economics chapter 3

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Questions and Answers

What is the relationship between production, income and spending in the economy?

Production creates income, which is then spent to purchase goods and services. (correct)

Spending creates production, which is then used to earn income.

Spending creates income, which is then used for production.

Income creates production, which is then spent to purchase goods and services.

What do stocks measure in economics?

The total amount of income earned over a period of time.

The total amount of goods and services produced over time.

The amount of natural resources available at a point in time.

The value of goods and services at a specific point in time. (correct)

What are the three major flows in the economy?

Production, income, and spending. (correct)

Households, firms, and government.

Production, income, and government spending.

Saving, investing, and consuming.

What are natural resources?

All gifts of nature that may be used to yield an income. Signup and view all the answers

What is the 'circular flow' in the economy?

The simultaneous processes of production, income, and spending. Signup and view all the answers

What is the term used to describe all those natural resources over which people have the power of disposal?

Natural resources. Signup and view all the answers

What is production in the economy?

The process of creating goods and services. Signup and view all the answers

What is the relationship between households and firms in the economy?

Households provide resources to firms, which then produce goods and services. Signup and view all the answers

What is the term for the incorporation of new knowledge into actual production techniques and products?

Innovation Signup and view all the answers

Which type of production is dominated by machines?

Capital-intensive production Signup and view all the answers

What is the remuneration earned by entrepreneurship?

Profit Signup and view all the answers

Which factor of production earns the most income?

Labour Signup and view all the answers

What is the term for the total spending by households on consumer goods and services?

Aggregate Consumption Signup and view all the answers

Who determines what to produce?

Households Signup and view all the answers

What is the goal of firms in the goods market?

To maximise profits Signup and view all the answers

What do households supply to firms in the factor market?

Services of labour Signup and view all the answers

What is the term for when firms purchase capital?

Investment or capital formation Signup and view all the answers

What is the term for the aggregation of all the different markets under one heading?

Aggregation Signup and view all the answers

What is the market in which firms purchase factors of production?

Factor market Signup and view all the answers

What is the circular flow of goods and services?

The interrelationship between households and firms Signup and view all the answers

What is the direction of the flow of money in the goods market?

From households to firms Signup and view all the answers

What is the role of the market in the circular flow of income and spending?

To co-ordinate the actions of producers and consumers Signup and view all the answers

What are the two main dimensions that describe a market?

The nature of the good and the geographic area Signup and view all the answers

What is the relationship between firms and households in the market?

Firms and households are in a demand and supply relationship Signup and view all the answers

What does 'S' represent in the equation S = I?

Savings Signup and view all the answers

What is the total of planned injections equal to?

Total planned leakages Signup and view all the answers

What is an example of a leakage from the circular flow?

Taxes Signup and view all the answers

What is represented by 'I' in the equation S = I?

Investment Signup and view all the answers

What is the main function of financial institutions in the circular flow of income and spending?

To act as a funnel through which saving can be channelled back into the circular flow in the form of investment spending Signup and view all the answers

What is the role of government in the circular flow?

To provide public goods and services Signup and view all the answers

What is the term for the spending by households on consumer goods and services?

Consumption spending (C) Signup and view all the answers

What is the result of a budget deficit?

An offset to the equation S = I Signup and view all the answers

What is an example of an injection into the circular flow?

Investment spending Signup and view all the answers

What is the total expenditure in the circular flow of income and spending?

C+I+G+X–Z Signup and view all the answers

What is the circular flow of income also known as?

The circular flow model Signup and view all the answers

What is the term for the spending by foreigners on South African goods and services minus spending by South Africans on imported goods and services?

Net exports (X–Z) Signup and view all the answers

What is the term for the removal of purchasing power from the system?

Leakages Signup and view all the answers

What is the term for the addition of real output and creation of employment in the economy?

Injections Signup and view all the answers

What is the role of financial institutions in the circular flow of income and spending?

To act as a link between households and firms with surplus funds Signup and view all the answers

What is the term for the spending by firms on capital goods?

Investment spending (I) Signup and view all the answers

Study Notes

Production, Income, and Spending in the Mixed Economy

The economy has three major flows: production, income, and spending, which are interconnected and simultaneous.
Stocks vs. Flows: Stocks are measured at a point in time, while flows are measured over a period of time.

Sources of Production: The Factors of Production

Natural resources (land) are all gifts of nature, including farming and building land, forests, mineral deposits, fisheries, rivers, lakes, sunlight, rain, and seeds.
Labour-intensive production emphasizes human effort, while capital-intensive production dominates with machines.
Specialisation and the division of labour lead to increased productivity.

Sources of Income: The Remuneration of the Factors of Production

Incomes are earned by selling the services of the factors of production.
Remuneration for natural resources (land) is rent.
Remuneration earned by labour is wages.
Remuneration earned by capital is interest.
Remuneration earned by entrepreneurship is profit.

Sources of Spending: Households and Firms

Households supply services of labour to firms in the factor market and are the owners of factors of production.
Households buy goods and services from firms in the goods market, with total spending known as Aggregate Consumption (C).
Firms are buyers of factors of production in the factor market and sellers of goods and services in the goods market, aiming to maximise profits.
Firms purchase capital, known as Investment or capital formation, denoted by the symbol I.

The Circular Flow of Goods and Services

The circular flow diagram shows the interrelationship between households and firms.
Households sell their factors of production to firms in the factor market, and firms transform them into goods and services sold to households in the goods market.

The Circular Flow of Income and Spending (Monetary Flow)

Goods market: Households demand goods and services from firms and provide firms with money, while firms spend on factors of production.
Factor market: Firms demand services of labour from households and households supply it in exchange for money from firms.
Each market is described by the nature of the good and the geographic area.

The Foreign Sector in the Circular Flow of Income and Spending

The foreign sector involves spending by foreigners on South African goods and services (X) minus spending by South Africans on imported goods and services (Z).

Financial Sector

Financial institutions include banks, insurance companies, pension funds, and the JSE Securities Exchange.
Financial institutions act as a link between surplus units (households or firms) and deficit units, facilitating saving and borrowing.

Total (Aggregate) Spending

Total expenditure is the sum of household spending on consumer goods and services (C), firm spending on capital goods (I), government spending on goods and services (G), and foreign spending on South African goods and services (X) minus spending by South Africans on imported goods and services (Z).

Leakages and Injections

Government public spending on goods and services (G) is an injection, while taxes (T) are a leakage.
Savings (S) are a leakage, and investment spending (I) is an injection.
Total planned injections equal total planned leakages.

The Major Elements of the Circular Flow of Income and Spending

The diagram summarises the essence of the previous circular flow diagrams, highlighting the flow between households and firms, and the leakages and injections into the circular flow.

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