Chapter 2 and 3:
Economic systems
and flows
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THEMES
Theme 1: The Three Economic Questions and the Different
Economic Systems
LO1: Describe the three central economic questions;
LO2: Briefly describe the main characteristics of traditional,
command, market and mixed economic systems;
LO3: Identify the rewards paid for the use of the four factors of
production.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THEMES
Theme 2: Major Flows, Participants and Markets
LO4: Discuss the relationship between the identified key
participants, main markets and three major flows in the
economy;
LO5: Distinguish between the goods market and the factor
market.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THEMES
Theme 3: Stocks and Flows
LO6: Provide examples of stock variables and flow variables.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
Prescribed figures, boxes and tables
• Prescribed figures, boxes and tables:
• Figure 3.1 to 3.5
• Box 2-1, 2-4, 3-1, 3-2 and 3-4
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THEMES
Theme 1: The Three Economic Questions and the Different
Economic Systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
ECONOMIC SYSTEMS
A System is a set of things working together as a network
e.g Nervous system of a body, Transport system or political system in South
Africa
An economy is a large set of inter-related production and consumption
activities that help in determining how scarce resources are allocated.
An economic system is a means by which societies or governments organize
and distribute available resources, services, and goods across a geographic
region or country.
Economic systems regulate factors of production
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the three central economic questions
2.1 DIFFERENT ECONOMIC SYSTEMS
The three central economic questions
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
DIFFERENT ECONOMIC SYSTEMS CONTINUED
Classifying economic systems
Three coordinating mechanisms
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the major differences between traditional,
command, market and mixed economies
DIFFERENT ECONOMIC SYSTEMS CONTINUED
CLASSIFYING ECONOMIC SYSTEMS CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Two basic criteria
1. Property rights (who owns the factories, farms and other productive assets) i.e. who
has the rights to the properties
• Property rights refer to the right to possess tangible assets e.g. houses and patents
(granting of a property right by a sovereign authority to an inventor e.g. Coca Cola)
Property rights can be owned publicly or socially by the government or public boards
(socialism) . Socialism is a political and economic theory of social organization which
advocates that the means of production, distribution, and exchange should be owned or
regulated by the community as a whole
OR
Property rights can be owned privately by individuals, cooperatives or companies
(capitalism)
Capitalism is when the means of production, distribution and exchange is owned by the
private individuals, companies or cooperatives
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
DIFFERENT ECONOMIC SYSTEMS CONTINUED
CLASSIFYING ECONOMIC SYSTEMS CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
2. Coordinating mechanisms
- A coordinating mechanism is the means in which information
about what to produce, how to produce and for whom to
produce is passed to all participants in the economy.
- In a market economy, the coordination is done through the
invisible hand or forces of demand and supply
- In a planned economy, coordination is done by the central
economy e.g. the government.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
DIFFERENT ECONOMIC SYSTEMS CONTINUED
CLASSIFYING ECONOMIC SYSTEMS CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Using the two criteria discussed above, economic systems can be classified
broadly as;
a) Market capitalism (a.k.a) capitalist market - this is where F.O.P (factors
of production) are privately owned. Decision are made by the owners of
FOP. E.g. USA, Canada
b) Planned socialism (a.k.a centrally planned socialism, command
socialism) – this is where there is public ownership of the factors of
production. Decision making is centralised and coordinated by a central
plan or command from the government E.G. North Korea
c) Market Socialism – is an economic system which is characterised by
public ownership of the factors of production. Decision making is
centralised but coordinated by the market mechanism e.g. Hungary
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
DIFFERENT ECONOMIC SYSTEMS CONTINUED
Four systems of the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the major differences between traditional,
command, market and mixed economies
LO: Describe the major differences between traditional, command, market and mixed economies
2.2 THE TRADITIONAL
SYSTEM
A system in which the
same goods are produced
and distributed in the same
way by each successive
generation.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE TRADITIONAL SYSTEM CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Property rights
Ownership of the factors of production is determined by tradition
Coordinating mechanism
All decisions made are determined by tradition
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE COMMAND SYSTEM CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Advantages a Traditional economy
•
•
•
•
•
It is an easy method of passing knowledge
Less environmental destruction
Clear understanding of how resources are distributed
It centers around the family
It is an economy which allows for movement and freedom.
