Basic concept and population and labour force


The four factors of production are the resources (inputs) that are used to produce goods and services (outputs). These are:

  • 1 natural resources
  • 2 labour
  • 3 capital
  • 4 entrepreneurship.

In a market system, most of the factors of production are privately owned. Each factor receives its own reward or remuneration.

  • Natural resource
  • labour
  • Capital
  • entrepreneurship

1.1. Natural RESOUTCES

1.1.1 Characteristics of natural resources

A natural resource is something, such as a forest, mineral deposit, or fresh water that is found in nature and is necessary or useful to humans. Some of their characteristics are:

  • their supply is limited
  • not all natural resources are renewable and as such can be divided into non-renewable resources (such as minerals and fossil fuels) and renewable resources (such as plants and animals)
  • their distribution is not even, meaning that some countries may have lots of natural
  • resources while others may have very few
  • they are used in the production of goods and services
  • they have to be processed for further use.

Mineral resources are non renewable and the rate at which they are being exploited is a cause for concern. Renewable resources must be managed carefully.

1.1.2 The importance of natural resources

Natural resources are important because they:

  • help the economic development of the country
  • provides the basis for economic activities producing goods and services
  • provide the owners of these resources with income
  • create employment
  • form the basis for international trade.
1.1.3 Remuneration of natural resources

We use the term rent to describe the payment for all natural resources.

Remuneration of factors of production is influenced by the following factors:

  • an increase in the demand for a product or service
  • the quality of the natural resource
  • climate
  • technology
  • location.


Labour is work, either physical or mental. done by people for wages or reward.

1.2.1 Characteristics of labour
  • Labour varies in quality and quantity according to the workers.
  • Labour can be classified as skilled, semi-skilled and unskilled.
  • Labour cannot be stored.
  • it takes time to train skilled workers therefore supply cannot be increased at short notice.
  • Developing countries have a large supply of unskilled workers.
  • The geographical and occupational mobility of labour is low.
1.2.2 Importance of labour

lt is important to have a skilled work force because:

  • the work force is responsible for the production in a country
  • a shortage of skills restricts the growth of the economy
  • skilled workers tend to be more productive than unskilled workers.
  • the supply of labour is determined by factors such as the population growth rate, the labour force participation rate and migration
  • the quality of labour is determined by the skills, knowledge and health of workers. Skills can be improved by education and training. Skills development is a key strategy in South Africa.

Population growth rate. This increases if the birth rate exceeds the death rate and the effects of this increase will be felt when children reach working age.

Labour force participation rate. This comprises of those people who are economically active and seeking work.

Migration. Workers often move from country to country seeking work.

1.2.3 Remuneration of labour

Workers are rewarded with wages. Other benefits, often called payment in kind, such as company housing or cars, can also be included.

In a market system the following factors influence levels of wages:

  • the demand for specific goods and services
  • the demand for a specific type of labour.


Capital consists of all the manufactured goods and resources used in the production of consumer goods (goods used to make consumer goods) as well as the money used to buy capital goods (goods bought by consumers to satisfy their wants).

Capital comes from savings which has four sources:

  • 1 households
  • 2 businesses
  • 3 government
  • 4 foreign countries.
1.3.1 Characteristics of capital
  • It is essential for maintaining production and creating economic growth (an increase in the value of goods and services produced in the economy).
  • Capital goods depreciate over time and need to be replaced.
  • Capital is owned by businesses and the state.
  • Capital can be classified as social capital (i.e. schools and hospitals) and human capital (i.e. skills and experience).
1.3.2 Importance of capital
  • Capital is important for maintaining production and creating economic growth.
  • Capital widening happens when capital stock increases at the same rate as the labour force and the depreciation rate, thus capital per worker remains constant. The economy will expand in terms of aggregate output, but productivity per worker will remain constant.
  • Capital deepening happens when the capital per worker is increasing.
  • The creation of capital goods is called investment.
1.3.3 Remuneration of capital

Owners of capital earn interest which is the money earned for lending money to another individual or institution or the money that is paid for borrowing money.

