GRADE 12 ECONOMICS LEARNER 26423

PREFACE This document is intended to assist the Economics learners with all Grade 12 topics covered in Term 1, Term 2 and Term 3 in Economics. The document covers the following: Circular Flow Business Cycles Public Sector International Trade Perfect Market Monopoly Oligopoly Monopolistic competition Market Failure Economic growth and development Regional Development Economic and Social indicators Inflation Tourism Environmental Sustainability Assessment Activities Use this document to study the topic and answer the assessment activities thereafter. If you do not get all answers correct the first time, revise the topic and check thoroughly where you went wrong. The Curriculum Grade 10 – 12 Directorate acknowledges the contribution made in conceptualizing and producing this document by the KwaZulu-Natal Department of Education and Economics Subject Advisors. 7
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TOPIC Circular Flow WEIGHTING 25% SUB-TOPIC The circular flow model CONCEPTS Capital market, circular flow model, closed economy, consumption, economic equilibrium, factor market, financial market, foreign exchange market, goods market, injections, leakages, money flow, money market, open economy, real flow, savings, taxes, PRIOR KNOWLEDGE Circular Flow Model as a Macro-Economic Model: Grade 11 RESOURCES Textbooks, previous question papers, support documents ASSESSMENT Economic key concepts related to the Model and Circular flow diagram ERRORS/MISCONCEPTIONS/PROBLEM Participants confused with the markets. Differentiation between real ATIC AREAS and money flows. Roles of participants as individuals METHODOLOGY: Lecturing, Class discussion and Presentations CONCEPTS 8
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Source: Mind the Gap, DBE , 2012 The above model shows how the household sector, the public sector, the business sector as well as the foreign sector interacts with one another in an open economy. They are all economic participants. We also observe 3 markets in the model i.e. the factor market, the goods / services market and the financial market. Describe the open economy your own words. An economy that imports and exports goods and services to other countries. Describe a closed economy. An economy that does not take part in international trade. Circular flow model - The flow of production factors (real flow) and goods / services (also the real flow) AND the flow of money (e.g. wages, profits, disposable income of consumers will be the money flow) between households, firms and the government in the economy. Economic goods and services = these goods / services are scarce; have utility and value which contributes to the wealth of citizens of a country e.g. money and property; Participant
Consumers (C) = Household sector - Individuals which buy and consume goods and services, owns and control the factors of production by selling or renting them; Income (Y) – remuneration for the use of the factors of production in the form of rent, wages, interest and profits; Disposable income – Income earned after the deduction of taxes; Consumer expenditure - the spending of consumers on final goods and services; Savings – Income that is not consumed; Participant  Enterprise = Firms = Business sector – Economic units that demand productive resources from households and supply goods and services to households and the government; 9
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Investment (I) – Spending by firms on capital goods; Participant  Government (G) = State = Public sector – all aspects of local, regional and national government which include public corporations such as Denel, Telkom, Transnet, Eskom, SARB and the SABC; Transfer payment – payment by government to transfer spending power from one group to another, such as pensioners, disabled people and children; A transfer is ‘no remuneration’ for the use of factors of production as the people who receive the transfer are not employed; Investment – money spent on capital goods by firms or a business; Output = Quantity total produced; Subsidy – payment by government to producers to increase income and lower market prices of products; it bridges the gap between factor cost and market prices OR Subsidies on production – subsidies that are not linked to specific goods or services, e.g. subsidy on employment; Subsidies on products – financial incentives to help struggling industries to produce, as well as direct subsidies payable per unit exported to encourage exports (e.g. government subsidy on bread); Taxes (T) – Compulsory payments made by private individuals or business enterprises to the government sector with no direct benefit; Taxes on production – refer to taxes on production not linked to a specific good or service (e.g. tax on land and buildings); Taxes on products – taxes that are payable per unit of some good or services ( e.g. VAT, import duties & sin tax); Participant  Foreign sector – all economic activities carried out beyond the border of a nation; Foreign trade – the exchange of goods between countries in the form of imports and exports; Imports (M or Z) – goods produced by the foreign sector and purchased by the household, business or government sectors in the domestic economy; Exports (X) – goods produced by the domestic economy and purchased by the foreign sector. What do you understand by the term foreign investment? Foreign investment takes place when a foreign firm buys a business in our country, then this would be an inflow of foreign investment into our economy. When a foreign firm sells their assets, owned in our country, it is called and outflow of foreign investment. Market
Financial sector or market – this sector represents those financial institutions (e.g. banks, pension funds, JSE, insurance companies) who are not directly involved in the production of goods and services but act :
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as a link between households and firms; Market  Goods / Service market – a market where goods and services are traded; Market  Factor market – represents the amount received by the various factors of production; We distinguish between two types of flows in the economy circular flow model. Monetary (money) flows - the flow of income and expenditure between the participants in the circular flow; Real flows - the flow of production factors and goods / services between participants in the circular flow. On the model we also observed leakages and injections. Revision of the definitions and acronyms: Leakages (withdrawals) - (L) refer to the outflow of money from the economy e.g. • Savings (S) • Taxation (T) • Payment for Imports (M) Injections – (J) refer to the inflow of money into the economy e.g. • Investment (I) • Government expenditure (G) • Payment for exports (X) When will the economy be in equilibrium? When injections are equal to leakages, thus when L = J. And lastly which formula is used to calculate the GDP of a country? GDP = C + I + G + (X – M) where GDP is the value of all final goods and services produced within the borders of a country for a specific period. Interaction of markets in the Circular flow Model The model shows how the household sector, the public sector, the business sector as well as the foreign sector interacts with one another in an open economy. They are all economic participants. We also observe 3 markets in the model i.e. the factor market, the goods / services market and the financial market. The product and factors markets Product / Service market – a market where goods and services are exchanged, e.g. consumer and capital goods. Factor market – represents the amount received by the various factors of production e.g. in the labour and capital markets. ;
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The money and financial capital markets Financial sector or market – this sector represents those financial institutions (e.g. banks, pension funds, JSE, insurance companies) who are not directly involved in the production of goods and services but act as a link between households and firms. The money market - is the market for short-term and very short-term savings and loans. Discuss the impact of each participant in the economy. • NB: - when teaching roles of the economic participants it is very important to include within discussion the impact that these participants have in the economy • The impact can be both negative and positive • As a methodology you can ask learners to give the how each participants impact the economy. FOR EXAMPLE: Household: positively impact the economy by increasing aggregate demand leading to increase in the economic growth Negatively affect the economy as excessive demand leads to inflation. Business: create more job opportunities leading to an increase in the economy Private sector must be competitive in the economy Government: Improves infrastructure and provides service delivery to the public Activity 1 Explain the interaction of the economic participants in the macro-economic circular flow. Activity 2 Recap the day’s lesson when learners complete the blank spaces on the diagram: 10 x 2 = (20) <
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Activity 3 3.1 Give two examples of participants in an open economy (2x1) (2) 3.2 What role do financial institutions play in the circular flow (1x2) (2) 3.3 Study the table below and answer the questions that follow. Component R billion Government Spending 50 Savings 50 Exports 50 Taxes 40 Imports 55 Investments 55 (a) Give TWO examples of injections in the circular flow. (2) (b) Give an example of a leakage and an injection from the table. (2) (c) Distinguish between the leakages and injections. (2x2) (4) (d) Would you say this economy is in equilibrium? Justify your answer (4) 3.4 Explain the interaction between the households and firms in the circular flow (8) 3.5 Tabulate the differences between goods and factor markets (8) 3.6 Differentiate between real flows and money flows in the circular model (8) =
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WEEK 3 – 4.5 (6 Hours) TOPIC Circular Flow WEIGHTING 25% SUB-TOPIC/ CLARIFICATION National Account Aggregates RELATED CONCEPTS/TERMS/ VOCABULARY Final goods- are goods that are ready for consumption by the participants in the economy. Intermediate goods- are goods that are used as inputs to produce other goods and services Double counting: occurs when intermediate products are added to final products and will cause national accounts to reflect an incorrect higher total Residual item – balancing item due to errors and omissions Taxes on production –refers to taxes on production not linked to a specific product taxes on land and building taxes are payable corporate tax Taxes on product- are payable per unit of some good and service eg VAT Subsidies on production- it refers that are not linked to specific goods and services eg subsidy made on production Subsidies on product- financial incentives to help struggling industries produce, as well as direct subsidies payable per unit exported Gross Domestic Expenditure Gross national income (GNI)-total remuneration for the factors of pro Real GDP- it is the referred to as GDP at constant prices, real GDP are adjusted for price changes Nominal GDP- it is referred to as the GDP at current prices, it gives the current value of the price. GDP Deflator: it’s a ratio of GDP at current prices to the GDP at constant price for a particular period Formula for GDP Deflator: Nominal GDP ÷ Real GDP x 100 >
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PRIOR-KNOWLEDGE/ BACKGROUND KNOWLEDGE: The circular flow and quantitative elements: Economic goods and services RESOURCES ATP Textbooks Mind the Gap Study Guide Previous Question Papers ERRORS/MISCONCEPTIONS/PROBLEM AREAS o Calculations using different methods o GDP at current prices and constant prices. METHODOLOGY: use notes and activities below to explain national account aggregates. The National Account aggregates National account is an accounting record of a country total production, income and expenditure It is used to measure economic activities of a country i.e. GDP GDP is a total value of all final goods and services produced within the borders of a country in a specific in a specific period The term aggregate means total There are three methods that used to measure the national accounts The income method: remuneration for the factors of the factors of production that have been used in the production of goods and services The production method/ value added method: value of all the final goods and service produced in the primary, secondary and tertiary sector Expenditure method: total expenditure on final goods and services within the borders of a country Reasons for calculating GDP Deflator are to eliminate the effect of price changes to get the actual GDP not distorted by inflation. National account aggregates and conversions - key concepts. Differentiate between domestic production and national production. Domestic production (GDP) is the production that takes place within the borders of a country. It does not matter whether production is by South African or foreign firms. National production (GNP) is the output of a country produced by the factors of production owned by the permanent residents of that country, regardless of where the production takes place. In order to compare the GDP of one year with that of another, the nominal (current GDP which include the effect of inflation) has to be changed to a real (constant) GDP as follows: Nominal GDP x 100 / deflator Thus to calculate the real GDP the index should be deflated, that is, removing the effects of inflation since the base 65
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year. Which base year does the SARB use to publish figures and what does it mean? The current base year used by the SARB is 2005, because it is the year with very small price changes or price fluctuations. How can national income figures be expressed? National income figures can be expressed at market prices, basic prices and factor cost, depending on which approach is used to calculate the GDP of a country. In the national accounts there are two types of taxes namely • Taxes on production – refer to taxes on production not linked to a specific good or service (e.g. tax on land and buildings, business licensees, payroll taxes). • Taxes on products – taxes that are payable per unit of some good or services ( e.g. VAT, import duties, tax on imports and exports). The national accounts reflect two types of subsidies namely • Subsidies on production – subsidies that are not linked to specific goods or services, e.g. subsidy on employment. • Subsidies on products – financial incentives to help struggling industries to produce, and direct subsidies payable per unit exported, to encourage exports (e.g. government subsidy on bread). National account aggregates show the total (aggregate) value of income, expenditure and production in a country, the so called national income figures and are recorded in the national income accounts of the country. In short they can be summarised as PIE, illustrated below (the 3 methods in calculating the GDP): Source: Mind the Gap, DBE , 2012 66
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The production method is a method whereby we determine the Gross Domestic Product - GDP (P) - at market prices by adding the final values of all goods and services produced, calculated as gross value added. The income method is a method whereby we determine the Gross Domestic Product - GDP (I) - at market prices by adding all the income earned by the owners of the factors of production (gross domestic income). The expenditure method is a method whereby we determine the gross domestic product - GDP (E) - at market prices by adding the spending of the four major sectors of the economy - consumption, government, investments and exports (minus imports). Let's do an example of the different methods in calculating the national account aggregates. • What does the expenditure method calculate or add? The expenditure method adds up all the money spent in the country by households, firms, government and the foreign sector on final goods and services. Calculation yields GDP at market prices. AT MARKET PRICES This table shows that South Africa imported more goods and services than it exported in 2005. This caused a leakage (going out) from the circular flow to the value of about -R7 390 billion in 2005. • What does the income method calculate or add up? The income method add up all the money earned by households as remuneration for the factors of production, that is, by adding the amount of money earned through wages, rent, interest and profits. Calculation yields GDP at factor cost. Assessment Class work, homework on National account aggregates 67
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Activity 4 Study the table (data response question) below and answer the questions that follow: CALCULATION OF GDP ACCORDING TO THE INCOME METHOD R billion • Compensation of employees 843 • Net operating surplus 644 • Consumption of fixed capital 255 Gross value added @ A 1 742 • Taxes on production 35 • Subsidies on production 6 Gross value added @ basic prices B • C on products 231 • Subsidies on products 6 Gross domestic product @ market prices 1 996 Questions 4.1 Differentiate between GDP and GNP. (4) 4.2 Which alternative term is used for GDP in the national accounts? (2) 4.3 Provide labels for A and C. (4) 4.4 Calculate the gross value added at basic prices (letter B) . (4) 4.5 Which component contributed the most to the GDP? (2) 4.6 Give a reason why the GNP figures in South Africa are generally lower than the GDP figures. (2) 4.7 Which financial institution is responsible for the publishing of the GDP figures in South Africa? (2) = [20] 68
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What does the production method calculate or add? The production method calculates the value of each stage in the production process, thus the primary, secondary and tertiary sector outputs. Calculation yields GDP at basic prices. Value added in R Millions 2009 2010 Primary sector 136 076 141 906 Secondary sector 358 197 373 024 Tertiary sector 1 100 063 1 124 555 Gross value added at basic prices 1 594 336 1 639 485 Plus taxes on products 238 557 312 863 Minus subsidies on products (14 914) (19 106) Gross domestic product @market prices Source: South African Reserve Bank, Quarterly Bulletin, Sept 2011 If one uses the production method to calculate the GDP(P) at market prices, will GDP(E) be more, equal or less? Motivate your answer. It will be equal, because of the residual item (errors and omissions). Thus Production (or value added) GDP(P) = Income GDP(I) = Expenditure GDP(E) when calculating the GDP. Activty 5 5. Study the data in the fictitious table on main aggregates and answer the questions that follow: Billions of Rand Remuneration of employees 312 Other tax on production 72 Subsidies on products 6 Factor payments from the rest of the world 3 Factor payments to the rest of the world 11 Consumption of fixed capital 79 Tax on products 83 Other subsidies on production 7 Net operating surplus 138 5.1 Identify the method used in the above table to calculate the GDP. (2) 5.2 Name any other two methods that can be applied to calculate GDP. (4) 5.3 Calculate the GDP at factor cost. Show all the calculations. (4) 5.4 Calculate the GDP at market price. Show all the calculations. (6) 69
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5.5 The GNP (gross national product) differs from the GDP. Calculate the GNP at market prices. Note: Use the answer in Question 1.4 to do the calculations. (4) 5.6 “South Africa is very popular among other nations as a place to employ human and physical capital.” Do you agree with this statement? Motivate your answer by referring to the above figures. (3 5.7 Indicate which national account figure you will use for information on the following: 5.7.1 A change in the production of goods and services inside the borders of a country. 5.7.2 The level of production of goods and services inside the borders of a country. 5.7.3 The level of domestic expenditure inside the borders of a country. 5.7.4 The expenditure on the goods and services produced inside the borders of a country. 5.7.5 The income earned by the factors of production inside the borders of a country. 5.7.6 The value of goods and services produced by the citizens of a country. 6 x 1 = (6) Activity 6 6.1 Give any two methods used to calculate GDP (2x1) (2) 6.2 Why are subsidies subtracted when calculating GDP? (1x2) (2)6 6.3 Study the diagram below and answer the questions that follow. (a) Identify the sector that processes raw materials into consumer goods. (1) 6:
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(b) Which sector contributed most to the overall GDP growth? (1) (c) Define the concept Gross Domestic Product (2) (d) How to convert the GDP at market prices to GNI at market prices. (2) (e) Calculate the percentage of the Gross Value Added (GVA) at basic prices (4) 6.4 Distinguish between the basic prices and market prices. (8) 6.5 Study the table below and answer the questions that follow. Gross value added by kind of economic activity 2014 (R Millions) At current prices Primary sector 371 268 Agriculture, forestory and fishing 84 662 Mining, quarrying 286 606 Secondary sector C (c) Manufacturing 452 326 Electricity, gas and water 125 377 Construction 138 917 Tertiary sector 2 316 605 GVA @ basic prices 3 404 493 Source: [SARB Quarterly Bulletin 2015] (a) Identify any two activities under the primary sector (2x1) (2) (b) Which method is used in the table to calculate GVA. (1) (c) Determine the value of (C). (2) (d) Tabulate the TWO differences between nominal and real figures. (2x2) (4) 6.6 Study the extract below and answer the questions that follow. ,Feb March 2016 The government of Valspar has decided to expand the national road network by R200 million this year. The tendency of households is to save 20 per cent of their income. Source: DBE March/Feb 2016 (a) What percentage of their income do households spend? (2) (b) Explain the term multiplier. (2) (c) What impact will a tax increase have on the multiplier? (2) (d) Calculate the size of the multiplier. Show ALL calculations. (4) 6;
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WEEK 3–4 TOPIC BUSINESS CYCLES WEIGHTING 25% SUB-TOPIC/ CLARIFICATION Composition and features of business cycles RELATED CONCEPTS/ TERMS/ Recovery, recession, prosperity, depression, trend line, trough, peak, VOCABULARY exogenous, endogenous, lagging, leading, coincident, inflation, expansion, contraction, moving averages, extrapolation, forecasting PRIOR-KNOWLEDGE/ Circular Flow Model as a Macro-Economic Model (the open economy circular BACKGROUND KNOWLEDGE flow model); Multiplier RESOURCES • Text book and work books • Mind the Gap • Economics last mile version • News papers • Previous question papers • Chalk board ERRORS/MISCONCEPTIONS/PROBLEM AREAS • Circle or cycle • Business cycle & Actual or Real business cycle • Different trend lines • Difference between Endogenous & Exogenous causes of business cycles • Distinction between Monetary & Fiscal policy METHODOLOGY • Group discussions • Working in pairs • Explanations by educators (narration) • Question and answer method • Peer explanation • Combination of the above methods ASSESSMENT Class work Home works Class test 6<
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BASIC CONCEPTS: Definitions Business cycle is an increasing and decreasing of economic activities. Business cycle is the upward and downward movement of levels of gross domestic product (GDP). Business cycle is successive periods of fluctuations in economic activity. Key words Fluctuations Increasing/Decreasing Economic activity Periods Actual (Real) Business cycles is obtained when the effect of seasons, irregular events and the long –term growth trend are removed from the time series. The composition of the business cycle Source: Mind the Gap, page 16 6=
