Economic questions, economic activities and economic systems – Basic Economic Concepts and Principles (Senior 4 Economics) | Ganzaa

Basic Economic Concepts and Principles

Lessons

Senior 4 · Economics

Basic Economic Concepts and Principles

5 lessons

Lesson 5 of 5

Economic questions, economic activities and economic systems

30 min

From a hillside to a cup

Follow a kilogram of Rwandan coffee. A farmer grows and picks the cherries; a washing station pulps, washes and dries them; a roaster turns the beans into a packed product; a trader exports it or a café in Kigali sells it by the cup. At every step somebody decided what to produce, how to produce it and for whom. In some countries those decisions are made mainly by prices in markets, in others by a government plan, and in others by custom. This lesson looks at the questions every economy must answer, the kinds of activity that answer them, and the systems societies use to organise them.

Definition

Basic economic questions: the questions that scarcity forces every society to answer: what to produce and in what quantities, how to produce it, and for whom to produce it. Many writers add where and when to produce.

1. The basic economic questions

Question	What it asks	Rwandan illustration
What to produce, and how much?	Which goods and services, in what quantities, given scarce resources	Should a hillside grow tea for export or food crops for local markets?
How to produce?	Which methods and combinations of resources: labour-intensive or capital-intensive	Hand-picking tea or using machines; hoes or tractors
For whom to produce?	How output is shared among people, which depends on incomes	Who can afford the roasted coffee: local households or foreign buyers?
Where to produce?	The location of production	A factory in a special economic zone or near the raw materials
When to produce?	The timing of production, now or in the future	Planting in Season A or Season B; consuming now or investing for later

2. Economic activities

Economic activities are carried out to earn an income or to produce goods and services for exchange. Non-economic activities are done out of love, duty, religion or social custom, with no aim of earning: a nurse treating patients at a hospital is economically active; the same nurse caring for her own sick child at home is not. Economic activities are grouped into sectors.

Sector	Activity	Examples in Rwanda
Primary	Extracting or growing natural resources	Farming, tea and coffee growing, fishing on Lake Kivu, mining tin and coltan, forestry
Secondary	Turning raw materials into goods: manufacturing, processing and construction	Cement making, food and drink processing, building houses and roads
Tertiary	Providing services	Trade, transport, banking, tourism, education, health, ICT
Quaternary (sometimes added)	Knowledge-based services: research, information, software	Software development, data analysis

Rwanda's economy by sector. NISR's national accounts show how much each sector adds to GDP.

Services now produce more than half of Rwanda's output. They employ a smaller share of workers: 44.4% of employment in 2025 (NISR, Labour Force Survey 2025). When a sector's share of output is larger than its share of jobs, output per worker in that sector is above the national average.

Worked example 1: turning shares into values

GDP at current prices in 2025 was Frw 23,387 billion (NISR). Find the value added by each main sector.

\text{Services: } 0.52 \times 23\,387 \approx \text{Frw } 12\,161 \text{ billion}

\text{Industry: } 0.22 \times 23\,387 \approx \text{Frw } 5\,145 \text{ billion}

\text{Agriculture: } 0.20 \times 23\,387 \approx \text{Frw } 4\,677 \text{ billion}

Check: services alone are worth more than industry and agriculture together ( $5\,145 + 4\,677 = 9\,822$ ). Because the published shares are rounded, these values are approximate.

Definition

Economic system: the set of institutions, laws and methods a society uses to answer the basic economic questions, in particular who owns resources and who decides how they are used.

3. Economic systems

	Traditional (subsistence)	Command (planned)	Free market (capitalist)	Mixed
Who owns resources?	Families, clans, the community	The state	Private individuals and firms	Both private owners and the state
Who decides what, how and for whom?	Custom and tradition	A central planning authority	Consumers and producers through prices (the price mechanism)	Mostly markets, with government planning, regulation and public services
Motive	Survival, family needs	Meeting plan targets and social goals	Profit and self-interest	Profit and social welfare
Merits	Little conflict; everyone knows their role; strong community support	Can mobilise resources fast; less inequality; basic needs and public goods provided	Wide consumer choice; efficiency and innovation driven by competition and profit	Combines market efficiency with public goods, regulation and protection for the poor
Demerits	Low output and living standards; slow to change; little specialisation	Little choice; shortages and surpluses; weak incentives; heavy bureaucracy	Inequality; public and merit goods under-supplied; externalities; monopoly; booms and slumps	Can suffer the faults of both: red tape, inefficient state firms, debates over the right balance
Examples	Subsistence farming communities, past and present	The former Soviet Union; North Korea	No pure case exists; the United States leans this way	Most countries today, including Rwanda