The rate of return on an investment ( the amount of reward) is influenced by:

  • the risk involved in the investment
  • the liquidity of the investment
  • the length of time (term) of the investment
  • the demand for capital goods
  • the supply of funding
  • the monetary policy of a country.


Entrepreneurs are people or businesses who start new businesses or who create and market new goods and services.

1.4.1 Characteristics of entrepreneurs
  • They are innovative and identify opportunities.
  • They bring together the other three factors of production and use them to produce goods or services.
  • They take the initiative or risk to start or grow new businesses.
  • They tend to be enterprising people.
  • Thev can be individuals, groups of individuals, businesses or governments.
1.4.2 Importance of entrepreneurs

Entrepreneurs are essential because:

  • They bring land, capital and labour together to produce goods and services thereby creating economic growth
  • They create wealth by using savings and borrowed money to buy capital goods thereby paying interest to their lenders
  • They employ people thereby creating jobs
  • They promote healthy competition.
1.4.3 Remuneration of entrepreneurs

The reward for entrepreneurs is profit.



Important functions of local government are that it allows:

  • people to be consulted on things happening in their area
  • keeps people informed on plans and projects of local government


In the decades before South Africa achieved democracy in 1994, the apartheid government svstematically excluded African, Indian and coloured people from meaningful participation in the country's economy. This inevitably caused much poverty and suffering. To rectify this situation the government of South Africa developed a set of black economic empowerment policies (BEE) and procurement policies.

3.2 Empowerment

The Broad Based Black Economic Empowerment (BBBEE) Act was passed in 2003. South Africa's policy of black economic empowerment is not simply a moral initiative to redress the wrongs of the past. It is a pragmatic growth strategy that aims to realise the country's full economic potential while helping to bring the black majority into the economic mainstream.

The government aims to achieve the following objectives:

  • empower more black people to own and manage enterprises
  • achieve a substantial change in the racial composition of ownership and management structures and in the skilled occupations of existing and new enterprises
  • promote access to finance for black economic empowerment
  • empower rural and local communities by enabling their access to economic activities, land, infrastructure, ownership and skills
  • promote human resource development of black people through, for example. mentorships, learnerships and internships
  • increase the extent to which communities, workers, co-operatives and other collective enterprises own and manage existing and new enterprises, and increase their access to economic activities, infrastructure and skills
  • assist in the development of the operational and financial capacity of BEE enterprises. especially small, medium and micro enterprises (SMMEs) and black-owned enterprises
  • increase the extent to which black women own and manage existing and new enterprises, and facilitate their access to economic activities, infrastructure and skills training.

3.3 Procurement

Procurement policy means giving preference to the awarding of government tenders to businesses that comply with the BEE Act.

Circlar flow and quantitative element: economic goods and services


Economic goods and services are produced using the factors of production to satisfy the needs and wants of consumers. Economic goods are consumable items that are useful to people but scarce in relation to their demand, so that human effort is required to obtain them. In contrast, free goods (such as air) are in abundant supply and no conscious effort is needed to obtain them.

There are two different types of economic goods.

  • Intermediate goods and services are used in the production of other goods or services.
  • Final goods and services are goods sold to the end consumer and will not be sold again.

Some items can be used both as final products or intermediate products depending on how they are used. For example, sugar is consumed directly as well as in the manufacture of food products.

Final goods and services are bought on the product markets by four main participants in the economy:

  • households
  • businesses
  • governments
  • foreign sector.

We call household spending consumption ( C), spending by firms on capital goods investment spending (I), spending by government is called government expenditure (G) and foreign sector spending is called exports (X). Imported goods are called imports (Z).

1.1 Flows in the economy

Goods and services flow between the producers in the enterprises and the consumers in the households. Payments for goods and services and payments for factors of production flow between households, government and firms. These are known as the circular flow in the economy.



This is the total value of all money spent by the people in a country on the final goods and services in a certain period of time. Economists examine this to identify changes in the business cycle. For example, increase in spending on durable goods may indicate that an upturn in the cycle is about to occur.

2.1 Composition

Households spend their income on non-durable goods, semi-durable goods, durable goods and services.

