Private sector/public sector firms

Microeconomic Decision‑Makers – Firms

Learning Objective

Explain the differences between private‑sector and public‑sector firms, their objectives, sources of funding and the way they make decisions in the market.

Key Definitions

• Firm: An organisation that combines factors of production to produce goods or services for sale.
• Private‑sector firm: Owned by individuals, partnerships or shareholders; operates for profit.
• Public‑sector firm (state‑owned enterprise): Owned and controlled by the government; may pursue non‑profit or social objectives.

Characteristics of Private‑Sector Firms

1. Ownership is private – individuals, families, shareholders.
2. Primary objective is profit maximisation.
3. Financed through:

   • Owner’s capital
   • Bank loans
   • Equity issued on stock markets

4. Decision‑making driven by market signals (price, cost, demand).
5. Subject to competition and market entry/exit.

Characteristics of Public‑Sector Firms

1. Owned and controlled by the government (central, regional or local).
2. Objectives may include:

   • Provision of essential services
   • Employment creation
   • Price stability for consumers
   • Social welfare

3. Financed through:

   • Tax revenue
   • Government borrowing
   • Subsidies

4. Decision‑making influenced by political considerations and policy goals.
5. Often protected from direct competition (monopolies or regulated markets).

Comparison of Private and Public Sector Firms

Decision‑Making in Private‑Sector Firms

Private firms aim to maximise profit (\$\pi\$). The basic profit equation is:

\$\pi = TR - TC\$

where \$TR\$ is total revenue and \$TC\$ is total cost.

Profit maximisation occurs where marginal revenue (\$MR\$) equals marginal cost (\$MC\$):

\$MR = MC\$

Key steps in the decision‑making process:

1. Estimate market demand and price elasticity.
2. Calculate expected total revenue: \$TR = P \times Q\$.
3. Determine cost structure (fixed vs variable costs).
4. Find \$MC\$ from the cost function and compare with \$MR\$.
5. Adjust output (\$Q\$) until \$MR = MC\$.
6. Review profit after accounting for taxes and interest.

Decision‑Making in Public‑Sector Firms

Public firms are guided by multiple objectives, often expressed as a weighted function:

\$\max \; W = \alpha \times \text{Social Welfare} + \beta \times \text{Employment} + \gamma \times \text{Revenue}\$

where \$\alpha\$, \$\beta\$, and \$\gamma\$ reflect the relative importance assigned by the government.

Typical considerations include:

• Ensuring universal access to essential services (e.g., water, electricity).
• Keeping prices affordable for low‑income households.
• Maintaining employment levels in strategic industries.
• Operating within budgetary constraints set by the treasury.

Examples

• Private‑Sector: Tesco (retail), BP (energy), Samsung (electronics).
• Public‑Sector: British Broadcasting Corporation (BBC), National Health Service (NHS), Kenya Power (state‑owned utility).

Suggested Diagram

Summary

Private‑sector firms are profit‑driven, funded by private capital, and respond directly to market forces. Public‑sector firms are government‑owned, pursue broader social objectives, and are financed through taxation and public borrowing. Understanding the differing motivations and constraints of each type of firm is essential for analysing market outcomes and the role of government in the economy.