The traditional economy is based on the concept that you
go where you must to obtain the resources you require to
survive.
• It supports the skills of an individual
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE COMMAND SYSTEM CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Disadvantages a traditional economy
• Resists innovation and technology
• High levels of competition for the available resources
• The economies can be devasted by natural disasters e.g
bad weather can destroy farm land hence people might
starve
• Rarely achieve goals of economic growth
• Methods of production are often inefficient
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the major differences between traditional, command, market and mixed economies
2.3 THE COMMAND
SYSTEM
2
A system or economy in which participants are instructed
what to produce and how to produce it by a central authority,
which also determines how the output is distributed.
a.k.a centrally planned systems
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE COMMAND SYSTEM CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Property rights
Characterised by state-ownership of all goods, services and factors of
production (except labour)
Coordinating mechanism
All decisions are made by a central authority
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE COMMAND SYSTEM CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Command Economic Systems are no longer common
because; (Disadvantages)
They restrict human freedom of choice
• Innovation and change are discouraged
• There is no competition and thus no motivation to improve
processes, production methods and efficiency (
• The task of coordinating all the production and consumption
in the economy is difficult and thus almost impossible to
perform efficiently
• Greed and corruption are possible when a small group of
central planners are responsible for allocating all the
resources in the economy
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE COMMAND SYSTEM CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Advantages a Command Economy
•
•
•
•
Low levels of inequality and unemployment
Improved welfare of the people / citizens
Easy response to internal disasters and emergencies
Industrial power is boosted because the government is in
control
• Everyone has access to heath care and all essential
services
• There can be higher production of goods since the
government can just give an authority
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
WHAT IS A MARKET
- any communication or contact between potential buyers and potential suppliers
of goods and services.
- An institution or mechanism which brings buyers and sellers together
- Markets can be local (e.g. spaza shops), regional, national (JSE) and international
(London Gold Market)
For a market to exist, the following conditions have to be met
a) There must be at least one potential buyer and one potential seller
b) The seller must have something to sell
c) The buyer must have means (money) to purchase the product
d) An exchange ratio (market price) must be determined
e) An agreement must be guaranteed by law or by tradition
A market price is a sign of scarcity which shows consumers what they have to
sacrifice to obtain the good they want
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the major differences between traditional, command, market and mixed economies
LO: Describe the salient features of the market economy
2.4 THE MARKET SYSTEM
An economic system in which there is
minimal government intervention/central
planning, and where economic
decisions result from the combined
interactions between buyers and sellers
(private individuals and companies) of
goods and services, and the effect of
these on demand and supply (as
indicated by market prices).
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE MARKET SYSTEM CONTINUED
LO: Describe the major differences between traditional, command,
market and mixed economies
LO: Describe the salient features of the market economy
Property rights
Characterised by the private ownership of the factors of production
Coordinating mechanism
All decisions made are voluntary exchanges and reflect in market prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE MARKET SYSTEM CONTINUED
LO: Describe the major differences between traditional, command,
market and mixed economies
LO: Describe the salient features of the market economy
Such an economic system is characterised by
•
•
•
•
•
•
individualism – most FOP are owned by individuals,
private freedom (the owner of FOP have freedom to make decisions)
private property and property rights (private ownership)
decentralised decision making and
limited government intervention.
