2017 ECONOMICS GRADE 12 REVISION MANUAL FOR EXAM

Economics GRADE 12 EXAMINATION REVISION MANUAL 2017

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https://ultradeep.co.za 2 THIS MANUAL CONSISTS OF NOTES THAT CAN BE USED TO PREPARE FOR EXAMINATION. IN ECONOMICS ALL CONTENT IS EXAMINABLE, SO IN PREPARING FOR EXAMINATION THE LEARNER SHOULD GO BEYOND THIS MANUAL AND COVER THE FOLLOWING TOPICS IN DETAILS. PAPER 1 PAPER 2 CIRCULAR FLOW PERFECT MARKET BUSINESS CYCLE IMPERFECT MARKET PUBLIC SECTOR MARKET FAILURE FOREIGN EXCHANGE MARKET INFLATION PROTECTIONISM AND FREE TRADE TOURISM GROWTH POLICIES ENVIRONMENTAL SUSTAINABILITY INDUSTRIAL POLICIES ECONOMIC AND SOCIAL INDICATORS https://tvetpapers.co.za

https://ultradeep.co.za 3 NATIONAL ACCOUNT AGGREGATES  The National Accounts Aggregate represents a summary of a record of a country’s economic activities which are production, income and expenditure.  Therefore, a country‘s GDP can be calculated using production method, income method and expenditure method.  Production method / Value added method  Production takes place in primary, secondary and tertiary sector.  The value that is added by each sector is added together. That is why this method is called value added method.  Only final products are counted, if intermediate goods can be added there will be double counting of the value of some products.  Double counting is when the value of a product is counted twice e.g. as an input and as a final product. Gross value added in R millions Primary sector 324 365 Secondary sector 556 708 Tertiary sector 1789 431 GDP at basic prices ? + Taxes on products 312 863 - Subsidies on products 19 106 GDP at market prices ?  Income method  When firms produce goods and services they employ factors of production.  Therefore the value of income in the economy is equal to GDP at factor cost.  These factor costs are:  compensation of employees which is wages and salaries paid to workers,  Net operating surpluses which are rent, interest on capital and profit of entrepreneurs before taxation. https://tvetpapers.co.za

https://ultradeep.co.za 4  Consumption of fixed capital which is depreciation value of fixed asset Income in R million Compensation of employees 882 379 Net operating surplus 629 116 Consumption of fixed capital 252 595 Gross value added at factor cost ? + other taxes on production 35 374 - Subsidies on production 7388 Gross value added at basic prices ? Plus :Taxes on products 23000 Less :subsidy on products 5891 GDP at market prices ?  Expenditure method  Expenditure on GDP measures total amount spent on final goods and services produced within the country.  Expenditures by all participants in an open economy are added together. Expenditure on GDP R millions Final consumption expenditure by 990 773 households (c) Final consumption expenditure by 305 733 general government (G) Gross capital formation 282 130 Residual item -164 Gross domestic expenditure ? Export of goods and services (X) 430 169 Less: Import of goods and services 437 559 (M) Expenditure on GDP at market ? prices https://tvetpapers.co.za

https://ultradeep.co.za 5 TOPIC 2: THE BUSINESS CYCLE The length and amplitude of a business cycle. Trend line Length /durati on Economic activity Amplitude Time (in years) Amplitude  It measures the vertical distance between a trough and the trend line or the vertical distance between the peak and the trend line.  It indicates the intensity of the underlying forces and the size of a change.  High amplitude shows the strong forces in the economy and severe expansion or contraction of economic activities.  Low amplitude indicates weak forces in the economy and a more moderate expansion or contraction of economic activities. Length or duration  It is the time that the economy takes to move from one peak to another peak or one trough to another trough.  Some business cycles last for a short time while other can take up to 50 years. https://tvetpapers.co.za

https://ultradeep.co.za 6  Shorter cycles represent a weaker cycle and longer lengths represent a stronger cycle. Trend line  It shows the general direction in which the economy is moving.  It usually has a positive slope because the production capacity of a country increases over time.  Economists look at the performance of the economy over the past few years and then predict a future trend. Extrapolation  Means to estimate something unknown from facts or information that is known.  For example, if it becomes clear that the business cycle has passed through a trough and has entered a boom phase, forecasters might predict that the economy will grow in the few months. Moving averages  This is a method of repeatedly calculating a series of different average values along a time series to produce a smooth curve.  By using averages, the economists get a clearer picture of the general trends in the business cycle. TOPIC 3: THE PUBLIC SECTOR PROBLEMS OF PUBLIC SECTOR PROVISIONING The public sector has a socio-economic responsibility to the citizens of the country. The following problems often occur when the government tries to carry out its duties. ACCOUNTABILITY  Refers to the duty of an individual or organization to explain their decisions and actions and accept responsibility for their behavior. https://tvetpapers.co.za