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The above graph shows economic activity over an extended period of time as the economy moves between periods of expansion (recovery/prosperity) and periods of contraction (recession/depression). Features The business cycle oscillates between the upper (peak) and lower (through) turning points. A period where there is a general increase in economic activity is known as an upswing. This is the entire period from the through to the peak. A period where there is a general decline in economic activity is known as a downswing. This is the entire period from the peak to the through. Peaks are the high points on a business cycle. The period immediately before and through the upper turning point of the cycle is called the boom. Troughs are the lower turning points on a business cycle. The period immediately before and through the lower turning points of the cycle is known as the slump. The length of a business cycle is the distance from one peak to the next peak or from one through to the next through. Amplitude is the vertical distance between a trough and the next peak. The trend-line may be positively sloped (when the GDP is rising), horizontal (when the GDP is staying the same) or negatively sloped (when the GDP is falling). Thus indicating the expected growth rate of a country. Extrapolations – is a technique used to predict the future by using past data Moving averages – are used to minimise the effect of short-term fluctuations. The aim is to highlight the long term movements when dealing with time series data. Define the concept business cycle: It is the recurrent, but not periodic pattern of expansion and contraction in the level of economic activity that occurs within a country OR It refers to fluctuations in economic activity or production over several months or years. What is the difference between the expansion phase and the contraction phase that could appear on a business cycle? Expansion is characterised by growth in real GDP, income and employment. It consists of two phases i.e. the recovery and prosperity (also known as the boom) phase. Firms make high profits and this attracts 6>
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other businesses to enter or the firms expand in the market. As more businesses open, more factors of production (e.g. labour) are employed. The increase in income causes an increase in aggregate demand which in turn forces producers to increase their output. This causes an increase in investment spending as producers expand their businesses and buy more inventories. Contraction is a period of gradual decline in economic activity. There is a decrease in aggregate demand that forces a decrease in output. The decrease in sales leads employers to reduce employment and income decreases. There is a downward spiral of real GDP (output), employment, income, standard of living, etc. This period consists of two phases i.e. recession and depression. When will a recession kick in? When there is a continuous decrease in economic activity for a period of six consecutive months (or two quarters). Causes of the business cycle There are numerous theories as to the causes of business cycles. Among these are the Monetarist approach and the Keynesian approach. The government uses monetary instruments such as interest rates to mediate these business cycles. The Monetarist (exogenous) approach. Exogenous variables are similar to independent or explanatory variables. They are used in a theory to explain other things but they are not themselves explained by the theory. This follows the belief that economic growth arises due to influences outside the economy or business of interest, markets are inherently stable. When disequilibrium occurs, market forces kick in and bring the market back to its equilibrium route, government should not intervene. Exogenous factors are factors that originate from outside the domestic economic system. Examples are technology advances, climate conditions affecting production, political shocks and unexpected events that can act as a trigger mechanism for a contraction or expansion. The Keynesian (endogenous) approach Endogenous variables are dependent variable. This follows the belief that economic growth is primarily the result of Endogenous and not external forces, markets are inherently unstable and prices are not flexible enough. 75
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Endogenous factors are factors that are inherent to the economy, markets are inherently unstable and that business cycles are part of the way market economies operate. They say that changes in investment spending and consumer spending bring about changes in the demand for output. Structural explanations for business cycles Methodology: kinds of business cycles- names, periods and economic activities Economists have identified a number of different kinds of business cycles based on the duration of a cycle and reasons for fluctuations. Kitchin cycles – These cycles last between three and five years and are thought to be caused businesses adapting their inventory levels. Jugler cycles – These cycles last slightly longer, from seven to eleven years and they are thought to be caused by changes in net investments by businesses and the government. Kuznets (Building) cycles – These are caused by changes in activity in the building and construction industry. They are usually between 15 and 20 years. Kondratieff cycles – These are long cycles because they describe long term fluctuations in economic activity – lasting fifty years and longer. Activity 7  Study the graph below and answer the questions that follow. 7.1 Name TWO turning points in the business cycle. (2) 7.2. Describe the concept business cycle (2) 7.3 What is indicated by the trend line? (2) 7.4 Explain how the government can stimulate economic activity in an effort to smooth out business cycles. (4) 7.5 What impact, do you think, will a huge investment, such as the Gautrain project, 76
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have on the business cycle? (2) 7.6 Differentiate between endogenous and exogenous factors as economic variables. (4) WEEK 3–4 TOPIC BUSINESS CYCLES WEIGHTING 25% SUB-TOPIC/ CLARIFICATION Smoothing of business cycles RELATED CONCEPTS/ TERMS/ demand-driven business cycle, supply-driven business cycle, investment-driven VOCABULARY business cycle, fiscal policy, monetary policy, new economic paradigm, paradigm shift, demand-side, supply-side, PRIOR-KNOWLEDGE/ Circular Flow Model as a Macro-Economic Model (the open economy circular BACKGROUND KNOWLEDGE flow model); Multiplier RESOURCES • Text book and work books • Mind the Gap • Economics last mile version • News papers • Previous question papers • Posters with formats in the notice board • Chalk board ERRORS/MISCONCEPTIONS/PROBLEM AREAS • Circle or cycle • Business cycle & Actual or Real business cycle • Different trend lines • Difference between Endogenous & Exogenous causes of business cycles • Distinction between Monetary & Fiscal policy METHODOLOGY • Group discussions • Working in pairs • Explanations by educators (narration) • Question and answer method • Peer explanation • Combination of the above methods ASSESSMENT Class work Home works Class test 77
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Government policies are used to correct disequilibrium in the economy. Monetary Policy Fiscal Policy Who formulates and SARB or monetary authority Government or State, implements The SARB’s Monetary Policy The Ministry of finance headed by the Minister of Committee (MPC) lead by the finance is responsible for executing this policy governor is responsible for executing the monetary policy Definition Monetary policy is process by The policy is about government’s budget, how is which the monetary authority of raises and spends money. the country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. Instruments Interest rates, Cash reserve Taxation and Government spending requirements, Open market transactions, Moral persuasion, Exchange rate policy, Reserve deposits, Credit control, and Management of public debt Also note the following Also indicating who is responsible for monetary policy and fiscal policy. Government’s primary aim with business cycle policies are to achieve the best possible growth rate (real GDP), stable prices and full employment. The policy instruments that government uses include primarily monetary and related policies, and fiscal policy. Monetary Policy The SARB can use monetary policy to soften the impact of the business cycle. If the economy moves into a recession, the SARB can increase the money supply by decreasing the interest rate. The decrease in 78
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interest rate makes it cheaper for firms to borrow money to finance the purchase of consumer goods. Together this increase in the demand for output helps the economy to move out of the recession, thus the SARB uses the expansionary monetary policy to stimulate economic activity. Other actions the SARB can take to enact the monetary policy are the following: o Modify the cash reserve requirements o Employ moral persuasion o Alter the exchange rate policy o Engage in open-market transactions When the economy is in an expansionary phase the state can adopt a restrictive monetary policy in an attempt to rein in potential inflation. This will decrease the level of economic activity due to the decrease in the size of the money supply. Fiscal policy This policy refers to the government’s use of taxation and spending in an effort to achieve the economic objectives of the state. The national budget is the chief mechanism through which fiscal policy is enacted. An example of South Africa’s 2011 national budget in pie chart form. The Trend Line The Trend line shows the general direction of the economy. It shows whether the economy is growing, remaining constant or declining over time. o Positive trend line shows that economy is growing o Constant trend line show that economy remains constant over time o Negative trend line show that economy is failing over time. What could the government do when the economy is in a recession? • Government can adopt an expansionary fiscal policy in an attempt to contain the economic slump and stimulate economic activity. • Government can increase government spending (G) and / or reduce the level of taxes (T). 79
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• When the economy is in an expansionary phase the state can make use of a restrictive fiscal policy to decrease economic activity. • Government can reduce government spending (G) and / or increase the level of taxes (T). The new economic paradigm (smoothing of cycles) In the new paradigm government focuses less on fine–tuning and more on eliminating uncertainties with regard to fiscal and Monetary policy. Government should rather stick to a stable and predictable policy to enhance the stability of the economic system. The economic paradigm is embedded in demand–side and supply-side policies. A) Demand-side policy Demand-side economic policy refers to measures undertaken by the government to influence the aggregate demand for goods and services in the country. Aggregated demand can be stimulated by curbing inflation or encouraging consumer spending through the implementation of monetary and / or fiscal policy measures. Explain how inflation can develop in the economy? o Assume aggregate demand and supply is in equilibrium in the market. o When the demand increases, the supply will react on the same day. o If the supply does not react to an increase in demand, prices will increase - a new equilibrium point will be formed. o This can lead to inflation. Explain how unemployment and inflation are related in the economy. o Demand-side policies are effective in stimulating economic growth. o The demand for labour will increase due to economic growth, and that leads to reduced unemployment. o A decrease in unemployment results in an increase in inflation because more people are employed, which causes and increase in demand for labour. o This relationship between unemployment and inflation can be illustrated by the Phillips curve. 7:
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B) Supply-side policy Discuss how supply can be stimulated through o Reduction in costs o Improving efficiency in inputs o Improving efficiency in markets Supply-side policy refers to any measures undertaken by the government to influence the level of aggregate supply of goods and services in the country in order to meet changes in demand. Aggregate supply can be stimulated by reducing production costs (e.g. cash incentives) or improving the efficiency of inputs (e.g. human resources development) through the implementation of monetary and / or fiscal policy measures. WEEK 3–4 TOPIC BUSINESS CYCLES WEIGHTING 25% SUB-TOPIC/ CLARIFICATION Features underpinning forecasting with regard to business cycles RELATED CONCEPTS/ TERMS/ Forecasting, economic indicator, depression, peak, recession, trough, VOCABULARY amplitude, moving averages, extrapolations, composite. PRIOR-KNOWLEDGE/ Business cycles (Grade 10) BACKGROUND KNOWLEDGE RESOURCES • Text book and work books • Mind the Gap • Economics last mile version • News papers • Previous question papers • Posters with formats in the notice board • Chalk board ERRORS/MISCONCEPTIONS/PROBLEM AREAS • Different trend lines • Distinction between Monetary • Interpretation of data i.e. jagged diagram • Extrapolation as a concept 7;
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METHODOLOGY • Group discussions • Working in pairs • Explanations by educators (narration) • Question and answer method • Peer explanation • Combination of the above methods ASSESSMENT Class work Home works Class test Features underpinning forecasting Forecasting is done by studying changes in the numerical values of indicators, i.e. time series data. Indicators suggest how an economy is performing or is likely to perform. Economic indicators are grouped into three categories i.e. leading, co–incident and lagging indicators. A) Leading indicators Leading indicators are those economic indicators that change before the economy has changed. They tell us how the economy will look in a few months’ time. Examples of leading indicators are: o Real M1 money supply o Prices of share categories e.g. gold o Business confidence o Labour productivity in manufacturing o Job advertising space in the Sunday Times, for example B) Co–incident indicators Co–incident indicators provide us with current information about the current state of the economy. This is because they vary at the same time as the economy and because of changes in the economy. Examples of co–incident indicators are: o Value of wholesale, retail and new vehicle sales at constant prices o Utilisation of production capacity in manufacturing o Volume of imports o Industrial production index 7<
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C) Lagging indicators These indicators change after economy has changed. Examples of lagging indicators are: o Real investment in machinery and other investment o Number of hours worked in construction o Unemployment rate o Number of commercial vehicles sold D) Composite indicator - Is summary of various indicators of the same type into a single value. - Their value is consolidated into a single value. - The same is done for coincident and lagging indicators. - The three composite indicators are often used to calculate a single composite indicator that is a single number to benchmark a country’s economic performance. CLASS TEST BUSINESS CYCLES QUESTION 1 MULTIPLE CHOICE 1.1 Various options are provided as possible answers to the following questions. Choose the answer and write only the letter next to the question number. 1.1.1 A business cycle estimating something unknown from information that is known is called……….. A. amplitude B. extrapolation C. trend 1.1.2 Negative economic growth for at least two consecutive quarters is known as a................ A. boom B. depression C. recession 1.1.3 Indicators which change before the business cycle change are called… A. leading B. lagging 7=
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C. coincidence 1.1.4 Business cycles are in the shape of... A circles B waves C a line graph 1.1.5 The new economic paradigm is embedded in … policy/policies. A demand – side B supply – side C demand and supply side 1.1.6 Fiscal stabilisation policies of the business cycles are … in nature. A countercyclical B procyclical C cyclical 1.1.7 During an economic recession ………… A unemployment will increase B production increases C spending increases (7 x 2) [14] 1.2. Choose a description from column B that matches an item in Column A. Write only the letter next to the question number. COLUMN A COLUMN B 1.2.1 Moving average A. Predictions about the future behaviour business cycles 1.2.2 Business cycle B. Interventionists that hold the view that markets are 1.2.3 Depression inherently stable 1.2.4 Keynesian C. The policy that is applied by the government in its approach endeavour to ensure the economy is run according to best 1.2.5 Coincidence possible practice. indicator D. The tool that is used smooth the business cycle in order to 1.2.6 Forecasting get a better picture of the general trend. 1.2.7 Fiscal Policy E. The graph that represent the level of economic 1.2.8 Extrapolation activity in a country. F. A phase where many businesses close down, resulting in very low output. G. A technique used to predict the future based on previous 7>
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Knowledge. H. Gross value added at constant prices, excluding agriculture, forestry and fishing. I. It shows the severity of each phase of the business cycle + (8 x 1) [8] 1.3 Give one term for each of the following descriptions. Write only the term next to the question number (1.3.1 – 1.3.6) 1.3.1 The graph/curve used to illustrate the relationship between unemployment and inflation. 1.3.2 Focusing on variables outside the system being explained. 1.3.3 The investment in capital goods is an example of this indicator. 1.3.4 The term used to describe the vertical distance between the trend line and turning points of the business cycle. 1.3.5 The ability of a firm or industry to adapt quickly to changes in consumer demand and technology. 1.3.6 An economic theory that stresses that economic growth depends on the stimulation of aggregate supply. (6 x 1) (6) [30] QUESTION 2: BUSINESS CYCLE 2.1 Answer the following questions. 2.1.1 Name two problems that may be encountered when applying fiscal policy to manage business cycles. (2x1) [2] 2.1.2 What is the purpose of the Trend line in a business cycle? (2x1) [2] 2.2 Study the diagram below and answer the questions that follow. 85
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2.2.1 What kind of economic growth does this graph illustrate? (2) 2.2.2 Identify the phase represented along no 6 and 7 on the graph above (2) 2.2.3 What impact do you think a huge investment such as the Rea – Vaya project can have on the business cycle (2) 2.2.4 Explain how the government can stimulate economic activity in an effort to smooth out business cycles. (4) 2.3. Explain stagflation in the context of business cycles (8) 2.4. Describe the economic activities taking place during phase 2 as depicted in the graph above. (8) 2.5 In your opinion, how can politics cause business cycles? (8) 86
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ACTIVITY 8 8.1 Study the extract below and answer the questions that follow. SA ECONOMY CLOSING IN ON A RECESSION South Africa's economy is at risk of falling into a recession, the World Bank said, as it cut the nation's growth forecast for this year to 0,8%. Growth in Africa's third-largest economy is under pressure, following a slump in commodity prices, weakening demand from China and the worst drought in more than a century. The rand has plunged 14% against the dollar in the past three months as sentiment worsened and credit-rating companies (Moody's, Standard & Poor's and Fitch) downgraded the country's credit rating because of growth risks. South Africa is projected to remain largely below the average growth rate of 4,5% for sub-Saharan Africa in 2016 to 2017. Against this backdrop, poverty in South Africa is set to rise as incomes fall. [Adapted from Fin24, February 2016] a) Identify TWO factors from the extract that contributed to the poor performance of the South African economy. (2) b) When is a country officially in a recession? (2) c) Explain the impact a downgrading of South Africa's credit rating will have on the economy. (2) d) In your opinion, what can government do to stabilise the downswing in the business cycle? (2 x 2) (4) 8.2 Name TWO types of business cycles. (2 x 1) (2) 8.3 Why the state would intervene in the economy? (1 x 2) (2) 8.4 Distinguish between exogenous approaches and endogenous approaches to business cycles (2 x 4) (8) 87
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8.5 Study the extract below and answer the questions that follow Composite business cycle indicators for South Africa The composite leading business cycle indicator decreased by 0, 9 per cent on a month-to- month basis in December 2014. The largest negative contribution to the movement in the composite leading indicator in December resulted from a decrease in the number of residential building plans passed. The largest positive contributions in December came from acceleration in the twelve-month percentage change in the number of new passenger vehicles sold, as well as acceleration in job advertisement space. The composite lagging business cycle indicator increased by 1, 2 per cent on a month-to-month basis in November 2014. Adapted from SARB: 24 February 2015 a) Identify the reason for the decrease in composite leading indicator. (1) b) What was the percentage of composite lagging indicator? (1) c) Define the term business cycle? (2) d) Distinguish between leading and lagging indicator (2 x 2) (4) e) What impact, do you think, a decrease of a leading indicator will have on the country’s economy? (2) 8.6 Discuss the following features underpinning forecasting: a) Trend line b) Amplitude c) Length (4 x 3) (12) 88
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WEEK 4 TOPIC Public Sector WEIGHTING 25% SUB-TOPIC/ Necessity and Composition of the public Sector CLARIFICATION RELATED Term Definition CONCEPTS/ The budget A document that details expected revenue and TERMS/ projected expenditure VOCABULARY Bureaucrats An official in a government department Central national government Concerned with national issues, e.g. safety and security Collective goods E.g. parks and public utilities. Free riders or people who do not want to pay can be excluded by levying fees Community goods E.g. police stations. Everyone can use these whether they are prepared to pay for them or not Demerit goods Harmful goods, e.g. cigarettes Deregulation Removal of unnecessary restrictions by law Direct taxes Taxes that are not shifted to the end user, e.g PAYE Indirect taxes Taxes levied on the sale of goods and services Local government Deals with local issues within a town or municipal area Merit goods Goods and services whose provision has more public benefit than private benefit, e.g. health Monetary Policy Committee (of the Reserve Bank) (MPC) Decides on the country’s monetary policy Medium Term Budget Policy Statement (MTBPS) Government's statement setting out its three-year budget Medium Term Expenditure Framework (MTEF) Estimates income and expenditure for a three-year period Nationalisation Transfer of functions and ownership from the private sector to the public sector Public goods and services Provided by the state for use by all the members of @ society, e.g. public libraries Regional government Deals with economic and other issues specific to a region/ province Regulation Putting laws in place to regulate activities State Owned Enterprises (SOE) A business owned wholly on partly by the state and run by a public authority, e.g Eskom and SAA Value Added Tax (VAT) An indirect tax on goods and services consumed in the economy 34| Page

