Major Actors: 1. Firms 2. Households 3. Government 4.

Foreign Sector

Major Markets: 1. Goods & Services 2. Factor market 3. Financial Market

Major Flows: 1. Total Production 2. Total income 3. Total expenditure

5 main policy objectives

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 Economics

Scarcity, Choice, Opportunity Cost.

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Classified as Internal use only
 Factors of Production -

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 Economic Theory purposes: 1. Explain 2. Predict 3. Serve as a basis for formation and analysis of decisions and economic
policy Objectives of economic policy: used to appraise the performance of a economy ; Economic growth, Full employment, price stability,
balance of payments stability and equal distribution of income.

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 firms
Circular Flow of Income
Firms:
Firms provide households with goods and services
We don’t get freebies from firms.
We don’t provide labor for free either.
So there’s money flowing in the opposite direction.

ds
Househol
Households gotta pay firms for the goods they get.
Firms also gotta pay households in the form of wages,
rents, interests or profits.
Firms gotta get factors of production from households –
It can be labor, land, capital or entrepreneurship.

Savings:

investment
Savings &
We don’t spend everything we earn in real life.
So let’s add savings.
Savings is money we don’t spend.
So there’s money flowing out.
savings don’t just sit in banks, Banks invest in firms
by lending to them.
because firms need money to buy capital equipment or cover
other costs of production, So there's investments flowing into the economy.

Government:
Let’s add government. (3 sector economy: firms + households + government)
Government buys stuff as well - So there’s money flowing in.
Government gets money from taxes - Taxes.
So there’s money flowing out as for the money we’re paying as taxes,
we cannot spend it.
nt
Governme

Foreign Sector:
countries interact with one another.
Let’s add trade.
(4 sector economy: firms + households + government + foreign sector)
Countries imports products ,
products flow from 1 country into another
And money spent on imports flows out of one country into another.
Other countries export products and export products to foreigners –
Money then flows from foreign countries into the country in question-
This is countries export earnings.

Injections.
Investments, Government Spending and Export earnings are called Injections.
 Because money is flowing in.

leakages or withdrawals. Imports & exports

Savings, taxes and import spending are called leakages or withdrawals.
 Because money leaks out of the system.

Relation
injections and leakages are sort of related.
Investments come from savings.
Government spending comes from taxes.
America makes money from foreigners by exporting.
But foreigners also make money from America when America imports.

Hence it's a Circular Flow of Income

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Injections & Leakages/withdrawals
 How does an economy function? Look at the Circular Flow of Income.
Who are the major players in an economy?
In order of increasing complexity, there are:
 2-sector economy: households + firms
 3-sector economy: households + firms + government
 4-sector economy: households + firms + government + foreign sector
There are real goods and services flowing in one direction in the circular flow of income and money flowing in the opposite direction.
When money flowing to the country, it's called injections.
When money flows out, it’s called withdrawals or leakages.
Injections consist of government spending, investments and exports.
Leakages or withdrawals include imports, taxes and savings. Injections and leakages/withdrawals are related to each other. This is because government
spending comes from tax revenues and investments, at least the local component, come from savings. That said, investments can flow from foreign countries
in the form of foreign direct investments (FDI). Lastly, while money can flow from foreign countries when we export overseas, money also leaks out of the
country because we import.

GDP : Gross Domestic Product :

Production of goods and services

 Firms use factors of production from households,

 To produce /get goods and services
 These goods and services are sold back to households.
 Households pay for these goods and services which reflects
the value of these goods and services this is known
 the National Expenditure
 the National Output.
 This is equivalent Because when firms sell goods to households,
 It's just goods transformed into money
Spending
 Spending comes from income made by the households. So this arrow,
the national income,
 also equals to national expenditure.
 We see that National Income = National Expenditure = National Output.
 They are just in different stages of the Circular Flow of Income.
How do we measure GDP? We can measure the total output, the total final goods and services.

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 Economics:

Scarcity

Choice

Opportunity costs:

Micro vs Macro economics

Micro economics: Individual decisions

Macro Economics: National decision making, aggregate demand and supply

Capital goods ( used to produce other goods ) vs Final products (goods consumed by consumers)

Intermediate products

Factors of production : Land, labour, Capital, Entrepreneurship and Technology

3 major flows of an Economy : Production, income & spending (production creates income, income creates spending
creates production) Production = income=spending

Circular flow- goods and services (goods market) (factor Market: factors of production)

Consumers/households: owners of factors of production, sells factors of production to firms and firms buy factors of
production and creates goods and services selling theses goods and services back to households.

