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MEN Assignment 2010
MEN Assignment 2010
MEN Assignment 2010
March
2010
08
Author:
Nkululeko Conny Setjeo
Summary:
This document contains four sections, which are answers to the four
questions given as an assignment for the class work covered in the
2nd semester of the 1st year of my MBA in the above-mentioned
subject.
Author: NNC SETJEO for Milpark Business School 2010 MBA - MEN Page 1 of 22
INDEX
Question 1. 3
Introduction 3
1.1 South African Recession 3
1.2 Demand and Supply 4
1.3 Riding the recession wave 5
Labour 5
Technology 5
Infrastructure 5
Question 2. 7
Introduction 7
Market structures 7
2.1 Pure or perfect competition 7
2.2 Pure monopoly 9
2.3 Monopolistic competition 10
2.4 Oligopoly 11
Question 3. 13
Introduction 13
3.1 What it FDI 14
3.2 Benefits of FDI into a country 14
3.3 South Africa’s attempts to attract FDI 14
3.4 R: $ Exchange volatility and its impact on FDI 16
Question 4. 18
Introduction 18
4.1 Fiscal Policy 19
4.2 Revenue Budget 21
Referencing 22
QUESTION 1
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Introduction
The question states that South Africa was in recession 2008/09 and as a result of
that, Company XYZ, an automotive component, its turnover has dropped by 40%
and its profits by 50%. The assumption is that had it not been for the recession
the company’s turnover and profits might have stayed the same or perhaps
improved. Mine is not to prove whether the assumption is true or not but it is
however to provide a hypothetical advice to the management of Company XYZ
on how to apply microeconomics is order for the company to compile appropriate
operational and pricing policies in terms of demand and supply and discuss the
methodology that the company’s management need to apply.
The recession means that there will be retrenchments and interests rates
would be higher. For the automotive industry this simply means that the
financing of a car would be more expensive and the opportunity cost of
capital is higher which will slow down the purchase of a new car.
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mean that the price would go up and quantity supplied would be reduced.
As shown in Figure 1.2.1 below, the recession would cause a negative
shift in demand from D to D1 and the same would be applicable to supply
shifting from S to S1. The price would rise up from P to P1 and the
quantity would reduce from Q to Q1. Though profits are not shown in the
figure below, they would however be reduced.
Figure 1.2.1
S1
P1 E1
P E
D1 D
Table 1.2.2
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Company Demand Supply Equilibrium Equilibrium Marginal Marginal Profits
XYZ State Shift Shift Price Quantity Cost Revenue
Past + + + + +
Present - - + - + - -
Future + + + + + + +
The table above indicates that Company XYZ was making a profit in the
past, before the recession and everything within the operations of that
company was balanced. However with the recession facing the company,
the demand curve has shifted to the left as well as the supply curve. Due
to input prices having gone up, as result of recession, the company’s
prices have also gone up. With less disposable income and less
employment the likelihood of the company producing more goods to meet
the demand is very slim. Therefore their quantity has also decreased.
With marginal costs having increased since it has become more
expensive to produce their products. In addition, the company’s marginal
revenue has decreased resulting in decreased profits by 50%.
Labor
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Cash flow is difficult to manage and therefore labour costs would be one
cost that the company needs to cut down on. The renewal of contracts for
consultants at this stage should not be renewed. Job rotations and work
restructuring should be revisited to allow for workers to work less hours
without interfering with the quality of work. Where work was formerly done
by employees, outsourcing to vendors that are willing to adjust their costs
based on the changing workload is also another option in order to reduce
labor cost.
Technology
With profits having declined by 50% it would not be a wise move for the
company to invest in any new technology, though new technology could
save transformation cost. With that said, should any of their machinery
break presently, that would halt the production and therefore result in
further reduced profits. It would therefore be wise for the Company XYZ to
plan ahead for any possibility of machine shutdown. The surplus supply of
products that the company needs to shed may act as a buffer during the
shutdown period.
Infrastructure
It would be advisable for the company to move their production to smaller
premises if where they are currently they are on lease. This would reduce
rental and maintenance costs.
