1.1.1 Nature and purpose of economic activity
Why did you choose Economics as an A-Level?
What other options were there?
Why didn’t you choose Economics plus the alternative options?
AQA E CON 1: M ARKETS AND
MARKET FAILURE
1.1.1 W HAT
YOU NEED TO KNOW

Candidates should understand that the central
purpose of economic activity is the production of
goods and services to satisfy needs and wants, and
thereby to improve economic welfare

They should address the questions of what, how and
for whom goods and services should be produced,
and consider the role of economic incentives in
providing the answers to these questions

Candidates should appreciate that economists take a
broad view of production and consumption activities
including, for example, housework, DIY and benefits
derived from the natural environment
W HAT
DO ECONOMISTS MEAN BY THE
‘ ECONOMIC
Explain how the
economic
problem can be
applied to
education in the
UK.
PROBLEM ’?

People have unlimited wants

However, there aren’t enough resources available to
supply all of these wants

This creates the economic problem of scarcity

The ‘economic problem’ occurs when there are finite
resources available to supply infinite wants i.e. scarcity

Therefore, choices have to be made
Examples of scarcity.
Can you add any recent examples that you have seen in the
media?
E CONOMIC A CTIVITY
The central purpose
of economic activity
is the production of
goods and services to
satisfy needs and
wants.
Economic activity will
improve economic
welfare, the benefit
gained by individuals,
firms or society in the
production of goods
and services.
Needs are those
things required that
are essential to
maintain survival.
Wants are those
things that are
desired but not


The purpose of economic activity is to satisfy the wants
and needs of society

What is the difference between a want and a need?

Are you ever guilty of using the wrong term?

Write a list of 4 needs and 4 wants
The economic problem tries to answer 3 basic questions:

What to produce?

How to produce?

Who to produce for?
W HAT, HOW AND FOR WHOM GOODS AND
SERVICES SHOULD BE PRODUCED
Economic agents are
the individuals and
firms that partake in
economic activity, the
demand for and
supply of goods and
services.



A free market
economy is one where
firms decide what
goods and services to
produce with limited
intervention from the
government.
What to produce?
How to produce?


Economic incentives will provide economic agents with the
information required to tell them what goods and services to
produce
Firms will combine the factors of production (land, labour,
capital and enterprise) in order to produce a good or a service
For whom to produce?

In a free market economy we produce according to demand
and supply

If there is demand for a product a firm may wish to supply it for
a profit
T HE
Economic incentives are the
reasons for economic
agents providing goods and
services. They include:
• Rationing
• Signalling
• Incentive
ROLE OF ECONOMIC INCENTIVES

Economic incentives provide the reasons for economic agents to
provide goods and services

These are based on the price mechanism, the method by which
prices for goods and services are achieved

The rationing function occurs because increased demand for or
reduced supply of a product will lead to a price rise

The signalling function occurs because changing prices give a signal
to consumers and producers as to whether to leave or enter a
market e.g. higher prices suggests that consumers should buy less

The incentive function occurs because a consumer or producer is
motivated to a course of action e.g. higher prices will incentivise a
producer to supply more of a good or service
E CONOMISTS TAKE A BROAD VIEW OF
CONSUMPTION AND PRODUCTION ACTIVITIES
Consumption is the use of
a good or a service by a
consumer.
Production is the
provision of a good or
service by a producer.

Economists include a variety of activities when looking at
consumption and production

These will include goods and services that have both a financial and
non-financial incentive, for example:

Financial:




Wages earned in a job
Buying tickets for a football match
Old people’s home
Is childcare the same
economic activity if
undertaken by a parent or
paid for in a nursery?
Non-financial



Benefits from the natural environment e.g. walking on the beach
Housework
Do It Yourself (DIY) work
Q UICK
Define the
term scarcity.

Define the
term
economic
problem.

TEST
What is the economic problem faced by society?
a)
How to reduce wants and need
b)
What, how and for whom to produce goods and services
c)
How to maximise profits for businesses
d)
Who to allocate scarce resources to
Can you explain your answer?
Q UICK


TEST
The fundamental purpose of economic activity is?
a)
To increase the supply of renewable resources
b)
To reduce the use of scarce resources
c)
Profit maximisation
d)
The satisfaction of needs and wants
Can you explain your answer?
T HE N ATURE
Take it in turns to
pick a term and
explain it to the rest
of the group.
In the study of
Economics you will
learn a lot of new
terminology.
 Finite resources
 Infinite wants
 Wants
 Needs
 Economic problem
 Scarcity
AND
P URPOSE
OF
E CONOMIC
A CTIVITY
 Economic welfare
 Economic agent
 Free market economy
 Economic incentives
 Consumption
 Production
 Economic activity
Can you pick any two words and explain the relationship between them?
T EST
YOURSELF
1.
What is the purpose of economic activity?
2.
State and briefly explain 3 economic incentives.
3.
Would an economist view housework as
production, consumption or neither? Justify your
answer.