https://ultradeep.co.za 7  In South Africa, parliamentary questioning, treasury control and the rule of the Auditor-General reflect the government’s accountability.  The Auditor-General produces audit reports annually on all government departments, public entities and municipalities.  It is important that government employees are also held individually accountable for what they decide and what they do.  Government employees must be accountable when dealing with the tax payers’ money and must not abuse their powers.  Public accountability is important because the public need to be assured that public sector delivers the quantity and quality of goods and services for which taxes are raised. ASSESSING NEEDS  The government must provide goods and services according to the assessed needs of the inhabitants of the country.  It is very difficult for the public sector to assess needs because they do not have the market prices to guide them.  And that leads to an under or over supply of public goods and services.  The private sector on the other hand provides goods and services in response to the price mechanism of supply and demand.  The state can overcome this problem by, for example, conducting household surveys and canvasing the opinions of the public. PRICING POLICY  The government has to make a decision about what to charge for the public goods it provides.  The government has three pricing options. - Free of charge: the state may choose to offer a public good free of charge to the consumer. These are community goods such as police services. - Charging a small fee: the state may decide to levy a fee for the use of collective goods such as public swimming pools etc. However, if the cost of collecting such a charge is higher than the revenue raised, it is of no worth to levy such a charge. - Subsidies: https://tvetpapers.co.za

https://ultradeep.co.za 8  Government can pay subsidies to promote the production of certain products for the prices to be affordable.  The difficulty with using subsidies arise when relatively fixed cost are involved. PARASTATALS: • They are State-Owned Enterprises established to be profit making businesses. • They receive exclusive rights from the government. • This can lead to monopolies and inefficiency. • They can be created when the government begins a new enterprise or through the process of nationalization. PRIVATIZATION:  It refers to a process whereby state-owned enterprises are sold to the private sector.  It implies that the government sells more than 50% of its shares to the private sector.  The income generated through privatization becomes additional funds for the government.  The problem with privatisation is that it often leads to higher prices since the private sector motive is profit. EFFICIENCY  Efficiency means goods and services are provided in the desired quantity.  Public goods are provided efficiently if Pareto efficiency is achieved.  Pareto efficiency is when resources are allocated in a way that no one can be made better off without making another person worse off.  There is often lack of efficiency in the public sector due to bureaucracy, incompetence and corruption. https://tvetpapers.co.za

https://ultradeep.co.za 9 TOPIC 4: INTERNATIONAL TRADE BALANCE OF PAYMENTS There are 3 components of the BOP (please see the 2017 examination guideline) 1. CURRENT ACCOUNT Goods exports + Net gold exports + Services receipts + Income receipts less Merchandise imports less Payment for services less Income payments Current transfers (net receipts) Balance on Current Account Memo item: trade balance 2. CAPITAL TRANSFER ACCOUNT NET LENDING TO (+) OR BORROWING FROM (-) REST OF THE WORLD 3. FINANCIAL ACCOUNT Net direct investment Net portfolio investment Net financial derivatives Net other investments Reserve assets Balance on financial account Memo item: balance on financial account excluding reserve assets Unrecorded transactions 1. CURRENT ACCOUNT  It record transaction related to production, income and expenditure  Merchandise exports and imports: record transaction on all visible goods (raw materials and intermediate goods, final goods) that South Africa export and import.  Net gold export: shows the record of the income earned from the exportation of gold. While gold is a physical good it is recorded separately because of the amount of money that it earns as an individual product and South Africa relies heavily on it as an earner of income.  Services: record money earned or spends on services such as insurance, transportation, recreational, professional. https://tvetpapers.co.za

https://ultradeep.co.za 10  Income: Income earned by South African citizens from non- citizens and vice versa (non -South African citizens earning income from South African). It consists of two components which are compensation of employees e.g. salaries and wages and investment income e.g. dividends and profits.  Current transfer: Items transferred from residents to non-residents and vice-versa without any counter performance required e.g. gifts. CURRENT ACCOUNT RBILLIONS (2015) 2014 Merchandise exports 960 940 Net Gold exports 66 63 Service receipt 22 20 Income receipt 25 23 (Less) merchandise imports 1069 1076 (Less) service payments 29 30 (Less) income payment 27 29 Current transfers (net) -2 3 Balance on current account ? ? Memo item: trade balance ? ?  A negative balance on the current account indicates the existent of a deficit on the account.  This means the money outflow (capital outflow) was higher than the money (capital) inflow.  A positive balance indicates a surplus which means money inflows was higher than money outflows. Trade account  It reflects the transactions involving exports and imports of goods (merchandise).  This means only merchandise exports; net gold exports and merchandise imports are part of trade account.  The trade balance is obtained by subtracting merchandise imports from the sum total of merchandise export and net gold exports. https://tvetpapers.co.za

https://ultradeep.co.za 11 TRADE ACCOUNT 2015 2014 Merchandise exports 960 ? Net gold exports 66 ? (Less) merchandise imports 1069 ? Trade balance -43 ?  The balance is a deficit which indicating that South Africa imported more physical goods than exporting them. 2 CAPITAL TRANSFER ACCOUNT Net lending to (+) or borrowing from (-) the rest of the world. 3 FINANCIAL ACCCOUNT Direct investments  An investment in fixed property or the acquisition of a significant (10 % or more) share in a business. Portfolio investment.  The purchase of financial assets e.g. shares on a shares market of another country.  Another name = “hot money” because it can be quickly converted into cash Financial derivatives  An investment made in a specific asset with a fixed future value that is paid out on a specific date. Other investment Transactions that do not fall under direct, portfolio and financial derivatives, are classified as other investments. Example: Short term loans. Reserve assets  Financial capital held by the monetary authorities such as the central bank to finance the trading disequilibrium. https://tvetpapers.co.za

