Chapter 3

THE INTERDEPENDENCE
BETWEEN THE MAJOR
SECTORS, MARKETS AND
FLOWS IN THE MIXED
ECONOMY
 Major Sectors
• Major Sectors in a mixed economy:
– Households: sellers in the factor markets,
buyers in the goods market; determine what
should be produced
– Firms: buyers in the factor markets; sellers in
the goods market; determine how to produce
– Government: buyer in the factor & goods
markets; taxes; transfer payments
– Foreign sector: open economy; BP; X; Z

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 Box 3-3
The Public Sector in South Africa

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 Major Markets
• A Market is any communication between
potential buyers and potential sellers of a
good or service.
• Goods markets
• Factor markets:
– Labour markets
– Capital goods markets

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 Major Flows
• A flow is the rate of change of a stock. A
stock is measured at a point in time,
whereas a flow is measured over a period.
• Major flows:
– PRODUCTION uses factors of production
– Factors of production earn INCOME
– INCOME is SPEND on goods & services

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Figure 3-1 The three major flows in the economy

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Figure 3-2 The circular flow of goods and services

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 Figure 3-3 The circular flow of income and
spending

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Interdependence between Households,
Firms, Government & Foreign sector
In order to understand the interdependence,
one needs to distinguish between:
- Monetary flow & flow of goods & services
- Addition or Injection & leakage or
withdrawal

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Figure 3-4 The government in the circular flow of
production, income and spending

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Figure 3-5 The foreign sector in the circular flow of
income and spending

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Figure 3-6 Financial institutions in the circular flow
of income and spending

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Figure 3-7 The major elements of the circular flow
of income and spending

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