AQA A-Level Economics · Revision notes
4.1.1.2 The Nature and Purpose of Economic Activity
What the specification covers
In our own words — not the official specification wording
Why economic activity happens at all, and the three fundamental questions every economy has to answer.
- Economic activity exists to produce the goods and services people need and want.
- Every economy must settle three questions: which goods to make, what methods to use, and who ends up with them.
Every economic question starts from the same place: people want more than can be produced. This topic covers the purpose of economic activity, the three key decisions every economy has to make about what to produce, how and for whom, and the different economic systems that answer them.
The purpose of economic activity
A need is something required for survival: food, water, shelter, warmth. A want is everything beyond that, desirable but not necessary for life.
The central purpose of economic activity is the production of goods and services to satisfy these needs and wants. Wants are effectively unlimited while resources are finite, so not every want can be satisfied, and choices have to be made.
The key economic decisions
Because resources are scarce, every society must answer three questions:
- What to produce, and in what quantities?
- How to produce it, with which combination of resources and technology?
- For whom to produce, and how output is distributed between people?
Different economic systems answer these questions in different ways, through markets, the state, or a mix of both.
Three economic systems
A free market economy Resources are privately owned, and decisions about production and consumption are made by individuals and firms responding to prices. Firms produce what is profitable; consumers buy what they want and can afford. The state's role is limited to essentials such as enforcing contracts and protecting property rights.
A command (planned) economy Resources are owned or controlled by the state, and a central authority decides what is produced, how and for whom. Prices, output targets and wages are set by planners rather than by markets. The Soviet Union and North Korea are the main historical and current examples.
A mixed economy Both the market and the state allocate resources. Most goods are produced privately and sold through markets, but the state provides some goods and services directly, regulates markets, and redistributes income. Every modern economy, including the UK, is mixed; they differ in the balance between market and state.
Key terms
| Term | Meaning |
|---|---|
| Need | Something required for survival |
| Want | Something desired beyond what is needed to survive |
| Economic problem | The need to decide what to produce, how and for whom, given scarcity |
| Free market economy | An economy where resources are allocated by prices and private decisions |
| Command economy | An economy where the state owns resources and allocates them by central planning |
| Mixed economy | An economy where both markets and the state allocate resources |
Common mistakes
- Treating the UK as a free market economy. It is a mixed economy with a large public sector.
- Describing the systems without the three questions. The difference between systems is who decides what, how and for whom.
How this has been examined
This topic has not appeared as a standalone question in the AQA papers indexed on this site.
Where this goes next
The resources used to produce goods and services are classified in 4.1.1.3 Economic resources, and the scarcity that forces these decisions is developed in 4.1.1.4 Scarcity, choice and the allocation of resources. 4.1.1.5 Production possibility diagrams turns the choice of what to produce into a diagram, and how prices answer the three questions in a market economy is covered in 4.1.8.1 How markets and prices allocate resources.
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