Economics Year 12 PDF

ECONOMICS
YEAR 12
CURRICULUM DEVELOPMENT UNIT

MINISTRY OF EDUCATION
SUVA, FIJI 2015
Economics: Year 12 1
PREFACE
“Change is the law of life and those who look only to the past or present are certain to miss the
future.”
-John F. Kennedy
This textbook has been written to guide, support and reinforce the level of skills, understanding
and knowledge captured at year 11 level. Since it is an extension of Year 11 economics, we
have decided to entitle the book as “The Direct Approach - Year 12 Economics” textbook. This
is an essential book which is imperative for students to follow as it is aligned to the new syllabi of
year 12.
On that same note, the text will save more time and solve the problem of collating notes and
activities from a variety of textbooks as is usually experienced by senior Economic teachers.
Notice that we have tried to integrate a wider array of activities to allow advance exposure upon
student learning. However, teachers must not regard the book as exhaustive, since changes are
inevitable and there will always be a need to accommodate these changes as we embark into
new horizons.
Furthermore, we have also incorporated the curriculum perspectives which will broaden the
holistic overview of a child’s learning. Namely, a few of them included: Careers Education,
Citizenship Education,Cultural Economics and Financial Education.
The book uses simple explanatory verbs to guide students on the usage. It has a total of five strands
whereby a general strand outcome is formulated for each strand. The strand outcomes are
further refined into achievement indicators which are the concrete measurable performances
students must meet as indicators of achievement.
The book is also recommendable as it has highly incorporated special pedagogical aids. This
extraordinary feature will enhance the students’ ability to use key concepts in newabstract
situations. This includes recent resource interpretation activities which will produce critical and
analytical thinking individuals.
It is hoped that this first edition of the Direct Approach for Year 12 Economic students will illuminate
students’ learning and teachers alike. We should develop responsible critical thinkers in this major
transitional learning period to meet the changing needs of our society and at the same time
developing a sound and knowledge-based society.
2 Economics: Year 12
ACKNOWLEDGEMENTS
The following people are acknowledged for their contribution in the development of the Direct
Approach Year 12 Economics textbook.
Mrs. Urmila Devi Singh HOD- Suva Sangam High School.
Mrs. Apolonia Mere K. Cakaunivalu Vice Principal- Vashist Muni College.
Mr. Maciusela Betei Senior Cultural Enterprise Officer –

Department of Heritage, Culture and Arts.
Mr. Sipiriano Nemani Principal Policy & Convention Officer –

Department of Heritage & Arts
Mrs. Lusiana Fotofili Director - Department of Heritage & Arts
Mrs. Sikiti Sukanavere Saukuru SEO Economics (CDU)
TABLE OF CONTENTS
Preface
Acknowledgements
STRAND 1 : INTRODUCTION TO ECONOMICS 5

Lesson 1.1 The Theory Of Production Possibility Curve. 6
Lesson 1.2 Concepts Illustrated By PPC. 7
Lesson 1.3 Marginal Rate Of Transformation. 9
Lesson 1.4 Shifts Of PPC. 11
STRAND 2 : MICROECONOMICS 21
Lesson 2.1 Cost of Production 22
Lesson 2.2 Productivity 25
Lesson 2.3 Law Of Diminishing Returns 27
Lesson 2.4 Economies And Diseconomies Of Scale 34
Lesson 2.5 Secondary Industry Or Manufacturing Industry 37
Lesson 2.6 Elasticity 40
Lesson 2.7 Industry Economics 51
Lesson 2.8 Imperfect Competition 63
STRAND 3 : MACROECONOMICS 85
Lesson 3.1 National Income 86
Lesson 3.2 Limitations Of GDP 89
Lesson 3.3 Role Of Government 95
Lesson 3.4 Money Supply 103
STRAND 4 : INTERNATIONAL ECONOMICS 111

Lesson 4.1 Gains From International Trade 112
Lesson 4.2 Trade Agreement For Fiji 115
Lesson 4.3 Importance Of Foreign Investments In Fiji 119
STRAND 5 : DEVELOPMENT ECONOMICS 120

Lesson 5.1 Economic Development 120
Lesson 5.2 The Cultural Industries In Fiji 125
ement indicator
ompletion of this strand students will be able to achieve the following outcomes:
SUBJECT OUTCOME
ne andRecognize,
making optimum use possibility
draw production curve.
analyze and explain how people satisfy their needs and wants by managing and
of the available resources in enterprising ways with a commitment to
ecological sustainability.
tify and explain five assumptions of PPC.

STRAND 1 INTRODUCTION TO ECONOMICS
culate opportunity cost and marginal rate of transformation (MRT)

Strand Outcome
Explore the relationship between scarcity, choice and opportunity cost.

tify andAchievement
explain theindicators
economic concepts illustrated by PPC.
lain theUpon
shape of PPC
completion of this strand students will be able to achieve the following outcomes:
• Define and draw production possibility curve.

lain the points and shifts of PPC.
•
•
Identify and explain five assumptions of PPC.
Calculate opportunity cost and marginal rate of transformation (MRT)
• Identify and explain the economic concepts illustrated by PPC.
• Explain the shape of PPC
• Explain the points and shifts of PPC.
LESSON 1.0 INTRODUCTION TO ECONOMICS
The study of economics has developed as a result of scarcity. Scarcity is the fundamental
economic problem faced by all economies in the world. The term scarcity means that there
are not enough resources available to satisfy everyone’s needs and wants. Thus people need to
make choices to maximize their welfare.
LESSON 1.1 THE THEORY OF PRODUCTION POSSIBILITY CURVE
The Production Possibility Curve (PPC) shows the maximum possible combination of two goods
that can be produced with given level of resources and technology in a given period of time.
PPC is an economic model which gives a simplified picture of reality. It is a devise based on
certain assumptions which we use to demonstrate and predict the consequences of a particular
aspect of economic behavior.
PPC is based on five assumptions:
1. All resources are fully employed.

2. All the resources are fixed in supply.
3. All resources can be transferred from production of one good to the other.(under straight line
PPC all resources are equally transferable).
4. Only two goods are produced.
5. The level of technology is fixed.
Construction of PPC
Construction of PPC of PPC
Construction
TheThe above assumptions are used to construct the PPC Schedule. The table below indicates the
above assumptions
The are used toare
above assumptions construct the
used towhichPPC Schedule.
construct PPC The
the might table below
Schedule. The indicates
table below the maximum
indicates
maximum
combination combination
of two goods of two
which goods
society might society
choose to produce choose
at any to produce
given time. at any giventhe maximum
time.
combination of two goods which society might choose to produce at any given time.
Production Possibility
Production Schedule
Possibility ForFor
Schedule Bread and
Bread Tractors
and Tractors
Production Possibility Schedule For Bread and Tractors
Alternatives
Alternatives Bread Bread Tractors Tractors
(000’s of loaves) (00’s)
(000’s of loaves) (00’s)
A A 0 0 65 65
B B 60 60 45 45
C C 100 100 15 15
D D 120 120 0 0
LESSON
LESSON1.2
1.2 CONCEPTS
LESSON 1.2CONCEPTS ILLUSTRATED
CONCEPTS BY PPCBY PPC
ILLUSTRATED
ILLUSTRATED BY PPC
TheThe
Production Possibility
The Production
Production Model illustrates
Possibility
Possibility Model Model aillustrates
number
illustrates of economic
a number
a number concepts
economicofconcepts
ofofeconomic which are:
concepts ofscarcity,
of which are: are:
which scarcity,
choice, opportunity
scarcity,choice,
choice,
cost, law
opportunity of
opportunity
diminishing
cost,cost,
law of
law
returns
diminishing and
of diminishing
efficient
returns resource allocation.
and efficient
returns resource
and efficient allocation.
resource allocation.
1. Scarcity 1. – Scarcity
PPC illustrates
PPC the idea ofthe
scarcityof
in scarcity
the senseinthat either we can produce one commodity
1. Scarcity – PPC–illustrates
illustrates
the idea idea
of scarcity in thethe sensethat
sense that either
either we
we can
canproduce oneone
produce commodity
or the otherororthe
commodity a combination
or theorother
other oforboth butofnothing
a combination
a combination both butmore
of than more
both
nothing the
butamount
nothing of amount
than the resources
more than the amount of
of resources
resources available.(beyond
available.(beyond the production the production
possibility boundary)possibility boundary)
available.(beyond the production possibility boundary)
2. Choice – given the alternatives we have to make a choice of what combination we can
2. Choice 2.– given
produce. Choice the–alternatives we have towe
given the alternatives make
have a choice
to makeofawhat
choicecombination we can produce.
of what combination we can produce.
4 | 3. g e 4 | P a g e cost refers to trade-off – in order to obtain more of one good, the economy
P a Opportunity
has to forgo certain units of the other good because we cannot have more of the both
goods.
certaincertain
units ofunits
the of
other
the good
other because
good because
we cannot
we cannot
have more
have of morethe of
boththegoods.
both goods.
4. Law Of Diminishing Returns – PPC also illustrates the law of diminishing i.e. at the top of
4. Law 4. OfLaw Diminishing
Of DiminishingReturnsReturns
– PPC–alsoPPCillustrates
also illustrates
the law theoflaw
diminishing
of diminishing
i.e. at i.e.
the at
topthe
ofto
t
where resources are allocated to produce capital goods, we say that the curve represents max
wherewhere
resources
resources
are allocated
are allocated
to produce
to produce
capitalcapital
goods,goods,
we saywe that
saythe
that
curve
the curve
represents
represent
max
output of capital goods at point A. And as resources are diverted away from point A, Outpu
outputoutput
of capital
of capital
goodsgoods
at pointat A.
point
And A.asAnd
resources
as resources
are diverted
are diverted
away from
away point
from A, point
Output
A, O
4. Law Of Diminishing Returns – PPC also illustrates the law of diminishing i.e. at the top of
quite slowly reflecting the law of diminishing returns.
the quite slowly
quite slowly
PPC where reflecting
resourcesreflecting
theallocated
are lawtheoflaw
diminishing
toofproduce
diminishing
returns.returns.
capital goods, we say that the curve
5. Efficiency
represents maximum –points of PPC
output illustrates
of capital goods concept
at pointofA.efficiency i.e. production
And as resources efficiency
are diverted away and allo
5. Efficiency
5. Efficiency
–points –points
of PPC ofillustrates
PPC illustrates
concept concept
of efficiency
of efficiency
from point A, Output falls quite slowly reflecting the law of diminishing returns. i.e. production
i.e. production
efficiency
efficiency
and allo
an
efficiency.
5. Efficiency – points of PPC illustrates concept of efficiency i.e. production efficiency and
efficiency.
efficiency.
allocative
Production efficiency.
efficiency means producing maximum with the given level of resources. Productio
Production
Production
efficiency
efficiency is achieved efficiency
meansmeans
when producing
economy producing
is maximum maximum
operating with
on itsthe
withgiven
the given
production level of
level
resources.
possibilityoffrontier
resources.
Production
Prod
efficiency
Production efficiency
is achieved
efficiency ismeans
achieved
when when
economy
producing economy
is operating
maximum is with
operating
on its
the on
production
given its production
level possibility
of resources.possibility
frontierfrontier
Production
efficiency is achieved when economy is operating on its production possibility frontier
Allocative efficiency is achieved when the economy is producing the unique combination of go
Allocative
Allocative
best meets efficiency
efficiency
the needs is achieved
of thatissociety
achieved
when when
the economy
at given the economy
point in is producing
time. is producing
It refers the
to unique
thethe unique
combination
combination
combination of goo
of goods
Allocative
best efficiency
meets
best meets is
the needs
the achieved
needs when
of thatofsociety the
that societyeconomy
at given
at given is
point in producing
point
time.in It
time.the
refers unique
It refers combination
to the to
combination of
the combination
of goods
of gt
goods
would
that
maximize
best meets
economic
the needs
welfare.
of that society at given point in time. It refers to the combination
wouldwould
maximize
maximize
economiceconomic
welfare. welfare.
of goods that would maximize economic welfare.
Shapes
Shapes of PPC
of PPC
Shapes
Shapes
of PPC
of PPC
A can
A PPC PPCbe candrawn
be drawn as a straight
as a straight line,
line, or or concave
concave to theto the origin.
origin. .
AStraight
PPCA.can
PPC be can
drawn
line PPC be drawn
as a straight
as a straight
line, or
line,
concave
or concave
to the to
Concavedorigin.
thePPC
origin. . ..
Straight
Straight
line
Straight PPC
line line PPC
PPC Concaved
Concaved
ConcavedPPCPPCPPC . .
Cans cars
Cans
of Cans cars carsA B
ofcoke of A BA B
coke coke C
increasing
increasingincreasing C C
opportunity
opportunity
cost
opportunity D
cost cost D D
E
0 cans of Fanta 0 milk (l) E
E
0 0 cans ofcans
Fanta
of Fanta 0 0 milk (l)
milk (l)
Constant opportunity cost
ConstantConstant
opportunity
opportunity
cost cost
The shape of PPC is concave to the Origin bowed outwards, illustrating the law of increasing
TheThe shape
The
shape of shape
opportunityof cost.
PPCPPC
is ofisPPC
concave
concave is concave
to the
to the to
Origin
thebowed
Origin Origin
bowed bowed
outwards,
outwards,
outwards, illustrating
illustrating law
illustrating
the of
the law theoflaw
increasing
of increas
increasing
opportunity
opportunity
opportunity cost.cost. cost.
The law of increasing opportunity cost states that as production of one good increases, the oppo
TheThe
law law
of
Theincreasing
oflaw opportunity
increasing
of increasing cost cost
opportunity states
opportunity thatstates
states
cost as production
that asthat of one
production
as productiongood
of one increases,
ofgood
one the
increases,
good increases,
the oppor
the
cost of
opportunity
producing
cost of
additional
producing
units
additional
is increasing.
units is increasing.
cost ofcost
producing
of producing
additional
additional
units isunits
increasing.
is increasing.
The shape
TheThe
shape of isPPC
of PPC is straight
straight line dueline due to the law of constant cost.
shape
The shape
of PPC ofisPPC
straight linetodue
is straight the law
lineto theofto
due constant
lawtheoflaw cost.
constant
of constant
cost. cost.
The The
law law of constant
of constant opportunity
opportunity costcost states
states thatthat
as as productionofofone
production onegood
good increases
increases the
the opportu
The law
The
oflaw
constant
of producing of constant
opportunity
opportunity
cost states
cost states
that asthat
production
as production
of oneof
good
one increases
good increases
the opportun
the op
opportunity cost ofadditional
producingunits remains
additional constant.
units remains constant.
of producing
of producing
additional
additional
units remains
units remains
constant.
constant.
5|Page
5 | P a5g| eP a g e
LESSON 1.3 MARGINAL RATE OF TRANSFORMATION
LESSON 1.3 1.3 MARGINAL
LESSON RATE OF
MARGINAL TRANSFORMATION
RATE OF TRANSFORMATION
Marginal rate of transformation (MRT) measures the

Marginal
Marginal
extent rate
of theofsacrifice
rate transformation
of transformation (MRT)
(MRT)
of moving measures
frommeasures
one point the
theon
extent oftothe
extent
PPC sacrifice
of the
another. ofofmoving
sacrifice moving from onepoint
from one pointonon
PPCPPC
to another.
to another.
.
. For example
For example as illustrated
as illustrated in the
in the graph
graph belowatatpoint
below pointYY200
200million
millionunits
unitsof
ofconsumer
consumer goods
goodsand 1650
and
For example
1650 million as
million units illustrated
units of
of capital in
capitalgoods
goodsthe graph
areare below
possible at
and and
possible point
at point Y 200
X 1300
at point million
X million units
of capital
1300 million of consumer
goods with
of capital goods
millionand 1
900with
goods
million
900 units
units
million of of
ofunits capital
consumer goods
goods
consumer are possible
is goods
possible and at point X 1300 million of capital goods with 900 mi
is possible
units of consumer goods is possible
Capital
Goods
Capital
Goods
1650 Y
1650 Y
1300 X
1300 X
0 200 900 Consumer goods
0 200 900 Consumer goods

If the economy moves from point X to point Y, it will gain 350 units of capital good i.e. 350 units and
700 units of consumer goods would be sacrificed/forgone. The economy is operating on its production
possibility Frontier and cannot have had more of capital goods without diverting resources away from
consumer goods.
IfIfthe
theeconomy
economymoves
movesfrom frompoint
pointX X
toto point
point Y, itY,willit gain
will 350
gainunits
350 of
units of capital
capital good good i.e.units
i.e. 350 350 units
and The
700 units marginal
700 units Rate
of consumer of
of consumer Transformation
goods would
goods is therefore calculated
be sacrificed/forgone.
would be sacrificed/forgone. as follows:
The economy
The economy is operating
is operating onon its produc
possibility Frontier and cannot have had more of capital goods without diverting resources away fro
its production possibility Frontier and cannot have had more of capital goods without diverting
resources
consumer away from consumer goods.
MRT goods.
= Gain: forgone
= 350:700
The
Themarginal
marginal Rate ofofTransformation is therefore calculated as follows:
= Rate 1: 2Transformation is therefore calculated as follows:
MRT = Gain: forgone
= economy
The 350:700
has to forgo 2 units of consumer goods for each additional unit of capital good.
MRT
=
= Gain:
1: 2
forgone
= 350:700
=
The economy 1: to2 forgo 2 units of consumer goods for each additional unit of capital good.
has
The economy
6 | P a g e has to forgo 2 units of consumer goods for each additional unit of capital good.
NOTE: Calculation for Opportunity Cost and MRT
NOTE: Calculation for Opportunity Cost and MRT
1. What is the opportunity cost of producing each additional unit of consumer goods when the
economy 1. moves
What is the point
from opportunity y. of producing each additional unit of consumer goods when the
cost
to point
economy moves from point to point y.
ANS: OC = F /G
ANS: OC
= = F /G
700
= 700
350
= 2350
units of consumer goods for additional unit of capital goods.
= 2 units of consumer goods for additional unit of capital goods.
2. What is the opportunity cost of producing consumer good if the economy moves from point
2. What is the opportunity cost of producing consumer good if the economy moves from point x
x to point y.
point y.
ANS = 700 units
ANS of consumers
= 700 goods. goods.
units of consumers
Points ofPoints
PPC of PPC
A
Capital B
• Y
goods
X C
E
0 consumer goods
1. Points A, B,1.C, D and

Points A,EB,illustrates
C, D andfull
E employment of resources of
illustrates full employment or resources
full utilization of utilization
or full resources.of resource
2. Point X-Points inside

2. Point PPC refers
X-Points insideto
PPCinefficient
refers to allocation
inefficient of resources
allocation or unemployment
of resources of
or unemployment of
resources, under utilization of resources or some resources are lying idle
resources, under utilization of resources or some resources are lying idle
3. Point Y-Points outside

3. Point PPC is unattainable
Y-Points outside PPC ispoint with the given
unattainable point level
with of
theresources and
given level of technology.
resources and
It could onlytechnology.
be achieved through
It could onlyexternal tradethrough
be achieved or through economic
external trade or growth.
through economic growth.
7|Page
LESSON 1.4 SHIFTS OF PPC
LESSON 1.4 1.4 SHIFTSSHIFTS
LESSON OF PPCOF PPC
Graph A Graph B Graph C Graph D
Graph A Graph B Graph C Graph D
Computers Computers
Computers Computers
Computers Computers
Computers Computers
yy
•• xx
0 0 Apples Apples 0 0 ApplesApples 0 0 Apples

Apples 00 Apples
Apples
Graph A shows increase in production of both goods due to improvement in the quantity and
quality Graph
Graph A A shows
of shows increase
increase
resources and in production of both goods due to improvement in the quantity and quality of
in production
technology. of both goods due to improvement in the quantity and quality of
resources and technology.
resources and technology.
Graph B shows increase in production of apples only due to improvement in the resources and
Graph B shows increase in production of apples only due to improvement in the resources and
Graph B shows
technology usedincrease
technology in production
to produce
used apples. of apples only due to improvement in the resources and
apples.
to produce
technology used to produce apples.
C shows
Graph Graph increase
C shows in inproduction
increase ofcomputer
production of computeronlyonly due
due to to introduction
introduction oftechnology
of modern modern to
Graph produce
C showscomputers.
technology to produce computers.
increase in production of computer only due to introduction of modern technology to
produce computers.
Graph Graph
D showsD shows movement
movement from from point
point insidePPC
inside PPCtotopoint
point on
on the
thePPC.
PPC.This
Thisillustrates
illustratesincrease in
increase
Graph efficiency
in efficiency
D shows of resource
of resource
movement use.
use.
from This movement
Thispoint
movement can be
canto
inside PPC achieve
bepoint without
achieve incurring
on thewithout any
incurring
PPC. This opportunity cost.
any opportunity
illustrates increase in
cost.
efficiency of resource use. This movement can be achieve without incurring any opportunity cost.
Economic growth and PPC
Economicgrowth
Economic growth and
andPPC
PPC
Economic growth means increase in productive capacity of a nation. Economic growth leads to an
expansion in the production possibility.
Economicgrowth
Economic growthmeans
meansincrease
increase
in in productive
productive capacity
capacity of aofnation.
a nation. Economic
Economic growth
growth leadsleads
to an
to an expansion in the production possibility.
expansion in the production possibility.
Effect of Economic Growth
Effect of Economic Growth

Capital
goods
Capital
goods
0 consumer goods
0 consumer goods
8|Page
8|Page
ACTIVITY 1.1
ACTIVITY 1.1
ACTIVITY 1.1
Multiple Choice
Multiple ChoiceQuestions
Questions
QuestionMultiple Choice the

1 1is isbased Questions
Question based on followingproduction
on the following production possibility
possibility schedule
schedule
Question 1 is based on the following production possibility schedule
Combination A B C D E F
Food (tonnes)m 0 2 4 6 8 10
Combination A B C D E F
Machines (000) 24 22 18 13 7 0
Food (tonnes)m 0 2 4 6 8 10
Machines (000) 24 22 18 13 7 0
1. 1.TheThe opportunitycost
opportunity costofofthe
the first
first22million
milliontonnes
tonnes of
of food
foodisis
1. The opportunity cost of the first 2 million tonnes of food is
A. 1000
A. 1000 machines
machines
B. 2000
B. 2000 machines machines
A. 1000 machines
C. 6000 machines
C. 6000 machines
B. 2000 machines
D. 2100 machines
C. 6000 machines
D. 2100 machines
D. 2100 machines
Use the graph given below to answer questions 2and 3
Use the graph given below to answer questions 2 and 3
Use the graph given below to answer questions 2and 3
Good J
Y B
Good J
A
Y B
.R
A
.R
0 K Good x
0 K Good x
2. If the economy produces OK of good X then it sacrifices
A. OJ of good Y
2. If the 2. If the economy produces OKgood
of good X then it sacrifices
B. economy
OA of goodproduces
Y OK of X then it sacrifices
A. OJ of good Y
C. AJ of good Y
A. OJD. of KBB. OA
good Y ofxgood Y
of good
B. OA of good Y of good Y
C. AJ
C. AJ of goodD. KBY of good x
D. 3.KB The movement
of good x from point R. to point B would mean
3. The movement from point R. to point B would mean
A. Underutilization of resources of resources
3. TheB.movement
Unattainable point
from withR.the
point
A. Underutilization togiven
pointlevel
of resources B of of resources
would mean and technology.
resources
C. Increase in production of resources without incurring any cost
B. Unattainable point with the given level of resources and technology.
D. Increase in economic growth
A. Underutilization of resources
D. Increase
B. Unattainable in economic
point with the given growth
level of resources and technology.
D. Increase in economic growth
9|Page
9|Page
Questions 4 and 5 are based on the following production possibility schedule
Possibility A B C D E F G
4Televisions(000s)
QuestionsQuestions
and 5 4are
andbased
5 are based on21
on the 20production
the following
following 18 15
production 11 schedule
possibility
possibility 6 0
schedule
Cars (000s) 0 1 2 3 4 5 6
Possibility A B C D E F G
Televisions(000s) 21 20 18 15 11 6 0
4. AsCars
production
(000s) of cars0increases
1 ,the
2 opportunity
3 4 5cost 6of producing them
4. A.AsRemains
4. As production of cars constant
production of cars increases
increases ,the opportunity
,the opportunity costcost of producing
of producing them
them
B. Increases
C.A.
A. Remains Remains constant
Decreases
constant
B. Increases
D.C. Falls
B. Increases
Decreases
C. Decreases
D. Falls
D. Falls5. A combination of 14000 television and 2000 cars
5. A combination of 14000 television and 2000 cars
5. A combination of 14000 television and 2000 cars
A. Would mean some resources have not been fully utilized
A. Would mean some resources have not been fully utilized
B.B. IsIssome
A. Would mean impossible given
resources
impossible
thenot
given have
resources
been
the resources
and
andfully
technology
utilized
technology available
available
C.C. Would
B. Is impossible Would mean
given mean
the too
too many
many
resources andresources
resources areavailable
are being
technology being
used to used to televisions
produce produce televisions
D.D. Means
C. Would mean Means
too manyresources
resources areare
resources fully
fully utilized
utilized
are being used to produce televisions
D. Means resources are fully utilized
Thegraph
The graph given
given below
below shows
showsproduction
productionlevel in economy
level Z
in economy Z
The graph given below shows production level in economy Z
Good y
Good y X
X
Good x
Good x by PPC is violated in the above economy?

