Economics 1B Notes ECS1601

ECONOMICS 1B {ECS 1601} INTERDEPENDENCE OF THE MAJOR SECTORS, MARKET AND FLOWS IN A MIXED ECONOMY Production is not pursued for its own benefit, the ultimate aim is to use or consume the products to satisfy human wants. Production creates income and this income is then spent to purchase products. This process contains 3 major elements are: Production Income Spending. One problem is how the income is distributed among the various participants in the economy. The following are 4 economic participants: Households/Consumption (C) Government Expenditure (G) Foreign sector (Exports & Imports) (F) Businesses/Firms (B) Production, income and spending are all FLOWS. Stock variable – can only be measured at a particular point in time and has no time dimension (wealth, assets, liabilities, capital, population, and balance on savings account). FLOW VARIABLE – can be measured over a period of time (income, profit, loss, investment). In mixed economy households, firms, government and foreign sector are all participants. Exchange is an important economic activity that links all the various sectors. 1. HOUSEHOLDS Households can be defined as all the people who live together and who make joint economic decisions. Can be an individual, whole family. These members are called consumers. Consumption – the act of using or consuming goods and services. Symbol C = total consumption or consumer. In a market economy it is the households or consumers that largely determine what should be produced. In a mixed economy most of the factors of production are owned by households. Downloaded by Liam Bibby () lOMoARcPSD| 2 Households sell their factors of production to firms that convert them into goods and services 2. BUSINESSES/FIRMS Firm can be defined as the unit that employs factors of production to produce goods and services that are sold in the goods market. Different types of firms are – individuals or sole proprietorship, cc, companies, partnerships. Profit = difference between revenue and cost. Investment or capital formation = the act of purchasing capital goods. Firms are responsible for spending on capital good