Economics

GRADE 12
EXAMINATION REVISION
MANUAL
2017
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THIS MANUAL CONSISTS OF NOTES THAT CAN BE USED TO PREPARE FOR

EXAMINATION.

IN ECONOMICS ALL CONTENT IS EXAMINABLE, SO IN PREPARING FOR

EXAMINATION THE LEARNER SHOULD GO BEYOND THIS MANUAL AND COVER
THE FOLLOWING TOPICS IN DETAILS.

PAPER 1 PAPER 2
CIRCULAR FLOW PERFECT MARKET
BUSINESS CYCLE IMPERFECT MARKET
PUBLIC SECTOR MARKET FAILURE
FOREIGN EXCHANGE MARKET INFLATION
PROTECTIONISM AND FREE TRADE TOURISM
GROWTH POLICIES ENVIRONMENTAL SUSTAINABILITY
INDUSTRIAL POLICIES
ECONOMIC AND SOCIAL INDICATORS

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NATIONAL ACCOUNT AGGREGATES

 The National Accounts Aggregate represents a summary of a record of a country’s

economic activities which are production, income and expenditure.
 Therefore, a country‘s GDP can be calculated using production method, income
method and expenditure method.

 Production method / Value added method

 Production takes place in primary, secondary and tertiary sector.
 The value that is added by each sector is added together. That is why this method is
called value added method.
 Only final products are counted, if intermediate goods can be added there will be
double counting of the value of some products.
 Double counting is when the value of a product is counted twice e.g. as an input and
as a final product.

Gross value added in R millions

Primary sector 324 365
Secondary sector 556 708
Tertiary sector 1789 431
GDP at basic prices ?
+ Taxes on products 312 863
- Subsidies on products 19 106
GDP at market prices ?

 Income method
 When firms produce goods and services they employ factors of production.
 Therefore the value of income in the economy is equal to GDP at factor cost.
 These factor costs are:
 compensation of employees which is wages and salaries paid to workers,
 Net operating surpluses which are rent, interest on capital and profit of
entrepreneurs before taxation.

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 Consumption of fixed capital which is depreciation value of fixed asset

Income in R million
Compensation of employees 882 379
Net operating surplus 629 116
Consumption of fixed capital 252 595
Gross value added at factor cost ?
+ other taxes on production 35 374
- Subsidies on production 7388
Gross value added at basic prices ?
Plus :Taxes on products 23000
Less :subsidy on products 5891
GDP at market prices ?

 Expenditure method
 Expenditure on GDP measures total amount spent on final goods and services
produced within the country.
 Expenditures by all participants in an open economy are added together.

Expenditure on GDP R millions

Final consumption expenditure by 990 773
households (c)
Final consumption expenditure by 305 733
general government (G)
Gross capital formation 282 130
Residual item -164
Gross domestic expenditure ?
Export of goods and services (X) 430 169
Less: Import of goods and services 437 559
(M)
Expenditure on GDP at market ?
prices

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TOPIC 2: THE BUSINESS CYCLE

The length and amplitude of a business cycle.

Trend line
Length
/durati
on
Economic activity

Amplitude

Time (in years)

Amplitude

 It measures the vertical distance between a trough and the trend line or the vertical
distance between the peak and the trend line.
 It indicates the intensity of the underlying forces and the size of a change.
 High amplitude shows the strong forces in the economy and severe expansion or
contraction of economic activities.
 Low amplitude indicates weak forces in the economy and a more moderate
expansion or contraction of economic activities.

Length or duration

 It is the time that the economy takes to move from one peak to another peak or one
trough to another trough.
 Some business cycles last for a short time while other can take up to 50 years.

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 Shorter cycles represent a weaker cycle and longer lengths represent a stronger
cycle.

Trend line
 It shows the general direction in which the economy is moving.
 It usually has a positive slope because the production capacity of a country
increases over time.
 Economists look at the performance of the economy over the past few years and
then predict a future trend.

Extrapolation
 Means to estimate something unknown from facts or information that is known.
 For example, if it becomes clear that the business cycle has passed through a
trough and has entered a boom phase, forecasters might predict that the economy
will grow in the few months.

Moving averages

 This is a method of repeatedly calculating a series of different average values along

a time series to produce a smooth curve.
 By using averages, the economists get a clearer picture of the general trends in the
business cycle.

TOPIC 3: THE PUBLIC SECTOR

PROBLEMS OF PUBLIC SECTOR PROVISIONING

The public sector has a socio-economic responsibility to the citizens of the country. The
following problems often occur when the government tries to carry out its duties.

ACCOUNTABILITY
 Refers to the duty of an individual or organization to explain their decisions and
actions and accept responsibility for their behavior.

