Property economics

Property economics & finance 2
Individual assignment 1
Markets in economics
Production, Income & Spending
The circular flow Diagram
Noluthando NjumbuxuContents
Introduction………………………………………………………………………………………………………………………………………….3
Different markets in economy……………………………………………………………………………………………………………….4
The Traditional system………………………………………………………………………………………………………………………….4
The command system………………………………………………………………………………………………………………………..4-5
The market system……………………………………………………………………………………………………………………………….5
Mixed economic systems………………………………………………………………………………………………………………………5
Production, Income and Spending in the mixed economy…………………………………………………………………….6
Production……………………………………………………………………………………………………………………………………………6
Income…………………………………………………………………………………………………………………………………………………7
Spending………………………………………………………………………………………………………………………………………………7
The circular flow of goods and services………………………………………………………………………………………………..8
The circular flow of income and spending……………………………………………………………………………………………..8
Adding the government……………………………………………………………………………………………………………………….9
Adding the foreign sector…………………………………………………………………………………………………………………9-10
Financial institution in the circular flow of income and spending………………………………………………………10
The major elements of the circular flow of income and spending……………………………………………………..10
Conclusion………………………………………………………………………………………………………………………………………..11
Referencing……………………………………………………………………………………………………………………………………….11
Introduction
Economics is a social science that studies how society resources are shared. Economics describes and analyzes how choices about the way goods and services are produced, distributed, consumed and asses the consequences of those choices.

We are dealing with three central questions that have to be solved in every society. These questions are; what goods and services should be produced? How should each of the goods and services be produced? Lastly, for whom are these goods and services produced. These questions are asked in every production process that happens in the economy.
Economics is essentially concerned with what to production. The total production of goods and services is of major concern to economists. The solutions to these three central questions are our economic systems, of which we have four different economic system types in South Africa. No two economics systems have identical solutions to the central questions. These systems do not always work well.

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When there’s solutions than the three flows (production, income and spending) in economy takes place. Lastly, we will deal with the circular flow of economic, which focusses on the flow of goods, services and resources. It is a model showing the basic economic relationships within a market economy. It shows where money goes and what it is used for it is also known as the injection and leakages illustration.
Different Markets in economics
There are three main types of economic systems namely traditional system, command system and market systems. These three systems work closely with the three central questions that have to be solved. Also, help the systems to meet the needs and requirements of the consumer. The first question that will be asked is what goods and services will be produced? This question is followed directly with how will each of the goods and services be produced ? How much of the scare resources will be used I the production proses of each good? The last question to be asked is for whom will the various goods and services be produced?
The Traditional system
The oldest solution to the three central questions is tradition. The production process in this system is produced the same way it was done many years ago by our ancestors and parents , this method goes for service delivery as well. This economic system has clear and easy answers to the three central questions. Yet it is a very difficult system to adapt to the changing behavior of the economy and its consumers. This system does not compromise its religion nor its cultural values, therefore the solutions for economic activities will always come second when dealing with this system.
I would describe this economic system as a “my way or no way” economic system, since it is so stubborn and not keen to new ideas or innovations. In the central Karoo the Klein Merino family farms sheep’s, cows, lamb, etc. to sell meat for Beaufort west and surrounding towns. Will answer the output, input and distribution questions according their previous generations methods, no matter what the consumer needs are. What-will be the biltong, chops and all the kinds of meat that their culture use to eat. How- will be either the old way of slaughtering (without machinery) and packaging. Then it will not be washed thoroughly just to save the water of the farm. For whom- central Karoo butcheries that is on their old data base, will start with the family member’s shops or ones that share the same cultural values as them.

As we see our economy change extremely due to the taste, quality and preference of the consumer. So this leads the traditional system to be limited to isolated and largely independent communities. This does not mean this system will be not used to solve the central questions in the near future. This systems significance will never fade, because there are important aspects of economics that are governed by this system.