QUESTION 2
Introduction
To fully understand what Market Structures are, one needs to be clear on the
understanding of a Market to start with. According to Armstrong & Kotler (2009),
“A market is the set of actual and potential buyers of a product. These buyers
share a particular need or want that can be satisfied through exchange
relationships.” These relationships between the actual and potential buyers
would be formed with the actual sellers of the sought product, the company. The
firm usually and most often operates in an environment where there are other
firms who offer the same product to the same market. Meaning the firm has
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competition within the market in which it operates in to sell its products. The
manner or the behavior in which the firm operates is influenced by its own market
and its cost of production. However, the market is not only limited to the actual
and potential buyers, the number of competitors and the cost of production of the
firm. The market would also include size of the actual and potential buyers, the
size of the competition, nature of the product, the availability of information and
the barriers of entry and exit of the market as a whole. These inclusions are
what make a market structure. They are simply the features that influence and
determine the behavior of company as it operates its business.
Market Structures
Market structures are divided into four categories, namely:
2.1 Pure or perfect competition
2.2 Pure monopoly
2.3 Monopolistic competition
2.4 Oligopoly
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• Producers produce a standardized or homogeneous product,
meaning the characteristics of the product are the same.
• No barriers to entry or exit of the market.
• Both buyers and suppliers have perfect knowledge of the market. If
one company raises its price then the buyers would know that other
companies are charging a lower price and they would therefore not
buy from the supplier with a higher price.
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created in the consumer, this will results in more demand, which in turn
the company will return to normal production and pricing.
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consumers. Another example is supermarket industry. There are the usual
know big supermarkets such as Pick n’ Pay, Checkers and Spar. Then
there are other smaller supermarkets. Each would have a no-name brand
that would be a product of the supermarket itself. However you may find
that the content of the product is not differentiated at all, though the
consumers would be the once to state the difference in their own
interpretation. That interpretation could be price or familiarity with the no-
name brand product of one supermarket over the other.
2.1 Oligopoly
Oligopoly is when a few firms dominate the market.
Characteristics of oligopoly
• Barriers to entry differ from industry to industry, however they are
almost no barriers to entry.
• The product may be homogeneous or differentiated.
• Companies in an oligopoly structure are interdependent. Meaning if
one company increases price then the rest of the other companies
will have to follow suit.
• Uncertainty is high. Since a company cannot know the policies and
strategies of its competitors, it operates in a state of uncertainty
because it is
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Author: NNC SETJEO for Milpark Business School 2010 MBA - MEN Page 11 of 22
The differences between the four above discussed market structures is
mostly visible in the Profit making, which is illustrated below in figure 1.1
Figure 1.1
Profit Pure Pure monopoly Monopolistic Oligopoly
maximization competition competition
Author: NNC SETJEO for Milpark Business School 2010 MBA - MEN Page 12 of 22
on in the • Profit
long run is maximizati
very low. on in the
long run is
feasible
QUESTION 3
Introduction
South Africa is a country that is very rich in mineral resources. It is the world’s
largest producer and exporter of gold, platinum and chromium, (EverBank 2010).
Though the country is by far the most developed economy on the African
continent, it is also dealing with significant challenges such as outdated
infrastructure and poverty issues. Key issues that might have has an impact in
rendering the Rand to be volatile against the American Dollar in the year 2009
such as inflation, political issues and commodity prices. The focus of this
question is to analyze this volatility and discuss its impact on FDI.
3.1 What is FDI and what does it mean for South Africa?
Foreign Direct Investment is a major stimulus to the economy of a
developing country with key focus on dealing with the challenge of scarcity
of capital, technology, skills and entrepreneurship. According to Mwilima
(2003), FDI is an investment made to acquire a lasting management
interest (usually at least 10% of the voting stock) and acquiring at least
10% equity share in an enterprise operating in a country other than the
home country of the investor. An investor would most probably invest
because of one of the following reasons, seeking cheap labor, seeking
efficiency or seeking a market. The key industries that investors are
most likely to invest in are, Mining, Metalworking, Automobile assembly,
Textiles, Steel, Foodstuffs, Chemicals, and Commercial ship repair.
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Greenfields
Investing in new assets and starting the business from scratch.
Brownfields
Buying into the shareholding of an existing company and building up.
