Fundamentals of Economic Activity and Production

Understanding Economic Activity

What is economic activity? People have many needs: food, clothing, shelter, and medical care. We call activity any process by which we obtain the products and services that meet these needs. Economic activities cover three stages: producing what we need, distribution, and consumption.

The needs and desires of people are endless, but the means we use to meet them (raw materials, work, money, etc.) are limited. Therefore, it is necessary to choose what goods and services are produced, in what quantity, by what means, how to distribute the products, and what percentage of the profits will go to investment. Economics also analyzes consumer behavior: what products they need, how much they spend, and more. Thus, the field of study of economics is very broad.

The Three Economic Sectors

Economic activities are varied, but they can be grouped into three main sectors:

• The primary sector includes activities to obtain food and raw materials from the environment: agriculture, livestock, fisheries, and forestry.
• The secondary sector includes economic activities that transform raw materials extracted from nature into manufactured products: industry, construction, mining, and energy sources (water, oil, gas, etc.).
• The tertiary sector comprises a variety of activities that, unlike the primary and secondary sectors, do not produce a tangible good but provide a service to society. These include, for example, trade, transport, health, and education.

In general, the more advanced or developed an economy is, the more weight the tertiary sector has and the less the primary sector represents.

Types of Capital in Production

All resources that are not natural and are used to produce goods and services account for capital. We can distinguish three kinds of capital: physical, human, and financial.

• Physical capital is made up of tangible assets such as buildings, machinery, tools, equipment, and transportation elements.
• Human capital refers to the training or qualifications of workers and their experience. Generally, the more skilled and experienced workers are, the greater the productivity of an enterprise. For this reason, the training of workers is becoming increasingly necessary.
• Financial capital is the money needed to start a company and maintain its activity. Sometimes business owners have enough money, but often they must borrow money or apply for government grants to start a business or to continue trading.