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 In South Africa, parliamentary questioning, treasury control and the rule of the
Auditor-General reflect the government’s accountability.
 The Auditor-General produces audit reports annually on all government
departments, public entities and municipalities.
 It is important that government employees are also held individually accountable for
what they decide and what they do.
 Government employees must be accountable when dealing with the tax payers’
money and must not abuse their powers.
 Public accountability is important because the public need to be assured that public
sector delivers the quantity and quality of goods and services for which taxes are
raised.

ASSESSING NEEDS
 The government must provide goods and services according to the assessed needs
of the inhabitants of the country.
 It is very difficult for the public sector to assess needs because they do not have the
market prices to guide them.
 And that leads to an under or over supply of public goods and services.
 The private sector on the other hand provides goods and services in response to the
price mechanism of supply and demand.
 The state can overcome this problem by, for example, conducting household
surveys and canvasing the opinions of the public.

PRICING POLICY
 The government has to make a decision about what to charge for the public goods it
provides.
 The government has three pricing options.
- Free of charge: the state may choose to offer a public good free of charge to the
consumer. These are community goods such as police services.
- Charging a small fee: the state may decide to levy a fee for the use of collective
goods such as public swimming pools etc. However, if the cost of collecting such a
charge is higher than the revenue raised, it is of no worth to levy such a charge.
- Subsidies:

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 Government can pay subsidies to promote the production of certain products for the
prices to be affordable.
 The difficulty with using subsidies arise when relatively fixed cost are involved.

PARASTATALS:
• They are State-Owned Enterprises established to be profit making businesses.
• They receive exclusive rights from the government.
• This can lead to monopolies and inefficiency.
• They can be created when the government begins a new enterprise or through
the process of nationalization.

PRIVATIZATION:
 It refers to a process whereby state-owned enterprises are sold to the private
sector.
 It implies that the government sells more than 50% of its shares to the private
sector.
 The income generated through privatization becomes additional funds for the
government.
 The problem with privatisation is that it often leads to higher prices since the
private sector motive is profit.

EFFICIENCY
 Efficiency means goods and services are provided in the desired quantity.
 Public goods are provided efficiently if Pareto efficiency is achieved.
 Pareto efficiency is when resources are allocated in a way that no one can be
made better off without making another person worse off.
 There is often lack of efficiency in the public sector due to bureaucracy,
incompetence and corruption.

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TOPIC 4: INTERNATIONAL TRADE

BALANCE OF PAYMENTS
There are 3 components of the BOP (please see the 2017 examination guideline)

1.CURRENT ACCOUNT
Goods exports
+ Net gold exports
+ Services receipts
+ Income receipts
less Merchandise imports
less Payment for services
less Income payments
Current transfers (net receipts)
Balance on Current Account
Memo item: trade balance

2. CAPITAL TRANSFER ACCOUNT

NET LENDING TO (+) OR BORROWING FROM (-) REST OF THE

WORLD

3. FINANCIAL ACCOUNT
Net direct investment
Net portfolio investment
Net financial derivatives
Net other investments
Reserve assets
Balance on financial account
Memo item: balance on financial account excluding reserve assets
Unrecorded transactions

1. CURRENT ACCOUNT
 It record transaction related to production, income and expenditure
 Merchandise exports and imports: record transaction on all visible goods (raw
materials and intermediate goods, final goods) that South Africa export and import.
 Net gold export: shows the record of the income earned from the exportation of gold.
While gold is a physical good it is recorded separately because of the amount of money
that it earns as an individual product and South Africa relies heavily on it as an earner of
income.
 Services: record money earned or spends on services such as insurance,
transportation, recreational, professional.

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 Income: Income earned by South African citizens from non- citizens and vice versa
(non -South African citizens earning income from South African). It consists of two
components which are compensation of employees e.g. salaries and wages and
investment income e.g. dividends and profits.
 Current transfer: Items transferred from residents to non-residents and vice-versa
without any counter performance required e.g. gifts.

CURRENT ACCOUNT
RBILLIONS (2015) 2014
Merchandise exports 960 940
Net Gold exports 66 63
Service receipt 22 20
Income receipt 25 23
(Less) merchandise imports 1069 1076
(Less) service payments 29 30
(Less) income payment 27 29
Current transfers (net) -2 3
Balance on current account ? ?
Memo item: trade balance ? ?

 A negative balance on the current account indicates the existent of a deficit on the
account.
 This means the money outflow (capital outflow) was higher than the money (capital)
inflow.
 A positive balance indicates a surplus which means money inflows was higher than
money outflows.
Trade account

 It reflects the transactions involving exports and imports of goods (merchandise).

 This means only merchandise exports; net gold exports and merchandise imports are
part of trade account.
 The trade balance is obtained by subtracting merchandise imports from the sum total of
merchandise export and net gold exports.