Circular flow- income and spending

Consumers /households : sell factors of production and receive income back, firms spends money in the factor
market , households then spend money on goods and services

Households

Firms

Foreign Sector

Government

Injection

Leakages

Total spending/aggregrigate spending is made up of : C + G + I + X-Z (Imports -Exports)

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 Measuring the performance of the economy ( indicators) (macro economic objectives) indicates the health of the
economy:

 economic growth (GDP)

 Full employement (unemployement rate)
 Price stability (CPI) : Inflation rate if prices is stable or not
 External stability ( balance of payments) if money coming in and out of the country is sufficient are we
running in a deficit or surplus
 Equal Income distribution (Lorenz Curve) (Gini Coefficient) closer to 1, closer to 0

Recession: negative growth in 2 periods

GDP (economic growth)

Production , Value added method: alovera produced R150, sold to edgars R150, edgars resell value R200 : value added
R150+R50=R200

Expenditure method : final market price? What the customer pays edgars resell value R200.
Income method- income of factors of prodicion, rent, wages, intrest, profit

Expenditure method : final market price : R240 000

Buy – sell = value added – rent-wages-intrest = profit

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 Topic `1 Summary
1. Definitions
•Economics: The study of how individuals, businesses, and governments make choices about the allocation of scarce resources to satisfy their unlimited wants
and needs.
•Scarcity: The fundamental economic problem of having limited resources to meet unlimited wants. It forces individuals and societies to make choices about how
to allocate resources efficiently.
•Opportunity Cost: The value of the next best alternative that is forgone when a choice is made. It’s the cost of what you give up to get something else.

2. Macroeconomics vs. Microeconomics

•Macroeconomics: The study of the economy as a whole, focusing on large-scale economic factors such as national income, inflation, and unemployment.
Example: Analyzing the impact of fiscal policy on national economic growth.
•Microeconomics: The study of individual consumers and businesses, focusing on supply and demand, pricing, and market structures. Example: Examining how a
change in the price of coffee affects consumer demand and producer supply.

3. Three Main Economic Questions

What to produce?: Deciding which goods and services should be produced.

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 How to produce?: Determining the methods and resources used in production.
For whom to produce?: Deciding who will receive and consume the goods and services produced.

4. Three Main Flows in the Economy

Goods and Services Flow: The movement of goods and services from producers to consumers.
Money Flow: The movement of money from consumers to producers in exchange for goods and services.
Resource Flow: The movement of resources (labor, capital, land) from households to firms in exchange for income.
These flows are interconnected, creating a circular flow of economic activity.

5. Four Factors of Production

Land: Natural resources used in production. Example: A plot of land for farming.
Labor: Human effort used in production. Example: A factory worker.
Capital: Man-made resources used in production. Example: Machinery in a factory.
Entrepreneurship: The ability to combine the other factors of production to create goods and services. Example: A business owner.
6. Relationship Between Households and Firms
Here’s a simple diagram to illustrate the circular flow of income:
Households
↑ ↓
Income Goods & Services
↓ ↑
Resources Firms

Households provide resources (labor, capital, land) to firms, and in return, they receive income (wages, rent, interest). Firms use these resources to produce
goods and services, which are then sold to households.

7. Nominal vs. Real Values

Nominal Values: Measured in current prices, without adjusting for inflation. Example: Nominal GDP is the total value of goods and services produced in a country
at current prices.
Real Values: Adjusted for inflation, reflecting the true purchasing power. Example: Real GDP is the total value of goods and services produced in a country,
adjusted for changes in price levels.

8. Main Objectives of Macroeconomic Theory

Economic Growth: Increasing the output of goods and services over time.
Full Employment: Achieving the lowest possible level of unemployment.
Price Stability: Maintaining stable prices to avoid inflation or deflation.
Balance of Payments Stability: Ensuring a stable relationship between a country’s imports and exports.
Equitable Distribution of Income: Reducing income inequality.

9. Five Main Objectives of Macroeconomic Policy

Economic Growth: Promoting sustainable growth.
Full Employment: Reducing unemployment.
Price Stability: Controlling inflation.
Balance of Payments Stability: Managing the country’s international financial position.
Equitabl
e Distribution of Income: Ensuring fair income distribution.

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