CHAPTER 3
Production,
income and
spending in
the mixed
economy
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
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 3-1 SOUTH AFRICA’S FACTOR ENDOWMENT
IMPORTANT CONCEPTS
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
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
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.2 Production, income and spending
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
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Describe how total production, total income and total spending in the economy are
3.2 Production, income and spending (cont.)
related
Figure 3-1 The three major flows in the economy (p. 53)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.2 Production, income and spending (cont.)
LO: Distinguish between stocks and flows
Stocks and flows
• Stocks
measured at a particular point of time
• Flows
measured over a period of time
See Box 3-1 Stock and flows (p. 53)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.2 Production, income and spending (cont.)
Stocks and flows (cont.)
LO: Distinguish between stocks and flows
• The three major elements in the economy are all flows
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.2 Production, income and spending (cont.)
Stocks and flows (cont.)
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 (p. 53)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production
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
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production (cont.)
LO: Describe the different sources of production and income
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production (cont.)
LO: Describe the different sources of production and income
Natural resources (land)
See In the real world 3-1 Land reform (p. 70)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production (cont.)
LO: Describe the different sources of production and income
Labour
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production (cont.)
Labour (cont.)
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 (p. 55)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production (cont.)
LO: Describe the different sources of production and income
Capital
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
See Appendix 3-1 South Africa’s
factor endowment (p. 67)
3.3 Sources of production (cont.)
LO: Describe the different sources of production and income
Entrepreneurship
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production (cont.)
LO: Describe the different sources of production and income
Technology
The fifth factor of production
• Invention
• Innovation
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production (cont.)
LO: Describe the different sources of production and income
Money is not a factor of production
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.3 Sources of production (cont.)
LO: Describe the different sources of production and income
The choice of technique
• Capital-intensive production
• Labour-intensive production
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.4 Sources of income
LO: Describe the different sources of production and income
3.4 SOURCES OF INCOME: THE
REMUNERATION OF THE FACTORS OF
PRODUCTION
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.4 Sources of income (cont.)
LO: Describe the different sources of production and income
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending
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
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending (cont.)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending (cont.)
Households
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending (cont.)
Firms
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending (cont.)
Firms (cont.)
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 (p. 59)
See Box 3-4 The goods market and the factor market (p. 60)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending (cont.)
The government
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending (cont.)
The government (cont.)
Three important flows
• Government expenditure
• Taxes
• Transfer payments
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending (cont.)
The foreign sector
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.5 Sources of spending (cont.)
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.
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.6 Putting things together
3.6 PUTTING THINGS TOGETHER:
A SIMPLE DIAGRAM
Figure 3-2 The different components of
production, income and spending
(p. 62)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.7 Illustrating
interdependence
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
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.7 Illustrating interdependence (cont.)
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 (p. 62)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.7 Illustrating interdependence (cont.)
Households and firms (cont.)
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 (p. 63)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.7 Illustrating interdependence (cont.)
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 (p. 63)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.7 Illustrating interdependence (cont.)
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
(p. 64)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.7 Illustrating interdependence (cont.)
Financial institutions in the
circular flow of income and
spending
Figure 3-7 Financial institutions in the circular
flow of income and spending (p. 64)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.7 Illustrating interdependence (cont.)
The overall picture
Figure 3-8 The major elements of the
circular flow of income and spending
(p. 65)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.8 A few further key concepts
3.8 A FEW FURTHER KEY CONCEPTS
•
•
•
•
Specialisation and exchange
Opportunity costs
Absolute advantage
Comparative advantage
See Box 3-2 Specialisation and the division of labour (p. 55)
See Box 3-5 Why did Charl Schwartzel not finish matric? (p. 66)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
3.8 A few further key concepts (cont.)
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
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
Appendix 3-1 South Africa’s factor endowment
LO: Describe South Africa’s factor endowment
APPENDIX 3-1:
SOUTH AFRICA’S FACTOR ENDOWMENT
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
Appendix 3-1 South Africa’s factor endowment
LO: Describe South Africa’s factor endowment
See In the
real world
Land reform
3-1 (p. 70)
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
IMPORTANT CONCEPTS
• Production
• Income
• Division of labour
• Human capital
•
•
•
•
•
•
•
•
Spending
Stock
Flow
Goods market
Capital
Consumption of fixed capital
Entrepreneurship
Technology
• Factor market
• Factors of production
• Natural resources (land)
• Money
• Capital-intensive production
• Labour-intensive production
• Labour
• Specialisation
• Rent
• Wages and salaries
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
Important concepts (cont.)
• Interest
• Profit
• Household
• Balance of payments
• Imports
• Exports
• Consumer spending
• Firms
• Profit
• Circular flow
• Injection (addition)
• Leakage (withdrawal)
•
•
•
•
• Financial sector
• Absolute advantage
• Relative (comparative)
advantage
Capital formation (investment)
Government
Public sector
Government expenditure
• Taxes
• Transfer payments
• Foreign sector
• Macroeconomic objectives
Chapter 3 Production, income and spending in a mixed economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e