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TRADE ACCOUNT
2015 2014
Merchandise exports 960 ?
Net gold exports 66 ?
(Less) merchandise imports 1069 ?
Trade balance -43 ?

 The balance is a deficit which indicating that South Africa imported more physical goods
than exporting them.

2 CAPITAL TRANSFER ACCOUNT

Net lending to (+) or borrowing from (-) the rest of the world.

3 FINANCIAL ACCCOUNT
Direct investments
 An investment in fixed property or the acquisition of a significant (10 % or more)
share in a business.
Portfolio investment.
 The purchase of financial assets e.g. shares on a shares market of another country.
 Another name = “hot money” because it can be quickly converted into cash
Financial derivatives
 An investment made in a specific asset with a fixed future value that is paid out on a
specific date.
Other investment
Transactions that do not fall under direct, portfolio and financial derivatives, are
classified
as other investments. Example: Short term loans.
Reserve assets
 Financial capital held by the monetary authorities such as the central bank to
finance the trading disequilibrium.

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TOPIC 5: FREE TRADE

ARGUMENTS IN FAVOUR OF FREE TRADE

Freedom of choice:
 Free trade gives consumers the freedom to consume goods to choose to consume
goods produced elsewhere in the world.
 Some of these products in the world market are cheaper than others due to
increased competition.
Specialisation
 Free trade gives a country a chance to produce only goods that it has comparative
advantage in. Specialization will increase economic efficiency and prevent resource
wastage.
Economies of scale
Free trade allow firms to maximise economies of scale, reduce costs and become
competitive in the world.
Innovation
Due to increased competition, firms find it important to innovate.
Innovation result in new and improved products as well as new methods of
production that cut costs and improve the quality of existing products.

TOPIC 6: PERFECT MARKET

THE INDIVIDUAL BUSINESS AND THE INDUSTRY

 An individual business is a firm that produces a particular product e.g. maize.
 An industry consists of all individual businesses that produce the same product e.g.
maize industry, tomato industry.
 In a perfectly competitive market the price that the individual firm charges for its
products is set by the market / industry. That is why individual producers are called
price takers.
 The market price is the price at which the industry demand is equal to supply.

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- DEMAND CURVES OF AN INDUSTRY AND INDIVIDUAL FIRM

Market individual firm

D S
PRICE

P P D=MR=AR

Q1 Q1 Q2 Q3
QUANTITY
QUANTITY

- The market / industry equilibrium price is P and it is the price at which demand
DD is equal to supply SS. The equilibrium quantity is Q1.
- The market equilibrium price P is then taken by the individual firm as the price for
its products.
- The individual firm‘s production is so small that it cannot influence the market,
therefore it has to accept the market price.
- At this price P the individual firm can produce and sell various quantities such as
Q1, Q2 and Q3.
- Since the individual business is a price taker, its demand curve D is a horizontal
(perfectly elastic)
- For every unit of a product sold, the business receives the same price; as such
the Average Revenue (AR) that the firm receives is also the same as the price.
- The revenue for selling additional unit of the product (MR) will also give the same
amount as the price.
- Therefore, the horizontal demand curve also represents the AR and the MR
curves.

SUPPLY CURVE OF A FIRM IN A PERFECT MARKET

 The supply of the individual firm in a perfectly competitive market is determined
by the MC and AVC curves.
 The firm‘s supply curve is the upward sloping part of the Marginal Cost (MC)
curve.

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 The MC intersects the AVC at its lowest point.

 This is because the individual firm will only produce when the price lies above the
minimum point on the AVC curve.
 If the market price is equal or below Average Variable Costs (AVC), the firm
should close /shut down.

MC AC

P2

P1
REVENUE/ COSTS

AVC MR=AR

P MR=AR

Shut down point

MR=AR

Output (Quantity)

SHORT RUN EQUILIBRIUM POSITIONS IN THE PERFECT MARKET

 A short run is a period during which at least one factor of production is fixed.
 In the short term the following three equilibrium positions are possible for a perfectly
competitive firm

ECONOMIC PROFIT
AC
COST AND REVENUE

E
and revenue

P MR/AR
Cost

H
B

0
Q QUANTITY

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• Equilibrium is at E i.e. The firm will produce where MC = MR.

• MC = MR is where the firm maximises its profit.
• At this point Q1 goods are produced at a price of P.
• The average cost for Q1 units is point B on the AC curve.
• Price /AR is greater than AC. or (TR > TC).
• Therefore economic profit is represented by the area P1HBE/shaded area.
• Economic profit is the extra profit that the firm makes above normal profit.

