ECO1Economic Foundations: Needs, Wants, Resources and Choices
3.1.1.1 Needs and wants
Needs and wants
A need is something essential for survival, such as food, water, shelter and basic clothing.
A want is something people would like to have, but can live without, such as a games console, a holiday or a takeaway.
Needs and wants change over time. Rising incomes turn yesterday’s luxuries into everyday items; new technology creates new wants; fashion and adverts change tastes; and people’s needs change with their stage of life (a baby, a student, a pensioner).
Some items sit on the boundary. Many people would call a phone or internet access a need today, because work, school and banking depend on them, even though people survived without them in the past.
Wants are unlimited. When one want is met, people find another.
Exam tipWhen you explain why a want changes, give the reason (higher income, new technology, a new life stage) and then the result for what the person buys. A reason on its own gets 1 mark of 2.
Need
Something essential for survival, such as food or water.
Want
Something desirable but not essential, such as a television.
3.1.1.1 The central purpose of economic activity
The central purpose of economic activity
Economic activity is producing, buying and selling goods and services.
Its central purpose is to produce goods and services to satisfy people’s needs and wants.
Goods are physical things you can touch (bread, a bike). Services are things done for you (a haircut, a bus ride).
Making a profit, collecting taxes and creating jobs all happen along the way, but none of them is the central purpose.
Watch outMultiple-choice questions on the central purpose use tempting wrong answers such as ‘to make a profit’ or ‘to raise tax revenue’. The answer is always about satisfying needs and wants.
Economic activity
The production and consumption of goods and services.
Central purpose of economic activity
Producing goods and services to satisfy needs and wants.
3.1.1.1 The key economic decisions
The key economic decisions: what, how and for whom
Because resources are scarce, every economy, firm and household must answer three questions.
In most markets, prices help answer these questions: people who are willing and able to pay get the product.
Government also answers them, for example by providing schooling and healthcare free at the point of use.
Decision
The question
Example
What to produce?
Which goods and services, and how many of each?
A farm chooses between growing wheat and keeping sheep.
How to produce?
Which mix of land, labour, capital and enterprise?
A bakery chooses between bakers working by hand and a new automatic oven.
For whom to produce?
Who gets the goods and services: who benefits?
A government decides whether dental care is free for everyone or only for children.
Exam tipA ‘key economic decision’ is what, how or for whom. In one past paper many students wrote a business objective, such as ‘make a profit’, instead. That scores nothing.
Key economic decisions
What to produce, how to produce it, and who is to benefit from it.
3.1.1.1 The main economic groups
The main economic groups and how they interact
AQA names three main economic groups: consumers, producers and government.
Consumers buy and use goods and services. Most are also workers who sell their labour to producers.
Producers (firms) combine the factors of production to make goods and services, aiming for profit or other goals.
Government collects taxes, spends on services such as schools and roads, pays benefits, and makes laws and rules for firms and consumers.
They depend on each other: consumers’ spending is producers’ revenue; producers’ wages are consumers’ income; both pay taxes that fund government spending; government contracts and rules shape what producers do.
Consumers, producers and government depend on each other
Watch out‘Workers’ is not one of the three main groups. Workers are consumers who also supply labour.
Exam tipTo explain an interaction, name both groups and say what passes between them, then the result: ‘Consumers buy from a supermarket, which gives it revenue to pay wages…’.
Consumer
A person or household that buys and uses goods and services.
Producer
A firm or person that makes goods or provides services.
Government
The body that taxes, spends, provides some services and sets the rules for an economy.
3.1.1.2 The factors of production
Economic resources: the four factors of production
An economic resource is anything used to produce goods and services. Resources are scarce, so decisions must be made about how they are used. Economists group them into four factors of production.
Money is not a factor of production. Money can buy capital, but capital means the machines and tools themselves.
The same item can be a different factor in different settings: a field is land to a farmer; a tractor is capital.
An entrepreneur is the person who provides enterprise.
Factor
What it is
Examples
Land
Natural resources, including what is on or under the ground and in the sea
Farmland, forests and timber, oil, coal, fish stocks, rivers
Labour
The human effort, mental and physical, used in production
A nurse’s work, a plumber’s skill, a call-centre adviser’s time
Capital
Man-made goods used to make other goods and services
Machines, tools, vans, computers, factories
Enterprise
Organising the other three factors and taking the risk
Someone who starts a business and risks their own savings
The four factors of production and the reward each one earns
Exam tipIf asked for two examples of a factor, make them different kinds. ‘A forest and an oil field’ or ‘coal and fish’ works; ‘the Atlantic and the Pacific’ gets only 1 mark, because both are oceans.
Watch outAbout one in five students in one year gave capital or enterprise when asked for examples of land. Land means natural resources only.