6. Which economic concept illustrated
A. Scarcity
6. Which B. Opportunity
6. economic
Which economic costconcept
concept illustrated
illustrated by PPC is by PPC in
violated is the
violated
aboveineconomy?
the above economy?
C. Economic Choice
A. Scarcity
A. Scarcity D. Economic efficiency
B. Opportunity cost
B. Opportunity cost
C. Economic Choice
C. Economic Choice
7. D.
“AnyEconomic efficiency
combination of goods outside PPC is unattainable with the given level of resources and
D. Economic efficiencythis statement clearly illustrates the concept of;
technology”
A. Efficiency
7. “Any7.combination
“Any combination cost of
of goods
B. Opportunity goods
outside outside
PPC PPC is unattainable
is unattainable with
with the given levelthe
of given level
resources of resourc
and
technology”
C. Choice
technology” this statement
this statement clearly the
clearly illustrates illustrates
concepttheof;concept of;
D. Scarcity
A. Efficiency
A. Efficiency
8. Thecost
B. Opportunity production possibility curve is concave to the origin because of the law of
B. Opportunity cost
C. ChoiceC. Choice
D. Scarcity A. constant cost B. increasing costs
D. Scarcity costs
C. decreasing D. demand and supply
8. 10The
| P aproduction
ge possibility curve is concave to the origin because of the law of
A. constant cost B. increasing costs
C. decreasing costs D. demand and supply
8. The production possibility curve is concave to the origin because of the law of
A. constant cost B. increasing costs

C. decreasing costs D. demand and supply
9. The term the best describes the production possibility frontier is
A. Indifference curve
B. Transformation curve
C. Law of variable proportion
9. The term the best describes the production possibility frontier is
D. Lorenz curve
A. Indifference curve
B. Transformation curve
10. Marginal rate of transformation is
C. Law of variable proportion
D. Lorenz curve
A. the opportunity cost
10. Marginal rate of transformation is
B. the slope of transformation curve
C. measures efficiency A. the opportunity cost
D. rate of return B. the slope of transformation curve
C. measures efficiency
D. rate of return
ACTIVITY 1.2
ACTIVITY 1.2
Use the information in the graph below and your knowledge to answer the questions
Use the information in the graph below and your knowledge to answer the questions
i. What is the real cost of producing an additional ton of wheat if the economy moved from
point C to pointi. B What is the real cost of producing an addition ton of wheat if the economy moved from point C to
point B
ii. Define the termii.production efficiency
Define the term and
production allocative
efficiency efficiency
and allocative in relation
efficiency in relationto PPCand
to PPC and identify
identify the
the productive efficient andefficient
productive allocative efficient
and allocative points
efficient from
points fromthe graph.
the graph.
iii. State one way this economy can increase wheat production? Use graph to illustrate
iii. State one way this economy can increase wheat production? Use graph to illustrate
iv. Explain how the economic concept of scarcity and law of diminishing returns are illustrated by PPC
iv. Explain how the economic concept of scarcity and law of diminishing returns are illustrated
by PPC
11 | P a g e
ACTIVITY 1.3
ACTIVITY 1.31.3
ACTIVITY
Use the information in theinproduction
Use the information possibility
the production possibilitycurve
curve given
given below
below to answer the questions that
Use the information in the production possibility curve given below totoanswer
answer the questions
the questions that
thatfollow
follow
follow
i. Calculate MRT if the economy moves form point A to point B

i. Calculate MRT if the economy moves from point A to point B
ii. Explain why point C is unattainable.
i. Calculate MRT if the economy moves form point A to point B
iii. Is it advisable for the economy above to produce at point D? Explain
iii. Is it advisable
iv. for the economy
Explain above
how the concept to produce
of opportunity cost at point D?byExplain
is illustrated PPC
iii. Is it advisable for the economy above to produce at point D? Explain
iv. Explain how the concept of opportunity cost is illustrated by PPC
iv. Explain how theACTIVITY
concept of opportunity1.4 cost is illustrated by PPC
ACTIVITY
Use the 1.4 below and your knowledge to answer the questions that follow.
information given
ACTIVITY 1.4
Use
Usethe
the information givenbelow
information given below and
and your
your knowledge
knowledge to answer
to answer the questions
the questions that follow.
that follow.
i. Identify the economic concept illustrated by the PPC above
ii. Discuss the effect of the movement from point A to point B on the economy in terms of
economic growth and standard of living.
12 | P a g e
i.
i. Identify Identify the economic
the economic concept
concept illustrated
illustrated by by
thethe PPCabove
PPC above
ii. Discuss the effect of the movement from point A to point B on the economy in terms of
ii. Discuss economic
the effect of the
growth andmovement
standard of from
living.point A to point B on the economy in terms of
economic growth and standard of living.
12 | P a g e
ACTIVITY 1.5
ACTIVITY
ACTIVITY 1.5
Use the
Use
Use theproduction
the
production possibility
productionpossibility givenbelow
possibilitygiven
given below
below andand
and youryour knowledge
knowledge
knowledge to to answer
to answer
answer the the to
thequestion
questionquestion
follow. to follow.
tofollow.
i. If the PPC is a straight line, it illustrates the principle of constant cost. Explain
i. If the PPC is a straight line, it illustrates the principle of constant cost. Explain
i.ii. IfState
the PPC is a straightbased
one assumption line, itonillustrates the PPC.
straight line principle of constant cost. Explain
ii. State one assumption based on straight line PPC.
ii.iii. State
Whatone assumption
does based on straight
the term trade-off mean inline PPC.to PPC
relation
iii. What does the term trade-off mean in relation to PPC
iii. What does the term trade-off mean in relation to PPC
ACTIVITY 1.6
ACTIVITY 1.6
ACTIVITY 1.6
Use the information given below and your knowledge to answer the questions that follow
Use the Possibility given below

A Band your
C D E
Use theinformation
information given below and your knowledge
knowledge to answer
the questions that follow
that follow
Computers(m) 12 10 7 2 0
Possibility
Food (tones) A0 B1 C
2 D
3 E
4
Computers(m) 12 10 7 2 0
i. Draw and(tones)
Food fully label the
0 production
1 2possibility
3 frontier
4 for food and computers
ii. Production possibility curve illustrates the concept of opportunity cost. Explain.
i. i.iii.Draw and
What
Draw dofully
and the label
fullypoints
the
labelon
thethe
production
production
production
possibility
possibility
possibility
frontier
indicate?
frontier
for food and computers
for food and computers
ii.iv.Production
ii. The economy
Production is currently
possibility
possibility producing
curve
curve atthe
illustrates
illustrates point C ,what
theconcept
conceptof would be the cost.
opportunity opportunity
of opportunity cost of producing
Explain.
cost. Explain.
iii. What each do
additional unitonofthe
the points food if the economy
production moved
possibility from point C to point D
indicate?
iii. v.What doa the
With foodpoints on the
production of 2production possibility
tones, what would be theindicate?
largest quantity of computers the producer
iv. The economy is currently producing at point C ,what would be the opportunity cost of producing
could produce?
iv. The
eacheconomy
additional isunit
currently
of food ifproducing
the economyatmoved
pointfrom
C ,what
point Cwould beD the opportunity cost of
to point
vi.producing
Explain how a point outside PPC can be achieved?
each additional unit of food if the economy moved from point C to point D
v. 13With
| P a ag food
e production of 2 tones, what would be the largest quantity of computers the producer
could
v. With produce?
a food production of 2 tones, what would be the largest quantity of computers the
producer could produce?
vi. Explain how a point outside PPC can be achieved?
13 | P a g e
vi. Explain how a point outside PPC can be achieved?
ACTIVITY 1.7
ACTIVITY 1.7
Use the figure above to answer the following questions

Use the figure above to answer the following questions
i. At what point will the economy be producing if it devotes all of its resources to production of
i. At what point will the economy be producing if it devotes all of its resources to production of
consumer goods ?
consumer goods ?
ii. What
ii. is the
Whatmaximum unit units
is the maximum of consumer
of consumergoods theeconomy
goods the economy can produce
can produce withof550 units of
with 550 units
capital goods
capital goods
iii. Theiii. Thethe

shift in shift in the graph
graph showsshows increase
increase in in production ofofcapital
production goods.
capital Explain
goods. the effect
Explain theofeffect
this on of this
on currentcurrent
andand futurestandard
future standard ofofliving
livingof of
people in thein
people economy.
the economy.

iv. Whativ. does
What doesGPoint
Point andG point
and point
H H in thefigure
in the figure represents?
represents?
v. What is law of increasing cost?

v. Explain the law of increasing cost?
vi. List two assumptions of production possibility curve
vi. List two assumptions of production possibility curve
14 | P a g e
ACTIVITY 1.8
ACTIVITY 1.8.
Use the diagramUse the diagram

given below given
and below and your knowledge
your knowledge to answer
to answer thethe question that
question thatfollows
follows
i. Explain the shifti. inExplain

the PPFthe from
shift inPPFT1
the PPFtofrom
PPRT2 T1 to PPR
PPFand T2 and
state thestate the cause
cause the shift.
of the shift.

ii. Explain why the
ii. PPC is concave
Explain why PPC isto the origin?
concave to the origin?
iii. Differentiate between opportunity

iii. Differentiate between cost and scarcity.
opportunity cost and scarcity.
ACTIVITY 1.9
ACTIVITY 1.9
Use the information in the production possibility curve given below to answer the questions that follow
Use the information in the production possibility curve given below to answer the questions that
follow
i. What is the i.opportunity

What is thecost
opportunity cast producing
of producing eacheachadditional
additional Tractor if the
Tractor if economy moves from
the economy Y to W?
moves
from Y to W?
ii. Suppose the economy is producing at point X. Comment on the Economies production.
ii. Suppose the economy is producing at point X. Comment on the Economies production.
iii. State one way in which combination Z can be achieved.
iii. State one way in which combination Z can be achieved.
iv. If PPC
iv. If PPC is a straight line,isitaillustrates
straight line,the
it illustrates
principle theofprinciple
constantof constant
cost. cost. Explain.
Explain.
18 Economics: Year 12 15 | P a g e
ACTIVITY 1.10 ACTIVITY 1.10
Use the graph given below and your knowledge to answer the questions that follow
Use the diagram given below and your knowledge to answer the question that follows
i. The economyi.above
The economy above
would not would
prefer not preferattopoint
to produce produce at point A .Explain.
A .Explain.
ii. Explain the concept of choice and allocative efficiency in relation to PPC.
ii. Explain the concept of choice and allocative efficiency in relation to PPC.
iii. Using graph explain the effect of technological progress in the economy.
iv. Calculate theiii.opportunity

Using graph
of ifexplain the effect moved
the economy of technological progress
from point in the Beconomy.
E to point on the graph.
v. Calculate MRT if the economy increased its butter production from 0 units to 12 units.
iv. Calculate the opportunity of if the economy moved from point E to point B on the graph.
v. Calculate MRT if the economy increased its butter production from 0 units to 12 units.
16 | P a g e
ACTIVITY 1.11
ACTIVITY 1.11
Match up each situation in the table with the appropriate letter or graph.
Match up each situation in the table with the appropriate letter or graph.
Graph 1 Graph 2
H
Steel Computer .
Y
.A .X C
.B G
Wheat Food
Situation Letter or graph number

1. some resources are unemployed
2. a level of output beyond capacity
3. Resources Are Equally suited To Produce Both Goods
4. Resources are more suited to production of one good than the other.
5. production efficient point
6. point indicates that the economy can increase the standard of living
without incurring an opportunity cost
ACTIVITY
ACTIVITY 1.12 1.12
Study the four production possibilities curves below and answer the questions that follow.
Explain what each of the four production possibilities curves show
17 | P a g e
Explain what each of the four production possibilities curves show
Strand Outcome
Investigate
STRAND 2production processes used by manufacturing industries, the
MICROECONOMICS
responsiveness of demand to changes in the market price and the performance of
different
Strand Outcomemarket structures.
Achievement
Investigate indicator
production processes used by manufacturing industries, the responsiveness of
demand to changes in the market price and the performance of different market structures.
Upon completion of this strand students will be able to achieve the following outcomes:
Achievement indicators
• Calculate and illustrate graphically the Production Costs.
• Define Productivity and ways of improving productivity to increase output.
• Calculate productivity
• Define law of diminishing returns and illustrate graphically.
• Calculate and illustrate graphically the Production Costs.
• Define and illustrate economies and diseconomies of scale and illustrate graphically
• Define Productivity and ways of improving productivity to increase output.
• Identify the nature and production of manufacturing sector
• Calculate productivity
• Discuss the importance of manufacturing sector to Fiji’s economy
• Define law ofthe
• Identify diminishing
domestic and returns
importand illustrate
resource graphically.
based industries.
• Define
• Listandthe illustrate economies and diseconomies
importance of diversification in manufacturing.of scale and illustrate graphically
• Identify the nature
• Identify and production of
the problems associated withmanufacturing sector
manufacturing sector production in Fiji
• Discuss the importance of manufacturing sector to Fiji’s
• Interpret and analyze statistical data related to manufacturing sector. economy
• Identify the domestic
• Investigate and strategies
government import resource
and policy based industries.
implemented to curb the problems in manufacturing
• List the importance
sector. of diversification in manufacturing.
• Identify
• Definethe elasticity
problems associated with manufacturing sector production in Fiji
• Interpret
• Define andanalyze
and identifystatistical data
the formulas related to of
measurement manufacturing
price, income andsector.
cross elasticity of demand
• Investigate government strategies
• Interpret PED in relation to various goods and policy implemented to curb the problems in
manufacturing sector.
• Explain the responsiveness of elasticity using graphs
• Define elasticity
• Identify and define the different markets structures
• Define and identify examples
• Identify domestic the formulas measurement
of firms in these marketofsituations
price, income and cross elasticity of
demand
• Identify features of different market structures
• Explain
• Interpret PEDusing
in relation
graphsto thevarious goods
short run and long run situations
• Describe
• Explain the performanceofofelasticity
the responsiveness all marketusingstructures
graphs
• Identify and define the different markets structures
• Identify domestic examples of firms in these market situations
• Identify features of different market structures
• Explain using graphs the short run and long run situations
• Describe the performance of all market structures
18 | P a g e
2.1 2.1 COST
COST OF PRODUCTION
OF PRODUCTION
LESSON 2. 1. COSTS OF PRODUCTION

COSTS DEFINITION FORMULA shape
COSTS DEFINITION FORMULA shape
Total Cost Is the sum of fixed and TC = FC+VC p TC
(TC) Total CostvariableIscost
the sum of fixed and TC = FC+VC p TC
(TC) variable cost
q
q
Variable Cost Costs that varies with VC =0, when output p VC
(VC/TVC ) the level of output =0
Variable Cost Costs that varies with VC =0, when output p VC
(VC/TVC ) the level of output =0
q
Fixed Cost Cost that remains fixed FC =TC ,when p
(FC /TFC) or constant irrespective output =0 FC
q
of the changes in the
Fixed Costoutput. Cost that remains fixed FC =TC ,when p q
Average(FC
Total
/TFC)Is the per unit cost.irrespective
or constant It is ATC = TC /output
output =0 p AC FC
Cost ‘U’ shape curve
of the changes in the
(AC/ATC)
output. q
q
Average Total Is the per unit cost. It is ATC = TC /output p AC
AverageCost ‘U’‘U’
Generally shape curve AVC =TVC/ output p
shape. AVC
Variable(AC/ATC)
Cost AVC initially falls and
(AVC) later starts to rise due to q
law diminishing returns
q
Average Generally ‘U’ shape. AVC =TVC/ output p AVC
Variable Cost AVC initially falls and
Average(AVC)
Fixed Declines later
as starts
outputto rise dueAFC
to =TFC/output p
Cost law diminishing returns
increases
(AFC) AFC q
q
Marginal Cost MC is additions to total TC2-TC1 p MC
(MC ) Average Fixed Declines as output AFC
cost. MC is ‘J’ shape or Q2-Q1 =TFC/output p
Cost increases
a ‘√’ shape curve.
(AFC) AFC
q q
Marginal Cost MC is additions to total TC2-TC1 p MC
(MC ) cost. MC is ‘J’ shape or Q2-Q1
a ‘√’ shape curve.
19 | P a g e
ACTIVITY 2.1.12.1.1
Activity
Activity 2.1.1
ACTIVITY 2.1.2
Activity2.1.2
Activity2.1.2
Complete the the
Complete table.
table
Complete the table
Quantity FC VC TC AC AFC AVC
Quantity FC VC TC AC AFC AVC
1 720 720
1 720 720
2 1000 300
2 1000 300
3 830 1230 410 133.33 276.67
3 830 1230 410 133.33 276.67
4 1000 1400
4 1000 1400
5 1100 1500
5 1100 1500
6 1900 316.67 66.67
6 1900 316.67 66.67
7 400 400 57.14 342.86
7 400 400 57.14 342.86
(11marks)
(11marks)
20 | P a g e
20 | P a g e
ACTIVITY 2.1.3
Label the Curves given below
Label the Curves given below.
Label the Curves given below.
LESSON 2.2 PRODUCTIVITY
LESSON 2.2 LESSON 2.2 PRODUCTIVITY
PRODUCTIVITY
Productivity is expressed or measured as a mathematical division of the

following parameters (functions).
The term productivityThe term product

generally refers to the relationship
generally refersbetween the volume between
to the relationship of goodsthe
andvolume
servicesofproduced
goods and overtime
servicesand the
produced overtim
The termof productivity
volume usedgenerally
resourcesvolume inoftheir refers to in
production.
resources used the relationship
their production.between the volume of goods and
services produced overtime and the volume of resources used in their production.
Productivity is output per unit ofisinput.
Productivity Labour
output productivity
per unit is total output
of input. Labour per workers.
productivity is total output per workers.
Productivity is output per unit of input. Labour productivity is total output per workers.
Productvity = total output =

Productvity total output
No. of units of inputNo. of units of input
Productivity will increase if the output

Productivity of goods
will increase if and servicesofrises
the output goodsmore
andthan proportionately
services rises more increases
than proportionately in
in any input of resources.
Productivity will increase if the
in any input of output of goods and services rises more than proportionately
resources.
increases in any input of resources.
22 | P a g e
22 | P a g e
Ways of Improving Productivity.
There are a number of ways a firm can employ to improve productivity.

Ways of Improving Productivity.
i. Increase in specialization i.e when each firm tends to confine its activity to the production of
a particular
There good
are a number or service.
of ways a firm can employ to improve productivity.
i. Interdependence
ii. Increase in specialization
means i.emutual
when each firm tends
reliance to confine
is when eachits activity
sector to the production
specializes of a good
in a certain
orparticular
service and
good exchange
or service. or depend on each other to satisfy their wants.
ii. Interdependence means mutual reliance is when each sector specializes in a certain good or service
iii. Division of labour increases productivity since it allows people to do work for which they are
and suited
best exchange or take
and depend
fullonadvantage
each other toofsatisfy their wants.
their existing skills talents and abilities.
iii. Division of labour increases productivity since it allows people to do work for which they are best
iv. Automation is an extension of mechanism where human control is replaced by mechanical
suited and
control e.g.take full advantage ofoftheir
computerization existing skills
production talents and abilities.
process.
iv. Automation is an extension of mechanism where human control is replaced by mechanical control
v. Productivity is also improved
e.g. computerization through
of production economies of scale and mass production. An economies
process.
of scale is sometimes called increasing returns to scale or economies of mass production.
v. The Productivity
scale of isa also improved
firm’s through
operation economies
increase of scale
as firm and mass
becomes production.
bigger, An economies
reducing of of
per unit cost
production.
scale is sometimes called increasing returns to scale or economies of mass production. The scale of a
firm’s operation increase as firm becomes bigger, reducing per unit cost of production.
ACTIVITY 2.2.1
Activity2.2.1
i. What is meant by the term productivity?
ii. Distinguish
i. What isbetween
meant by increase in production and increase in productivity.
the term productivity?
ii. Distinguish between increase in production and increase in productivity.
iii. Identity ways of improving productivity in a garment industry.
iii. Identity ways of improving productivity in a garment industry.
ACTIVITY 2.2.2
Activity2.2.2
Melee decides to start her business growing vegetables for sale at the local market. Melee is
specializing in the production of vegetables only .
i. Explain
i. Explain how how specialization
specialization affectsproductivity
affects productivityof
of workers
workers and
and total
totaloutput.
output.(2 (2
marks)
marks)
ii. Explain how specialization creates interdependence. (2 marks)
ii. Explain how specialization creates interdependence. (2 marks)
26 Economics:
23 | P a gYear
e 12
LESSON 2.3 LAW OF DIMINISHING RETURNS
2.3 LAW OF DIMINISHING RETURNS
NISHING RETURNS
2.32.3 LAW
LAW OFOF DIMINISHING
DIMINISHING RETURNS
RETURNS
The law of diminishing returns states that as
The law of quantities
increasing diminishing of areturns
variable states thatinput
factor as increasing
are quantities
The
of The law
a variable
added of diminishing
lawtoofadiminishing
factor
fixed factorinputinput, returns
returns thestates
are added states
to that that
as as increasing
to increasing
a fixed
additions factor input,
total quantities
quantities
the
aof aeventually
variable factor input are added to ato atofixed factor input,
the the
tates that as increasing quantities
of variable
additions
output
additions
Marginal
Marginal to
factor
to total
additions total
product
product
output
output
input
begins
to total output
isisadditions
arefall.
additions
added
eventually
to
eventually
eventually
totototal
begins
total
fixed
begins
begins
production
production
factor
fall. input,
toorfall.
to fall. or output. The law
ed to a fixed factor input, the
of
Law
Marginal
output.
MarginalThe
diminishing
of
lawproduct
product
ofdiminishing
Variable
of
returns is
returns
Proportions.
additions
diminishing
is additions
isThe
returnsto total
is
to totalLaw
is also called
also called
law of
also production
called
production
of Variable
Law
diminishing
or output.
or output.
of Variable
TheThe
law law
Proportions.
Proportions.
of
Thediminishing
law returns
of diminishing isreturns
also called
will Law
only of Variable
happen Proportions.
in short run
lly begins to fall.
returns
TheThe
because will
law law only
of least
at happen
of diminishing
diminishing
one factor in short
isreturns
returns run
willwill
fixed. because
onlyonly
happen at
happen in short
in short run run
least one factor is fixed.
total production or output. The law
because
because at least
at least one one factor
factor is fixed.
is fixed.
led Law of
Illustrative
Illustrative Variable
example Proportions.
example
Illustrative
example
Illustrative example
will only happen in short
Units of labour run Total output
Labour Marginal
Units of labour Labour
Units of labour (Hectares
Labour ) Total
Total output
output Marginal
Marginal
output
ed. 0 (Hectares
2 ) )
(Hectares 0 output
output0
0
1 0 2 2 0 0
30 0 0
30
12 1 2 2 30 30
90 30 30
60
2
3 2 2 2 90 90
170 60 60
80
3
4 3 2 2 220170
170 50 80
80
4
5 4 2 2 250220
220 30 50
50
5
6 5 2 2 250250 0 30
30
Total output 6 6 Marginal 2 2 250250 0 0
) Graph Showing Total
Graph
Graph
Graph Showing Showing
Showing
Total Product
output
andTotal
Product and Marginal Product
Total Product
Product
Marginal Product andand Marginal
Marginal Product
Product
300
0 0
30300
300
250
30
90
250
200
250 60
170
200 200 80
150 TP
220
150 150 50 TP
MP
TP
100
250
100 100 30 MP MP
50
250
50 50 0
0
0 0 1 2 3 4 5 6
al Product and Marginal Product 1 1 2 2 3 3 4 4 5 5 6 6
Units of labour
Units
Units of labour
of labour
Relationship Between Total Product and Marginal Product
Relationship
Relationship Between
Between Total Total
Product andProduct and
Marginal Marginal Product
Product
Total product Marginal product Terminology
Total product Marginal product Terminology
Increasing at an increasing rate Positive and rising
Increasing at an increasing rate Positive and rising
Increasing returns
Increasing returns
Increasing at an decreasing
Increasing rate rate
at an decreasing Positive and falling
Positive and falling Diminishing returns
Diminishing returns
ConstantConstant
at maximum
at maximum Zero Zero Constant returns
Constant returns
Falling Falling Negative
Negative Negative returns
Negative returns
TP isTP is increasing
increasing at a at aTP TP is falling
is falling
Decreasing
Decreasing rate rate
Output TP is increasing at
Output( TP/MP)
TP is increasing at rate
Increasing
( TP/MP) Increasing rate
Total
Total
Product curve
Product curve
0 Units of variable factor

MP is increasing MP is decreasing MP
0 (increasing returns) (diminishing returns) Units of variable factor
MP is increasing MP is decreasing MP
MP is negative
(increasing returns) (diminishing returns) (Negative returns)
MP is negative
(Negative returns)
28 Economics: Year
2512| P a g e
Graph
Graph Showing
Showing Relationship
Relationship between
between Total Product
Total Product and Marginal
and Marginal ProductProduct
Graph Showing Relationship between Total Product and Marginal Product
Note:
Note:Stage 1 indicates
Note:
Stage 1Stage increasing
1 indicates
indicates marginal
increasing
increasing returns
marginal
marginal returns
returns
Stage
Stage 2Stage 2 indicates
indicates
2 indicates diminishing
diminishing
diminishing marginal
marginal
marginal returns
returns
returns
Stage 3Stage 3 indicates
indicates negative
negative marginalreturns
marginal returns
Stage 3 indicates negative marginal returns
26 | P a g e
ACTIVITY 2.3.1
Activity 2.3.1
1. Division of labour is seen when workers undertake
1. Division of labour is seen when workers undertake
A. Unskilled tasks.
A. Unskilled tasks.
B. Dual operations.
B. Dual operations.
C. Specialized tasks.
C. Specialized tasks.
D. Trade union activities.
D. Trade union activities.
QuestionQuestion
2 and 23 and
are 3based
are based on the
on the following
following production
production dataforfora afirm
data firmwhich
whichuses
usesonly
onlytwo
two inputs,
inputs, land
land and
andlabour.
labour.
Land Labour Total

units Units Product
units
1 1 60
1 2 130
1 3 210
1 4 280
1 5 340
1 6 340
1 7 320
1 8 310
2. The law of diminishing returns begins to operate with the employment of

2. The law of diminishing returns begins to operate with the employment of
A. the first unit of labour
A. the B.
first the
unitfourth unit of labour
of labour
B. the C.
fourththeunit
sixth
ofunit of labour
labour
C. the D.
sixththe seventh
unit unit of labour
of labour
D. 3.
the On the data shown
seventh unit of ,the firm will employ a maximum of
labour
3. On the data shown ,the firm will employ a maximum of
A. Three units of labour
B. units
A. Three Fourofunits of labour
labour
B. FourC.units
Five unit of labour
of labour
C. FiveD.
unitSix
of unit
labourof labour
D. Six unit of labour
4. The law of diminishing marginal returns states that
4. The law of diminishing marginal returns states that
A. The marginal utility falls as each successive units are consumed
B. The additions
A. The marginal to as
utility falls total product
each eventually
successive unitsdecline as more variable factor is added
are consumed
C. The marginal
B. The additions to total cost increases
product as output
eventually decreases
decline as more variable factor is added
D. The average cost falls as output increases
C. The marginal cost increases as output decreases
D. The average cost falls as output increases
27 | P a g e
Use the graph given below to answer the question 15
a
a
Cost b
Cost b
0 Output
5. The vertical distance between curve a and curve b illustrates firms
0 Output
5. The vertical5.distance between
The vertical curve
distance a and
between curve
curve b curve
a and illustrates firms firms
b illustrates
A. Variable cost
B. Fixed cost
A. VariableC.cost A. Variable cost
Total cost
B. Fixed cost B. Fixed cost
D. average cost
C. Total cost C. Total cost
D. average cost D. average cost
Activity2.3.2
ACTIVITY 2.3.2 Activity2.3.2
i. Label increasing ,decreasing and constant returns on the graph (3marks)

ii. Afteri. employment of __________
Label increasing no.and
,decreasing of workers
constantthe law ofondiminishing
returns the graph returns is set in.
(3marks)
i. Label increasing ,decreasing and constant returns on the graph (3marks)
iii. Explain
ii. why
Afterfirms experience
employment diminishing returns
of __________ in short the
no. of workers run.law of diminishing returns is set in.
iii. Explain
ii. After employment why firmsno.
of __________ experience diminishing
of workers returns
the law of in short returns
diminishing run. is set in.
iii. Explain why firms experience diminishing returns in short run.
28 | P a g e
28 | P a g e Economics: Year 12 31
ACTIVITY 2.3.2
Activity2.3.2
a) Use the
a) information given below
Use the information andbelow
given answer
andthe questions
answer that followthat follow
the questions
i. meant
i. What is What is
bymeant by of
the law thediminishing
law of diminishing
returns? returns?
ii. The following

ii. The table shows
following production
table data for data
shows production tomatoes grown grown
for tomatoes on a 1000 hectares
on a 1000 farmfarm
hectares
b) Complete the tablethe

b) Complete given
tablebelow
given and
belowanswer the questions
and answer that that
the questions follow.
follow.
Labour Total product Marginal product

input
0 0 0
1 500 500
2 2400 1900
3 5100 -----
4 8000 -----
5 ------ 3000
6 12000 -----
7 ------ 800
8 13300 -----
9 13300 -----
10 13000 ------
iii. Which factor is fixed? Which is variable?

iii. Which factor is fixed? Which is variable?
iv. What is the marginal product of 3rd worker?
iv. What is the marginal product of 3rd worker?
v. What is total product of 7th worker?
vi. Complete the Statement:

v. What ‘theoflaw
is total product of diminishing returns sets in with the employment of the
7th worker?
__________________ worker.’
vi. Complete the Statement: ‘the law of diminishing returns sets in with the employment of the
__________________ worker.’
29 | P a g e
ACTIVITY 2.3.2
Activity2.3.2
Activity2.3.2
2. Use the table to answer the questions that follow.
i. Complete thethe
i. Complete table
tablebybycalculating andfilling
calculating and fillingininthe
thesix
sixmissing
missingnumbers.
numbers.
(3 marks)(3 marks)
i. Complete the table by calculating and filling in the six missing numbers. (3 marks)
ii. Atii.
which output
At which levellevel
output do do
diminishing returns
diminishing returns begin?
begin? (1 mark)
(1 mark)
ii. At which output level do diminishing returns begin? (1 mark)
iii. Explain
iii. Explain whywhy diminishing
diminishing returnscause
returns cause the
themarginal
marginal costcost
of tennis racket racket
of tennis production to increase.
production to
iii. Explain why diminishing
increase. (2 returns cause the marginal cost of tennis racket production
(2 marks) to increase.
marks)
(2 marks)
ACTIVITYActivity2.3.3
2.3.3
Activity2.3.3
Use the information given below and answer the questions that follow
UseUsethethe
information
informationgiven
givenbelow andanswer
below and answerthethe questions
questions thatthat
followfollow
Workers Output Marginal Product
Workers
0 Output0 Marginal Product
0 1 0 20
1 2 20 50
2 3 50 90
3 4 90 120
4 5 120 140
5 6 140 150
6 7 150 155
7
i. Calculate 155 products for each level of output. (2marks)
marginal
i. Calculate marginal products for each level of output. (2marks)
i. ii.Calculate
Draw totalmarginal
product and marginalforproduct
products each curves (2marks)
level of output. (2marks)
ii. Draw total product and marginal product curves (2marks)
ii. iii.Draw
Statetotal
one relationship
product and between TP and
marginal MP curves (1mark)
product (2marks)
iii. State one relationship between TP and MP (1mark)
iii. State one relationship between TP and MP (1mark)
30 | P a g e
2.4 ECONOMIES AND DISECONOMIES OF SCALE
2.4 ECONOMIES AND DISECONOMIES OF SCALE
Economies of scale refer to reduction in per unit cost as output increases.
Economies of scale refer to reduction in per unit cost as output increases.
Internal economies of scale refer to reduction in per unit cost as the firm increases its plant size.
The factors that lead to economies of scale are:
Internal economies of scale refer to reduction in per unit cost as the firm increases its plant size. The
factorsspecialization
i. Increased that lead to economies of scale are:
of labour
ii. Bulk buying
iii. Increased usei. ofIncreased
capital specialization of labour
ii. Bulk
iv. Better access to finance buying
iii. Increased use of capital
iv. Better access to finance
External economies of scale refer to reduction in per unit cost which is the result of forces outside
the control of the firm.
External economies of scale refer to reduction in per unit cost which is the result of forces outside the
The factorscontrol
thatofmay
the firm.
lead to external economies of scale are:
The factors that may lead to external economies of scale are:
i. Lower resource prices
i. Lower resource prices
ii. Better education and training of labour force
ii. Better education and training of labour force
iii. Increased research and development within the industry.
iii. Increased research and development within the industry.
iv. Increased growth and efficiency
iv. Increased of the
growth and capitalofmarket.
efficiency the capital market.
Diseconomies of scale
Diseconomies of refer
scale to increase
refer in per
to increase unit
in per cost
unit costasasoutput increases.It Itresults
output increases. resultswhen
whenthethe
firm
firm starts to produce beyond the optimum plant
starts to produce beyond the optimum plant size. size.
31 | P a g e
Graphical illustration
Graphical of economies
illustration of economiesand
anddiseconomies ofscale
diseconomies of scale
AC
Optimum plant size is at productive efficient point

Optimum plant size is at productive efficient point
ACTIVITY 2.4.1
Activity2.4.1
1. The concept of economies of scale refers to a long-run situation because
1. The concept of economies of scale refers to a long-run situation because
A. The production process has an element of discontinuity.
A. The production process has an element of discontinuity.
B. The B.
production process
The production usesuses
process different weighing
different weighingscales.
scales.
C. All productive resources are variable.
C. All productive resources are variable.
D. Employees do more
D. Employees shiftshift
do more work.work.
2. 2.Reduction
Reductionininper
perunit
unitcost
cost which
which occurs
occursasasthe firm
the increases
firm the size
increases of itsofplant
the size its plant
arearecalled
called
A. Economies
A. Economies of scale
of scale
B. Diseconomies
B. Diseconomies of scale
of scale
C. decreasing returns to scale
C. decreasing returns to scale
D. increasing returns to scale
D. increasing returns to scale
32 | P a g e
3. Diminishing returns to scale The technical optimum level of output is the
A. The output the corresponds with the point MR= MC

3. B.The
Thetechnical
point at with LR average
optimum levelcost curve isisatthe
of output its minimum
C. It is the excess capacity level of production
A. D.The
Is point where
output the law of diminishing
corresponds with returns is set
the point MR= in MC
B. The point at with LR average cost curve is at its minimum
C. It is the excess capacity level of production
4. Increase
D. Is pointinwhere
per unitlaw
costofasdiminishing
output increases results
returns is setinin
A. Diminishing returns
4. B.Increase
Increasing
in returns
per unit cost as output increases results in
C. Diseconomies of scale
A. D.Diminishing
Economies of scale
returns
B. Increasing returns
C. Diseconomies of scale
D. Economies of scale
Activity2.4.2
ACTIVITY 2.4.2
Use the labels in the Resource List to correctly match the different parts of the graph numbered 1-
6 in your answer book. (3marks)
Use the Resource

labels in the
list Resource List to correctly match the different parts of the graph numbered
1-6 in your answer book. (3marks)
ResourceOptimal
list output, Costs, Economies of scale, Output,
Diseconomies of scale, Average cost, Average variable cost,

Optimal output, Costs, Economies of scale, Output,
Diseconomies of scale, Average cost, Average variable cost,
Diminishing returns
Diminishing returns
Label theLabel
graphtheusing
graphthe information
using givengiven
the information in theinresource list. list.
the resource
1 6
4 5
0 2 3
33 | P a g e
2.5 SECONDARY INDUSTRY OR MANUFACTURING INDUSTRY
Manufacturing industry deals with processing raw materials into semi-finished or finished goods
Two Major Manufacturing Industry in Fiji:
• Garment
• FMF
LESSON 2.5.1 Garment Industry
Nature of industry
• Garment industry is a secondary industry where raw materials (clothing material) are turned
into finished goods. (Coats,shirts,dresses.)