NORMAL PROFIT

MC
AC

MR/AR
COST AND REVENUE

P
E1
E

0
Q QUANTITY

 The firm is at equilibrium at point E where MC = MR and AR = AC

 MC = MR is the profit maximizing position for the firm.
• The firm sell Q goods at a price of P
• Total costs of production are equal to total revenue earned.
• TR and TR are represented by area 0PEQ.
• The business makes normal profit.
• Normal profit is the minimum earnings required to prevent the entrepreneur from
leaving the industry and use his/her factors of production elsewhere.

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ECONOMIC LOSS
MC AC

REVENUE
E1

ANDrevenue
B

and revenue
F K

Cost
Cost and revenue
Cost and

and revenue
P MR/AR

and revenue
and revenue
COST

Cost
E MR/AR

Cost
Cost

0
Q
QUANTITY

• The firm is at equilibrium is at point E where MC = MR.

• MC =MR is the point where the loss is minimised.
• At this point Q goods are produced at a price of P.
• Total revenue is less than total cost.
• Total revenue is represented by 0PEQ and total cost is represented by area
0FBE(shaded area)
• The business makes an economic loss.
• This means the money that the firm receives is less than the money it spends to
produce each unit of the product.

COMPETITION POLICY

• In South Africa, competition policy is carried out using the Competition Act of 1998.
• The Competition act provides for the establishment of the Competition Commission,
Competition Tribunal and the Competition Appeal Court.
• The Competition Commission‘s job is to investigate act of restrictive practices by
businesses.,
• The Competition Tribunal is responsible for adjudicating over the cases referred to it by
the Competition commission.
• The Competition Appeal Court serves those businesses that are unhappy with the
judgement of from the Competition Tribunal. The appeal court may confirm, amend or
set aside a decision made by the Competition Tribunal.

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Aims of competition policy

• To promote healthy competition among businesses.
• To prevent restrictive practices such as collusion.
• To protect the consumer against unfair pricing and inferior products.
• Provide all South Africans with equal opportunities to participate fairly in the economy.
• To regulate the growth of market power by means of takeovers and mergers.
• To prevent the abuse of economic power such as of monopolies

IMPERFECT MARKETS

OLIGOPOLY
Characteristics
Number of firms
 The market consists of few firms which dominate the market.
Nature of the product
 The product manufactured may either be homogenous or heterogeneous.
 When the product is the homogeneous, the market is called pure oligopoly and when
the product is differentiated, the market is called differentiated oligopoly.
 Example of homogeneous product is petrol and heterogeneous product is motor car.
Entry in to the market
 The entry in to the market is difficult due to various barriers such the amount of
capital outlay often needed.
 The existing firms may often be enjoying economies of scale and this may be a
further barrier.
 Mutual dependence
 Oligopolistic firms are often influenced by the action of one another.
 The decision that one firm make about prices, advertising and quantities depends on
what it think other firms will react.
 Therefore, the policy decisions of an oligopolistic firm are more complex than in
other market structures.

 Incomplete information
 Buyers and sellers do not have the full information of market conditions.

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 Even though oligopolists monitor one another’s actions they do not always know
how the competitor will react to their actions.
 Control over Price
 Oligopolists have influence on the price of their products, though not as much as the
monopolist.
 Price wars as often a feature when existing firms want to limit entrance in to the
market.
Collusion
 Firms often cooperate with one another instead of competing.
 This can be by forming a cartel which is a formal agreement among the firms to work
together.
 At certain times the collusion can be price leadership which involves one firm serving
as a price leader in the market. This is an unspoken, informal agreement.
 When the price leader changes its price other firms also do the same.

THE OLIGOPOLIST’ DEMAND CURVE

 Due to mutual interdependence the demand curve of an individual firm tends to be

kinked (when there is no collusion in among firms).
 Each firm believes that if it increases its price others will not follow it but if it reduces
its price others will also reduce theirs.

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D
D
MC1
105
MC
R100
100
PRICE

D
MR
MR D
RR
70 100
QUANTINTY
70

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

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

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Because a monopolist is the only supplier of a product there is always the possibility of
consumer exploitation.
It can produce low quantity of a product and sell it at a very high price.

MONOPOLY’ REVENUE
REVENUE SCHEDULLE FOR A MONOPOLIST
Quantity Price Total revenue Marginal Average Revenue
Q P TR= Q X P revenue AR = TR /Q
MR=∆TR/∆Q
0 R110 0 - -
1 R100 R100 R100 R100
2 R90 R180 R80 R90
3 R80 R240 R60 R80
4 R70 R280 R40 R70
5 R60 R300 R20 R60
6 R50 R300 R0 R50
7 R40 R280 - R20 R40

8 R30 240 -R40 R30

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MONOPOLIST REVENUE

PED >1
MARGINAL AND AVERAGE REVENUE

PED=1

R50
PED<1

AR
0
2 4 6 7 8 10
Q
300
MR
TOTAL REVENUE

0 2 4 5 6 7 8 10

 The demand curve of the monopolist is downward sloping indicating that as

price increase quantity sold will decrease. Therefore the monopolist should
have a pricing policy like any other firm.
 The demand also serves as AR curve because it shows the revenue per
product that the firm will receive as consumers demand its product . If the