PRIOR- Government as participant in the Circular Flow Model as a Macro-Economic Model and KNOWLEDGE/ government intervention BACKGROUND KNOWLEDGE RESOURCES • Text books • Mind the Gap • News papers • Previous question papers • Chalk board ERRORS/MISCONCEPTIONS/PROBLEM AREAS • Role of the Public Sector • Necessity of the Public Sector METHODOLOGY • Group discussions • Working in pairs • Explanations by educators (narration) • Question and answer method • Peer explanation • Combination of the above methods ASSESSMENT Class work Home works Class test ACTIVITIES Activities The composition and necessity of the public sector. A. Levels (spheres) of government • National government is that part of the public sector responsible for the overall running of the country and deals with national issues such as safety and security, foreign affairs and international trade. In South Africa the national government includes the President, Cabinet Ministers and Members of Parliament. The government is responsible for national issues such as defence, education, health, housing, safety and security. Central government also includes public service organisations such as the CSIR and SABS. 8:
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• Provincial government forms the part of the public sector that deals with economic issues specific to a given region or province. Provincial government receives a budget from national government, but they also generate their own income, mostly from taxes. They draw up frameworks for developing the economy of the province and improving services such as housing, health clinics and education. • Local government forms the part of the public sector that deals with local issues within a town or municipal area. These include municipal roads, libraries, traffic control and refuse removal. B. State-owned enterprises (SOE) -These enterprises are created by government to undertake commercial activities on behalf of government to provide public goods and services (e.g. electricity), also referred to as parastatals. C. Public -private partnerships- is whereby the government forms partnerships with private sector in order to provide public goods and services efficiently. Necessity/ reasons for government to intervene in the economy. It provides the structure and law and order that allow society to exist. The public sector determines the policies they believe will improve the living conditions and lives of the citizens. The public sector puts policy into action. It must deliver services and enforce law and order. Adam Smith argued that the government has three main duties namely: • To protect its citizens against external threats. • To maintain law and order within the country. • To provide certain goods and services which are needed by the citizens, but which are not profitable for entrepreneurs to provide. The government intervenes in South Africa’s mixed economic system when there is market failure. Market failure occurs when the free market forces of demand and supply fail to lead to an efficient allocation of resources. 8;
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Role of the public sector • The provisioning of public goods and services • Public goods are non-rival in consumption • It is not possible to exclude individuals from using public goods • Public goods are non-rejectable • Collective goods: goods for which it is possible to exclude free riders by levying fees or tolls • To conserve common resources: o Negative externalities o Positive externalities o To manage the economy: To protect consumers from monopolies. o The promotion of merit goods and the restriction of demerit goods Now we will discuss the necessary reasons why government should intervene in the economy. • The provisioning of public goods and services Public goods/services are also known as community goods/services e.g. public roads, national defense and street lights which are not provided by the private sector in a mixed economic system. The following characteristics of public goods and services can be studied: o Public goods/services are non-rivalrous in consumption Take a litre of Coke as an example. When one person has consumed the litre of Coke, it cannot be used by another person. Such goods are said to be rivalrous in consumption. Some goods can be divided into sale-able units and are therefore non-rivalrous in consumption. Some examples are street lights. They can still be used by other consumers without being used up. These goods/services are also known as communal goods/services. o It is not possible to exclude individuals from using public goods/services A good example will be the Union Building’s park. It is impossible to prevent individuals from enjoying the city’s views, while having a picnic. Also known as collective goods. Now the problem of free riders could arise, where individuals realize they could still benefit from good/services without paying for it. A good example will be watching TV without paying your TV licence. 8<
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Government try to overcome this problem of free riders by imposing compulsory payment in the form of taxes e.g. the tax levy on fuel consumption, which is included in the fuel prices. o Public goods are non-rejectable The third characteristic gives individuals the choice whether or not to consume the public product/service provided e.g. calling on the police force to remove criminals or choosing to pay a security firm to do this job. • Existence of externalities This is benefits or costs which result from the production of a good or service, but which are not reflected in the price of the product. Externalities are also known as spill over effects. The consumption of a good/service could have positive or negative consequences. A negative consumption of a good/service could be the depletion of natural resources or pollution. A positive consumption of a good/service could be free education. These negative and positive side-effects of production and consumption are known as externalities. How could government assist in reducing these negative externalities and thus limit the damages or social costs? Government could intervene by imposing taxes (increase their private costs) on e.g. paper producers, thus increasing their cost of production and then hoping they will limit their pollution. On the other hand how could government assist in maximising the benefits and encouraging the production of the good/service? Government could subsidise the production of the good or service to lower the cost of production or government could produce the good itself. • The promotion of merit goods and the restriction of demerit goods. Differentiate between the concepts merit and demerit goods? Merit goods are goods or services whose provision has more public benefit than private benefit. Examples include healthcare, education, emergency services and sporting facilities. Demerit goods are goods such as cigarettes which are deemed to be socially and environmentally harmful. The government often takes steps to discourage consumption and production of these goods e.g. through sin taxes. 8=
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• To protect consumers from monopolies When monopolies are formed there is a potential for resources to be wasted and for consumer to pay higher prices for goods and services than they would if there was perfect competition in the market. The state intervenes and strives to protect consumers through fair trade and healthy competition. Activity 9 9.1 Study the newspaper headlines below and answer the questions that follow:

















