AQA GCSE Economics

The purpose of economic activity

Economic activity is the production, distribution and consumption of goods and services. It exists because people have needs and wants. A need is something required to live a healthy and safe life, such as food, clean water, shelter, basic clothing and warmth. A want is something that would make life more comfortable or enjoyable but is not essential to survive, such as a games console, a holiday or a new phone.

The line between the two is not fixed. It depends on the person, the country and the time. A phone or an internet connection was a want for most households twenty years ago, yet many people now treat it as close to a need because jobs, schooling and banking depend on it. Income matters too: a wealthy household and a poor one will not draw the line in the same place, and what is a need in a cold climate (heating) may be a want in a warm one.

Wants are unlimited, since meeting one tends to produce another, but the resources available to meet them are limited. That mismatch is the starting point for almost everything else in economics.

The three key economic decisions

Every society, whether its economy is planned by a government or left largely to markets, has to settle the same three questions, because it cannot produce everything everyone would like.

• What to produce: how much of the limited resources goes into food, housing, healthcare, weapons, entertainment and so on.
• How to produce: which methods to use, for instance whether a good is made by many workers using simple tools or by a few workers using advanced machinery, and whether the method is cheap but polluting or dearer and cleaner.
• Who is to benefit: how the goods and services produced are shared out between people, for example by who can afford to pay, or by need through public services.

In a market economy these questions are answered mostly by prices and the decisions of millions of buyers and sellers. In a mixed economy such as the UK, the government answers some of them directly, for example by providing state education and healthcare.

The main economic groups

Three groups take part in economic activity, and each has its own aims.

Consumers

Consumers buy and use goods and services. Their aim is usually to get the most satisfaction from the money they have, so they weigh price, quality and convenience. Consumers also supply labour to firms, which makes them workers as well as buyers, and they save or borrow through banks.

Producers

Producers are the firms and other organisations that make goods or provide services. Most aim to make a profit, though some, such as charities and social enterprises, have other main aims. Producers buy factors of production, pay wages and sell to consumers, other firms and sometimes the government.

Government

The government makes the laws and rules that markets operate within, collects taxes and spends them, provides services such as defence, policing, roads and (in the UK) most healthcare and education, and tries to manage the performance of the whole economy. It also buys goods and services from producers and employs workers directly. Its aims are broad: a stable economy, jobs, fair treatment and a healthy environment, and they sometimes pull in different directions.

How the groups interact

The groups depend on each other in a circle.

• Consumers sell their labour to producers and receive wages, and they spend those wages on the goods and services producers sell.
• Producers sell to consumers and receive revenue, which pays for materials, wages and profit.
• The government taxes both consumers (income tax, VAT) and producers (corporation tax), then spends the money on public services, benefits and contracts with producers, which puts income back into the economy.
• The government also shapes behaviour through regulation, for example setting a minimum wage that producers must pay or safety standards that goods must meet.

A change in one group passes to the others. If the government raises income tax, consumers have less to spend, firms sell less and may cut jobs, and the government in turn may collect less from other taxes. Seeing these links is what lets a question about one group be answered by reasoning about the other two.

Moral and ethical considerations

Economic decisions carry moral questions as well as financial ones. A firm may cut costs by using cheaper materials that damage the environment, or by paying workers very little. A consumer may choose the cheapest product even if it was made in poor conditions. A government may favour growth at the expense of the environment. These questions recur throughout the course, and a balanced answer weighs the financial gain against who is harmed and who is helped.