  • Durable goods are tangible goods (goods that can be touched) that tend to last longer than a year, such as furniture and cars.
  • Semi-durable goods are tangible goods with a shorter life cycle, such as clothing and footwear.
  • Non-durable goods are goods such as food and petrol that can be used up or do not last long.
  • Services are activities that bring use and satisfaction of needs and wants such as restaurants, medical services and education.

2.2 Importance

    The higher consumer spending, the more wants and needs are being satisfied therefore the higher the economic satisfaction of households and the higher the economic activity of the country.


Consumption expenditure by government (G) is the money spent by all the different government departments on goods and services.

3.1 Composition

Consumption expenditure by government (G) falls into two categories:

  • remuneration of public sector employees (which is the largest component)
  • spending on goods and services.


Gross fixed capital formation (I) is also known as investment and occurs when capital stock, such as machinery, buildings and inventories increase. This should not be confused with financial investment. Financial investment occurs when people deposit money in financial institutions or buy shares or other financial instruments.

Capital goods are regarded as final goods because they are not processed further for resale

4.1 Composition

Fixed capital includes goods such infrastructure and factories that help produce goods.

Tangible assets are goods such as machinery that can be touched and seen.

Intangible assets cannot be touched or seen, such as exploring for gas or coal.

4.2 Importance

  • Capital formation is important because as the capital stock increases so does the economic ability to produce more goods and services, which leads to economic growth
  • Increased production leads to higher employment and an increase in GDP.


5.1 Gross Domestic Production / Product (GDP)

This is the total value of all the final goods and services produced within the country within a period of time (usually a year).

This can be calculated in three ways:

  • the value added method
  • the income method
  • the expenditure method.

5.2 Gross value added (GVA)

The gross value added method measures the total output of final goods and services produced in a year. This is the market value of a firm‘s output less the value of any inputs bought from other firms. This means the GDP is calculated according to the gross value added method.

Example: A farrner produces 2 ooo bags of wheat which are sold to a miller for R20 ooo. The value added by the farmer is therefore R20 ooo. The miller turns the wheat into flour and sells it to a bakery for R35 000. He has added R15 000 to the value of the product. The baker makes bread from the flour and sells it to shops for R40 ooo. He has added R5 000 to the value of the product. The shops sells the bread for R45 000. He has added R5 ooo to the value of the product.

  • Farmer = R20 ooo
  • Miller = R15 ooo
  • Baker = R 5 ooo
  • Shop = R 5 ooo
  • Totalvalue added = R45 ooo

5.3 Gross national expenditure (GN E)

This is the total value of all the money spent on goods and services in a period of time.

5.4 Gross domestic expenditure

GDE=C+G+l

C is the final consumption expenditure by households.

G is government consumption expenditure.

I is gross fixed capital formation and the change in inventories.

5.5 Expenditure on gross domestic product

Part of domestic expenditure includes goods imported from other countries, therefore these need to be added to consumption. Part of domestic product is sold overseas as exports and not bought locally, therefore this needs to be subtracted from domestic expenditure.

Expenditure of gross domestic product = C + I + G + (X - Z)

5.5.1 Imports (M) and exports (X) (Trade)

The transactions between countries, imports and exports, are what we call trade.

Exports allow for increased production which stimulates the economy, allow for greater employment and cause foreign exchange to enter the country as payment for the exports.

lmports bring essential goods and services into the country which cannot be produced locally. Cheaper imports can help poorer people.

5.6 Gross national income (GNI)/GDP (I)

This is the total value of the output or income earned by the inhabitants of a country as a result of the employment of their factors of production in a year.

GDP (I) = rent + interest + wages + profits GNI = GDP + income earned from the rest of the world by South Africans — income earned in South Africa by foreigners

Ecomomics system:mixed economy


Also known as the free market system. the forces of demand and supply are used by entrepreneurs to answer the three main questions in economics.

  • What should be produced?
  • How should production take place?
  • Who is the economy producing for?

1.1 Characteristics of the market economy

The desire to generate the highest profits is the biggest motivating factor.

