ECS1601_studynotes_units_1_to_11

CHAPTER 3 – INTERDEPENDENCE BETWEEN MAJOR SECTORS, MARKETS AND FLOWS IN THE MIXED ECONOMY STUDY UNIT 1 Production, Income and Spending *Identify the three major flows in the economy Production – occurs and generates income Income - earned Spending – Buy available goods and services *Distinguish between a flow and a stock (Box 3-1 Stocks and Flows) STOCKS FLOWS  Measured at a particular point in time  NO time dimension  Has a Time dimension – only measured over a period  Water level of dam measured at a particular point in time (at 00:00 on May 1 2007 capacity was 72,64%)  Flow of water into the dam measured over a period (1 May 2007 inflow was measured as 250 cubic metres per second  Stock Takes  Calculation of sales, profit or loss  Still pictures  Moving pictures Examples  Wealth  Assets  Liabilities  Capital  Population  Balance in savings account  Unemployment  Gold reserves held by SA Res bank Examples  Income  Profit  Loss  Investment  Number of births and deaths  Saving  Demand for labour  Gold sales, gold production  Stocks and flows are related  Stocks can only change as a result of flows  Prices are ratios between different flows  Ratios between a stock and flow and visa versa have a time dimension  Ratios between two stocks and two flows have no time dimension “Identify the two basic sets of markets in the economy Goods Markets – Markets for goods and services Factor Markets – Markets for factors of production 1 Interdependence of households and firms HOUSEHOLDS FIRMS All people who live together and who make joint economic decisions or who are subjected to others who make such decisions for them Unit that employs factors of production to produce goods and services that are sold on the goods market  Every individual is a member of a household  Own factors of production  Sell them on factors markets to firms  In exchange they receive income to purchase consumer goods in the goods market  Goods then consumed to satisfy human wants  Firms purchase factors of production in the factor market  Transform factors into goods and services  Sell these goods in the goods market  Members are called consumers – the act of consuming is consumption  Capital purchased by firms – the act of purchasing capital goods is investment or capital formation ( I )  Total spending is called total or aggregate consumption ( C ) CIRCULAR FLOW OF GOODS & SERVICES CIRCULAR FLOW OF INCOME AND SPENDING  Households sell their factors of production to firms in the factor market  Firms purchase factors of production in the factor market  Firms transform factors into goods and services  Firms spending = income of the households  Sell product to household in the goods market  Households spend income to purchase goods and services  Household spending = income of firms