Economics Grade 12 P2 Eastern Cape June 2014 Question Paper

Downloaded from hlayiso.com ECONOMICS P2 COMMON TEST - JUNE 2014 MEMORANDUM NATIONAL SENIOR CERTIFICATE GRADE 12 MARKS : 150 TIME : 1½ Hours This memorandum consists of 10 pages

Economics P2 Downloaded 2 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum SECTION A (COMPULSORY) QUESTION 1 1.1 Multiple choice items 1.1.1 B price-maker. 1.1.2 A zero economic. 1.1.3 C oligopoly. 1.1.4 B economic 1.1.5 C average 1.1.6 B free. 1.1.7 C both rival and excludable. 1.1.8 A unique.  (8 x 2) (16) 1.2 Choose from columns 1.2.1 D 1.2.2 F 1.2.3 G 1.2.4 B 1.2.5 A 1.2.6 C 1.2.7 H 1.2.8 E (8 x 1) (8) 1.3 Concepts 1.3.1 social benefits 1.3.2 industry 1.3.3 equilibrium price 1.3.4 breakeven point 1.3.5 patent  1.3.6 variable costs      (6 x 1) (6) [30] Copyright Reserved Please turn over

Economics P2 Downloaded 3 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum SECTION B QUESTION 2 2.1 Answer the following questions appropriately. 2.1.1 Name two kinds of collusion that characterize oligopolies. * overt / explicit collusion * tacit / implicit collusion (2 x 1) (2) 2.1.2 Why is Eskom regarded as a natural monopoly?  High development costs prevent others from entering the market and therefore the government supplies the product through Eskom   It costs billions of rands to build and maintain power stations and therefore there are no other suppliers. Government plays a key role (1 x 2) (2) 2.2 Study the graph below and answer the questions that follow. 2.2.1 R70          (2) 2.2.2  A          (2) 2.2.3 Due to negative slope of demand curve the additional units are bought at lower prices. (2)   2.2.4 (R70 x 4 = R280) – (R50 x 4 = 200) = R80 OR (R70 – R50 = R20) x 4 = R80 (4) [10] 2.3 Study the cartoon below and answer the questions that follow 2.3.1 SANRAL/South African National Road Agency Limited  (2) 2.3.2 Message portrayed by the cartoon. * Govt. failure/public sector failure * Confusion caused by mixed messages * Frustration  * Lack of CBA * Any relevant answer Any 1 x 2 = (2) 2.3.3 *the cost of construction was very high *the price to the final consumer is high *road-users/consumers/tax payers were not adequately consulted *the effects of the e-tolls on people was not considered *the billing system of the e-tolls is inaccurat *e-tolls are being forced on road-users Any 3 x 2 = (6) (Accept any relevant answer even those that say CBA was taken into account if valid reasons are given.) [10] Copyright Reserved Please turn over

Economics P2 Downloaded 4 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum 2.4 Outline the ways in which government regulations can create barriers to entry in the monopoly market. * Licences : Government limits entry by requiring businesses to obtain a licence before they enter the market . * Patents : Entry is blocked by granting exclusive rights to one firm to operate in the market . * Copyrights : The issue of copyrights restricts entry into the market and creates a monopoly . (Max 8) Any 4 x 2 (8) 2.5 How can merit and demerit goods be regarded as a cause of market failure. * Merit goods : These are goods that are desirable in society  but the market does not produce them in large quantities . Examples are schools, hospitals . Most people cannot afford them because the price is high . As a result their provision is taken over by government . * Demerit goods : These are goods that are harmful to society. The market produces them in large quantities  and their price is very low. Examples: alcohol, cigarettes . Any relevant answer (Max: Merit = 4; Demerit = 4) Any 4 x 2 (8) [40] QUESTION 3 3.1 Answer the following questions appropriately. 3.1.1 Name TWO kind of businesses that are monopolistically competitive.  Supermarkets  Restaurants  Fast food outlets  Chemists  Clothing stores (Any relevant answer) (2 x 1) (2) Accept examples of businesses in the above categories eg. Spar, OK, Pick & Pay. (supermarkets) 3.1.2 Explain the concept “product differentiation”. Product differentiation is a strategy whereby the product is made distinct to others.(Any close definition.) (2) 3.2 Study the graph below and answer the questions that follow. 3.2.1 oligopoly         (2) 3.2.2 duopoly         (2) Copyright Reserved Please turn over

Economics P2 Downloaded 5 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum 3.2.3 Use of non-price competitione.g.  Embark on rigorous advertising and marketing campaigns   Offer loyalty rewards   Offer after-sales service   Provide efficient mobile phone service   Door-to-door sales  Any relevant answer Any 3 x 2 = (6) 3.3 Study the cartoon below and answer the questions that follow 3.3.1 They met to discuss the construction of stadiums/ They colluded (2) 3.3.2 Collusion can destroy the companies involved/ Govt. is always on the lookout for price fixing tendencies (2) (Any relevant answer) 3.3.3 They can take the matter to the Competition Appeal Court  (2) 3.3.4 There are three competition institutions: * Competition Commission: It investigates allegations of collusion * Competition Tribunal: It adjudicates cases of anti-competition * Competition Appeal Court: It reconsiders decisions taken by the Tribunal if referred by the aggrieved party    (4) 3.4 Briefly compare monopoly with perfect competition. Profit: The economic profit made in the perfect market is gradually reduced as more firms enter the market. In the long term the perfect competition makes a normal profit while the monopoly makes the economic profit. The monopolist makes economic profit both in the short run and the long run. Price: Monopoly charges a higher price than the perfect market. Output: The output produced by the monopolist is lower than the output produced by the perfect market. If the monopolist increases the output it would depress the price. Therefore to keep his price he limits the output. Efficiency: The monopolist does not produce at the lowest possible cost. As a result the community does not get the best deal from the monopolist. Any 4 x 2 (8) Copyright Reserved Please turn over

Economics P2 Downloaded 6 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum 3.5 Explain why it is difficult for the oligopolists to compete with the price. * It is difficult for oligopolists to fix the price because collusion is illegal. * If they agree to increase the price, other firms may cheat and not change their prices * They must consider the reaction of oligopolists if they change the price * Those that increased the price will lose customers * The quantity sold will decrease and the firm will make less profit than before * If they decide to reduce the price, the percentage increase in the quantity is less than the percentage drop in the price * In both cases it is not worthwhile compete with the price * Max 4 for the graph if the learner included the kinked demand curve Any 4 x 2 (8) (40) TOTAL FOR SECTION B: [80] Copyright Reserved Please turn over

Economics P2 Downloaded 7 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum SECTION C QUESTION 4 “Perfect competition is an ideal market structure to which all economies aspire”.  Discuss the characteristics of a perfect market in detail. (26)  With the aid of a graph explain why marginal revenue must be equal to marginal cost for profits to be maximised. (10) Introduction Any relevant introduction (2) Body Number of buyers and sellers  There are many buyers and sellers  Buyers and sellers are so many that no individual buyer or seller can influence the price  Each seller or producer has a small market share. Control over price  Because the market share is so small, it is impossible for each seller to influence the market price.  The price is determined by the interaction of demand and supply in the market.  Each seller is a price taker   If the producer tries to increase the price above the market price, customers will buy from another seller.  If he charges a price less than the market price, he will run out of stock Freedom of entry and exit  Anyone who wants to enter the market is free to do so.  Likewise he is free to leave the market any time.  There are no restrictions to entry or exit Nature of the product  The product is 100% identical or homogeneous.  Because the product is identical there is no reason for the customer to prefer one seller to the other.  He can buy from any seller and still get the same quality product at the same price Perfect information  All buyers and sellers have complete knowledge of the market conditions.  Buyers and sellers have full knowledge about the price, the availability of the product, the quality  There is no barrier to the knowledge of market conditions. Profit  Sellers in the perfect competition make a normal profit.  In the beginning they can make an economic profit but it attracts other sellers to enter the market  The entry of other sellers increases supply and reduces the profit to normal profit  There is no one seller that can influence the price. Copyright Reserved Please turn over