• The industry makes use of labour and capital for production purposes. It is a specialized
industry where division of labour is practiced.

• Garment is produced in Fiji for local consumption as well as for export purpose.
Importance
• Creates employment opportunities

• Earns foreign exchange
• Contributes towards the GDP
• Satisfies the needs of the locals
• The increase in garment production has resulted in an increase in the development of other
sectors e.g. Transportation, banking, insurance and so on.
Problems
• Workers are not paid well

• Strikes by workers who demand better working conditions
• Congested working places
• Workers employed for long hours
• Harassment of female workers at work place
• Leads to pollution land
• Expiry of Tax free agreement leads to ceasing operations and creates unemployment
• Factories employ foreigners and as a result locals are left unemployed
• Factories close without prior notice to their employees
• Power failure affects production level
Government Policies to Curb the Problem in Garment Industry.
• The introduction of Tax Free Zone and Tax Free Factories has boost the production in the
garment industries in the recent years in Fiji.
• Introduces minimum wage rate.
• Provide Subsidy to company.
ACTIVITY Activity
2.5.1.1 2.5.1.1
Activity 2.5.1.1
Year Export
Earning(garment)
1999Year Export
128.9
Earning(garment)
2000 122.7
1999 128.9
20012000 160.7
122.7
20022001 120.8
160.7
2002 120.8
i. In which year was export earning
• i.the highest
In which year was export earning
i. In which year was export earning
• the lowest
• the highest
• the highest
• the• inlowest
the lowestearnings?
ii. Explain the trend export
ii. ii. Explain the the
Explain trend ininexport
trend export earnings?
earnings?
iii. Construct
iii.
iii. Construct a lineusing
Construct
a line graph
a graph
line graph using information
using information
information from
from
from the table.
the the table.
table.
iv. State 2 reasons why garment industries are importantFiji’s
iv. State 2 reasons why garment industries are important to economy.
to Fiji’s economy.
iv. State 2 reasons why garment industries are important to Fiji’s economy.
ACTIVITY 2.5.1.2
Activity 2.5.1.2
Activity 2.5.1.2
i. Study the photograph below and answer the question that follows.
i. Name the i. type

Nameofthe type ofshown
industry industry shown
in the in thephotograph.
above above photograph.
Give Give a reason
a reason for for
youryour answer.
answer.
ii. State two problems faced this industry
ii. State two problems faced this industry
iii. Outline the contributions of this industry towards Fiji’s economy.
i. iv.
iii. OutlineName Discuss the government
the type ofofindustry
the contributions policies
shown
this industry that
in would
towards theFiji’s help
above the industry grow.
photograph.
economy. Give a reason for your answ
ii. State
iv. Discuss two problems
the government faced
policies this
that industry
would help the industry grow.
iii. Outline the contributions of this industry towards Fiji’s economy.
38 Economics: 35
Year| 12
Pa ge
iv. Discuss the government policies that would help the industry grow.
2.5.2 Flour Mills of Fiji LTD (FMF)
Nature of the Industry
• FMF industry is a secondary industry where raw materials are turned into finished goods.
(Biscuits ,Snacks, cereal)
• The industry makes use of labour and capital for production purposes.
• It is a specialized industry where division of labour is practiced.
• FMF in Fiji produces for local consumption as well as for export purpose
Importance
• Provides employment opportunities for local people.

• Exports of manufactured goods earn foreign exchange
• Contributes to GDP
• Satisfies domestic consumptions.
• Leads to development of other sectors
• Has led to an increase in Fiji export base.
Problems Associated With Manufacturing Industry in Fiji
Many factors determine the future of these industries.
• Limited natural resources and distance to markets

• Lack of technology and skillful people.
• Relatively low wages and poor working conditions
• Lack of incentives for workers
• Low productivity
• Lack of competition
• Deregulation
• Fluctuations in world market price
• Political instability
• Duplication of activities in production and types of production which lowers overall economic
productivity.
Government strategies and policy to solve problems faced by the secondary industry
Government can:
• Identify of new products to manufacture to increase export base

• Provide Additional assistance to small scale industries to help improve their profitability.
• Help Improve productivity and efficiency by increasing by education and training.
• Introduce more tax free zones and tax free factories to encourage growth in secondary
sector
• Provide funds to improve the level of technology used.
ACTIVITY 2.5.2.1
1. Define
a) export orientation
b) Import substitution
2. State 2 reasons why the manufacturing industry is important for Fiji?
3. State four factors that will hinder the development of the manufacturing industry?
ESSAY WRITING
Educational fieldtrip are organized for Form 7 Economics students to visit a primary,
secondary and tertiary industry. This field trip often marvels the students as they witness the
real l situation.
Discuss the above statement with reference to:
• The nature , purpose and scope of your selected industry (3marks)

• Any three problems encountered by the industry (3marks)
• Measures or policies taken by the government to remedy such problems (3marks)
2.6 2.6 ELASTICITY

ELASTICITY
The term elasticity is used in economics to measure responsiveness or reaction of one variable
The term elasticity is used in economics to measure responsiveness or reaction of one variable to
to changes in another.
40
changes
Economics: in another.
Year 12
The term elasticity is used in economics to measure responsiveness or reaction of one variable to
changes in another.
LessonLESSON
2.6.1 2.6.1Price elasticity
PRICE of demand
ELASTICITY OF DEMAND
Price elasticity
Price elasticity of demand
of demand (PED) measures
(PED) measures the responsiveness
the responsiveness of quantity
of quantity demanded to
demanded to change
change in
price.
in price.
PED = Q1-Q2 X P1+P2

Q1+Q2 P1-P2
Note: Ignore Negative Sign When Calculating PED
Describing PED PED

Describing
Value of PED Terminology : Description in terms of general formula.

coefficient Demand is…
PED =0 perfectly Qty. demanded does not respond to price change
inelastic
38 | P a g e
0<PED<1 relatively A change in price leads to a smaller than proportional
inelastic change in qty. demanded.
PED =1 unitary A change in price leads to a same proportional change in
inelastic qty. demanded
∞>PED>1 relatively A change in price leads to more than proportional change
elastic in qty. demanded
PED=∞ perfectly Purchases are prepared to buy all they can at going prices
elastic but not even a slightly higher price. Changes on QD have
no effect on price.
[Source : Introducing Economics Bk 1 By Barry Collier}
PED Graphical Summary Economics: Year 12 41

elastic but not even a slightly higher price. Changes on QD have
no effect on price.

PED Graphical Summary
PED Graphical Summary
P D p p
D
0 q 0 q 0 q
Perfectly inelastic unitary elastic perfectly elastic
p p
D D
0 q 0 q
Relatively elastic relatively inelastic
39 | P a Goods
Classifying g e Goods
Classifying According to PED
According to PED
Goods having large no. of Luxuries (e.g. compact

closed substitutes disc players)
Goods having Goods occupying

Durable goods which relatively large
relatively
can be repaired on proportion of total
Elastic demand
which expenditure household spending e.g.
can be delayed e.g. cars
TV, refrigerator
Goods having large no. of

alternative use e.g. butter
Goods having very few or no Necessities e.g. food items

Goods having very few or no Necessities e.g. food items
close substitutes e.g. salt
Complementary Goods having Goods occupying

goods used in relatively relatively small proportion
conjunction with Inelastic demand of total household
other more expensive spending e.g. cars
goods e.g. petrol used
in cars.
Goods which are habit

forming e.g. cigarettes

40 | P a g e
ELASTICITY AND TOTAL REVENUE TEST
ACTIVITY 2.6.1.1 Activity 2.6.1.1
MULTIPLE CHOICE QUESTIONS
Multiple Choice Questions
1. Which of the following is a characteristic of a good with elastic demand?
1. Which of the following is a characteristic of a good with elastic demand?
A. The good isA. The goode.g.

a necessity is abasic
necessity e.g. basic food item.
food item.
B. ConsumersB. Consumers
spend spend a small
a small proportion proportion
of their ofthe
income on their income on the good
good
C. Goods whichC.are
Goods
habitwhich
forming.areE.g.
habit forming. E.g. drugs.
drugs.
D. Goods thatD.
areGoods that
durable andarefordurable and for which
which expenditure canexpenditure
be delayed. can be delayed.
2. Suppose
2. the price elasticity
Suppose the price of elasticity
a good is of
0.4.a The
goodgraph thatThe
is 0.4. bestgraph
depicts
thatthe good
best is
depicts the good is
A.
p B. p
D D
Qty qty
C. D. p
p
D
qty qty
41 elasticity
3. The price | P a g eof demand for the international air travel is 3. An increase in the international
air fares will:
A. Increase the demand for international travel

B. Increase the annual expenditure on the international travel
C. Decrease the annual expenditure on the international travel
D. Have no effect on the annual expenditure on international travel
4. A rise in retail price of petrol will increase the total revenue of oil companies
if the demand for petrol is
A. Relatively elastic
B. Relatively inelastic
C. Inversely elastic
D. Unitary elastic
5. Demand can be said price elastic when
A. a decrease in price causes a smaller percent increase in quantity demanded

B. an increase in price causes a smaller percent decrease in quantity demanded
C. a decrease in price causes a larger percent increase in quantity demanded
D. an increase in price causes a larger percent increase in quantity demanded
6. The price elasticity of demand for goods depends on
A. the number of substitutes available for the goods

B. the quality of the good
C. the amount of supply in the market
D. The income of the buyers.
7. A restaurant manager notices that, when he increases the price of the meals, the total
revenue also increases ;the price elasticity of demand for meals therefore is
A. Elastic
B. Unit Elastic
C. Inelastic
D. Perfectly elastic
ACTIVITY 2.6.1.2
Activity 2.6.1.2
Use theUse the diagram

diagram aboutballs
about tennis tennis
to balls
answerto answer the questions
the questions that follow
that follow
Price
$
30
25
demand
0 8 10 qty (00)
i. How many tickets are sold at $25

i. How many tickets are sold at $25.
ii. At $30 what is the revenue from ticket sales
ii. Calculate the revenue at $30.
iii. Calculate the price elasticity of demand from the graph given above.
iii. Calculate the price elasticity of demand from the graph given above.
iv. Describe the elasticity calculate in part iii.
Activity 2.6.1.3
ACTIVITY 2.6.1.3
Classify
Classify the Following
the Following Goods
Goods According
According ToTo PED.
PED. Placea atick
Place ticktoto indicate
indicate PED
PED for
for the
the following
following
goods
goods
GOODS ELASTIC INELASTIC

DEMAND DEMAND
1. meals at restaurant
2. compact DVD player
3. butter
4. food
5. car
6. soft drink
LESSON 2.6.2 INCOME ELASTICITY OF DEMAND (YED

LESSON 2.6.2 INCOME ELASTICITY OF DEMAND (YED
Lesson 2.6.2 Income Elasticity of Demand (YED)
43 | P a g e
Income elasticity of demand measures
measures thethe responsiveness of
responsiveness quantity demanded of a commodity to a
Income elasticity
Income
change in
of demand
elasticity
income. of demand measures the responsivenessof quantity
of quantity demanded
demanded of a
of a commodity to a
commodity change
to a change in income.
in income.
YED = % change in quantity demanded
YED = %
% change
change in
in quantity
income demanded
% change in income
DescribingDescribing
YED
Describing
YED
YED
GOODS
GOODS
NORMAL GOOD INFERIOR GOOD

NORMAL
YED = +ve GOOD INFERIOR
YED = -veGOOD
YED = +ve YED = -ve
Normal Necessity Normal Luxury

0Normal
< YEDNecessity
<1 1Normal
< YED Luxury
<∞
0 < YED < 1 1 < YED < ∞
Examples of different types of goods

ACTIVITY 2.6.2.1
Activity 2.6.2.1
1. Which of the following is an example of an inferior good?
1. Which of the following is an example of an inferior good
A. Mobile phones
A. Mobile phones
B. BreadB. Bread
C. WineC. Wine
D. Second hand computers
D. Second hand computers
2. If 2. If income
income elasticity
elasticity of demandfor
of demand foraagood
good isis equal
equaltoto-2-2
, the good
, the is is
good
A. good
A. normal normal good
B. an good
B. an inferior inferior good
C. a substitute
C. a substitute
D. a complement
D. a complement
ACTIVITY 2.6.2.2
Activity 2.6.2.2
A. A. Demand curve.
Price
$
4
3 D
0 4 8 qty
i. Calculate the price elasticity of demand if price falls from$4 to $3 (answer to2dp)
Describe the type of elasticity. (1mark)
i. Calculate the price elasticity of demand if price falls from$4 to $3 (answer to 2dp)
Describe the type of elasticity. (1mark)
ii. Consumer’s income fall during recession. The income elasticity of demand for four products
are given below
Income elasticity of demand
Fashion clothing 2.8

Cinema visits 3.0
Shoes 0.9
New cars 1.9
Which retail item would be most affected during recession? Give a reason to your answer.
(2marks)
ACTIVITY 2.6.2.3
Activity 2.6.2.3
Use the information

Use the information given belowgiven
andbelow and answer
the questions that follow:
that follow:
i. Identifyi.the Identify
goods the
which
goodswould
which fall
wouldunder habithabit
fall under forming normal
forming normalnecessity and
necessity and normal
normal luxury
luxury
goods. (3marks)
goods. (3marks)
ii. Explain the term relatively elastic demand and relatively inelastic demand . (1mark)
ii. Explain the term relatively elastic demand and relatively inelastic demand .(1mark)
Lesson LESSON LESSON
2.6.3 2.6.3 CROSS
Cross 2.6.3 CROSS
ELASTICITY
Elasticity ELASTICITY
(CED)OFCED
OF DEMAND
of Demand DEMAND CED
Cross elasticity Cross

Cross elasticity
of demand elasticity
of demand of demand
measures
measures measures the responsiveness
the responsiveness
the responsiveness of quantity of demanded
quantity
demanded
of quantity demanded
of one of one
commodity
of one to com
a
change change
in change in
price of anotherprice of another commodity.
commodity to a in pricecommodity.
of another commodity.
CED = Qx2-QxCED
1 x= Qx
Py2-2+Qx
Py11 x Py2+Py1
Qx2+Qx1 Qx
Py22-+Qx
Py11 Py2- Py1
Describing CED
Describing CED Describing CED
ComplementsComplements
CED = -ve CED = -ve Substitutes CEDSubstitutes
=+ve CED =+ve
e.g.
e.g. car & petrol car & petrol Cross elasticityCross
of elasticity E.g. E.g.
of coke and Pepsi coke and Pepsi
An increase inAn increase
price of car in price of car demand demand An increase inAn increase
price of in price of
will result
will result in a decrease in in a decrease in coke
coke will result in a will result in a
quantity
quantity demanded for demanded for increase in quantity
increase in quantity
petrol petrol demanded for Pepsi
demanded for Pepsi
ACTIVITY 2.6.4
1. Which of the following would have a positive cross elasticity of demand

Activity2.6.4
Activity2.6.4
A. Second hand clothes
B. Food1.item 1. following
Which of the Which of would
the following would have
have a positive crossa elasticity
positive cross elasticity of demand
of demand
C. Butter and margarine
A. Second handA.clothes
D. Pen and ink
Second hand clothes
B. Food item B. Food item
2. An increase in price ofD. good A causes a decrease in demand for good B, then good A and
D. Pen and ink Pen and ink
good B are
2. An increase2.inAn increase
price in A
of good price of good
causes A causes
a decrease a decrease
in demand for in demand
good forgood
B, then goodAB,and
then good
good BAarean
A. Substitutes goods
B. Complementary goodsA.
A. Substitutes Substitutes goods
goods
C. Inferior goods B. Complementary
B. Complementary goods goods
C.
C. Inferior goods
D. Normal goods Inferior goods
D. Normal goodsD. Normal goods
3. Complementary goods are goods that are used in conjunction with one another, example
petrol. 3. Complementary
3. Complementary
car and goods
goods are goods that are goods
used inthat are used in
conjunction conjunction
with withexample
one another, one another, example
car and
petrol. petrol.
i. Explain how decrease in pricehow
i. decrease
Explain of cars would price
decrease affect the would
demand for petrol. use graph to
i. Explain how in price of carsinwould of cars
affect affect
the demand forthe demand
petrol. use for petrol.
graph use graph t
to explain
explain (1mark) (1mark)
(1mark)
ii. If a decrease
ii. If a in price
ii. of
decrease cars
inIfprice decreases
a decrease
of pricetotal
carsindecreases revenue
of cars
total forfor
decreases
revenue carcardealers,
total revenue describe
dealers,for thetype
car dealers,
describe the type
of of
describe the type
elasticity
elasticity ofofdemand forof
demand for cars.
demand for cars.
cars.
(1mark) (1mark) (1mark)
47 | P a g e 47 | P a g e
ACTIVITY 2.6.5
Calculate cross elasticity of demand and indicate is the product are substitutes or complementary
goods.
Activity2.6.5
i. The price of good A increased by 8%and the quantity demanded of good B rose by 5%
(1mark)
Calculate cross elasticity of demand and indicate is the product are substitutes or complementary goods.
ii.
i. The Theprice
priceof
ofgood A increased
good A increased byfrom $8 to
8%and the$12 in response
quantity to of
demanded purchase of good
good B rose by 5%B decreased
(1mark)
from 200 units to 100 units (1mark)
ii. The price of good A increased from $8 to $12 in response to purchase of good B decreased from
iii. The
200consumption of good
units to 100 units X rose by 20%when price of good Y fell by 5%.
(1mark)
iii. The consumption of good X rose by 20%when price of good Y fell by 5%.
iv. The quantity of good C fell from 120 units to 100 units as a result of a fall in price of good D
iv. The $15
from quantity of good C fell from 120 units to 100 units as a result of a fall in price of good D from
to $12
$15 to $12
ACTIVITY 2.6.5
Activity2.6.5
Write true or false for the following statements
Write true or false for the following statements
Statements True or false

i. If the cross elasticity is negative ,the products are substitutes
ii. If the cross elasticity is negative ,the products are complements
iii. If the cross elasticity is positive ,the products are substitutes
iv. If the cross elasticity is positive ,the products are complements
v. If the price decreases for one product and quantity demanded increase
for another product ,than these products are substitutes
vi. If the price decreases for one product and quantity demanded increase
for another product ,than these products are substitutes
2.7 INDUSTRY ECONOMICS
MARKET MODELS
The market environment of ay firm will be influenced y two factors, firstly demand for the product
at each possible price level and secondly, the type of competition it encounters from its rivals in
the market. In the form of four simplified market structures which can serve as models.
• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly
• Duopoly
LESSON 2.7.1 PERFECT COMPETITION
Perfect Competition – a market structure of a large number of individual firms each selling
a standardized product and each having so small a share of the total market that none can
influence market price.
Characteristics of Perfect Competition

For perfect competition to exist, an ideal world containing the following six market conditions
apply.
• There are large number of buyers, all so small that no single buyer an influence the price
ruling in the market or the demand.
• There are large numbers of sellers, all so small that no single seller can influence price or
quantity demanded. All firms are Price takers.
• There are no barriers to entry in Long Run; there is total freedom to enter or exit the market
therefore normal profit is earned in long run.
• There are Homogenous products. This guarantees that prices of all firms remain same and if
one firm did raise the price it would lose its market share.
• Perfect knowledge exists between buyers and sellers.
• Cost of production for all firms is identical.
• Resources are employed in accord with consumer sovergnity.
• Homogenous products provide little consumer choice.
Examples of Perfect Competition are: Baby-sitting, Suburban lawn mowing runs, Domestic
cleaning, Market Vendors.
Short Run Profit situation under Perfect Competition
Short Run Profit situation under Perfect Competition
Short
In short run there areRun Profitprofits
possible situation under Perfect Competition
situations
In short run there are possible profits situations
In Super Normal
i. short profit – occurs when firm’s total revenue exceeds its total costs, both im
i. Super Normal profitrun there arewhen
– occurs possible
firm’sprofits situations
total revenue exceeds its total costs, both implicit
i. explicit.
Super It is also
Normal known
profit – as super
occurs profits
when or economic
firm’s profit.
total revenue exceeds its total costs, both im
and explicit. It is also known as super profits or economic profit.
explicit. It is also known as super profits or economic profit.
Supernormal profit
Supernormal profit
Supernormal profit
Cost/rev. MC
Price
Cost/rev. MC
$
Price AC
$ AC
Pe D =AR=MR=P
Pce D =AR=MR=P
c
0 Qe output
0 Qe output
ii. Normal Profit - occurs when a firm’s total revenue is exactly equal to its total cost. No
ii. Normal Profit - occurs
situationwhen a known
is also firm’s totalbreak
revenue
evenissituation
exactly where
equal the
to its total cost. Normal
ii. Normal Profit - occurs as
when a firm’s total revenue firm
is exactly is making
equal to itszero
totalprofit. TR
cost. No
profit situation is Normal
also known as break even situation where the firm is making zero profit.
profit
situation is also known as break even situation where the firm is making zero profit. TR
TR= TC – Normal profit
Normal profit
Cost/rev. MC
Price
Cost/rev. MC AC
$
Price AC
$
Pe D=AR=MR=P
Pe D=AR=MR=P
0 Qe output
0 Qe output
50 | P a g e
iii. Subnormal Profit – occurs when the firms total cost exceeds total revenue. It is a loss in the fir
iii. Subnormal Profit – occurs when the firms total cost exceeds total revenue. It is a loss in the
TC > TR - Subnormal profit made
firm. TC > TR - Subnormal profit made
Graphically
iii. Subnormal Profit – occurs when the firms total cost exceeds total revenue. It is a loss in the firm.
Graphically
TC > TR - Subnormal profit made
P/R/C
Graphically MC
$ AC
P/R/C
MC
$ AC
C
Pe D=MR=AR=P
C
Pe D=MR=AR=P
0 Qe output
0 Q output
Prefect Competition in Long Rune
Prefect Competition in Long Run
In long run, all productive factors are variable. New firms can enter the market and existing firms a
Prefect Competition in Long Run
leaverun,
• In long it. all productive factors are variable. New firms can enter the market and existing
firms a leave
In long it. productive factors are variable. New firms can enter the market and existing firms a
run, all
leave it. of supernormal profit is being earned by perfect competition firms, new firms will be attract
In case
• In case of firms
As new enter theprofit
supernormal industry the supply
is being earned will
byincrease, the price in the
perfect competition market
firms, newwill fall
firms willand
bethis will
continue
In case ofAs
attracted. until
new normal
supernormal profitsthe
profit
firms enter isare earned.
being earnedthe
industry by supply
perfect competition
will increase,firms,
thenew firms
price will be
in the attracted.
market will
fallAs
andnewthis
firms
willenter the industry
continue the supply
until normal will increase,
profits the price in the market will fall and this will
are earned.
Graphically
continue Incaseare
until normal: profits of earned.
Supernormal Profit
Graphically : Incase of Supernormal Profit
Graphically : Incase of Supernormal Profit
P($) S0 MC
S1
P($) S0 MC
AC
S1
AC
Pe0 D=AR
Pe0 D=AR0 D=AR
Pe1 D=AR1
Pe1
However, if firms are experiencing losses in the short run, some existing firms will exit. As some fir
exit the market
However, if firmsthe
are supply will decrease
experiencing andshort
losses in the causerun,ansome
upward movement
existing in exit.
firms will priceAsuntil
somenormal
firms profits a
0
being
exit theearned Qe
market again. Qe Qty 0 Q
the supply will decrease and cause an upward movement in price until normal profits
0 1 e output
are
0 earned again.
being Qe0 Qe1 Qty 0 Qe output
51 | P a g e
51 | P a g e
However, if firms are experiencing losses in the short run, some existing firms will exit. As some
However,
firms exit if firmsthe
the market are supply
experiencing losses in theand
will decrease shortcause
run, some
an existing
upwardfirms will exit. inAsprice
movement some until
firms
exit the market the supply will decrease and cause an upward movement in price until normal profits are
normal profits are being earned again.
being earned again.
Graphically Graphically
In case of subnormal Profit In case of subnormal Profit
P S1 P/R/C MC
$ S0 AC
Pe1 D=AR1
Pe0 D=AR0
0 Qe1 Qe0 Qty 0 Qe output
LESSON 2.7.2 PERFORMANCE OF PERFECT COMPETITION

LESSON 2.7.2 PERFORMANCE OF PERFECT COMPETITION
• In long run, the firms operate where P = MR = MC = SRAC = LRAC therefore charge lowest prices
• In longtorun, the firms operate where P = MR = MC = SRAC = LRAC therefore charge lowest
consumers.
prices
• to consumers.
Perfectly competitive firms provide optimal result from society’s point of view, achieving economic
• Perfectly competitive
efficiency. In otherfirms
wordsprovide optimal
they produce resultdesirable
at socially from society’s point of view, achieving
level of output.
economic efficiency. In other words they produce at socially desirable
• At point E, the firms able to achieve productive efficiency meaning producing level of output.
highest possible
output
• At point at minimum
E, the firms ablecost to achieve productive efficiency meaning producing highest
• In output
possible addition,atatminimum
point E the cost
firms achieve allocative efficiency since perfectly competitive firm’s
produce according to consumer
• In addition, at point E the firms achieve demand so they allocate
allocative resources
efficiency sincetoperfectly
those goods that are in demand
competitive firm’s
producetherefore there isto
according noconsumer
wastage. demand so they allocate resources to those goods that
are in demand therefore there is no wastage.
Disadvantages of perfect competition:
Disadvantages of perfect competition:
• Lack incentive to innovate or undertake research and development since they only earn normal
profits in LR.
• Lack incentive to innovate or undertake research and development since they only earn
• Not able to enjoy economies of scale due to small scale production.
normal profits in LR.
• Profits earned are competed away due to freedom of entry and exit.
• Not able to enjoy economies of scale due to small scale production.
• Homogenous product therefore lack of consumer choice.
• Profits earned are competed away due to freedom of entry and exit.
• Homogenous product therefore lack of consumer choice.
52 | P a g e
BREAKEVEN AND SHUTDOWN POINTS
BREAKEVEN AND SHUTDOWN POINTS
Shutdown Shutdown
Point – is Point
a point– isata point
whichat only
whichvariable costs costs
only variable are covered.
are covered.It makes
It makesthe
the differences
differences between
between keeping thefirm
keeping the firmgoing
goingininshort
short runin in
run a loss
a loss situation
situation andand
shut shut
downdown altogether
altogether in long in long
run. If the firm i
run. If the firm is not able to cover its fixed cost, there is no point in trading/
not able to cover its fixed cost, there is no point in trading/ operating. operating.
Graphically: Shut Down Point

Graphically: Is At Minimum
Shut Down Point Is AtAVC
Minimum AVC
MC
P/R/C AC
AVC
P D=AR=MR
Shut down pt.
0 Q output
Shut down point and Supply Curve
Firm’s Supply Curve is MC above the shut down point.

