ECONOMICS 1B
ECS1601
, 1
Study Unit 1
Interdependence of the major sectors, markets and flows in a mixed
economy
3.1 Production, income and spending
The three major flows in the economy as a whole:
Production
Income
Spending
Production occurs, creates income; and all or part of the income is spent to
buy goods and services.
Production
generates
income
Income part
or all is spent to
Spending buy available
goods and
services
Flows
Production, income and spending are all flows. They are measured over a
period of time. This period must be specified. These are moving pictures of
the economy.
Stocks
These are measured at a particular point in time. These are still pictures of
the economy. Stocks can only change as a result of flows. Capital stock can
only increase if investment is made.
Apart from production, income, and spending, the other important economic
activity that links the various sectors in the economy is exchange. In a mixed
economy, exchange usually occurs in markets. Goods, services and factors of
production are all exchanged in markets.
THE EXPERT IN ANYTHING WAS ONCE A BEGINNER
, 2
Stock: still picture Flow: moving picture
Wealth Income
Assets Profit
Liabilities Loss
Capital Investment
Population Number of births and deaths
Balance in savings account Saving: diff between income &
spending
Unemployment Demand for labor
Gold reserves held by the Reserve Gold sales, production
Bank
Consumption
3.2 The interdependence between households and firms
Although households own the factors of production, these factors cannot
satisfy human wants directly. Households sell their factors of production
on the factor market to the firms who combine these factors and convert
them into goods and services. In return for the factors of production
they supply, households receive income in the form of wages, salaries,
rent, interest and profit. This income is then used to purchase consumer
goods and services in the goods market, which satisfy their wants.
Households
In economic analysis it is assumed that households are rational and attempt
to maximise their satisfaction given the means at their disposal.
The household is the basic decision-making unit in the economy.
The word “economics” is derived from a Greek word meaning the management
of the household.
Members of household consume goods and services to satisfy their wants:
consumers, and the act of consuming is called consumption.
C= total consumption
Firms
This is the unit that employs factors of production to produce goods and
services that are sold on the goods market.
Firms are the basic productive units in the economy.
Firms are actually artificial units: they are ultimately owned by or operated
for the benefit of one or more individuals.
Firms are engaged primarily in production.
We assume that firms like households, are rational and aim to achieve
maximum profit.
One of the factors of production firms purchase is capital and the act of
purchasing is called investment or capital formation = I.
THE EXPERT IN ANYTHING WAS ONCE A BEGINNER
, 3
3.3 Introducing the Government
In contrast to households and firms, who are assumed to act rationally and
consistently, we do not assume that government always acts in a consistent
fashion.
Government’s economic activity involves 3 important flows:
1. Government expenditure: on goods and services including factor
services = G
2. Taxes levied on and paid by household and firms = T
3. Transfer payments: the transfer of income from certain individuals and
groups e.g. the wealthy to other individuals and groups e.g. the poor.
Unlike government spending and taxation, transfer payments do not directly
affect the overall size of the production, income and expenditure flows. We
only focus on Government spending G and Taxes T.
Government spending constitutes an injection into the flow.
Taxes are a leakage or withdrawal from the circular flow.
3.4 Introducing the Foreign Sector
The fourth major sector is the foreign sector. An open economy is one that
has strong links with the rest of the world.
The various flows between South Africa and the rest of the world are
summarized in the balance of payments.
Globalisation occurs when the economic links between different countries
become stronger and more complex.
The flow of goods and services between the domestic economy and the foreign
sector are:
• Exports: additions or injections into the domestic economy = X
• Imports: leakage or withdrawal from the domestic economy = Z
THE EXPERT IN ANYTHING WAS ONCE A BEGINNER
ECS1601
, 1
Study Unit 1
Interdependence of the major sectors, markets and flows in a mixed
economy
3.1 Production, income and spending
The three major flows in the economy as a whole:
Production
Income
Spending
Production occurs, creates income; and all or part of the income is spent to
buy goods and services.
Production
generates
income
Income part
or all is spent to
Spending buy available
goods and
services
Flows
Production, income and spending are all flows. They are measured over a
period of time. This period must be specified. These are moving pictures of
the economy.
Stocks
These are measured at a particular point in time. These are still pictures of
the economy. Stocks can only change as a result of flows. Capital stock can
only increase if investment is made.
Apart from production, income, and spending, the other important economic
activity that links the various sectors in the economy is exchange. In a mixed
economy, exchange usually occurs in markets. Goods, services and factors of
production are all exchanged in markets.
THE EXPERT IN ANYTHING WAS ONCE A BEGINNER
, 2
Stock: still picture Flow: moving picture
Wealth Income
Assets Profit
Liabilities Loss
Capital Investment
Population Number of births and deaths
Balance in savings account Saving: diff between income &
spending
Unemployment Demand for labor
Gold reserves held by the Reserve Gold sales, production
Bank
Consumption
3.2 The interdependence between households and firms
Although households own the factors of production, these factors cannot
satisfy human wants directly. Households sell their factors of production
on the factor market to the firms who combine these factors and convert
them into goods and services. In return for the factors of production
they supply, households receive income in the form of wages, salaries,
rent, interest and profit. This income is then used to purchase consumer
goods and services in the goods market, which satisfy their wants.
Households
In economic analysis it is assumed that households are rational and attempt
to maximise their satisfaction given the means at their disposal.
The household is the basic decision-making unit in the economy.
The word “economics” is derived from a Greek word meaning the management
of the household.
Members of household consume goods and services to satisfy their wants:
consumers, and the act of consuming is called consumption.
C= total consumption
Firms
This is the unit that employs factors of production to produce goods and
services that are sold on the goods market.
Firms are the basic productive units in the economy.
Firms are actually artificial units: they are ultimately owned by or operated
for the benefit of one or more individuals.
Firms are engaged primarily in production.
We assume that firms like households, are rational and aim to achieve
maximum profit.
One of the factors of production firms purchase is capital and the act of
purchasing is called investment or capital formation = I.
THE EXPERT IN ANYTHING WAS ONCE A BEGINNER
, 3
3.3 Introducing the Government
In contrast to households and firms, who are assumed to act rationally and
consistently, we do not assume that government always acts in a consistent
fashion.
Government’s economic activity involves 3 important flows:
1. Government expenditure: on goods and services including factor
services = G
2. Taxes levied on and paid by household and firms = T
3. Transfer payments: the transfer of income from certain individuals and
groups e.g. the wealthy to other individuals and groups e.g. the poor.
Unlike government spending and taxation, transfer payments do not directly
affect the overall size of the production, income and expenditure flows. We
only focus on Government spending G and Taxes T.
Government spending constitutes an injection into the flow.
Taxes are a leakage or withdrawal from the circular flow.
3.4 Introducing the Foreign Sector
The fourth major sector is the foreign sector. An open economy is one that
has strong links with the rest of the world.
The various flows between South Africa and the rest of the world are
summarized in the balance of payments.
Globalisation occurs when the economic links between different countries
become stronger and more complex.
The flow of goods and services between the domestic economy and the foreign
sector are:
• Exports: additions or injections into the domestic economy = X
• Imports: leakage or withdrawal from the domestic economy = Z
THE EXPERT IN ANYTHING WAS ONCE A BEGINNER