Self interest (buyers want to maximise satisfaction while sellers want
to maximise profits)
In the market economy, there are also
• Incentives (workers work harder because there is a possibility of getting
more income)
• Competition (among buyers and among suppliers)
• Negotiation (between sellers and buyers)
ECONOMICS
FOR SOUTH
AFRICAN
STUDENTSeconomic activity)
• Market
prices
(directs
and controls
CHAPTER 2: ECONOMIC SYSTEMS
ADVANTAGES
OF
A
MARKET
ECONOMY
• Individuals are free to make economic decisions and
pursue their own interests
• Less government control means political freedom and
less bureaucracy
• Locally made decisions means better use of resources
and increased productivity
• Profit motive means resources are used efficiently
and hard work is rewarded
• High competition results in higher quality and more
diverse products
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
DISADVANTAGES
OF
A
MARKET
ECONOMY
• Market economies see not need to provide public
goods and hence the society can slip into poverty
• Does not give security to the sick or aged (no social
grants)
• During economic booms, business owners become
rich while workers become poor
• Market economies do not do well in terms of
economic security
• It widens the gap between the rich and the poor
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
FUNCTIONS OF PRICES IN A MARKET ECONOMY
 Rationing Function
- Price allocate scarce goods and services to those who can afford to buy
them (or can afford the highest bid)
 Allocative function
- Prices direct the factors of production between different uses in the
market.
- Factors of production follow markets or industries where prices are high
- When there is excess demand in the market, prices go up. This also
means profits go up, ceteris paribus.
- More profits attract more factors of production (Land, labour, capital,
entrepreneurship)
- Where there is excess supply, prices go down, and profits are reduced.
Factors of production move away from the activities concerned.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the major differences between traditional, command, market and mixed economies
2.5 THE MIXED
ECONOMY
An economic system that
displays features of tradition,
command and the market,
although one of the three
coordinating mechanisms
usually dominates.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
THE MIXED ECONOMY CONTINUED
LO: Describe the major differences between traditional,
command, market and mixed economies
Property rights
Characterised by primarily private but also public ownership of the
factors of production
Coordinating mechanism
All decisions are made by either the market or the state
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
ADVANTAGES
OF
A
MIXED
ECONOMY
• A mixed economy improves production efficiency.
• Mixed economies promote control equality.
• Employment opportunities are more readily available.
• The mixed economy attempts to balance the need for
private innovation with the need for the massive supports a
government provides.
• Competition in the mixed economy encourages producers to
seek out innovative processes.
• The expanded role of the state in the mixed economy when
compared to the market economy provides more protection
for the old and the young through social grants
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
DISADVANTAGES
OF
A
MIXED
ECONOMY
• It can leave the less competitive members of society without
support.
• The mixed economy encourages people and agencies to go
into debt.
• In a mixed economy, the market equilibrium is tough to
maintain because of public and private interests.
• Problems of corruption, Kick-backs
• , black market, nepotism are prevalent in a mixed economy.
• Excessive state control in a mixed economy hinders the
growth of private sector industries.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
2.6 SOUTH AFRICA’S MIXED ECONOMY
• there is private property, private initiation, self-interest and market
mechanism
• There is state ownership of organisations which supply essentials
e.g. Eskom, SAA, SABC
• the government also intervenes to control the activities in the
economy e.g. to control prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
Theme 2: Major Flows, Participants and Markets
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
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 2: ECONOMIC SYSTEMS
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 53)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
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 2: ECONOMIC SYSTEMS
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 2: ECONOMIC SYSTEMS
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 2: ECONOMIC SYSTEMS
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the different sources
of production and income
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
Natural resources (land)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the different sources
of production and income
LAND (NATURAL RESOURCES
• Consists of all the gifts of nature E.G mineral deposits,
water, arable land, vegetation, natural forests, marine
resources, other animal life, the atmosphere and even
sunshine.
• Natural resources are fixed in supply. Their availability
cannot be increased. Also known as land.
• One of the factors of production. May be categorised
as a primary factor of production or a non-human
resource.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
Labour
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the different sources
of production and income
LABOUR (HUMAN RESOURCES)
• The human mental and physical effort that
people allocate to producing goods and
services, with the aim of earning income as
reward.
