MODULE 3: ECONOMICS

1A. Definition of economics;

1B. Definitions of terms: Goods; Utility, Value,
Price and Wealth.
2. The relationship of economics with the built environment and
land use.

1A. What is Building Economics?

Economics is the study of how people and society choose to employ scarce resources that could have
alternative uses in order to produce various commodities and to distribute them for consumption, now or
in the future, among various persons and groups in society.

Lionel Robbins, 1932: the science which studies human behavior as a relationship between ends and
scarce means which have alternative uses.”

One of the earliest recorded economic thinkers was the 8th century B.C Greek poet Hesiod, who first
mentioned about the labor, materials, and time needed to be allocated efficiently to overcome scarcity.

But the founding of modern western economics occurred much later, credited to the publication of
Scottish philosopher Adam Smith also known as Father of Economics; 1776; An inquiry into the nature
and Causes of the Wealth of Nations.

Quote and Un-quote:

i. “The branch of knowledge concerned with the production, consumption and transfer of
wealth.” …….. (Oxford dictionary)
ii. “A study of mankind in the ordinary business of life; it examines the part of individual and
social action which is most closely connected with the attainment and with the use of material
requisites of well-being.” …………….. (Alfred Marshall)

Defining Economics:

Economics is a social science concerned with the production, distribution and consumption of goods and
services. It studies how individuals, businesses, governments, and nation make choices on allocating
resources to satisfy their wants and needs, trying to determine how these groups should organize and
coordinate efforts to achieve maximum output.

Nature & Scope of Economics:

Economics is the branch of social science which is concerned with the study of how individuals,
households, firms, industries and government take decision relating to the allocation of limited resources
to productive uses, to derive maximum gain or satisfaction. Simply, it is all about the choices we make
concerning the use of scarce resources that have alternative uses, with the aim of satisfying our most
infinite wants and distribute it among ourselves.
Building Economics:

Building economics is concerned with production and consumption and services and the analysis
commercial activities –

As it is related to architecture and building activity all types of functions by the builders and consumption
i.e the ones who either buy or hire those buildings for various functions with the services offered by
professionals like architects, planners, engineers etc.

Basic Concept – Any activity which shall result in building to serve people for which the people are ready
to pay the price directly or indirectly by buying or hiring the spaces can be treated as an economic
activity.

Importance of Building Economics:

a. Need to introduce / integrate Economy in Building Project in early design stage.

b. Economy made integral part of project planning, construction and management.
c. Helps in managing cost overrun.
d. Helps in managing time over run through time management.
e. Ensuring Building design completed within scheduled time.
f. Provides complete picture of total cost of project.
g. Helps designer integrating aesthetics and economy.
h. Helps in creating product without sacrificing quality.
i. Helps in meeting clients’ needs within given time.
j. Helps in creating product without sacrificing quality.
k. Looks at life cycle cost rather than initial cost.
l. Provides most economical solution to building construction/ operational costs.
m. Reduces maintenance cost to minimum.
n. Provides value for money to client.
o. Provides highest building efficiency in design.
p. Helps in making planning choices/ bringing economy in buildings.
q. Helps Architect to bring innovation in design and construction of building.

Issues and challenges associated with building projects:

