Economic Activity (AQA A Level Economics)

The Purpose of Economic Activity

• The central purpose of economic activity is the production of goods and services to satisfy needs and wants

  • Needs are essential for survival, eg. food and shelter

  • Wants are desires for goods and services that are not essential, eg. electronics 

• The demand for needs and wants are infinite, while the supply of resources needed to produce them is finite

Diagram: The Purpose of Economic Activity 

The purpose of economic activity is to take inputs, add value to them, and create products which meet customer needs and wants

To produce goods or services

• The primary purpose of business activity is to produce goods or services that satisfy a need or demand in the market

  • Goods are physical products, such as bicycles and T-shirts

  • Services are non-physical items such as hairdressing, tourism and manicures

Meeting customer needs

• The ultimate goal is to create products that meet the needs and preferences of customers and provide value to them

• By meeting customer needs, businesses can build customer loyalty, increase brand awareness, and generate revenue

To add value

• The third purpose of business activity is to add value to products or services 

• Value-added features can differentiate products from competitors, create a unique selling point, and increase customer satisfaction

  • E.g. a product that is easier to use, has a better design, or is of higher quality than competitors can create a competitive advantage for a business

The Three Fundamental Economic Questions

• In order to solve the basic economic problem of scarcity, economic systems emerge or are created by different economic agents within the economy

  • These agents include consumers, producers, the government, and special interest groups (e.g. environmental pressure groups or trade unions)

  • Any economic system aims to allocate the scarce factors of production

• The three main economic systems are a free market system, a mixed economy, and a planned economy

Diagram: Three Fundamental Economic Questions

How the three questions are answered determines the economic system of a country 

• Each economy has to answer three important economic questions

1. What to produce? As resources are limited in supply, decisions carry an opportunity cost. Which goods/services should be produced, e.g. better rail services or more public hospitals?
   

2. How to produce it? Would it be better for the economy to have labour-intensive production so that more people are employed, or should goods/services be produced using machinery?
   

3. Who to produce it for? Should goods/services only be made available to those who can afford them, or should they be freely available to all?

  
How These Questions are Answered Determines the Economic System