https://ultradeep.co.za 12 TOPIC 5: FREE TRADE ARGUMENTS IN FAVOUR OF FREE TRADE Freedom of choice:  Free trade gives consumers the freedom to consume goods to choose to consume goods produced elsewhere in the world.  Some of these products in the world market are cheaper than others due to increased competition. Specialisation  Free trade gives a country a chance to produce only goods that it has comparative advantage in. Specialization will increase economic efficiency and prevent resource wastage. Economies of scale Free trade allow firms to maximise economies of scale, reduce costs and become competitive in the world. Innovation Due to increased competition, firms find it important to innovate. Innovation result in new and improved products as well as new methods of production that cut costs and improve the quality of existing products. TOPIC 6: PERFECT MARKET THE INDIVIDUAL BUSINESS AND THE INDUSTRY  An individual business is a firm that produces a particular product e.g. maize.  An industry consists of all individual businesses that produce the same product e.g. maize industry, tomato industry.  In a perfectly competitive market the price that the individual firm charges for its products is set by the market / industry. That is why individual producers are called price takers.  The market price is the price at which the industry demand is equal to supply. https://tvetpapers.co.za

https://ultradeep.co.za 13 - DEMAND CURVES OF AN INDUSTRY AND INDIVIDUAL FIRM Market individual firm D S PRICE P P D=MR=AR Q1 Q1 Q2 Q3 QUANTITY QUANTITY - The market / industry equilibrium price is P and it is the price at which demand DD is equal to supply SS. The equilibrium quantity is Q1. - The market equilibrium price P is then taken by the individual firm as the price for its products. - The individual firm‘s production is so small that it cannot influence the market, therefore it has to accept the market price. - At this price P the individual firm can produce and sell various quantities such as Q1, Q2 and Q3. - Since the individual business is a price taker, its demand curve D is a horizontal (perfectly elastic) - For every unit of a product sold, the business receives the same price; as such the Average Revenue (AR) that the firm receives is also the same as the price. - The revenue for selling additional unit of the product (MR) will also give the same amount as the price. - Therefore, the horizontal demand curve also represents the AR and the MR curves. SUPPLY CURVE OF A FIRM IN A PERFECT MARKET  The supply of the individual firm in a perfectly competitive market is determined by the MC and AVC curves.  The firm‘s supply curve is the upward sloping part of the Marginal Cost (MC) curve. https://tvetpapers.co.za

https://ultradeep.co.za 14  The MC intersects the AVC at its lowest point.  This is because the individual firm will only produce when the price lies above the minimum point on the AVC curve.  If the market price is equal or below Average Variable Costs (AVC), the firm should close /shut down. MC AC P2 P1 REVENUE/ COSTS AVC MR=AR P MR=AR Shut down point MR=AR Output (Quantity) SHORT RUN EQUILIBRIUM POSITIONS IN THE PERFECT MARKET  A short run is a period during which at least one factor of production is fixed.  In the short term the following three equilibrium positions are possible for a perfectly competitive firm ECONOMIC PROFIT AC COST AND REVENUE E Cost P MR/AR H and revenue B 0 Q QUANTITY https://tvetpapers.co.za

https://ultradeep.co.za 15 • Equilibrium is at E i.e. The firm will produce where MC = MR. • MC = MR is where the firm maximises its profit. • At this point Q1 goods are produced at a price of P. • The average cost for Q1 units is point B on the AC curve. • Price /AR is greater than AC. or (TR > TC). • Therefore economic profit is represented by the area P1HBE/shaded area. • Economic profit is the extra profit that the firm makes above normal profit. NORMAL PROFIT MC AC MR/AR COST AND REVENUE P E1 E 0 Q QUANTITY  The firm is at equilibrium at point E where MC = MR and AR = AC  MC = MR is the profit maximizing position for the firm. • The firm sell Q goods at a price of P • Total costs of production are equal to total revenue earned. • TR and TR are represented by area 0PEQ. • The business makes normal profit. • Normal profit is the minimum earnings required to prevent the entrepreneur from leaving the industry and use his/her factors of production elsewhere. https://tvetpapers.co.za

https://ultradeep.co.za 16 ECONOMIC LOSS MC AC REVENUE ANDrevenue Cost and COST E1 Cost B Cost Cost F K Cost and revenue P Cost MR/AR and revenue and revenue E and revenue MR/AR and revenue 0 Q QUANTITY • The firm is at equilibrium is at point E where MC = MR. • MC =MR is the point where the loss is minimised. • At this point Q goods are produced at a price of P. • Total revenue is less than total cost. • Total revenue is represented by 0PEQ and total cost is represented by area 0FBE(shaded area) • The business makes an economic loss. • This means the money that the firm receives is less than the money it spends to produce each unit of the product. COMPETITION POLICY • In South Africa, competition policy is carried out using the Competition Act of 1998. • The Competition act provides for the establishment of the Competition Commission, Competition Tribunal and the Competition Appeal Court. • The Competition Commission‘s job is to investigate act of restrictive practices by businesses., • The Competition Tribunal is responsible for adjudicating over the cases referred to it by the Competition commission. • The Competition Appeal Court serves those businesses that are unhappy with the judgement of from the Competition Tribunal. The appeal court may confirm, amend or set aside a decision made by the Competition Tribunal. https://tvetpapers.co.za

