The nature of business and the four sectors
A business brings together resources to produce goods or services that customers want, usually for payment.
The resources are the factors of production: land, labour, capital (machinery and buildings) and enterprise, the risk-taking that combines the other three.
Inputs pass through a process to become outputs, and four functions share the work: human resources, finance and accounts, marketing, and operations.
A business survives only if customers value its output above the cost of the bought-in materials and services.
That gap is added value.
A bakery that pays €1.20 for the ingredients and energy in a loaf and sells it for €3.50 adds €2.30 of value, which must cover wages and rent and leave a profit.
The four sectors
Activities are classified by what the business does, not by what it sells.
Sector
What it does
Examples
Primary
Extracts or harvests natural resources
Farming, fishing, mining, forestry
Secondary
Turns raw materials into goods
Manufacturing, construction, food processing
Tertiary
Provides services
Retail, banking, transport, tourism
Quaternary
Provides knowledge-based services
Research and development, software, consultancy
One firm can work in several sectors at once.
Why the balance shifts
The balance is measured by each sector's share of employment or national output.
As an economy develops, the primary share falls first: machinery raises farm productivity and spending on food grows more slowly than income.
Industrialisation raises the secondary share.
Later, rising incomes increase demand for services while manufacturing is automated or moves abroad, so tertiary and quaternary shares grow: deindustrialisation.
For businesses, workers in declining industries may need retraining, and service and knowledge firms gain markets and skilled labour.
- Business: an organization that combines human, physical and financial resources to provide goods or services for customers.
- Primary sector: businesses that extract or harvest natural resources, such as farming or mining.
- Tertiary sector: businesses that provide services to consumers and other businesses, such as retail or banking.
- Quaternary sector: businesses that provide knowledge-based services, such as research, software development and consultancy.
Montaña Cacao (a fictional firm) grows cocoa on its own plantation, makes chocolate bars in its factory, sells them in its cafés and runs a laboratory that develops low-sugar recipes to sell to other food firms.
Identify the sector of each activity, with a reason.
1. Growing cocoa extracts a natural resource: primary.
2. Making bars processes a raw material into a good: secondary.
3. Running cafés sells a service to customers: tertiary.
4. Developing recipes to sell as knowledge: quaternary.
Answer: primary (plantation), secondary (factory), tertiary (cafés), quaternary (laboratory).
The table gives invented employment figures for Veloria, a fictional country.
Calculate each sector's share of employment in both years and the change in percentage points.
Sector
1990 (millions)
2020 (millions)
Primary
3.2
1.2
Secondary
4.8
3.6
Tertiary
7.2
12.2
Quaternary
0.8
3.0
1. Total employment: 16.0 million in 1990 and 20.0 million in 2020.
2. Shares in 1990: primary 3.2 ÷ 16.0 = 20%, secondary 30%, tertiary 45%, quaternary 5%.
3. Shares in 2020: primary 1.2 ÷ 20.0 = 6%, secondary 18%, tertiary 61%, quaternary 15%.
4. Changes: primary −14, secondary −12, tertiary +16, quaternary +10 percentage points.
Answer: employment shifted towards the tertiary and quaternary sectors; secondary employment also fell in absolute terms.
When you identify or explain the sector of an activity, name the sector and give the reason ("processes timber into furniture, so secondary").
When you describe a shift, say whether you mean a share or an absolute number.
- Classifying by product instead of activity. A supermarket sells food but provides a retail service, so it is tertiary, not primary.
- Confusing a percentage-point change (20% to 6% is 14 points) with a percentage change (a 70% fall).
Check your understanding
1. Define the term tertiary sector. [2]
2. State the sector of each: (a) a firm felling trees for timber; (b) a furniture factory; (c) a firm designing artificial intelligence software for hospitals. [3]
3. In a fictional country, secondary employment fell from 5.0 million out of 20.0 million workers to 4.4 million out of 22.0 million. Calculate the change in the secondary sector's share of employment. [2]
4. Explain two reasons why the tertiary sector's share of employment usually rises as an economy develops. [4]