Economic Systems and Circular Flow

Economic Systems

• Economic systems address scarcity by answering four questions:
  1. Which goods and services to produce?
  2. How many goods and services to produce?
  3. How to produce goods and services?
  4. For whom to produce goods and services?
• Global Economy (Globalization):
  • Sharing resources globally.
  • Example: Raw materials from South Africa are processed in England and sold in Brazil.

1. Planned Economy

1.1. Definition

• Government decides what, how, and for whom to produce.
• Used by countries with communism and socialism.

1.2. Origin

• Self-sufficient stage: people produced for their own needs, no trade.
• Collective ownership of community resources.
• Heads of tribes/states protected resources and planned resource acquisition, processing, and distribution.
• Karl Marx: 'The father of communism', supported this system.
• Centrally planned economy: common before and during the 1930s (e.g., China, Japan).
• Collapsed after World War II: countries decided to trade due to depression.
• Countries using this system were later considered underdeveloped.

1.3. Characteristics

1. Government control:
   • All economic activities (production, distribution, consumption) are controlled by the government.
   • Government decides what to produce, how to distribute, and who will consume.
2. Price control:
   • Government sets prices for all goods and services.
   • Prices change only as the government wishes.
3. Wage control:
   • Government decides worker payments.
   • No wage negotiation allowed.
4. Nationalisation:
   • All businesses and factors of production are owned, controlled, and managed by the government.
5. No competition:
   • Government controls demand and supply.
6. No profit motive:
   • Government-owned businesses offer public goods and services without aiming for profits.
7. No freedom of choice:
   • Government controls consumption by controlling production.

1.4. Contribution Towards Global Economy

• Does not support globalization because prices are determined by the government, not by demand and supply.

2. Market Economy

2.1. Definition

• Economic problems are solved by demand and supply interaction (market forces).
• Also known as capitalism.

2.2. Origin

• Formulated by economic philosophers who opposed government intervention.
• Argued that government interference hinders economic improvement.
• Adam Smith (Scottish philosopher): described how the economy would work without government interference in "Wealth of Nations".
• "The invisible hand determines an equilibrium price in the market".

2.3. Characteristics

1. Private ownership:
   • Factors of production belong to private individuals.
   • Businesses and government buy production factors from households.
2. Freedom of choice:
   • People choose where to work and what to consume.
   • Variety of jobs and goods/services available.
3. Profit motive:
   • Producers produce for profits; consumers consume for maximum satisfaction.
4. Market forces:
   • Prices increase when demand exceeds supply; prices decrease when supply exceeds demand; market price forms where they are equal.
5. Free competition:
   • Buyers compete for low prices; sellers compete for high prices.
6. No government intervention:
   • Production and consumption are left to the people.

2.4. Contribution Towards Global Economy

• Strongly supports globalization (international trade).
• Advocates for trading goods and services without government restrictions.
• Goods and services are traded globally.

3. 'Mixed' Economy

3.1. Definition

• Both private (individuals) and public (government) sectors participate in production, distribution, and consumption.
• Government produces goods that the private sector cannot or will not.

3.2. Origin

• Introduced in Europe and USSR after the collapse of communism.
• Countries like China privatized some industries.

3.3. Characteristics

1. Private initiative with some government control:
   • People can run businesses but must follow government laws.
2. Mixed ownership:
   • Factors of production are owned by private businesses and the government.
   • Laborers work for both private and government entities.
3. Dual pricing:
   • Prices from state-owned businesses are set by the government; private businesses use demand and supply.
4. Profit vs. public service:
   • Private sector aims for profits; state-owned businesses may not.
5. Government intervention:
   • Runs businesses needing large capital.
   • Runs businesses with low profits.
   • Runs businesses catering to basic human rights.
   • Formulates laws for production, distribution, and consumption.
   • Charges taxes for public services and subsidies.

3.4. Contribution Towards Global Economy

• Supports globalization because governments, private businesses, and individuals can trade internationally.

Circular Flow

• Flow of resources, money, goods, and services between economic sectors.

1. Introduction

• Nature provides resources for producing goods and services to satisfy needs.
• One sector produces; another consumes.
• Markets determine factor payments and prices.
• 'Closed' economy: production and consumption within the country; no foreign trade.

1.1. Participants in a 'Closed' Economy

Household Sector

• People living at home, alone, in families, groups, hostels, etc.
• Owners of factors of production.
• Supply businesses with factors of production and demand goods and services from them.
• Consume goods and services for satisfaction.
• Also called the consumption sector.