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

SHORT TERM PROFIT OF A MONOPOLIST

MC

AC
Price/cost/revenue

27

15

AR

MR
0
120 Quantity

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 Economic profit is the extra profit that the firm makes over and above the normal profit.
 The firm makes maximum profit where MR = MC
 The firm makes economic profit when TR > TC or when AR > AC

TR > TC AR > AC
= TR - TC = (AR - AC) X Q
= (p x q) – ( ac x q) = (R27 - 15) X 120
= (R27 x 120) - (R15 x 120) = R12 X 120
= R3240 - R1800 = R1440
= R1440

ECONOMIC LOSS OF A MONOPOLIST

MC
MC AC
AC

R35

R27
PRICE

AR/D
AR/D

MR

120 QUANTITY

 Though a monopolist is the only seller of the product, it can still make a loss if demand is
lower and production costs are higher.
 At MC= MR the firm makes minimum loss, therefore it is a loss minimizing point.
 The monopolist makes a loss when TR < TC or AR < AC

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TR < TC AR < AC

TR - TC (AR - AC) X Q
(P X Q) - (AC X Q) (R27 - R35) X Q
(R27 x 120) - (R35 x 120) -R8 X 120
R3240 - R4200 - R960
-R960 or (R960)

TOPIC 8: MARKET FAILURE

It is when the market fails to allocate resources efficiently e.g. When there is shortage or
overproduction of certain goods

COST BENEFIT ANALYSIS

• A process of calculating and comparing the social benefit and costs of a project over a
given period
Reasons for using CBA
• CBA assesses whether a new project will be a feasible investment.
• To determine whether a project will benefit the country as a whole.
• To evaluates the feasibility of different projects to determine which project will be the
best investment.
• It includes the wider social impact and includes externalities in the decision-making
process.
• To estimate the effects of an investment on social welfare and on the environment.
• The private sector usually only compares the expected private costs and benefits over
the estimated time span of a new project, the public sector on the other hand, needs to
compare the expected social costs and benefits over the estimated time span of a new
project.
• It brings greater objectivity to decision making – it quantifies all the cost and benefits in
money terms.

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CONSEQUENCES OF MARKET FAILURE

1. Government intervention

Minimum wages
 It is the lowest wage an employer is by law allowed to pay an employee.
 Minimum wages is helps to redistribute income.
 This is because unskilled workers (e.g. farm workers) are at a disadvantage at
negotiating and are usually unable to obtain real wage increases.
 Their wages are usually very low and this continues unfair income distribution of
income
 Their wages are usually very low and this continues unfair income distribution of
income.

M
D
MINIMUM WAGES
S

W1
WAGES

S
D

Q1 Q Q2
Q

QUANTITY

 The original wage rate is W at which quantity of labour employed is Q.

 The implementation of minimum wage increased wages to W1.
 Minimum wages resulted in increase in supply for labour, meaning more workers look
for employment as indicated by Q2.

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 Therefore, the effect of minimum wages is that it can result in oversupply of labour/
decreased demand for labour.

Minimum prices

 They are the lowest price that the producer is by law allowed to charge for the product.
 They are usually higher than the market prices and are implemented on basic foodstuff
such as maize.
 The aim is to make it useful (worthwhile) for producers of such products to say in the
market.
 Minimum prices can however result in oversupply of the product.

D
S

50 MINIMUM PRICE

35

S D

80 100 120

 At the market price of 35 there is equilibrium between demand supply at

100.
 When the government impose a minimum price of R50 demand
decreased to 80, but supply increased to 120. This created an excess
supply of 40.

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Maximum prices

 They are the highest prices that a producer is allowed by law to charge for a
particular product and are below the market price.
 In other word the government put a price ceiling for the particular product.
 Their effect is that they cause supply to decrease, therefore resulting in excess
demand for the product.
 This usually result in black market where the price charged is higher than the price
ceiling.

MAXIMUM PRICE
S
D

MAXIMUM PRICE
P1

S D

Q1 Q Q1

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2. EXTERNALITIES

NEGAVTIVE EXTERNALITY

S1=MSC= (MPC + External cost

Market
failure
D
S = MPC

P1

Q1 Q

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

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POSITIVE EXTERNALITY

Market S
D1
failure

P1

D1=MSB= (MPB + External Benefit

D = MPB

Q
Q Q1
Q1

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

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TOPIC 10

INDUSTRIAL DEVELOPMENT
Industrial development is an important vehicle for economic development. One of the
strategies that South Africa uses to achieve industrial development is regional
development.