Economic resource
A scarce input used in production, so choices must be made about how to use it.
Factors of production
The four types of resource: land, labour, capital and enterprise.
Land
Natural resources, such as minerals, forests, fish and farmland.
Labour
The human effort used in production.
Capital
Man-made goods, such as machinery and tools, used to produce goods and services.
Enterprise
Organising the other factors of production and taking the risk of doing so.
3.1.1.2 The reward accrued to each factor
The reward to each factor
Each factor of production earns a payment, called its reward.
Profit is the reward for risk: if the business does badly, the entrepreneur may make a loss instead.
A memory aid: Land → Rent, Labour → Wages, Capital → Interest, Enterprise → Profit.
Factor
Reward
Example
Land
Rent
A landowner is paid rent by the farmer who uses the field.
Labour
Wages (or salaries)
A shop worker earns a wage for each hour worked.
Capital
Interest
Interest is the reward for the money lent to buy machines and buildings.
Enterprise
Profit
The owner keeps what is left after all costs are paid.
Exam tipQuestions often describe a person and ask for the reward. Find the factor first (a landlord supplies land; a builder supplies labour), then name its reward.
Rent
The reward to land.
Wages
The reward to labour.
Interest
The reward to capital.
Profit
The reward to enterprise, for organising production and taking the risk.
3.1.1.3 The basic economic problem
The basic economic problem: scarcity and choice
The basic economic problem: how best to satisfy unlimited wants with limited (scarce) resources.
Scarcity means there are not enough resources to produce everything everyone wants.
Because of scarcity, every group must make choices:
Consumers have limited income and time, so they choose what to buy.
Producers have limited money, workers, machines and space, so they choose what and how to produce.
Government has limited tax revenue, so it chooses what to spend on.
Even the richest countries face the problem: wants keep growing faster than resources.
From unlimited wants and scarce resources to choice and opportunity cost
Exam tipIf a question asks about an individual consumer, answer about that person: limited income or time against unlimited wants. Some students lost marks by writing about firms or the government.
Basic economic problem
How to satisfy unlimited wants with limited resources.
Scarcity
When resources are limited compared with the wants they could satisfy.
Choice
Deciding between alternative uses of scarce resources.
3.1.1.3 Costs and benefits of economic choices, including opportunity cost
Opportunity cost and weighing up costs and benefits
Opportunity cost: the benefit of the next best alternative given up when a choice is made.
It is only the next best option, not every option given up.
Consumers: spending £40 on a concert ticket might mean giving up a new pair of trainers.
Producers: a café that spends its budget on a new kitchen gives up the extra seating it could have bought instead.
Government: money spent on a new hospital cannot also be spent on schools or roads.
Weighing up a choice: list the costs (including the opportunity cost) and the benefits of each option, think short and long term, then choose the option whose benefits most outweigh its costs.
Time is scarce too. An hour spent revising is an hour not spent working a paid shift.
Choosing the laptop means giving up the driving lessons: they are the opportunity cost
Worked exampleEllie works Saturdays in a café for £78 a day. Ellie is offered a one-day coding workshop on a Saturday that costs £40. What is the full cost to Ellie of going, including the opportunity cost?
Money paid: £40the fee itself
Wages given up: £78the next best use of Ellie’s Saturday is working, so this is the opportunity cost
£40 + £78 = £118add the fee and the earnings given up
£118
Exam tipTo get the second mark when you explain an opportunity cost, say what is given up and the benefit that is lost: ‘The council can’t build the pool, so residents lose a place to exercise.’ Naming a cost alone isn’t enough.
Opportunity cost
The benefit of the next best alternative given up when an economic decision is made.
Trade-off
Giving up some of one thing to get more of another.
3.1.1 Economic foundations (moral, ethical and sustainability issues)
Moral, ethical and sustainability questions in economic choices
The spec asks you to think about the moral, ethical and sustainability issues behind economic decisions. This runs through the whole course.
Moral and ethical questions are about what is right and fair, not only what earns the most. For example, should a firm buy cheaper cotton from a factory with unsafe working conditions?
Sustainability: meeting the needs of people today without harming the ability of future generations to meet their own needs.
Consumers may pay more for Fairtrade, recycled or locally made products.
Producers may choose cleaner methods of production, even if they cost more (a ‘how to produce’ decision).
Government may protect scarce natural resources, such as fish stocks or forests, so they are not used up.
These choices have opportunity costs too: a greener method may mean higher prices or lower profit today.
Exam tipIn longer answers, a point about sustainability or fairness is a good way to evaluate: ‘This is cheaper now, but it uses up a resource that future generations will need.’
Sustainability
Meeting the needs of the present without harming the ability of future generations to meet their own needs.
Ethical decision
A choice based on what is morally right, not only on cost or profit.
Genious