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Cambridge IGCSE0450

Classification of businesses

Business Studies 0450 Chapter Notes

What this chapter covers

Classification of businesses - Economic sectors in terms of primary, secondary and tertiary sectorsClassification of businesses - Private sector and public sector
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In this chapter

  1. 1Primary sector: taking from nature
  2. 2Secondary sector: making goods
  3. 3Tertiary sector: providing services
  4. 4How the three sectors link
  5. 5Why the importance of each sector changes
  6. 6A mixed economy: two sectors
  7. 7The private sector
  8. 8The public sector
  9. 9Sorting a business into its sector

1. Primary sector: taking from nature

Businesses are classified by what they do. The primary sector is made up of businesses that extract natural resources from the land or sea. These are the raw materials that other businesses use.

Farming, fishing and logging are all primary activities. The output is a raw material, not a finished product.

A sector is a group of businesses, not one business. A definition describes the activity. Examples alone do not define the term.

Examiner insight

“A common mistake was to identify examples of primary sector activities. Others confused the term with the secondary sector.” “A common error was to confuse the sector with an individual business.”

Worked example 12 marks

Karimi Fisheries catches tuna in the open sea and sells it, unprocessed, to a factory. Explain why Karimi Fisheries is in the primary sector.

  1. 1

    Knowledge: the primary sector extracts natural resources as raw materials. [1]

  2. 2

    Application: Karimi Fisheries takes tuna from the sea and sells it unprocessed. [1]

2. Secondary sector: making goods

The secondary sector is made up of businesses that carry out production of goods. These goods are made from raw materials, which often come from the primary sector.

A business that buys timber and turns it into chairs is secondary. The test is whether it makes a product.

Examiner insight

“Most candidates understood that the secondary sector involved the production of goods. Better responses stated these were made from raw materials, allowing them to gain the second mark.” “A common mistake was to omit mentioning that production involved using raw materials to make the products.”

Worked example 12 marks

Marlow Chairs buys timber and makes wooden chairs, which it sells to furniture shops. Explain why Marlow Chairs is in the secondary sector.

  1. 1

    Knowledge: the secondary sector produces goods from raw materials. [1]

  2. 2

    Application: Marlow Chairs turns the raw material, timber, into chairs. [1]

3. Tertiary sector: providing services

The tertiary sector is made up of businesses that provide services. Banks, transport firms, advertising agencies, retailers, schools, restaurants and hotels are all tertiary.

A service business does not produce goods. So a point that suits a factory, such as access to raw materials, does not apply to it. Examiners give no marks to an answer about a tertiary business that discusses manufacturing.

Examiner insight

“Others ignored the fact that ABA was in the tertiary sector and discussed the potential benefits for a manufacturing business. None of these answers gained any marks.” “Some location factors given, such as access to raw materials, did not apply to a tertiary sector business and were more suited to the location of a manufacturing business.”

Worked example 14 marks

Brightline Advertising designs campaigns for local shops from a small office. A manager says, "We should move closer to our raw materials, as a factory would." Outline two reasons why this advice does not suit Brightline.

  1. 1

    Knowledge: the tertiary sector provides services. It does not produce goods. [1]

  2. 2

    Application: Brightline sells campaign designs to local shops, so it has no raw materials to be near. [1]

  3. 3

    Knowledge: access to raw materials matters to a manufacturing business in the secondary sector. [1]

  4. 4

    Application: Brightline works from a small office, not a factory, and makes no product. [1]

5. Why the importance of each sector changes

The importance of each sector changes over time, in developed and developing economies. A question that asks for reasons wants the cause of the change, not a description of the sectors.

The primary sector can shrink because of the depletion of natural resources: with less left to extract, primary output falls. Industrialisation, increased use of technology and better education are other reasons examiners credit.

The tertiary sector can grow because economic growth brings higher disposable income. People then spend more on services, so demand for services rises. Where a question gives data, quote the numbers.

Examiner insight

“Better candidates were able to explain that the depletion of natural resources in an economy resulted in a decline in the size of the primary sector.” “Stronger responses were able to develop these points to show why the primary sector had declined in importance. Instead of analysis, many repeated the knowledge point.”

Worked example 16 marks

Veldara Tea Estates grows tea in Veldara. The table gives the share of Veldara's output from each sector. Explain two reasons why the primary sector has become less important in Veldara.

