1.2.1 - Factors of production and economic sectors
Learn how businesses combine resources to produce goods and services, how economic activity is grouped into sectors, and how sector data can reveal changes as an economy develops.
Resources used in production
Production turns resources into goods or services that satisfy wants. A bakery needs ingredients, people, equipment and someone to organise the business. Economists group these resources into four factors of production.
| Factor | Meaning | Bakery example |
|---|---|---|
| Land | Natural resources used in production | The land on which wheat grows, water and wheat as a natural resource |
| Labour | Human physical and mental effort used in production | Bakers mixing dough and a worker managing orders |
| Capital | Human-made resources used to produce other goods or services | Ovens, mixing machines and the bakery building |
| Enterprise | Organising the other factors and taking the risks of business decisions | An entrepreneur choosing the product range, investing and risking a loss |
Land means more than the ground: minerals, forests and fish stocks are natural resources. Capital has a different economic meaning from money. Money can buy a productive oven, but the oven is the capital resource. Bread bought to eat is a consumer good; a machine bought to make bread is capital.
Enterprise connects the resources. An entrepreneur may notice demand for gluten-free bread, hire bakers and buy equipment without knowing whether sales will cover costs. Ownership alone is not the full idea: organising production and bearing risk matter. One person can supply labour as a baker and enterprise as the owner, but these remain distinct roles.
Classifying economic sectors
A sector groups activities according to the kind of production they perform, rather than the resource they use.
The primary sector extracts or harvests natural resources. Farming wheat, fishing, forestry and mining are primary activities. The secondary sector manufactures goods or constructs buildings: milling wheat into flour, baking bread for sale and building a factory are secondary activities. The tertiary sector supplies services, such as transport, retailing, banking, healthcare and education.
These sectors depend on one another. A farm supplies wheat to a flour mill; a bakery uses the flour; a retailer sells bread; transport links each stage. A farm still uses labour and capital, and a bank still uses buildings and workers. “Primary” describes the farm's activity, not the only factor it uses. A supermarket selling manufactured goods provides a retail service, so its activity is tertiary.
A business may operate in more than one sector. A company might grow fruit and manufacture jam. Classify the stated activity rather than assuming the whole company must fit a single label. Economic sector is also different from public or private ownership: a privately owned hospital still provides a tertiary service.
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