1.1.2 Business Activity/Sectors of Economy/Opportunity Costs

IB Business & MGT Unit 1YR1

Mr Greenbank

Lesson 2 – Learning Objectives

• By the end you will be able to:• Understand the economic problem• Demonstrate knowledge of how to overcome an

economic problem for the good of a country• Demonstrate knowledge of businesses in each

sector of the economy and how they rely on each other

• Understand the concepts of opportunity cost and specialisation

Why can’t we all have or produce all the items we want?The Economic problem!

• The economic problem is the scarcity of the resources and money that goes into making products and buying them

• A business might want to buy some machinery but a lack of money (capital) prevents this from happening.

• This is what the study of business & economics is all about!

What Are Resources?

• Scarce Resources – The amount of resources available is limited

• Resources – Anything that can be used to produce goods and services

Opportunity Cost• Because of the SCARCITY of the factors of production, we all

have to make choices from what is available and possible.• As we have a limited supply of money, we have to make

decisions as to what items we buy, as we can’t buy everything we would like – buy a new car or a new kitchen – you may not be able to buy both!

• Businesses face similar choices, as they too don’t have the capital to buy everything they want. E.g. Buy new machinery or build a new office – they may not have enough capital for both

• When a choice has to be made in this way it is called OPPORTUNITY COST

Problems of a Lack of Resources...

Specialisation• When a business is in one particular sector, it will often

specialise in that area, and leave other sectors of business activity to their work. E.g. a toy maker will concentrate on making toys, leaving the selling of the toys to another specialist firms.

• By concentrating on, or specialising in, one activity the business can save money by looking at ways of reducing costs in that one area

• However, workers may become bored by concentrating on only one stage of production & also the firm relies on other outside suppliers and retailers who could be unreliable

Economic Sectors

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Primary Secondary

Covers activity that involves:

• Agriculture• Fishing• Extraction of raw materials

Closely monitored by the government due to:

1) Scarcity of materials and food sources

2) Pollution effects due to extraction process

Includes industries that create finished/usable products.

Takes goods from the primary sector and turn it into finished or component products.

Has declined for many developed countries due to loss of international competitiveness.

(4)

Economic Sectors

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Tertiary Quaternary

Covers activity that involves providing services to businesses & individual customers.

Grown in importance in many developed countries (i.e. Netherlands)

Includes:1) Transportation & distribution2) Advisory & consultancy3) Wholesale and retail services

Includes organizations providing information services through ICT.

Linked to all sectors, mostly the tertiary sector.

(4)

Outputs – the main sectorsSector Description Examples

Primary Extraction of natural resources

Mining, farming, energy extraction

Secondary Production of finished goods and components

Manufacturing, food processing, component assembly, raw material processing

Tertiary Providing services to consumers and businesses

Personal services (e.g. beauticians), retailing, household franchises

Quaternary Providing information & ICT

Software development, financial services, data processing

Businesses can operate in more than one sector

Many farms in Britain (farming = primary sector) also offer holiday accommodation (tertiary sector) and produce processed foods such as cheese and ice-cream from farm supplies (secondary sector).

Interdependence

• Important to remember that all three sectors depend on each other to function:– E.g. Tuna is extracted from the sea (primary),

which then needs a business to manufacture them in to cans (John West), who then needs a shop to sell and service them to customers (Carrefour). This is the chain of production. When each sector depends on the others, it is called INTERPEDENDENCE