a) . Identify one State-Owned Enterprise in the above newspaper headline (1) b) Give another name for State-Owned Enterprise (1) c) What is common about the State-Owned Enterprises mentioned above? (2) d) Explain one reason why State-owned Enterprises often run into problems (2) e) How would privatisation solve the problem of State-Owned Enterprises? (4) f) Explain the role of public sector. (6) g) Tabulate the three levels of government and briefly explain the functions performed by each of these components. (8) 9.2 Briefly discuss possible reasons for government intervention in the economy. 4 x 2 = (8) 9.3 .Study the extract below and answer the questions Vote out failures, vote in profits One of South Africa’s most successful black industrialists says the current economic climate in the country is not conducive to business. The core of the problem, “the elephant in the room”, is south Africa” intractable labour laws, more than anything”. There are other structural macroeconomic issues that need to be sorted out, but labour is the biggest issue, he says.” We all 8>
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9.4 Read the following extract and answer the questions that follow: (a) Define the term privatisation. (2) (b) List any TWO different methods of privatisation (2x1) (2) (c) In your opinion, what are the alternative models to solve energy crisis. (2) (d) Why is Eskom regarded as a strategic industry? (2x 2) (4) 9.5 Name TWO instruments of fiscal policy (2X1) (2) 95
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9.6 Study the cartoon below and answer the questions that follow. WHAT A SURPRISE! NO INCREASE IN INCOME TAX OR VAT [Source: Business Times, February 2016] (a) Identify TWO indirect taxes in the cartoon above. (2X1) (2) (b) Name the fiscal instrument represented by the scale in the cartoon above. (2) (c) What is the 'surprise' depicted in the cartoon above? (2) (d) In your opinion, why did the Minister of Finance decide to keep income tax and VAT at the same levels? (2 x 2) (4) 96
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9.7 Study the graph below and answer the questions that follow. (a) Which curve is depicted in the graph above? (2) (b) What tax rate will generate maximum revenue for the government? (2) (c) What is the correlation between a tax rate of zero and a tax rate of 100% for the government? (2) (d) Explain the implication of a tax rate of 60% on the taxpayer. (4) 97
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9.8 Study the information below and answer the questions that follow. (Adapted from National budget 2015) (a) What does the acronym Sanral stand for? (2) (b) Describe the term E-toll. (2) (c) What negative socio-economic impact can e-toll tariffs have in South Africa? (2) (d) In your opinion what is the most important cause of public sector failure In South Africa? (Motivate your answer) (4) 98
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WEEK 8 – 10 TOPIC INTERNATIONAL TRADE WEIGHTING 30% SUB-TOPIC/ CLARIFICATION BALANCE OF PAYMENTS RELATED CONCEPTS/ TERMS/ Absolute advantage, balance of payments, BoP disequilibrium, capital transfer VOCABULARY account, comparative advantage, current account, current transfers, demonetization, debt forgiveness, direct investment, exports, financial account, free trade, imports, globalization, international trade, international monetary fund, international trade, monetization, net balance, net trade, opportunity cost, portfolio investment, reserves account, special drawing rights, specialization, terms of trade, trade balance, trade deficit, transfer payment, trade surplus, unrecorded transaction, PRIOR-KNOWLEDGE/ Circular Flow: open economy, foreign exchange market, national accounts BACKGROUND KNOWLEDGE aggregates and Globalization, RESOURCES • Text book and work books • Mind the Gap • Economics last mile version • News papers • Previous question papers • Posters with formats in the notice board • Chalk board • Textbooks • Examination guideline • South African Year Book • SARBQB • Stats SA • News bulletin • Internet ERRORS/MISCONCEPTIONS/PROBLEM AREAS • Disequilibrium (deficit/surplus) • Calculations • Portfolio vs direct investments (Liabilities and Assets) • Explanation of items captured under each account 99
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METHODOLOGY • Group discussions • Working in pairs • Explanations by educators (narration) • Question and answer method • Peer explanation • Combination of the above methods ASSESSMENT Class work Home works Class test ACTIVITIES 06 activities (easy, average and difficult) 9:
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BALANCE OF PAYMENTS The balance of payments is a systematic record of all transactions between one country and the rest of the worid. © Trade in goods © Trade in services e Income flows 1. The current account e The balance of the current account is an indication of whether the country can 2. The capital transfer account e The balance shown reflects the net amount of the capital transfer, either 3. The financial account e Records all international transactions in assets and liabilities are recorded 4. The reserve account e South Africa's balance of gold and foreign exchange reserves are not shown in the balance of payment account — this represents stock. Only the changes to the gold and foreign reserves are shown. Format of the Balance of payments 2012 R Millions R million Current accounts Export of goods 743 811 Net gold exports 71 050 Revenues from services 124 332 Revenues from income 48 501 Minus: Import of goods 854 439 Minus: Payments for services 145 006 Minus: Income payments 121 428 Current transfers (net receipts +) -31 369 Balance on current account -164 548 Capital transfer account 233 (net receipts +) Financial account Direct investments Liabilities 37 428 Assets -24 528 Net direct investments 12 900 Portfolio investments Liabilities 95 039 46|Page

Correcting disequilibria in the balance of payments The solution to correct balance of payments disequilibrium lies in earning more foreign exchange through more exports and reducing imports. ; Export promotion = government can help to promote exports ; Import substitution = government can help to reduce imports, making a country more selfreliant. How can the BOP disequilibria be corrected? o Automatic corrections by the forces of demand and supply freely working towards equilibrium. o Deliberate measures by the government intervening and manipulating imports and exports. Which methods can the government implement to correct the disequilibrium on the BOP account? o Obtain assistance from the IMF, the World Bank and the World Trade Organization. o Promote tourism as this lead to an inflow of foreign currency. o Control foreign exchange by forcing exporters to change foreign currency to local currency. o Incentives (concessions) can be granted to local manufacturers and exporters. o Control of imports by imposing duties or by implementing a quota system. o Disposable income can be lowered by higher taxation. 9<
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o Devaluating the local currency (Rand) to make exports cheaper and increase the price of imports. CLASS TEST 2 SECTION A QUESTION 1 1.1 Various options are provided as possible answers to the following questions. Choose the answer and write only the letter (A-C) next to the question number. 1.1.1. The systematic record of all the transactions of a country's inhabitants with the rest of the world, is known as the ... A. trade balance. B. balance of payments. Cc. national budget. 1.1.2 The value of visible exports minus visible imports is.................++ A. exchange rate B. net balance c. trade balance 1.1.3 Portfolio investments refers to investments in A. Property B. banks c. shares 1.1.4 Withdrawal of capital investment from a company or a country ....... A. investment 48|Page

