This chapter explains how businesses can be classified by activity and ownership. You will learn the primary, secondary and tertiary sectors, why the importance of sectors changes, what de-industrialisation means, and how private-sector and public-sector organisations differ.
This topic classifies business activity into primary, secondary and tertiary sectors and explains how their importance changes.
Most production passes through three main stages:
Businesses that obtain or extract natural resources from the Earth.
Businesses that use raw materials and convert them into manufactured or processed goods.
Businesses that provide services to consumers and to other businesses.
This represents primary → secondary → tertiary activity.
The primary sector involves obtaining or extracting natural resources from the Earth.
The secondary sector uses raw materials from the primary sector and converts them into manufactured or processed goods.
The tertiary sector provides services to consumers and to other businesses.
Businesses in one sector often depend on businesses in other sectors.
For example:
The importance of each sector can be measured by:
The relative importance of the three sectors varies from country to country.
In many developing economies, the primary sector is relatively important.
This may be because:
In such economies, a large proportion of workers may be employed in agriculture, mining or other primary industries.
In more developed economies:
As incomes rise, people tend to spend more on services such as:
In highly developed economies, the tertiary sector may produce more output than the primary and secondary sectors combined.
The relative importance of sectors does not remain the same.
Important reasons include:
Resources such as:
may eventually run out.
This can reduce the importance of the primary sector.
Some developed countries lose manufacturing activity to countries where production may be cheaper or more competitive.
As living standards rise, consumers often spend a larger proportion of their income on services.
This increases the importance of the tertiary sector.
De-industrialisation occurs when the importance of the secondary or manufacturing sector declines.
This can be measured by:
For example, in some developed economies, manufacturing has declined while service industries have expanded.
This topic explains how businesses can be owned and controlled by private individuals, shareholders or the government.
A mixed economy contains both:
Most countries have mixed economies.
The private sector consists of businesses that are not owned by the government.
They are usually owned by:
Private sector businesses normally make their own decisions about:
The public sector consists of businesses and organisations owned and controlled by the government or state.
The government may decide:
Some public services may be provided free to users and paid for through taxation.
Governments may own or control important industries because they want to:
This topic explains what happens when a public-sector business is transferred to the private sector, including possible benefits and problems.
Privatisation occurs when a government sells a public-sector business to the private sector.
For example, governments may privatise:
Governments may privatise businesses because private-sector firms may:
Private businesses often aim to earn profit, so managers may control costs more carefully.
Private owners may invest more capital than the government can provide.
Competition can encourage:
Privatisation can also cause problems.
Private firms may reduce the number of workers to lower costs.
A private business may focus more strongly on profit than on providing a service to the community.
Do not simply say:
“Private businesses are better because they make profits.”
A stronger answer is:
Private businesses may have a stronger incentive to reduce costs because higher efficiency can increase profit. However, reducing costs could lead to job losses or poorer service if too many workers are removed.
| Private Sector | Public Sector |
|---|---|
| Owned by individuals or shareholders | Owned by government |
| Usually aims to make profit | May have social and service objectives |
| Decisions mainly made by owners/managers | Government influences major decisions |
| Competition may be strong | Competition may be limited |
| Capital comes mainly from private investors | Finance may come partly from taxation |
Use this final topic to compare classifications, learn definitions and check examination skills.
Businesses can be classified in two main ways.
This distinction is summarised directly in the chapter's revision material.
| Term | Exam-ready definition |
|---|---|
| Primary sector | Businesses that extract and use natural resources |
| Secondary sector | Businesses that manufacture or process goods |
| Tertiary sector | Businesses that provide services |
| De-industrialisation | A decline in the importance of the secondary/manufacturing sector |
| Mixed economy | An economy containing both private and public sectors |
| Private sector | Businesses owned by private individuals or organisations rather than government |
| Public sector | Businesses and organisations owned and controlled by government |
| Privatisation | The sale of a public-sector business to the private sector |
Students should be able to:
These are the main areas highlighted in the chapter's revision checklist.