Understanding Business Sectors, Growth, and Economic Systems

Chapter 2: Types of Business Activity

The Three Sectors of Industry

• Primary Sector: Extracts and uses natural resources from the Earth.
• Secondary Sector: Manufactures goods using raw materials provided by the primary sector.
• Tertiary Sector: Provides services to consumers and other sectors of industry.

The three sectors are usually compared by two factors:

• The number of workers in each sector.
• The value of the output of goods and services.

Economic Systems

• Deindustrialization: The process involving a decline in the importance of the secondary manufacturing sector in an economy.
• Free Market Economy: An economy without government control over the factors of production; also known as a market economy.
• Monopoly: A business that controls the entire market for a particular product.
• Command Economy: An economy where there is no private sector, as all resources are owned by the state.
• Mixed Economy: An economy that contains both public (state) and private sectors.
• Privatization: The process in which national industries are sold by the government to individuals in the private sector.

Business Size and Capital

Capital is the money invested into a business by its owners.

Various groups compare business sizes for specific reasons:

• Investors: To decide where to invest their capital.
• Governments: To apply appropriate tax rates for small versus large businesses.
• Competitors: To assess their standing and importance relative to other firms.
• Workers: To understand the scale of the organization they are joining.
• Banks: To assess the importance of a loan relative to the business's overall size.

Business size is measured in three ways:

• By number of employees.
• By value of output and sales.
• By capital employed.

Profit and Business Growth

Profit is the surplus a business makes after total costs have been subtracted from sales revenue.

• Internal Growth: When a business expands its existing operations.
• External Growth (Integration): When a business takes over or merges with another business.

Types of Integration

• Merger: Two businesses agree to join together to form one firm.
• Takeover (Acquisition): One firm buys the rights or ownership of another business.
• Horizontal Integration: A merger between firms in the same sector and at the same stage of production.
• Vertical Integration: A merger between firms in the same sector but at different stages of production (can be forward or backward).
• Conglomerate Integration: A merger or takeover involving firms in completely different industries; also known as diversification.

Factors Influencing Business Size

A business may remain small depending on:

1. The type of industry it operates in.
2. The market size.
3. The owner’s objectives.