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 section
3.1 in textbook
pg. 42-43 and
box 3.1 on
pg. 44

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.
By spending it he helps
other firms to produce
things. And so on.

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 on a specific
time
Start a discussion with your e-tutor on the
difference between stock and flow variables.

Read section
3.2 in
textbook pg.
43-44

1.2 Interdependence of
households
Do you know and
what firms
a

factor of production
The household is ais?
group of people that
If youchoices
dont, you
makes economic
together.
have to ask your eThey consume tutor
goods
and services to
today!

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

Read section
3.2 in
textbook pg.
45-47

1.2 Firms

A firm is an organization 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 3-2

on page 47

Goods and factor markets

Firms produces 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

See Fig 33 on page

47

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

Goods
Income
& services

Goods
market

Househol
ds

Goods
Spending
& services

Read section
3.3 in
textbook pg.
47-50

1.3 Introducing the

government

The government is all political officials on all levels. Also

known as the public sector. We use the letter G for
short.
Households and firms are rational, they make choices
that are best for them! For example, David only buys
things HE likes. But the government, are suppose to
make choices that helps the country obtain the national
goals.
They should create a healthy environment for the
economy to function in
The government also have an effect on the circular flow
between households and firms
When government spend a lot it is like an injection into the
spending-income flow.
But taxes are like a leakage out of the spending-income flow
Make sure to discuss this with your e-tutor

See Fig 3-3

on page 47

Spending

Goods
& services

TAXES

Public goods
and services

Factors of

Goods &
services

TAXES

Labour, capital,
etc

Income

Firms

Income
Spending

Government
Spending

Government
Spending

Public goods
and services

The G also
production
buys goods
and services
from the
Governme
goods
nt
buys
market.
give public
public
GGgives
labour,
Thus,and
the
G
goods
and
goods
services
capital
and
Lets
Households
putto
the
lets
add For
is
a special
services
toNow,
households.
Firms
pay
other
two
figures
the
government
type
of
pay
taxes
firms.
For
example,
police
taxes
factors
of
(G)
together.
consumer.
example,
firms
protect
citizens
They buy
production
deliver
goods
from
crime
cars
for
on
the
via
public
transport,
factor
roads.
food for
market.
functions,
Factors of
Thus,
buildingthe
production
governmen
material for
tRDP
is also
an
houses,
etc.
employer

Spending
Goods
& services

Read section
3.4 in
textbook pg.
50 - 51

1.4 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 summarizes 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.
Imports (like taxes) is 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 3-5 on page 51

Read section
3.5 in
textbook pg.
51 -52

1.5 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 borrowed 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.

Read section
3.6 in
textbook
pg.52

1.6 Summary

You now know more about:

Production, income and spending
Aggregate (meaning TOTAL) Spending in South
Africa consist 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 out of

the circular flow of income and spending
Government spending, investment and exports
are injections into the circular flow of income and

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 show 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!