Firm’s Supply Curve is MC above the shut down point.
P/R/C MC
AC
AVC
P D=AR=MR
Shut down pt.
0 Q output
Therefore no firms will supply anything below its shutdown point. A firm’s supply curve is its MC
Therefore no firms
curve will the
above supply anything
shutdown point below
if MC <itsAVC,
shutdown
firm ispoint. A firm’sitssupply
not covering variablecurve is its
cost and itsMC
better not to
curve above the shutdown point if MC < AVC, firm is not covering its variable cost and its better
operate.
not to operate.
53 | P a g e
BREAK EVENBREAK
POINT -EVEN POINT -isAC
is at minimum at minimum AC
MC
P/R/C
AC
P D=AR=MR
Break even pt.
0 Q output
NOTE: A firm NOTE:

in theAlong
firmrun
in the
mustlongbe
runable
musttobecover
able toallcover all itsincluding
its costs, costs, including variable
variable and and fixed
fixed i.e. i.e.
earning
earning normal normal
profit. profit.
Owner Owner remains
remains in business.
in business. This pointThisispoint is called
called breakeven
breakeven pointpoint
andandthisthis point
the firm s earning zero economic
point, the firm s earning zero economic profit. profit.
ACTIVITY 2.7.2.1
Activity2.7.2.1
1. If the price in a perfectly competitive market is $5 then the marginal revenue of a firm in that
1. If the price in a perfectly competitive market is $5 then the marginal revenue of a firm in that mark
market will be
will be
A. Zero as a perfectly
A. Zero ascompetitive firm maximizes
a perfectly competitive profit at anprofit
firm maximizes output where
at an outputMR=0
where MR=0
B. Unable to determine as a competitive firm must reduce the price in order
B. Unable to determine as a competitive firm must reduce the price in order to sell to
more
sell more
C. DependentC. onDependent
average cost as marginal revenue is equal to average revenue minus
on average cost as marginal revenue is equal to average revenue minus average
average cost
cost D. Is equal to $5 , as all firms in competitive market are price takers
D. Is equal to $5 , as all firms in competitive market are price takers
2. A perfectly competitive firm will shut down in the short run if :
2. A perfectly competitive firm will shut down in the short run if :
A. At the loss minimizing level of output
B. Fixed cost
A. At the loss minimizing exceeds
level total revenue
of output
B. Fixed cost exceeds total revenueexceeds total revenue
C. Total variable cost
D. Total cost exceeds total revenue
C. Total variable cost exceeds total revenue
D. Total cost
3. exceeds
Short runtotal revenueprofits in a perfectly competitive market will result in
supernormal
3. Short run supernormal

A. Firms areprofits in a perfectly
price takers thereforecompetitive market
face by horizontal will result
demand curvein
B. Long run subnormal profits as too many new firms enter the market
A. Firms are price takers
C. No therefore
changes facerun
in the long by because
horizontal demand
of strong curve
barriers to entry
D. Normal
B. Long run subnormal profits
profits asaretooearned
manyinnew
longfirms
run due to freedom
enter of entry
the market
C. No changes in the long run because of strong barriers to entry
D. Normal profits are earned in long run due to freedom of entry
54 | P a g e
4. The
4. The
marginal
marginal
cost cost
aboveabove
the shut
the shut
downdown
pointpoint
for afor
firm
a firm
is itsis its
A. Demand
4. The marginal cost A. Demand
above curve
the curve
shut down point for a firm is its
B. Production
B. Production
curve
curve
A. Demand curveC.4.Supply
C.The
Supply
curvecurve
marginal cost above the shut down point for a firm is its
B. Production curve
D. Close
D. Close
down down
pointpoint
C. Supply curve A. Demand curve
D. Close down point B. Production curve
5. The
5. The
reason
C.reason
for long
Supply for long
curverun normal
run normal
profits
profits
underunder
perfect
perfect
competitive
competitive
market
market
is is
A. Horizontal
A. Horizontal
D. Close demand
down demand
point curve
curve
5. The reason for long run normal profits under perfect competitive market is
B. Price
B. Price
takers
takers
5. The reason
C. Freedom
C. offorentry
Freedom long run normal
of entry
and exit profits under perfect competitive market is
and exit
A. Horizontal demand curve
B. Price takers D.A.Homogenous
Horizontalproduct
D. Homogenous demand curve
product
B. Price takers
C. Freedom of entry andC.exit
Freedom of entry and exit
D. Homogenous productD. Homogenous product
ACTIVITY 2.7.2.2 Activity2.7.2.2

Activity2.7.2.2
Activity2.7.2.2
Study
Study
the information
the information
givengiven
in the
intable
the table
belowbelow
and answer
and answer
the questions
the questions
that that
follow;
follow
Study the information given in the table below and answer the questions that follow;
Study the information given in the table below and answer the questions that follow;
OUTPUT
OUTPUT TC TC
OUTPUT TC
(Q) (Q) ($) ($)
(Q) ($)
0 00 300
300300
1 11 450450
450
2 22 570570
570
3 33 670670
670
4 780
4 4 780 780
Price per unit of output =$100

Price per unit
Price of output
per unit =$100
of output =$100
i. Calculate the total fixed cost for the firm. (1mark)
i. Calculate the total fixed cost for the firm. (1mark)
i. i.Calculate the total
Calculate fixedfixed
the total cost cost
for the
forfirm.
the firm. (1mark)
(1mark)
ii. Calculate the total ii.
revenue from the
Calculate producing 4th from
total revenue unit of output?4th
producing (1mark)
unit of output? (1mark)
ii. firms
iii. Determine the ii.Calculate
profit the total
Calculate
maximizationrevenue
the total
price from
revenue
and producing
from
output 4th unit
producing
level. 4th unit
of output?
of output?
(1mark) (1mark)
(1mark)
iii. Determine the firms profit maximization price and output level (1mark)
iv. Identify the market structure that is depicted by the information above. (½ mark)
iii. iii.Determine
Determine
the firms
the firms
profit
profit
maximization
maximization
priceprice
and output
and output
levellevel
(1mark)
(1mark)
iv. Identify the market structure that is depicted by the information above
(½ mark)
iv. iv.Identify
Identify
the market
the market
structure
structure
that that
is depicted
is depicted
by the
byinformation
the information
aboveabove
(½ mark)
(½ mark)
ACTIVITY 2.7.2.3
Activity2.7.2.3
Activity2.7.2.3
A. A.Use
Usethe
theinformation
information given belowand
given below and answer
answer the the questions which follow:
questions
A. Use the information given below and answer the questions
There are 100 small firms selling vegetables on the island Taveuni.
There are 100 small firms selling vegetables on the island Taveuni.
i. Name
i. Name the the
typetype of marketstructure
of market structurethat
that vegetable
vegetable sellers
sellerscome
come under. (1 mark)
under. (1 mark)
ii. Thei. Fiji
Name theCorporation
sugar type of market
has structure that over
more control vegetable sellers
the price come
of its under.than
products (1 mark)
vegetable sellers.
ii. The Fiji sugar
ii. The Corporation
Fiji has more
sugar Corporation control over the price
has more control over the price(2of its its products than
products
ofmarks) vegetable
than vegetable sellers.
Explain the significance of this statement.
sellers. Explain the significance of this statement. (2 marks)
Explain the significance of this statement. (2 marks)
Activity2.7.2.4
ACTIVITY 2.7.2.4
Activity2.7.2.4
Assume that the growing of the sugar cane is a perfectly competitive industry and the price of sugarcane
is determined
Assume on thatthe
theworld market.
growing Fijisugar
of the has many
cane issmall sugarcane
a perfectly producers.
competitive industry and the price of sugarcane
Assumeis that the growing of the sugar cane is a perfectly competitive
determined on the world market. Fiji has many small sugarcane producers. industry and the price of
i. Perfectly competitive firms are faced by horizontal demand
sugarcane is determined on the world market. Fiji has many small sugarcane curve. Give a reason for horizontal
producers.
demand
i. curve. competitive firms are faced by horizontal
Perfectly (1mark)
demand curve. Give a reason for horizontal
i. Perfectly competitive
demand curve. firms are faced by horizontal demand curve. Give a reason for horizontal
(1mark)
demand curve. (1mark)
56 | P a g e
58 Economics:
56Year
| P 12
age
ii. A firm in perfectly competitive market is earning supernormal profits in short run. What t
ii. A firmprofit will this
in perfectly firm earnmarket
competitive in longis run? Explain
earning (2marks)
supernormal profits in short run. What type of
profit will this firm earn in long run? Explain (2marks)
ACTIVITY 2.7.2.5
Activity2.7.2.5
Usethe
Use thegraphs
graphs and
and your
your knowledge
knowledge to answer
the questions that follow:
that follow:
i. On Graph 10, illustrate the effect on the international market for sugarcane following the
damage
i. caused 10,
On Graph by Cyclone
illustrateYasi
theineffect
Queensland. Label the new
on the international world price
market WP2. (2 marks)
for sugarcane following the
ii. At thedamage caused
world price by Cyclone
of WP1 the firm inYasi
Graphin 9Queensland. Labelprofit.
is making normal the new world
Explain price WP2. (2 mark
why.
(1 mark)
iii. Explain why the Demand curve (D1) for the perfectly competitive firm is horizontal, while the
ii. AtDemand
Market the world price
curve of WP1
(DM) for sugarcane in Graph
the firm slopes down9 is
to making normal profit. Explain
the right. (2 marks)why.
iv. On Graph 9, using the new market equilibrium price from Graph 10: (1 mark)
iii. Explain
• Draw whyDemand
the new the Demand
curvecurve
for the(D1) for theD2=MR2=AR2).
firm (label perfectly competitive firm is horizontal, whil
• Label the new priceP2 and the profit maximizing level of output Q2.
Market Demand curve (DM) for sugarcane slopes down to the right.(2 marks)
• Carefully shade and label (SNP) the resulting area of supernormal profit. (3 mark)
v. Fully explain why Fijian sugarcane firms may only enjoy these supernormal profits in the short-
run. On Graph 9, using the new market equilibrium
iv. price from Graph 10: (2marks)
¾ Draw the new Demand curve for the firm (label D2=MR2=AR2).
vi. Which price on Graph 9 is the breakeven price? P1, P2, P3 or P4 (1mark)
¾ Label the new priceP2 and the profit maximizing level of output Q2.
vii. Which price on Graph 9 is the Shutdown price? P1, P2, P3 or P4 (1 mark)
¾ Carefully shade and label (SNP) the resulting area of supernormal profit. (3 mark)
v. Fully explain why Fijian sugarcane firms may only enjoy these supernormal profits in the
run. (2marks)
vi. Which price on Graph 9 is the breakeven price? P1, P2, P3 or P4 (1mark)
vii. Which price on Graph 9 is the Shutdown price? P1, P2, P3 or P4 (1 mark)
ACTIVITY 2.7.2.6
Activity2.7.2.6
Use the table given below andtable
Use the answer the
given questions
below that follow.
and answer the questions that follow.
Product price Quantity

demanded
2 0
2 1
2 2
2 3
2 4
2 5
i. What can you conclude about the type of industry in which this firm is operating? (1mark)
i. What can you conclude about the type of industry in which this firm is operating? (1mark
ii. What type of profit is earned by the above type of market and why? (2marks)
ii. What type of profit is earned by the above type of market and why? (2marks)
iii. State one way in which is industry is different from other types of market industries. (1mark)
iii. State one way in which is industry is different from other types of market industries.(1ma
ACTIVITY 2.7.2.7
Activity2.7.2.7
CASE STUDY
CASE STUDY
On a typical Friday or a Saturday night in Australia there is large no. of households lookin
Study the case given to answer the questions that follow:
for babysitters and unlimited teenagers ready for the job. The market is very easy to enter
and leave. No single babysitter can block the entry of another babysitter and all of them
produce identical service
On a typical Friday or a Saturday night in Australia there is large no. of households
looking for babysitters and unlimited teenagers ready for the job. The market is
very easy to enteri. and
Identify theNo
leave. typesingle
of being discussed
babysitter in the
can casethe
block study above.
entry (1mark)
of another
babysitter and all of them produce identical service
ii. Explain what is meant ‘the market is very easy to enter and leave? (1mark)
iii. Is this market a perfect competitor or a imperfect competitor? Explain.(1mark)

i. Identify the type of being discussed in the case study above. (1mark)
ii. Explain what is meant ‘the market is very easy to enter and leave? (1mark)
iii. Is this market a perfect competitor or a imperfect competitor? Explain. (1mark)
58 | P a g e
ACTIVITY 2.7.2.8
Activity2.7.2.8
Use the graph givenUse

below
the and answer
graph the questions
given below thatthe
and answer follow.
questions that follow
MC AC
P/R/C ($) 20 AVC
15
10 AR =D
0 20 22 output
i. label
i. Draw the graph and Draw
thethe graph
profit and label the profit
maximization pricemaximization
and output. price
and output.
(1mark)(1mark)
ii. Identify the type of profit earned by this firm. (1mark)
ii. Identify the type ofiii.profitCalculate
earned the
by amount
this firm.
of profit or loss earned by this (1mark)
market shown above. (1marks)
iv. Explain the long run situation of the market. (2marks)
iii. Calculate the amount of profit or loss earned by this market shown above. (1mark)
iv. Explain the long run situation of the market. (2marks)

Activity2.7.2.9
Essay writing
ACTIVITY 2.7.2.9
1. Perfect Competitive firms are an idea type of market structure that has many buyers and se
With reference to above statement discuss:
• Three main features of perfect competitive firms
Essay writing
• The profit situations of perfect competitive firm in short run
1. Perfect Competitive firms are
• Explain the an
longideal typesituation
run profit of market structure
for the form inthat
longhas
run. many buyers and
sellers.
2. If all firms operate in a perfectly competitive market then their performance would be rega
With reference to above statement discuss:
most efficient.
• Three main features of perfect competitive firms
• With
The profit situations of reference
perfect to the above
competitive firmstatement
in short discuss
run
• Explain the long run profit situation for the form in long run. curve and barriers to entry in relation to perfec
• Describe the type of product ,the demand
competitive firm
• Explain the performance of perfect competitive firm.
2. If all firms operate in a perfectly competitive market then their performance would be
• Discuss how perfectly competitive firms are able to protect public interest.
regarded as most efficient.
59 | P a g e
With reference to the above statement discuss

• Describe the type of product ,the demand curve and barriers to entry in relation to perfectively
competitive firm
• Explain the performance of perfect competitive firm.
• Discuss how perfectly competitive firms are able to protect public interest.
ACTIVITY 2.7.2.10
Activity2.7.2.10
The information given below show a perfectly competitive firm.
The information
Use the information given ingiven below show
the graph a perfectly
and answer the competitive firmfollow
questions that
Use the information given in the graph and answer the questions that follow
p/r/c
$
60
50 d
c
40
b
30
a
20
10
10 20 30 40 50 60 70 80 output
i. Label the graphs marked a- d (2marks)

i. Label theii.
graphs marked
Mark a - d. price and output
the breakeven (1mark) (2marks)
ii. Mark theiii. Mark and label supply curve for the market.(1mark)
breakeven price and output. (1mark)
iv. Identify the profit maximization price and output level for the firm.(1mark)
iii. Mark andv.labelState
supply
the curve
type offor the market.
profit earned by this firm. (1mark) (1mark)
vi. Calculate the amount of profit or loss earned by this firm. (1mark
iv. Identify the profit maximization price and output level for the firm. (1mark)
v. State the type of profit earned by this firm. (1mark)
vi. Calculate the amount of profit or loss earned by this firm. (1mark)
60 | P a g e
ACTIVITY 2.7.2.11
The table below shows the total cost and total revenue schedules for a particular market structure.
Refer to the table to answer the questions that follow.
Output Total cost Total revenue

0 10 0
1 30 50
2 60 100
3 80 150
4 120 200
5 170 250
6 200 300
7 220 350
i. Determine the profit maximization price and output (1mark)
ii. Calculate the amount of variable cost at 4th unit of output. (1mark)
iii. Calculate average revenue at 3rd unit of output. (1mark)
iv. Identify the type of market structure illustrate by the information in the table. (1mark)
2.8 IMPERFECT COMPETITION
The imperfect competition market structures are:
1. Monopoly
2. Monopolistic Competition
3. Oligopoly
4. Duopoly
LESSON 2.8.1 MONOPOLY
Monopoly – is a market situation where there is a single seller of product sometimes referred to
as single film market. In other words monopoly is entire industry.
Examples of monopolies are PWD, Post & Telecom, FSC, and FEA.
How monopolies created?
• Monopolies emerge because of barriers preventing entry f other firms in the industry. Such
barriers are:
Legal Barriers – are the law and order that has to be observed before monopoly can emerged.
These include:
(i) Government Regulation – laws passed to commences the monopoly e.g. govt license.
(ii) Government Franchise – is an exclusive right given to affirm to supply good or service e.g.
Telecom has been given exclusive right to deal with all post & telecom services.
(iii) Patent Right – is an exclusive right given to the inventor or producer to produce the particular
good or services?
Regional barriers – If products are produced cross national boundaries this leads to very high
transport and tariff costs.
Technological barriers – very high capital investments required to start up monopolies or to

achieve the economies of scale.
Unique Supply Of resources - e.g. Gold are only found Vatukoala and Hydro system in Monosavu.
Characteristics of Monopoly
i. Single seller of goods and services.
ii. Monopolies are price makers. Since they are the sole supply of goods and services, they are
able to set the price and quantity combination.
iii. Monopolies are faced by downward sloping demand cure i.e. demand usually contracts
following a price rise and expands following a price reduction.
iv. Monopolies maximize profit by charging higher prices and restricting output since they are
profit oriented (have profit motive).
v. They have strong barriers to entry so are mostly able to earn supernormal profit.
vi. They involve themselves in price discrimination.
vii. They are able to undertake research and development.
LESSON 2.8.2 PROFIT SITUATION UNDER MONOPOLY
LESSON 2.8.2RunPROFIT
LESSON
Short 2.8.2 SITUATION
PROFIT
Profit Situation UNDER MONOPOLY
SITUATION
under Monopoly UNDER MONOPOLY
Short RunMonopoly
Profit Situation
makes under
three Monopoly
possible
Short Run Profit Situation underprofits in the short run.
Monopoly
Monopoly i.
MonopolySupernormal
makes threethree
makes Profit
possible profits
possible in the
profits short
in the run.run.
short
i. Supernormal
i. Profit
Supernormal Profit
P/R/C ( $) MC profit maximization rule:

AC MR=MC
P/R/C ( $) MC profit maximization rule:
Pe AC supernormal profit
MR=MC
c
Pe supernormal profit
c
MR D=AR
0 Qe MR D=AR output
0 Qe output
ii. Subnormal Profit


MC
P/R/C ($)
MC AC Profit Max. Rule :
P/R/C ($) c MR=MC
Pe AC Profit Max. Rule :
c MR=MC Subnormal profit
Pe
Subnormal profit
MR D=AR
0 Qe output
MR D=AR
0 Qe output
63 | P a g e
63 | P a g e
iii.Profit
iii. Normal Normal Profit
MC
P/R/C ($)
AC TR=TC therefore zero
P=c profit
MR D=AR
0 Qe output
Long RunLong
Equilibrium
Run Equilibrium
Monopolies mostly make

Monopolies mostlysupernormal profitsprofits
make supernormal in Long Run since
in Long barriers
Run since to entry
barriers restrict
to entry freedom
restrict freedom of
entry
of entry of of other
other firms firms
in theinindustry.
the industry.
Thus Thus Monopoly
Monopoly profits
profits are are protected.
protected.
Performance
Performance of Monopolies
of Monopolies
• Due to • the
Due to the
fact thatfact that monopoly
monopoly firm isfirm
theisindustry
the industry it has
it has a significant
a significant marketpower
market powerandand can
canearn
supernormal
earn supernormal profit
profit in in
hehelong
longrun.run.
• Since it is a single producer it has freedom to produce at a plant size which is less than optimal
• Since it is a single producer it has freedom to produce at a plant size which is less than
therefore loss of Economic Efficiency. In other words they do not produce at socially desirable level
optimal therefore loss of Economic Efficiency. In other words they do not produce at socially
of output.
desirable level of output.
• Monopolists restrict output and charge prices to earn supernormal profit. Thus Consumers have to
• Monopolists restrictprice
pay higher outputwhichand charge
is not prices
in their to earntherefore
best interest, supernormal profit. fail
monopolies Thusto Consumers
operate efficiently
have to or payrespond to consumers demand (loss of allocative and productive efficiency, creatingfail
higher price which is not in their best interest, therefore monopolies to weight
dead
operate loss)
efficiently or respond to consumers demand (loss of allocative and productive
efficiency,
• Therecreating
is no dead weight
competitive loss) lack of urgency to improve their product. This is at the expense of
therefore
• There is no competitive
the public service.therefore lack of urgency to improve their product. This is at the
expense of the public service.
Good side of monopolies
Good side of monopolies
• Monopolies earn supernormal profit and have strong barriers to entry; they have greatest ability to
• Monopolies undertake research and development,
earn supernormal profit and have innovation
strongandbarriers
diffusion.
to entry; they have greatest
•
ability to undertake research and development, innovation and create
Monopolies are able to achieve economies of scale they may a long run advantage to
diffusion.
consumers.
• Monopolies are able to achieve economies of scale they may create a long run advantage
• They have sufficient funds to innovate product quality for consumers.
to consumers.
• They are able to produce and supply the entire economy very efficiently.
• They have sufficient funds to innovate product quality for consumers.
• They are able to produce and supply the entire economy very efficiently.
64 | P a g e
Types of Monopolies
Natural Monopoly - occurs when a single firm can supply the entire industry output more
efficiently than several sellers.
Near Monopoly - Market approaching Monopoly.
ACTIVITY 2.8.2.1
1. Monopolist are able to maximize profit by
A. Supplying the entire industry

B. Imperfect knowledge
C. Restricting output and charging higher prices
D. Selling differentiated product
2. Monopolies are able to maintain their supernormal profits because
A. They are price markers

B. They are faced by downward sloping demand curve
C. They have strong barriers to entry
D. They are imperfect competitors.
3. A monopoly is firm where there is
A. Single seller
B. Single buyer
C. Few sellers
D. Many sellers
4. Monopoly is different from all other market structures since
A. Produces identical products

B. Faced by downward sloping demand curve
C. Is a price marker
D. Is a single seller.
5. Price discrimination used under monopolies means
A. Competing through Non price competition

B. Using product differentiation
C. Charging different prices to different consumers.
D. Cut throat competition
6. When comparing a perfect competitor with a monopolist which of the following is true?
6.6.greater
A. Monopolists have Whencomparing
When comparing
market a aperfect
power perfect
because competitor
competitor witha amonopolist
of fewerwith
barriers monopolist
to entry whichwhichofofthe
thefollowing
followin
B. Monopolists tend to A.A.Monopolists
Monopolists
produce below havehavegreater
optimal greater marketpower
plantmarket
size powerbecause
becauseofoffewer
fewerbarriers
barrierstotoentry
entry
B.B.Monopolists
C. A monopoly is allocative Monopolists tendtotoproduce
tend
efficient firm. producebelow
belowoptimal
optimalplant
plantsize
size
D. Both compete usingC. C.AAmonopoly
price monopoly
competitionisisallocative
allocativeefficient
efficientfirm.
firm.
D.D.Both
Bothcompete
competeusing
usingprice
pricecompetition
competition
ACTIVITY 2.8.2.2
Activity2.8.2.2
Activity2.8.2.2
A. The diagram represents a monopolist, and the market demand curve for the output of the
firm.
A.A.The
Thediagram
diagramrepresents
representsa amonopolist,
monopolist,and
andthe
themarket
marketdemand
demandcurve
curvefor
forthe
theoutp
out
P/R/C
P/R/C MC
MC
AR
AR
Output
Output
i. Determine the profiti. maximizing
Determinelevel
theofprofit
output for this firm level
maximizing and level it as Qe
of output (1mark)
for this firm and level it as
i. Determine the profit maximizing level of output for this firm and level it as Q
(1
(1m
ii. Mark and level profit maximization price as Pm (1mark)
ii.ii. Mark
Markand
andlevel
levelprofit
profitmaximization
maximizationprice
priceasasPm
Pm (1
(1m
iii. Draw to illustrate supernormal profit earned by this monopoly (2mark)
iii. Draw
iii. Drawtotoillustrate
illustratesupernormal
supernormalprofit
profitearned
earnedbybythis
thismonopoly
monopoly (2
(2m
ACTIVITY 2.8.2.3
Activity2.8.2.3
Activity2.8.2.3
A. Study the information given
A.Study
A.Study thein
the the table below
information
information given and
giveninintheanswer
the the question
tablebelow
table below that follow;
andanswer
and answer thequestion
the questionthat
thatfollo
foll
OUTPUT
OUTPUT Price$ $
Price TC
TC
(Q)
(Q) ($)
($)
00 00 300
300
11 180
180 450
450
22 160
160 570
570
33 140
140 670
670
44 135
135 780
780
Calculate the: Calculatethe:

Calculate the:
i. i. Total
Totalfixed
fixedcost
costfor
forthe
thefirm.
firm. ( (1 1mark)
mark)
i. Total fixed cost for the firm. (1 mark)
ii.ii. Total
Totalrevenue
revenuefrom producing4th4thunit
fromproducing unitofofoutput?
output?( (1 1mark)
mark)
iii. Variable
iii. costatat3rd3rdunit
Variablecost unitofofoutput
output (1mark)
(1mark)
iv.iv. Determine
Determinethe
thefirms
firmsprofit
profitmaximization
maximizationprice
priceand
andoutput
outputlevel
level(1mark)
(1mark)
ii. Total revenue from producing 4th unit of output? (1 mark)
iii. Variable cost at 3rd unit of output (1 mark)
iv. Determine the firms profit maximization price and output level (1 mark)
v. Explain why monopoly equilibrium does not result in Allocative efficiency. (1 mark)
ACTIVITY 2.8.2.4
Activity2.8.2.4
Activity2.8.2.4
Study
Study the graph given below andthe graphthe
answer given below and
questions thatanswer
follow the questions that follow
Study the graph given below and answer the questions that follow
Price/rev/ MC
Price/rev/ cost MC
($) AC
cost ($) AC
40
40 28
28
20
20
AR=D
AR=D
0 10 15 0 10 15
MR MR
i. State the profit maximization price and output level for the firm. (1mark)
i. i. State theprice
State the profit maximization profit
andmaximization
output level forprice and output
the firm. (1mark)level for the firm. (1mark)
ii. Calculate the amount of profit earned by the firm (1mark)
ii. Calculate the amount of profit earned
ii. Calculate by the firm
the amount of profit(1mark)
earned by the firm (1mark)
iii. Stateiii.oneState
feature that makes
one feature this this
monopoly different perfect competitive
firm.firm. (1mark)
iii. that State
makes monopoly
one feature thatdifferent perfect
makes this competitive
monopoly different perfect competitive firm.
(1mark)
(1mark)
ACTIVITY 2.8.2.5
Activity2.8.2.5
Activity2.8.2.5
Use thegiven
Use the statement statement given
below below
and and answer
the questions thatfollow
that follow
Use the statement given below and answer the questions that follow
Fiji Electricity Authority (FEA) is the sole provider

of electricity in the economy
Fiji Electricity Authority (FEA) is the sole provider
of electricity in the economy
i. Namei. theName
typethe
of type of market
market structure
structure thatthat
FEAFEA comesunder.
comes under. (1 mark)
(1 mark)
ii. FEA was facedi.strong barriers
Name to entry
the type when itstructure
of market started. Explain
that FEAwhatcomes under. (1 mark)
ii. FEA was faced strong barriers
‘Barriers to entry’ means andto entry
give ONE when it
example started.
of a Explain
barrier to what
entry that ‘Barriers
FEA may to entry’
have faced.means
ii. FEA was faced strong barriers
and give ONE example of a barrier to entry that FEA may have faced. to entry when it started. Explain what
(2 marks)
‘Barriers to entry’ means and give ONE example (2 marks)
of a barrier to entry that FEA may h
Economics: Year(212marks)
69
ACTIVITY 2.8.2.6
Use the data given below to answer the questions that follow:
Schedule for kava production
Output kava Average variable Average revenue

