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Unit three of the tutorial focuses on classifying settlements based on size and complexity. Settlements are named based on the number of services and functions they have. The smallest unit is the isolated farmstead, which is a single dwelling or house. Settlements are classified based on their size and complexity, with the largest and most complex having more services and functions. The tutorial also covers the concepts of site, situation, rural, and urban settlements, which help us understand why settlements are located where they are.