1. Lack of Skilled Workers: This is a big problem facing the construction industry: not enough
skilled workers to fill a growing demand. The younger generation is being pushed toward college
and not vocational trades. The benefits of a career in construction are not being sold to
millennials and much of today’s existing workforce is closing in on retirement.
2. Lack of Communication: Technology is the answer to your communication problems.
3. Unreliable Subcontractors: Many contractors have problems finding reliable source for their jobs.
Recommended subcontractors should be worked upon. Always check on the sub-contractors
licenses, liability insurance, list of companies as additional insurance before hiring.
4. Scheduling: Project management and project timeline should be set for the scheduling. Status of
completion and status updates to be real time.
5. High Insurance Costs: Contractor insurance is part of the cost of doing business, and that doesn't
mean you have to overpay for it. You can get lower rates on your contractor insurance coverage
not letting your coverage lapse and reviewing policies each year.
6. Available Cash: The due payments for subcontractors, employees, vendors, material suppliers and
equipment renters but don’t get paid until the project is complete. There is a tough spot between
bills get due and project’s end and the credit suffering.
7. Document Management: Contracts, change orders, material orders, receipts, invoices,
employment applications, certificate of insurance, organizing and tracking of the documents
makes it difficult sometimes. Digital file keeping is a good way to store and organize them.
8. The blame Game:
9. Regulations: Following blogs and industry publications to get updated on the changing
regulations that affect the business.
10. Building Efficiency: The characteristics of the building envelope dictate how the building will
interact with its environment. Careful design and upkeep of the building envelope will minimize
energy use by two of the predominant energy using systems namely ventilating and air condition
system and lighting system.
Exterior Walls: Insulation, Minimize Thermal Bridging, Passive Solar Heating, Passive Solar
Cooling, Air Flow and Moisture Control.
Windows: Day Lighting, reduce heat gain, Optimize Heat gain, Low Conductivity casements.
Rooftops and Ceilings: Insulation, Cool Roofs and coatings
Foundations, Floors and Basements
Infiltration and Ventilation.
11. Building life cycle: Building life cycle refers to the view of a building over the course of its entire
life. I view it not just as an operational building, but also taking into account the design,
construction, operation, demolition and waste treatment. It is useful to use this view when
attempting to improve an operational feature of a building that is related to how a building was
designed. For eg. The vast majority of cases there is less than sufficient effort put into designing a
building to be energy efficient and hence large inefficiencies are incurred in the operational
phase.
12. Cost Benefit Analysis: Before building a new plant or taking on a new project, prudent managers
conduct a cost benefit analysis to evaluate all the potential costs and revenues that a company
might generate from the project. The outcome of the analysis will determine whether the project
is financially feasible or if the company should pursue another project.
13. Monetary and Non-Monetary Benefits: Monetary incentives are designed to reward employees
for outstanding job performance or longevity.
14. Non-Monetary Incentive: A meritorious category might include the some benefits or culmination
of a special research project or training program that leads to a desirable certification. Health care
benefits, Life insurance, Promotion, Vehicle allowance.
Needs and Wants:

Need is something needed to survive: In economics the idea of survival is real, someone would die
without their needs being met. Includes food, water and shelter.

Want in economics is in the order of needs and is simply something that people desire to have, they may
or may not be able to obtain. Economics deals with how we allocate scarce resources, and those scarce
resources may be needed to meet some people’s needs and other people’s wants.

Economics is a science: Science is an organized branch of knowledge that analyzes cause and effect
relationships between economic agents. Further economics helps in integrating various sciences such as
mathematics, statistics etc to identify the relationship between price, demand, supply and other economic
factors.

Positive Economics: A positive science is one that studies the relationship between two variables but does
not give any value judgment. It states, “what is”. It deals with facts about the entire economy.

Normative Economics: As a normative science, economics passes value judgment. It is concerned with
economic goals and policies to attain these goals.
1B. Goods:

An economic good is defined as a product or service that provides value to consumers in a society.
Economic goods have some degree of scarcity, meaning the supply of goods is limited. This characteristic
of scarcity contributes to the value of the good by increasing the demand for the good in a competitive
environment. Economic goods are also valuable because they satisfy human wants or needs. An economic
need is a good that is essential to human life, such as food, water, and shelter. An economic want is a
good that is desired and may improve the quality of life but is unnecessary for sustaining human life.
Examples of economic goods that are wants include designer clothing, technological devices, and
products related to leisure activities. Everyone in an economy must make choices about purchasing
economic goods based on their wants and needs.

Utility

Utility refers to the comprehensive benefits obtained from consuming an item or service. This sums up
the utility definition. Consumers would typically aim to maximize their utility based on rational choice
based on economic models. To comprehend the monetary value of an item or service is crucial because it
directly impacts demand, and hence pricing, for that service or product. It is impossible to assess and
quantify a consumer's utility in practice.

Origin of Utility

● In economics, The idea of usefulness is used for the utility definition.