The command system
It is the second solution to the central questions. A central authority on how to solve the three central questions instructs it. That is why this system is also known as centrally planned systems. The planners have to control the output questions, the input questions and distribution questions and come up with solution. This can be a difficult task to deal with especially in a changing environment.
Command economies are described as socialist or communist systems. Although central planning has been used mostly in socialist or communist systems, central planning is not necessarily synonymous with socialism or communism. Central planning refers to the way in which economic activity is coordinated, while socialism and communism refers to ownership of the factors of production except labour are owned by state.

In the South African economy, the government plays an important role. All government activities have to be planned and coordinated accordingly to their specific places by their central bodies.

Using the Klein Merino farm example, the central bodies will have to come with a different approach on how many natural resources will be used here, since Beaufort West has a huge crisis of water. Each and every town, province will have different solutions to the central questions since its facing different complications geographically.
The market system
The market system is the third economic system solution to the central questions. This system requires more explanation that is detailed. A market is any communication between potential buyers and potential sellers of a good or service. There must be at least one willing buyer and one willing seller of the good or service. The seller must have something to sell. The buyer must have the means with which to purchase it. There must be a market price and everything should be stated down on a piece of paper, which is known as an agreement.

A market system is the network of buyers, sellers and other actors that come together to trade in a given product or service. This system can be specific to a product or sector. The most important elements of this system are market prices. Market prices are signals of scarcity, which indicate to consumers what they have to sacrifice to obtain the goods or services concerned. At the same time, market prices also indicate to the owners of the various factors of production how these factors can best be employed.
This system works by producing what consumers want for the least cost. These wants are communicated by the prices that consumers are willing to pay for products and services.
It is almost incredible that a complicated economic system can function quite smoothly without some agency to coordinate the millions of decisions taken by the various participants every day.

Mixed economic system
All modern economies are mixed where the means of production are shared between the private and public sectors. This system is known as the dual economy. A mixed economy is a system that combines characteristics of traditional, command and market economies. It benefits from the advantages of all three systems.
Production, Income and spending in the mixed economy
The total production of goods and services is of major concern to economists. Production is not pursued for its own sake. The ultimate aim is to use or consume the products to satisfy human wants. The logical sequence is that production creates income and this income is spend to purchase the products. The sequence contains three major elements: production, income and spending. There is a continuous circular flow of production, income and spending in the economy. When production occurs then income is earned thereafter a portion or all (eventually all the money will be used whether it is saved) the money earned needs to be spent on production

Production
There are four main factors of production namely: Land, Labour, capital and entrepreneurship. Land and labour is the primary factors of production and capital and entrepreneurship is the secondary factors.

Land is the natural resources and it is fixed in supply. They availability cannot be increased if we want more of it. A good example for this can be the fishery industry where fishers are restricted to a certain number of product (fish) per month.
Labour is the exercise of human effort in the production of goods and services. Their aim is to obtain income at the end of the day. The quality is more important than the quantity.
Capital is all the manufactured resources. It is the answer of how these goods and services will be produces. Capital has a long life span, but it can get outdated. For instance a slaughter machine that is bought years ago use to work with oil and pulling strings now we just put the plug on and it does the whole process.
Entrepreneurship are people who see opportunities and are willing to take risks by producing goods in the expectation that they will be sold. Their aim is to earn profit at the end of the process.

The availability of land, labour and capital is not sufficient to ensure economic success without the entrepreneurs.
Income
Income is generated through production. The only way in which the total income in the economy can grow is to increase the production. Like production, income has also four main factors of income, each is associated with a different factor of production.
The remuneration of land is rent.
Salaries and wages are the remuneration of labour.
Remuneration of capital is interest.

