Chapter 3:
Production, income and
spending in the mixed
economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
CHAPTER OUTLINE
LEARNING OUTCOMES
3.2 PRODUCTION, INCOME AND SPENDING
3.3 SOURCES OF PRODUCTION
3.4 SOURCES OF INCOME
3.5 SOURCES OF SPENDING
3.6 PUTTING THINGS TOGETHER
3.7 ILLUSTRATING INTERDEPENDENCE
3.8 A FEW FURTHER KEY CONCEPTS
APPENDIX
IMPORTANT CONCEPTS
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
LEARNING OUTCOMES
Once you have studied this chapter you should be able to
• describe how total production, total income and total spending in the
economy are related
• distinguish between stocks and flows
• describe the different sources of production and income
• distinguish between households and firms and show how their
decisions and activities are interrelated
• show how the government sector interacts with households and firms
• show how the foreign sector interacts with the domestic economy
• describe South Africa’s factor endowment
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
LO: Describe how total production, total income and total spending in the economy are related
LO: Distinguish between stocks and flows
3.2 PRODUCTION, INCOME AND SPENDING
Three major elements
• Production
• Income
• Spending
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
PRODUCTION, INCOME AND SPENDING CONTINUED
LO: Describe how total production, total income and
total spending in the economy are related
Figure 3-1 The three major flows in the economy (Textbook page 41)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
PRODUCTION, INCOME AND SPENDING CONTINUED
LO: Distinguish between stocks and flows
Stocks and flows
• Stocks
measured at a particular point of time
• Flows
measured over a period of time
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
PRODUCTION, INCOME AND SPENDING
STOCKS AND FLOWS CONTINUED
LO: Distinguish between stocks and flows
• The three major elements in the economy are all flows
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
PRODUCTION, INCOME AND SPENDING
STOCKS AND FLOWS CONTINUED
LO: Distinguish between stocks and flows
• Stocks and flows are related
• Stocks can only change as a result of flows
Example
Stock
Wealth
Flow
Income
Need income to
create wealth
See Box 3-1 Stocks and flows (Textbook page 41)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
LO: Describe the different sources of production and income
3.3 SOURCES OF PRODUCTION:
THE FACTORS OF PRODUCTION
The four main factors of production
• Natural resources (land)
• Labour
• Capital
• Entrepreneurship
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
Natural resources (land)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
Labour
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION
LABOUR CONTINUED
LO: Describe the different sources
of production and income
• Specialisation and the division of labour
• The quantity of labour
• The quality of labour
See Box 3-2 Specialisation and the division of labour (Textbook page 43)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
Capital
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
Entrepreneurship
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
Technology
The fifth factor of production
• Invention
• Innovation
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
Money is not a factor of production
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
The choice of technique
• Capital-intensive production
• Labour-intensive production
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
LO: Describe the different sources of production and income
3.4 SOURCES OF INCOME: THE
REMUNERATION OF THE FACTORS
OF PRODUCTION
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF INCOME: THE REMUNERATION OF THE FACTORS OF
PRODUCTION CONTINUED
LO: Describe the different sources
of production and income
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
LO: Distinguish between households and firms and show how their decisions and activities are interrelated
LO: Show how the government sector interacts with households and firms
LO: Show how the foreign sector interacts with the domestic economy
3.5 SOURCES OF SPENDING: THE FOUR
SPENDING ENTITIES
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES
CONTINUED
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES
CONTINUED
Households
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES
CONTINUED
Firms
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES
FIRMS CONTINUED
Types of firms
• Individual (or sole) proprietorships
• Partnerships
• Companies
– Private
– Public
• Closed corporations
• Other
– Examples: hawkers, street vendors
See Box 3-3 Different types of firms (Textbook page 47)
See Box 3-4 The goods market and the factor market (Textbook page 48)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES CONTINUED
The government
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES
THE GOVERNMENT CONTINUED
Three important flows
• Government expenditure
• Taxes
• Transfer payments
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES CONTINUED
