ECS1601 Summary Notes

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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.

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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 goods.

Goods market – in macroeconomics we treat the goods market as if there were
only one market for all goods and services.

Factor market – Factors of production are purchased and sold in many markets
called factor markets.

Circular flow of goods and services – the households offer factors of
production for sale on the factor market where these factors are purchased by
the firms.
o The firms combine the factors of production and produce consumer goods
and services.
o These goods and services are offered for sale on the goods market where
they are purchased by the households.

o The circular flow of income and spending – flow of income and spending is
usually a monetary flow.

o Firms purchase the factors of production in the factor market.

o This spending by firms represents the income of the households.

o The households in turn spend their income by purchasing goods and
services in the goods market.

3. Government

 Includes all aspects of local, regional, provincial and national government.
 Public sector – everything that is owned by the government.
 Government includes all politicians, civil servants, government agencies
and other bodies belonging to or under the control of government.
 G = government expenditure

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Government spending and Taxes




 T = taxes, transfer payments – transfer of income and expenditure from
certain individuals and groups.
 Government spending is an injection to the circular flow.
 Taxes are a leakages to the circular flow.
 Exports are an injection (sell)
 Imports are a withdrawal (buy)

Symbols

C – Consumer spending -injection
I – Investment -injection
G – Government spending -injection
X – Exports -injection
S – Savings -leakage
T – Taxes -leakage
Z – Imports -leakage

Total expenditure = C + I+G+(X-Z)

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4. Foreign sector

 4th major sector of the world.
 S.A economy is an open economy with strong links with the rest of the
world.
 Balance of payments = various flows between S.A and rest of the world.
Exports = X, injection into economy, are goods produced within the
country and sold outside the country. Imports = Z, withdrawal from
economy, produced outside and purchased locally.


Financial institutions in the circular flow of income and spending – surplus units
= individuals are in a position to save because they spend less (savings is a
withdrawal), deficit units = individuals that spend more than they earn
(investment is a leakage.

THE CIRCULAR FLOW OF INCOME




o Goods and services flow clockwise
o Income and spending flow anti-clockwise