7 sanction 7 disinvestment 1.1.5 The financial account in the balance of payment records the transactions related to... 7 production 7 assets and liabilities 7 net gold exports 1.1.6 The practice of selling goods in a foreign country at lower prices than in the country of origin is known as 7 exportation 7 importation 7 dumping 1.1.7 Payment for services forms part of the ...in the balance of payment. 7 financial account 7 current account 7 capital transfers account 1.1.8 The ratio of export prices and import prices is known as the.... 7 terms of trade 7 exchange rate 7 balance of trade (2 x 8) [16] 9>
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1.2 Choose the description from COLUMN B that matches an item in COLUMN A. Write only the letter (A-J) next to the question number (1.2.1-1.2.8) in the answer book COLUMN A COLUMN B 1.2.1 Capital transfer account A. the value of exports minus imports 1.2.2 Transfer payment B. subaccount in the balance of payment C. C. where one country can produce goods 1.2.3 Special Drawings Rights or services cheaper than others 1.2.4 Absolute advantage D. D. money received without any productive 1.2.5 Trade balance services rendered 1.2.6 Free trade 7 A financial instrument distributed among the member countries of the IMF. 1.2.7 International trade 7 The outflow is greater than the inflow of 1.2.8 Comparative advantage funds. 1.2.9 Direct investment 7 when consumers and producers are free to buy goods and services anywhere in the 1.2.10 Globalisation world without any restrictions 1.2.11 Deficit 7 The exchange of goods and service across the international borders. 7 A situation where one country has a relative advantage in the production of goods and services. 7 the economic integration and cooperation of countries of the world with international trade as a key element 7 Includes transactions relating to investment in business. 7 The transfer of ownership of fixed property between the residents of countries 1x12=12 :5
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1.3 Give ONE term for each of the following descriptions. Write only the term next to the question number (1.3.1-1.3.6) in the ANSWER BOOK. 1.3.1 The sum of net direct investment, net portfolio investment and other investments. 1.3.2 The worldwide interaction of economies, with trade as a key element 1.3.3 An international organisation that lends money to countries with ongoing balance of payment problems 1.3.4 A situation where one country has a relative advantage in the production of goods and services 1.3.5 The unfavorable balance on the balance of payments. 1.3.6 The sector that needs to be included for the economy to be regarded as an open economy (1x6) (6) SECTION B QUESTION 2 2.1 Study carefully the table below and answer the questions that follow: 2.1.1 Name ONE other account that forms part of the BOP. [1] 2.1.2 Identify an account that captures the effect of a foreigner purchasing shares on the JSE Securities Exchange? [1] 2.1.3 Define the term balance of payments. [2] :6
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2.1.4 Why is gold exports listed as a separate item in the BOP? [2] 2.1.5 Calculate the trade balance on the current account for 2006. [4] [10] 2.2 study the diagram below and answer the questions that follow: 2.2.1Name ONE item that appears in the current account of the balance of payments. (1) 2.2.2 Which year yielded the most unfavourable balance on the current account? (1) 2.2.3 Define the term Trade Balance. (2) 2.2.4 Describe the general trend of the balance on the current account between 2006 and 2011 (2) 2.2.5 Suggest TWO methods to improve the balance on the current account. (4) :7
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2.3 Study the table below and answer the questions that follow: 2.3.1 In which year did SA experience less deficit on BOP? (1) 2.3.2 Name an institution in South Africa that publishes regular detailed data on some of the most important economic indicators. (1) 2.3.3 How can taxes be used to reduce the above deficits on the current account? (2) 2.3.4 Explain the impact of the difference between production and consumption on imports in 2010? (2) 2.3.5 What is the correlation between the figures in the last two columns? (4) [10] :8
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2.4. STUDY THE GRAPHS BELOW AND ANSWER QUESTIONS THAT FOLLOW . 2.4.1 Which year shows the highest increase in net portfolio investments? (1) 2.4.2 Which account of the BoP is represented by the above data? (1) 2.4.3 What are portfolio investments? (2) 2.4.4 Explain the trend of total investment in the last graph. (2) 2.4.5 Discuss the impact of increase in FDI to the economy. (4) [10] :9
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2.5 Study the table below and answer the questions that follow: 2.5.1 Name TWO items that are captured as income under the current account. (2) 2.5.2 Explain the use of unrecorded transactions in the balance of payments. (2) 2.5.3 Why was there a change in the trade balance between 2011 and 2012? (2) 2.5.4 Calculate the balance on the current account for the second quarter in 2012 (4) [10] 2.6 Study the extract below and answer the questions that follow: BALANCE OF PAYMENTS BRIGHTENS There has been a turnaround from the sizeable net outflows over the past years when South African companies stepped up their efforts to internationalise their businesses. The shift in direct investments trend made a small contribution to improving the financial account of SAs balance of payments, which showed a surplus of 3.5% for the third quarter, up from 1.3% the previous quarter. The Reserve Bank’s quarterly bulletin shows capital inflows were more than adequate to finance the deficit of the balance of payments, which widened to 4.1% from a revised 2.9% in the third quarter. Economists expect that the current account deficit, which tends to be a driver of the rand exchange rate, will narrow again in the fourth quarter as exports pick up again. (Source: Business Day,12 December 2016) 2.6.1. What was the surplus in the financial account for the 3rd quarter of 2016? (1) 2.6.2. List any other accounts of the B.O.P. (1) 2.6.3. Explain one possible cause of the surplus in the 3rd quarter. (2) ::
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2.6.4. How will an increase in exports have an impact on the current account of the B.O.P.? (2) 2.6.5. Discuss any two methods that can be used to correct a deficit in B.O.P. (4) [10] SECTION C: ESSAY QUESTION3 Every country strives to have a positive balance of payments in order to survive in the global economy. · Analyse the components of the balance of payments. (26) · Briefly suggest ways in which the government can correct a sustained deficit. (10) Total: 40 ACTIVITY 10 10.1 The composition of the Balance of Payments (BoP) 10.2 Name TWO items in the financial account of the balance of payment (1x2) (2) 10.3 Define the term trade balance (2x1) (2) 10.4 Study the Balance of payment Current account and answer the questions tha follow. 2015 Balance of Payments Account R billions Merchandise exports 974 Net gold exports 68 Merchandise imports -1076 Trade Balance -34 Net service, income and current transfer payments -140 Balance on current account A Source: SARB Quarterly Bulletin June 2016 (a) Calculate the Balance on the Current Account for 2015 (A) Show ALL calculations. (4) :;
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10.5 How can imports be targeted to reduce the deficit on the balance of trade In South Africa? (4x2) (8) 10.6 In your opinion how can the Reserve Bank reduce the deficit on the balance of payments? (4 x 2) (8) :<
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WEEK 8 – 10 TOPIC INTERNATIONAL TRADE WEIGHTING 30% SUB-TOPIC/ CLARIFICATION FOREIGN EXCHANGE MARKETS RELATED CONCEPTS/ TERMS/ Exchange rates, domestic price, interbank foreign exchange market, VOCABULARY Johannesburg Securities exchange, direct intervention, indirect intervention, appreciation, depreciation, devaluation, revaluation, overvalued, undervalued, free floating exchange rates, fixed exchange rates, managed or controlled floating, terms of trade, exports, imports, deterioration in terms of trade, improvement in terms of trade, free trade, protection, exchange control PRIOR-KNOWLEDGE/ Circular Flow: open economy, foreign exchange market, national accounts BACKGROUND KNOWLEDGE aggregates and Globalization, RESOURCES • Text book and work books • Mind the Gap • Economics last mile version • News papers • Previous question papers • Posters with formats in the notice board • Chalk board • Textbooks • Examination guideline • South African Year Book • SARBQB • Stats SA • News bulletin • Internet ERRORS/MISCONCEPTIONS/PROBLEM AREAS • Interpretation of graphs • Calculations • Exchange rates systems • Factors that influence demand and supply of foreign exchange • Interpretation of graphs • Calculations • Exchange rates systems • Factors that influence demand and supply of foreign exchange :=
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METHODOLOGY • Group discussions • Working in pairs • Explanations by educators (narration) • Question and answer method • Peer explanation • Combination of the above methods ASSESSMENT • Class work • Home works • Class test ACTIVITIES 06 activities (easy, average and difficult) EXCHANGE RATES PRIOR KNOWLEDGE: CIRCULAR FLOW (FOREIGN EXCHANGE MARKETS) CONCEPTS Foreign exchange market concepts The foreign exchange market is a market where the currencies of different countries are exchanged, usually through the interaction of the demand for and the supply of currencies; also known as forex markets. Forex – every country has its own currency (shorthand for foreign exchange). When international trade occurs, imports have to be paid for in foreign currency. Exchange rates – it is the price of one national currency in terms of another currency. It is the ratio at which one currency can be exchanged for another currency on the exchange market. Fixed exchange rate – when a country fixes its currency to a quantity of gold or the US dollar, and announces a statutory exchange rate. Revaluation – measure enforce by a government to increase the exchange value of the currency. Devaluation – measure taken by a government to decrease the value of the currency. Floating exchange rate – exchange rate determined by market forces of demand and supply. Appreciation – an increase in the value of a currency in terms of other currencies as a result of market forces. :>
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Depreciation – a decrease in the value of a currency in terms of other currencies because of market forces. Foreign exchange control – these are various forms of control imposed by a government on the purchase or sale of foreign currencies by private residents. Foreign exchange market – introduction It is expressed (quoted) as the domestic price of one unit of a foreign currency, e.g. $1 = R9.80 or R9.8000 (rates are quoted in four decimals in foreign exchange markets). The price of a Dollar, Euro and any other currency is expressed in terms of the Rand (domestic currency). However, it can also be quoted the other way round, e.g. the foreign price of one unit of the domestic currency: R1 = (1
9.8). The price of the Rand is expressed in terms of the dollar and other currency. The first quotation is direct and the second one is indirect. The leading exchange markets in the buying or selling of foreign exchange is situated in London, New York and Tokyo. These markets serve the world but they are interlinked with regional and country markets. Differences in currencies Every country has its own currency, e.g. the US Dollar, the British Pound, the Japanese Yen, the French Franc, the Chinese Yuan and the Botswana Pula. A currency is a legal tender only in the country of origin. Trading blocks sometimes use a single currency, e.g. member countries of the European Union use the Euro. The US dollar serves as a base currency worldwide. The demand for and supply of foreign exchange on forex markets Imports create a demand for forex. An importing country such as South Africa will have to pay for imports with dollars, Euros or other currencies. Where the demand for and supply of foreign exchange are equal, the foreign exchange market is in equilibrium Demand of foreign exchange ;5
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GRAPH • DD represent original demand for dollars • SS represent original supply of dollars • Point E where DD is equal to SS is the original exchange rate $ = R6 · Original equilibrium quantity of US dollars is 15 dollars SHIFT IN THE DEMAND CURVE • The new demand curve of the dollar is D1D1 • Point E1 is the new equilibrium where the exchange rate is $1 = R8 • The new equilibrium quantity of US dollars is 25 dollars The demand for foreign exchange is determined by: • Importing goods and services from foreign countries • Services from foreign countries to the country concerned ;6
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• Payments of interest and dividends on loans and foreign investments • Payments of instalments on repayment of overseas loans • Tourists or representatives pending money in foreign countries • Outflow of capital to foreign countries ACTIVITY 11 GRAPH 11.1 Define the term exchange rates. 11.2 State 5 factors that could influence the shift of the demand curve from DD to D1D1 11.3 Use the above graph to explain the effect of the increase in the demand for the US dollar. 11.4 What happens to the value of the rand when DD shift to D1D1? Motivate your answer. ;7
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SUPPLY OF FOREIGN EXCHANGE • DD is the original demand of the US dollars. • SS is the original supply of the US dollar. • Point E where DD = SS is the original equilibrium exchange rate $1 = P • Original equilibrium quantity of the US dollars is Q dollars INCREASE IN SUPPLY • The new supply curve is S1S1 • Point E1 is the new equilibrium where the exchange rate is $1 = R4 • The new equilibrium quantity is 25 dollars The supply of foreign currency is determined by: • Exporting goods and services to foreign countries • Receiving interest and dividend on loans and foreign investments • Inflow of foreign capital ;8
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• Expenditure of money by tourists • Other receipts received from foreign countries • Rendering services to foreign countries • Repayment (by foreign countries) on loans made in South Africa • Investments made by foreign countries in South Africa ACTIVITY 12 Define the term foreign exchange markets. 12.1 Identify the original equilibrium point 12.3 What will be the effect on the value of the rand when there is an increase in the number US tourists visiting SA? 12.4 In a tabular form differentiate between supply and demand reasons for foreign exchange. 12.5 What will happen to the value of the rand when SS shifts S1S1? Motivate your answer. ;9
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EXCHANGE RATE SYSTEMS Free floating • Exchange rates that are determined by the market forces (demand and supply). • Exchange rate disequilibrium is controlled by the market through itself correcting mechanism. • There is no government intervention through the SARB. SA uses a free floating exchange rate system. Managed/ controlled floating • It is when the market forces (demand and supply) are allowed to influence exchange rates but up to certain levels. • There is an intervention of the government from time to time to stabilize exchange rates. • The central bank through buying and selling of foreign currency Fixed exchange rates • Determined and prescribed by the government. • Government intervention leads to stable exchange rates that benefit investment and trade between countries. • Exchange rates are fixed for a short period. There is revaluation and devaluation. TERMS OF TRADE Ratio between export and import prices, expressed in the form of an index. Increase in terms of trade – when export prices are higher than import prices. Decrease in terms of trade – when import prices are higher than export prices (disequilibrium) ACTIVITY 13 13.1 Differentiate between managed floating and free floating exchange rate system. (8) 13.2. Briefly discuss fixed exchange rates. (8) ;:
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13.3. Differentiate between devaluation and depreciation, using examples. (8) 13.4 How does the government intervene to control exchange rate system (8) 13.5. Differentiate between appreciation and revaluation. (8) ACTIVITY 14 TERMS OF TRADE 14 Use the table below to answer the following questions: Year Index of export prices Index of import prices 2014 110 98 2015 108 94 14.1. Define the terms of trade. (2) 14.2. Using information from the above table, calculate terms of trade for 2014 and 2015. (8) 14.3 What happened to terms of trade in 2014 to 2015? Substantiate your answer. (4) ;;
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ACTIVITY 15 15.1 Study the graph below and answer the questions that follow. (a) What market is depicted in the graph above? (1) (b) What currency is used in South Africa? (1) (c) Describe the term exchange rate (2) (d) If the original equilibrium point is e, identify the equilibrium point where the value of the rand has depreciated against the dollar. Motivate your answer. (2x2) (4) (e) Discuss factors that will affect the demand for foreign exchange in South Africa . (4x2) (8) (f) Differentiate between depreciation and appreciation. (4x2) (8) (g) Explain the term “managed exchange rate”. (2) (h) What effect did the change in demand have on the value of the rand? Motivate your answer. (2) ;<
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(i) How can the Central Bank of South Africa intervene in the foreign exchange market to influence the exchange rate? (2x2) (4) 15.2 Study the table below and answer the questions that follow. SOUTH AFRICA : TERM OF TRADE Year Index of Import Index of export Term of Trade prices prices 2011 153 191 124.8 2012 163 200 122.7 2013 179 214 (A) 2014 191 225 117.8 Source SARB Quarterly Bulletin, March 2016 (a) Identify the institution responsible for publishing the data above. (1) (b) Describe the term terms of trade. (2) (c) In your opinion what is the cause of the decreasing trend in the term of trade? (3) (d) Calculate terms of trade for 2013, labeled (A) on the table. Show all your calculations. (4) 15.3 Why is the terms of trade important to South Africa’s economy. (4 x 2) (8) ;=
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TERM 2 PERFECT MARKETS When totes! costs are greeter than total rewenue. When everace revenue & lower than average cost the firm makes am economic toss Profit that is mede in addition to normal profit. When everage revenue is greater than average cost the firm makes an economic profit Explich cost Actual expenditure of business. e.¢ wages and imterest impticit cost Velvwe of inputs owned Dy enmtrepreneur and used in the Production process (forcteited rental, interest + salary) Long run The period of production where sill factors can change- The time is tong enough for variable and fixed factors to change Market An institution of mechanism that brings together buyers @nd selfters of soo0ds of services Market structure How a merket is organised Monopolistic A merket structure in which businesses have many competition competitors. but each one selis a slightly different Product (e¢ CD's and books) Monopoly Exctusive comtrol of a commodity or service ina Perticuler merket Norma! profit The minimum earnings required to prevent an entrepreneur from leaving the industry. When average revenue equals average cost the firm mekes a normal proat A merket structure controfied by = small group of Dusinesses Perfect competition A merket structure with terse numbers of producers and buyers Price taker Has mo influence om price. Takes price thet is determined by the market Short run The period of production where only the variable factors of production can change while st least ome factor is fixed Shutdown point Business will close where MC = AVC The Cor Appes! Court An institution whose main functions ts to review orders made by the Competition Tribunal and amend or confirm these orders The Competition Commission Practices, abuse of dormmant postions and mergers in order to achieve equity in the South African economy The Competition Tribunal An institution whose main function is to approve large mergers, sdjudicate im the case of misconduct @nd issue orders on matters presemted to & by the Competition Commission 69|Page

