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5 Businesses: The Basic Production Unit

Most business activity in the U.S. economy is conducted by private firms within two broad economic sectors: the services-producing sector and the goods-producing sector. The three main types of firms are sole proprietorships, partnerships, and corporations. Firms generally seek to maximize profits and operate in different types of competitive environments, or market structures. These market structures include perfect competition, monopolistic competition, oligopoly, and monopoly. Today business practices are monitored by the government, private organizations, and by businesses themselves.

BUSINESS BASICS

For-profit businesses produce the great majority of goods and services in the U.S. economy. In 2012 private business firms produced 87 percent of all final goods and services counted in the nation's gross domestic product (GDP). Government at the federal, state, and local levels accounted for the remaining 13 percent of GDP.[1] Households, businesses, and government consume trillions of dollars in goods and services each year. Three basic ways to categorize business firms is by industry, by size, and by economic sector.

Firms and Industries

A firm is a business entity that produces a good or service. A firm is often called a business or a company. In 2010 nearly 28 million private firms operated in the U.S. economy.[2] Most American businesses are nonemployer firms—firms that are owned by one person; earn at least $1,000 per year in revenues; and do not hire additional employees. In 2010 there were 22.1 million nonemployer firms in the U.S. economy. Despite the large number of nonemployer firms, they account for only a tiny percentage of total U.S. business receipts. In fact, business receipts of these nonemployer firms are so small that this financial data is excluded from most U.S. Census business statistics.[3] Another 5.7 million U.S. businesses are employer firms—firms that hire employees. The great majority of all employer firms are classified as small businesses and the remainder large businesses. Employer firms account for almost all business receipts in the U.S. economy.[4]

Firms use the factors of production—natural resources, human resources, and capital goods—to produce outputs. Entrepreneurship is often considered a fourth factor of production. Outputs are typically categorized by the degree of processing that has gone into the product. For example, the output of a logging firm is cut trees. Economists view unprocessed trees as a natural resource. The output of a sawmill is board lumber, a semifinished or intermediate good. The output of a furniture manufacturer might be a wooden table, a final good.

Some firms specialize in the production of one type of good or service, while others diversify to produce different types of products. Examples of firms that produce one type of product are General Motors, which produces motor vehicles; Nike, which produces athletic footwear and apparel; and H& R Block, which prepares people's tax forms. Highly diversified firms such as Procter & Gamble and Unilever produce many types of household and personal care products, beauty products, health and nutrition products, and more.

One way to classify firms is by industry. An industry represents all of the firms that produce a similar product. For example, General Mills, Kellogg, Post, and Quaker Oats, are firms that operate in the breakfast cereal industry. Similarly, General Motors, Ford Motor, and Chrysler are major firms in the U.S. auto industry. At times the term “industry” is more broadly defined, as is the case with the limited-service restaurant or fast food industry. Consider the variety of restaurants that might reasonably be placed in the fast food industry, including firms that specialize in hamburgers, tacos, chicken, pizza, sandwiches and subs, and so on. Industries that produce tangible products are categorized as goods-producing industries. Industries that produce services are categorized as servicesproducing industries. In the U.S. economy the vast majority of all firms, workers, and output are associated with the services-producing industries.

  • [1] U.S. Department of Commerce (DOC), Bureau of Economic Analysis (BEA), “Table 5. Value Added by Industry Group as a Percentage of GDP,” News Release, April 25, 2013
  • [2] U.S. Bureau of the Census, “Number of Firms, Number of Establishments, Employment, and Annual Payroll by Small Enterprise Employment Sizes for the United States, NAICS Sectors: 2010,” Statistics of U.S. Businesses, October 2012; U.S. Small Business Administration (SBA), “Non-Employer Firms and Receipts by State, 1992, 1997–2010,”
  • [3] U.S. Bureau of the Census, “Nonemployer Statistics,”
  • [4] U.S. Bureau of the Census, “Number of Firms, Number of Establishments, Employment, and Annual Payroll by Small Enterprise Employment Sizes for the United States, NAICS Sectors: 2010,” Statistics of U.S. Businesses, October 2012; U.S. Small Business Administration (SBA), “Non-Employer Firms and Receipts by State, 1992, 1997–2010,”
 
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