https://ultradeep.co.za 17 Aims of competition policy • To promote healthy competition among businesses. • To prevent restrictive practices such as collusion. • To protect the consumer against unfair pricing and inferior products. • Provide all South Africans with equal opportunities to participate fairly in the economy. • To regulate the growth of market power by means of takeovers and mergers. • To prevent the abuse of economic power such as of monopolies IMPERFECT MARKETS OLIGOPOLY Characteristics Number of firms  The market consists of few firms which dominate the market. Nature of the product  The product manufactured may either be homogenous or heterogeneous.  When the product is the homogeneous, the market is called pure oligopoly and when the product is differentiated, the market is called differentiated oligopoly.  Example of homogeneous product is petrol and heterogeneous product is motor car. Entry in to the market  The entry in to the market is difficult due to various barriers such the amount of capital outlay often needed.  The existing firms may often be enjoying economies of scale and this may be a further barrier.  Mutual dependence  Oligopolistic firms are often influenced by the action of one another.  The decision that one firm make about prices, advertising and quantities depends on what it think other firms will react.  Therefore, the policy decisions of an oligopolistic firm are more complex than in other market structures.  Incomplete information  Buyers and sellers do not have the full information of market conditions. https://tvetpapers.co.za

https://ultradeep.co.za 18  Even though oligopolists monitor one another’s actions they do not always know how the competitor will react to their actions.  Control over Price  Oligopolists have influence on the price of their products, though not as much as the monopolist.  Price wars as often a feature when existing firms want to limit entrance in to the market. Collusion  Firms often cooperate with one another instead of competing.  This can be by forming a cartel which is a formal agreement among the firms to work together.  At certain times the collusion can be price leadership which involves one firm serving as a price leader in the market. This is an unspoken, informal agreement.  When the price leader changes its price other firms also do the same. THE OLIGOPOLIST’ DEMAND CURVE  Due to mutual interdependence the demand curve of an individual firm tends to be kinked (when there is no collusion in among firms).  Each firm believes that if it increases its price others will not follow it but if it reduces its price others will also reduce theirs. https://tvetpapers.co.za

https://ultradeep.co.za 19 D D MC1 105 MC R100 100 PRICE D MR MR D RR 70 100 QUANTINTY 70  The demand curve has two segments which are elastic and inelastic.  If it the firm increases its price , it operates on the elastic part of the demand curve, which means a small increase in price will result in a bigger decrease in quantity demanded e.g. If price increases from R100 to R105 quantity may decrease from 100 to 70. This represents a 30% decrease.  This means a 5% increase in price has resulted in a 30% decrease in customers (market share)  If the firm decreases prices, it will operate on the inelastic part of the demand curve. This means a larger percentage increase in prices will result in a small quantity demanded. This is because when the firm reduces its price the other firms will also do the same.  Therefore the increase in customers will be small compared to the percentage decrease in price.  Because of the kink, part of the MR is vertical (between A and B). The firm maximise profit where MR=MC and this is on the vertical part of its MR.  The best profit maximisation point is where MR = MC, but it can still maximise profit at the same quantity and price, up to where MR = MC https://tvetpapers.co.za

https://ultradeep.co.za 20 MONOPOLY CHARACTERISTICS 1. One seller of a product  Monopoly market has only one seller of a product. Therefore, the firm faces no competition.  The seller is also responsible for the industry output  They are faced with demand curves Monopolists are also confronted with a demand curve for their product, but because they are the only supplier of the product they can decide at what point on the demand curve they wish to be. Because the monopolist is the only supplier of the product in the market, the demand curve that confronts the monopolist is that of the market as a whole that is, the market demand curve which slope downwards from left to right.  They decide on their production levels Once a monopolist has decided on a price, the quantity sold is determined by markets demand. By reducing the price, monopolists can sell more units of the product, and vice versa. To a significant extent, monopolists can influence the price-quantity combination of the product they sell. Other participants cannot act because a basic requirement for the existence of a monopoly is that entry to the market is totally blocked.  They are exposed to market forces Although the monopolist is the only supplier of a product, the product is still influenced by market forces in the economy. e.g. Consumers have limited budgets and therefore monopolies cannot demand excessive prices for their products. The monopolist’s product has to compete for customers’ favour with all the other products available in the economy.  They face substitutes There are few products that have no close substitutes whatsoever. For example, for many years, even though there was no completion for telephone services in South Africa, consumers could still consider using alternative forms of communication such as letters and messengers.  They may exploit consumers https://tvetpapers.co.za

https://ultradeep.co.za 21 Because a monopolist is the only supplier of a product there is always the possibility of consumer exploitation. It can produce low quantity of a product and sell it at a very high price. MONOPOLY’ REVENUE REVENUE SCHEDULLE FOR A MONOPOLIST Quantity Price Total revenue Marginal Average Revenue Q P TR= Q X P revenue AR = TR /Q MR=∆TR/∆Q 0 R110 0 - - 1 R100 R100 R100 R100 2 R90 R180 R80 R90 3 R80 R240 R60 R80 4 R70 R280 R40 R70 5 R60 R300 R20 R60 6 R50 R300 R0 R50 7 R40 R280 - R20 R40 8 R30 240 -R40 R30 https://tvetpapers.co.za

