Study Unit 1 Interdependence of Major Sectors, Markets and Flows in A Mixed Economy

ECS 1601
Study Unit 1
Interdependence of major sectors,
markets and flows in a mixed
economy
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Content
In this study unit you will learn more
about:
Production, income and spending
Interdependence of households and firms
Introduction to the government
Introduction to the foreign sector
Introduction to the financial sector
A summary of total production, income
and spending
Read sections 3.1

and 3.2 in
textbook pp 40-42
and box 3.1 on
p. 41
1.1. Production, income

and spending
Lets say David works in

a firm that PRODUCES
laptops.
By working, David
receives an INCOME.
With this income, David
goes to the shops and
SPENDS it.
He spends it on goods
that were PRODUCED
by all different
producers.
Producti
on
Spendin
g
Income
1.1 Continued
This simple diagram of production
income spending shows the major flow
in the economy.
What is the difference between a flow
variable and a stock variable?
Flow variables are measured over time.
Stock variables are measured at a specific
time.
Start a discussion with your e-tutor on the
difference between stock and flow variables.
1.2 Sources of production:

factors of production
Read section 3.3

in textbook pp. 4245
Four main factors of production:

Natural
resources
Labour
Capital
Entrepreneur
ship
Sometimes a fifth factor is added:

Technology
1.2 Sources of production:

factors of production
Read section 3.3

Four main factors of production:

Natural
resources
Labour
Capital
Entrepreneur
ship
Money is not a factor of production

Money can be used to pay for factors of production
but not to produce.
To produce, it is necessary to employ factors of
production.
1.3 Sources of income:

remuneration of factors of
production
Read section 3.4

Different names for the income of

production factors
Natural
resources
Ren
Labour
Wages
Capital
Inter
Entrepreneur
ship
Pro
Read section
3.5 in textbook
pp. 46-49 and
Box 3-4
1.4 Sources of spending: the

four spending entities
Four main spending entities:

Households
Firms
Government
Foreign sector

Households
Expenditure of
households on goods
and services is called
consumption. We
use the symbol C to
depict consumption.

Firms
Firms are involved in

production. To
produce, they have
to purchase capital
goods such as
machinery and
equipment. We call
this investment or
capital formation and
use the symbol I to
depict this.

The government
purchases goods and
services to provide
certain services,
such as health
services, education,
policing etc.
Government
expenditure is
depicted using the
symbol G.
Government

Exports are goods that are
produced in our country but sold
to the rest of the world. It is
depicted using the symbol X.
Foreign sector
Imports are produced in other

countries but purchased to be
used in our country. It is depicted
using the symbol Z.
Net exports, or net spending by
the foreign sector on our
production is thus
X-Z
X-Z

Now we put it all together:
Households
Firms
Government
Foreign sector
C
I
G
X-Z
Total spending = C + I + G + X - Z
Read section
3.7 in
textbook p0
50 - 53

Households
The household is a group of people that

makes economic choices together.
They consume goods and services to
satisfy their wants and needs.
In order to get money they have to sell
the factors of production that they own.
For example, dad and mom
has to sell their labour to a firm,.
meaning, they have to WORK.
1.4 Sources of spending:

the four spending entities
Firms
A firm is an organisation that uses factors
of production to produce goods and
services.
Households consume and firms produce.
Firms are rational; they want to maximise
profits
Profit = revenue cost
See Fig 3-3

on p 50
Goods and factor markets
Firms produce goods and

service
Firms sell the goods and
services to households on
the goods market
On the other hand
Households own factors of
production
They sell their factors of
production to firms on the
factor market
Firms buy the factors of
production so that they can
produce goods and services
Factors of
production
Firms
Factor
Market
Factors of
production
Goods
& services
Goods
market
Househol
ds
Goods
& services
Circular flow of income & spending