DETERMINATION OF OUTPUT IN THE PERFECT MARKET IN THE SHORT TERM The equilibrium price in Fig 1 is P1 where demand and supply intersect. The individual producer in Fig 2 can sell any quantity at this price. He takes the price that has been determined in the market. He has no reason to reduce the price to P0 because buyers are prepared to pay P1. If he reduces the price, he will soon run out of stock. He will be forced to increase the price back to P1. If he sells at P2 he will have no buyers. Consumers will buy from other sellers because there are many other sellers in the market. He will be forced to reduce the price back to P1. <5
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How much must he produce and sell at this price? He must use marginal revenue-marginal cost rule Marginal revenue-marginal cost rule What is marginal revenue? 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 Fig 3 is A. In a perfect market the price (P) is the same as MR and the demand (D). In Fig 3 both MR and D coincide in one curve. In Fig 3 if the firm is producing a quantity between 0 and Q1 it is worthwhile to continue producing because at this stage more profits can be obtained by producing more. At this stage MR lies above MC. The profit-maximising rule says as long as MR is more than MC the firm must continue to produce until MR = MC. The maximum profit is obtained at point A where MR = MC. At any point to the left of A, the <6
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firm must increase its output in order to increase profit. At any point beyond A, MC lies above MR – the cost of producing one more unit is more than the revenue obtained. A wise entrepreneur will not produce beyond A because that will reduce his profit. Point A is called the profit maximising point* because that is where the profit is at its maximum. IN THE LONG-TERM Production level in the long-run is determined using the long-run average cost (LAC) curve. LAC is a summation of short-term costs, SACs. LAC is U-shaped. This shows that long-run costs decrease in the beginning as the size of the firm increases. This happens because when the firm begins to buy in bulk, it gets discounts and the average input costs decrease. In the long-run all factors of production are variable. The firm can increase its size or it can acquire more factors of production. As the business becomes bigger, its costs of production per unit become lesser. We say in the long-term the firm enjoys the economies of scale*. This is depicted by the falling part of the LAC curve in Fig 4 – the area between A and B. The curves SAC1 to SAC4 are the short-term average cost curves of the same firm. The curves SMC1 to SMC3 represent the short-term marginal cost curves of the same firm. At a price of P1 the firm is producing Q1 and making economic profit (shaded area). As time goes on the firm is able to increase its size. As the size increases, the average costs are decreasing – shown by the lower SAC2. During this stage the firm is able to buy more inputs at a lower cost because of bulk-buying. As long as LAC is decreasing, the firm must continue to increase its size because it will make more profiting by doing so. The optimum point of production level in the long term is “e” where output is Q3. Here LAC is at its minimum point. LMC cuts LAC at its minimum point. As long as the firm is producing any quantity to <7
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the left of Q3 it can increase its profit by producing more. The firm must take advantage of the economies of scale applicable to this stage. However, the firm must not exceed point “e”. At any production level beyond “e” the firm will suffer the diseconomies of scale* because it will become too big and cumbersome. Determination of the output of the industry Fig 5 shows the long term production level for the industry. Equilibrium in the industry is achieved where the quantity demanded is equal to the quantity supplied. The existence of economic profit in the industry attracts other firms. At P1 the industry is prepare to sell Q6. As more firms enter the market, the supply increases to S2 and the price drops to P3.The economic profit that was made in Fig 4 has decreased. Both the individual firm and the industry are making normal profit at P3. The individual firm produces Q3 while the industry produces Q6. Q6 is a sum total of all the quantities supplied by the individual firms that make up the industry. In the long-run all businesses will produce output where they are making normal profit. Those businesses that make losses will exit the market. DETERMINATION OF PROFITS IN THE PERFECT COMPETITION Profit is a positive difference between TR and TC. There are two kinds of profits that the business can make economic profit and the normal profit. 1. ECONOMIC PROFIT It is possible for an individual in the perfect market to make an economic profit in the short-term. There are two ways of determining economic profit – the total revenue/total cost approach and the marginal revenue: marginal cost approach. a) Total Revenue/Total Cost Approach <8
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The total revenue curve (TR) is drawn from the origin. Total cost (TC) starts above the origin because before production takes place there are fixed costs that are incurred. Between the output 0 and Q1, the firm is making a loss. TC runs above TR meaning the costs are more than revenue. However, the firm must continue producing because it can still make profit by producing more. If it continues to produce it will reach a breakeven point where TR is equal to TC (breakeven point B1). At this point the firm is making a zero profit (zero loss). The firm is now able to cover its costs. It must continue to produce in order to realise a profit. Between Q1 and Q3 it is making economic profit. It will earn the maximum profit where the difference between TR and TC is the greatest. This will be at Q2. The maximum profit is found where the line XY (which is parallel to the TR curve) is tangent to TC. Again as the firm continues to grow, TC starts to increase until it reaches breakeven point B2. The firm should not grow more than point B 2 because it will make a loss. b) The MR/MC approach According to the MR/MC rule maximum profit is made at point where MR=MC. In Fig 7 below, that point is point A. At this point the total cost is 0CBQ1. Total revenue is 0PAQ1. The difference between TR and TC is CPAB. This is the economic profit that this firm is making. If the firm is producing a quantity which is less than Q1, it must continue to produce because it will still make more profit by doing <9
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so. For quantities to the left of Q1 MR runs above MC. The firm must continue to produce until it reaches Q1. The profit maximisation point is a point where MR = MC (point A in Fig 7). <:
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2. NORMAL PROFIT. Because in the perfect competition there is free entry, more sellers will be attracted by the economic profit. As more firms enter the market economic profit is depleted. In the long-run only normal profit is made. Point E in Fig 8 shows normal profit in the long-run. 3. ECONOMIC LOSS If the firm is making a loss, it will try to minimise its loss. The point where the loss is at it’s a lowest is where MR=MC. Fig 9 shows economic loss in the short-run. <;
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Economic loss is minimised at Point B where MR=MC. At a price of P the AC lies above the AR curve. The cost of producing one unit is more than the revenue received from that unit. In other words MC is more than MR. Total cost is 0CAQ. Total revenue is 0PBQ. Total cost is more than total revenue. The area CABP marks the economic loss. The supply curve and the shutdown point If the firm is making a loss when should it shut down? It should shut down at a point where average variable costs (AVC) are more than marginal revenue (MR). Remember, MR is the same as the price. It does not make sense to produce at a cost that is more than revenue. At that point the firm must shut down. That point is represented by A in Fig 10. If the price falls below P, the firm must shut down. Point A is called a shutdown point*. However, if the price is anywhere between P and P1, the firm can continue to produce because the price is above AVC. For the prices above P the firm is prepared to offer Q, Q1 and Q2 for sale. In other words points A, B and C form the supply curve of this firm. The supply curve is the rising part of the MC curve above the AVC. <<
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1. MONOPOLY The berriers to entry are not economic in nature, but are ceused by other factors. For example. = petent — this is the tegali right of a holder to exchusively manufacture & product Cartel A group of producers whose gos! is to form a collective monopoly im order to fix prices and limit supply and competition Coftusion An arrangement between businesses with the aim of fimitings Competition between them by fixing prices When the merket price is not a pure refiection of the scarcity (lack) of thet product Monopoly based on tews preventing other companies from competing Monopotistic A merket structure with many buyers and seers where competition entry is relatively easy but the product is differentiated. ee. toothpaste Monopoly A merket structure where only one setlier (producer) operates. Emtry is biocked and the product has no close substitutes High development costs prevent others from entering the market. A singge business can serve the whole market at @ lower price due to economies of scale. being terge e.<- weter and electricity Non-homogenous Manufacture different werietions of their products in order to make itt difficult for other companies to copy thet specific product Oligopoty A merket structure where only = few sellers opersate_ Entry is difficult and products can be differentisted or Standardised A shuation where one frm fixes a price and the others @ccept ft as the market price 78|Page

DETERMINATION OF PROFIT AND LOSS IN THE SHORT-RUN Use the table below of a typical monopolist and plot the revenue curves on the same set of axes. Notice the position of the Marginal revenue curve in relation to the Demand curve- Price Quantity Total revenue Average revenue Marginal revenue — o o o o 100 a 100 100 100 30 2 180 30 so 80 3 240 80 60 7o a 280 7o 420 60 Ss 300 60 20 so =] 300 so o 40 7 280 ao -20 30 3 240 30 —40 Answer to activity 1 100 3:0 so 7o 60 so 40 30 20 10 DD = AR a MR a 2 3 a Ss a 7 s Quantity 7-3-2 Economic profit in the short term (ea Sy Step 1: Draw your two axes First, draw your TWO axes: Price (vertical) and Quantity (horizontal) — remember, they meet at the “Price origin (O). Everything counts for marks — do not leave out anything. Now go to step 2. Step 2: o : a The two Figure 7.2 revenue curves start on the price axis Price and move down to meet the quantity axis. Draw these axes now. Then go to step 3. Akan) VAR o Figure 7.3 79|Page

Step 3: This MC curve intersects the AC curve at the minimurr point of the AC curve. ~ mc en ee “aR es “o Figure 7.4 4 same point) “ Quantity Step 4: The most important point om the graph is where MC = MR (look for the dot © )}. At this point: equilibriurny maximum profit/ profit maximisation is reached (all the Step 5: This dot is extended upwards and downwards. Your cosi occurs where it meets the AC curve, and your marke price occurs where it meets the AR curve (demanc curve). Remember, a monopoly company will determine the price. “Price ~Mc Figure 7.5 80|Page