Regional development:
 Aim to encourage investments in areas that are characterised by poverty and
unemployment (but offers potential for growth).
 the policy is applied through Spatial Development Initiative (SDI) and Special
Economic Zones (SEZ)

1. SDI
 SDI is a policy to promote sustainable industrial development in areas where poverty and
unemployment are at their highest.
 SDI Concentrate on establishment of industries in poor areas but which offers potential for
sustained industrial growth.
 The main objective is to stimulate economic growth and employment in those regions.
 Economic growth is mainly stimulated through economic projects that are based on
the area’s strength.
 These efforts help to decentralise economic activities in the country.
 The investments are done on Public –Private-Partnership- bases.

SDI FOCUS
Lubombo Agri-tourism
Fish river industrial
Platinum Industrial and agri-processing
Wild Coast Agri-tourism
West Coast investment initiative Industrial and agri-processing
Phalaborwa Industrial and agri-tourism
Richards Bay Mining and agri-processing
Maputo Industrial and agri-processing
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SPECIAL ECONOMIC ZONES

 It is an enclosed industrial area (usually near a harbour or airport) where normal
custom regulations do not apply.
 It aims to boost exports, increase economic growth and create jobs.
 Investments are based on the Private Public Partnership where the state provides
the infrastructure and the private sector establishes the businesses. Incentives are
offered to businesses which establish their firms in the zone so that they can have a
competitive edge. √√
 Streamlined administration in the SEZ e.g. fewer government regulations apply to
businesses in these zones.
 Assistance is given in importing and exporting of products.
 World class infrastructure such as efficient power, water and telecommunication and
High quality transport facilities is available to the SEZ.
 Examples of SEZ are Coega, East London and Richards’ Bay SEZ.

TOPIC 11: ECONOMIC INDICATORS

 Economic indicators are statistics used to assess the performance of an economy and
they include the following:

1. FOREIGN TRADE
 In a globalised world, foreign trade is important. Exports serve to stimulate employment
while imports serve to increase consumer choices.
 Two indicators of how a country performs in international trade are: exchange rate and
terms of trade.
Exchange rate: An exchange rate is the price of one country’s currency in terms of
another country’s currency.
 Changes in exchange rate affect the prices paid for imports and earnings from exports.
 A depreciation of the rand against the dollar will result in imports from the USA
expensive but will make South African exports cheaper in USA. Therefore it may
increase earnings from exports.
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 An appreciation of the rand will cause imports to be cheaper and South African exports
expensive in foreign countries.
Terms of trade
 It is the ratio of between the average price of exports and average price of imports.
 To calculate the terms of trade export prices are divided by import prices and multiplied
by 100.
 Changes in terms of trade indicate changes in the country’s welfare.
 If the terms of trade improve (increase) it shows that a higher volume of imports can be
purchased with an unchanged volume of exports. This indicates that the country is
better off than before.
 If terms of trade decreases it means more goods have to be exported to purchase the
same volume of imports as before. This indicates that the country is worse off.

2. PRODUCTION

 The level of production (economic growth) in a country is indicated by the gross

domestic product (GDP).
 GDP refers to the total market value of all final goods and services produced within the
borders of a country within a year. GDP can be measured nominal, real or per capita
terms.
 Nominal GDP: is when the value of goods and services produced in a country is
calculated in prices of the current year e.g. if the GDP is measured for 2016, prices for
2016 will be used.
 Real GDP: To remove the effect of inflation on the GDP figures, real prices are used.
Real GDP can be used to make comparison in economic growth between various years.
GDP per capita: It shows the effect of economic growth on individuals of a country.
 Real GDP per capita indicate the standard of living of people in a country.

3 MONEY SUPPLY
 Money supply is controlled by the South African Reserve Bank and is classified in three
categories:
- M1: Notes and coins in circulation and demand deposits of the domestic private sector
with monetary institutions
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- M2: M1 plus other short term and medium term deposit of the domestic private sector
with monetary institutions.
- M3: M2 plus long term deposits of the domestic private sector with monetary institutions
 The money supply is an indicator of inflation changes in a country. A consistent
increase in money supply will lead to increase in inflation due to increase in demand.

4. PRODUCTIVITY
 Productivity is the relationship between the output of economic activities and the input
used.
 Labour productivity is the output per worker.
 When labour productivity increases, it can lead to economic growth and improvement in
living standards.
 South Africa generally has lower labour skills and lower productivity of labour.
 If increase in labour productivity is lower than increase in real wages the result will be
demand pull inflation

TOPIC 12: INFLATION

DEMAND PULL INFLATION

 The increase in general price level prices that occur as a result of an excessive demand
of goods and services.
CAUSES
Increase in household spending
 Increase in household expenditure may take place because of the following
Reasons:
Easily available credit: this may results in consumers spending more
 due the extra money available from the financial institutions.
 At certain times the application for credit may be encouraged by lower
interest rates.
Lack of saving: If consumers spend all or very high percentage of their
Incomes, this will cause inflation.
 This is because lack of saving will result in lack of liquidity for banks to
finance capital investments.
Reduction in taxes: If personal income tax can be reduced, people will
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have more disposable income and spending tend to increase.