(kg) cost $ ($)
1 320 800
2 300 610
3 276 530
4 250 410
5 220 340
6 250 320
i. Calculate the marginal cost for 3rd kg of kava.
ii. Calculate total cost at 4th kg of kava.
iii. Calculate total revenue at 5th kg of kava.
iv. Calculate variable cost at 6th unit of kava. (4marks)
ACTIVITY 2.8.2.7
ESSAY WRITING
A Monopoly is a sole supplier in the industry.
With reference to the above statement:
• Identify and explain the three features of a monopoly. (3marks)
• Explain the three barriers to entry under monopoly market. (3marks)
• Explain the three reasons why monopolies produce against public interest. (3marks)
LESSON 2.9.1 MONOPOLISTIC COMPETITION
Monopolistic competition is a market structure that lies between two extremes of prefect
competition and monopoly. It is referred to as monopolistic competition because, through its
behavior in advertising, product differentiation and pricing aims to increase sales, it able to enjoy
market power like monopolies.
Characteristics
LESSON 2.9.1 of Monopolistic Competition:COMPETITION
MONOPOLISTIC
1. Monopolistic competition
There are a large number is of buyersstructure
a market and sellers therefore
that lies price
between fixing is impossible
two extremes and price
of prefect competition
and
andmonopoly. It is referred
output behavior to asfirm
of one monopolistic
has minimumcompetition
impactbecause, through its behavior in
on others.
advertising, product differentiation and pricing aims to increase sales, it able to enjoy market power like
2. monopolies
Long run barriers are non existent; because of their small scale i.e. small capital cost to start
or operate so any one can start up monopolistic competition (unlike monopoly).
Characteristic of Monopolistic Competition
3. Similar production cost for each firm.
1. There are a large number of buyers and sellers therefore price fixing is impossible and price and
output behavior of one firm has minimum impact on others.
4. 2.
Similar
Longproduct but not
run barriers identical.
are non This
existent; is called
because product
of their smalldifferentiation. It is also
scale i.e. small capital known
cost asornon-
to start
price competition. Forms of product differentiation are packaging
operate so any one can start up monopolistic competition (unlike monopoly). and quality improvement
(It is most effective
3. Similar productioncompetitive
cost for each instrument
firm. - attracts most consumers therefore sale as and
profitability
4. in the long
Similar product run).
but not identical. This is called product differentiation. It is also known as non- price
competition. Forms of product differentiation are packaging and quality improvement (It is most
5. They effective
are pricecompetitive
makers toinstrument - attracts
some extent duemost consumers therefore
to successful sale as and profitability in the
competition.
long run).
5.
Examples TheyofareMonopolistic
price makers to some extent due
Competition are:toSolicitors,
successfulrestaurants,
competition.hairdresser, takeaways food
stores, coffee shops and dry cleaners.
Examples of Monopolistic Competition are: Solicitors, restaurants, hairdresser, takeaways food stores,
coffee shops and dry cleaners.
Types of Profits in the Short Run:
Types of Profits in the Short Run:
In short runrun
In short it isitpossible forfor
is possible monopolistic
monopolisticcompetitive firms to
competitive firms to earn
earnsupernormal,
supernormal, subnormal
subnormal and and
normal profit.
normal profit.
i. Supernormal Profit i. Supernormal Profit
P/R/C
($) MC profit max. rule :
MR=MC
AC
Pe supernormal profit
c
MR D=AR
0 Qe output
ii. Normal Profit
ii.
ii. Normal
Normal Profit
Profit
P/R/C
P/R/C ($)
($) MC
MC
AC
AC Profit
Profit Max.
Max. Rule
Rule ::
MR=MC
MR=MC
TR=TC
TR=TC
MR
MR D=AR
D=AR
00 Q
Qee output
output
iii. iii.
iii. Subnormal
Subnormal Profit
Profit Subnormal Profit
P/R/C
P/R/C ($)
($) MC
MC AC
AC profit
profit max.
max. rule
rule
P
Pee MR=MC
MR=MC
cc
Subnormal
Subnormal profit
profit
MR
MR D=AR
D=AR
00 Q
Qee output
output
LESSON 2.9.2 Long run Equilibrium UNDER MONOPOLISTIC COMPETITION
In the long run monopolistic competitive firms earn normal profit since the supernormal profit is
competed away due to weak barriers to entry.
Excess Capacity Theorem
Monopolistic competition is not able to achieve economic efficiency since they do not produce
at optimum plant size. Minimum AC is considered to be the firms optimum capacity. This theorem
states that each firm has the capacity to increase production to produce at optimum plant size,
i.e. produce maximum at minimum average cost.
70
70 || P
P aa gg ee
Performance of Monopolistic Competitive Firm
• No single firm is large enough to achieve economies of scale.

• Productive and economic efficiency is not achieved because MC does not equal minimum
AC.
• Consumers pay high price since monopolistic competitive firms restrict output and charge
higher prices
• Monopolistic Competitive firm is economically inefficient because they do not produce
at optimum plant size. Thus there is misallocation of resources because too many firms
producing too little (lies below than optimum plant size)
• Firms innovate and undertake research and development.
• Monopolistic competitive firms involve in real product differentiation
Product differentiation means attracting customers by making the product look different or
appear different and superior to the competition’s product through advertising, different
packaging, different brand names, longer warrantee periods and discount offers.
ACTIVITY 2.9.2.1
1. What is the main advantage for a firm using non price competition?
A. Greater choice for consumers

B. Better quality goods for consumers
C. Increased cost for the producer
D. Increased sales or market share
2. Firms in monopolistic competition can be distinguish from firms in perfect competition by
A. the presence of homogeneous products

B. the presence of differentiated products
C. the absence of strong entry and exit barriers
D. the absence of advertising and sales promotion
3. Monopolistic competition is a price maker since
A. It takes the price set in the industry

B. It matches with the price deduction of rival firms
C. It has power to set its price and quantity combination
D. Since it earns normal profit in LR.
4. Which of the following is a form of non- price competition?
A. Advertising to promote sales

B. Imposition of Taxation
C. Price control by government
D. Price discrimination
5. Price discrimination is typical feature of
A. Oligopoly
B. Monopoly
C. Perfect competition
D. Monopolist competition
6. A Monopsony Market Structure means there is
A. One buyer in the market

B. One seller in the market
C. One buyer and one seller
D. A maximum of two buyers
ACTIVITY 2.9.2.2
1. Monopolistic competition is so named because of its behaviour in advertising, product

differentiation and pricing aims to increase sales. Discuss the above statement with reference
to
• Three main characteristics of monopolistic competition

• Three ways in which monopolistic competition is different from perfect competition
• Performance of monopolistic competition ,in terms the excess capacity theorem , price
maker and long run profit situation
2. Monopolistic competition is so named because of its behaviour in advertising, product

differentiation and pricing aims to increase sales. Discuss the above statement with reference
to
• Three main characteristics of monopolistic competition

• Three ways in which monopolistic competition is able to gain a supernormal profit
• Performance of monopolistic competition.
LESSON 2.10.2 OLIGOPOLY
OLIGOPOLY is a market structure consisting of a few, relatively large firms selling products which
are close substitutes.
Characteristics of Oligopoly
1. Few sellers few large firms dominate the supply to an entire market.
2. Each firm produces similar products. (Differentiated products)
3. Entry into the industry is very difficult because it involves very high startup cost (sunk costs).
(Strong barriers).
4. High degree of real and imaginary product differentiation.
5. Consumers knowledge about product differentiation is limited.
6. Rivalry between firms since there are so few firms in the Oligopoly market that each firm
must consider the prices and quantity reactions of its rivals therefore leading to mutual
interdependence ( actions of one producer will affect the actions of others.
7. Oligopolist is faced by kinked demand curve since the firms match price reduction but do
not match price reduction.
8. Loss of allocative efficiency
9. Formation of cartels a group of firms get together to enjoy monopoly power.
11. Competition is very fierce and often known as ‘cut throat competition.
12. Heavy advertising throughout the years therefore it turns to be a fixed cost (FC)
13. Involve a research and development and due to large size, revenue and profit potential is
greater and have funds to undertake research and development.
14. Price leadership may also develop where one large firm will dominate the industry.
15. Predatory competition occurs when a dominate firm in the market takes over smaller rivals
in the same market.
Formation of cartels
Firms under oligopoly market situation form an open collusion or a group of firms form an
agreement to set the price and the quantity in the industry and enjoy monopoly power and act
as price makers.
Obstacles to Collusion
• Demand and cost differences

• Number of firms - large number of firms would lead difficulty to manage.
• Cheating
• Recession in the economy.
Oligopolies Kinked Demand Curve
Oligopolist is faced with kinked demand curve because the rival firms match price reduction but
do not match price increases.
Marginal Revenue Curve for an Oligopolist.
There is a discontinuity in the marginal revenue curve for an oligopoly firm because of price
rigidity or price stickiness at kinked.
Marginal Revenue and Kinked

Marginal Demand
Revenue Curve for
and Kinked the Oligopoly
Demand
Marginal Revenue and Kinked Demand Curve Curve
for thefor the Oligopoly
Oligopoly
P/R/C ($)
P/R/C ($)
Pe Kinked
Pe Kinked
Discontinuous portion
Discontinuous portion
D AR
D AR
0 Qe output
0 Qe output
MR
MR
Types
Types of
of profits
profits under Oligopoly
under Oligopoly
Oligopolists Types of make
mostly profitssupernormal
under Oligopoly
profits both in short
Oligopolists mostly make supernormal profits both in short runrun
andand
longlong
run. run.
Oligopolists mostly make supernormal profits both in short run and long run.
Supernormal Profit Supernormal Profit
Supernormal Profit
P/R/C ($)
P/R/C ($)
MC profit max.rule:
MC profit max.rule:
Pe
Pe
AC MR=MC
AC MR=MC
c
c
D=AR
D=AR
0 Qe output
0 Qe output
MR
MR
Performance of Oligopolies
• There is no guarantee of efficiency

• Firms are unlikely to achieve economies of scale
• P > MC i.e. mark up pricing leads to misallocation of resources or exploitation of consuming
public.
• Research and development undertaken by firms. Each has sufficiently high profits to find such
development and innovation. It is advantageous to consumers because of better product
quality.
• They are able to enjoy monopoly power through formation of cartels.
Government controls over imperfect market structures
• Government uses Competition laws - law that promotes or maintains market competition
by regulating anti-competitive conduct by companies. Competition law is known as antitrust
law or anti-monopoly law to protect public interest and maintain fair competition .
• Government also uses taxation to control monopoly power
• overnment uses regulations and legislations to control monopolies in Fiji.
• Government also subsidizes monopolies
ACTIVITY 2.10.1
1. The oligopoly market structure formed by
A. Many sellers
B. Many buyers
C. Few sellers
D. Single seller
2. The discontinuity in the marginal revenue curve for oligopolies occurs due to
A. Price rigidity
B. Price leadership
C. Predatory competition
D. Cut throat competition
3. Oligopolist is faced with kinked demand curve because
A. The rival firms match price reduction but do not match price increases.
B. The firms compete through product differentiation
C. There are very few sellers in the market
D. There is huge sunk cost
4. Oligopolies are able to enjoy monopoly power through
4. Oligopolies are able to enjoy monopoly power through
A. product differentiation
B. A. throat
4. cut product
Oligopolies differentiation
are able to enjoy monopoly power through
competition
B. cut throat
C. price leadershipcompetition
A.
C. product differentiation
price leadership
D. formation of cartels
B.
D. cut throat competition
formation of cartels
C. price leadership
5. Price leadership under oligopoly market means
5. D. formation
Price of cartels
leadership under oligopoly market means
A.
5. Group
Price of firms
leadership
A. Group joining
under
of firms together
oligopoly
joining to operate
market
together meanslike
to operate a single
like a singlefirm
firm
B. One large
B. One firmfirm
large will dominate thethe
will dominate entire industry.
entire industry.
A.
C. Group
C. Firms match
Firms of firms
price
match joining together
reduction
price to
butbut
reduction operate
dodo not like a price
notmatch
match single firm
increases
price increases
B.
D. Few One
largelarge firm
sellers inwill
thedominate
industry
D. Few large sellers in the industry the entire industry.
C. Firms match price reduction but do not match price increases
D. Few large sellers in the industry
ACTIVITY 2.10.2
Activity2.10.2
Activity2.10.2
a) a)Complete
Complete the the table by naming
table by namingthe
thetype
typeofofmarket
marketstructures
structures
ininorder
orderofofthethe number
number of of firms
firms in the
inmarket.
the market.
a) Complete the table by naming the type of market structures in order of the number of firms in the
market.
No. Of Firms Market Structure
One firm
No. Of Firms (seller) Market Structure
Twofirm
One firms(seller)
One firms
Two firm (buyer)
A few
One firmfirms
(buyer)
Many
A firms
few firms
Many
Manyfirmsbuyers & sellers
Many buyers & sellers
Activity2.10.3
ACTIVITY 2.10.3
Activity2.10.3
Very occasionally, a major oil company (and their retail outlets) operating in the South Pacific will
Very
loweroccasionally, a major
the price of their oil company
petrol for a day(and their
or two retail
only, tooutlets)
promoteoperating in the
awareness Southbrand
of their Pacific will
lower the price of their petrol for a day or two only, to promote awareness of their brand
.
.
i. In what way do oil companies meet the definition of an oligopoly? (Do not repeat characteristics of
i.i. In
Inwhat
whatway
waydodo oil
oilcompanies
companies meet
meetthethe
definition of of
definition anan
oligopoly? (Do(Do
oligopoly? notnot
repeat characteristics
repeat of
characteristics
oligopoly
of mentioned
oligopoly mentioned below).
below). (1 mark)
mark)(1 mark)
oligopoly mentioned below). (1
ii. State
ii. State TWOways
waysininwhich
which oilcompanies
companies differentiate their product, other
thanthan by price. (1 mark)
ii. State TWO
TWO ways in which oil
oil companies differentiate their
differentiate product,
their other
product, other by price.
than by (1 mark)
price.
iii. (1
iii. Explainwhy
Explain whythe
theoil
oilcompanies
companieslower
lower their
their price
price forfor
onlyonly a short
a short period
period of time.(1
of time.(1 mark) mark)
mark)
iv. Describe
iv. barriertotoentry
Describeaabarrier entrythat
thatmakes
makes it difficult
it difficult forfor
newnew firms
firms to enter
to enter thisthis market
market structure
structure
iii. Explain why the oil companies lower their price for only a short period of time. (1 mark)
(1 mark)
(1 mark)
v.iv. Describe
Manypetrol
Many petrol retailers
a barrier
retailers alsosell
toalso
entrysell products
that makes
products such
such as as groceries
it difficult andand
for new
groceries fast
firms
fast tofood.
food.enterUsing
Usingthis the concept
themarket
concept of of
structure
(1 mark)
marginalcost,
marginal cost,explain
explainwhywhypetrol
petrolretailers
retailers sell
sell such
such products.
products. (1 mark)
(1 mark)
77 || PP aa ggee
77
v. Many petrol retailers also sell products such as groceries and fast food. Using the concept of
marginal cost, explain why petrol retailers sell such products. (1 mark)
ACTIVITY 2.10.4
Study the diagram below and answer the questions that follow
Activity2.10.4
i. Which market structure has the following characteristics?
a. has the strongest barriers to entry

b. sells a product that does not have close substitutes Source: Senior Economics
i. Which
c. market structure
is imperfectly has the following
competitive in nature characteristics? (1 mark)
a.
ii. has the
What strongest
type barriers
of product to entry
does an oligopolistic market structure produce and sell? (1 mark)
b.sells a product that does not have close substitutes
c.is imperfectly competitive in nature (1 mark)
iii.
In terms of number of sellers, differentiate between a monopolistic competition and a
ii. monopoly.
What
type of product does an oligopolistic market structure produce and sell?(1 mark) (2 marks)
iii. iv. A perfectly

In terms competitive
of number of sellers,firm produces
differentiate and sells
between a homogeneous
a monopolistic product.
competition and a Explain this
monopoly.
statement.
(2 marks) (1 mark)
iv. A perfectly
v. State whycompetitive firm
a perfectly produces and
competitive sells
firm hasa homogeneous
very weak orproduct. Explain
no barriers this statement.
to entry. (1 mark)
(1 mark)
v. State why a perfectly competitive firm has very weak or no barriers to entry. (1 mark)
ACTIVITY 2.10.5
Activity2.10.5
Read the article below and answer the questions that follow.
Read the article below and answer the questions that follow.
The structure of markets varies. Some markets are competitive in that they have many
buyers and many sellers while, at the other extreme, there are markets that have only one
firm with just one, or a few, sellers. We are interested in market structure because the way
firms behave, when deciding on prices, output, product design, promotional activity and so
on, depends on the characteristics of the market in which they operate.
Source: Economic Concepts
Source: andConcepts
Economic Applications 2008
and Applications 2008

i. Identify
i. Identifythe
the market
marketstructure thatthat
structure has has
the descriptive featurefeature
the descriptive of having
ofmany buyers
having andbuyers and
many
many sellers.
many sellers. (1 mark)
(1 mark)
ii. Name the market structure that has only one firm. (1 mark)
iii. Explain why this type of market structure is said to be operating under imperfect market
conditions. (2 marks)
ii. Name the market structure that has only one firm. (1 mark)
iii. Explain why this type of market structure is said to be operating under imperfect market
conditions. (2 marks)
iv. Identify the market structure that is very large in size, a few firms exist and has an emphasis on
product designing. (1 mark)
ACTIVITY 2.10.6
Activity2.10.6
i. In terms of the number of sellers, what is the difference between oligopoly and monopolistic
i. In terms of the number of sellers, what is the difference between oligopoly and monopolistic
competition? (2 marks)
competition?
(2 marks)
ii. The typeii. of
Theproduct
type ofthat an oligopolistic
product market structure
that an oligopolistic produces
market structure and sells
produces andissells
somehow
is somehow
differentiated in nature.inExplain
differentiated nature.why this why
Explain is so.this

is so. (2 marks)
(2 marks)
iii. Which iii.market
Which structure
market has a perfectly
structure elastic elastic
has a perfectly demand curve
demand thatthat
curve is horizontal in in
is horizontal nature?
nature?
(1 (1 mark) mark)
iv. A monopoly can become a perfect competitive firm overnight, if it so wishes.
iv. A monopoly Comment on this statement.
can become a perfect competitive firm overnight, if it(1mark)
so wishes. Comment on
this statement. (1mark)
ACTIVITY 2.10.7
Activity2.10.7
Use the graph given below and answer the questions that follow
Use the graph given below and answer the questions that follow
i. Identify the profit maximizing price and output level for the firm. (1mark)
i. Identify the profit maximizing price and output level for the firm.(1mark)
ii. Nameii.the type
Nameofthemarket
type ofstructure and type
market structure and of profit
type illustrated
of profit by the
illustrated graph
by the graph (1mark)
(1mark)
iii.the Explain
iii. Explain shape of thethe
shape of the demand
demand curve curve
shown shown
in thein graph.
the graph. (1mark) (1mark)

iv. If the government regulates price at above $40 ,what would be the effect on the market.(1mark)
iv. If the government
v. Explain two regulates
ways inprice
whichatthis
above
firm is$40
able,what woulditsbeprofits
to maintain the effect on the market.
(2marks)
(1mark)
v. Explain two ways in which this firm is able to maintain its profits (2marks)
Activity2.10.8
ACTIVITY 2.10.8
Part B ESSAY WRITING
Oligopolies comes under imperfect competition because ot its ability to influence market conditions
Part B ESSAY WRITING
Discuss the statement with reference to:
Oligopolies comes under imperfect competition because ot its ability to influence market
conditions • Three features of oligopolies (3marks)
Discuss the •statement

Illustrate with
with reference
graph the nature
to: of demand curve and profit maximization (3marks)
• Three types of collusion oligopolies could use to safe guard their interest (3marks)
• Three features of oligopolies (3marks)
• Illustrate80 | P graph
with a g e the nature of demand curve and profit maximization (3marks)
• Three types of collusion oligopolies could use to safe guard their interest (3marks)
SUMMARY
SUMMARY
A Comparison of Perfect and Imperfect

A Comparison Competition
of Perfect and Imperfect Competition
Perfect Competition Imperfect Competition
Resource Use Resources employed In accordance Under employment of resources as output is

with consumer wishes restricted
Efficiency Of Relatively high unit cost a few Relatively low per unit cost resulting from
Production economies of scale economies of scale.
New technology may be employed New technology may not be employed because
because of the competitive nature of the firms can exclude competition and thus have
business. no need to innovate. Alternatively, new
Alternatively new techniques may techniques may be employed because the
not be employed because he supernormal profit they bring can be retained in
supernormal profits they bring are part or whole.
soon competed away.
Marketing As products are homogenous Considerable expenditure is devoted to marketing

exceptional marketing costs such as through advertising, packaging and branding of
advertising are not required products
Consumer Prices depends on cost of production Price may be low if costs savings from
Satisfaction which may be high in the economies economies of scale are passed on to the
of scale consumers.
Competition may keep prices at the Lack of competition ma permit continued high
lowest possible level for a given prices for a given output
output marginal cost pricing and Mark up pricing with long run supernormal profit
normal profit only being earned. Differentiated products allow considerable
Homogenous goods provide little consumer choice.
consumer choice.
MARKET STRUCTURE
Perfect Competition Imperfect Competition
Oligopoly Monopolistic
Many Sellers Monopoly Duopoly Competition
Homogenous
Products
A Few Sellers Many Sellers
One Seller Two Sellers
Price Taker
A A
A single A differentiated differentiated
Individual seller with no differentiated Product product
Sellers suitable product
decide substitutes Price maker Weak control
quantity Price Maker over price &
Price maker Control over quantity sold
Perfect Control over Quantity Sold
Knowledge Control over Quantity Weak
Quantity Sold Strong barriers barriers to
No Barriers Sold
to entry of to entry of entry of other
Strong other firms firms
other firms Strong barriers to
Barriers to entry of other NZ: Examples NZ:
NZ example: entry of other firms
Market Oil Companies Examples
firms Diaries
Gardener NZ: Example
Railways
NZ: example Cooperation
Railways
Corporation
Source: New Approach & Graphical Analysis Source: New Approach & Graphical Analysis
82 | P a g e
Market
Market Structures
Structures
Features Perfect Monopolistic Oligopoly Duopoly Monopoly

competition competition
Market
Firm
Examples Baby sitters, Restaurants, Punja and Sons Ltd Vodafone FEA
lawn movers, clothes shop, FMF Ltd And telecom
market venders coffee shop Moti Bhai
hair saloon
Type of Perfect Imperfect Imperfect Imperfect Imperfect

competition
Number of seller Many firms Many firms A few large firms Two firms Single seller
Type of product Homogenous Differentiated Differentiated Differentiated No substitute
Barriers to entry No barriers Weak Strong Strong Strong
Control over Price taker Price maker Price maker Price maker Price maker
price
Demand curve Horizontal Relatively Kinked demand Normal Relative

demand curve elastic demand curve demand inelastic
demand
D
D D D
D
83 | P a g e
STRAND 3 MACROECONOMICS
Strand Outcome
Explore the real GDP in the context of the Fiji Economy, the ways of financing a budget
deficit with the effects and factors which influence the domestic market for money.
• Calculate GDP using income, expenditure and value added approach.
• Discuss the limitations of GDP.
• Use formulas to calculate GNE,GNI,GDP at factor cost and GDP at market prices.
• Define national budget.
• Explain the effects of government budget deficits or surpluses.
• Identify ways of financing budget deficit.
• Discuss the effects of internal and external borrowing.
• Identify spectrum or medium of money measure/ monetary aggregates (component of

money).
• Differentiate near and broad money.
• Define money demand and identify factors determining money demand.
• Define money supply and identify factors determining money supply.
• Determine interest rate in the economy.
• State and calculate quantity theory of money supply,
LESSON 3.1 NATIONAL INCOME
LESSON
Gross domestic 3.1.
product is theNATIONAL INCOME
total value of goods and services produced in an economy in
LESSON 3.1. NATIONAL INCOME
a given year. It is measured at current market prices.
LESSON 3.1. product
Gross domestic NATIONAL
is the total INCOME
value of goods and services produced in an economy in a given
Gross domestic product is the total value of goods and services produced in an economy in a given
Calculatingyear.
GDPIt is measured at current market prices.
year. It is measured at current market prices.
There areGross
3 main approaches
domestic product isof
thecalculating
total value ofGDP
goods and services produced in an economy in a given
Calculating
year. GDP
It is measured at current market prices.
Calculating
There are 3 mainGDP approaches of calculating GDP
There are 3–main
INCOME APPROACH is aapproaches
method of ofcalculating
determining GDP GDP by summing all income earned in
Calculating
producing the GDP
goods APPROACH
and services–inisaa particular period of time.
INCOME
There are 3 main methodGDP
approaches of– calculating of determining GDP Itbyissumming
made up allof income
income earned
earned in
INCOME
by people inform
producing APPROACH
of wages
the goodsand is
andsalaries,a method
services inprofit of determining
earnedperiod
a particular GDP
by business by summing
of time. Itfirms, all income
netupindirect
is made of incomeearned in by
taxearned
earned
producing
people inform
by the government. the goods
of wagesand services
and in a particular
salaries,ofprofit period
earned GDP of time.
by business It is made
firms,all up
netincome of income
indirectearned earned
tax earned by
by the
INCOME APPROACH – is a method determining by summing
people inform of wages and salaries, profit earned by business firms, net indirect tax earned by the in
government.
producing the goods and services in a particular period of time. It is made up of income earned by
Thus: government.
Thus:
people inform
Thus: of wages and salaries, profit earned by business firms, net indirect tax earned by the
government.
Thus: GPD = r + w + i + p + net indirect tax +depreciation
GPD = r + w + i + p + net indirect tax +depreciation
Net Indirect
GPD = r + Taxesw + =i Indirect
+ p Taxes + net -indirect
Subsidies
tax +depreciation
Net Indirect Taxes = Indirect Taxes - Subsidies
Net Indirect
Consumption Taxes
of = Indirect
Fixed Taxes
capital - Subsidies
(Depreciation)
Consumption of Fixed capital (Depreciation)
Consumption of Fixed capital (Depreciation)
Net Indirect Taxes = Indirect Taxes - Subsidies
EXPENDITURE APPROACH
EXPENDITURE
Consumption – measures
of FixedAPPROACH the –measures
total amount
capital (Depreciation) of spending
the total on final on
amount of spending goods and services
final goods and services in
aEXPENDITURE
year. This is the APPROACH
method of –measures
calculating GDP the
by total amount
adding of spending
expenditure on on final goods
consumption, and services
investment, govtin
in a year. This is the method of calculating GDP by adding expenditure on consumption,
a year.
spending This is
and netthe method
volume of calculating
ofvolume
exports. GDP by adding expenditure on consumption, investment, govt
investment, govt spending
EXPENDITURE and
APPROACH net
spending and net volume of exports. of
–measures exports.
the total amount of spending on final goods and services in
a year. This is the method of calculating GDP by adding expenditure on consumption, investment, govt
spending
GDP and
= net volume of exports.
Consumption + Investment + Govt Expenditure + Net Exports
GDP = Consumption + Investment + Govt Expenditure + Net Exports
GDPNX
= isis
NX Consumption
net
netexports
exports= +Exports
=Investment +- Govt
- Imports
Exports Expenditure
(X - M) (X -+M)
Imports Net Exports
NX
Grossis net exports = Exports - Imports (X - M)
GrossCapital
Gross Capital
Capital
Formation
Formation
Formation
means
means
Investment.
means Investment.
Investment.
NXStatistical
is net discrepancy
exports
Statistical = is
Exports
discrepancy also
- added to
Imports balance
(X - M)income and expenditure approaches
Statistical discrepancy is also is alsotoadded
added balance to balance
income income and
and expenditure expenditure
approaches
Gross Capital Formation means Investment.
approaches
Example
Statistical of Incomeis and
discrepancy also Expenditure Approach
added to balance income and expenditure approaches
Example of Income and Expenditure Approach
Example of Using
Income and Expenditure
the figures Approach
in the table given below calculates GDP using:
Example
Using of Income and Expenditure
table givenApproach
(i) the figures
IncomeinApproach
the below calculates GDP using:
(i)in theExpenditure
Using the figures(ii) Income Approach
table given below calculates GDP using:
Using the(ii)figures in the tableApproach
Expenditure given below calculates GDP using:
Approach
(i) Income Approach
(i) Income Approach
(ii) Expenditure
(ii) Approach
Operating Surplus Approach
Expenditure 21000
Operating Surplus 21000
Increase in Stock 900
Increase in Stock 900
Compensation
Operating Surplus of Employees 2100042000
Compensation of Employees 42000
Imports
Increase of goods and services
in Stock 900 15000
Imports of goods and services 15000
Compensation ofCapital
Gross Fixed Formation
Employees 4200011000
Gross Fixed Capital Formation 11000
GovtofExpenditure
Imports goods and services 1500023000
Govt Expenditure 23000
Subsidies
Gross Fixed Capital Formation 11000400
Subsidies 400
GovtExports of goods and services
Expenditure 2300014000
Exports of goods and services 14000
Consumption of Fixed Capital
Subsidies 400 6000
Consumption of Fixed Capital 6000
FinalofPrivate
Exports goods consumption
and services Expenditure 1400043000
Final Private consumption Expenditure 43000
Indirect Taxes
Consumption of Fixed Capital 6000 300
Indirect Taxes 300
Statistical
Final discrepancy Expenditure
Private consumption 43000300
Statistical discrepancy 300
Indirect Taxes 300
85 | P a g e
85 | P adiscrepancy
Statistical ge 300
85 | 12
86 Economics: Year Page
Solution: Income Approach
GDP = r+ w + P + Depreciation + (Indirect Taxes - Subsidies)
=Solution:
42000Income
+ Approach
21000 + 6000 + (8000 - 400)
= 69000 + 7600
= $76600 + P + Depreciation
GDP = r + w + (Indirect Taxes - Subsidies)
= 42000 + 21000 + 6000 + (8000 - 400)