1.1 PROFIT IN THE SHORT-RUN Let’s look at the determination of profit and loss in the short-term. The dynamics that face the monopolist are not the same as those that face a firm in the perfect competition. While the individual firm in a perfect competition is the price-taker, the monopolist is the price-maker*. While the individual firm in a perfect competition is faced with a horizontal demand curve, the monopolist is faced with a downward-sloping =6
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demand curve. This means the firm in the perfect competition can sell any quantity at the market price. The monopolist, on the other hand, can reduce his price up to a point where he makes maximum revenue. The point where the maximum profit is made is determined where MR = MC. The monopolist is faced with the same cost structure as any other business. To maximise profit the monopolist must produce at a point where MR = MC. Suppose Table 1 shows the marginal revenue and marginal cost of a certain monopolistic business. Table 1 Profit maximisation schedule of a monopolist Quantity Price Marginal revenue Marginal cost 0 110 - - 1 R100 R100 R40 2 R90 R80 R20 3 R80 R60 R30 4 R70 R40 R40 5 R60 R20 R50 6 R50 R0 R60 7 R40 -R20 R70 8 R30 -R40 R80 MR and MC are going in opposite directions. As output increases marginal revenue decreases while marginal cost decreases. They are bound to meet somewhere. This happens at the output of 4 units. Both MR and MC are equal at R40 each. This is the profit maximising point. At the quantities smaller than four, marginal revenue is bigger than marginal cost. At the forth unit MR = MC. At quantities bigger than four, MR falls below MC. This confirms that the point where the monopolist makes the maximum profit is where MR and MC are equal. =7
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Fig 1: Profit maximisation by the monopolist Fig 1 is a graphical representation of Table 1. Marginal revenue and marginal cost are measured on the y axis while the quantity is on the x axis. The profit maximisation point is Point E where MR and MC are equal. The corresponding output produced is 4 units (Qm– monopoly quantity). On quantities smaller than Qm, the MR curve runs above MC curve. This is to show that the monopolist can still increase his profit by increasing output until the point where MR = MC. In the graph above that happens when four units are produced. He cannot produce more than four units because the fifth unit and more are produced at a higher cost. From the fifth unit upwards, marginal cost is more than marginal revenue – MC is now above MR. To determine the price the monopolist will charge, we extend the vertical line from Qm right up to Point A where it meets with the demand curve. The price that corresponds to Qm on the demand curve is R70 (Pm – monopoly price). The average cost (AC) is the total cost of production. The cost of producing four units is R50 each. It is found where AC cuts the QmA line at point B. There are two methods of calculating profit. 1. Using the totals: Total revenue minus total cost. Total revenue is the area marked 0PmAQm which is R70 x 4 = R280. Total cost is the area 0CBQm which is R50 x 4 = R200. Therefore profit is R280 – R200 = R80. 2. Using unit values: (Profit per unit minus cost per unit) x quantity (R70 – R50) x 4 = R80 In both cases the monopolist is making an economic profit. Economic profit is the profit that is over and above the normal profit. It is also called the abnormal, supernatural profit. =8
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1.2 ECONOMIC LOSS Does the monopolist always make economic profit? It is possible for the monopolist to make a loss as well. The monopolist makes a loss if total cost (AC) is more than average revenue (AR). Remember, AR is the price at which the product is selling. Now, if the cost is more than revenue, the company will make a loss. Fig 3 Economic loss The MR/MC rule applies even where the company is making a loss. Fig 3 shows AC running above the average revenue curve (AR). This tells us that the cost is more than the price. The company is making an economic loss here. The area P1 P2BA, represent the economic loss that the firm is making. Note that AR is above AVC. Although the firm is making a loss, as long as average revenue (AR) is greater than average variable cost (AVC) in the short-term, the company can continue producing. At this stage the company can still cover its variable costs. There is no need to shut down the business yet. The monopolist should shut down when the price falls below AVC. =9
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1.3 Determination of profit and loss in the long run a) Long-run profit A firm that is making economic profit in the short-run will try to sustain it even in the long-term. A firm that is making economic loss in the short term will try to improve its situation so that it can make economic profit in the long term. Fig 4 Long-run equilibrium of the monopoly The monopolist makes economic profit even in the long term. Equilibrium in the long term is determined where LMR = LMC at point E. The price the monopolist charges is obtained by extending the line to point C on the demand curve, D=AR. Total revenue is 0P2CQ1 while total cost is 0P1BQ1. Economic profit is the difference between 0P2CQ1 and 0P1BQ1 which is P1P2CB. =:
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1.4 Comparison between monopoly and perfect competition Perfect competition Monopoly Demand curve The individual firm in a perfect competition The monopolist faces a downward-sloping faces a perfectly elastic demand curve. He demand curve. He knows his demand and can cannot change the price. If he tries to manipulate output in order to make increase his profit by increasing the price, maximum profit. Since the monopoly also consumers will move away and buy from forms the market on its own, the demand for someone else. If he tries to increase sales by an individual monopolist is the same as the reducing the price, he will immediately run demand for the industry. The monopolist can out of stock because he will be swamped by increase his profit by reducing the price up to customers. The individual firm in a perfect a level where MR is equal to MC. This competition is a price-taker. The price is quantity is the profit-maximising quantity determined in the marketplace by the interaction of demand and supply Efficiency Businesses in the perfect competition are In Fig 5(b) the monopolist charges a price forced to achieve both productive and which is much higher than the price charged allocative efficiencies. At point E in Fig in the perfect competition. The monopolist 5(a) both productive and allocative charges P2 instead of P1 which is charged by efficiencies are achieved. Productive perfect competition. efficiency means production takes place at the lowest possible cost. This is achieved at The monopolist produces a lesser quantity point E because ATC is at its minimum than the perfect competition. The allocative point. Allocative efficiency is achieved efficient output is Q Com which is the output because price is equal to marginal cost. associated with the minimum point of ATC. Instead the monopolist produces QM which is less than the output the society wants. The monopolist is only interested in making maximum profit for himself. He is looking for the point where MR = MC. As a result society loses the quantity QMQC. Profit The economic profit made in the perfect In the monopoly, the economic profit made is market is gradually reduced as more firms sustained indefinitely. The monopolist enter the market. In the long term the continues making economic profit b…oth in perfect competition makes a normal profit. the short run and the long run. =;
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Fig 5 Inefficiency of monopoly compared against perfect competition 2 OLIGOPOLY 2.1 Characteristics of an oligopoly Number of businesses There are few but large businesses e.g. Vodacom, MTN, Cell C in the cellphone industry. The Big-4-Banks of SA also form oligopoly. If there are only two firms it is called the duopoly. If the firms are more than two it is called the pure oligopoly. Entry is free but not easy. Nature of the product The product may be identical or differentiated e.g. cement or steel producers. If the product is homogeneous the market is a pure oligopoly. If the product is differentiated the market is called differentiated oligopoly. Examples of pure oligopoly are the producers of cement and steel. These are very few but big industries. Examples of differentiated oligopolies are manufacturers of toothpaste, banking services, insurance companies. Freedom of entry & There are strict barriers which prevent entry into the market. However, it is possible for many exit smaller firms to operate on the periphery of an oligopolistic market, but none of them is large enough to have any significant effect on market prices and output. Decision making There is a lot of interdependence between the different firms. The decisions taken by one firm are influenced by the decisions of other firms. Each firm is aware of the others’ actions. If one firm introduces a new marketing strategy all the other competitors become aware and do the same. A new advertising campaign by one firm causes others to follow suit – refer Cell C’s “Call for free on the weekends”. Control over price The oligopolist has control over the price but not as much as the monopoly. He is a price-maker. However, he must consider the reaction of other firms. The prices charged by oligopolists are closed related. Example interest rates charged by banks are very similar. The oligopoly is characterised by price rigidity. Prices tend to be rigid and sticky. If any firm cuts the price, the rival firms retaliate by cutting their prices as well. A price-cut by one competitor initiates a price-war in the oligopolistic market. Hence under oligopoly no firm resorts to price- cutting without first consulting other firms in the market. Non-price Oligopolists do not use the price when they compete with each other. They use non-price competition competition strategies such as
aggressive advertising
branding =<
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product differentiation
product loyalty
good service (e.g. after-sales services)
extended business hours (including Sundays and holidays)
door-to-door deliveries Collusion Oligopolies are characterised by the act of collusion. Since there are few firms in the industry, it is easy for them to collude. They come together and form agreements to cooperate with each other and raise prices or restrict production in order to influence the price. There are two forms of collusion – overt collusion*(a.k.a. explicit collusion) and tacit collusion* (a.k.a. implicit collusion). Overt collusion: This is open collusion which can be seen by everybody. An example of overt collusion is a cartel. A cartel is an open agreement between firms to fix prices or to limit supply in order to increase profits. The disadvantage is that cartels are unreliable. A firm can decide to cheat on others and sell at a lower price in order to attract buyers. Examples of cartels are the Organisation of Petroleum Exporting Countries (OPEC) and De Beers (diamond firm in South Africa). Tacit collusion: Since it is illegal to form a cartel, oligopolists may decide to collude informally. A dominant firm in the industry is tacitly (implicitly, secretly) given a task to set the price. It takes the lead and announces the price increase. All other firms then follow the leader and start increasing their prices as well. NOTE: All forms of collusion are illegal. Firms are not allowed to come together to fix the price. 2.2 Demand curve of the oligopolist Unlike in the case of perfect competition and monopoly it is impossible to determine the demand curve facing the oligopolist. The quantity of goods the oligopolist produces is not determined by the consumers’ demand only. The oligopolist must also consider the actions of other producers. One theory that can be used to determine the oligopolist’s demand curve is what is called the kinked demand curve. According to this theory firms in an oligopoly are striving to protect and maintain their market share. ==
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Fig 6: A kinked demand curve Kinked demand curve. A kinked demand consists of two sections. The top section (D1) is very elastic and the bottom part (D2) is highly inelastic. Suppose the market price is R20. At this price 10 units are produced and sold. Total revenue is R20 x 10 = R200. If the firm tries to increase its profit by increasing the price by R2 to R22 it faces the risk that the quantity demanded will fall from 10 units to 4 units. Total revenue will fall to R88. A small change in price causes a huge change in quantity. Other oligopolists in the industry will not follow his lead. Therefore the upper segment of the demand curve (D1) shows that rivals will ignore price increases but match price cuts. The firm that increases the price will lose its customers to those that did not increase the price. The firm can also try to increase its profit by reducing the price and thereby increase its total sales. If the price is reduced by R4 from R20 to R16, demand increases only by 4 units from 10 to 14 units. Demand is inelastic. There is a small increase in revenue to R224. Other firms will feel forced to also cut their prices because if they don’t they will lose customers to the firm that reduced prices. The increase in total revenue may be very small but firms feel obliged to reduce prices as well because they want to retain their market share. Therefore the oligopolist is faced with a difficult situation because if he increases the price above the market price he will lose customers. If he reduces the price below the market price he will initiate a price war. =>
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2.3 Comparison between the oligopoly and perfect competition Oligopoly Perfect competition Prices Prices are higher because the oligopolist is a Prices are lower because there are many buyers price-maker. There are few firms in the and sellers. The individual is a price-taker. He industry. It is easy for them to come together has no control over price. and fix a higher price. Output Output is less under oligopoly than under There is more output because there are many perfect competition. They keep output low so sellers. The output by each firm increases that it will not depress the price. market output. Competition It uses non-price competition strategies such as Individual firms use price competition in order advertising and product differentiation to to attract customers. increase profit Profit The oligopoly makes economic profit in the It can make economic profit in the short term short term and the long term because it is but normal profit in the long-term. The difficult for new firms to enter the market. economic profit made in the short term attracts competitors to enter the market in the long run. Demand The demand in the oligopoly market cannot be The demand curve is downward-sloping from ascertained because it is affected by the left to right. reaction of other firms. As a result the kinked- demand curve shows the reaction of other firms when the price changes. >5
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3. MONOPOLISTIC COMPETITION a) Determination of prices and output in the short-run As with the other market structures, profits are maximised at the output where MC = MR. The diagram is the same as for the monopolist, except that the demand curve (D/AR) and MR curve are very elastic. As with perfect competition, it is possible for the monopolistically competitive firm to make economic profit in the short run. This is illustrated by Fig 7 (a). Fig 7: Equilibrium of the firm under monopolistic competition (a) short-run (b) long-run b) Determination of prices and output in the long-run Fig 7(b) depicts the equilibrium position of a monopolistic competition in the long-run. If a firm earns economic profit in the short-term, it attracts new firms in the long-run to also enter the market. As new firms enter, they will take some of the customers away from established firms. The demand for the established firms’ products will therefore fall. Their long-run average revenue curve, LAR (which is also demand) will shift to the left, and will continue doing so as long as economic profits are earned. Long-run equilibrium will be reached when only normal profits are earned i.e. when there is no further incentive for new firms to enter. This occurs at point a where LAR is tangent to LAC in Fig 7(b). Output will be QL – where LAR = LAC. At any other output, LAC is greater than LAR and thus less than normal profit would be made. MARKET FAILURE >6
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TERM DEFINITION Allocative When resources are not allocated in the right proportions and the product mix does Inefficiency not match consumers’ tastes. ft is possible to reallocate resources to make one person better off while not making someone else worse off Allocative/Pareto Occurs when resources cannot be readjusted to make one consumer better off without Efficiency making another consumer worse off. There is zero opportunity cost Black market An illegal market in which illegal goods are bought and sold or illegal prices are charged Cost-Benefit An analysis done by government which weighs the costs and benefits of a project to Analysis determine whether it should be carried out Demerit Goods Goods that are seen to be socially harmful e.¢ cigarettes, gambling Externalities Costs or benefits to third parties which are not included im the market price of a good Market Failure When the forces of demand and supply fail to allocate resources efficiently Maximum Price/ Aprice set below the equilibrium price/market price to make goods affordable Price Ceiling Merit Goods Goods that are so beneficial to society that every individual should consume them irrespective of their income e.g health care, education Minimum Price/ A price set above the equilibrium price/market price to allow producers to make a fair Price Floor profit Minimum Wage Awage rate set by the government, below which no employer can pay their workers. It is set above the equilibrium wage rate Negative Acost to a third party which is not included in a market price of a good. ft is a difference Externalities between social cost and private cost. E.¢ the harmful effect of a product e-¢- pollution Non-Excludable Goods whereby individuals can benefit even if they do not pay for it e.g. the television or Goods the police force Non-Rival Goods Goods when consumed by one person will not reduce the consumption by another individual e-g. street lights Positive Externalities | The benefit gained by a third party which is not included in the market price Private Benefit The gain a consumer gets from the use of a goods or the gain a producer gets from the sale of a product. E.¢ The joy gained by a consumer from driving a car Private Cost The actual cost paid by a consumer when a good is purchased. E.¢. R150 O00 for a car Producer Subsidies Acash allowance given to a producer to lower the cost of production and allow more Goods to be supplied at a lower price Productive/ When resources are not used appropriately to produce the maximum number of goods Technical @t the lowest cost and best quality Inefficiency Public Works A government initiative aimed at reducing poverty by creating temporary jobs in areas of Programme infrastructure and other areas SABS - South An institute that monitors the quality of goods in South Africa African Bureau Of Standards Social Benefit The benefit gained by society from the use of a good or service. E.¢ taxpayers pay for the maintenance of roads, society will benefit from fewer accidents. It is calculated by adding the private benefit and external benefit Social Cost The cost of a good or service which is paid by society. It is calculated by adding the Private cost and external cost. E.¢ the air pollution caused by cars, will affect people’s health bills 92|Page

Negative externalities Negative externalities bear a private cost, the cost of producing the actual product and a social cost, a cost suffered by society. if the social cost of a good were added to the private cost of a good, the final price would be pushed up and fewer goods would be supplied. This is depicted in Figure 8.2 below. S, (MSC) D S (Mpc) Price v From the graph it can be seen: * The demand for the cigarettes is represented by DD. * The supply of the product, which is also the marginal private cost (MPC) of the industry, is represented by SS. * Asa result of the pollution, the marginal social cost (MSC) is greater than MPC. + If the market is left to its own devices, a quantity Q will be produced at price P_ + This is a socially inefficient solution. - Social efficiency requires that MSC be equal to the price of the product. This occurs at price P, and quantity Q,. Fewer goods should be produced at a higher price. + The shaded angle represents the negative externality (welfare loss) to society. The government has used three methods to reduce negative externalities: * The government has carried out campaigns in order to change/ persuade people from causing negative externalities. : Levying taxes on goods that cause negative externalities. E.¢ Taxes are levied on cigarettes and alcohol. * Passing laws and regulations to prevent activities that cause negative externalities. E.g. Tobacco companies are not allowed to advertise. There are laws that regulate the amount of air pollution and waste. 93|Page