Government expenditure
 An increase in government spending leads to an increase in prices.
 When government increase its spending on infrastructure it may cause
an increase in goods needed for infrastructure improvement.
 Social spending such as grants may leads to an increase in aggregate
demand of consumer goods and services.
Investors expenditure√
 Producers may increase their investment with expectation of making higher profit.
 the demand for goods and services that are needed for this new investment such as
construction, furnishing of buildings will increase more than supply.
Export earning
 An increase in exports without an increase in local production will result in supply
been lower than demand.
 As goods and services leave the country as exports, the amounts of goods
available for the local market get reduced.
 This results in prices increasing to dampen the local demand.

CONSUMER INFLATION
 Kinds of consumer inflation rate are used in South Africa namely: headline
inflation, core inflation and administered price inflation.
 Headline inflation: It is measured by Consumer Price Index and calculated in
urban areas only.
 It represents the cost of the shopping basket of goods and services of average
South African.
 It is used for inflation targeting, meaning when it is above 6% SARB may
increase interest rates.
 Core inflation
 Core inflation is attained when products with prices that are highly volatile are
excluded from the CPI basket e.g. petrol, electricity, fresh vegetable and fruits,
meat interest on mortgages.
 Core inflation is lower than headline inflation and is often stable.
 Administered price inflation
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 Administered prices are prices set by the government or regulated by

government appointed authorities e.g. electricity (NERSA),

 PRODUCER INFLATION
 Producer inflation is measured by the Producer Price Index (PPI).
 When PPI increases, often CPI will later increase.
CPI PPI
Measures costs of living Measures costs of production

Basket consist of consumer goods Basket consist of goods only

and services
Capital and intermediate goods are Capital and intermediate goods
excluded included
Prices include VAT Prices exclude VAT
Prices of imported goods are not Prices of imported goods are shown
shown explicitly explicitly
Include interest rates Excludes interest rates

Effectiveness of Inflation targeting

 Inflation targeting is a transparent way to explain interest rate policy and to manage
consumers' expectations about future inflation.
 With the inflation target of 3-6% the public knows that if inflation gets out of the
target, the central bank will take action.
 This certainty can stimulate economic activity.
 Businesses are able to make investment decisions knowing that prices will be
stable.
 It provides an explicit measure that serve to improve discipline and accountability of
the SARB
 However, the policy is ineffective in dealing with cost push inflation.
 Factors that cause cost push inflation are outside the control of the monetary
authorities.
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TOPIC 13: TOURISM

Households

 Member of households earn income from tourism sector as tour operator, travel
agents etc.
 Many households are indirectly involved in tourism as employees in hotels, transport
sector etc.
 Entrepreneurs from households that operate as curio producers or musicians can
earn income from tourism.
 A large number of households acquire skills in the tourism industry. School
curriculum and Learnership offer opportunities to acquire these skills.
 Improved infrastructures which are created for tourism are also used by households.

Government
 Tourism enables government to advertise the country’s tourist potential. This can
create a good image of the country if accompanied by good service.
 Tourism makes direct and indirect contribution to the government revenue through
levies on tourists such as tickets, hotel room occupancy.
 It creates jobs at no cost to the government especially in the informal sector.
 It earns foreign exchange, therefore it boost the country’s foreign exchange
reserves directly when tourists pay in foreign currencies.
 It enables the government to achieve its socio-economic objectives of black
economic empowerment and SMME development.

 Businesses
 Tourism stimulates business in areas such as accommodation and entertainment.
 The construction industry, in private-public partnership with the government to
provide the infrastructure, manufacturing sector and recreation sector all benefits
from increased demand due to tourism.
 The previously disadvantaged communities get entrepreneurial opportunities
through the black economic empowerment schemes.
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 Infrastructure development
 Adequate and well maintained infrastructure is essential for tourist destinations.
 Locals share this infrastructure with tourists.
 Economic infrastructure such as ports and beaches are often prioritised by
government.
 In addition to physical and basic infrastructure, social infrastructure is also important
for the growth of tourism.

TOPIC 14: ENVIRONMENTAL SUSTAINABILITY

MAJOR ENVIRONMENTAL PROBLEMS AND INTERNATIONAL MEASURES

TAKEN TO ENSURE SUSTAINABLE DEVELOPMENT: TOPIC 14

Environmental sustainability is a global issue as it affects the whole world. The

following are some of the world’s biggest environmental problems and measures
taken to deal with such problems.