Worked example 2: why Rwanda is a mixed economy

Use evidence from the government's plan, the National Strategy for Transformation (NST2, 2024–2029, MINECOFIN):

Planning by the state: NST2 sets national targets, such as average real GDP growth of 9.3% a year from 2024 to 2029 and 1.25 million productive and decent jobs.
Private enterprise: of NST2's estimated financing of Frw 63,559 billion, 43% is expected from the private sector and 57% from public resources.
A growing private role: NST2 aims to raise private investment from 15.9% of GDP in 2023 to 21.5% by 2029.

Private share of planned financing:

0.43 \times 63\,559 \approx \text{Frw } 27\,330 \text{ billion}

Conclusion: both the market (private firms and investors) and the state (planning, public investment) answer the basic questions, which is the definition of a mixed economy.

Warning

No real economy is pure. Even the most market-led economy has courts, police, roads and taxes, and even the strictest planned economy has had informal markets. When you classify a country, say which way it leans and give evidence, rather than calling it purely one system.

Tip

Custom, Command, Market, Mix. For any system, ask the same two questions: who owns the resources, and who decides? The answers place it in the table.

Important

Discuss. In a mixed economy, where should the line between the state and the market be drawn? Take one example, such as electricity, school textbooks or mobile-phone services, and argue whether the market or the government should mainly provide it.

CrashCourse, "Economic Systems and Macroeconomics: Crash Course Economics #3". Watch for how command and market economies answer the basic economic questions differently, and why most countries end up with a mix.

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Practice

State and explain the three basic economic questions.
Distinguish between economic and non-economic activities, with one example of each.
Classify each activity as primary, secondary or tertiary: (a) mining tin ore, (b) brewing banana beer for sale, (c) teaching in a school, (d) fishing on Lake Kivu, (e) assembling mobile phones, (f) a bank lending money.
Using NISR's figures (GDP Frw 23,387 billion in 2025; industry 22%), calculate the value added by industry, to the nearest billion.
Explain four features of a free-market economy.
Give three merits and three demerits of a command economy.
Using evidence from NST2, explain why Rwanda is described as a mixed economy.
"The free market answers the basic economic questions better than any other system." Discuss.

Show answersHide answers

What to produce and how much (which goods, given scarce resources); how to produce (which methods and resources); for whom to produce (how output is shared, depending on incomes).
Economic activities aim at an income or production for exchange (a nurse paid by a hospital); non-economic activities are done for love, duty or custom (a mother nursing her own child).
(a) Primary. (b) Secondary. (c) Tertiary. (d) Primary. (e) Secondary. (f) Tertiary.
$0.22 \times 23\,387 = 5\,145.14$ , so about Frw 5,145 billion.
Private ownership of resources; decisions made through the price mechanism; the profit motive; consumer sovereignty; competition; little government intervention.
Merits: resources mobilised quickly for national goals; less inequality; basic needs and public goods provided. Demerits: little consumer choice; shortages and surpluses because planners lack price signals; weak incentives to work and innovate; bureaucracy.
The state plans (NST2 targets of 9.3% growth and 1.25 million jobs) and finances 57% of NST2, while the private sector is expected to finance 43% and private investment is planned to rise from 15.9% to 21.5% of GDP. Both the state and the market answer the basic questions.
For: prices signal what people want; profit rewards efficiency and innovation; wide choice. Against: inequality decides "for whom"; public and merit goods are under-supplied; externalities are ignored; monopolies can form. A balanced answer concludes that markets answer "what" and "how" well but need government help on "for whom" and on goods the market misses, hence mixed economies.

Quick check

In a command economy, who mainly decides what to produce?

Key points

Every economy must decide what, how and for whom to produce (and often where and when).
Economic activities are primary, secondary or tertiary; in 2025 services made up 52% of Rwanda's GDP (NISR).
Traditional, command, free-market and mixed systems differ in who owns resources and who decides.
Rwanda is a mixed economy: the state plans and invests, and the private sector is expected to finance 43% of NST2.

1From a hillside to a cup

21. The basic economic questions

32. Economic activities

43. Economic systems

From a hillside to a cup

1. The basic economic questions

2. Economic activities

3. Economic systems