Business Sector

• Industries that acquire and process resources, and distribute goods and services.
• Includes primary, secondary, and tertiary industries.
• Buy factors of production from households.
• Supply households and the government with finished goods and services.
• Also called the production sector.
  Note: Factor market is where factors of production are bought and sold.

Government Sector

• Local, provincial, and national government.
• Intervenes in 'mixed' economies.
• Buys goods and services from businesses, supplies households with public goods and services, charges taxation.
• Main role: maintain order and stability.
• Also called the public sector.

2. Flow of Factors of Production

• Household sector owns natural resources/raw materials, labour, capital, and entrepreneurship.
• Households supply factors to the factor market; businesses demand them.
• Aim: produce goods and services.
• Factors flow from households to businesses.

3. Flow of Goods and Services

• Business sector uses resources to produce durable, semi-durable, and non-durable goods and services.
• Produced in large quantities to meet consumer needs.
• Business sector supplies goods and services to the consumer market.
• Goods and services flow from businesses to households.
  Note: Consumer market is where goods and services are bought and sold.
  Note: The flows of factors of production and goods and services are called real flows.

4. Flow of Money

• Money is used to buy and to pay.
• Businesses pay for factors of production:
  • Rent for natural resources.
  • Wages and salaries for labour.
  • Interest for capital.
  • Profit for entrepreneur.
  • Corporate income tax to the government.
• Households use money to buy goods and services and pay income tax to the government.
• Government uses money to pay for public goods and services (education, health, social services, security) and offers financial assistance to businesses and subsidizes basic foodstuffs.
  Note: The flows of money are called money flows.

Formulas and Calculations

Selling Price Calculation

• CP + PM = SP
• CP: Cost Price
• PM: Profit Mark-up
• SP: Selling Price
• Cost price is always 100%.

Calculating Selling Price when Cost and Mark-up percentages are known.

• If Cost Price = 3200 and Mark up is 25%, then the selling price is given by :

• SP = 3200 + (0.25 * 3200) = 4000

Calculating the cost of sales when Selling Price and Mark-up percentages are known.

• If Selling Price = 5000 and Mark up is 25%, then the cost of sales is given by :

• CP = (100/ 125) * 5000 = 4000

Calculating the Selling Price when profit margin and cost price are known

• If the Cost price is 2000 and the Profit mark up is 50%, the selling price is computed as:

• Selling Price = (150/100) * 2000 = 3000

Profit mark-up / Formula to calculate profit

• Profit = Selling \ Price - Cost\ Price

Profit mark-UP% Formula

• Profit \% = (Profit / Cost \ of\ Sale) * 100\%
  A business buys goods for R9000 and sells them for R13 500. What will the profit mark-up and profit. -up % Be?

• Profit = R13500 - R9000 = R4 500

• Profit \% = (R4500/R9000) * 100\% = 50\%

Transactions examples

Thas Kofu company purchased trading stock for RS 500 from Makro wholesalars and paid by EFTOI on the 20Th

Assets CA EQUITY CE] + LIABILITIES C
effects Reason
-5500 Bank
+5500 Trading
stock
Effects of Transactions on the CP

DOC DAY Details Fol Bank ac Sundry accounts
EFT 20 Matro RS500 RS500 ccants fol Deals
wholes

ikasi Kofu company sold goods for cash for R4500, Cost price was R3000 on the $31 Jan 2021
Selling price - Cost price R4 580
Assels [A] effect Reasons
Bank +4 500
1-3000 Frading stock price R 3000
Equity [C] effect Reasons
R1500 Profit
L
effect Reasons

CRJ

DOC DAY DETAILS FOL ANALYSIS OF CAN
No RICCIPITY SCOSS OF AS
GUES SALES ABOUT
CRR 31 SALES R4500 4800R4500 R 3000m
Hros

IKAST KOFU COMPANY SOLD GOODS OF R4050

ACCORDING TO CASH REGISTER ROLL ON THE O

CRR

KAST KOFU COMPANY SOLLS GOODS WITH A MARK-UP OF 50% on COST PRICE
Pm = SP
CP + CP + PM
1) 100%
50%
R4050 x 100/150
R2100
SP nad 150%bood bloa

Demand and Supply

Change in Quantity Demanded

Price of product finacose in price \Vlowers demand
Cless people want \I can afford it) and a
Amount of money customers have income (salary)
affected by things like inflation \Cless money to
Spend)
Advertising Influence of company to buy product.
Weather /season likes change during certain
periods (more food bought over December
Competition Apple vs Samsung \Cnew / different
Complementary products, same some but different Clong
-life milk us freash milk)
Fashion trend As seen by famous people