https://ultradeep.co.za 22 MONOPOLIST REVENUE PED >1 MARGINAL AND AVERAGE REVENUE PED=1 R50 PED<1 AR 0 2 4 6 7 8 10 Q 300 MR TOTAL REVENUE Q 0 2 4 5 6 7 8 10  The demand curve of the monopolist is downward sloping indicating that as price increase quantity sold will decrease. Therefore the monopolist should have a pricing policy like any other firm.  The demand also serves as AR curve because it shows the revenue per product that the firm will receive as consumers demand its product . If the https://tvetpapers.co.za

https://ultradeep.co.za 23 monopolist charges R100 it can only sell one item, but when the price decrease to R90, it can increase the quantity sold and TR.  The AR of the monopolist is equal to the price ( AR = P)  MR curve indicates the revenue gained by selling one additional unit. The MR curve lies below the AR curve (with the exception of the first unit) indicating that the amount gained for selling extra unit is lower than the price charged.  The monopolist maximizes revenue (makes highest Total Revenue) were the MR is equal to zero (MR=0). The price should be at the center of the demand curve (AR curve). This is at the price of R50. At this point the demand for the product is unitary elastic (PED =1), meaning a change in price is likely to bring the same TR.  Above the center of the demand curve, the product has elastic demand (PED = >1). This means a smaller change in price will result in a larger change in TR. At this point the MR is above zero (MR >0) indicating that TR can be increased by decreasing price.  Below the center of the demand curve, the demand for the product is inelastic. Therefore it does not respond well to price change. This means the PED <1 and the MR < 0. At this point the total revenue decreases with a decrease in price e.g. at the price of R40 the MR = -R20. SHORT TERM PROFIT OF A MONOPOLIST MC AC Price/cost/revenue 27 15 AR MR 0 120 Quantity https://tvetpapers.co.za

https://ultradeep.co.za 24  Economic profit is the extra profit that the firm makes over and above the normal profit.  The firm makes maximum profit where MR = MC  The firm makes economic profit when TR > TC or when AR > AC TR > TC AR > AC = TR - TC = (AR - AC) X Q = (p x q) – ( ac x q) = (R27 - 15) X 120 = (R27 x 120) - (R15 x 120) = R12 X 120 = R3240 - R1800 = R1440 = R1440 ECONOMIC LOSS OF A MONOPOLIST MC MC AC AC R35 R27 PRICE AR/D AR/D MR 120 QUANTITY  Though a monopolist is the only seller of the product, it can still make a loss if demand is lower and production costs are higher.  At MC= MR the firm makes minimum loss, therefore it is a loss minimizing point.  The monopolist makes a loss when TR < TC or AR < AC https://tvetpapers.co.za

https://ultradeep.co.za 25 TR < TC AR < AC TR - TC (AR - AC) X Q (P X Q) - (AC X Q) (R27 - R35) X Q (R27 x 120) - (R35 x 120) -R8 X 120 R3240 - R4200 - R960 -R960 or (R960) TOPIC 8: MARKET FAILURE It is when the market fails to allocate resources efficiently e.g. When there is shortage or overproduction of certain goods COST BENEFIT ANALYSIS • A process of calculating and comparing the social benefit and costs of a project over a given period Reasons for using CBA • CBA assesses whether a new project will be a feasible investment. • To determine whether a project will benefit the country as a whole. • To evaluates the feasibility of different projects to determine which project will be the best investment. • It includes the wider social impact and includes externalities in the decision-making process. • To estimate the effects of an investment on social welfare and on the environment. • The private sector usually only compares the expected private costs and benefits over the estimated time span of a new project, the public sector on the other hand, needs to compare the expected social costs and benefits over the estimated time span of a new project. • It brings greater objectivity to decision making – it quantifies all the cost and benefits in money terms. https://tvetpapers.co.za

https://ultradeep.co.za 26 CONSEQUENCES OF MARKET FAILURE 1. Government intervention Minimum wages  It is the lowest wage an employer is by law allowed to pay an employee.  Minimum wages is helps to redistribute income.  This is because unskilled workers (e.g. farm workers) are at a disadvantage at negotiating and are usually unable to obtain real wage increases.  Their wages are usually very low and this continues unfair income distribution of income  Their wages are usually very low and this continues unfair income distribution of income. M D MINIMUM WAGES S W1 WAGES W S D Q1 Q Q2 Q QUANTITY  The original wage rate is W at which quantity of labour employed is Q.  The implementation of minimum wage increased wages to W1.  Minimum wages resulted in increase in supply for labour, meaning more workers look for employment as indicated by Q2. https://tvetpapers.co.za

https://ultradeep.co.za 27  Therefore, the effect of minimum wages is that it can result in oversupply of labour/ decreased demand for labour. Minimum prices  They are the lowest price that the producer is by law allowed to charge for the product.  They are usually higher than the market prices and are implemented on basic foodstuff such as maize.  The aim is to make it useful (worthwhile) for producers of such products to say in the market.  Minimum prices can however result in oversupply of the product. D S 50 MINIMUM PRICE 35 S D 80 100 120  At the market price of 35 there is equilibrium between demand supply at 100.  When the government impose a minimum price of R50 demand decreased to 80, but supply increased to 120. This created an excess supply of 40. https://tvetpapers.co.za