Expenditure Approach
= 69000 + 7600
= $76600
GDP = C + I + G + (X- IM)
=Expenditure
43000 + (11000 + 900) + 23000 + (14000 - 15000)
Approach
= 43000 + 11900 +23000 + (14000 -15000)
=GDP76900
= C - + Statistical
I + Discrepancy
G + (X- IM)
= 76900 - 300
= 43000 + (11000 + 900) + 23000 + (14000 - 15000)
= 43000
= $76600 + 11900 +23000 + (14000 -15000)
= 76900 - Statistical Discrepancy
VALUE ADDED=APPROACH
76900 - 300
= $76600
A method of determining GDP by calculating how much value is contributed at each stage
VALUE
of production i.e.ADDED APPROACH
as goods progress down the chain of production from primary production
through to the end of tertiary production level; when they are finally distributed to consumers.
A method of determining GDP by calculating how much value is contributed at each stage of production
Value added
i.e. as approach is also
goods progress downknown as production
the chain approach.
of production from primary production through to the end of
tertiary production level; when they are finally distributed to consumers. Value added approach is also
Exampleknown
in theasproduction
production of a bottle of milk, the farmer, dairy factory, retailer and the various
approach.
transporters of the
Example in milk add valueof a bottle of milk, the farmer, dairy factory, retailer and the various
the production
transporters of the milk add value
Example:
Example:
A South Pacific Island Country, Oceania has the following firms in the economy.
*Treasure Island Ltd pays its workers $600 to collect attractive shells and give $200 to
the land owners for collecting from their beaches.
*Sun Shells co-operation buys the shell, washes and sells them. Sun’s Shell cooperatives
pay its embers $900.
* Designers wonders buys the shells from the cooperative and users them to make
ornaments. It sells the ornaments for $5000 and its only expenses are wages and owners
profit.
* A forth company, Husky cooperative collects coconut and sells them for $500 which is
shared among its members.
Solution Solution
$800 added
$800 value value added of Treasure
of Treasure Island
Island Ltd Ltd
$900 value added of Sun Shells Cooperation
$900 value added of Sun Shells Cooperation
$3300 value added of Designers wonders
$3300 value added of Designers wonders
$500 value added of Husky co operations
$500 value added of Husky co operations
$5500
$5500
86 | P a g e
ACTIVITY 3.1.1
Activity3.1.1
Study the information given below and answer the questions that follow
Study the information given below and answer the questions that follow
Compensation of employees 75
Consumption of fixed capital 23
Final consumption expenditure –government 36
Final consumption expenditure –private 57
Gross capital formation 43
Indirect tax 30
Less subsidies 8
Operating surplus 53
i. using
i. Calculate GDP Calculate
incomeGDP using income approach
approach (1mark) (1mark)
ii. Differentiate between the terms:

• consumptionii. of
Differentiate
fixed capitalbetween the terms:
• capital formation
• consumption of fixed capital (2mark)
iii. What is net tax • capital formation (2mark)

(1mark)
iv. State the formula for calculating GDP using expenditure approach.(1mark)
iii. what is net tax (1mark)
v. List two limitation of GDP as a measure of economic welfare (2marks)
iv. State the formula for calculating GDP using expenditure approach.(1mark)
ACTIVITY 3.1.2
v. Activity3.1.2
List two limitation of GDP as a measure of economic welfare (2marks)
The following is national income

The following is statistics for thestatistics
national income imaginary state
for the of Pacifica.
imaginary state Note that some
of Pacifica. of some of
Note that
the data is not relevant.
data is not relevant.
$m
Final consumption expenditure: government 35
Final consumption expenditure: private 55
Gross fixed capital formation 40
Taxes on production and imports 30
Less imports on goods and services 55
Change in inventories 10
i. Define Grossi.Domestic Gross Domestic

Define Product (GDP). Product (GDP). (1 mark) (1 mark)
ii. Explain
87 | P a g e why Real GDP is a better measure of a country’s economic growth than Nominal G
(1 mark)
iii. Use the expenditure approach to calculate GDP (1 mark)
iv. State and briefly describe ONE other approach that can be used to measure GDP.(1 mark)
ii. Explain why Real GDP is a better measure of a country’s economic growth than Nominal GDP.
(1 mark)
iii. Use the expenditure approach to calculate GDP (1 mark)
iv. State and briefly describe ONE other approach that can be used to measure GDP.
(1 mark)
v. List two limitation of GDP as a measure of economic welfare (2marks)
ACTIVITY 3.1.3
Using the information below calculate GDP using income and expenditure method.
F$ billions
Gross fixed capital formation 32
Gross operating surplus 34
Net exports -2
Net indirect taxes 25
Physical increase in stock 2
Private Consumption expenditure 39
Government consumption expenditure 1
Compensation to employees 44
LESSON 3.2 LIMITATIONS OF GDP
1. The GDP figures do not take into account the following items.
(i) Non market activities i.e. the household production is not taken into account while
calculating GDP. If the goods and services are sold, it can be counted but if it is not sold
it is not counted therefore excluded in GDP figures. Example voluntary labour
(ii) Goods and services traded on informal markets.
(iii) Illegal market activities are not counted e.g. drugs, leisure activities are also not accounted
for in GDP figures.
2. The relative merit of production – there is no distinction in the national income account of the
relative “goods” or “bads” of production. For e.g. a dollar spent on cigarettes may carry out
the same weight as a dollar spent on education.
LESSON 3.2 LIMITATIONS OF GDP
1. The GDP figures do not take into account the following items.
(i) Non market activities i.e. the household production is not taken into account while
calculating GDP. If the goods and services are sold, it can be counted but if it is not sold it is
not counted therefore excluded in GDP figures. Example voluntary labour
3. Distribution
(ii) Goods ofand
Income
services– GDP
tradedis on
aninformal
aggregate or a total output. It gives no indication of how
markets.
this
(iii) production is distributed.
Illegal market A country
activities are may
not counted e.g.have
drugs,high GDP
leisure yet due
activities areto uneven
also distribution
not accounted
there may be
for in GDPa large number of people living in poverty. Not able to share the country’s high
figures.
level of production. production – there is no distinction in the national income account of the
2. The relative merit of
relative “goods” or “bads” of production.
For e.g. a dollar spent on cigarettes may carry out the same weight as a dollar spent on education
4. Social conditions, GDP does not take into account for:
3. Distribution of Income – GDP is an aggregate or a total output. It gives no indication of how this
a) Resources
production isthat were notA used
distributed. e.g.
country mayproduction lost through
have high GDP unemployment.
yet due to uneven distribution there
b) The
may relative
be a largesocial,
numberpolitical
of peopleorliving
the working conditions
in poverty. Not able toofshare
the the
economy
country’sthat
highcreate
level of the
output.
production.
4. Social conditions, GDP does not take into account for:
a) Resources
5. Ecological cost are thatunderestimated
were not used e.g. in
production lost through
the calculation unemployment.
of GDP i.e. externalities created by
b) The relative social, political or the working conditions of the economy that create the output.
economic activity.
5. Ecological cost are underestimated in the calculation of GDP i.e. externalities created by
economic activity.
6. Role
6. Roleof women
of women areareunder represented
under represented in in calculation
calculation of GDP
of GDP e.g.
e.g. the the motherhood
motherhood and the
and the child
child care thatthat
care moulds the young
moulds for future
the young forgeneration which in turn
future generation contributes
which to a great deal
in turn contributes toinathe
great
economy is under represented.
deal in the economy is under represented.
7. Transfer of existing assets is not counted in GDP
7. Transfer of existing assets is not counted in GDP
Calculations
Calculations under National Income under National Income
Gross National Income GNI is the national turnover of goods and services
GNI =GDP –NX
Gross National Expenditure GNE is Gross National Product
GNE=C+I+G
GDP At Factor Cost GDP at factor cost = GDP- (indirect tax –subsidy +dep)
GDP at factor cost is same as Domestic Factor Income
DFI =r+w+i+p
GDP At Market Prices Refers to cost of final goods and services under current
market prices.
GDP = C+I+G+(X-M)
PRICE AND INFLATION

PRICE AND INFLATION
Because pricesprices
Because of goods and
of goods andservices
services rise
rise and fall,we
and fall, weuseuse price
price index
index to measure
to measure averageaverage
prices. Price
prices. index
Price is
index is calculated as
calculated as follows: follows:
Commodity Qty Bought 1990 (Base year) 1991 (current year)

Price Expenditure Price Expenditure
6 packs of 4 $6 $24.00 $6.75 $27
89 | P a g e
soft drinks
Video tapes 2 $3 $6.00 $4.20 $8.40
Total $30.00 $35.40
Price Index for 1991 = Expenditure Current Year x 100

Expenditure Base Year 1
= 35.40 x 100
30.00 1
= 118
Inflation Rate = CPI Current Year - CPI Base Year x 100
CPI base Year 1
= 118= 35.40 x 100
30.00 1
Inflation Rate = CPI Current Year - CPI Base Year x 100
= 118 CPI base Year 1
Inflation Rate
= 118 = -CPI100
Current Year - CPI Base Year
x 100 x 100
CPI base Year 1
100 1
= 118 - 100 x 100
= 18% increase
100 in price. 1
= 18% increase in price.
ACTIVITY 3.2.1
Activity3.2.1
The Consumer
Consumer Price
Activity3.2.1
Price Index
Indexisis the
thebasis
basisfor
forthe
thecalculation
calculationofof
thethe
annual raterate
annual of inflation.
of inflation.
The Consumer Price Index is the basis for the calculation of the annual rate of inflation.
CPI
Year CPI
CPI
2012 182
Year CPI
2013 114
2012 182
2013 114
i. i. Define CPI.
CPI.
ii. i. two
State Define CPI.
limitations of CPI.
ii. State two limitations of CPI.
iii. Use ii. the
State two in
values limitations
the tableof CPI. to calculate the annual inflation rate for a hypothetical Country A
below
iii. the
iii. Use Usevalues
the values in the
in the table
table belowtoto calculate
below calculate the annual
the inflation
annual rate for
inflation ratea hypothetical Country A
for a hypothetical
Country A
ACTIVITY 3.2.2
90 | P a g e
90 | P a g e Activity3.2.2
Study thethe
Study flow chart
flow chartbelow
belowand answerthe
and answer thequestions
questionsthatthat follow.
follow.
ForFor
each
eachofofthe
theitems
items tabulated below,
tabulated below, identify
identify by by placing
placing a (√)
a tick tickwhere
(√) where appropriate
appropriate
Whether it is a: Cause, effect a measure of inflation.
Whether it is a: Cause, effect or a measure of inflation.
Cause [C] • Effect [E] • Measure [M] of

inflation
Wage rates or raw material costs increasing.
Increases in demand
Redistributes income from some groups to
others.
Redistributes income from some groups to
others.
Harms those on fixed incomes.
Government decreases its spending.
Central Bank reduces the amount of cash
settlement in the system.
Activity3.2.3
others.
Harms those on fixed incomes.
Government decreases its spending.
Central Bank reduces the amount of cash
settlement in the system.
ACTIVITY 3.2.3
Activity3.2.3
The followingThe following

table showstable
the shows
Gross the Gross Domestic
Domestic ProductProduct
(GDP) (GDP) dataafor
data for a hypothetical
hypothetical economy.
economy.
Study the table below and answer the questions
Study the table below and answer the questions that follow. that follow.
Define GDP
i. Define GDPi. at Current at Current Price.
Price. (1 mark)
(1 mark)
ii. Calculate the increase in Nominal GDP from Year 2 to Year 3. (1 mark)
ii. Calculateiii.
the increase in Nominal GDP from Year 2 to Year 3. (1 mark)
iii. iv. Calculate the rate of inflation for Year 2. (2 marks)
iv. Calculate the rate of inflation for Year 2. (2 marks)
v. Calculate the values for A& B (1 mark)
v. Calculate the values for A& B (1 mark)
vi. Give ONE limitation of using changes in Real GDP as a measure of changes in the standard of
living. (1mark)
vi. Give ONE91limitation
|Page
of using changes in Real GDP as a measure of changes in the standard
of living. (1mark)
ACTIVITY 3.2.4
Activity3.2.4
The following table shows the Gross Domestic Product (GDP) data for a hypothetical economy.
The following table
Studyshows thebelow
the table Grossand
Domestic Product
answer the (GDP)
questions thatdata for a hypothetical economy.
follow.
Study the table below and answer the questions that follow.
i. Define Nominal GDP. (1 mark)

i. Define Nominal GDP. (1 mark)
ii. Give another name for Real GDP. (1 mark)
ii. Give anotheriii.
name for Realthe
Calculate GDP .
economic
growth rate in real terms from (1 mark)
Year 1 to Year 3. Show ALL workin
(2marks)
iii. Calculate the economic growth rate in real terms from Year 1 to Year 3. Show ALL workings.
iv. of A. Show ALL
Complete the above table by calculating the value working (2 marks)
(2marks)
iv. Complete thev.above
Whattable
does by
GNIcalculating
stand for inthe value of A. Show ALL working (2 marks) (1 mark)
economics?
v. What does GNI stand for in economics? (1 mark)

Activity3.2.5
iii. Calculate the economic growth rate in real terms from Year 1 to Year 3. Show ALL workings.
(2marks)
iv. Complete the above table by calculating the value of A. Show ALL working (2 marks)
v. What does GNI stand for in economics? (1 mark)
ACTIVITY 3.2.5
Activity3.2.5
Study the diagram below and answer the questions that follow.
i. Define the term economic growth. (1mark)

i. Define the term economic growth. (1mark)
ii. Which of the three economic growth indicators given above is also known as
• GDP
ii. Which of the three at Current
economic Prices?
growth indicators given above is also known as
•
• GDP at Current Prices? GDP at Constant Prices? (2marks)
• GDP at Constant Prices? (2marks)
iii. Give the formula for calculating
(i) Real GDP
iii. Give the formula for calculating
(ii) Real GDP per Capita
(i) Real GDP
(ii) Real GDP per Capita (2 marks) (2 mar
iv. Differentiate between Gross National Income (GNI) and Gross National Expenditure (GNE).
iv. Differentiate between Gross National Income (GNI) and Gross National Expenditure (GNE).
92 | P a g e
ACTIVITY 3.2.6
Activity3.2.6
The graph below shows data for Peace Island’s Gross Domestic Product.
i. Distinguish between GDP at current prices and GDP at constant prices. (2 marks)
ii. Identify
ii. a year ainyear
Identify which Peace
in which Island
Peace experienced
Island experienced economic growth.
economic growth.
(1 mark) (1 mark)
ii. Identify a year in which Peace Island experienced economic growth. (1 mark)
ACTIVITY 3.2.7
Activity3.2.7
The
The table below
table below shows
shows datadata for three
for three neighboring
neighboring islands. islands.
Read theRead the information
information and
and answer the answer the
questions
that follow.that follow.
questions
Island GDP at current GDP at constant Population (m) Real

prices ($m) price ($) GDP/capita
Peace Island 1500 1200 0.2
Happy Island 1600 1400 0.25
Sun Island 1800 1500 0.3
a)
a) Calculate
Calculate thethe Real
Real GDP/capita
GDP/capita forisland.
for each eachWrite
island. Write
your your
answer in answer in the of
the last column last
thecolumn of the
table below.
table below.
b) Explain which island has the highest economic growth and give a reason why. (2marks)
b) Explain which island has the highest economic growth and give a reason why.
(2marks)
ACTIVITY 3.2.7
93 | P a g e
Read the excerpt below and answer the questions that follow.
A good number of economic indicators is available for economic assessors to lay

their hands on; and they include the following:
• GDP at Current Prices

• GDP at Base Prices
• Real GDP per Capita
Other economic indexes such as the Consumer Price Index and the Rate of Inflation
are somehow linked to the three mentioned above.
i. State an advantage and a disadvantage of using GDP at Current Prices to measure the
standard of living and well being of an economy.
(2marks)
ii. Even though Real GDP per Capita is seen as the principal measure of an economy’s standard
of living it has its own shortcomings as well. List TWO limitations of Real GDP per Capita as a
measure of an economy’s standard of living.
(2marks)
LESSON 3.3 ROLE OF GOVERNMENT
LESSON 3.3 ROLE OF GOVERNMENT
National budget is a statement which sets out the spending, tax income and borrowing plans
of government over the
National budget forthcoming
is a statement which financial
sets out theyear.
spending, tax income and borrowing plans of
government over the forthcoming financial year.
Budget surplus is a situation when total tax revenue exceeds total government expenditure.
BudgetBudget
surplus leadsisto
surplus a contractionary
a situation when total taxeffect onexceeds
revenue the economy. it leadsexpenditure.
total government to decrease in the level
Budget
surplusoutput
of income, leads toand
a contractionary
employment effectinonthe
the economy
economy. it leads to decrease in the level of income,
output and employment in the economy
Budget deficit is a situation when total government expenditure exceeds total tax revenue.
BudgetBudget
deficitdeficit is a situation
results in an when total government
expansionary expenditure
effect of the exceeds
economy. total tax revenue. Budget
Increase in government
deficit results in an expansionary effect of the economy. Increase
spending leads to increase in income output and employment in the economy. in government spending leads to
increase in income output and employment in the economy.
If government budgets for a deficit then it needs to look into ways financing this deficit.
If government budgets for a deficit then it needs to look into ways financing this deficit.
National budget
Budget Budget
Balanced
deficit surplus
budget
Government borrowings
Internal External
borrowings borrowing
Floating Fixed
exchange rate exchange rate
Public Banks Reserve Bank
Monetized Fully funded

deficit deficit
95 | P a g e
Ways of Deficit Financing and Its Effects
There are two main ways of deficit financing
A. Internal borrowing
Borrowing from Reserve Bank simply means printing more money. The government will
spend this money into the economy. This will increase domestic money supply resulting to
inflationary pressure in the economy. This situation is called monetizing the deficit.
Borrowing from private sector government can borrow money from private by selling
bonds or securities. As people withdraw their money from the registered banks and give to
the government in return for the bonds, the money supply decreases and the interest rate
increases. When interest rate increases it results in crowding out of investment. Crowding
out investment means decrease in the level of investment due to transfer of funds from
private sector to government.
B. External borrowing
Borrowing from overseas financial institution such as IMF, ADB and World Bank. Borrowing
from overseas from overseas will lead to increase in national debt and debt servicing
burden.
If there is a floating exchange rate –an exchange rate that is free market equilibrium,
then what comes in is equal to what goes out. Therefore there is no change in the
money supply. Under fixed exchange rate overseas borrowings will increase the level of
money supply.
National debt is the volume of funds on loan to government in a given period of time. It is
national obligations.
Debt servicing is payment made to lenders in form of interest or dividends on borrowed

funds
Monetized deficit is inflationary

Non monetized deficit (fully funded) deficit counteracts the inflationary effect
of the deficit in the operating balance.
ACTIVITY 3.3.1
1. The result of a surplus in national budget is
A. Contractionary effect in the economy

B. Expansionary effect in the economy
C. Increase in employment in the economy
D. Increase in the level of economy activity in the economy.
2. Borrowing from general public by selling government bonds would result in
A. Decrease in money supply in the economy

B. Crowing out effect
C. Multiplier effect
D. Leakage effect
3. Negative effect of borrowing on the economy would be
A. Increase in Compensating deficit

B. Increase in output in the economy
C. Increase in debt servicing burden.
D. Increase in investment
4. Government trying to bring fairness in income distribution and wealth through progressive
taxation and welfare benefits is example of
A. Allocative role
B. Stabilization role
C. Regulative role
D. Redistributive role
5. A fiscal policy tool used by government to control the fluctuations in the trade cycle is
A. National budget
B. Interest rate
C. Reserve ratio
D. Open market operations
6. Which of the following is not a fundamental role of government?
A. Allocative
B. Stabilizing
C. Marketing
D. Distributive
Activity3.3.2
Activity3.3.2
a) Use your knowledge to complete the flow chart given below
a) Use your knowledge to complete the flow chart given below
a) Use your knowledge to knowledge
a) Use your completetothe flow chart
complete given
the flow chart below
given below
Borrowings
Borrowings
Borrowings
(1mark)
(1mark)
(1mark)
(1mark)
b)Classify
b)b) Classify
Classifythethe
the following
following
following into
into
into internal
internal
internal and
andand external
external
external borrowings
borrowings
borrowings
b) Classify the following into internal and external borrowings
1.1.1.More
More
More money
money
money printed
byby
printed
printed Reserve
by Bank.
Reserve
Reserve Bank.
Bank.
2.2.2.Selling
Selling
Sellinggovernment
government
government bonds
or or
bonds
bonds securities
or to general
securities
securities public
to general
to general public public
3.3.3.Borrowing
Borrowing
Borrowing

from
from Asian
Asian
from Development
Development
Asian Bank.
Bank.
Development Bank.
(3 (3marks)
marks)
(3marks)
(3marks)
c)c)
c) State two effectsState
State two
of two
c)State two
each effects
effects ofof
effects
type ofofeach
each type
type
each of of
type
borrowing. borrowing.
borrowing.
of borrowing. (3amrks)
(3(3amrks)
(3amrks)
marks)
ACTIVITY 3.3.3
Activity3.3.3
Activity3.3.3
Activity3.3.3
Use
Usethe
theinformation given
information to to
given answer thethe
answer question thatthat
question follow
follow
Use the information Use thetoinformation
given answer thegiven to answer
question thatthe question that follow
follow
$m$m
Government
Government expenditure 20 20$m
expenditure
Taxation receipts
Government
Taxation 15 15 20
expenditure
receipts
Saving
Taxation receipts
Saving 10 10 15
Investment
Saving
Investment 15 1510
Investment 15
i.
i. State
Statetwo
twoforms
formsofof
government expenditures ( 1 mark)
government expenditures ( 1 mark)
i. State two forms of government ofexpenditures (1 mark)
ii. i. Calculate
State two formswhether
to show government
the economyexpenditures ( 1 mark)
is operating under budget surplus or a deficit
ii. Calculate to show whether the economy is operating under budget surplus or a deficit
(1 mark)
ii. Calculate ii.
to Calculate
show whetherto show
the whether
economy the
is economy
operating is operating
under under
budget budget
surplus surplus
or (1ormark)
a deficita deficit
iii. Identify one way of deficit financing and explain its effect on the economy (2mark)
iii. Identify one way of deficit financing and explain its effect on the economy (2mark)
(1 mark)(1 mark)
iii. Explain
iv. Identify
oneone
wayway of deficit
in which financing
government and explain
regulates prices its effect
in free on the
market economy
system (1mark)(2mark)
iv. Explain one way in which government regulates prices in free market system (1mark)
98 | Pway
iii. Identify one a g eof deficit financing and explain its effect on the economy (2mark)
98
iv.| P aExplain
ge one way in which government regulates prices in free market system (1mark)
iv. Explain one 98 way| P a in
g ewhich government regulates prices in free market system (1mark)
ACTIVITY 3.3.4
Activity3.3.4
a)
a) Study theinformation
Study the informationgiven
given below
below andand place
place a (√in)tick
a (√ )tick the in the appropriate
appropriate column column
Functions of Government Allocative Distributive Regulative Stabilization

Role Role Role Role
i. Create law and order
ii. Provide social welfare benefits
iii. Use monetary policy to control

inflation
iv. Use progressive taxation to

bring fairness in income
distribution
v. Provide infrastructure and

national defense
vi. Enforce price controls for

consumers
vii. Use fiscal policy to control

unemployment in the economy.
viii. Provide education and health

facilities
(8marks)
(8marks)
b) State two sources of government revenue and two major forms of government expenditure.(2marks)
b) State two sources of government revenue and two major forms of government expenditure.
(2marks)
99 | P a g e
Activity3.3.5
ACTIVITY 3.3.5
A. ESSAY WRITNG
A. ESSAY WRITNG The national budget is seen as the primary instrument for the governm
economy
The national budget is seen as the primary instrument for the government’s involvement in the
economy
Discuss the above statement with reference to
• the definition of National Budget and two main components of it
• the definition of National Budget and two main components of it (3marks)
• the condition that gives rise for a deficit for a deficit budget National Bu
why
• the condition that gives rise for a deficit
a deficit forNational
a deficitBudget
budgetisNational
good forBudget
macro-economy
and any two
reasons why a deficit National Budget is good for macro-economy
(3marks) • the relationship that exists between a deficit National Budget and the m
• the relationship that exists between a deficit National Budget and the money supply
(3marks)
ACTIVITY 3.3.6
Activity3.3.6
B. Use the information givenB.
to answer
Use the the questiongiven
information that follow
to answer the question that follow
$m
Government expenditure 20
Taxation receipts 15
Saving 10
Investment 15
v. State two forms

v. State two forms of government expenditures
of government expenditures (1 (marks)
1 mark)
vi. calculate to show whethervi.the economy

calculate to show whether
is operating underthe economy
budget is operating
surplus under budget su
or a deficit
(1 mark)
vii. Identify one way of deficit financing and explain its effect on the eco
vii. Identify one way of deficit financing and explain its effect on the economy (2marks)
viii. Explain one way in which government regulates prices in free marke
viii. Explain one way in which government regulates prices in free market system (1mark)

100 | P a g e
Activity3.3.7
ACTIVITY 3.3.7
a) Which of the following are Government Policies would the government use in order to control the
fluctuations in the trade cycle?
a) Which of the following are Government Policies would the government use in order to control
the •fluctuations in the trade cycle?
Fiscal Policy
• •Fiscal
Monetary
Policy Policy
• Monetary Policy
b) Classify each of the following government actions as either Fiscal Policy (FP) or Monetary Policy (M
b) Classify each
or Direct of the(DC)
Control following government
by placing a tick (√)actions as either Fiscal
in the appropriate Policy (FP) or Monetary
column.
Policy (MP) or Direct Control (DC) by placing a tick (√) in the appropriate column.
GOVERNMENT POLICY
GOVERNMENT
ACTIONS FP MP DC
1. Increase funding
for projects to
help the long term
unemployed.
2. Increase in the
minimum wage
rate.
3. Not allow retail
stores to open on
Easter Friday.
4. Raise all petrol to
be lead free.
5. Require all petrol
to be lead-free.
6. Require a
minimum 30%
deposit on the
purchase of all
new motor cars.