• Often categorised as a primary factor of
production or a human resource.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION
LABOUR CONTINUED
LO: Describe the different sources
of production and income
Specialisation and the division of labour (See Box 3-2 pg 43)
Specialisation – is when people, businesses and countries to concentrate on activities to
which they are best suited (for example, a firm might only make clothes, or only sell food).
• Enables an economy to produce goods and services at the lowest possible cost.
Division of labour – is when a production process is broken up into different steps or parts,
each of which is performed by an individual worker or group of workers, where each
worker can focus on a particular task.
• The advantages of this are time saving, allocation of work to the best suited individuals,
development of specific skills, mechanisation is made possible and quality of output in
improved.
The disadvantages include worker alienation and the interdependent nature of the process.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
Capital
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the different sources
of production and income
CAPITAL
• All manufactured (man-made) resources, such as
machines, tools and buildings, which are used in
the production of other goods and services.
• Often categorised as a secondary factor of
production or a non-human resource.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
Entrepreneurship
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the different sources
of production and income
ENTREPRENUERSHIP
• The human resource that organises the other three
factors of production: labour, land and capital.
• Entrepreneurs come up with new ideas about what,
how, when and where to produce, make business
decisions and bear the risk and rewards that arise from
their decisions.
• Usually seen as business leaders or innovators.
• May be categorised as a secondary factor of
production or a human resource.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
Technology
The fifth factor of production
• Invention
• Innovation
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the different sources
of production and income
SOURCES OF PRODUCTION: THE FACTORS OF PRODUCTION CONTINUED
Money is not a factor of production
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the different sources
of production and income
LO: Describe the different sources of production and income
3.4 SOURCES OF INCOME: THE
REMUNERATION (REWARDS) OF
THE FACTORS OF PRODUCTION
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
SOURCES OF INCOME: THE REMUNERATION OF THE FACTORS OF
PRODUCTION CONTINUED
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
LO: Describe the different sources
of production and income
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 2: ECONOMIC SYSTEMS
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES
CONTINUED
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES
CONTINUED
Households
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
SOURCES OF SPENDING: THE FOUR SPENDING ENTITIES
CONTINUED
Firms
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
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 2: ECONOMIC SYSTEMS
3.6 PUTTING THINGS TOGETHER:
A SIMPLE DIAGRAM
Figure 3-4 The different components of
production, income and spending
(Textbook page 63)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
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 2: ECONOMIC SYSTEMS
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 62)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
CURCULAR FLOW OF GOODS AND SERVICES (FIGURE 3.3
PAGE 62)
• In the circular flow of goods and services, Households
sell their factors of production to firms in the factor
market.
• The firms transform these factors into goods and
services which are then sold to households in the
goods market.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
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 63)
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
CURCULAR FLOW OF INCOME AND SPENDING (FIGURE
3.4 : PAGE 63)
• In the circular income and spending, firms purchase
factors of production in the factor market.
• Their spending represents the income of the
households (ie the sellers of the factors of production).
• Households spend their income in the goods market
on purchasing goods and services.
• Their spending represents the income of the firms.
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
GOODS MARKETS AND FACTOR MARKETS
• A GOODS MARKET IS A MARKET WHERE GOODS AND
SERVICES ARE SOLD BY THE FIRMS AND BOUGHT BY THE
HOUSEHOLDS (PEOPLE)
• A FACTOR MARKET IS A MARKET WHERE THE FACTORS OF
PRODUCTION ARE SOLD AND BOOGHT.
• households sell labour to firms in the factor market
• Firms buy labour from household (people) in the factor market
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
Theme 3: Stocks and flows
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS
PRODUCTION, INCOME AND SPENDING CONTINUED
LO: Distinguish between stocks and flows
Stocks and flows (see table 3,1 page 53)
• Stocks
ARE variables measured at a particular
point of time E.G. wealth, assets,
liabilities, capital, population
• Flows
ARE Vvariables measured over a period of
time e.g. income, profit, loss, investment,
number of births or deaths
ECONOMICS FOR SOUTH AFRICAN STUDENTS
CHAPTER 2: ECONOMIC SYSTEMS