Cambridge International as and a level Economics Ebook

abnormal profi t
or supernormal profi t. Th
e prospect of making abnormal 
profi t motivates an entrepreneur to take risks. It can, 
though, act as a signal for other fi rms to move into a 
market, lured by the prospects of making abnormal profi t 
for themselves.
Abnormal profit: 
that which is earned above normal profit.
KEY TERM
158
Cambridge International A Level Economics

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Firms and industries
We can now extend the earlier defi nition of a fi rm. ‘Firm’ is 
a generic term to denote a business organisation that buys 
or hires factors of production in order to produce goods and 
services that can be sold at a profi t. From an organisational 
standpoint, fi rms are of many types including:
■ 
sole traders or one-person businesses
■ 
partnerships
■ 
cooperatives
■ 
private or public limited companies
■ 
state-owned firms
■ 
multinational or transnational firms.
Firms can range from small simple organisations to ones 
that are almost too complex to control and where there 
is some confl ict of interests between the members. Th
e 
characteristics and behaviour of the fi rm depend on the 
type of economic activity and the nature of competition. 
Th
e factor mix in fi rms varies enormously, with most 
fi rms in the service sector being highly labour intensive. 
Th
is contrasts with some types of manufacturing industry 
that are capital intensive. Th
e decisions that fi rms 
take will vary according to the cost and availability of 
factors of production and be a function of the diff erent 
economic systems in which they operate. In the former 
command economies of Central and Eastern Europe, for 
example, there was more emphasis on employing labour, 
as unemployment was virtually unknown. Th
is has not 
been the case in market and mixed economies. Th
ere has 
been a trend in the rich Western economies of the EU to 
make large parts of manufacturing more capital intensive 
to the point where some major activities, such as car 
manufacturing and food processing, can largely be done by 
robots and computer-controlled machinery. Another trend 
has been increased concentration of ownership in the hands 
of large multinational conglomerates. At the same time, as 
we shall see later, there remain opportunities for new small 
fi rms to make an impact. In some developed economies 
like the UK,