Sector1990 (%)2020 (%)
Primary4015
Secondary3030
Tertiary3055
  1. 1

    Knowledge: depletion of natural resources. [1]

  2. 2

    Application: the primary share fell from 40% to 15%. [1]

  3. 3

    Analysis: with less left to extract, primary output falls, so it is a smaller part of the economy. [1]

  4. 4

    Knowledge: economic growth brings higher disposable income. [1]

  5. 5

    Application: the tertiary share rose from 30% to 55%. [1]

  6. 6

    Analysis: people spend more on services, so the tertiary sector grows and the primary sector becomes a smaller share of output. [1]

Recap

  • Primary sector = extracts natural resources from the land or sea as raw materials (farming, fishing, logging).
  • Secondary sector = production of goods made from raw materials.
  • Tertiary sector = provides services (banks, transport, retailers, advertising agencies).
  • A sector is a group of businesses, not one business. Examples alone are not a definition.
  • The sectors link: secondary firms use primary output and rely on tertiary services such as distribution.
  • Primary falls with depletion of natural resources. Tertiary grows with economic growth, higher disposable income and demand for services.
  • Give reasons for change, develop each one and use the data's numbers.

6. A mixed economy: two sectors

In a mixed economy, businesses exist in both the private sector and the public sector. Each business belongs to one of the two.

The test that sorts a business is ownership: who owns it. Who runs it does not decide the sector.

Worked example 12 marks

Kestrel Bakes is owned by two friends. Skyline Metro, which runs trams in the same city, is owned by the government. Explain what is meant by a mixed economy.

  1. 1

    Knowledge: a mixed economy has businesses in both the private sector and the public sector. [1]

  2. 2

    Application: here Kestrel Bakes is in the private sector and Skyline Metro is in the public sector, side by side in one city. [1]

7. The private sector

The private sector is the part of the economy that is not government owned. Its businesses are owned by private individuals, such as a sole trader or the shareholders of a company.

Sole traders and limited companies are examples of private sector businesses. They are examples, not the definition.

Examiner insight

“Weaker responses were imprecise so referred to control or running the business rather than focusing on ownership.” “Other candidates made vague statements such as privately owned but omitted to say who owned the businesses.”

Worked example 14 marks

Marisol Pottery is a small business in Lisbon. It is owned by Marisol and her brother, who have shared the profits since they opened. Explain why Marisol Pottery is in the private sector.

  1. 1

    Knowledge: the private sector is made up of businesses that are not owned by the government. [1]

  2. 2

    Knowledge: its owners are private individuals. [1]

  3. 3

    Application: Marisol Pottery is owned by Marisol and her brother, who are private individuals. [1]

  4. 4

    Analysis: because the owners are private individuals and not the government, the business is placed in the private sector and not the public sector. [1]

8. The public sector

The public sector is the part of the economy owned by the government. The key idea is ownership: the government owns the business, it does not merely run it.

A public corporation is in the public sector. Its aims can differ from those of a private sector business, which often aims to maximise profit.

Examiner insight

“Some responses needed more precision by referring to the government owning the business rather than simply running it.”

Worked example 14 marks

Northgate Rail carries passengers between three towns. The government owns all of the company and appoints its managers. Explain why Northgate Rail is in the public sector.

  1. 1

    Knowledge: the public sector is made up of businesses owned by the government. [1]

  2. 2

    Application: the government owns all of Northgate Rail. [1]

  3. 3

    Application: the government also appoints the managers, but it is ownership that places the company in the public sector. [1]

  4. 4

    Analysis: a business that private individuals owned would be in the private sector, so ownership, not running the business, decides the sector. [1]

9. Sorting a business into its sector

Ask one question: who owns the business? If private individuals or shareholders do, it is in the private sector. If the government does, it is in the public sector.

A public limited company is owned by shareholders, so it is in the private sector. The word *public* in its name is not about the public sector.

Examiner insight

“A common mistake was to confuse the term with a public limited company, which is an organisation in the private sector.”

Worked example 14 marks

Three businesses operate in Vale, which has a mixed economy. The table shows who owns each one. Explain which one is in the public sector.

BusinessWhat it doesOwner
Orchard plcSells fruit juiceShareholders
Vale WaterSupplies tap waterThe government
Tariq TaxisRuns a taxi serviceTariq
  1. 1

    Knowledge: the public sector is made up of businesses owned by the government. [1]

  2. 2

    Application: Vale Water is the public sector business because the government owns it. [1]

  3. 3

    Application: Tariq Taxis, owned by Tariq, is in the private sector. [1]

  4. 4

    Analysis: shareholders own Orchard plc, a public limited company, so it is in the private sector too. [1]

Recap

  • A mixed economy has businesses in both the private sector and the public sector.
  • Private sector: not government owned, owned by private individuals.
  • Public sector: owned by the government.
  • Ownership decides the sector. Running or controlling a business does not.
  • A public limited company is owned by shareholders, so it is in the private sector.
  • In an answer, name the owner of the business in the question.