ACTIVITY 3.3.8
Activity3.2.8
a) information
a) Use the Use the information below to
below to answer theanswer the questions
questions that follow.that follow.
Country Z’s National Budget 2014 $m

Expenditure 1961.7
Revenue 1745.7
i. Calculate the balance in Country Z’s 2011 budget, indicating whether it is a surplus or
i. Calculate the balance in Country Z’s 2011 budget, indicating whether it is a surplus or
balance.
deficit balance.
(1mark)
(1mark)
ii. Explain the effect of the type of budget balance you identified above on Country Z’s ec
ii. Explain the effect of the type of budget balance you identified above on Country Z’s (2 ma
iii. State what a government can do with the surplus revenue when it runs
economy (2 a budget surplus
marks)
iii. State what a government can do with the surplus revenue when it runs a budget surplus.
b) A government can finance a budget deficit by borrowing from the public
(1 or borrowing fro
mark)
i. Describe
b A government the meaning
can finance a budget borrowing
of deficit from thefrom
by borrowing public. (1ormark)
the public borrowing from
abroad.
ii. State the effect of borrowing from abroad under a fixed exchange rate on a country’s ra
i. Describe the meaning of borrowing from the public. (1 mark) (1 mark)
iii. the A
ii. State government
effect budget
of borrowing deficit
from puts under
abroad more burdens on future generations.
a fixed exchange rate on a country’s
Explain the meaning of this statement.
rate of (1 (1 mark) mark)

iii. A government budget deficit puts more burdens on future generations. Explain the
meaning of this statement. (1 mark)

LESSON 3.4 MONEY SUPPLY
LESSON 3.4 MONEY SUPPLY
Money supply is measured using different mediums.
M0 is the sum ofMoney

total supply
currency in circulation.
is measured using different mediums. M0
LESSON 3.4 MONEY SUPPLY M1
1. M1 = coins and notes, travellers cheques + transaction
M0 is the sum of total currency in circulation. M2
accounts operable by cheques. Narrow money, include
1. M1 = coins and notes, travellers cheques +transaction
most immediate formsoperable
accounts of money available
by cheques. Narrow tomoney,
the general
include M3 M 0
Money supply is measured using different mediums.
public. M1
most immediate forms of money available to the general public.
M0 is the sum of2.total

M2currency in circulation.
= M1 + other savings account. This includes EFTPOS,M2investmentsaccounts
accounts and bonds. M2 is
2. M2 = M1 + other
1. M1 = coins and called savings
notes,Near account. This includes EFTPOS, investments
travellers
Money.cheques +transaction
and bonds.
M2 is called
accounts Near
operable Money.
Near
by Money – assets
cheques. Narrowthat money,
can be converted
include into cash easily.
M3
Near
most immediate forms of money available to the into
Money – assets that can be converted cash
general easily.
public.
3. M3 =M2 + term deposit held at banks or other financial institutions this is called broad money which
consists of large denominators, certificates of deposits.
3. 2. M3
M2=M2
= M1++term
otherdeposit
savings held
account.at banks or otherEFTPOS,
This includes financialinvestments
institutionsaccounts
this is called broadM2
and bonds. money
is
calledconsists
which Near Money.
of large
MONEY DEMAND denominators, certificates of deposits.
Near MoneyMoney
– assets that can
demand existsbefor
converted into cash easily.
three motives
MONEY DEMAND 1. Transaction Demand – is a desire to hold money to buy things with i.e. for means of exchange.
3. M3 =M2 + term2.deposit Precautionary Demandor–other
held at banks the demand that arises
financial due to people
institutions this is holding moneymoney
called broad for emergency
which
consists of large purpose or
denominators, for unforeseen circumstances.
certificates of deposits.
Money demand exists for three motives
3. Assets (Speculatory Demand) – people may hold money to buy shares now and sell later at a
1. Transaction Demand – isprice
higher a desire
so thattothey
hold
canmoney togain
get capital buyifthings with
they find thei.e. forprice
share means of exchange.
is increasing.
MONEY DEMAND
Money demand exists for three motives Overalldue Demand for Money
2. Precautionary
1. TransactionDemand
Demand ––the demand
is aInterest thatmoney
desire to hold arises to buyto things
people holding
with i.e. formoney
means for emergency
of exchange.
purpose or for unforeseen
2. Precautionary Demand –circumstances.
the demand
Rate % that arises due to people holding money for emergency
purpose or for unforeseen circumstances.
3. Assets (Speculatory
3. Assets (SpeculatoryDemand)
Demand) – –people
people may
may holdholdmoney
money to buy
to buy shares
shares now now
and selland sellatlater
later a at
higher
a higher pricesosothat
price that they
they can
canget getcapital gaingain
capital if they find the
if they findshare price isprice
the share increasing.
is increasing.
Overall Demand for Money

Interest
Rate % MD
0 qty of money ($)
The demand curve for money is downward sloping because when interest rate raises, the demand for
money falls.
MD
a) The higher the interest rate, the higher the opportunity cost for holding money for asset motive
(better thing is to save or put money in the bank to earn higher interest rates/ lending.
b) At lower interest rate, the opportunity cost is lower for holding money for asset motive i.e.
people could gain by buying property and borrowing.
0 qty of money ($)
103 | P a g e
The
Thedemand curve
demand curve for for money
money is downward
is downward sloping sloping because
because when when
interest interest
rate raises, therate raises,
demand for the
money falls.
demand for money falls.
a) The
a) The higherhigher the interest
the interest rate,
rate, thethe higher
higher thetheopportunity
opportunity cost
cost for
for holding
holdingmoney
money forfor
asset motive
asset motive
(better thing is to save or put money in the bank to earn higher interest rates/
(better thing is to save or put money in the bank to earn higher interest rates/ lending. lending.
people could gain by buying property and borrowing. Economics: Year 12 103
103 | P a g e
people could gain by buying property and borrowing.
Factors Affecting Money Demand

Factors Affecting Money Demand
There are two factors affecting the money demand:
There are two factors affecting the money demand:
1. The General price Level
1. The General price Level
If the general price level rises, pushing up the price, people would demand more money
than before If the general
to buy priceTherefore
things. level rises,MD
pushing
(moneyup the price, people
demand) shifts would demand
right. And moreprice
general moneylevel
than before
to buy things. Therefore MD (money demand) shifts right. And
is falling; people will demand less money than before, therefore MD shifts left. general price level is falling; people
will demand less money than before, therefore MD shifts left.
2. Real Income
2. Real Income
That is, if real

Thatincome
is, if realincreases, peoplepeople
income increases, will demand more
will demand money
more moneytotouse
use therefore MDwill
therefore MD will shift to
shift to thethe
right and if real income decreases, people would demand less money to spend.
right and if real income decreases, people would demand less money to spend. Money demand
Money demand shiftleft.
shift to the to the left.
Interest rate
MD2
MD1 MD0
0 Quantity of money ($)
MONEY SUPPLY
MONEY SUPPLY
Money Supply is vertical.

Money Supply isItvertical.
remains constantconstant
It remains irrespective of theofchanges
irrespective in in
the changes thethelevel
levelofofinterest
interest rate.
rate. The money supply
The money is setisand
supply maintained
set and maintainedbybyReserve
Reserve Bank
Bank atat a certainrate
a certain rateinina a given
given period
period of time.
of time.
Factors Affecting Money Supply
Factors Affecting Money Supply
The factors affecting money supply are:
The factors affecting money supply are:
• Open Market Operation (OMO) - when Reserve bank purchases govt bonds from banks or the
public it to leads increase monetary base thus increases money supply.
• Open Market Operation (OMO) - when Reserve bank purchases govt bonds from banks or
When reserve bank sells bonds to bank or public, this decreases the monetary base therefore
the public it to leads increase
decreases monetary
excess reserve base ofbase thus
banking increases
system money
therefore supply.
decreases When
money reserve
supply.
bank sells bonds
. to bank or public, this decreases the monetary base therefore decreases
excess reserve base of banking
• RR -Increase system
in reserve ratio therefore decreases
leads to decrease in themoney
loanablesupply.
fund which leads to decrease in
MS while decrease in Required Reserve (RR) leads to increase in advances (loanable funds)
104 Economics: Year 12 which leads to increase in MS.
104 | P a g e
• RR - Increase in reserve ratio leads to decrease in the loanable fund which leads to decrease
in MS while decrease in Required Reserve (RR) leads to increase in advances (loanable funds)
which leads to increase in MS.
• Interest
• Interest rate – increases rate –rate
in interest increases
leadsintointerest
decreaserate in
leads to decrease
investment, in investment,
resulting resulting in a dec
in a decrease
in AD thus decrease
in AD thus decrease in MS and vice versa. in MS and vice versa.
Money Market Equilibrium

Money Market Equilibrium
It is achieved where ItMD intersectswhere
is achieved with MS.
MD The basicwith
intersects interest
MS.rate
The for theinterest
basic economy is determined
rate for the economy is determ
by money market equilibrium. The overall
by money market demand
equilibrium. for money
The overall demand
demand for moneyset demand
by consumers and
set by consumers and
business while the MS is set and
business whilecontrolled
the MS is by the controlled
set and Reserve Bank.
by the Reserve Bank.
Interest Rate MD MS
ie
0 Qe Qty of Money ($)

Multiple choice questions
Multiple choice questions
1. The components of the narrow definition of money include
1. The componentsA.of Notes
the narrow definition
and coins of money
in circulation include
and all savings accounts.
B. Notes and coins in circulation, cheque accounts and reserves.
A. Notes and coins C.
in circulation and in
Notes and coins allcirculation,
savings accounts.
cheque accounts and savings accounts.
B. Notes and coins D.
in circulation, cheque
Notes and coins accounts
in circulation, and reserves.
cheque accounts and demand deposits.
C. Notes and coins in circulation, cheque accounts and savings accounts.
2. Inflation
D. Notes and coins in the economy
in circulation, cheque would resultand
accounts in demand deposits.
A. Increase
2. Inflation in the economy wouldmoney
resultsupply
in
B. Shift the money demand curve to left
A. Increase money C. Increase in money demand
supply
D. Decrease in interest rate.
B. Shift the money demand curve to left
C. Increase in money demand
3. When interest rate is low which group would gain
D. Decrease in interest rate.
A. Borrowers
B. Lenders
C. Suppliers
D. Producer Economics: Year 12 105
105 | P a g e
3. When interest rate is low which group would gain
A. Borrowers
B. Lenders
C. Suppliers
D. Producer
4. An increase in reserve ratio will result in
A. Increase money supply

B. Increase in 4.
interest rate in reserve ratio will result in
An increase
C. Decrease in interest rate
A. Increase money supply
D. Increase in money demand
B. Increase in interest rate
C. Decrease in interest rate
5. The money supply curve in
D. Increase willmoney
shift demand
right if
A. The reserve 5.bank

The buys
moneybonds fromwill
supply curve general public
shift right if
B. The reserve bank sells bonds to the general public
A. The reserve bank buys bonds from general public
C. Reserve ratio increases
B. The reserve bank sells bonds to the general public
D. Interest rate increases
C. Reserve ratio increases
D. Interest rate increases
ACTIVITY 3.4.2
Activity3.4.2
Use the
Use the information ininformation
the graphingiven
the graph given
below andbelow and answer
the questions thatthat follow
follow
a) Explain howa)each
Explain howfollowing
of the each of thewill
following
affectwill
theaffect
leveltheoflevel of money
money supply.
supply.
i. Government i. borrows
Governmentfromborrows from the Reserve
the Reserve Bank orBank or Central
Central Bank Bank
(2 marks) (2 marks)
ii. Creation ii.
of credit through
Creation the
of credit banking
through system
the banking system
(2 marks) (2 marks)
iii. Borrowingiii.fromBorrowing
overseas from overseas (2 marks (2 marks
b) Explain howb)each of the

Explain howfollowing
each of thefactors
followingcreates inflation.
factors creates inflation.
i. Decreasei.in interest
Decreaserates
in interest rates
ii. Increase in reserve ratio
ii. Increase in reserve ratio
iii. OMO –selling of government bond. (3 marks)
iii. OMO –selling of government bond. (3 marks)
c) Identify the c) Identify the determinant

determinant for borrowing
for borrowing and loanable
and loanable funds.
funds. (1marks) (1marks)
106 | P a g e
ACTIVITY 3.4.3
Activity3.4.3
ESSAY WRITING
ESSAY WRITING
The money market, like any other market, has both a demand and supply side.
Evaluate
The moneythe above
market, statement
like any otherwith reference
market, to: a demand and supply side.
has both
Evaluate the above statement with reference to:
• Differentiate between transaction demand, precautionary demand and speculative
demand. (3marks)
• Differentiate between transaction demand, precautionary demand and speculative demand. (3marks)
•• State
Statethree factors
three thatthat
factors affect money
affect demand
money and explain
demand (3marks)
and explain (3marks)
•• Significance
Significance of of
thethe
equilibrium raterate
equilibrium of interest, how how
of interest, it is determined in the money
it is determined market and
in the money what and
market is
likely
whattois occur if the
likely to equilibrium
occur interest rateinterest
if the equilibrium is very rate
low. is very low. (3marks) (3marks)
ACTIVITY 3.4.4
Activity3.4.4
The
Thediagram
diagram below shows
below howhow
shows the definition of money
the definition supply M1,
of money M2M1,
supply and M2
M3,and
relate to each
M3, other.
relate to each
Study
other.the diagram
Study the and answerand
diagram the questions
answer thethatquestions
follow. that follow.
M3
M2
M1
i. i. Which
Which definition
definitionis also known
is also known asasthe
thenarrow
narrowmoney
moneysupply
supplyandand comprises notesand
comprises notes andcoins
coins
held byby
held the
thepublic
publicplus
plus transactions account
transactions account deposits
deposits keptkept in financial
in financial institutions?
institutions?
(1 mark) (1 mark)
ii. Which definition is also known as the broad money supply where the majority of other funding
ii. Whichis indefinition
the form ofis term
also deposits?
known as (1 themark)
broad money supply where the majority of other funding
is in the form of term deposits? (1 mark)
iii. What happens to the liquidity of money as one moves outward from the centre of the diagram?
iii. What(1 mark)
happens to the liquidity of money as one moves outward from the centre of the
diagram? (1 mark)

Activity3.4.5
Use the table below to calculate the values of M1.M2 and M3.
Use the table below to calculate the values of M1.M2 and M3.
Use theMonetary
table below to calculate the values of M1.M2
aggregates and M3.
$ millions
Accounts operable by EFTPOS 14 221
Monetary aggregates $ millions
Accounts operable by EFTPOS and cheques 9 489
Accounts operable by EFTPOS 14 221
Notes and coins held by the public 2 465
Accounts operable by EFTPOS and cheques 9 489
Term deposits 46 355
Notes and coins held by the public 2 465
Term deposits 46 355
ACTIVITY 3.4.6
Activity3.4.6
Activity3.4.6
Use the Case Study given below and answer the questions that follow.
At the start of every month Arena’s bank balance is $2000. She receives her monthly pay
of $3000, which makes her balance $5000. During the month she spends this $3000 on
goods andAt services
the start so
of that
everybymonth
the beginning
Arena’s of thebalance
bank next month, her balance
is $2000. is backher
She receives to monthly pay
$2000 again.
of $3000, which makes her balance $5000. During the month she spends this $3000 on
goods and services so that by the beginning of the next month, her balance is back to
$2000 again.
i. Statei. theState
threethemotives
three motives of money
of money demand
demand (1 ½ marks)
(1 ½ marks)
ii. Calculate Arena’s transaction demand for money for the month. (1mark)
i.
ii. Calculate Arena’s State the three motives
transaction demand of money demand
for money for the month. (1 ½ marks)
(1mark)
iii. Calculate Arena’s transaction demand for money for the month.(1mark)
ii. Calculate Arena’s transaction demand for money for the month. (1mark)
iii. Calculate Arena’s transaction demand for money for the month. (1mark)
iii. Calculate Arena’s transaction demand for money for the month.(1mark)
108 | P a g e
108 | P a g e

LESSON 3.4.2
LESSON QUANTITY
3.4.2 QUANTITY THEORY
THEORY OFOFMONEY
MONEY
The
Thequantity
quantitytheory of money
theory of moneyis isanan identity
identity thatthat
shows shows the relationship
the relationship betweenbetween nominal
nominal GDP, the GDP,
the stock
stock of money
of money and velocity
and velocity of circulation.
of circulation. It is alsoIt known
is also as
known as the of
the equation equation
exchangeoforexchange
Fisher or
Fisher Equation
Equation
TheThe quantitytheory
quantity theoryofofmoney:
money:
MV = PQ
Where
Wherethe:
the:
M =MMS,= MS,
V =V Velocity of Circulation
= Velocity (the rate at
of Circulation which
(the ratethe
at money changes
which the hands
money at a given
changes periodatofatime).
hands given
P = Price level
period of time).
Q = Physical Value of goods and services (output therefore PQ = nominal GDP)
P = Price level
Q the =
Some of Physical Value
assumptions of equations
of these goods and services (output therefore PQ = nominal GDP)
are:
1.Some
Effectsofofthe assumptions
change of and
in ‘P’ if ‘V’ these
‘Q’equations are:
are constant
If 1.
P increase
Effects when MV = inQP
of change ‘P’ (PQ) then M
if ‘V’ and ‘Q’will
arealso increase to balance equation
constant
Therefore MVwhen
If P increase = PQMV = QP (PQ) then M will also increase to balance equation
Calculation
Therefore ofMV
velocity
= PQ
Velocity shows the number of times average dollar spent on goods and services changes hand. The
Calculation of velocity
faster the dollar the changes the hand the higher the velocity. Eg If a $2 note is used only 10 times in a
year then it has a velocity of 10. Velocity is the ratio of nominal GDP to the number of dollars in the
Velocity
money shows
supply. the number
If there of times
was $4500 average
worth of dollar
transaction spentinona year
(output) goodsandand
MS services
was $900.changes
Calculatehand.
The faster
velocity. the dollar the changes the hand the higher the velocity. Eg If a $2 note is used only
10 times in a year then it has a velocity of 10. Velocity is the ratio of nominal GDP to the number
Solution
of dollars in the money supply. If there was $4500 worth of transaction (output) in a year and MS
MV =$900.
was PQ Calculate velocity.
V = PQ/M
V = 4500/900
Solution
V =MV5 times.
= PQ
Changes in velocity
V = PQ/M
V = 4500/900
Velocity changes due to a change in economic situation i.e. during the times of:
V = 5 times.
1. Boom – there is a high level of economic activity in income therefore
Changes in velocity
Money Supply in the rate at which the money changes hand
Velocity changes due to a change in economic situation i.e. during the times of:
2. Recession – low level of economic activity in income therefore MS
1. Boom – there is a high level of economic activity in income therefore
in the rate at which money changes hands
109 | P Money
a g e Supply in the rate at which the money changes hand

2. Recession – low level of economic activity in income therefore MS
in the rate at which money changes hands
ACTIVITY 3.3.2.1
1. The equation of exchange is referred to as
A. Mathematical equation
B. Fisher equation
C. Keynesian equation
2. According to the Quantity Theory of Money, which of the following will result in an increase in
price?
A. Money supply is fixed, velocity of circulation is fixed and quantity of outputs increases.
B. Money supply increases but velocity of circulation and quantity of outputs remain fixed.
C. Money supply increases, velocity of circulation is fixed, quantity of outputs increases faster
than increase in the money supply.
D. Money supply is fixed, velocity of circulation increases and quantity of outputs increases
faster than increase in the velocity of circulation.
3. According to the formula MV=PQ , if the money supply increases BY 20%,the most likely
effect would be
A. The nominal GDP will increase by 20%

B. The output will increase by 20%
C. The productivity will increase by 20%
D. The real GDP will increase by 20%
Use the equation of exchange given below and answer the question that follow.
MV=PQ
i. State what the following stand for in the above equation.

• M
• P
• V
• Q (2 mark)
ii. Explain why PQ = GDP. (1 mark)

STRAND 4 INTERNATIONAL ECONOMICS
Strand Outcome
Explore Fiji’s Balance of Payments and its trade relations in response to the changing needs
of the Fiji Economy.
• Apply the concepts of opportunity cost, comparative advantage, specialization, exchange,

markets and gains from to international trade
• Differentiate between Bilateral, Regional and Multilateral trade agreements with current
examples in the Fiji context
• Describe the role of IMF and WTO on trade in the Pacific
• Explain the importance of foreign investment
• Identify and Explore the costs and benefits of multinational organizations in Fiji

LESSON 4.1 GAINS FROM INTERNATIONAL TRADE
Free International
LESSON trade promotes
4.1 GAINS international specialization and encourages
FROM INTERNATIONAL TRADE increases in
productivity and total output. Nations specialize in those goods and services in which they have
LESSON
some kind of advantage
Free
Free International
4.1 GAINS
over
International other
trade nations.
trade FROM
promotes INTERNATIONAL
promotes international
international specialization
specialization and
TRADEincreases in
and encourages
encourages increases in productiv
productiv
and
and total output. Nations specialize in those goods and services in which they have some kind of
total output. Nations specialize in those goods and services in which they have some kind of
Economies can gain
advantage
Free fromoverinternational
over
International
advantage other
other nations.
trade tradeinternational
promotes
nations. through Absolute Advantages
specialization and comparative
and encourages increases in productiv
advantages Economies
and
Economies can
can gain
total output. from
Nations
gain international
fromspecialize
international trade
in those through
tradegoods
through andAbsolute
servicesAdvantages
Absolute in which they
Advantages and
andhavecomparative
some kindadvan
comparative of
advan
advantage over other nations.
Absolute
Absolute- Advantages
Economies
Absolute Advantages acan gain has
Advantages
nation -a
from nation has
international
-aabsolute
nation absolute
hasadvantage advantage
trade through
absolute in
in aa production
in a Absolute
advantage production of anof
Advantages
production an
and
ofitem
an itemit isif it
it is
ifcomparative
item if ableis able to
to pr
ableadvan
pr
to produce more more
more of
of of
the the commodity
thecommodity
commodity than than
thanthethe other
theother
other nation
nation
nation.
Absolute Advantages -a nation has absolute advantage in a production of an item if it is able to pr
more of theCountrycommodity than the other
Country Wheat
Wheat nation cheese
cheese
Units
Units units
units
Country
Australia
Australia Wheat
50
50 cheese
10
10
Fiji
Fiji Units
10
10 units
20
20
Australia 50 10
Australia has anAustralia
absolute advantage in production of wheat and 20Fijiand
has absolute advantage in
Australia has has Fiji
an
an absolute advantage10
absolute advantage in
in production
production of of wheat
wheat and Fiji
Fiji has
has absolute
absolute advantage
advantage in
in production ofproduction
cheese. of
production of cheese.
cheese.
Australia has an absolute advantage in production of wheat and Fiji has absolute advantage in
Comparative Advantage
Comparative
production
Comparative Advantage
of cheese.
Advantage
A
A nation
nation has
A nation has comparative comparative
hasadvantage
comparativeover advantage
a trading
advantage over aa trading
overpartner
trading in partner in
in production
production
partner of an item
production of
of ifan
anit item
produces
item if
if it
it produces
produces thth
that commodity commodity
Comparative
at a lower
commodity at a lower
Advantage
at opportunityopportunity
cost than
a lower opportunity cost than
costitsthan its
partner. partner.
its partner.
A nation has comparative advantage over a trading partner in production of an item if it produces th
Country
commodityCountry at a lower opportunityWheat cost than its partner.Cheese
Wheat Cheese
Units
Units units
units
Country
Australia
Australia Wheat
50
50 Cheese
40
40
Fiji
Fiji Units
10
10 units
20
20
Australia 50 40
The table
table shows Fiji that
shows that Australia
Australia hashas an 10 absolute
an advantage20
absolute advantage in both
both wheat
wheat and
and cheese
cheese because
because Austra
The table showsThe that
able to Australia
produce has an
more of absolute
both goods. advantage in
in both wheat and cheese because Austra
able to produce more of both goods.
Australia is ableTotodetermine
produce more
which of bothhas
country goods.
The
To table shows
determine that country
which Australia has
has aa comparative
comparative advantageinin
an absolute advantage
advantage inboth
which
which particular
wheat and cheese
particular commodity
commodity because weAustra
we must
must
calculate
able to the
produce opportunity
more of cost
both of producing
goods. wheat and
calculate the opportunity cost of producing wheat and cheese in each country. cheese in each country.
To determine which countrywhich
To determine has acountry
comparative advantage
has a comparative in which
advantage particular
in which commodity
particular commodity we we must
must calculatecalculate
the opportunityCountry
the cost ofcost
opportunity
Country producingWheatwheat
of producing
Wheat andand
wheat cheese
Cheeseinineach
cheese
Cheese country.
each country.
Units
Units units
units
Country
Australia
Australia 50 Wheat
F/G=
50 F/G= 40/50 40/50 40 Cheese
F/G
40 F/G =50/40 =50/40
Units
= 0.8
= 0.8 =units
= 1.25
1.25
Australia
Fiji
Fiji 50
10 F/G=
F/G =
10 F/G = 20/10 40/50
20/10 40
20 F/G =50/40
20 F/G
F/G = 10/20
= 10/20
== 0.8
= 22 = 1.25
= 0.5
= 0.5
Fiji 10 F/G = 20/10 20 F/G = 10/20
From the
From the table
table wewe can
can see
see that
that in = 2
in Australia,
Australia, producing 11 unit
producing = 0.5
unit of wheat,
of wheat, the
the opportunity
opportunity cost cost is
is 0.8
0.8 uu
of cheese
of cheese and and this
this is
is much
much cheaper
cheaper than
than Fiji
Fiji whose
whose opportunity
opportunity cost
cost is
is 22 units
units of
of cheese.
cheese. For
For Fiji, th
th
From the table Fromwe can the see
tablethat
we can see that inproducing
in Australia, Australia, producing 1 unit of
1 unit of wheat, thewheat, the opportunity
opportunity cost isFiji,
cost is 0.8 0.8 u
opportunity
opportunity cost
iscost of producing 11than
unit of
of cheese is opportunity
0.5 units
units of
of wheat
wheat and for Australia, the opportuni
opportuni
units of cheeseof and
cheesethisand thisofisproducing
much cheaper
much unit
cheaper Fijicheese
than whose
Fiji is
whose 0.5opportunity cost and
is22for
costis unitsAustralia,
units of the
cheese.
of cheese. For Fiji, th
cost of
For Fiji, the opportunity
cost of cheese
cheese
cost of 1.25 units of
producing
1.25 units of wheat.
wheat. Thus
1 unitThus Australia
of cheese
Australia hasunits
is 0.5 aa lower
lower opportunity
of wheat cost
and cost in the
the production
production o
for Australia,
opportunity cost of producing 1 unit of cheese is 0.5has
units opportunity
of wheat in
and for Australia, the opportunio
the opportunitywheatcost of cheese
therefore has1.25 units of wheat.
comparative advantage Thus Australia
in wheat
wheat while has
Fiji a lower opportunity
opportunitycost
wheat
cost oftherefore
cheese has
1.25 comparative
units of wheat.advantage
Thus in
Australia while
has a Fiji has
lower has lower
lower opportunity
opportunity costhas
in the
cost in
cost in the
the
production o
in the production of wheat therefore has comparative advantage in wheat while Fiji lower
production
production of cheese
of cheese therefore
therefore comparative
comparative advantage
advantage in production
in production of cheese.
of cheese. Hence, they
Hence,cost
they are
of inare goi
opportunity cost in the
wheat production
therefore of cheese
has comparative therefore comparative
advantage in wheat while advantage
Fiji has lower inopportunity
production thegoi
cheese. Hence, they are
produce
produce those
those going to produce
products
products those products respectively.
respectively.
respectively.
production of cheese therefore comparative advantage in production of cheese. Hence, they are goi
112 Economics: Year 12 112
112 || P
P aa gg ee
produce those products respectively.
112 | P a g e
ACTIVITY 4.1.1
Activity 4.1.1
MULTIPLE CHOICE QUESTIONS (5 marks)
MULTIPLE CHOICE QUESTIONS (5 marks)
Circle the letter Circle
of yourthechosen
letter ofanswer.
your chosen answer.
1. In explaining1.comparative
In explainingadvantage,
comparativeeconomists often useoften
advantage, economists the concept of
use the concept of
A. Opportunity costs.
A. Opportunity costs.
B. Variable cost B. Variable cost
C. Accounting costC. Accounting cost
D. Ecological cost D. Ecological cost
2. Atocountry
2. A country is said is said to have
have absolute absolute ifadvantage
advantage it is able iftoitproduce
is able to produce
A. At a lower opportunity cost than the other.

A. At a lower opportunity cost than the other.
B. More of the product than the other
B. More of the product than the other
C. Less of the product than the other
C. Less of the product
D. Atthan
low the
totalother
cost than the other.
D. At low total cost than the other.
3. Use the table3.given

Use below
the tabletogiven
answer question
below 3 question 3
to answer
Country Wheat cheese

Units units
Australia 80 100
Fiji 10 20
A. Australia
A. Australia has absolute has absolute
advantage advantageofinwheat
in production production
only of wheat only
B. Fiji has absolute advantage in production of cheese
B. Fiji has absolute advantage in production of cheese
C. Australia has comparative advantage in production of wheat
C. Australia has comparative advantage in production of wheat
D. Australia has comparative advantage in production of cheese.
D. Australia has comparative advantage in production of cheese.
4. Free international trade means
4. Free international trade means
A. Free from taxation
B. Free from trade barriers
A. Free from taxation
B. Free from trade C. Free from government intervention
barriers
D. Freeintervention
C. Free from government from influences on money supply.
D. Free from influences on money supply.
5. International trade is
5. International trade is
A. Where countries trade globally
B. Where trade occurs within a country
A. Where countriesC. trade
Whereglobally
trade occurs between firms
B. Where trade occurs within a country
D. Where firms have its branches in other countries.
C. Where trade occurs between firms
D. Where firms have its branches in other countries.