● The amount to which an economic good or product benefits a consumer's demand or need
determines its utility.
● In economics, Daniel Bernoulli was a prominent 18th-century Swiss mathematician.
● He defined the term "utility". Since then, the theoretical economic perspective has advanced,
resulting in numerous monetary values.

Different kinds of utility

After looking at what is utility? Let's look at the various kinds of utility.

Total Utility

● Total utility is the total of a consumer's fulfillment or satisfaction due to their purchases of
products or services.
● Economists use utile to try to measure Utility and total Utility.
● "The Law of Diminishing Marginal Utility" is used to comprehend total utility fully. When
more of a particular product or service is used, the extra satisfaction, or marginal utility,
decreases.
● Total utility is a crucial topic to consider when understanding customer behavior.
● According to economic theories, consumer activities are based on the objective of total utility
maximization, which contributes to purchasing units with the highest perceived utility
satisfaction.
●
Marginal Utility
 ● The additional advantage of utilizing one more unit of a particular commodity or service is
marginal utility.
● The Marginal Utility of consuming units might be positive, negative, or zero.
● The utility is not consistent, and with each extra unit consumed, the customer typically suffers
declining marginal benefit, in which each subsequent unit offers decreasingly marginal utility.

What is the Expected Utility?

● The expected utility is the utility of activity or occurrence over time when uncertain conditions
are known.
● The anticipated utility will be the sum of the products of conceivable outcomes multiplied by the
chance of the events occurring.
● Based on their risk aversion, organizations may or may not pick the option with the highest
projected utility value when considering uncertain scenarios.

Measurement of Utility

Utility measurement allows for the analysis of the needs or demand behavior of a customer. There are two
ways to measure utility.

Cardinal Utility approach

This approach is believed to be measurable. With cardinal numbers, i.e., quantitative numbers like 1, 2, 3,
and so on, one can express satisfaction. These numbers indicate a customer's preference in cardinal
measurements, measured in utile. However, measuring utility is not always possible as it cannot add
different types of goods together.

Ordinal Utility approach

This approach is believed to be comparable. Ratings or Rankings are used to express satisfaction.
Comparisons of commodities can be made by assigning them a rank, such as first, third, or seventh. In
this way, it shows the preferential order. A value is ordinally measured using a qualitative method.
However, evaluating utility concepts is tough.

Price : A price is the amount of money that a buyer gives to a seller in exchange for a good or a service.

Cost : The cost can be defined as the total amount spent on the inputs like land, labour, capital,
machinery, material, etc. with an aim of producing the product or supplying the services. It can be
anything which adds to the expense of product or service manufactured or supplied by the firm.

In simple terms, cost implies the financial worth of the sacrifice made, to obtain the goods or services. It
is incurred for present or future benefits. The basic elements of cost are: Material, Labour and
Overheads.

At the time of setting up a price, it is necessary to identify and compute all the costs, as they affect the
business profitability to a great extent. Further, costs are divided into fixed costs and variable costs:
 ● Fixed Cost: Costs, which remain the same irrespective of the number of units produced, it is
called a fixed cost. For Example, Rent, depreciation, insurance, web hosting etc.,
● Variable Cost: The kind of costs, which varies with the number of units produced is called
variable cost. For Example Raw material, labour, shipping cost, etc.

Definition of Value

Value can be described as the benefit derived by the customer from the product or service. In clearer
terms, value is what a customer perceives the product or service is worth to them.

Price is the amount that a buyer must pay to purchase a product or service. Cost is the amount a seller
incurs to produce and offer the product or service for sale. Value is the perceived worth of the product or
service to the buyer, which can be influenced by factors such as quality, brand, and customer experience.

