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
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