ACTIVITY 4.1.2
Activity 4.1.2
Activity 4.1.2
A. The table below
A. Theshows the production
table below of dalo and
shows the production canned
of dalo fish per
and canned fishworker per week
per worker for for
per week Fiji Fiji and N
A. The table
and New Zealand.below
Zealand. shows the production of dalo and canned fish per worker per week for Fiji and New
Zealand.
Commodity Fiji New Zealand
Commodity Fiji New Zealand
Dalo 50 20
Dalo 50 20
Canned fish 30 80
Canned fish 30 80
i. Define the terms absolute advantage and comparative advantage.

ii. Which country has absolute
ii. Which advantage
country has in production
absolute advantage of dalo?of dalo?
in production
ii. Which country has absolute advantage in production of dalo?
iii. Which country has comparative
iii. Which advantageadvantage
country has comparative in production of canned
in production fish? fish?
of canned
iii. Which country has comparative advantage in production of canned fish?
iv. State oneiv.advantage
State oneof
advantage of free international
free international trade trade
iv. State one advantage of free international trade
ACTIVITY 4.1.3
Activity 4.1.3
Activity 4.1.3
The following table shows the number of units of tea and coffee produced by two countries X
and Y, using the same quantity of resources. Study the table and answer the questions that follow.
i. Which country has an absolute advantage in tea production?

i. Which
ii. country
Which has an absolute
country has an advantageadvantage
absolute in tea production?
in coffee production? (1 mark)
i. Which
ii. country
Which has an
country absolute advantage in tea production?
iii. Calculate the opportunity cost of: in coffee production? (1 mark)
has an absolute advantage
ii. iii.
WhichCalculate
country the
hasopportunity
1.anTea
absolutecostadvantage
of: in coffee production? (1 mark)
1. Tea 2. Coffee
iii. Calculate 2.Which
iv. the Coffee
opportunity
country cost
has a of:
comparative advantage in
iv. Which
1. Tea country
• Tea production advantage in
has a comparative
2. Coffee• Tea production
• Coffee production (2 marks)
iv. Which country has a comparative advantage in
• Tea production
114 | P a g e
114
114 Economics: | P12a g e
Year
LESSON 4.2 TRADE AGREEMENT FOR FIJI
Trade Agreements play a very important role in the trade relations between countries or a region.
Whether they are domestic, regional or international trade policies/agreements; they can play a
significant role in the expansion of cultural industry trade for the region.
As an island country with a small market, regional integration plays a vital role in creating a larger
trade and investment market for Fiji.
Fiji has a number of trade agreements with other countries. The three major forms of the trade
agreements are:
Multi-Lateral trade agreement: - world wide trade agreement involving many countries. The
most famous is GATT. (General Agreement on Tariffs and Trade).
1. Fiji joined the World Trade Organisation (WTO) in 1996.Since then the government of Fiji has
adopted an export oriented and outward-looking trade policy in line with the realisation that
export has great potential for the country. The WTO provides market access to more than 153
members.
2. General agreement on Tariff and Trade:

GATT- the original agreement by 23 nations in general in 1997 but now it includes over 60 of
the worlds trading nations. The general aim of agreement is to reduce trade barriers.

GATT is a multi-lateral with a set of rules governing the conduct of world trade. It provides the
forum for the countries to discuss and seek solutions to their trading problem. Negotiation
between countries to expand trading partners is also encouraged by the GATT. The main
objective of GATT is to liberalize world trade so as to contribute to the economic growth and
development of all member nations.
3. The Interim Economic Partnership Agreement (IEPA) that was initialled in 2007 by Fiji and
Papua New Guinea, and the European Community. The IEPA provides duty free and quota
free market access on all products from Fiji except for sugar and rice, which are subjected
to longer transitional periods. Most importantly, the IEPA also provides for improved rules of
origin, especially in fisheries, and this allows investors based in Fiji to use fish caught using any
boats (global sourcing) and export it to the EU, provided that the fish is landed and processed
(canned) in Fiji. Fiji is still negotiating a full IEPA in order to deepen its trade relationship with the
EU over time;
Regional Trade Agreement (PICs)
1. The Melanesian Spearhead Group (MSG) Trade Agreement which is a free trade agreement
that allows trade to take place freely between Fiji, Papua New Guinea, Vanuatu and Solomon
Islands;
2. The Pacific Island Countries Trade Agreement (PICTA), which seeks to establish a free trade
area among the fourteen Forum Island Countries (FICs). Six countries have already completed
the legislative requirements and are ready to commence trading under PICTA;
3. The South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA),
which is a non-reciprocal agreement that allows Fiji and other fourteen Forum Island Countries
(FICs) to export almost all of their products to Australia and New Zealand duty free. Fiji also
benefits from the SPARTECA-TCF Scheme which allows its textiles, clothing and footwear (except
wool and wool blend fabrics) to be exported to Australia duty free under more favourable
rules of origin.
4. The Pacific Agreement on Closer Economic Relations (PACER), which is a framework

agreement for co-operation on trade and economic integration between the fourteen FICs
and Australia and New Zealand, with a view towards the development of a single regional
market. It also provides for assistance to FICs including Fiji, to enable them to implement
PICTA and address customs matters, standards and conformance and quarantine issues.
The involvement of Fiji in these arrangements shows that the government is fully committed
to trade liberalization. This will help enhance the volume of Fiji’s trade with its regional trading
partners as well as the rest of the world.
Bi-Lateral trade agreement: - trade agreements between two countries. E.g. trade agreement
between Fiji and Australia.
1. European Union (EU):

This is a bilateral trade agreement. It involves setting of what is called a customer union in
which members remove all barriers to trade amongst themselves and adapt a common
sense of external barriers therefore eliminating the need for customer and internal borders. Its
ultimate aim has been some form of political interrogation. The EEC dates from the treaty of
Rome in 1957 where its original 6 members have gone to 12 at present.
In addition customs union, the EEC now EU is trying to become a common market in which
member countries allow full freedom of factor flow amongst themselves. In addition to this,
EU is trying to achieve full Economic Union, in which member countries unite all their member
policies including Monetary Fiscal Policy as well as policy towards Trade and Factor Migration.
International Monetary Fund (IMF):
The IMF rules are:

• Provide international fund to maintain exchange.
• Assist member countries by lending to them in the times of deficit from its holdings of goods
and services and currencies.
• Loans are given to help with the short term deficit financing. These loans are not freely given
out but with certain conditions:
• When country devalues the currency
• Raises tax (introduction of VAT in Fiji)
• Cut government spending
• Interest of IMF loans is paid-in full by borrowers.
• Developing countries are charged a lower interest rate.
• IMF has an important role as a coordinator. It provides a framework on international
discussion and keeps member countries in line with the policies.
The World Bank (IBRD) (International Bank for Recons and Development)
Its fund are meant to promote development of other economies, especially that of developing
countries. Projects like construction of dams, roads etc. have been undertaken by these
organization. It gives advice on economic and development policies and their funds are
borrowed for commercial purposes.
ACTIVITY 4.2.1
1. The International Monetary Fund (IMF) is the
A. organization that maintains stability in the international financial system.

B. main body that regulates world trade and other related aspects.
C. general agreement of trade and transport for trading nations.
D. banker to the United Nations and the Asian economies.
2. International Trade allocates existing goods more efficiently as well as enabling
A. zero opportunity costs.

B. increased production.
C. monopoly profits.
D. less competition.
Essay writing
Trade comes in different forms: domestic trade, international trade, free trade, bilateral trade
and multilateral trade.

• The definition of domestic trade ,international trade and free trade (3marks)
• Three advantages of free international trade (3marks)
• Differentiate between regional bilateral and multilateral trade agreements (3marks)
ACTIVITY 4.2.2
1. The International Monetary Fund (IMF) is the
A. organization that maintains stability in the international financial system.

B. main body that regulates world trade and other related aspects.
C. general agreement of trade and transport for trading nations.
D. banker to the United Nations and the Asian economies.

2. International Trade allocates existing goods more efficiently as well as enabling
A. zero opportunity costs.

B. increased production.
C. monopoly profits.
D. less competition.
Essay writing
Trade comes in different forms: domestic trade, international trade, free trade, bilateral
trade and multilateral trade.

• The definition of domestic trade ,international trade and free trade (3marks)
• Three advantages of free international trade (3marks)
• Differentiate between regional bilateral and multilateral trade agreements (3marks)
ACTIVITY 4.2.3
A. Read the article below and answer the questions that follow
The World Trade Organization (WTO) was established on 1st January 1995,
and is a successor of the General Agreement on Tariffs and Trade (GATT)
which was formed in 1948. As of July 2007, WTO has 151 members. All WTO
members are expected to grant all other members market access on as
favorable terms as that which they grant any other country.
Source: Economic Concepts and Applications 2008
i. State the main function of the World Trade Organization. (1 mark)

ii. State the importance of all WTO members granting all other members market access
(1 mark)
iii. What does the abbreviation IMF stand for? (1 mark)
iv. State the main role of the IMF. (1 mark)

LESSON 4.3 IMPORTANCE OF FOREIGN INVESTMENTS IN FIJI
Foreign investment takes place when foreign individuals and companies establish new firms
and industries in domestic country. Foreign investment also means setting up and expansion of
subsidiaries by multinationals. Multinational corporations are firms which operate in more than
one country. Multinationals like Coca Cola, Shell, and IBM.
Advantages of MNCs
• Private foreign investments by MNCs helps domestic achieve desirable rates of capital
accumulation.
• Inflow of foreign exchange rate associated with foreign investment helps to ease BOP
problems.
• Increase in domestic incomes generated by activities of multinationals lead to increase in
revenue and profits thus increases government tax revenue.
• Foreign investments by MNCs facilitate the transfer of modern technology and skills form
advanced nations to domestic nations.
Disadvantages of MNCs
• While MNCs provide foreign capital they effectively lower domestic savings by encouraging
conspicuous consumption (rich minorities) and lowers the level of investment by local firms.
• MNCs are able to gain through transfer pricing i.e. by raising the value of imports and lowing
the value of exports. Transfer pricing effectively reduces the volume of foreign exchange
earning by domestic nations
• Increasing the level of private investments by MNCs means increasing foreign ownership and
control over the resources of the nation.
ACTIVITY 4.3.1
Multinational corporations (MNCs) are also known as transnational corporations (TNCs) and
they play a vital role in the development of less developed nations (LDCs).
Discuss the above statement with reference to:
• Foreign investment and its two importance. (3marks)

• Any three advantages of investment by MNCs (3marks)
• Any three disadvantages of investment by MNCs (3marks)

STRAND 5 DEVELOPMENT ECONOMICS
Strand Outcome
Investigate economic development in the Fiji Context and the application of cultural
economics as an integral part of raising our standard of living.
Achievement indicator
• Define the term Economic Development and Sustainable Development

• Identify the indicators of Economic Development
• Identify the measures of Economic Development
• Discuss the costs and benefits of Economic Development
• Explore the government policies or strategies used to enhance Economic Development in Fiji
LESSON 5.1 ECONOMIC DEVELOpMENT
Economic development occurs when sustained increases in real GDP per capita are
accompanied by changes in economic and social structures of nation as are required to
reduce the incidence of poverty among people
Sustainable development is development which meets the needs of the present without
limiting the needs of the future generations. It is development which is economically, socially
and environmentally viable overtime.
Indicators of Economic Development
There are two broad indicators of economic development :
1. Monetary indicator - is the prime indicator of economic development is real GDP per capita.
‘The higher the nations real GDP per capita the higher the economic development of a
nation’ .The real GDP per capita is the monetary indicator that is used to show the enomorous
gap between living standards of LDCs and advanced nation
2. Non Monetary Indicators or social indicators
Real GDP per capita figures do not provide a clear picture of differences in material welfare
among the world’s people.

To overcome this deficiency and make international comparisons of living standards more
meaningful, non-monetary or social indicators are used.

Some key social indicators are
• Life expectancy at birth measures the average number of years a new born infant can
expect to live.
• The infant mortality rate refers to the percentage of babies who die before reaching their first
birthday.
• Daily calories supply per capita measures the food supply available to each person.
• The adult literacy rate measures the percentage of the population aged fifteen years and
over who can read and write.
Measures of Economic Development
Human Development Index (HDI) is a composite index which measures development in terms of
nation’s ability to meet the basic needs of its population. (Focus on human face development)
HDI measures development in terms of socio economic progress. It combines per capita income
with three social indicators into a single index.
Costs and Benefits of Economic Growth
Benefits of Economic Development
Economic development is accompanied by changes in social structures and institutions which

will lead to:
• Higher standard of living for people in the economy –improved quality of goods and services
such as provision of Better standard of education, housing and health facilities to people
• Improved social welfare of people. Economic development reduces the level of poverty
among people. Higher growth and development means more income for government to
alleviate poverty and improve welfare of people
• Increased employment opportunities. Development of various sectors and industries will
create more job opportunities thus reduce the level of unemployment in the economy.
• Better infrastructures- will increases efficiency in transportation and communication in the
economy
• Improved participation international trade Increase in export base and will lead to healthier
BOP
Costs of Economic Development
Some of the costs associated with Economic Development are:
• Rapid Economic Development may mean destruction to customs, beliefs and values which
have been a vital part of any given society
• Structural unemployment may result in due to structural changes in the economy.
• High level of externality or industrial pollution due to economic development.
• Depletion of natural resources due to growth and development
• There may be Inflationary pressure on the economy
Government Policies or Strategies for Economic Development
Recently the government has funded to various sectors of the economic for growth and
development
Some of the ways to encourage growth and development is by
• Reforms e.g. reforms in education sector to improve efficiency and reduce school dropouts
• Free Education Policy and Transport Assistance to poor and needy students to improve the
literacy rate in the country.
• Introducing Micro Finance Policies to encourage people to start up small agro -business.
• Funded for Improvement in the Infrastructure in the economy e.g. setting up Telecenters in
rural areas and upgrading roads and high ways.
• Encourage Import Substitution and Export Promotion Polices to improve international trade.
• Increase Civil Servants Salaries to encourage growth and productivity.
• Involve in Recent Trade Agreements to enhance better trading and international relationships
in the global market.
ACTIVITY 5.1.1
1. The type of development that meets the needs of the present without limiting the needs of
future generations is called
A. Environmental development.
B. Sustainable development.
C. Modern development.
D. Future development.
2. Which ONE of the following indicators is not a non–monetary indicator of development?
A. Life expectancy at birth.

B. Infant mortality rate.
C. Real GDP per capita.
D. .Adult literacy rate.
3. Capital accumulation is defined as
A. Increased production of investment goods, which adds to society’s stocks.

B. Foregoing current consumption in order to increase production of consumer durables.
C. Finance that has accumulated over the years in a country’s Central Bank vault.
D. Increased production of consumer goods, which adds to the stock–pile.

4. Governments of Least Developed Countries (LDC’s) play a major role in the early stages of
economic development in those countries.
Which of the following is NOT a reason why the governments play these major roles?
A. Only government can provide a large amount of the needed basic social capital.
B. The absence of private entrepreneurs to accumulate capital and take risks.
C. The slowness and uncertainty of the price system in fostering development.
D. The necessity of creating new money to finance capital accumulation.
Study this cartoon given below and answer the question that follows.
5. The message of the cartoon is that
A. the economic gap between LDC’s and developed nations is widening.

B. flies and spiders are found in both LDC’s and developed nations.
C. LDC’s are more concerned with flies than spiders.
D. advanced nations are big bullies.
6. The standard notation HDI stands for
A. Holistic Development Index.

B. Human Development Index.
C. Hazard Development Index.
D. Hyper Development Index.

A. Holistic Development Index.
B. Human Development Index.
C. Hazard Development Index.
D. Hyper Development Index.
ACTIVITY 5.1.2
Activity 5.2
A. Use the Case Study to answer the questions that follow:
A. Use the Case Study to answer the questions that follow:
Case study
Case study
In many developing countries, traditional social, cultural and religious beliefs and values are
simply not compatible with attitudes and values required of people living in a modern
economy. An advanced economy must be future oriented, out looking and conducive to
changes. By contrast the traditional values held by people in Less Developed Countries
(LDCs) are usually inward looking and tend to maintain the status quo. In fact often
constitute positive barriers to economic development.
For example, government policies aimed at controlling population growth are likely to meet
with limited success in a society which clings to the belief that large family sizes bring
prestige to the heads of the household. Cultures which assign a low status for women and
social conventions which keep women at home effectively restrict the potential resources’
available for development.
Clearly development involves more than changes in economic relationships. In many cases,
long held ideas and beliefs about rights, duties, responsibilities and obligations will be turned
upside down. As people are forced to make choices, some cultures and customs are lost
altogether.
(Source: Introducing Economics by Barry collier)
i.
i. Define Define theEconomic
the term term Economic Development.
Development.
ii. Identify one factor that hinders development in many LDCs.
ii. Identify one factor that hinders development in many LDCs.
iii. Identify one cost and benefit of Economic Development.
iii. Identify one cost and benefit of Economic Development.
ACTIVITY 5.1.3
1. Differentiate between: 125

• Economic Growth and Economic Development (1 mark)
• Monetary indicators and social indicator (1 mark)
2. State monetary indicator of Economic development. (2 marks)
3. State two non -monetary indicator of Economic development (2marks)
4. State two benefits and two cost of Economic development (2 marks)
5. a. Calculate Real GDP per capita for a country with total Real GDP of $600 000 and
population 10 000. (1 mark)
b. Calculate the percentage change in Real GDP per capita if population falls to 6 000.
(1 mark)
ACTIVITY 5.1.4
The age structure of the population of a Less Developed Country includes

birth rate, death rate, life expectancy and migration.
i. Define the following:

• Birth rate
• Life expectancy (2 mark)
ii. One of the tests of a country’s rate of economic development is the ratio of man-made
resources to the labor force.
Explain the significance of this statement. (1mark)
LESSON 5.2 THE CULTURAL INDUSTRIES IN FIJI
Culture as an industry (where cultural products were produced and traded) was an important
aspect of early Pacific societies and in Fiji, it meant the production of salt by women of Malomalo
in Nadroga and bartered with clay pots (kurotuli) made by the women of Nakabuta also of
Nadroga or masi (tapa) created by the women of Vatulele Island. These exchanges which were
associated with elaborate rituals and ceremonies were an intricate part of i-Taukei lifestyle (and
culture) and are still being practiced to some extent in parts of Fiji.
© FIJI ARTS COUNCIL

Clay pots on sale at a national exhibition of
crafts held in Suva.

A renowned masi-maker and designer
prepares a piece for sale at the local market.
Nevertheless, in contemporary Fijian society, globalization has paved the way for the production
of new cultural products and allow for these products to be exported to international markets in
Australia, New Zealand, North America, Europe and in Asian countries as well.

Fiji Fashion Week is a renowned annual event in Fiji where local fashion designers showcase their
talent and skills. The above showcases a contemporary creation whereby local masi is used to
create fashionable clothes line and a headwear (hat). These are new cultural products designed to
meet local and international markets.
ACTIVITY 5.2.1
(a) Short Answer
Identify and develop a non-exhaustive list of cultural goods and services in Fiji and provide
local examples to support this.
(b) Essay
Choose one specific cultural product or service of interest and elaborate on the following:
• Name of cultural product/service and location

• Raw materials needed to create the product sourced locally or imported?
• Who is/are key players involved in the production?
• Sale and distribution of product – is it mass produced or not? Who are the target audience?
How and who determines the pricing of the good or service? Is the product produced for
local markets or international or both?
• Estimated revenue generated from the sale of the product.
• What are some of the challenges faced and measures put in place to minimize problems
encountered?

LESSON 5.2.1 CULTURAL ECONOMICS/ INDUSTRIES VALUE CHAIN
Cultural products are developed through creativity, the use of our intellect or knowledge systems
and the available resources within our surroundings. In Fiji, cultural goods and services created
have social and cultural meaning attached. It is best understood and analyzed through the
value chain model below.
The main components of a value chain are outlined below:
LESSON 5.2.2 KEY CULTURAL INDUSTRY PLAYERS - UNDERSTANDING FIJI’S

CULTURE SECTOR
For any industry, the stakeholders play an important part in the development and maintaining of
the key activities involved in a particular sector. In Fiji, the cultural industry is seen as an alternative
form of livelihood or source of income generation for individuals and communities who do not
have access to white and blue collar employment. Some of the key cultural industry organizations
in Fiji include:
Reggae is the most successful music genre to originate from the Caribbean especially Jamaica. In
the late 1990s, reggae had world sales of US$1.2 billion with US$300 going directly to Jamaican
producers, musicians and song writers. In Jamaica live performances were estimated to be US$50
million in 2006 alone. Jamaican success is testimony to potential that the cultural industry
possesses.
SOURCE: SPC, 2012.

ACTIVITY 5.2.2
Short Answer
Using the stakeholders identified above, complete the table below by linking their role in terms of
the development and promotion of the cultural industries. An example is given below:
ORGANISATION ROLE IN RELATION TO CULTURAL INDUSTRIES

e.g. Department of Established in 2000, the Department is responsible for creating policy and
Heritage & Arts regulations relevant to the protection of the cultural industry sector in Fiji.
LESSON 5.2.3 CURRENT STATE OF THE CULTURAL INDUSTRIES IN FIJI
The Cultural Industry is progressing slowly and its potential has yet to be fully recognized by
government. There is little investment and support for the development of the industry.
(i) Cultural Goods - Supply and Demand

Most producers of cultural products in Fiji make a living out of their works and production
especially the music industry (e.g. LaisaVulakoro and SeruSerevi), dance or performing arts like
the Vou Dance Group and the Rako Dance Group, visual art (painting/drawing) and other forms
of activities. Most of these producers (artists) rely heavily on local markets, events and community
activities for sales.

Although there are numerous outlets to promote and sell their products (e.g. Jacks Handicraft,
Tappoos, Proceera Music) the biggest challenges faced by artists are piracy andcompetition
with imported (sometimes fake) cultural products which limits the ability of the local producer to
supply the local market.
(ii) International Trade on Cultural Goods and Services
Unlike Jamaica, Fiji has yet to fully utilize the opportunities access international markets to promote
the export of its cultural goods and services. However, government through partnerships with other
countries, international organizations, and through the Fiji Trade Missions around the world, tries
to promote the exhibition, and the sale of Fijian cultural products overseas. Some international
activities include the:
• Participation of artists in international cultural exchange and training;

• Participation of artists at International and Regional Festivals, Exhibitions, Shows e.g. the Pacific
Festival of Arts held every four years;
• Participation of cultural product producers at World Expos around the world;
• The display and sales of cultural products at Fiji Embassies around the world;
• Marketing and promotions done by Tourism Fiji to attract tourists into Fiji.

LESSON 5.2.4 INTERNATIONAL AND NATIONAL MEASURES TO PROTECT AND
PROMOTE THE CULTURAL INDUSTRIES
There are a number of international and regional agreements which Fiji has signed and some
which Fiji has yet to sign that assists in the production, promotion, distribution, participation and
consumption (refer to the Value Chain model) of cultural products.
• Economic Partnership Agreement between African Caribbean Pacific (ACP) Countries and
European Union (EU).
• Pacific Agreement on Closer Economic Relations (PACER).
• Pacific Island Countries Trade Agreement (PICTA).
• Melanesian Spearhead Group (MSG) Trade Agreement.
• MSG Framework Treaty on Traditional Knowledge and Expressions of Culture.
• Fiji-China Bilateral Cultural Cooperation/Agreement.
• Secretariat of the Pacific Community (SPC) Regional Culture Strategy
• 1970 Convention on the Prohibiting and Preventing the Illicit Import, Export and Transfer of
Ownership of Cultural Property.
• 1972 Convention Concerning Protection of World Cultural and Natural Heritage.
• 1979 amended Berne Convention for the Protection of Literary and Artistic Works.
• 1996 and 2002 World Intellectual Property Organization Copyright Treaty.
• 2003 Convention for the Safeguarding of the Intangible Cultural Heritage.
• 2005 Convention for the Protection and Promotion for Diversity of Cultural Expressions.
• 2007 Declaration of Rights of Indigenous Peoples.
ACTIVITY 5.2.3
ACTIVITY: Research all the agreements and conventions listed above, analyze and
prepare a summary for each by the answering the following questions:
(a) Has Fiji signed the agreement/treaty/convention or not?

(b) Who are its key partners (if Fiji has signed or proposes to sign) in the agreement/treaty/
Convention?
There are also national measures put in place by government to facilitate the development and
promotion of the cultural industries in Fiji:
• Fiji Roadmap for Democracy and Sustainable Socio-Economic Development -2009-2014

(RDSSED).
• Fiji Green Growth Development Framework 2014.
• Fijian Made Label.

• Intellectual Property Rights (IPR) in Fiji.
Some national events to
promote copyright in Fiji
Intellectual Property Rights refers to legal rights of a person to
include:
any creation or idea that results in the production of a good
or service. There are different forms of IPR and one of which is (a) Young Musso’s
Copyright. The Fiji Copyright Act (2009) was passed to protect the Acclaim organized
rights to original work of a creator of a product. This legislation is by the Fiji Performing
relevant to the protection of cultural products from exploitation. Rights Association to
A Copyright Amendment Decree was promulgated in 2009 to promote original music
change a few aspects of the Fiji Copyright Act of 1999. composition.
(b) Kula Film Festival
However, copyright in Fiji is challenged with the increasing piracy organized by Film Fiji to
(the illegal or unauthorized reproduction, copying, stealing or empower young people
theft of original works of a creator of an idea. In Fiji, local and create original films
international music and video piracy is increasing and a few and documentaries on
perpetrators have been successfully prosecuted by law. Those specific issues.
who illegally download or purchase pirated copies of musical (c) Fijian crafted promotes
CDs or video DVDs do not realize that many original creators authentic production of
use the cultural product created as their main source of living local crafts branded and
to feed their families and help improve living standards of their sold.
communities.
LESSON 5.2.5 CULTURAL INDUSTRIES OPPORTUNITIES
The Jamaican Reggae Music story provides a good understanding of how the cultural industries
can contribute effectively to economic development of a country and also improvement of
living standards and livelihoods of individuals, families, communities and society.
In terms of economic development, the cultural industry facilitates the following:
(a) Provide employment opportunities.

(b) Improve the standard of living.
(c) Contribute to Gross Domestic Product through exports of products.
(d) Provides a stable income for many people.
(e) Contribute to the revitalization of traditional knowledge and skills and cultural practices are
retained.
Building of new infrastructure to accommodate performances and exhibitions

REFERENCES
1. NCEA Economics year 11,12 and 13study guide.
2. Senior Economics workbook.
3. Senior Economics.
4. Introducing Economics book 1 and 2 by Barry Collier
5. Microeconomics by Bronfenberenner.Sichel. Garnder
6. Economics by Jacksons MC iver and Mc connell Brue
7. Economics by Hyman

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ECONOMICS

CURRICULUM DEVELOPMENT UNIT

Mrs. Urmila Devi Singh HOD- Suva Sangam High School.

Mrs. Apolonia Mere K. Cakaunivalu Vice Principal- Vashist Muni College.

Mr. Maciusela Betei Senior Cultural Enterprise Officer –

Mr. Sipiriano Nemani Principal Policy & Convention Officer –

Mrs. Lusiana Fotofili Director - Department of Heritage & Arts

Mrs. Sikiti Sukanavere Saukuru SEO Economics (CDU)

STRAND 1 : INTRODUCTION TO ECONOMICS 5

STRAND 4 : INTERNATIONAL ECONOMICS 111

STRAND 5 : DEVELOPMENT ECONOMICS 120

tify and explain five assumptions of PPC.

culate opportunity cost and marginal rate of transformation (MRT)

Explore the relationship between scarcity, choice and opportunity cost.

• Define and draw production possibility curve.

LESSON 1.1 THE THEORY OF PRODUCTION POSSIBILITY CURVE

PPC is based on five assumptions:

1. All resources are fully employed.

Marginal rate of transformation (MRT) measures the

0 200 900 Consumer goods

0 200 900 Consumer goods

1. Points A, B,1.C, D and

2. Point X-Points inside

3. Point Y-Points outside

0 0 Apples Apples 0 0 ApplesApples 0 0 Apples

Effect of Economic Growth

QuestionMultiple Choice the

Good x by PPC is violated in the above economy?

A. constant cost B. increasing costs

9. The term the best describes the production possibility frontier is

i. Calculate MRT if the economy moves form point A to point B

i. Identify the economic concept illustrated by the PPC above

Use the Possibility given below

Use the figure above to answer the following questions

iii. Theiii. Thethe

v. What is law of increasing cost?

Use the diagramUse the diagram

i. Explain the shifti. inExplain

iii. Differentiate between opportunity

i. What is the i.opportunity

iv. Calculate theiii.opportunity

Situation Letter or graph number

Explain what each of the four production possibilities curves show

LESSON 2. 1. COSTS OF PRODUCTION

Label the Curves given below

Label the Curves given below.

Label the Curves given below.

Productivity is expressed or measured as a mathematical division of the

The term productivityThe term product

Productvity = total output =

Productivity will increase if the output

There are a number of ways a firm can employ to improve productivity.

al Product and Marginal Product 1 1 2 2 3 3 4 4 5 5 6 6

0 Units of variable factor

Graph Showing Relationship between Total Product and Marginal Product

Land Labour Total

2. The law of diminishing returns begins to operate with the employment of

i. Label increasing ,decreasing and constant returns on the graph (3marks)