CLIMATE CHANGE
 Climate change is the change in the composition of the atmosphere that is related to
human activity.
 A build-up of greenhouse gases causes the heat from the sun to be trapped in the
atmosphere leads to global warming.
 Global warming has an effect on world’s weather patterns which include extreme
temperatures and change in rainfall patterns.
Measures taken:
 In 1992 the United Nations Framework Convention on Climate Change (UNFCCC)
formulated measures which were aimed at stabilising greenhouse gases.
 In 1997 the Kyoto protocol was signed due to lack of success of the UNFCCC.
 The aim of Kyoto protocol was for developed countries to reduce their greenhouse
emissions by 5.2% by 2012. Developed countries were also to provide some
financial assistance to developing countries to use clean technologies.
 These targets were never met and the agreement was not renewed.
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LOSS OF BIODIVERSITY
 Biodiversity refers to a number of different species and sub-species found in a
specific area.
 Due to extinction of the diversity of life forms on the planet decreases.
 Extinction is an irreversible process which means once those species are lost it is for
ever.
 Measures taken: The Convention on International Trade in Endangered Species
(CITES) bans trade in endangered species on agreed list of plant and animals.
 Control is executed through the issue of permits and quotas to regulate trade in
certain species.
 CITES‘s 17th meeting was held in Johannesburg in South Africa in 2016.

CHEMICAL WASTES
 Exposure to certain chemicals can lead to toxicity in living organisms.
 Such exposure can lead to immediate death, death after time or infertility in human
beings, plant and animals.
 In normal concentration some chemicals are not toxic, while others such as DDT
which is an insecticide are toxic by nature.
 Production of chemicals lead to chemical waste and getting rid of such waste always
create environmental problems.
 Stockholm Protocol on Persistent Organic Pollutants bans the most dangerous
manufactured substances such as DDT.
 The Rotterdam Convention protects countries that lack adequate infrastructure to
monitor the imports and exports of dangerous chemicals.

HARZADOUS WASTE
 It is not limited to chemical wastes but include toxic metal waste such as lead and
mercury, radioactive waste, inorganic compounds such as such as pesticides.
 These wastes are dangerous to the ecosystem as a whole.
 Due to their slow decomposition process, they tend to accumulate in the
environment for a very long time.
 Measures taken: The Basel Convention controls the import and export of
hazardous waste.
 40

 Trade can only take place between countries that signed the convention.
 Trade can only take place if the wastes are handled in an environmentally friendly
manner.
 South Africa is a party to the Basel Convention

LOSS OF INDIGENOUS KNOWLEDGE

 Indigenous knowledge refers to the knowledge that indigenous people in a particular
area use to make a living.
 Traditional people used organic methods and natural processes in production.
 Local capacity building among indigenous people is important aspects of sustaining
the environment.
 Capacity building involves equipping indigenous people with environmental
knowledge beyond their traditional belief.
 This can provide a foundation from which to develop alternative ways of managing
resources.
Measures taken:
 In 2007 the UN’s declaration on Rights of Indigenous Persons was adopted.
 The declaration sets the standard for protection of rights of indigenous people.

GOVERNMENT MEASURES TO ENSURE ENVIRONMENTAL SUSTAINABILITY

The government can take the following measures to ensure sustainable development.

Granting of property rights

 Granting of property rights has conservation has conservation effect as people
take care of things that belong to them.
 To prevent plant and animals from being extinct, people can be given property
rights over them.
 The plants and animals would then be preserved at little cost to the taxpayer.
 If property rights could be expanded to common goods like clean air, those
suffering from pollution could charge the polluters for the right to pollute.
 For example, if one has property right to clean air in one ‘erf, one can sue a
power station for the smoke it produces.
 41

 However, extending private property rights to air is impractical and therefore

hypothetical.
 But the principle of polluters paying victims to reduce pollution is sometimes
followed by governments.

Charging for the use of the environment

 Consumers and producers pay a monthly fee to the government for the waste
they produce and dispose of in the environment.
 Consumers pay municipal charges for rubbish collection and sewage disposal.
 Industries might also be levied emission charges and vehicle owners for gas
emissions.
 For best results, the charges should be proportional to the waste produced.
 A fixed total charge such as a monthly charge will not encourage waste
producers to reduce waste.

Paying environmental subsidies

 The government can provide subsidies to encourage activities that reduce
environmental damage.
 Subsidies could be for:
 Developing a new technique or equipment e.g. to save energy, reduce smoke or
to use environmentally friendly energy such as wind, tide or sun energy.
 Encouraging the production of environmentally friendly substitutes such as
unleaded petrol.
 Encouraging recycling of wastes such as bottles, cans and cardboard.