Change in Quantity Supply

Price of the product a new ferron because they
cost more \Cless people can afford) wont to make/ produce more to make more money.
Cost of production. I cost = T more supplied to
make money.
Method of production. Advanced technology to
make the process quicker \Cor Specialised materials)
Number of producers
It is important to note that a change in quantity clemandled will have an effect on the demand curve
This will in turn affect the equilibrium point. So we need to take the following into consideration.
When demand increases the demand curve shifts to the right.
·When demand decreases the demand curve shifts to the (left)
Increase and decrease in Supply it would also When there are changes in supply,.
therefore imply that there would be a change in the Supply curve and market equilibrium. Therefore we need to note the following ass of boo
• When supply increases the supply curve shifts to the right de-se of plaque utishoup n
• When supply decreases the supply curve shifts to the left

Law of supply, supply schedule and graphical illustration of the supply curve

Supply is quantifying the units producers are willing to provide at specific prices. Businesses need to determine the quantity of a product they are willing to supply at different prices. They will need to assess the capabilities of the business and the production department on what they are able to produce, how much it would cost, and how much they expect consumers to pay.
Economists also came up with a rule for this, known as the law of supply.

Law of supply

When the price of a product increases, the supply of that product will increase. When the price of that product decreases, the supply of that product will decrease, that is suppliers will supply more of a product if it can be sold at a higher price.

Supply schedule

As we saw with demand, it is important for us to show information in tables and graphs as this helps us to see things more clearly. We therefore have a supply schedule which shows, in a table, the amount of goods that can be supplied at specific prices. We can then take this information and interpret it graphically in a supply curve.

Supply curve

The supply curve is a graphical illustration of the information found in the supply schedule. The supply curve always has a positive gradient.

Law of demand, demand schedule and graphical illustration of the demand curve

Demand is quantifying the wants and needs of consumers. It is important for a business to assess what consumers need and want, but also what consumers are willing to pay. They therefore need to analyse what quantities consumers will demand at specific prices. In order to simplify matters, economists came up with a law of demand.

Law of demand

When the price of a product increases, the demand for that product will decrease. When the price of a product decreases, the demand for that product will increase.

Demand schedule

In order to show what the wants and needs of consumers are at specific prices, a demand schedule is drawn up. A demand schedule is a table showing the quantity demanded of a product at different prices. This is however not always the best way to represent the information. The demand curve was therefore created.

Demand Curve

The demand curve is a graphical illustration of the information found in the demand schedule. The demand curve always has a negative gradient.

Illustrate the circular flow

The circular flow of money, good and services, and factors of production can be shown in an illustration to better understand it. The drawing below shows how the participants of a closed economy interact with each other.

Businesses buy goods and services from government.

This is done Businesses pay taxes to government for the provision of services and infrastructure in the country.

Government buys the goods and services produced by businesses and pays them the agreed price.

Government also collects taxes from businesses which they use to make improvements to the country and supply businesses with services and other infrastructure needed by them and the country.

Households own factors of production and sell them to governmen

For example, households supply government with labour to work for the government and municipalities in the country, for which government pays them wages.
*
Households pay tax to government for the services and infrastructure they supply.*

Government provides households with goods and services such as infrastructure , education, healthcare, and so on.

Government supplies households with employment and capital in return for factors of production.

Households sell the factors of production they own to businesses who can then convert them into goods and services.

Households buy goods and services from businesses to satisfy their wants and needs and allow businesses to make a profit.
Households supply businesses with labour, i.e. people in the households are the workers in a business.

Businesses sell goods and services to households.

Businesses employ people from the households and pay them salaries and wages.

Households and businesses obtain goods and services from government and in return government charges taxes in the form of income tax, company tax and VAT.

*
*
Flow of money in a closed economy Money flows between the participants in the economy and circulates continuously throughout the local and global economy.*
Flow of factors of production in a closed economy Households, who are essentially the owners of the factors of production, sell their factors of production to businesses and government in order to earn a living, and purchase goods and services so that they can satisfy the wants and needs.

Capital

A business person uses their knowledge, skills and effort to start a business opportunity, in order to make a profit, this is seen as entrepreneurship.

Labour

Labour is the human effort/input needed, whether physical, intellectual, or creative, to produce goods and services.

Land

Land is the physical space and items used in the production of goods and services.

New words innovation: introduce or think about a new idea or thing Natural resources consists of land, air, water, minerals, plants, animals and so on.

## Flow of goods and services, money and factors of production in the circular flow of a closed economy

In an economy, goods and services flow between its participants in return for a fee.

