Types of Business Activity

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


  • 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


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


  • 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.


  • 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


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


  • Selling of government owned businesses to the private sector
In FavorAgainst
Higher EfficiencyLosses may occur
More CompetitionClosing of industries
Lower pricesUnemployment
Availability of capitalMonopolies may occur, causing higher prices
Good allocation and use of resourcesOnly owners will benefit
Raises revenue for government spending


Comparing Size of Business

People Interested in Size of Business
InvestorsWhere to invest
GovernmentTax rate
CompetitorsCompare the size and importance
WorkersTo know where to get a job

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


Reduces competition
Economies of scale
Bigger share of total market
  • 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
Assured outlet for product
Profit margin of retailer absorbed
Retailer could be prevented from promoting competitors’ products
Information can be directly obtained by manufacturer
  • Backward Vertical Merger: when one firm merges with another in the same industry at a less advanced/earlier stage of production
Assured supplier
Profit margin of supplier absorbed
Supplier could be prevented from supplying to competitors
Cost of supply could be controlled
  • Conglomerate merger: when one firm merges with or takes over a firm in a completely different industry (diversification)
Business has more activities in more than one industry therefore spreading risk
Transferring of ideas

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

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