Positive externalities if people acknowledged the social benefit of a good, they would Gemand more of that good. The price of such a good would therefore increase. This is depicted in the Figure 8.3 below. 7 SD ‘2 Figure 8_3 Positive externalities From the graph it can be seen: The supply of education, which is also the marginal social cost, is represented by SS. The demand for school education, which is also the marginal private benefit (MPB) of the industry, is represented by DD. The cost of school fees is P and the quantity demanded and supplied ts Q. if the cost of school fees is P_ most learners will not be able to afford it. The demand curve D,D, also represents the marginal social benefit. (MSB), that is, the level of education that should be demanded. As a result of the benefits of education, MSB és greater than MPB-_ if the market is left to its own devices, a quantity Q will be produced at price P_ There would be social inefficiency in the market since not enough education is being demanded. However, if social benefits are acknowledged. a quantity Q, will be Produced at price P,- More education would be demanded, this will lead to social efficiency. The shaded angie represents the positive externality (the welfare gain) to society. The government encourages positive externalities by: Advertising on the radio or television. Providing education, health care and other services at a low cost or free. Providing consumer subsidies. Consumer subsidies lower the cost of a good and encourage its usage. 94|Page

8.3.3 Government intervention Rules and regulations a) Direct controls The government can pass laws or use existing legisiative framework to control businesses that generate negative externalities_ b) Imperfect markets Firms in an imperfect market supply a limited quantity of goods and services at a very high price. The government uses its laws on competition to prevent exorbitant prices charged by firms, to ensure entry to the market is free, prevent harmful collusion and encourage foreign competition which helps keep prices of goods low. c) Establishing minimum wages * When the government enforces a minimum wage, it means workers have to be paid a certain wage amount and not anything less than this_ + The Figure 8.4 below shows that if the wage rate is set at W, the corresponding Gemand and supply of labour will be Q. - if a minimum wage of W, is set. the demand for labour will decrease from Q to Q.. Some people may become unemployed due to the introduction of a minimum wage- * However, the quantity of labour supplied will increase from Q to Q.. - More people will offer their labour because of the higher wage. Minimum wage Q. 2 Q Figure 8.4 Establishing minimum wages oD Setting maximum Prices/price ceilings The government sets a maximum price ceiling below the market Price to make goods more affordable. * Maximum prices allow the poor greater access to certain goods and services. 95|Page

96|Page A maximum price is set on goods such as basic foods, housing and transport. In South Africa the price of petrol. diesel fuel and paraffin are controlled at their maximum prices_ Figure 8.5 Setting maximum prices Initially the market equilibrium price is P and equilibrium quantity sQ. The government intervenes and passes a law that milk cannot be sold for more than P,-. The effect of this maximum price is that quantity supplied decreases to Q, and quantity demanded increases to Q.. There is a shortage of milk equal to the difference between Q, and Q.. A shortage creates a problem of how to allocate milk to consumers. Black markets often develop where people can obtain milk. A black market is an illegal market in which either illegal goods are bought and sold or illegal prices are charged. Maximum prices may cause a shortage of goods but they do improve the welfare of some consumers since goods can be purchased at lower prices. e) Setting minimum prices/price floors The government sets a minimum price at some point above the market price. This is Gone to enable producers to make a comfortable profit and thus encourages them to supply important essential goods.

Pree Surpius Minimum price Figure 8.6 Setting minimum prices Consider the market for wheat. The market equilibrium price is P and the equilibrium quantity is Q- if the government sets a minimum price at P,, farmers will be earn greater profits and supply more wheat. Quantity supplied will therefore increase to Q.. However, quantity demanded will decrease to Q,- There would be a surplus of wheat equal to the difference between Q, and Q,. Asurplus means the government will have to buy the extra wheat and dump it locally or abroad. Although minimum prices may cause a surplus they do encourage the supply of important food stuffs_ f) Taxes and subsidies Levying of taxes Governments intervene in the market by levying taxes to recover the external cost. These taxes will increase the price and will result in a decrease in production. This could help to reduce a negative externality such as pollution. Providing Producer Subsidies - The government provides subsidies to producers in order to encourage them to increase the production of goods. Supply increases. - Producer subsidies are often given to suppliers of agricultural Products such as milk, wheat and maize. - Subsidies lower the cost of producing goods and thus the market price of these goods is lowered. 97|Page

COST BENEFIT ANALYSIS • Cost-benefit analysis (CBA) is a standard method used to compare the social cost and benefits of alternative projects or investments. • Cost and benefits are measured and then weighed up against each other in order to generate criteria for decision-making. • We use one of 3 decision criteria: Net present value (NPV) Internal rate of return Benefit-cost ratio (BCR) (IRR) The present value of an investment The interest rate at which The BCR for a project project, found by discounting all the net present value of a is the ratio between the present and future receipts and project is zero (0); a sum of expected outgoings at an appropriate rate of project is worth investing benefits and its cost. interest; if the net present value in if its IRR is greater calculated is positive, it is worthwhile than the rate of interest. investing in a project. • CBA is, in essence, an accounting procedure for investment whereby the total cost of the particular project is weighted against its total benefits. Government usually uses CBA to see whether they should undertake a certain project. >=
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Rationale • This includes understanding the rate of return on a project and the idea that future costs and benefits can be discounted in reverse to give its present value. This determines the rate of return on a project and allows informed decisions to be made that are in the best interests of society. Price mechanisms • The procedure involves estimating the money equivalent of the benefits of a project and comparing these benefits estimates with the cost of providing the good or service. • It is relatively easy to measure private costs and benefits as they go through the price mechanism. • But in practice, it is more difficult to attach monetary values to external costs and benefits. • One way is by using shadow prices, based on opportunity costs. • Def. of shadow prices: Relative prices of goods, services and resources that are proportional to their true opportunity cost for the economy, taking account of any external economies and diseconomies. • E.g. to place a value on the benefits drivers would receive on completion of a new freeway, we could estimate the driving time that would be saved, and then multiply this by the average wage rate. • Money now is worth more than money later. • The relative levels of costs and benefits as well as the distribution of these must be considered. E.g. a project should go ahead if the investors (those who gain) can compensate those who lose, and still experience a net gain. Application • The calculation of a CBR is often the end result of the study. • The numerator of this ratio is defined as the present value of all of the expected economic benefits attributable to a proposed undertaking. • E.g. to calculate the monetary value for a public park or an art museum, shadow prices (benefits) may be used to calculate the value of the enjoyment of these facilities. • The denominator of the CBR is defined as the present value of the cost of undertaking and operating the project. If it is a large capital investment project there are 2 types of costs: capital cost and operation, maintenance and repair cost. • Capital costs occur before the project begins to produce outputs; the remaining costs are future expenses. • On the basis of these definitions, the CBR is defined as the value of benefits of a programme to the value of the programme’s cost: CBR = Present value of economic benefits Present value of economic costs • If the ratio is greater than 1, the project is judged economically worthwhile. • If the ratio is equal to1, public expenditure adds nothing. • If the ratio is below 1, it detracts from economic well-being. The uses of the CBA in practice • In practice, a CBA tries to answer the question: ‘Do the gains to the people exceed the sacrifices required of them?’ • If the answer is yes – CBA >1 • If no – CBA < 1 >>
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ACTIVITIES TOPIC Perfect Market SUB-TOPICS Cost and Revenue curves, individual business and industry, profit maximisation CONCEPTS Total output, marginal output, average output, average costs, fixed costs, variable cost, total cost, marginal cost, average fixed costs, average variable costs, total revenue, marginal revenue, average revenue, economic profit, normal profit, economic loss, long run, short run, implicit costs, explicit costs. ACTIVITY 1

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ACTIVITY 13 Study the graph below and answer questions that follow:
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TOPIC ECONOMIC GROWTH AND DEVELOPMENT ACTIVITY 16 Study the picture below and answer questions that follow: 16.1 Which policy is used to stimulate growth? (2) 16.2 Describe the term economic growth (2) 16.3 What will be reflected by the country’s real GDP? (2) 16.4 Explain how the supply side approach can promote growth and development. (4) 669
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ACTIVITY 17 Read the extract below and answer questions that follow: IPAP critical to achieving radical economic change – Davies News | 8 May 2017, 9:52pm ANA Reporter The Industrial Policy Action Plan (IPAP) was critical to achieving radical economic transformation, Trade and Industry Minister Rob Davies said yesterday. Davies said IPAP was firmly entrenched in the government’s overall policy and plans to address the key challenges of economic and industrial growth and race-based poverty, inequality and unemployment. The plan, which is a key component of the government’s Nine Point Plan, aims to develop a more competitive and diversified economy, with a higher global share of products. Emphasising the importance that the government attached to radical economic transformation and inclusive growth, Davies outlined new initiatives to shift the productive base of the economy and create sustainable jobs. He identified radical economic transformation as one of the focus areas and key priorities of IPAP 2017/18 and 2019/20. Adapted from: Business Report 8 May 2017 CI7C
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TOPIC INDUSTRIAL DEVELOPMENT POLICIES ACTIVITY 19 Read the extract below and answer questions that follow: R1bn boost for Coega IDZ Financial year starts with three new investment projects The Coega Industrial Development Zone (IDZ) has started its new financial year with the announcement of three new investments collectively valued at more than R1- billion. The imminent roll-out of a manufacturing cement grinding plant, a ready mix concrete plant and a gas cylinder plant follows a bumper 2015-16 financial year for the IDZ which saw nearly R12-billion of investments into the zone. Coega Development Corporation (CDC) spokesman Dr Ayanda Vilakazi said the latest developments, which represented advancements in economic transformation in the metals and manufacturing sectors, were investments of more than R1-billion into the IDZ. They were specified as a R650-million manufacturing cement grinding plant, a R71-million ready mix concrete plant and a R350-million gas cylinder plant, with the companies named yesterday as MM Engineering, Kenako Concrete and Osho Cement. Adapted from: Herald live April 2017 2.1.1 !"!

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TOPIC INFLATION ACTIVITY 21 Study the graph below and answer questions that follow: 21.1 !"!
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TOPIC TOURISM ACTIVITY 23 Study the picture below and answer questions that follow:
23.1 What type of tourism is in above picture (2) 23.2 Describe the term tourism (2) 23.3 What is the reason for tourism in the picture? (2) 23.4 Explain the benefits of this kind of tourism (4) 675
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ACTIVITY 25 Study the information below and answer questions that follow: South Africa losing three rhinos a day to poachers February 28, 2017
TMG Digital South Africa is losing three rhinos a day to poachers‚ despite law enforcement in the Kruger National Park reducing the losses there. A total of 1‚054 rhino were poached in 2016‚ compared to 1‚175 in the same period for 2015‚ representing a decline of 10.3%.In the Kruger‚ a total of 662 rhino carcasses were found in 2016 compared to 826 in 2015. 25.1 Which crime is committed in the above? (1) 25.2 Which year has the highest number of poached rhinos? (1) 25.3 Describe the concept Conservation (2) 25.4 What could be the final result (impact) of this crime to the country? (2) 25.5 Suggest two solutions to the problem depicted in the picture. (4) 677
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ACTIVITY 26 Read the extract below and answer questions that follow: South Africa has legislation to protect rivers‚ despite pollution Two rivers in India have been granted the same legal rights as human beings in a bid to prevent pollution‚ a position that is catered for in South Africa. While this is novel‚ South Africa enacted legislation which protects our rivers and ecosystems some 20 years ago. “I would argue the Indian case is following on South Africa‚ not the other way around‚” said scientist Dr Anthony Turton. He said the country’s environmental legislation‚ the National Water Act and the National Environmental Management Act‚ had similar aims. “What the country has done under the leadership of the late Kader Asmal was that the river and the ecosystem sustained by the river have a legal right to its own water‚” Turton said. He said under apartheid‚ the Land Act of 1913 gave the owner of the land the right to water that flowed over that land. Turton said the situation changed in 1994 when the rights to water that were associated with land ownership were nationalised. Adapted from: Sunday Times April 2017 26.1 What was enacted by South Africa 20 years ago? 2) 26.2 Describe pollution (2) 26.3 What it is the effect of pollution (2) 26.4 How do the government policies on environmental sustainability benefit the country? (4) 678
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ADDITIONAL INFORMATION Potential Special Economic Zones (SEZs) Limpopo - Tubaste Limpopo - Messina - Petro-chemicals -TGM + Agro processing + Logistics | Gauteng - Nasrec- ITC fp — = Se) Mpumalanga -Komatiepoort - Agro-processing 5 . : Free State - Harrismith - Agro processing + Logistics KZN - Dube ~Trade Port + Agro processing i Eastern Cape - Wild Coast q - Agro-processing + Tourism Ld Western Cape - Atlantis -Renewable energies 124|Page

Creating jobs - East London 1Dz © Value of ineestmeet to date: ®t 3 Silben @ lots oeated to date: manutacturing and related jobs. Graal: MORNE SCHAAF Selected Investment Incentives under Industrial Zones and SEZs Corporate _« Exemption for the first five « Exemption for first five to seven years Income Tax years depending on location and type of business e Up to 50% relief on profit reinvested within one year, 50% income tax reduction on depending on business type subsequent five years of exemption * 50% income tax reduction for the third five years on reinvested profit (subject to conditions) Customs ¢ Exemptions on machinery, ¢ Exemptions on materials and Duty equipment and other materials equipment used during construction used during construction period period ¢ Exemption on imported raw materials, e Exemption on imported raw machinery, equipment and other material for the first three specific goods for first five years of years of commercial commercial operation production Land Lease Investors canleaselandfor « Investors can lease land for up to 75 up to 70 years (50 years with years (50 years with an extension of 25 two extensions of 10 years years) each) Source: Directorate of Investment and Company Administration 125|Page