hello and welcome in this video we will be looking at chapter two which discusses the market system and the circular flow so we're going to begin with the circular flow now the circular flow is a diagram which shows the flow of goods and services between the different participants in your economy so we're going to discuss different participants in the economy we're gonna start off with households now households is an economic unit that consists of one or more persons that provides the economy with resources and it uses income received to purchase goods and services that satisfies economic ones okay now a household may consist of one person a family or a group of people that love together and depend on a common income so in order to be considered a household you have to love together okay and you have to depend on a common income okay now households have three different functions the first one is a primary function which is to provide or supply primary production factors to private businesses and government the second function is the intermediate function which is the production of goods and services for their own use and the third function is the final function which is to use income received from the supply of production factors to purchase final goods and services then we have business enterprises now business enterprise is an economic decision taker whose purpose is to earn an income or make a profit by supplying goods and services for which they exist a demand in the economy and the general function is to produce goods and services to make a profit then we look at government now governments are there to create the environments in which the economy can operate freely and fairly so you have three different levels of government the central level provincial and the local level all right and each of them make up your public sector now government has three different functions the first one is that they provide a legal framework and services for the market economy to operate efficiently and effectively so they have laws and regulations in place to ensure that the economies operate efficiently and effectively they also ensure fair competition so they have different apps in place such as a consumer protection act then they take care of market failures now what is a market failure so a market failure is the inability of the market to allocate resources that best satisfies the ones of consumers in particular the over or under put an allocation of resources to a specific good or service due to externalities or informational problems because markets do not provide desired public good so the main thing is externalities so an externality is a spell over effect okay so what does this mean this is when people who are not part of your production process they are affected even negatively or positively by the production process so you get positive externalities and you get negative externalities positive externalities are things such as your public goods and services so things like healthcare and education and negative externalities are things like pollution okay then you have a foreign sector now you have two types of economies an open economy and a closed economy right so an open economy includes or has a foreign sector now a foreign sector consists of a large number of individual states each with its own and consumers and business enterprises so basically yeah you have international trade taking place now we're looking at the economic system in your economic system you have three different types of markets you have your resource market product market in your financial market right so your resource market this is your factor market right in this market households own all economic resources either directly as workers or entrepreneurs or indirectly through the ownership of business corporations okay so your resource market is your factor market this is where your factors of production are soul soul and labor capital and entrepreneurship and in return they get salaries and wages interest profit and rent okay then your product market this is where businesses combine resources to produce goods and services which are then sold and bought okay and then your financial market this is the flow of surplus funds in the economy now savings becomes investments so when people save the money in banks the banks then use the that money to give out loans to people who want to start up businesses and that's how it becomes an investment in South Africa these funds are managed or controlled through the commercial financial entities so for example FNP is controlled by the Reserve Bank okay then we have the economic flow of resources goods and services and money right so your basic circular flow consists of your product market your factor market household and firms okay um now you have two types of flows you have real flows and you have money flows right real flows these are your actual goods and services that are flowing between your different participants right money flows are your remuneration so households provide their factors of production to the factor market firms purchase the factors of production from the factor market firms produce goods and services and sell them to the product market and consumers purchase the products from the product market okay so these ones income factor payment sales and consumption so income factor payment that's your money flows and then consumption of your goods and services is your real flows okay factors of production the flow of the factors of production is also real flows okay then you have your different economic systems now an economic system is a particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem so an economic system tells you what goods to produce how these goods are going to be produced who gets the goods and services how to promote technological progress and how to accommodate change now economic systems differ by who owns the factors of production and the method that is used to motivate coordinate and direct economic activity so basically what we're saying is that an economic system is basically like the government how the country is controlled okay so you're three different types of economic systems is your command economic system market economic system and mixed economic system so your command economic system is a method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities so in your command economic system government controls everything here are we looking at socialism or communism economic decision-making occurs through a central economic plan government owns most of the farms gov owns most of the resources right so in these types of economies government will say this business is going to produce good X this person is going to be a doctor so they tell you what you are going to be doing right so these are like China North Korea and Cuba okay then we look at the market economic system now the market economic system is an economy in which the private decisions of consumers resource suppliers and firms determine how resources are allocated so here we're looking at private ownership of resources and businesses private businesses and individuals make economic decisions so here we're looking at pure capitalism which is also known as laces fair and here we have no government intervention or little government intervention okay we have a lot of own self-interest in this type of market and we have private ownership of resources okay then in your mixed economic system this is an economic system which basically combines the markets and command economic system right so it is an economic system which is simultaneously influenced by the private and the public sector your government doesn't own the resources households and private businesses own the resources but government controls the resources okay so government provides rules for economic activity government provides public goods and services and the market is most dominant is the most dominant economic force okay so government provides certain goods in services that would have otherwise been under provided or not provided at all so if you look at South Africa for example government provides a lot of education and health care right because if they didn't a lot of people would not be able to afford education or health care right so the purpose of government to contribute to the economy in such a way that the socially desired results are reached okay okay now we look at the different practice questions here so the first ones there's named three characteristics of a market system so we have private ownership of resources own self-interest and the use of markets and prices to coordinate and direct economic activity then it says identify the four role players in the economy so remember we discussed the four participants in the economy this is households government business enterprises and the foreign sector okay then it says diagrammatically illustrate the flows between the different participants in a closed economy and an open economy and you need to label your flows okay so for this one here we're gonna start off with household I'm just gonna put in the first letters right household then you have firms you have your product market and you have your factor market right now it doesn't say that we should include government or the financial sector but we will discuss how the circular flow would look if you had those participants in it so remember households open the factors of production so they sell their factors of production to the factor market right so you're going to have a flow of factors of production right then firm splotches the factors of production to produce goods and services which they then sell to the product market and households purchase these goods and services from the product market now those are your fuel flows goods and services and factors of production are usual flows if we have to look at money flows this would be the remuneration that households would receive okay so that's the income which the firm's would pay right so firms pay for the factors of production which then go to your household then farms make sales when they sell goods and services and household purchase goods and services from the factors from the factor market rather okay now if we had government in here right now households and businesses pay tax to government and in return government provides them with public goods and services both firms and households they do purchase products from the product market remember government is both a producer and consumer and they purchase factors of production from your factor market if you had the financial sector in the middle here you would just have savings going from households to the financial sector also from farms savings to the financial sector okay and that is it for this video I hope it helped you and thank you