Manufacturing Firms
There are many types of businesses in a free-market economy. The three most common are (1) manufacturing firms, (2) merchandisers, and (3) service enterprises.
Manufacturing firms produce a wide range of products. Large manufacturers include producers of airplanes, cars, computers, and furniture. Many manufacturing firms construct only parts rather than complete, finished products. These suppliers are usually smaller manufacturing firms, which supply parts and components to larger firms. The larger firms then assemble final products for market to consumers. For example, suppliers provide many of the components in personal computers, automobiles, and home appliances to large firms that create the finished or end products. These larger end-product manufacturers are often also responsible for marketing and distributing the products. The advantages that large businesses have in being able to efficiently and inexpensively control any parts of a production process are known as economies of scale. But small manufacturing firms may work best for producing certain types of finished products. Smaller end-product firms are common in the food industry and among artisan trades such as custom cabinetry.
Merchandisers
Merchandisers are businesses that help move goods through a channel of distribution-that is, the route goods take in reaching the consumer. Merchandisers may be involved in wholesaling or retailing, or sometimes both.
A wholesaler is a merchandiser who purchases goods and then sells them to buyers, typically retailers, for the purpose of resale. A retailer is a merchandiser who sells goods to consumers. A wholesaler often purchases products in large quantities and then sells smaller quantities of each product to retailers who are unable to either buy or stock large amounts of the product. Wholesalers operate somewhat like large, end-product manufacturing firms, benefiting from economies of scale. For example, a wholesaler might purchase 5000 pairs of work gloves and then sell 100 pairs to 50 different retailers. Some large American discount chains, such as Kmart Corporation and Wal-Mart Stores, Inc. serve as their own merchandisers. These companies go directly to factories and other manufacturing outlets, buy in large amounts and then warehouse and ship the goods to their stores.
The division between retailing and wholesaling is now being blurred by new technologies that allow retailing to become an economy of scale. Telephone and computer communications allow retail salespeople to serve far greater numbers of customers in a given span of time than is possible in face-to-face interactions. Computer interfaces, because they do not require any physical communication between salespeople and customers, can allow close to an unlimited capacity for sales interactions. For example, a typical transaction to purchase a pair of shoes at a shoe store may take a half-hour from browsing, to fitting, to the transaction with a cashier. But a customer can purchase a pair of shoes through a computer interface with a retailer in a matter of seconds.
Service Enterprises
Service enterprises include many kinds of familiar businesses. Examples include dry cleaners, shoe repair stores, barbershops, restaurants, ski resorts, hospitals, and hotels. In many cases service enterprises are moderately small because they do not have mechanized services and limit service to only as many individuals as they can accommodate at one time. For example, a waiter may be able to provide good service to four tables at once, but with five or more tables, customer service will suffer.
In recent years the number of service enterprises in wealthier free-market economies has grown rapidly, and spending on services now accounts for a significant percentage of all spending. For example, private services accounted for about 20 percent of