Key Differences Between Price, Cost and Value

To have a deeper understanding of the difference between price, cost and value, let’s take a look at the
points stated below:

1. The price implies the financial compensation for the supply or use of the product or service. Cost
refers to the amount of expenditure made on a particular product to produce it or to undertake any
activity. On the contrary, Value implies the usefulness and desirability of a product or service to a
customer.
2. Price is what the company charges for goods or services from its customers; Cost is the what the
company pays to acquires goods and services for production, whereas and Value is what goods or
services pay to the customers i.e. worth.
3. While the price of the product is determined by the customer’s or marketer’s viewpoint, the cost
is ascertained from the producer’s viewpoint. But, the value can be determined from the
consumer’s viewpoint, because, he/she is the ultimate user of the product or service, who is going
to use the product in real.
4. When it comes to monetary measurement, both price and cost can be monetarily measured.
However, the value cannot be measured in terms of money.
5. Price is estimated through the pricing policy and strategy of the company. Unlike, Cost is
assessed on the basis of actual expenditure incurred on manufacturing a particular product, but
the estimation of value is based on a customer’s opinion about the product or service.
6. Market fluctuations causing due to demand and supply forces or competitive forces or the prices
of related items often affect the price of the product. Similarly, there are a number of factors
which leads to the rise and fall in the elements of cost, i.e. material, labour and overheads, which
may include a change in economic condition, government interference, technological changes,
and so on. However, the value of a product or service for a consumer is not affected by market
fluctuations.

Example: Suppose a person goes to a shop to buy medicine, for which he pays Rs. 1000, so it is the price.
Further, the amount the seller, or the manufacturer spent on producing the medicine, is its cost, which
may include the cost of labour, material, transportation, research and development, office expenses etc.
The cost is usually less in comparison to the price on which it is sold.

Now, the medicine bought by the buyer is of utmost importance to him, as it is going to treat his loved
ones. This usefulness of the medicine at that point of time is nothing but ‘value’.

Wealth:

Wealth measures the value of all the assets of worth owned by a person, community, company, or
country. Wealth is determined by taking the total market value of all physical and intangible assets
owned, then subtracting all debts.

The Wealth Definition is the earliest definition of Economics. This definition was developed by the
Economists who belong to Classical School of Economics. The main contributors are Adam Smith, John
Stuart Mill, JB Say, Prof. FA Walker, NW Senior, etc. Adam Smith is the first Economist who defined
Economics and hence is regarded as Father of Economics. According to Adam Smith “Economics is
a science of Wealth”. Economics was regarded as the science which studied the production and
consumption of wealth. He has written a book “an enquiry into the nature and causes of wealth of
nations” popularly known as “Wealth of Nations” published in 1776.

What’s the difference between income and wealth?

Income and wealth are both key indicators of financial security for a family or an individual. Income is
the sum of earnings from a job or a self-owned business, interest on savings and investments, payments
from social programs and many other sources. It is usually calculated on an annual or monthly basis.

Wealth, or net worth, is the value of assets owned by a family or an individual (such as a home or a
savings account) minus outstanding debt (such as a mortgage or student loan). It refers to an amount that
has been accumulated over a lifetime or more (since it may be passed across generations). This
accumulated wealth is a source of retirement income, protects against short-term economic shocks and
provides security for future generations. As of 2016, upper-income families in the U.S. had 7.4 times as
much wealth at the median as middle-income families and 75 times as much wealth as lower-income
families.

Need and Want

Definition of Needs

By the term needs, we mean those requirements which are extremely necessary for a human being to live
a healthy life. They are personal, psychological, cultural, social, etc that are important for an organism to
survive.
In ancient times the three basic needs of the man are food, clothing and shelter but with the passage of
time, education and healthcare also became integral, as they improve the quality of life. They are a
person’s first priority as they are the things, that they keep us healthy and safe. Therefore, if needs are not
satisfied in time, it may result in illness, inability in functioning properly or even death.

Definition of Wants

In economics, wants are defined as something that a person would like to possess, either immediately or
at a later time. Simply put, wants are the desires that cause business activities to produce such products
and services that are demanded by the economy. They are optional, i.e. an individual is going to survive,
even if not satisfied. Further, wants may vary from person to person and from time to time.

We all know that human wants are unlimited while the means to satisfy those wants are limited. Hence,
all the wants of an individual cannot be met and they must seek alternatives.

