CHAPTER 3
3 major flows in the economy:
Production
Spending Income
Production generates the income (for the various factors of production) and part of all of this income is then spent to
buy the available goods and services. All these things are happening at the same time.
Stock variable: has no time dimension and can only be measured at a specific moment (wealth, assets, liabilities,
capital, population, balance in a savings account, unemployment)
Flow variable: has a time dimension and can only be measured over a period (income, profit, loss, investment, and
demand for labour)
Four factors of production:
1. Natural resources: all the gifts of nature – fixed in supply. Materials are non-renewable or exhaustible assets
2. Labour: the exercise of human mental and physical effort in the production of goods and services
3. Capital: all manufactured resources which are used in the production of other goods and services
4. Entrepreneurship: people who see opportunities and who are willing to take risks by producing goods in the
expectation that they will be sold
Money is not a factor of production as it can’t be used to produce goods and services
Incomes of factors of production:
1. Natural resources: rent
2. Labour: wages/salaries
3. Capital: interest
4. Entrepreneurship: profit
Production techniques:
1. Capital-intensive: dominated by machines
2. Labour-intensive: emphasis on labour
Income: what is earned during a specific period. It is the remuneration for the application of the factors of
production
Wealth: the total possessions (both tangible and intangible) of an individual, household, producer or country that
have an exchange value
Participants in the economy:
3 major flows in the economy:
Production
Spending Income
Production generates the income (for the various factors of production) and part of all of this income is then spent to
buy the available goods and services. All these things are happening at the same time.
Stock variable: has no time dimension and can only be measured at a specific moment (wealth, assets, liabilities,
capital, population, balance in a savings account, unemployment)
Flow variable: has a time dimension and can only be measured over a period (income, profit, loss, investment, and
demand for labour)
Four factors of production:
1. Natural resources: all the gifts of nature – fixed in supply. Materials are non-renewable or exhaustible assets
2. Labour: the exercise of human mental and physical effort in the production of goods and services
3. Capital: all manufactured resources which are used in the production of other goods and services
4. Entrepreneurship: people who see opportunities and who are willing to take risks by producing goods in the
expectation that they will be sold
Money is not a factor of production as it can’t be used to produce goods and services
Incomes of factors of production:
1. Natural resources: rent
2. Labour: wages/salaries
3. Capital: interest
4. Entrepreneurship: profit
Production techniques:
1. Capital-intensive: dominated by machines
2. Labour-intensive: emphasis on labour
Income: what is earned during a specific period. It is the remuneration for the application of the factors of
production
Wealth: the total possessions (both tangible and intangible) of an individual, household, producer or country that
have an exchange value
Participants in the economy:
