Economics Grade 11 Paper 2 Gauteng June 2018 Memo

Downloaded from hlayiso.com GAUTENG DEPARTMENT OF EDUCATION PROVINCIAL EXAMINATION JUNE 2018 GRADE 11 ECONOMICS PAPER 2 MARKING GUIDELINE 21 pages

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 GAUTENG DEPARTMENT OF EDUCATION PROVINCIAL EXAMINATION ECONOMICS (Paper 2) SECTION A (COMPULSORY) QUESTION 1 1.1 MULTIPLE-CHOICE QUESTIONS 1.1.1 C - total  1.1.2 A - Decrease in price of a product and an increase in demand of the substitute product.  1.1.3 C - black  1.1.4 D - constant returns to scale  1.1.5 B - MC = MR  1.1.6 D - monopoly  1.1.7 B - inelastic  1.1.8 A - income  (8 x 2) (16) 1.2 MATCHING ITEMS 1.2.1 D - A feeling of uselessness; a lack of utility; the harmful effects that go with a particular activity or process.  1.2.2 A - A good that has a negative income elasticity of demand  1.2.3 I - There are many firms that produce goods that are similar but not exactly alike  1.2.4 B - An association of manufacturers or suppliers formed to maintain high prices and restrict competition  1.2.5 C - The business’ total revenue minus the explicit costs  1.2.6 H - Methods of production use a lot more machinery and equipment than labourers to produce products  1.2.7 E - The quantity of output in which total revenue is equal to total cost and the business earns no economic profit  1.2.8 G - Price elastic demand  (8 x 1) (8) 1.3 IDENTIFY THE CONCEPT 1.3.1 Compliment goods / compliments / complimentary  1.3.2 Relative prices  1.3.3 Heterogenous / differentiated  1.3.4 Explicit costs  1.3.5 Marginal costs  1.3.6 Price elasticity of supply  (6 x 1) (6) TOTAL SECTION A: 30 2

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 SECTION B Answer TWO of the three questions from this section in the ANSWER BOOK. QUESTION 2: MICROECONOMICS 2.1 2.1.1 Give any TWO examples of monopolies in South Africa.  Eskom   Telkom   Denel   Spoornet   South Africa Postal Service   De Beers  (Accept any other correct relevant example) (2 x 1) (2) 2.1.2 What effect will the increase of absolute prices have on the consumers’ spending power? A negative effect, because as prices increase the consumer will have less money to spend on satisfying wants and needs. (Accept any other correct relevant response) (1 x 2) (2) 2.2 DATA RESPONSE 2.2.1 Why would the seller not use sales when faced with a unitary elastic demand? It creates an approximately equal increase in demand  (1) 2.2.2 Give an example of a product with a unitary elastic demand. Clothing / clothing industry  (1) 2.2.3 Briefly the concept elasticity. The measure of the sensitivity or responsiveness between two variables that are related. (Accept any other correct relevant response) (1 x 2) (2) 3

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 2.2.4 Calculate the price elasticity of demand from the graph. Show all calculations. e=  e=  e = 1  (6) 2.3 DATA RESPONSE 2.3.1 According to the article, how long is the short run? There is no specific duration of time  (1) 2.3.2 Identify the total fixed cost in the graph? R50 / 50  (1) 2.3.3 Describe the concept total variable costs. The cost that changes as output changes  (Accept any other correct relevant response)  (2) 2.3.4. Why are all costs in the long run variable? All prices change over a period of time, because of inflation  (Accept any other correct relevant response)  (2) 2.3.5 The price of the product sold in the above graph is R100. What would be the profit / loss of producing NO products? Show all calculations. Profit / loss = total revenue – total cost  or = (price x quantity) – (total fixed cost + total variable cost) = (100 x 0) – (50 + 0)  or = 0 – 50  = -R50 (loss)  (must indicate the loss to get 2 marks) (4) 4

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 2.4 Compare the control over prices of a monopoly with a perfect competition. Monopoly  The monopoly has total or full control over the price   The monopoly is a price maker   The monopoly can change the price of the product without considering market forces   The monopoly can however not increase the price beyond the consumers ability to buy the product  (Max 4) Perfect competition  Individual firm in the perfect competition can not change the price on its own   They are price takers   Market forces supply and demand determines the price of the product   There are too many suppliers for one supplier to influence the price  (Max 4) (Accept any other correct relevant response) (Allocate a maximum of 4 marks for mere listing of fact / examples) (8) 2.5 How would collusion between companies negatively impact on the consumer? Collusion impacts negatively on consumer because:  it increase the prices of goods and services.   it decreases the quantity supplied, this leads to shortages or scaricities.   it leads to ineffective use of factors of production, leading to wastage, productive inefficiencies.   it leads to the creation of monopolies.   it leads to allocative inefficiencies – incorrect combination of product supplied to satisfy wants and needs.  (Accept any other correct relevant response). (Allocate a maximum of 2 marks for mere listing of fact / example) (8) [40] 5

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 QUESTION 3: MICROECONOMICS 3.1 3.1.1 Name any TWO characteristics of perfect competitor.  Many buyers and sellers   Product is homogeneous   Price takers   No government intervention   Complete or full market information   Free entry or exit from the mark   No collusion possible   Individual firms have a horizontal demand curve  (Accept any other correct relevant response) (2 x 1) (2) 3.1.2 How would economies of scale influence the price of a product? Economies of scale would influence the price of a product positively, as more products are produced, the cost of production decreases and the the price decreases.  (Accept any other correct relevant response) (1 x 2) (2) 3.2 DATA RESPONSE 3.2.1 Which market structure in the illustration has lots of competition and a differentiated product? Monopolistic competition  (1) 3.2.2 What control does the perfect competitor have over the price in the illustration? None  (1) 3.2.3 How is it possible for a monopoly to remain the only supplier of a product or service?  The product they are selling is unique and no one else is selling a similar product   They are normally protected by patent rights, copyrights or legislation.   To enter the market normally require a lot of capital and without government support it is not possible to start a company that will compete with the monopoly   Monopolies normally have a huge infrastructure to support their business  (Accept any other correct relevant response) (1 x 2) (2) 6

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 3.2.4 Oligopolies are the only market structure that can collude. Explain why. There are only 3 or 4 (few) sellers, making it easy for them to come together and collude  (2) 3.2.5 How would new suppliers in a perfect competition influence the price and quantity of a product and the profitability in the long run?  In the long run more firms will enter the market, and this competition will lead to lower prices.   More sellers will increase the quantity supplied and may even lead to surplus supply.   This competition then leads to an individual firm, only making normal profit in the long run.  (Accept any other correct relevant response) (2 x 2) (4) 3.3 DATA RESPONSE 3.3.1 Name one mobile data company mentioned in the article above.  Vodacom   MTN   Cell C   8ta  (Any 1 x 1) (1) 3.3.2 According to the article, why is the current promotional prices not sustainable? The prices are well-below cost (1) 3.3.3 What kind of market structure is represented in the above article? Oligopoly (2) 3.3.4 Explain price leadership. Price leadership occurs when one of the firms in the industry, usually the biggest, sets the market price. The other firms follow and set the same price.  (2) (Accept any other correct relevant response) 7

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 3.3.5 What would you advise Vodacom to use, other than lowering their prices, to gain more customers?  Vodacom should use non-price competition methods   They should use advertisement to create brand recognition and differentiation of their product   Vodacom should create brand loyalty – clients believing their product is superior  (Accept any other correct relevant response) (2 x 2) (4) (Merely mentioning examples related to the cell phone industry – a maximum of 2 marks) 3.4 Discuss the characteristics of monopolistic competition.  Relatively large number of buyers and sellers  - This type of competition consists of a large number of sellers, who are typically small businesses and no business has total market control.   Monopolistic competitors have little control over the price  - Competition does not take place through prices, but through differentiated products.   Products are differentiated  - Differentiated products differ only slightly, and the sellers promote their products as unique products through advertising / brand loyalty is also important  Market exit and entry is relatively easy  - Exit and entry is relatively easy, as there are no legal restrictions or patent rights   Buyers and sellers have incomplete information  - Neither the buyers nor the sellers have full knowledge about market conditions as there are many products and sellers  (Accept any other correct relevant response) (4 x 2) (8) (Allocate a maximum of 4 marks for mere listing of facts / examples) 8

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 3.5 With the aid of a graph, explain the relationship between an increase in consumption, total utility and marginal utility. (Max 4)  As the units consumed increase, total utility increases at a lower rate while marginal utility decreases at a faster rate   The total utility curve slopes upwards as the marginal utility curve slopes downwards   As consumption continues to unit 5, marginal utility becomes negative, while total utility declines  (Accept any relevant correct explanation) (Max 4) (8) [40] 9

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 QUESTION 4: MICROECONOMICS 4.1 4.1.1 Give any TWO examples of fixed costs in the short run.  Rent   Maintenance of a building   Equipment repayment   Overhead costs  (Accept any other correct relevant response) (2 x 1) (2) 4.1.2 What effect will a price increase on cigarettes have on the demand of smokers? The effect on the demand of smokers will be small to none as this is an addiction product and smokers will still buy the more expensive cigarettes irrespective of the price.  (Accept any other correct relevant response) (1 x 2) (2)  4.2 DATA RESPONSE 4.2.1 According to the table above, how many beers should this person consume to still get satisfaction? 3 beers  (1) 4.2.2 What is the formula to calculate marginal utility? MU = ∆TU / ∆Q  (1) 4.2.3 Explain the concept diminishing marginal utility. The law of diminishing marginal utility states that the marginal utility derived from the consumption of goods and services decreases as more units are consumed during a specific period of time. (1 x 2) (2) 4.2.4 Differentiate between economic profit and normal profit. Economic profit is the profit made over and above normal profit and normal profit is the minimum profit an entrepreneur must make to stay in the business. Costs are covered but no additional profit is made . (2) 10

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 4.2.5 Why is it important for an entrepreneur to cover implicit and explicit costs?  If only explicit costs – actual payment for the factors of production that are used in the production of goods and services  – are used the entrepreneur is not rewarded for his opportunity costs.   If implicit costs – the opportunity costs for the use of all self- owned resources in the production of goods and services- are covered then the entrepreneur will not take his resources elsewhere and continue with the business.  This is why the accounting profit differs from the economic profit. Accounting profit is calculated when revenue exceeds the explicit costs,  economic profit is calculated when revenue exceeds explicit and implicit costs.  (Accept any other correct relevant response) (2 x 2) (4) 4.3 DATA RESPONSE 4.3.1 Which picture illustrates an inelastic demand? Picture B  (1) 4.3.2 What is the nature of the product in Picture B? A necessity product  (1) 4.3.3 Give the formula to calculate price elasticity of demand. e=  (2) 4.3.4 Explain ONE factor that would determine the price elastic of demand?  The availability of substitutes – The larger the number of substitutes and the closer the substitutes are, the easier it is for the household to shift its consumption to alternative goods if the price of one of the goods increase.   The time period under consideration – the price elasticity of a product tends to be more elastic in the long term, compared to the short term. Households have time to adjust to a change in price.   The degree of necessity or luxury  – Necessities are more price inelastic and luxury products are more price elastic.   The proportion of income spent on the product – the smaller the proportion of income spent on a product, the more price inelastic the demand  (2 x 1) (2) 11

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 4.3.5 Distinguish between normal goods and inferior goods. Normal goods - A good that is demanded in larger quantities when income increases,  e.g. meat and milk.  Interior goods - A good that is demanded in smaller quantities when income levels increase,  e.g. milk sachet and cheap toilet paper.  (4) 4.4 Explain the SMART principle a business will follow to success.  Specific – the idea must be identified and understood and not merely a random idea   Measurable – it must be possible to test or measure whether the goal has been reached   Agreed – in a small business, the goal is easy to set as the owner is the only one who has to agree, in a larger business there will be many stakeholders who need to agree   Realistic – the goal must not be out of reach for the business, the business must be capable of generating the required profit   Time specific – there must be a time limit on achieving the goal  (4 x 2) (8) (Allocate a maximum of 4 marks for mere listing of fact / examples) 4.5 How would it help the entrepreneur to increase or decrease the price of his / her product if he / she is aware of the elastic of the demand curve?  Perfectly inelastic – the quantity demanded will not respond to any changes in the price of the product.  Producers can increase their income by increasing the price of the product as the quantity demanded will not change   Perfectly elastic – demand is very responsive to a change in price and lowering the price will increase the demand and as a result your revenue   Relatively elastic – to increase revenue always decreases the price never increases it   Relatively inelastic – to improve revenue only increases the price. A price increase will lead to an increase in income while demand remains unchanged   Unitary elastic – price changes have no effect on revenue. There sales income will remain constant  (Accept any other correct relevant response) (4 x 2) (8) (Allocate a maximum of 2 marks for mere listing of fact / example) [40] TOTAL SECTION B: 80 12

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 SECTION C Answer ONE question from this section in the ANSWER BOOK. Your answer will be assessed as follows: QUESTION 5: MICROECONOMICS  Discuss with the aid of graphs the following short-term equilibrium positions in a perfect market: o Economic profit (10 marks) o Economic Loss (8 marks) o Normal profit (8 marks) (26 marks)  How successful will an oligopoly be in increasing market share by changing the price of the product? (10 marks) INTRODUCTION A perfect competition is a market with a large number of buyers and sellers  OR A market is a place where buyers and sellers meet, agree upon a price and exchange goods or services  OR The short run is period where one of the costs must be a fixed cost  (Max. 2) 13

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 BODY MAIN PART ECONOMIC PROFIT Price / MC Costs /  Revenue  AR  MR  MARK ALLOCATION Correct drawing and labelling of cost curves: 1 mark Correct drawing and labelling of revenue curves: 1 mark Correct indication of profit maximisation point: 1 mark Correct indication of economic profit area: 1 mark Max 4 marks  The minimum point where the short-term average cost curve (AC) is lower than the market price.   The business is in equilibrium (profit maximisation) at point e where MR = MC and the business produces at quantity Q1 and market price P1   Total revenue is equal to 0Q1 x 0P1 (10 x 7) and the total cost is equal to 0Q1 x 0C (8 x 7)   The economic profit is represented by the area CP1eM (R14)  (6) (Accept any other correct relevant response) (Max 10) 14

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 ECONOMIC LOSS Price / Cost / Revenue 12 / C 10 / P1 7 / Q1 MARK ALLOCATION Correct drawing and labelling of cost curves: 1 mark Correct drawing and labelling of revenue curves: 1 mark Correct indication of profit maximisation point: 1 mark Correct indication of economic profit area: 1 mark Max 4 marks  The minimum point of the short-term average cost curve (AC) is higher than the market price or AR   The business is in equilibrium (profit maximisation point) at point e where MR = MC and the business will produce at quantity (Q1) and a market price of R10 P1   Total revenue is equal to 0Q1 x 0P1 (10 x 7) and total cost is equal to 0C x 0Q1 (12 x 7)   The economic loss is represented by the area P1CeB (-R14)  (4)(Max 8) (Accept any other correct relevant response) (4) (Max 8) 15

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 NORMAL PROFIT Price / Cost / Revenue 10 / P1 7 / Q1 MARK ALLOCATION Correct drawing and labelling of cost curves: 1 mark Correct drawing and labelling of revenue curves: 1 mark Correct indication of profit maximisation point: 1 mark Correct indication of economic profit area: 1 mark Max 4 marks  At point e where MR = MC the business will produce at quantity Q1 and market price P1   The lowest point of AC is tangent to the AR / MR curves   This implies that AC = AR and total cost is equal to total revenue (0P1eQ1 / 700)   Normal profit is the minimum earnings required to prevent the entrepreneur from leaving the market  (4) (Max8) (Accept any other correct relevant response) (Max. 26) 16

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 ADDITIONAL PART How successful will an oligopoly be in increasing market share by changing the price of the product?  The oligopoly will not use price to increase market share   As there are only a few large companies selling similar products in an oligopoly, they are interdependent on each other   If one company decreases their prices the other companies will follow,  and the expected increase in the quantity demanded will take place or will be much less than expected   If however the company increase the price the competition will not increase their price and the loss of customers will be much higher   This will lead to an oligopoly having a kinked demand curve   The oligopoly will use non-price methods to increase market share   If however this company is the largest company in the oligopoly it can increase the price, as it will be the price leader and other companies will follow   If all the oligopolies come together and through collusion they increase the price the consumer will have to pay the higher price   They can also form a cartel, and with this “monopoly” control the prices  (Accept any other correct relevant response) (Max. 10) CONCLUSION Businesses under perfect competition can only realise normal profits in the long-run due to the number of businesses entering into the market to share in the profits being made in the short run  (Accept any other correct relevant higher order response) (Max. 2) [40] 17

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 QUESTION 6: MICROECONOMICS  Discuss with the aid of graphs, the demand relationship for substitutes and compliments (complementary goods). (26 marks)  How dependent is the product market on the factor market? (10 marks) INTRODUCTION A substitute is a good that can be used in the place of another good   OR Complements are goods used jointly  (Accept any other correct relevant introduction) (Max. 2) BODY MAIN PART Demand for substitutes  An increase in the price of a good increases the demand and the price of the substitute good, ceteris paribus, and vice versa   The consumer can switch between the two goods and maintain the same degree of satisfaction  18

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 PRODUCT A PRODUCT B S1 Price Price So  So 16 10  12 e 7 e  D1  Do  Do 0 70 100 Quantity 0 Qo Q1 Quantity (Max 8 )  The above graphs shows the markets for two goods, Product A and Product B  The equilibrium price of Product A is R12, while that of Product B is R7   Assume there is a big decrease in the supply of Product A (So to S1) because of a severe drought. This leads to an increase in Product A’s price to R16  The law of demand states that when prices increase (from R12 to R16) the quantity demanded wil decrease (from 100 to 70)  Some consumers will switch from Product A to Product B  The demand curve for Product B will shift to the right (Do to D1) and the equilibrium price will shift from R7 to R10  While an increase in Product B also occurs, it is still relatively cheaper than Product A (R10 relative to R16)  (Max 6) (14) 19

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 Demand for complimentary goods  According to the law of demand, a decrease in the price of a product will increase the quantity of the product demanded.  As more of the product is used, households will also use more of the complement. PRODUCT A PRODUCT B S1 Price  So Price So P1 P1  Po Po   D1 Do Do 0 Q1 Q0 Quantity 0 Q1 Q0 Quantity (Max 6)  An increase in the price of Product A decreases the demand and the price of the complementary good, Product B , ceteris paribus, and vice versa  Consumers will buy less of product A and shifts the de,and curve to the left from D1 to D0 and, there is a decrease in the equilibrium price of Product B  They can lose business and revenue if the demand for their goods falls without them being aware that it is going to happen  Therefore they need to respond to the price changes that occur to other goods that could affect them quite quickly (Max 6) (12) (Max. 26) . 20

Downloaded from hlayiso.com ECONOMICS MEMORANDUM (Paper 2) GRADE 11 ADDITIONAL PART How dependent is the product market on the factor market? The factor market is a market where factors of production are bought and sold   The product market is a market where goods and services are bought and sold   The product market depends on the factor market for the availability of factors of production   When the supply of one factor of production changes, it will affect both the factor market and the product market   A change in supply of cow hides would affect the hide market negatively because there would be a decrease in the supply of hide   That would also affect shoe manufacturing and there would be fewer shoes and bags available in the product market for shoes and bags   When the demand for shoes in the product market increases, the demand for factors of production in the factor market will also increase  (Accept any other correct relevant response) (Max. 10) CONCLUSION Understanding the relationship between substitutes and complement any goods and keeping track of price changes is important to suppliers of these goods, as it will have a direct effect on their profit (Accept any other correct relevant higher order conclusion) (Max. 2) [40] TOTAL SECTION C: 40 TOTAL: 150 21