Key Differences Between Needs and Wants

The following points are noteworthy so far as the difference between needs and wants are concerned:

1. The term ‘needs’ is defined as an individual’s basic requirement that must be fulfilled, in order to
survive. Wants are described as the goods and services, which an individual like to have, as a part
of his caprices.
2. An individual needs are limited while his wants are unlimited.
3. Needs are something that you must have, in order to live. On the contrary, wants are something
that you wish to have, so as to add comforts in your life.
4. Needs represents the necessities while wants indicate desires.
5. Needs are important for the human being to survive. As against this, wants are not as important as
needs, because a person can live without wants.
6. Needs are those items, that are required for life and does not change with time. As opposed to,
wants are those items, that are desired by an individual either right now or in future. Therefore,
wants might change over time.
7. As needs are essential for life, non-fulfillment may lead to illness or even death. In contrast wants
are not essential for living and so non-fulfillment, does not have a great impact on a person’s life,
however, disappointment may be there.
2. The relationship of economics between the built environment and landuse.

INTRODUCTION: THE VALUE OF LAND RESOURCES

Land occupies more than one-third of the planet’s surface and represents an essential basis for
human life and our economic activities. It is difficult to overestimate the value of land resources
in our lives, from the value of land as an agricultural input to how it shapes economic activities
and the distribution of population. Rapid population growth in the 20th century led to
concomitant changes in land use patterns. Unfortunately, these changes do not always have a
positive impact on the earth’s environment and climate.

The role of economics is to find the optimal mix of development and conservation efforts to
ensure that land use changes are environmentally sustainable and economically efficient. The
first step in this direction is to evaluate the existing land resources in their current uses.

3. Different economic systems: Capitalism; Socialism, Communism, Mixed-Economies.

Capitalism and socialism first came into use in the 1830s. Capitalism described an economic system in
which wealth (or capital, another word for wealth) was owned by individuals for their personal profit.
The British policy of government regulation of trade called mercantilism was being abandoned by the
1830s, and the free market (not the government) determined the production and distribution of goods. The
word capitalism was a product of the changing economy of Great Britain during the Industrial
Revolution.

The word socialism also began to be used in the 1830s, to describe a system different from capitalism.
Socialism held that groups of people should own and regulate the economy for the benefit of all the
members, not just a few. Early nineteenth-century socialists were often disturbed by the economic and
social changes caused by the Industrial Revolution. In the first half of the nineteenth century, socialist
ideals inspired utopian communities such as the transcendentalists’ Brook Farm, Robert Owen’s New
Harmony, and the Oneida Community. An even older ideal of Christian socialism described in the Bible
inspired religious socialist communities such as the Shakers, Rappites, Amana Colonies, and Hutterites.
Even the term social studies alludes to how a community or wider society benefits from shared
knowledge.

Communism was first a French word, coined in the 1840s, to describe a system of collective ownership in
which individuals did not own private property and worked together for the benefit of all community
members. This new French word described ideals similar to the English concept of socialism and derived
from the word common, meaning something is free or open to everyone.

The word communism was adopted by Karl Marx and Frederick Engels in the 1850s to describe their
ideology of opposing industrial capitalism. Marxist communism sought the overthrow of governments
supporting a capitalist economy. By 1918, communism was the ideology of Russia’s Bolshevik
Revolution and was associated with a single authoritarian political party. The combined economic and
political ideology of modern communism was implemented in the Soviet Union (1922), the People’s
Republic of China (1949), North Korea (1948), North Vietnam (1945), and Cuba (1965).

Societies differ in many ways, but they all have to produce, distribute, and consume goods and services.
How this happens depends on which sectors of the economy are most important. This latter variable in
turn depends heavily on the level of a society’s development. Generally speaking, the less developed a
society’s economy, the more important its primary sector; the more developed a society’s economy, the
more important its tertiary sector. As societies developed economically over the centuries, the primary
sector became less important and the tertiary sector became more important. The primary sector was
certainly the only sector in the hunting-and-gathering societies that existed thousands of years ago, while
the tertiary sector dominates much of the economy in today’s wealthiest democracies.

