ECONOMICS 1601
UNIT ONE
Macroeconomics is concerned with the economic issues that involve the overall economic
performance of the economy, rather than that of particular individuals, markets or firms.
In this chapter you are introduced to the major participants in the economy
➢ Households
➢ Firms
➢ Government
➢ And the foreign sector
You will also be introduced to the major markets and flows and shown how these elements
are interrelated.
The major markets are:
➢ Markets for goods and services
➢ The major markets
➢ And financial markets
Flows
A flow is measured over a period of time. An example is investment which may be measured
as the amount of investment spending per year.
3 major flows
➢ Total production
➢ Total income
➢ Total spending
Stocks
Stocks or stock variables are measured at a particular point in time. A stock variable has no
time dimension and can only be measured at a specific moment. e.g.
➢ wealth
➢ capital
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,ECONOMICS 1601
➢ population
➢ unemployment
Stocks and flows are related. Stocks can only change as a result of flows.
1.1 Production, income and spending
➢ Production is not pursued for its own sake
➢ The ultimate aim is to consume the products
➢ Production creates income and the income is spent on purchasing goods and services
➢ The two sets of markets are goods market and factor markets
1.2 The interdependence of households and firms
Households can be defined as people who make joint economic decisions or subject to others
who make such decisions for them.
In a market it is the consumers who largely determine what should be produced.
Firms: defined as the unit that employees these factors of production to produce goods and
services.
*Firms are engaged in production whilst consumers in consumption
In economic analysis it is assumed that firm act rationally and want to maximise their profits.
Profit= Revenue-Costs
Circular flow of income and spending
Circular flow of income and spending illustrates the monetary flows between households and
firms. Its direction is the opposite of the flow of goods and services.
2
, ECONOMICS 1601
Firms purchase factors of production in the factor market thus rent, salaries, wages and profit
of households. The households then spend their income by purchasing goods and services in
the goods market.
*Assumption; there is only one market for goods and services and one factor market of
production in the economy.
Fig 1. The Circular flow of Income and Spending
1.3 Introducing the government
Government is a broad term that includes all aspects of local, regional and national
government
In economics we refer to the public sector, which includes everything that is owned by the
government as representative of the people.
3
UNIT ONE
Macroeconomics is concerned with the economic issues that involve the overall economic
performance of the economy, rather than that of particular individuals, markets or firms.
In this chapter you are introduced to the major participants in the economy
➢ Households
➢ Firms
➢ Government
➢ And the foreign sector
You will also be introduced to the major markets and flows and shown how these elements
are interrelated.
The major markets are:
➢ Markets for goods and services
➢ The major markets
➢ And financial markets
Flows
A flow is measured over a period of time. An example is investment which may be measured
as the amount of investment spending per year.
3 major flows
➢ Total production
➢ Total income
➢ Total spending
Stocks
Stocks or stock variables are measured at a particular point in time. A stock variable has no
time dimension and can only be measured at a specific moment. e.g.
➢ wealth
➢ capital
1
,ECONOMICS 1601
➢ population
➢ unemployment
Stocks and flows are related. Stocks can only change as a result of flows.
1.1 Production, income and spending
➢ Production is not pursued for its own sake
➢ The ultimate aim is to consume the products
➢ Production creates income and the income is spent on purchasing goods and services
➢ The two sets of markets are goods market and factor markets
1.2 The interdependence of households and firms
Households can be defined as people who make joint economic decisions or subject to others
who make such decisions for them.
In a market it is the consumers who largely determine what should be produced.
Firms: defined as the unit that employees these factors of production to produce goods and
services.
*Firms are engaged in production whilst consumers in consumption
In economic analysis it is assumed that firm act rationally and want to maximise their profits.
Profit= Revenue-Costs
Circular flow of income and spending
Circular flow of income and spending illustrates the monetary flows between households and
firms. Its direction is the opposite of the flow of goods and services.
2
, ECONOMICS 1601
Firms purchase factors of production in the factor market thus rent, salaries, wages and profit
of households. The households then spend their income by purchasing goods and services in
the goods market.
*Assumption; there is only one market for goods and services and one factor market of
production in the economy.
Fig 1. The Circular flow of Income and Spending
1.3 Introducing the government
Government is a broad term that includes all aspects of local, regional and national
government
In economics we refer to the public sector, which includes everything that is owned by the
government as representative of the people.
3