Profit is the remuneration of entrepreneurship.
The total income thus consists of rent, wages and salaries, interest and profit and the value of total income is identically equal to the value of the total production.
Spending
This income is then spend on buying the goods and services that have been produced. There are four basic sectors of spending in the economy:
Household is the members of the households who consume goods and services. It is the basic decision making in the economy, since they are consumers.
Firms can be described as the factories where production of the goods and services are manufactured. Factories are the basic productive units in the economy. Factories always aim to achieve profit. Profit is the difference between revenue and cost.

Government is the third main source of spending in the economy. Households and firms are assumed to act rationally and consistence. It differs when it comes to government, because government is supposed to attain national goals which may vary from time to time.
Foreign sectors are the fourth major sector consider. It is the rest of the world. South Africa exports many of their goods they made to the other countries. The other countries also imports many of the goods they made to South Africa, therefore our countries economy is classified as an open economy.

The circular flow of goods and services
The interaction between household’s ad firm’s can be shown by the circular flow of goods and services diagram. The diagram shows households offer their factors of production for sale on the factor market and then these factors are purchased by the firms. There after the firms combine the factors of production and produce consumer goods and services. These goods and services are offered for sale on the goods market where they are purchased by the households.

The circular flow of income and spending
In the diagram above, we show how goods and services flow between households and firms. The interaction between households and firms can also be explained by showing the flow of income and spending. There is not a huge difference between the goods and service flow and the income and spending flow. Its direction is opposite to the flow of goods and services.
This diagram shows firms purchase factors of production in the factor market. Also the spending by firms represents the income of the households than the households spend their income by purchasing goods and services in the goods market. The spending by the households represents the income of the firms.

Adding the government
Government spending (G) constitutes an addition or injection into the flow of spending and income, while taxes (T) constitute a leakage or withdrawal from the circular flow of income between households and firms. The various links between government, on the one hand, and households and firms, on the other, are illustrated in the diagram below…

Adding the foreign sector
The last major sector to consider is the rest of the world, which is called the foreign sector. The foreign sector consists of all countries and institutions outside the country’s borders. The flows of goods and services between the domestic economy and the foreign sector are export (X), and imports. South African exports consist mainly of minerals and other commodities, while the country’s imports are mainly capital and intermediate goods that are used in the production process.

Exports constitute an additional or injection into the circular flow of income and spending in the domestic economy. Imports constitute a leakage or withdrawal from the circular flow of income and spending in the domestic economy. To keep things simple, we concentrate on the flows of income and spending between the domestic economy and the foreign sector rather than on the flows of goods and services. The below diagram summaries the flows of income and spending between all four sectors.

Financial institution in the circular flow of income and spending
In this diagram we show where financial institutions fit into the overall picture. Financial institutions includes banks such as Capitec, FNB and ABSA. These institutions are not directly involve in the production of goods. The banking systems helps to facilitates the exchanging of money and it helps to productively turn savings into investments in order to grow the economy.

The major elements of the circular flow of income and spending
in this diagram the main flows and the four sectors have been combined to construct a number of pictures of how the main elements of the economy fit together. It is a combine of all the diagrams.

Conclusion
Economics is interlinked, each and every component can’t work or survive on its own it needs the help of the other components. This makes the economic an exchange friendly society. That is why we have different economic systems to give direction and clear understanding on how production should be put out. We have seen and tested that not all economic systems work well for certain economic issues, and at times it do work incredibly.

The different flows are a model showing the basic economic relationships within a market economy. Overall in the economy we make production to get an income to sustain our daily needs and wants. It is as a round wheel that never stops it keeps on rolling on the round world of us.
Referencing
Philip Mohr and associates, 2015, Economics for south African students, fifth edition
Income and spending flow, viewed 11 May 2018, http://www.econom.co.za/econres/kn_ecs2602/flaw01.htmlGovernment circular flow, viewed 11 May 2018 http://www.econom.co.za/econres/kn.ecs2602/t.htmlCircular flow of goods and services, foreign sector flow and elements of circular flow http://www.slideshare.net/WaldoKrugell/chapter-3-111