Government plays an important role in the economy as it can be seen as both a producer and consumer. the circular flow of an econom

A closed economy does not allow businesses to import or export goods to and from other countries. New word factors of production: labour, capital, land, and entrepreneurship used by society to produce goods and services We will only focus on a closed economy in this unit. There are three participants in a closed economy, namely households, businesses and government.

The participants in the circular flow of a closed economy ( role players and it is important to identify and understand these economies. There are two main types of economies: an open economy and a closed economy.

Cash float.

Nominal ac
Preparing a Trial Balance of a trading business
A Trial Balance is a list of accounts which appears in the General Ledger, showing each account's balance. It is also used to test the double entry principle and the accuracy of entries. The Trial Balance is prepared at the end of each month: it is the last part of the accounting cycle for the month.
One method to see if the double entry principle has been applied, is to prepare a Trial Balance.

The Trial Balance tests that each transaction has been posted to two separate accounts, once on the debit side and once on the credit side. This means it tests whether all the totals on the debit side of the General Ledger are the same as all the totals on the credit side. It is easy to make mistakes when preparing the Trial Balance.
Therefore it is important to check whether you have added the columns correctly; if the entries in the journals are entered correctly; if the posting to the General Ledger is entered correctly; and if all calculations are done correctly.

Stationery
Trading license
Advertising
Telephone
Salaries
Note:
The type of accoun
business.

Posting/recording of transactions from the CRJ and CPJ of the trading business to the General Ledger

Posting is transferring totals from the Cash Receipts Journal and Cash Payments Journal into the General Ledger account.

The analysis of receipts column does not have a total as all the money should have been transferred to the bank account at the bank.

Sections within the General Ledger

The General Ledger consists of two sections: the Balance Sheet accounts section and the Nominal accounts section. The Balance Sheet section is limited to accounts that are assets or liabilities.

The Nominal section has all the income and expense accounts.
Separate accounts are opened for each income or expense.

General Ledger is a book in which a business keeps a summary of all the transactions.

The double entry principle means that each transaction is recorded twice in the General Ledger: once on the debit side of an account and once on the credit side of a different account.

Advantages of a market economy;

Competition between different businesses leads to greater efficiency.

Disadvantages of a market economy; Capital investments are made for the greatest profit and not because of what most people really need Growing economic and social inequality Increases in corruption and crimes.

Characteristics of Each economic system; a government subsides the cost of living

All economic systems have advantages and disadvantages.

Advantages of a planned economy; Government is able to create a stable economy

Disadvantages of a planned economy;There is no profit motive central pllaning cannot predict consumer behaviour.
Government also monitors and controls activities .monopolies, and uses laws to control business combinations that could become .

The three major economic systems there are four basic economic questions that help us decide what kind of economic system a country has:

1 What will be produced
with our resources? 2 How much will be produced? 3 How will these goods be produced? 4 For whom will these goods be produced

A planned economy is an economic system where the government or another authority makes economic decisions

During the 20th century, many Communist countries believed that a centrally planned economy would do a better job of meeting people's needs, than an unplanned economy.

A market economy

In a market economy (sometimes called a free market economy), the principles of supply and demand determine
what is produced

Cash sales according to cash register roll, R18 600. Calculate cost of sales: 8 SP x 100/150 = CP = 18 600 *

100/150 = R12 400
Effect of cash transactions on the accounting equation It is very important to remember how profit or loss is calculated.

Total: 11 marks Cash Receipts Journal (CRJ) of a trading business The CRJ of a trading business has the following headings: In a trading business, the business buys goods at cost price.14

Trading Businesses; In a trading business, the transactions are entered into the cash journals the same way as for a service business. However, there are two main differences:1. Income is received from sales (not current or fee income). There will be a sales column in the CRJ.*

Normally in a retail business, the profit added to the purchase price (cost price) is set at a percentage.

The supply schedule below shows the effect of an increase in the price of t-shirts, on the demand for the t-shirts in a month Markel equilibrium is the point at which demand and supply are the same*.

The cost of production If the product is cheap to produce

The number of producers.* If there are a large number of businesses
producing a particular product or service, there will be a large supply. What happens at the end? Can it be reused, recycled or partly recovered?

The primary sector takes raw materials from the earth. , the secondary sector manufacturing and the tertiary are the three main sectors that exist

A business buys goods for R9000 and sells them for R13 500. What will the profit mark-up and profit.
*Profit = Selling
*Price - Cost Price; Profit = R13500 - R9000 = R4 500* Profit / cost of sole x 100%
Profit % = R4600/29000 x 100% Profit % = 50%
Profit = R4500