Recall that societies can be ranked on a continuum ranging from mostly capitalist to mostly socialist. At
one end of the continuum, we have societies characterized by a relatively free market, and at the other end
we have those characterized by strict government regulation of the economy. Figure 12.1 “Capitalism and
Socialism across the Globe” depicts the nations of the world along this continuum. Capitalist nations are
found primarily in North America and Western Europe but also exist in other parts of the world.
Comparing Capitalism and Socialism

People have debated the relative merits of capitalism and socialism at least since the time of Marx
(Bowles, 2012; Cohen, 2009). Compared to socialism, capitalism has several advantages. It produces
greater economic growth and productivity, at least in part because it provides more incentives (i.e., profit)
for economic innovation. It also is often characterized by greater political freedom in the form of civil
rights and liberties. As an economic system, capitalism seems to lend itself to personal freedom: Because
its hallmarks include the private ownership of the means of production and the individual pursuit of
profit, there is much more emphasis in capitalist societies on the needs and desires of the individual and
less emphasis on the need for government intervention in economic and social affairs.

Yet capitalism also has its drawbacks. There is much more economic inequality in capitalism than in
socialism. Although capitalism produces economic growth, not all segments of capitalism share this
growth equally, and there is a much greater difference between the rich and poor than under socialism.
People can become very rich in capitalist nations, but they can also remain quite poor.

Another possible drawback depends on whether you prefer competition or cooperation. It is often said
that important values in the United States include competition and individualism, both of which arguably
reflect this nation’s capitalist system. Children in the United States are raised with more of an individual
orientation than children in socialist societies, who learn that the needs of their society are more important
than the needs of the individual. Whereas US children learn to compete with each other for good grades,
success in sports, and other goals, children in socialist societies learn to cooperate to achieve tasks.

More generally, capitalism is said by its critics to encourage selfish and even greedy behavior: If
individuals try to maximize their profit, they do so at the expense of others. In competition, someone has
to lose. A company’s ultimate aim, and one that is generally lauded, is to maximize its profits by driving
another company out of the market altogether. If so, that company succeeds even if some other party is
hurting. The small mom-and-pop grocery stores, drugstores, and hardware stores are almost a thing of the
past, as big-box stores open their doors and drive their competition out of business. To its critics, then,
capitalism encourages harmful behavior, and there are many losers in capitalism. Yet it is precisely this
type of behavior that is taught in business schools.
As a business columnist recently summarized these problems of capitalism,

Why does one have to be a Democrat or a liberal to complain bout the way business gets done? Like
most Americans, I am OK with the notion that free-market capitalism produces winners and losers.
What I don’t like is that it also produces liars, cheaters, swindlers, self-dealing narcissists,
overleveraged idiots and reckless egomaniacs out to abuse their economic power and take unfair
advantage of hard-working people.
I don’t complain about fraud, abuse and folly because I am antibusiness or anticapitalist…What free-
market capitalism hasn’t yet figured out is what to do with all its losers. At this point in the
economic cycle, they are piling up like used tires: debt-sacked college kids who can’t get jobs,
foreclosed homeowners, failed small-business owners, pink-slipped employees, [and] millions
suddenly ejected from the middle class. (Lewis, 2012, p. C3)

Democratic Socialism
The economies of Denmark, pictured here, and several other Western European nations feature a
combination of capitalism and socialism that is called democratic socialism. In these economies, the
government owns important industries, but private property and political freedom remain widespread.

Some nations combine elements of both capitalism and socialism and are called social democracies,
while their combination of capitalism and socialism is called democratic socialism. In these nations,
which include Denmark, Sweden, and several other Western European nations, the government owns
several important industries, but much property remains in private hands, and political freedom is
widespread. The governments in these nations have extensive programs to help the poor and other people
in need. Although these nations have high tax rates to help finance their social programs, their experience
indicates it is very possible to combine the best features of capitalism and socialism while avoiding their
faults (Russell, 2011) (see Note 12.10 “Lessons from Other Societies”).

Economic Systems

Communism Socialism Capitalism

Government Government owns/regulates some parts of the Individuals and private

owns/regulates all economy for the benefit of the whole nation; businesses own everything
aspects of the and make economic decisions
economy. and free from government
regulation, keeping the profits
and accepting the losses
Individuals and private businesses also their own without intervention.
make their own economic decisions, keeping the
profits and accepting the losses.