https://ultradeep.co.za 28 Maximum prices  They are the highest prices that a producer is allowed by law to charge for a particular product and are below the market price.  In other word the government put a price ceiling for the particular product.  Their effect is that they cause supply to decrease, therefore resulting in excess demand for the product.  This usually result in black market where the price charged is higher than the price ceiling. MAXIMUM PRICE S D P MAXIMUM PRICE P1 S D Q1 Q Q1 https://tvetpapers.co.za

https://ultradeep.co.za 29 2. EXTERNALITIES NEGAVTIVE EXTERNALITY S1=MSC= (MPC + External cost Market failure D S = MPC P1 P D Q1 Q .  Supply curve (S) indicates the Marginal Private Cost (MPC) of the producer in order to produce the product.  If everything is left up to the market the price charged will be P and equilibrium quantity will be Q.  If the cost of harmful externality associated with production e.g. pollution is added to the MPC, the price will be pushed higher, to P2.  P2 takes into consideration social costs associated with externality. At this price the supply curve S1 indicates the Marginal Social Costs (MSC) which means the cost to the society (External cost) and the cost of producing the product (MPC) are included.  The distance between MSC (S1) and MPC (S) indicates market failure. Market has failed because too much of a product with negative externality is produced.  P2, DD, S1S1, Q1 represent socially optimal point of production while P1, DD, SS, Q represent market optimal point of production. https://tvetpapers.co.za

https://ultradeep.co.za 30 POSITIVE EXTERNALITY Market S D1 failure D P1 P D1=MSB= (MPB + External Benefit D = MPB Q Q Q1 Q1  The demand curve DD represents the Marginal Private Benefit (MPB)for the consumer and its intersection with supply curve SS result in market output of Q.  If a positive externality occur (e.g. a subsidy on education), this benefit will be added to the MPB to obtain Marginal Social Benefit (MSB). This means the distance between the MPB and the MSB represents the positive externality benefit.  P1, D1D1, SS, Q1 represent the socially optimal point of production. Because the market output is less than the socially optimal output, there is market failure. Market has failed to produce enough of the product which has benefit for the society. https://tvetpapers.co.za

31 TOPIC 10 INDUSTRIAL DEVELOPMENT Industrial development is an important vehicle for economic development. One of the strategies that South Africa uses to achieve industrial development is regional development. Regional development:  Aim to encourage investments in areas that are characterised by poverty and unemployment (but offers potential for growth).  the policy is applied through Spatial Development Initiative (SDI) and Special Economic Zones (SEZ) 1. SDI  SDI is a policy to promote sustainable industrial development in areas where poverty and unemployment are at their highest.  SDI Concentrate on establishment of industries in poor areas but which offers potential for sustained industrial growth.  The main objective is to stimulate economic growth and employment in those regions.  Economic growth is mainly stimulated through economic projects that are based on the area’s strength.  These efforts help to decentralise economic activities in the country.  The investments are done on Public –Private-Partnership- bases. SDI FOCUS Lubombo Agri-tourism Fish river industrial Platinum Industrial and agri-processing Wild Coast Agri-tourism West Coast investment initiative Industrial and agri-processing Phalaborwa Industrial and agri-tourism Richards Bay Mining and agri-processing Maputo Industrial and agri-processing

32 SPECIAL ECONOMIC ZONES  It is an enclosed industrial area (usually near a harbour or airport) where normal custom regulations do not apply.  It aims to boost exports, increase economic growth and create jobs.  Investments are based on the Private Public Partnership where the state provides the infrastructure and the private sector establishes the businesses. Incentives are offered to businesses which establish their firms in the zone so that they can have a competitive edge. √√  Streamlined administration in the SEZ e.g. fewer government regulations apply to businesses in these zones.  Assistance is given in importing and exporting of products.  World class infrastructure such as efficient power, water and telecommunication and High quality transport facilities is available to the SEZ.  Examples of SEZ are Coega, East London and Richards’ Bay SEZ. TOPIC 11: ECONOMIC INDICATORS  Economic indicators are statistics used to assess the performance of an economy and they include the following: 1. FOREIGN TRADE  In a globalised world, foreign trade is important. Exports serve to stimulate employment while imports serve to increase consumer choices.  Two indicators of how a country performs in international trade are: exchange rate and terms of trade. Exchange rate: An exchange rate is the price of one country’s currency in terms of another country’s currency.  Changes in exchange rate affect the prices paid for imports and earnings from exports.  A depreciation of the rand against the dollar will result in imports from the USA expensive but will make South African exports cheaper in USA. Therefore it may increase earnings from exports.