  • There is private ownership of the factors of production.
  • lndividuals are free to set up businesses and to live and work where they want.
  • Businesses compete with one another.
  • Absence of a central plan. The government plays a small role providing only basic services.
  • Businesses tend to specialise in producing products that yield the highest profits.

1.2 Advantages of a market economy

  • Production is efficient.
  • Consumers have a wide choice of products to choose from.
  • There is freedom of action, ownership, movement and speech.
  • People are encouraged to develop and innovate new products.
  • There is high economic growth.

1.3 Disadvantages of a market economy

  • Self-interest can lead to a lack of concern for those less fortunate and a careless use of resources.
  • There is uneven distribution of income and wealth.
  • The market economy does not always operate efficiently leading to government intervention to protect the poor (market failure).
  • The market economy is subject to business cycles.


A centrally planned economy is controlled and run by the government who make all the decisions relating to what is going to be produced, how it is going to be done and which goods and services are allocated to consumers.

2.1 Characteristics

A centrally planned economy is characterised as follows:

  • no private ownership
  • central planning and control
  • state entrepreneurship
  • coercion is used to achieve goals.

2.2 Advantages of a centrally planned economy

  • There is even distribution of income.
  • There is no wastage caused by competition.
  • State employs everybody leading to full employment.
  • Government provide infrastructure and services.
  • Externalities are dealt with.
  • There is administration of prices.

2.3 Disadvantages of a centrally planned economy

  • Workforce has little motivation to work harder or be innovative.
  • Little motivation by workers and poor planning by government can lead to lower economic growth.
  • There is a shortage of consumer goods and services.
  • No competition leads to a lack of consumer choice.
  • Freedom of movement and speech is restricted.


This is a combination of market capitalism and central planning. Some countries like China and Sweden apply more socialism and less capitalism while others like the USA apply more capitalism and less socialism.

3.1 Characteristics of the mixed system in South Africa

  • The profit motive exists.
  • Competition exists.
  • The government does intervene in the running of the economy.
  • Public sector businesses provide some goods and services.
  • Natural resources and businesses are mostly privately owned.

3.2 Advantages of the mixed economic system

  • There is freedom of choice and private ownership of land and businesses.
  • Private ownership with state provided infrastructure promotes economic growth.
  • State improves social welfare, especially for the poor.
  • State helps pass laws to protect the environment.
  • Economic growth is encouraged.

3.3 Disadvantages of a mixed economic system

  • As long as the profit motive exists there will be self-interest and a lack of concern for the poor.
  • Poverty still exists.
  • State enterprises generally do not allow competition leading to monopolies.
  • State intervention can discourage employment.


Two of the main duties of the state in a mixed economy are to provide social services which improve the welfare of the poor, and economic services to encourage economic growth.

4.1 South Africa’s social services

These services include:

  • education
  • healthcare
  • welfare services and social grants
  • housing and community amenities such as libraries, halls and parks
  • public order and safety.

4.1.1 The South African government’s efficiency in delivering these social senlices

Although there have been large increases in spending, the delivery of these services remains a problem, resulting in many public demonstrations and criticism in the press.

Education and training. South Africa has a low level of literacy and the Grade 12 pass rate remains low. There is a shortage of skilled workers which slows down the economy's growth.

Healthcare. Hospitals and clinics struggle to cope with the number of people needing healthcare. Demand for healthcare is likely to increase as more people with HIV and TB need treatment.

4.2 South Africa's economic services

Different state departments try and promote economic development by introducing policies that improve production. Subsidies and grants are also used to assist. An example is the Department of Trade and Industry which helps local businesses find markets for their goods through the use of trade deals with other countries.

4.2.1 The South African government's efficiency in delivering economic sen/ices

The high price of some of our goods, such as clothing, compared to those of China and India has made it difficult for South Africa to export goods. In 1996, the Accelerated and Shared Growth Initiative for South Africa (ASGISA) was introduced to promote growth and employment. In 2010, the New Economic Growth Path was announced to help beat poverty and unemployment.

