Technology Sometimes defined as a 5 th factor

Technology • Sometimes defined as a 5 th factor of production • Invention is the discovery of new knowledge while incorporation of this knowledge is called innovation • The application of inventions also requires entrepreneurs to identify the opportunities and exploit them • It can be argued that technology forms part of entrepreneurship

Money is NOT a factor of production! • Money is important, but it is not a factor of production • Goods and services cannot be produced with money. Money can buy the factors of production that is needed to produce goods and services, but the money itself cannot do anything.

Choice of technique? • When a production process is dominated by machines, it is called capital-intensive • When a production process is dominated by labour, it is called labour-intensive • The appropriate choice will depend on availability and quality of various production techniques as well as their costs + +

3. 3 Remuneration of the factors of production Read pg. 45 – 46 in your textbook. There are 4 types of income, each associated with a different factor of production Natural Resources Rent Labour Salaries and wages Capital Interest Entrepreneurship Profit

3. 4 Sources of spending Read pg. 46 – 47 in your textbook. Households • Household = All the people who live together and make joint economic decisions or who are subjected to others who make such decisions for them • Households are the basic decision making unit in an economy • Members of households consume goods and services to satisfy their wants, they are consumers • Consumption (C) = the act of consuming goods and services • Households/consumers largely determine what should be produced in a market economy • Households sell their factors of production to firms who combine them to create goods and services • They receive income from the firms in the form of wages, interest, profit etc.

3. 4 Continue Firms • Firm = unit that employs factors of production to produce goods and services that are sold in the goods market • Firms are engaged primarily in production • Firms always aim to achieve a maximum profit. • Profit is the difference between revenue and cost • Capital is one of the factors of production purchased by firms • The act of purchasing capital goods is called investment or capital formation (I)

Natural resources, labour, capital and entrepreneurship Putting things together Read pg. 49 in your textbook. Production Households, firms, government & the foreign sector Spending Rent, wages and salaries, interest and profit Income

Circular flow of goods and services Goods and services Firm Goods market Goods and services In turn, household own Firms then buy these factors of production, such as Firms offerbecause goods they of production Then households labour, capital, etc. buy And they and services for sale need the factors of these goods and offer to sell these factors of production on theservices goods to produce marketgoods production on the factor and services market s Factors of Production Factor market Read pg. 50 in your textbook. Hous ehold Factors of Production s

Circular flow of goods and services Goods market Income Read pg. 50 in your textbook. Goods and services Spending Hous Firm So, households spend on goods Then, spend on income thethe factor And thatfirms becomes the ofan the is how households get market to getincome. factors firms. of production s Income Spending Factors of Production ehold Factor market Factors of Production s

Markets Goods market • Market for goods and services • In macroeconomics we treat the goods market as if there were only one market for all goods in the economy (aggregation) • In microeconomics, markets are analysed individually • • Study Box 3 -4 in your textbook. Factor market Market for various factors of production Factor markets include the labour markets and markets for capital goods In macroeconomics we aggregate the factor markets In microeconomics markets are analysed individually