33  An appreciation of the rand will cause imports to be cheaper and South African exports expensive in foreign countries. Terms of trade  It is the ratio of between the average price of exports and average price of imports.  To calculate the terms of trade export prices are divided by import prices and multiplied by 100.  Changes in terms of trade indicate changes in the country’s welfare.  If the terms of trade improve (increase) it shows that a higher volume of imports can be purchased with an unchanged volume of exports. This indicates that the country is better off than before.  If terms of trade decreases it means more goods have to be exported to purchase the same volume of imports as before. This indicates that the country is worse off. 2. PRODUCTION  The level of production (economic growth) in a country is indicated by the gross domestic product (GDP).  GDP refers to the total market value of all final goods and services produced within the borders of a country within a year. GDP can be measured nominal, real or per capita terms.  Nominal GDP: is when the value of goods and services produced in a country is calculated in prices of the current year e.g. if the GDP is measured for 2016, prices for 2016 will be used.  Real GDP: To remove the effect of inflation on the GDP figures, real prices are used. Real GDP can be used to make comparison in economic growth between various years. GDP per capita: It shows the effect of economic growth on individuals of a country.  Real GDP per capita indicate the standard of living of people in a country. 3 MONEY SUPPLY  Money supply is controlled by the South African Reserve Bank and is classified in three categories: - M1: Notes and coins in circulation and demand deposits of the domestic private sector with monetary institutions

34 - M2: M1 plus other short term and medium term deposit of the domestic private sector with monetary institutions. - M3: M2 plus long term deposits of the domestic private sector with monetary institutions  The money supply is an indicator of inflation changes in a country. A consistent increase in money supply will lead to increase in inflation due to increase in demand. 4. PRODUCTIVITY  Productivity is the relationship between the output of economic activities and the input used.  Labour productivity is the output per worker.  When labour productivity increases, it can lead to economic growth and improvement in living standards.  South Africa generally has lower labour skills and lower productivity of labour.  If increase in labour productivity is lower than increase in real wages the result will be demand pull inflation TOPIC 12: INFLATION DEMAND PULL INFLATION  The increase in general price level prices that occur as a result of an excessive demand of goods and services. CAUSES Increase in household spending  Increase in household expenditure may take place because of the following Reasons: Easily available credit: this may results in consumers spending more  due the extra money available from the financial institutions.  At certain times the application for credit may be encouraged by lower interest rates. Lack of saving: If consumers spend all or very high percentage of their Incomes, this will cause inflation.  This is because lack of saving will result in lack of liquidity for banks to finance capital investments. Reduction in taxes: If personal income tax can be reduced, people will

35 have more disposable income and spending tend to increase. Government expenditure  An increase in government spending leads to an increase in prices.  When government increase its spending on infrastructure it may cause an increase in goods needed for infrastructure improvement.  Social spending such as grants may leads to an increase in aggregate demand of consumer goods and services. Investors expenditure√  Producers may increase their investment with expectation of making higher profit.  the demand for goods and services that are needed for this new investment such as construction, furnishing of buildings will increase more than supply. Export earning  An increase in exports without an increase in local production will result in supply been lower than demand.  As goods and services leave the country as exports, the amounts of goods available for the local market get reduced.  This results in prices increasing to dampen the local demand. CONSUMER INFLATION  Kinds of consumer inflation rate are used in South Africa namely: headline inflation, core inflation and administered price inflation.  Headline inflation: It is measured by Consumer Price Index and calculated in urban areas only.  It represents the cost of the shopping basket of goods and services of average South African.  It is used for inflation targeting, meaning when it is above 6% SARB may increase interest rates.  Core inflation  Core inflation is attained when products with prices that are highly volatile are excluded from the CPI basket e.g. petrol, electricity, fresh vegetable and fruits, meat interest on mortgages.  Core inflation is lower than headline inflation and is often stable.  Administered price inflation

36  Administered prices are prices set by the government or regulated by government appointed authorities e.g. electricity (NERSA),  PRODUCER INFLATION  Producer inflation is measured by the Producer Price Index (PPI).  When PPI increases, often CPI will later increase. CPI PPI Measures costs of living Measures costs of production Basket consist of consumer goods Basket consist of goods only and services Capital and intermediate goods are Capital and intermediate goods excluded included Prices include VAT Prices exclude VAT Prices of imported goods are not Prices of imported goods are shown shown explicitly explicitly Include interest rates Excludes interest rates Effectiveness of Inflation targeting  Inflation targeting is a transparent way to explain interest rate policy and to manage consumers' expectations about future inflation.  With the inflation target of 3-6% the public knows that if inflation gets out of the target, the central bank will take action.  This certainty can stimulate economic activity.  Businesses are able to make investment decisions knowing that prices will be stable.  It provides an explicit measure that serve to improve discipline and accountability of the SARB  However, the policy is ineffective in dealing with cost push inflation.  Factors that cause cost push inflation are outside the control of the monetary authorities.

37 TOPIC 13: TOURISM Households  Member of households earn income from tourism sector as tour operator, travel agents etc.  Many households are indirectly involved in tourism as employees in hotels, transport sector etc.  Entrepreneurs from households that operate as curio producers or musicians can earn income from tourism.  A large number of households acquire skills in the tourism industry. School curriculum and Learnership offer opportunities to acquire these skills.  Improved infrastructures which are created for tourism are also used by households. Government  Tourism enables government to advertise the country’s tourist potential. This can create a good image of the country if accompanied by good service.  Tourism makes direct and indirect contribution to the government revenue through levies on tourists such as tickets, hotel room occupancy.  It creates jobs at no cost to the government especially in the informal sector.  It earns foreign exchange, therefore it boost the country’s foreign exchange reserves directly when tourists pay in foreign currencies.  It enables the government to achieve its socio-economic objectives of black economic empowerment and SMME development.  Businesses  Tourism stimulates business in areas such as accommodation and entertainment.  The construction industry, in private-public partnership with the government to provide the infrastructure, manufacturing sector and recreation sector all benefits from increased demand due to tourism.  The previously disadvantaged communities get entrepreneurial opportunities through the black economic empowerment schemes.

