Primary/secondary/tertiary sector firms

Microeconomic Decision‑Makers – Firms

Learning Objective

Identify and describe the three economic sectors – primary, secondary and tertiary – and explain how firms in each sector make decisions about production, pricing and profit.

1. The Three Economic Sectors

2. How Firms Make Decisions

All firms, regardless of sector, aim to maximise profit. The decision‑making process can be summarised in three steps:

1. Estimate the expected revenue from selling a given output level.
2. Estimate the total cost of producing that output.
3. Choose the output where profit = total revenue – total cost is greatest.

3. Revenue, Cost and Profit

For a firm that sells its product at price p and produces quantity Q:

\$\text{Total Revenue (TR)} = p \times Q\$

The cost structure typically includes:

• Fixed Costs (FC) – do not vary with output (e.g., rent, salaries).
• Variable Costs (VC) – change with output (e.g., raw materials, hourly wages).

\$\text{Total Cost (TC)} = \text{FC} + \text{VC}\$

Profit (\$\pi\$) is therefore:

\$\pi = \text{TR} - \text{TC}\$

4. Profit Maximisation Condition

A firm maximises profit where marginal revenue (MR) equals marginal cost (MC):

\$\text{MR} = \text{MC}\$

In a perfectly competitive market, MR equals the market price (p), so the rule simplifies to:

\$p = \text{MC}\$

5. Sector‑Specific Considerations

5.1 Primary Sector Firms

• Revenue is highly sensitive to world commodity prices.
• Costs are influenced by weather, disease, and extraction technology.
• Decision‑making often involves risk management (e.g., futures contracts).

5.2 Secondary Sector Firms

• Scale economies are important – larger output can lower average cost.
• Investment in machinery affects both fixed and variable costs.
• Product differentiation may allow pricing above marginal cost.

5.3 Tertiary Sector Firms

• Quality of service and brand reputation are key non‑price factors.
• Labor costs are often the largest variable cost.
• Pricing strategies may use price discrimination (e.g., student discounts).

6. Example: Decision‑Making in a Tertiary Firm (Coffee Shop)

Assume a coffee shop sells each cup for $£2.50. The shop estimates the following costs:

• Fixed Costs (rent, utilities) = $£1,200 per month
• Variable Cost per cup (coffee beans, milk, wages) = $£0.80

Calculate the break‑even quantity (Q_BE) where profit = 0:

\$\text{TR} = 2.50Q\$

\$\text{TC} = 1,200 + 0.80Q\$

\$\text{Set TR = TC:}\; 2.50Q = 1,200 + 0.80Q\$

\$\Rightarrow 1.70Q = 1,200\$

\$\Rightarrow Q_{BE} = \frac{1,200}{1.70} \approx 706\text{ cups}\$

Thus the shop must sell at least 706 cups per month to cover all costs.

7. Summary Checklist

• Identify the sector a firm belongs to.
• List the main sources of revenue and cost for that sector.
• Apply the profit formula \$\pi = \text{TR} - \text{TC}\$.
• Use the condition \$MR = MC\$ (or \$p = MC\$ in perfect competition) to find the profit‑maximising output.
• Consider sector‑specific factors that may shift revenue or cost curves.