation and nationalisation.

• Privatisation: transferring a public-sector enterprise to private ownership. Aims: improve efficiency through profit motive.
• Nationalisation: transferring a private firm to public ownership. Aims: protect strategic industries, prevent monopoly abuse.

Cambridge tip. A common confusion: 'public limited company (PLC)' is in the PRIVATE sector, despite the word 'public'. The 'public' refers to public trading of shares, not government ownership.

Private-sector businesses can take FOUR main legal forms, each with different trade-offs.

1. Sole trader.

• ONE owner.
• Owner has UNLIMITED liability — personally responsible for all business debts.
• Easy to set up; minimal regulation.
• Limited capacity to raise capital (just one person's resources + bank loans).
• Owner has full control AND keeps all profit.

Examples. Local plumber, hairdresser, freelance designer.

Trade-offs. Simple and flexible — but personal asset risk and limited capital.

2. Partnership.

• 2-20 partners (varies by country).
• Partners typically have UNLIMITED liability — usually JOINT AND SEVERAL (each partner liable for the whole debt if others can't pay).
• Easier to raise capital than sole trader (multiple partners' resources).
• Profits and decisions shared.

Examples. Law firms, medical practices, accounting firms.

Trade-offs. More capital, but disagreements possible and personal asset risk.

3. Private limited company (Ltd).

• A SEPARATE LEGAL ENTITY from its owners.
• Owners are SHAREHOLDERS with LIMITED liability — they can only lose their investment.
• Shares CANNOT be sold to the general public — restricted to family, friends, employees, invited investors.
• Must register with government, file accounts, pay corporation tax.

Examples. Many family businesses, small-to-medium enterprises.

Trade-offs. Limited liability protection, but more regulation and disclosure than sole trader/partnership.

4. Public limited company (PLC).

• A SEPARATE LEGAL ENTITY with LIMITED-LIABILITY shareholders.
• Shares traded on the STOCK EXCHANGE — anyone can buy.
• Largest firms in the economy.
• Highest level of regulation, disclosure, and external scrutiny.

Examples. BP, Apple (NASDAQ), Tesco, Toyota Motor.

Trade-offs. Massive capital-raising capacity (anyone can buy shares), but loss of control (shareholders, board), high disclosure requirements, vulnerability to takeover.

Comparison table:

Feature	Sole	Partnership	Ltd	PLC
Owners	1	2-20	Shareholders (limited)	Shareholders (public)
Liability	Unlimited	Usually unlimited	Limited	Limited
Shares public?	n/a	n/a	No	Yes
Capital raising	Low	Medium	High	Highest
Control	Owner	Partners	Shareholders	Diluted

Cambridge tip. Mark schemes for 8-mark "compare business types" expect ALL FOUR forms. The killer concept is LIMITED vs UNLIMITED LIABILITY — get this right for full marks.