Organizations in the economy are classified according to what they produce or provide:
– primary: extractive industries such as the “3 Fs” − farming, fishing, forestry;
– secondary: organizations that manufacture products or construct roads, buildings, etc.;
– tertiary: organizations providing services − either commercial services, such as banking, transport and insurance, or direct (community services, for example the emergency services).
Another way of classifying organizations results from the UK’s mixed economy. The “mix” consists of the private sector and the public sector. Private sector firms are owned by individuals who hope to make a profit. The public sector consists of national and local government organizations where the emphasis is less on the profit motive and more on providing a service for the community.
Firms use resources, known as factors of production. The four factors are land, capital, labour and enterprise. The first three factors are combined and used by entrepreneurs (the enterprise factor of production) in producing their goods and services. They set up private sector organizations in the hope of making profits, and as business owners and decision-takers they bear the risk of making a loss. Entrepreneurs try to combine and use the other factors of production in the most efficient way. The price mechanism helps them make decisions. Entrepreneurs compare the relative prices (or costs) of each factor of production and, where possible, substitute a cheaper factor for a more expensive one.
Specialization helps entrepreneurs, their businesses and advanced economies generally to function more efficiently. This greater efficiency comes through the use of specialist tools and equipment, and by people developing specialized skills. Countries also tend to specialize in products or services, such as the UK specializing in certain manufactured goods. As a result of specializing, however, a country cannot produce everything it needs for its population. It must therefore trade with other countries by importing and exporting, selling the surpluses that result from specializing: countries become interdependent.
People also specialize, and become dependent upon others. They require a medium of exchange to buy what they need. Money serves this function. It also functions as a measure of value since it allows us to establish a price for something, and a store of value: it can be saved. Savings can be invested by the saver or a borrower with a view to making profit. To encourage savings to take place, interest is paid on them.
Through specialization, people develop particular skills. Problems of unemployment (and the need to retrain) arise if these skills become obsolete. Specialists who are in employment, whilst helping their organizations, operate efficiently, may face problems such as the boredom which can come from doing repetitive tasks. Where tasks are repetitive, there is scope to replace people (the labour factor of production) with machines (the capital factor of production). This leads to higher labour unemployment, which in turn leads to higher social and other costs.
One of the key decisions an entrepreneur must make is where to locate the business. Location is influenced by one or more of the following:
a) where other firms in the same industry are based (possible external economies);
b) the nearness of and ease of access to the firm’s:
− suppliers;
− markets;
c) the availability of:
− suitably skilled labour;
− a suitable site;
− UK government, European Union or other finance towards the cost;
− suitable infrastructure (road, rail, air or sea);
d) the personal choice of the owners/decision-makers.