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

  1. Nadia Travel books holidays for families and for other businesses. Define the term 'tertiary sector'.2 marks
  2. Zenith Logging fells trees in a forest and sells the logs as they are. Identify its sector and give a reason.2 marks
  3. Tembo Furniture makes tables from timber. Define the term 'secondary sector'.2 marks
  4. Rosa's Pottery buys clay and makes cups. It sells them through its own shop and website. Outline one secondary sector activity and one tertiary sector activity of Rosa's Pottery.4 marks
  5. Lumo Dental Clinic treats patients in a town centre. It buys gloves and filling material from suppliers. A student writes, "Lumo uses materials, so it is in the secondary sector." Outline two reasons why the student is wrong.4 marks
  6. Orla Furniture buys timber from a logging company, makes tables and sells them through retailers. Outline how Orla Furniture depends on one primary sector business and one tertiary sector business.4 marks
  7. Kanu Timber is a logging business in Brenvia, a developing economy. Much of Brenvia's forest has been cut down. The table gives the share of Brenvia's output from two sectors. Outline two reasons why the primary sector has become less important in Brenvia. | Sector | 1995 (%) | 2020 (%) | | --- | --- | --- | | Primary | 35 | 12 | | Secondary | 20 | 38 |4 marks
  8. Pine Bay Hotel is one of many new service businesses in Corvale, a developed economy. Use the table to explain two reasons why the tertiary sector has become more important in Corvale. | | 2000 | 2020 | | --- | --- | --- | | Average income per person ($) | 18 000 | 31 000 | | Primary share of output (%) | 14 | 4 | | Secondary share of output (%) | 31 | 22 | | Tertiary share of output (%) | 55 | 74 |6 marks
  9. Marla Fishing Co is a family fishing business in Tavora. The table gives data for Tavora's economy. Marla's owner says, "Our sector's share has halved, so the sea must be running out of fish." Explain two reasons why the primary sector has become less important in Tavora. Use calculations from the table to judge the owner's claim. | | 2000 | 2024 | | --- | --- | --- | | Total output ($ million) | 400 | 1200 | | Primary share (%) | 30 | 15 | | Secondary share (%) | 25 | 30 | | Tertiary share (%) | 45 | 55 |8 marks
  10. Sunhaven Orchards grows apples in Kessia and sells them, unprocessed, to a juice company. In twenty years the primary share of Kessia's output fell from 30% to 10%, the secondary share stayed at 25% and the tertiary share rose from 45% to 65%. The farm is 60 km from the nearest city. The owner can build a small juice factory on the farm or open a farm cafe. Recommend which option she should choose. Justify your answer.12 marks
  11. Kite Books is a private sector business owned by two sisters. Define 'private sector'.2 marks
  12. Delta Rail is a public sector business. Define 'public sector'.2 marks
  13. Ravi wants to start a business in the private sector. State two types of business organisation that are in the private sector.2 marks
  14. Halden Foods plc is owned by 20 000 shareholders. A student says: 'Halden Foods is a public limited company, so it is in the public sector.' Explain why the student is wrong.2 marks
  15. Dara's Dairy is owned by Dara and his wife. Explain why it is in the private sector.4 marks
  16. In the country of Solana, the government owns the railway, Solana Rail. Peak Cycles, a bicycle shop there, is owned by its founder, Ines. Explain why Solana is described as a mixed economy.4 marks
  17. Lumen Power supplies electricity to a region. The government owns it, and a board of managers runs it from day to day. A student writes: 'Lumen Power is in the public sector because the government runs it.' Explain why this answer is not precise and give a better one.4 marks
  18. Brightside plc is a large clothing retailer owned by thousands of shareholders. City Bus is a bus company owned by the government. Explain two differences between Brightside plc and City Bus.6 marks
  19. Maren has a mixed economy. The table shows four organisations there. A report claims: 'Three of these four organisations are in the public sector.' Explain which sector each organisation is in and whether the report is correct. | Organisation | Details | | --- | --- | | Maren Steel plc | A public limited company owned by 40 000 shareholders. | | Harbour Ferries Ltd | A private limited company owned by one family. The government pays it to run a ferry route. | | Maren Post | A public corporation owned by the government. A board of managers runs it. | | Kofi's Kiosk | A sole trader, Kofi. He sells stamps for Maren Post. |8 marks
  20. Orsa Water was a public corporation owned by the government of Orsa. Last year the government sold all of it to shareholders, and it became Orsa Water plc. It has the same managers and the same customers as before, and the government still sets the highest price it may charge. Student A says: 'It is still in the public sector, because the government controls its prices.' Student B says: 'It is in the public sector, because it is a public limited company.' Student C says: 'It is now in the private sector.' Consider the three views. Which student is correct? Justify your answer.12 marks

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