4.2.2 The objectives of GEAR

The objectives of GEAR include:

  • to achieve a high economic growth rate
  • to increase the size of the private sector
  • to increase production and employment
  • to reform fiscal policy
  • to encourage trade and investment.

4.2.3 The objectives of the RDP

The objectives of the RDP include:

  • fulfilment of the basic needs of the community (housing, water, electricity etc.)
  • development of human resources through education and training
  • growth of the economy and addressing of economic inequalities
  • democratisation of the state and communities
  • effective financial environment and management of the programme.

International competitiveness refers to the ability of South African businesses to match the price and quality of other nation’s outputs. There are three ways to achieve international competitiveness:

  • 1 businesses must produce goods of a high standard that are not more expensive than foreign goods
  • 2 the central bank must help maintain stable exchange rates
  • 3 exporting countries need rates of inflation that are similar to those of its trading partners.
Basic economic problem, business cycles and public sector: economic structure


1.1 Composition of the primary sector

The primary sector consists of industries based on the natural resources of a country.

These include:

  • agricultural land and animal husbandry
  • forests — timber industry
  • minerals — mining
  • water — hydro electric power
  • oil and coal reserves — power
  • sea life ~ fishing.

1.2 Importance of the primary sector

  • Provides power through raw materials such as coal.
  • Provides raw materials for secondary industries.
  • Produces food.
  • Creates employment and enhances skills.
  • Earns foreign exchange and increases trade.
  • Contributes to the GDP.
  • Generates state income through tax.
  • Helps stimulate economic growth.

As a country becomes more economically developed, the contribution that the primary sector makes to the overall GDP decreases.

1.3 Discrimination and exclusion in the primary sector

As a result of apartheid prior to 1994, black people:

  • lost their traditional land to white farmers
  • were unable to buy land outside of areas reserved for black people
  • were denied the assistance that was given to white farmers.

The Land Redistribution Programme (1995) is aimed at improving black pe0ple’s access to farming land although it has been slow to do so. Since 2006, many black empowerment deals have taken place giving black people ownership in mines.



2.1 Composition of the secondary sector

The secondary sector involves the manufacturing of goods from different raw resources. An example would be the construction of a car or a building. Some are used further in the production process to make other goods. An example is parts for a car. The secondary sector is divided into light and heavy industry.

2.2 Importance of the secondary sector

  • lt produces consumer goods.
  • It helps increase self-sufficiency.
  • Creates employment and provides skills training.
  • Contributes to the GDP.
  • Generates foreign exchange.
  • Promotes economic growth.

2.3 Discrimination and exclusion in the secondary sector

During apartheid, black people were mostly excluded from being trained which led to them being excluded from finding work in the secondary sector. Much emphasis has been placed on black economic empowerment (BEE) and the need to help more previously disadvantaged people acquire skills.



This is the biggest economic sector of all developed countries.

This is because in more advanced economies:

  • goods and services are sold in formal markets
  • the financial services sector is used by all
  • communication methods are more advanced
  • consumers use professional services.

3.1 Composition of the tertiary sector

The tertiary sector can be broken down into a number of different classes

  • finance
  • insurance
  • personal services
  • business services
  • real estate
  • wholesaling and retail
  • accommodation and catering
  • transport
  • communications
  • government services.

3.2 Importance of the tertiary sector

  • it contributes to GDP.
  • Creates employment and skills training.
  • Creates markets for goods and services.
  • Contributes to economic growth.

3.3 Discrimination and exclusion in the tertiary sector

During apartheid, there was discrimination against businesses owned by black people. As a result, they could not own property outside of restricted areas, raise capital, trade in white areas or form legal businesses.

Since 1994, laws have been passed to change this. Both the Black Economic Empowerment Act and the Employment Equity Act try to ensure that black people are employed at all levels of management.



4.1 Communication

The movement of information needs to be quick and efficient so that businesses can be competitive. Communication is important because:

  • businesses can operate efficiently
  • it contributes to GDP
  • employs people
  • keeps consumers informed about products and services
  • helps businesses make informed decisions.

In South Africa, we have many different communication systems.

