Summary Economics 1 B

Economics 1 B:
Chapter 3:
Production, income and spending:
Three major elements:

• Production

• Income

• Spending



Productio
n




Spending Income




Stocks and Flows:

 Stocks: Measured at a particular point of time
 Flows: Measured over a period of time
 Stocks and flows are related
 Stocks can only change as a result of flows

Example:


Stock Flow

Wealt Income
h Stock

Wealth
Need income to
create wealth




Sources of Production:

,The Factors of Production:

The Four main factors of Production

 Natural resources (Land)
 Labour
 Capital
 Entrepreneurship

Production:

The Factors of Production:

Human Resources Non-Human
Resources
Primary Factors Labour Natural Resources
Secondary Factors Entrepreneurship Capital


Technology:

The fifth factor of Production

 Invention
 Innovation

Money is not a factor of Production

Sources of Income: The Remuneration of the factors of
Production:

Income:

Types Associated Factor of
Production
Rent Natural Resources (Land)
Wages and Salaries Labour
Interest Capital
Profit Entrepreneurship




Sources of Spending: The Four Spending entities:

, Spending:

 Households (C)
o Consumer Spending
 Firms (I
o Capital formation or Investment Spending
 Government (G)
o Government Expenditure
 Foreign Sector (X, Z)



Three important Flows:

 Government Expenditure
 Taxes
 Transfer payments

Aggregate spending on South African goods and services consists
of spending by the four sectors:

 spending by households on consumer goods and services (C)

 spending by firms on capital goods (I)

 spending by government on goods and services (G)

 spending by foreigners on South African goods and services (X)
minus spending by South Africans on imported goods and services
(Z)

 Total expenditure can therefore be written as C + I + G + X – Z

Putting things together: A Simple diagram:




Illustrating Interdependence: Circular Flows of Production,
Income and Spending: