Chapter 2

Levels of Economic Activity

• Primary Sector uses and extracts the natural resources of the Earth
• Secondary Sector manufactures goods using the raw materials provided by the primary sector
• Tertiary Sector provides services to consumers and other sectors of the industry
• Based on the number of workers employed and value of output produced, a country can see which sector is most important

Public and Private Sectors of Industry

1. Free Market Economy [Market Economy]:
No government control over factors of production
No obstruction

Advantages:

• Customers free to purchase what they want
• Motivated employees
• Employees can keep most/all of their incomes
• Competition keeps prices low
• Encouragement for new businesses
• Consumer demand is met
• Aim of profit increases efficiency
• Prices are influenced by customerDisadvantages:
• Inequalities/ unequal distribution of wealth
• Uncontrolled trade cycle
• Monopolies may occur
• Public/merit goods not provided adequately
• External costs ignored

2. Planned Economy

• All resources owned by the government, no private sector

Advantages:

• Less wastage
• Employment for everyone
• Needs of population met
• Greater economic stability
• Consumer protection from monopoly

Disadvantages:

• Less incentive to work
• Large bureaucracy
• Customers wants not always met/less choice and variety of goods
• Workers are told where and what to work
• Low efficiency
• Mistakes in amounts of goods and services produced
• Loss of individual freedom

3. Mixed Economy

• Public and private sector present
• Public sector owns health, education, security etc.

Advantages:

• Freedom of choice to individuals and firms to produce variety of goods and services plus a profit motive
• Provision of public and merit goods for welfare of all individuals
• Better equal distribution of income and wealth
• Greater economic stability
• Reduced external costs
• Consumer protection from monopoly
• Private property and right to own

Disadvantages:

• Lack of profit motive in government owned industries
• Subsidizing loss

Privatization

• Selling of government owned businesses to the private sector

Comparing Size of Business

Methods of Comparison:

• Number of Employees however some firms may be more capital intensive
• Amount of Output/Sales however some firms may produce luxury items in less quantity
• Amount of Capital Employed however some firms may be more labor intensive
• Profits however it depends on more factors of production than just the size of business

How Can Businesses Grow?

• The benefits of growth include:

• Higher profits
• Status and prestige
• Higher salaries
• Economies of scale
• More market share

• Expansion can either be:

• Internal growth: expansion of existing operations
• External growth: takeover/merger

Mergers

• Horizontal merger: when one firm merges with another one in the same industry at the same stage of production
• Forward Vertical Merger: when one firm merges with another in the same industry at a more advanced/later stage of production

• Backward Vertical Merger: when one firm merges with another in the same industry at a less advanced/earlier stage of production

• Conglomerate merger: when one firm merges with or takes over a firm in a completely different industry (diversification)

Why Do Some Businesses Stay Small?

• Type of industry the business operates in: those with personal service/specialized products would find it difficult to offer close and personal service demanded by consumers
• More flexibility
• Market size: if the total number of consumers is small then it would not be cost effective to expand
• Owner’s objectives: preference to stay small to avoid stress