  • Our postal service is largely controlled by the South African Post Office which is a state agency.

    • Most landlines are provided by Telkom whose biggest shareholder is the state.
    • Messages and images can be sent via fax.
    • Internet and email usage is now common place in South Africa.
    • We have substantial print media in South Africa.
    • The South African Broadcasting Corporation (SABC) is an independent public broadcaster with many radio and news stations.
    • The SABC’s television network offers several different channels and is complimented by several private subscription services.

    4.2 Transport

    Good transport infrastructure is important as it helps the right people receive the right goods at the correct time. A good transport network is important to the economy because:

    • it contributes to GDP
    • goods produced in one area can be sold all over the country
    • helps grow tourism
    • provides employment
    • goods can be exported
    • you can be part of the globalised world if you can move goods business people anywhere.

    Our rail network in South Africa is controlled by Spoornet.

    Our airports are owned and run by Airports Company South Africa and state owned South

    African Airways provides local and international flights.

    Our commercial harbours are controlled by Transnet National Ports Authority.

    Transnet Pipelines operate numerous pipelines supplying liquid gas.

    4.3 Energy

    A regular source of energy is important to any economy. In South Africa, our main sources are electricity, liquid fuels and gas. A reliable source of energy stimulates economic growth. Since 2008, South Africa has experienced an energy crisis. The reasons for this are

    • Eskom has not invested enough in new power sources to keep up with demand
    • renewable energy sources such as solar power have not been emphasised
    • state has not allowed private companies to compete
    • the price of electricity has been too low to generate the capital needed for expansion.

    4.4 Exclusion

    Before 1994, black people in South Africa were disadvantaged when it came to infrastructural services. There have been many great strides in rectifying this, however many black households still do not have access to electricity. The use of landline telephones is still low, however there has been a substantial increase in the use of cell phones. The use of internet and email facilities is still very low in previously disadvantaged areas.

  • Dynamics of markets: price elasticity


    Goods or services that satisfy consumers are said to possess utility. Utility is very closely linked to demand because consumers purchase goods and services that satisfy their needs There are three different concepts that we use in association with the term utility: total utility, marginal utility and diminishing marginal utility.

    1 Total utility is the total of all the satisfaction that is gained by consuming a certain quantity of goods or services.

    2 Marginal utility is the extra satisfaction gained by consuming or owning another identical item.

    3 Diminishing marginal utility is an important characteristic of utility. Consumers receive less satisfaction from a good or service as the quantity consumed increases.



    1.1 Patterns of consumption

    Consumers buying patterns are influenced by:

    .
      v the marginal utility of items for the consumer ~ the price of the goods or services.

    For example, if two items have the same price then the consumer will purchase the one that gives them the most marginal utility.

    A consumer will maximise utility bv allocating their income until the marginal utility of each product is the same.

    marginal utility of A / price A marginal utility of B / price B

    1.2 Consumer equilibrium

    Consumer equilibrium is achieved when total utility is at its greatest. This means that money spent on one product gives the same marginal utility as money spent on any other product. Because income is shared between the purchase of different products, utility cannot be increased as you have achieved maximum utilitv. Furthermore, changes in buying patterns will only happen if a factor such as price changes.



    The graph above shows that the law of demand is downward sloping because:

    • as the product’s price changes so does the maximum satisfaction a consumer can get
    • an increase in price causes a decrease in quantity demanded because the marginal utility is reduced
    • if the price drops the marginal utility will be increased and the quantity demanded increases.

    A big change in demand means that consumers will purchase a lot more if the price drops and a lot less if the price rises. A small change in demand means that consumers will Durchase a little more if the price drops and only a little less if the price rises.

    2.1 Measuring price elasticity of demand

    Price elasticity is measured in percentages and not measured in absolute terms such as kilograms or rands.

    The formula for calculating price elasticity of demand is:

    ED = change in the quantity demanded / % change in price

    Example:

    When an increase of 10% in the price of a burger — from R20 to R22 — causes a decline of 20°/0 in the quantity demanded — from 1000 burgers to 800 burgers — the price elasticity is

























































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