Download Section 3.1 Production, Income and Spending 1. The ultimate aim of

Section 3.1 Production, Income and Spending
1. The ultimate aim of production is to consume or use the products to satisfy
human wants.
2. There are three major flows in the economy: Total Production, Total Income
and Total Spending.
3. Everything is happening at the same time meaning, production occurs and
income is earned and all or part of the income is spent to buy the available
goods and services.
4. Production, Income and spending are all flow variables or flows.
5. A Flow Variable is measured over or during a specific period.
6. A Stock Variable is measured at a particular point in time.
7. In a mixed economy, Households, firms, government and the foreign sector
all participate in the production process.
8. Two fundamental markets in the economy are The Goods Market and The
Factor Market
9. 3 Major Flows Summary: Production generates income for the various
factors of production and part or all of this income is then spent to buy
consumer goods and services.
Section 3.2 Interdependence between Households and Firms
1. Households can be described as all the people that live together and who
make joint economic decisions or are subject to someone that makes these
decisions on their behalf.
2. Households are the basic decision making units in the economy.
3. Members of the households consume goods and services to satisfy their
wants.
4. They are called consumers.
5. In a mixed economy most of the factors of production are owned by
households.
6. The total spending of all households on consumer goods and services is
called Total aggregate or Aggregate Consumption Expenditure / Total
Consumption
7. The symbol “ C ” is the abbreviation for Total Consumption or Consumer
spending.
8. In a market economy it is households that determine what should be
produced.
Summary:
• Every individual is a member of a household.
• Households are the basic units in an economic system.
• They own the factors of production and sell these factors on the factor
markets to firms.
• In exchange for these services of their factors of production, households
receive an income in the form of wages, salaries, profit etc., the households
then use their income to purchase consumer goods and services in the
goods market.
• The goods and services purchased are then consumed to satisfy human
wants.
Firms
1. A firm is a unit or company that employs factors of production to produce
goods and services that are sold on the goods markets.
2. Are the basic productive units in the economy.
3. Firms are operated and owned for the benefit of households or one or more
individual.
4. Large firms are owned by their shareholders and firms can also come in
different forms.
5. Firms are primarily involved in production while households are primarily
involved in consumption.
6. Firms are the units that convert factors of production into goods and services
that households desire.
7. Firms are the buyers in the factor market and the sellers in the goods market.
8. In a market economy it is usually firms that decide how goods and services
will be produced.
9. Purchase of capital goods is called Investment or Capital formation ( I )
*Note: Profit is the difference between revenue and cost.
Goods Market
1. The correlation of all markets together is called “ Aggregation “
2. Is where consumer goods and services are sold to households.
Factor Market
• Factors of production are sold in the factor market.
• Includes the Labour market and the market for Capital goods.
• Incomes earned from these factors of production are grouped into 4
categories: Wages, Salaries, Rent, Interest an Profit
Circular Flow Of Goods and Services
• Households offer their factors of production for sale on the factor market
where their factors of production are purchased by firms.
• Firms then combine their factors of production to produce consumer goods
and services.
• The goods and services are then purchased on the goods market by the
households to satisfy their wants.
*NB: Remember the diagrams and be able to label them!
Circular Flow Of Income and Spending
• Is a monetary flow.
• Flows in the opposite direction of the Flow of Goods and Services.
• Firms purchase factors of production in the factor market.
• This spending by firms is represented in the form of the income paid in the
form of rent, wages, salaries, interest and profit to households.
• The households then spend their income on consumer goods and services in
the goods market, this spending represents the income of the firms.