Lets go the other way
around
Firms spend on the factor
market (to get the
factors of production)
This is how households
get an income
Households spend their
income on goods and
services
From selling goods and
services on the goods
market, firms get an
income
Factors of
Spending
production
Firms
Factor
Market
Factors of
Income
production
See Fig 34 on p 51
Goods
Income
& services
Goods
market
Househol
ds
Goods
Spending
& services
Adding the
government
The government is all political officials on all levels, also
known as the public sector. We use the letter G to depict
government spending.
Households and firms are rational; they make choices
that are best for them! For example, David only buys
things HE likes. But the government is supposed to
make choices that helps the country obtain the national
goals.
The government should create a healthy environment
for the economy to function in.
The government also has an effect on the circular flow
between households and firms:
When government spends, it is an injection into the
spending-income flow.
But taxes are a leakage out of the spending-income flow.
Make sure to discuss this with your e-tutor.
See Fig 3-5

on p 51
Goods
& services
TAXES
Spending
Goods &
services
TAXES
Labour, capital,
etc
Income
Firms
Income
Spending
Government
Spending
Government
Spending
Public goods
and services
material for
RDP houses,
etc.
Public goods
and services
Factors of
Governme
production
The G also
nt
buys
buys
goods
labour,
and services
G
gives
public
from
the
capital
and
goods and
other
services
market. to
factors of
Thus,
the
G
firms.
Forthe
GLets
givesput
public
Now,
lets
add
production
is
a
special
example,
firms
goods
and
services
the
government
two
figures
Firms
pay
the
type
of goodsFor
deliver
toon
households.
(G)
together.
taxes
factor
consumer.
via
public
example,
police
They
buy
market.
roads.
Households
protect
citizens
carscrime
for
Thus,
the
from
pay
taxes
transport,
governmen
food for
t functions,
is also an
Factors of
production
employer
building
Spending
Goods
& services
Adding the foreign sector

The foreign sector is all the other countries in the world.
South Africa is an open economy due to our strong links
with the rest of the world.
The balance of payments summarises all the flows (such as
trade) between South Africa and other countries.
Imports (Z for short) is goods and services that are
produced in other countries and sold in South Africa.
Similar to taxes, Imports is also a leakage out of the
income-spending flow of an economy.
Exports (X for short) is the goods and
services that are produced in South Africa but
is sold in other countries.
Exports (like government spending) is a
injection into the income-spending flow
of an economy.
See figure 3-6 on page 52.
Financial sector
Financial institutions are the middle man between
those who want to save and those who want to
borrow.
When someone saves money, it means they do not
spend it in that month. So saving can also be seen
as a leakage from the circular flow of income and
spending.
However, when the savings is lend to someone else,
like a firm, that firm will buy capital goods such as
machinery. We call that a capital formation and that
is a form of investment (I). Investments are
injections into the circular flow of income and
spending.
See figure 3-7 page 52.
Summary
You now know more about:
Production, income and spending
Aggregate (meaning TOTAL) spending in South
Africa consists of C+I+G+X-Z
C for Consumption (what ALL the households spend)

I for Investment (what ALL the firms spend)
G for Government expenditure
X for Exports (foreign countries spending on South
African goods)
Z for Imports (South African spending on foreign goods)
Taxes, savings and imports are leakages from

the circular flow of income and spending.
Government spending, investment and exports
are injections into the circular flow of income
Are you able to:

Identify the three major flows in the
economy?
Distinguish between a flow and a stock
variable?
Identify the two basic sets of markets in
the economy?
Identify the various economic participants?
Identify the various injections and leakages from the
circular flow of income and spending?
Can you draw a diagram that shows the flow of goods
and services between households and firms?
Can you draw a diagram that shows the interaction
between different sectors in the economy by means of
the circular flow of income and spending?
Well
done!
Keep it
up.
That is the end of study unit

1.
A quiz on this work will be
available soon; make sure
you do it and discuss it
with your e-tutor!

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ECS 1601

If the slide has a red

Read sections 3.1

1.1. Production, income

Lets say David works in

1.2 Sources of production:

Read section 3.3

Four main factors of production:

Sometimes a fifth factor is added:

1.2 Sources of production:

Read section 3.3

Four main factors of production:

Money is not a factor of production

1.3 Sources of income:

Read section 3.4

Different names for the income of

1.4 Sources of spending: the

Four main spending entities:

1.4 Sources of spending: the

1.4 Sources of spending: the

Firms are involved in

1.4 Sources of spending: the

1.4 Sources of spending: the

Imports are produced in other

1.4 Sources of spending: the

1.4 Sources of spending: the

The household is a group of people that

1.4 Sources of spending:

See Fig 3-3

Goods and factor markets

Firms produce goods and

Circular flow of income & spending

See Fig 3-5

Adding the foreign sector

C for Consumption (what ALL the households spend)

Taxes, savings and imports are leakages from

Are you able to:

That is the end of study unit

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