Economics P2 Downloaded 8 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum No collusion  Collusions happen when sellers or buyers enter into agreements to limit competition in order to influence market price.  Collusion can only happen where there are few sellers and buyers  In the perfect market sellers act independently of each other  As a result they cannot get into agreements that may influence the price  No government intervention  There is no government intervention that can affect buyers or sellers (Any other relevant point) (26) Note :Max 8 marks for headings - 1 mark each ADDITIONAL PART  With the aid of a graph explain why marginal revenue must be equal to marginal cost for profits to be maximised. * Marginal revenue (MR) is the additional revenue the producer gets by producing one more unit * The individual producer must produce at a point where marginal revenue is equal to marginal cost (MR=MC) * The profit maximizing point in the graph is A * In a perfect market the price (P) is the same as MR and the demand (D). * If the firm is producing a quantity between 0 and Q1, MR runs above MC * It is worthwhile for the firm to increase output because at this stage more profits can be obtained by producing more output. * The maximum profit is obtained at point A where MR = MC. * At any point to the left of A, profit is increasing. * At any point beyond A, MC lies above MR and that reduces profits. * A prudent entrepreneur will not produce beyond A. * Therefore the optimum point of production A where MR = MC * This point is called the profit maximisation point. (Graph 4; Discussion 6) (10) Conclusion (2) (40) Copyright Reserved Please turn over

Economics P2 Downloaded 9 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum QUESTION 5 “No matter how perfect the market economy may seem to be, however, it has its own flaws”.  Discuss the various causes of market failure. (30)  Explain with the aid of a graph why the government uses price ceilings to correct market failures. (10) Introduction (Any relevant introduction) (2) Body: 1. Existence of externalities Externalities are the costs and benefits that are not included in the market price. Negative externalities results in goods being overproduced. For example, if a business pollutes the air, people living in surrounding areas may experience health problems. The community will have a burden of increased health care which is not paid for by the firm responsible for pollution. Society desires less of that good In the case of positive externalities the market under produces this good . 2. Existence of public goods Public goods are consumed by the community as a whole. It is impossible to exclude some consumers from using the product. As a result of this non-exclusivity, the private sector is usually unwilling to provide these public goods. Public goods then have to be provided by government. 3. Imperfect information One condition of perfect competition is that all buyers and sellers should have perfect knowledge of the market conditions. In reality households and firms do not have access to that kind of knowledge. This constitutes a condition of market failure. 4. Imperfect distribution of income and wealth The free market system tends to generate an unequal distribution of income across the population. The income of consumers determines their access to consumer goods and services. The higher the income, the more goods and services a consumer can purchase. The inequality of income and wealth causes people to live unequal standards. 5. Imperfect competition Competition is often impaired by power struggle in market economies. Imperfect competition restricts output and raise prices. They prevent new businesses to enter, prevent full adjustment to changes in demand. Modern market does not allow for price negotiations. Advertising promotes producer sovereignty and sway consumers to buy certain products. Copyright Reserved Please turn over

Economics P2 Downloaded 10 from hlayiso.com Common Test June 2014 NSC- Gr 12 - Memorandum 6. Immobility of factors of production Most markets do not adjust rapidly to changes in supply and demand because resources are not freely mobile. Labour takes time to move occupationally and geographically. Physical infrastructure like telephone lines takes time to move from one location to another.  Max (26) Note :Max 8 marks for headings - 1 mark each ADDITIONAL PART Explain with the aid of a graph why the government uses price ceilings to correct market failures.  A price ceiling is when the government imposes a maximum price that the producer must charge.  The ceiling price must be below the market price  The aim of a price ceiling is to make the product affordable to a large number of people  The market price in the graph is P and the quantity bought and sold is Q  The ceiling price is fixed at P1 where the quantity supplied is Q1  At this price the quantity demanded is Q2  The product is now accessible to a large number of people than before (Graph 4, Discussion 6) (10) Conclusion: Any suitable conclusion (2) TOTAL FOR SECTION C: [40] TOTAL MARKS: 150 Copyright Reserved Please turn over