The foreign sector
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES CONTINUED
Total spending: a summary
• Aggregate spending on South African goods and services consists of
spending by the four sectors:
– spending by households on consumer goods and services (C)
– spending by firms on capital goods (I)
– spending by government on goods and services (G)
– spending by foreigners on South African goods and services (X)
minus spending by South Africans on imported goods and services
(Z)
• Total expenditure can therefore be written as C + I + G + X – Z. You
will encounter these components of total expenditure frequently in
the rest of the book.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
3.6 PUTTING THINGS TOGETHER:
A SIMPLE DIAGRAM
Figure 3-2 The different components of
production, income and spending
(Textbook page 50)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
LO: Distinguish between households and firms and show how their decisions and activities are interrelated
LO: Show how the government sector interacts with households and firms
LO: Show how the foreign sector interacts with the domestic economy
3.7 ILLUSTRATING INTERDEPENDENCE:
CIRCULAR FLOWS OF PRODUCTION,
INCOME AND SPENDING
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
ILLUSTRATING INTERDEPENDENCE: CIRCULAR FLOWS OF
PRODUCTION, INCOME AND SPENDING CONTINUED
LO: Distinguish between households and firms and show
how their decisions and activities are interrelated
Households and firms
Figure 3-3 The circular flow of goods
and services (Textbook page 50)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
ILLUSTRATING INTERDEPENDENCE: CIRCULAR FLOWS OF
PRODUCTION, INCOME AND SPENDING
HOUSEHOLDS CONTINUED
LO: Distinguish between households and firms and show
how their decisions and activities are interrelated
Figure 3-4 The circular flow of income and
spending (Textbook page 51)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
ILLUSTRATING INTERDEPENDENCE: CIRCULAR FLOWS OF
PRODUCTION, INCOME AND SPENDING CONTINUED
LO: Show how the government sector
interacts with households and firms
Adding the government
Figure 3-5 The government in the circular
flow of production, income and spending
(Textbook page 51)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
ILLUSTRATING INTERDEPENDENCE: CIRCULAR FLOWS OF
PRODUCTION, INCOME AND SPENDING CONTINUED
LO: Show how the foreign sector interacts
with the domestic economy
Adding the foreign sector
Figure 3-6 The foreign sector in the
circular flow of income and spending
(Textbook page 52)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
ILLUSTRATING INTERDEPENDENCE: CIRCULAR FLOWS OF PRODUCTION, INCOME AND SPENDING CONTINUED
Financial institutions in
the circular flow of income
and spending
Figure 3-7 Financial institutions in the
circular flow of income and spending
(Textbook page 52)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
ILLUSTRATING INTERDEPENDENCE: CIRCULAR FLOWS OF PRODUCTION, INCOME AND SPENDING CONTINUED
The overall picture
Figure 3-8 The major elements of the
circular flow of income and spending
(Textbook page 53)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
3.8 A FEW FURTHER KEY CONCEPTS
•
•
•
•
Specialisation and exchange
Opportunity costs
Absolute advantage
Comparative advantage
See Box 3-5 Why did Charl Schwartzel not finish matric?
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
A FEW FURTHER KEY CONCEPTS CONTINUED
The five main macroeconomic objectives
• economic growth
• full employment (or low unemployment)
• price stability (or low inflation)
• balance of payments stability (or external stability)
• socially acceptable (or equitable) distribution of income
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
LO: Describe South Africa’s factor endowment
APPENDIX 3-1:
SOUTH AFRICA’S FACTOR ENDOWMENT
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
SOUTH AFRICA’S FACTOR ENDOWMENT CONTINUED
LO: Describe South Africa’s factor endowment
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
IMPORTANT CONCEPTS
• Production
• Income
• Spending
• Division of labour
• Human capital
• Capital
• Stock
• Flow
• Goods market
• Consumption of fixed capital
• Entrepreneurship
• Technology
•
•
•
•
•
•
•
•
Factor market
Factors of production
Natural resources (land)
Labour
• Specialisation
Money
Capital-intensive production
Labour-intensive production
Rent
• Wages and salaries
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY
IMPORTANT CONCEPTS CONTINUED
• Interest
• Profit
• Household
• Foreign sector
• Balance of payments
• Imports
• Consumer spending
• Firms
• Profit
• Exports
• Circular flow
• Injection (addition)
•
•
•
•
•
•
•
•
Capital formation (investment)
Government
Public sector
Government expenditure
• Taxes
• Transfer payments
Leakage (withdrawal)
Financial sector
Absolute advantage
Relative (comparative) advantage
• Macroeconomic objectives
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 3: PRODUCTION, INCOME AND SPENDING IN A MIXED ECONOMY