38  Infrastructure development  Adequate and well maintained infrastructure is essential for tourist destinations.  Locals share this infrastructure with tourists.  Economic infrastructure such as ports and beaches are often prioritised by government.  In addition to physical and basic infrastructure, social infrastructure is also important for the growth of tourism. TOPIC 14: ENVIRONMENTAL SUSTAINABILITY MAJOR ENVIRONMENTAL PROBLEMS AND INTERNATIONAL MEASURES TAKEN TO ENSURE SUSTAINABLE DEVELOPMENT: TOPIC 14 Environmental sustainability is a global issue as it affects the whole world. The following are some of the world’s biggest environmental problems and measures taken to deal with such problems. CLIMATE CHANGE  Climate change is the change in the composition of the atmosphere that is related to human activity.  A build-up of greenhouse gases causes the heat from the sun to be trapped in the atmosphere leads to global warming.  Global warming has an effect on world’s weather patterns which include extreme temperatures and change in rainfall patterns. Measures taken:  In 1992 the United Nations Framework Convention on Climate Change (UNFCCC) formulated measures which were aimed at stabilising greenhouse gases.  In 1997 the Kyoto protocol was signed due to lack of success of the UNFCCC.  The aim of Kyoto protocol was for developed countries to reduce their greenhouse emissions by 5.2% by 2012. Developed countries were also to provide some financial assistance to developing countries to use clean technologies.  These targets were never met and the agreement was not renewed.

39 LOSS OF BIODIVERSITY  Biodiversity refers to a number of different species and sub-species found in a specific area.  Due to extinction of the diversity of life forms on the planet decreases.  Extinction is an irreversible process which means once those species are lost it is for ever.  Measures taken: The Convention on International Trade in Endangered Species (CITES) bans trade in endangered species on agreed list of plant and animals.  Control is executed through the issue of permits and quotas to regulate trade in certain species.  CITES‘s 17th meeting was held in Johannesburg in South Africa in 2016. CHEMICAL WASTES  Exposure to certain chemicals can lead to toxicity in living organisms.  Such exposure can lead to immediate death, death after time or infertility in human beings, plant and animals.  In normal concentration some chemicals are not toxic, while others such as DDT which is an insecticide are toxic by nature.  Production of chemicals lead to chemical waste and getting rid of such waste always create environmental problems.  Stockholm Protocol on Persistent Organic Pollutants bans the most dangerous manufactured substances such as DDT.  The Rotterdam Convention protects countries that lack adequate infrastructure to monitor the imports and exports of dangerous chemicals. HARZADOUS WASTE  It is not limited to chemical wastes but include toxic metal waste such as lead and mercury, radioactive waste, inorganic compounds such as such as pesticides.  These wastes are dangerous to the ecosystem as a whole.  Due to their slow decomposition process, they tend to accumulate in the environment for a very long time.  Measures taken: The Basel Convention controls the import and export of hazardous waste.

40  Trade can only take place between countries that signed the convention.  Trade can only take place if the wastes are handled in an environmentally friendly manner.  South Africa is a party to the Basel Convention LOSS OF INDIGENOUS KNOWLEDGE  Indigenous knowledge refers to the knowledge that indigenous people in a particular area use to make a living.  Traditional people used organic methods and natural processes in production.  Local capacity building among indigenous people is important aspects of sustaining the environment.  Capacity building involves equipping indigenous people with environmental knowledge beyond their traditional belief.  This can provide a foundation from which to develop alternative ways of managing resources. Measures taken:  In 2007 the UN’s declaration on Rights of Indigenous Persons was adopted.  The declaration sets the standard for protection of rights of indigenous people. GOVERNMENT MEASURES TO ENSURE ENVIRONMENTAL SUSTAINABILITY The government can take the following measures to ensure sustainable development. Granting of property rights  Granting of property rights has conservation has conservation effect as people take care of things that belong to them.  To prevent plant and animals from being extinct, people can be given property rights over them.  The plants and animals would then be preserved at little cost to the taxpayer.  If property rights could be expanded to common goods like clean air, those suffering from pollution could charge the polluters for the right to pollute.  For example, if one has property right to clean air in one ‘erf, one can sue a power station for the smoke it produces.

41  However, extending private property rights to air is impractical and therefore hypothetical.  But the principle of polluters paying victims to reduce pollution is sometimes followed by governments. Charging for the use of the environment  Consumers and producers pay a monthly fee to the government for the waste they produce and dispose of in the environment.  Consumers pay municipal charges for rubbish collection and sewage disposal.  Industries might also be levied emission charges and vehicle owners for gas emissions.  For best results, the charges should be proportional to the waste produced.  A fixed total charge such as a monthly charge will not encourage waste producers to reduce waste. Paying environmental subsidies  The government can provide subsidies to encourage activities that reduce environmental damage.  Subsidies could be for:  Developing a new technique or equipment e.g. to save energy, reduce smoke or to use environmentally friendly energy such as wind, tide or sun energy.  Encouraging the production of environmentally friendly substitutes such as unleaded petrol.  Encouraging recycling of wastes such as bottles, cans and cardboard.