Also known as: Also known as: Also known as:

Command Economy Mixed economy

Free Market Economy or Free
Enterprise

Usually aligned to the political left Usually aligned to the political right
The three types of Economy:

The economy is composed of three sectors. The primary sector is the part of the economy that takes and
uses raw materials directly from the natural environment. Its activities include agriculture, fishing,
forestry, and mining. The secondary sector of the economy transforms raw materials into finished
products and is essentially the manufacturing industry. Finally, the tertiary sector is the part of the
economy that provides services rather than products; its activities include clerical work, health care,
teaching, and information technology services.

Societies differ in many ways, but they all have to produce, distribute, and consume goods and services.
How this happens depends on which sectors of the economy are most important. This latter variable in
turn depends heavily on the level of a society’s development. Generally speaking, the less developed a
society’s economy, the more important its primary sector; the more developed a society’s economy, the
more important its tertiary sector. As societies developed economically over the centuries, the primary
sector became less important and the tertiary sector became more important. The primary sector was
certainly the only sector in the hunting-and-gathering societies that existed thousands of years ago, while
the tertiary sector dominates much of the economy in today’s wealthiest democracies.

Understanding Sectors

Sectors are used by economists to classify economic activity by grouping companies that are engaged in
similar business activities. For example, some sectors are engaged in activities that involve the earliest
stages of the production cycle, such as extracting raw materials. Other sectors involve the manufacturing
of goods using those raw materials. Still, other companies are engaged in service activities.

Developing and emerging economies tend to have only one or two sectors that define most business
activities. For example, some nations rely heavily on the extraction and sale of crude oil, which can be
turned into gasoline and sold to consumers within developed economies. On the other hand, developed
nations tend to have a more diverse representation of all sectors.

Although there is some debate about the true number of sectors that represent business activity in an
economy, typically, sectors are broken out into four main categories. However, please bear in mind that
there can also be sub-sectors within each of the four major sectors listed below.

Primary Sector
The primary sector involves companies that participate in the extraction and harvesting of natural
products from the Earth. Primary sector companies are typically engaged in economic activity that utilizes
the Earth's natural resources, which are sold to consumers or commercial businesses.

Companies involved in the processing and packaging of raw materials are also categorized within the
primary sector.

Primary sector business activities include the following:

● Mining and quarrying

● Fishing
● Agriculture
● Forestry
● Hunting

Emerging economies tend to have a higher amount of economic activity and employment concentrated
within the primary sector versus more advanced economies. On the other hand, developed nations tend to
utilize machinery and technology in their primary sector activities, meaning the primary sector doesn't
represent a large portion of the population's employment.

Secondary Sector

The secondary sector consists of processing, manufacturing, and construction companies. The secondary
sector produces goods from the natural products within the primary sector. The secondary sector includes
the following business activities:

● Automobile production
● Textile
● Chemical engineering
● Aerospace space
● Shipbuilding
● Energy utilities

Tertiary Sector

The tertiary sector is comprised of companies that provide services, such as retailers, entertainment firms,
and financial organizations.
The tertiary sector provides services to businesses and consumers by selling the goods that are
manufactured by companies in the secondary sector. The types of services provided by the tertiary sector
include:

● Retail sales
● Transportation and distribution
● Restaurants
● Tourism
● Insurance and banking
● Healthcare services
● Legal services

Quaternary Sector

The quaternary sector includes companies engaged in intellectual activities and pursuits. The quaternary
sector typically includes intellectual services such as technological advancement and innovation.
Research and development that leads to improvements to processes, such as manufacturing, would fall
under this sector.

The companies and firms within the quaternary sector had been traditionally part of the tertiary sector.
However, with the growth of the knowledge-based economy and technological advancements, a separate
sector was created.

Firms within the quaternary sector use information and technology to innovate and improve processes and
services, leading to enhancements in economic development. Firms within the quaternary sector might be
engaged in the following business activities:

● Research and development

● Information technology (IT)
● Education
● Consulting services