This Document covers the first 3 sections of the microeconomics section of paper 1 for Economics grade 12.
Chapter 1: Circular Flow
Chapter 2: Business Cycles'
Chapter 3: The Public Sector
CIRCULAR FLOW
BUSINESS CYCLES
PUBLIC SECTOR
FOREX MARKETS
ECONOMIC PERSUITS
PREOTECTIONISM AND TRADE
GROWTH AND DEVELOPMENT
INDUSTRIAL DEVELOPMENT POLICIES
ECONOMIC AND SOCIAL PERFORMANCE INDICATORS
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CIRCULAR FLOW
Macroeconomics: Explains how the economy as a whole works.
, Microeconomics: Explains how specific ELEMENTS of the economy works. (Imports,
Exports, consumers, etc.)
Circular flow model:
- A representation of the economy showing how the economic participants interact
with one another.
Closed economy: An economy that does not take part in international trade. (There
is no trade with the foreign sector, includes only 3 participants.)
Open economy: An economy that imports and exports goods and services to other
countries. (Trades with the foreign sector, includes 4 participants.)
Circular Flow of an OPEN ECONOMY:
Consists of different components:
- Participants (Decision makers)
- Markets
- Flow patterns affected by leakages and injections.
Diagram:
Participants: (Decision makers!!)
HOUSEHOLDS
- Refers to any group of people who live together and make economic decisions together.
- Households are the major consumers (consumer spending (C)) of economic goods and
services – they use their income to buy from firms.
- Households are the primary economic participants because they are the owners of the
four factors of production.
- Households receive a remuneration from the firms in the form of wages, rent, interest
and profit.
- Pay tax (T)
- Save their money at financial institutions. (S)
- Households sell factors of production in the factor market to firms.
,- Households decide what products to buy, and when, what, and how to buy them.
FIRMS / BUSINESSES
- Responsible to produce goods and services purchased and consumed by participants.
- Firms purchase the factors of production from the household in the factor market.
- Firms use the factors of production to produce goods and services.
- Businesses sell goods and services to households, government and the foreign sector
through the goods market.
- Businesses receive an income from the other three participants (households,
government and the foreign sector). They use this income to produce more.
- Households’ savings are borrowed to entrepreneurs to buy capital goods.
- Firms pays interest in exchange for the loan.
- Capital goods = machinery, buildings, furniture and equipment.
- When firms purchase capital goods it called investment expenditure (I).
GOVERNMENT
- This refers to local, regional and national government.
- The state provides the households and businesses with public goods and services.
- The state receives taxes from households, e.g., income tax.
- The state receives taxes from the business sector, e.g., company tax.
- The state spends money in the economy. (G) (does also borrow it)
- The government buys factors of production in the factor market to produce public goods
and services.
- Pays subsidies to producers to keep the prices of certain goods low.
- Also makes transfer payments to persons who are excluded from economic activities.
(unemployed, old age, disability)
- Direct tax: Charged on person or tax.
- Indirect tax: charged on goods and services.
- Also known as state and/or public sector
FOREIGN SECTOR
- There is a flow of goods or imports that flow from the foreign sector and are paid for by
the individual households, businesses and the public sector.
- These imports be expenditure by individual households, businesses and public sector. (A
monetary outflow.)
- There is also a flow of goods and services to the foreign sector from businesses
(exports).
- These exports will result in an income for individual households, businesses and public
sector. (A monetary inflow.)
- Importers BUY goods from other countries.
- Exporters SELL goods from other countries.
- SA mainly exports primary and intermediate goods and capital goods.
- Consists of all firms, financial intermediaries, governments and households outside the
country.
, - FOREIGN MARKET
- If a foreign firm buys a business within our country i.e., inflow of foreign investment.
- When a foreign firm sells their assets owned in our country i.e., outflow of foreign
investment.
FINANCIAL SECTOR
- Consists of banks, insurance companies, pension funds and the Johannesburg Stock
Exchange (JSE)
- Represents those financial institutions that are not directly involved in the production of
goods and services but act as a link (intermediary) between households and firms that
have a surplus of money and other participants in the economy who require economic
funds.
- The money which households and firms provide to the financial sector is known as
savings.
- Businesses can Borrow money from the financial institutions and use it to purchase
capital goods.
- This spending on capital equipment by firms is regarded as investment.
Interactions between economic participants:
- Households provide production factors to producers (firms).
- Households receive an income (Y) in return – rent, wages, interest and profits.
- Households purchase goods and services from firms.
- Firms receive income from sales revenue.
- Households and firms purchase goods and services from the foreign sector as imports
(M).
- The foreign businesses receive money from firms and households.
- Firms sell goods and services to the foreign sectors, and this is called exports (X).
- Households and firms pay taxes to the government. (T)
- The government provides public goods and services to households and firms.
- The unexhausted (unspent) part of the household and firms’ income earned is saved in
the financial sector of the economy. (S)
- The money invested by firms and households is known as savings (S).
- The funds received by the financial sector are used by firms/businesses to purchase
infrastructure to produce goods and services.
- This flow of money from the financial sector for use by firms is known as investment (I).
Real flow and Money flow:
- Always move in opposite directions
- Real flow refers to the flow of goods and services from firms to households and factors
of production from households to firms and the public goods and services provided by
state.
- Factors of production via the factor markets. Goods and services via the goods markets.
Factors of production and goods and services flow from foreign countries to South Africa
(imports). Factors of production and goods and services flow from South Africa to
foreign countries (exports).
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