ECONOMICS: Production, Income and Spending

• PRODUCTION is the driving force to income and spending. We need production first
• Production = Output x Productivity
• PRODUCTION creates INCOME. INCOME is used to spend. SPENDING is used to purchase the products. PRODUCTION is formed again. {flow}
• PRODUCTION > INCOME > SPENDING [never ending circular flow]
• STOCKS: measured at a PARTICULAR POINT IN TIME. expressed at a specific time . [ at 00:00 .... 95,8 per cent of its capacity]
• FLOWS: measured OVER A PERIOD. [per second , minute, day etc.] . Can be expressed as so many cubic metres per second or minute or day...
• FLOW VARIABLES: production, income and spending all fall under this category.
• STOCK VARIABLES: capital stock, natural resources, population, money supply, foreign reserves, national debt, government expenditure on education, health care, defence, infrastructure, research & development, unemployment rate, inflation rate, interest rates, exchange rates, GDP deflator, current account balance, trade balance, budget deficit/surplus, fiscal policy stance, monetary policy stance, terms of trade, productivity, employment rate, consumer price index (CPI), gross fixed investment, net exports, net imports, net domestic product (NDP)
• Stocks and flows are interrelated. Stocks can only CHANGE as a result of flows. example: POPULATION is affected [can only change] by the NUMBER OF BIRTHS AND DEATHS. CAPITAL STOCK can only increase if INVESTMENT occurs.
• another important economic activity that links the various sectors in an economy is EXCHANGE.
• The value of what is exchanged depends on how much people want it. This means that the value of any good or service will depend on the demand for it.
• EXCHANGE: usually occurs in markets.
• 2 fundamental sets of markets: GOODS MARKETS and FACTOR MARKETS.
• FACTOR MARKETS: where factors of production are bought and sold
• GOODS MARKETS: where goods are bought and sold
• Natural resources [LAND] and Labour: PRIMARY[sector] factors of production
• Capital and Entrepreneurship: SECONDARY[sector] factors of production
• HUMAN RESOURCES: Entrepreneurship and Labour
• NON-HUMAN RESOURCES: Land and Capital
• NATURAL RESOURCES: fixed in SUPPLY. their VALUE cannot be inmcreased if we want more of them.
• SPECIALISATION AND DIVISION OF LABOUR: both interrelated
• DIVISION OF LABOUR: occurs when a production process is broken up into parts which each individual or group can SPECIALISE in.
• Division of labour creates/enables opportunities for specialisation.
• The importance of the division of labour was recognised in the 18th century by ADAM SMITH.
• ADVANTAGES OF THE DIVISION OF LABOUR: increases productivity (output per worker), reduces costs, improves quality, allows workers to develop skills, enables economies of scale, encourages innovation and creativity.
• DISADVANTAGE OF THE DIVISION OF LABOUR: leads to monotony and boredom, may lead to low wages as workers are easily replaced, may cause conflict between different groups of workers who have different interests, people and processes become more interdependent.
• Advantages of division of labour

  • Saves time (able to produce more goods and services within a short space of time)
  • Leads to better quality
  • Mechanisation
  • Allows workers to develop specific skills
  • Enables workers to be allocated to tasks they are best suited for/good at
• worker alienation is when workers are not engaged in the workplace and are not motivated to do their job
• INTERDEPENDENCE is one of the major features of any modern economy.
• SPECIALISATION is a broader concept than DIVISION OF LABOUR
• DIVISION OF LABOUR is an ACT OF ASSIGNING [sending out] individuals to perform different tasks.
• SPECIALISATION focuses on a particular area of the body or function. Concentrates on different activities to which they are best suited.
• ADAM SMITH: specialisation creates wealth ; only achieved if there is EXCHANGE and TRADE
• QUANTITY OF LABOUR [Labour force] = (SALARY X HOURS WORKED)
• QAULITY OF LABOUR [HUMAN CAPITAL]

  skills, knowledge and the health of workers is important. Education, training and experience as crucial determinants of the human capital.
• QUANTITY OF LABOUR [LABOUR FORCE]

  size of population and proportion of population that is able and willing to work. Depends on age and gender distribution of the population.
• CAPITAL GOODS are used to produce other goods
• Capital as a factor of production [input] is described as TANGIBLE THINGS that are used to produce other things.
• TO PRODUCE CAPITAL GOODS: current consumption has to be sacrificed in favour of future consumption [form of investment]
• PROVISION FOR DEPRECIATION [DEPRECIATION ALLOWANCE]