•Transfer of technology
•Transfer of management skills
•Access to new markets
•Stimulation of market forces
•Integrating economies
•Job creation
•Improvement of human capital through skills transfer
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5year plan aimed at strengthening economic development, broadening of
employment and the redistribution of income and socioeconomic
opportunities in favor of the poor. According to the Department of
Finance the key goals of the policy as originally outlined were economic
growth of 6% in the year 2000, inflation less than 10%, employment
growth above the increase in economically active population, deficit on the
current account and the balance of payments between 2 and 3 percent, a
ratio of gross domestic savings to GDP of 21.5 percent in the year 2000,
improvement in income distribution, relaxation of exchange controls and
reduction of the budget deficit to below 4 percent of GDP.
ASGISA
Another attempt to liberate the South African economy was through a
national initiative AsgiSA – Accelerated and Shared Growth Initiative for
South Africa, which was launched in 2006 by the former Deputy President,
Ms Phumzile Mlambo Ngcuka. Its aim is to halve unemployment and
poverty by 2014. AsgiSA identified the following as constraints that
prevent the country form achieving the desired growth rate:
• Relative volatility of the currency
• Labor market skills
• National logistics systems
• Barriers to entry, limits to competition and limited new investment
opportunities
• Regulatory burdens on SME’s
• Deficiencies in state organization, capacity and leadership
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This is precisely where one might notice the impact that the Rand/Dollar
exchange volatility had on FDI because it is through FDI especially, that
the above-mentioned constraints can be met head on.
3.4 R: $ Exchange volatility and its impact on FDI
Having established the importance of FDI into South Africa and how it
would assist in strengthening the economic growth, one needs to take into
congnisence the fact that the R:$ exchange gives investors a message as
to how our economy is perceived. The key elements that in my opinion
are attributable to the volatility of the Rand against the American Dollar
are but not exclusive to:
However in the later half of 2009 we saw the Rand slightly improving
with the price of petrol going down and commodities also gained their
momentum. A sign that the South African economy was viewed once
again as stable and investors could then invest into the country.
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Reserve Bank Governor coming into office with a background of having
Chaired Absa Bank that was somewhat troubled at the time, there
wasn’t enough confidence in the new Governor. That resulted in the
Rand declining in value and making it very expensive for our imports.
%
In addition, the GDP fell by 6.4% in the 1st Quarter of 2009. This decline
was caused by the global recession and it cut manufacturing and
mining exports. The prime rate remained at a high of 7.5%
From FDI perspective, when the Rand appreciates then the money that the
foreign investor had invested depreciates, which is good for the county. While
from the countries perspective the exporting companies will not be able to make
enough profits. In conclusion the volatility of the R:$ exchange in 2009 had
affected FDI. However FDI had declined across the world due to the global
recession, therefore one cannot make an assumption that even if the Rand had
stability, which is unlikely in a global recession, then perhaps FDI wouldn’t have
suffered.
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QUESTION 4
Introduction
2009 was a financially difficult year globally, with most countries having suffered
a recession that saw economies crumbling down under pressure. This is the
background in which the then Finance Minister, Mr. Trevor Manual had set the
2009/10 Budget.
Below is the summary of the 2009/10 Budget that will be a point of discussion for
this question. The point of discussion is the Fiscal Policy relating it to the budget
and to also provide reasons why the National Treasury did not reach its Revenue
budget.
The Minister of Finance, Mr. Trevor Manuel, announced a Budget that provided
tax relief of R13.6 billion in personal income tax relief to individuals but which
provided for an increase in indirect tax collections of R10 billion.
Education R140.4 bn
General public services R51.3 bn
Public order and safety R75.5 bn
Economic affairs R179.6 bn
Recreation and culture R7.7 bn
Social protection R118.1 bn
Housing and community amenities R73.2 bn
Health R86.9 bn
Defence R34.7 bn
Environmental protection R5.6 bn
State debt cost R55.3 bn
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2009/10 fiscal year due to South Africa's first recession since 1994.
Just coming out of recession in the last quarter of 2009 and needing to
stimulate the country’s economy, job creation is the number one priority
in getting the economy moving. With 63% of the working population
earning just below R2000, it is imperative for the government to create
sustainable jobs in order to collect tax that is needed to fund the
government’s spending. The 900 000 job losses in 2008/09 due to the
global recession might have played a huge role in the Treasury not
reaching its Revenue Budget. However the Expanded Public Works
Program is estimated to create 500 000.
The quality of education in the country has been declining over the past
couple of year. This is evident in the low Matric pass rate and the low
number of students qualifying for university entrance. The government
divided the Department of Education into two departments, adding the
Department of Higher Education onto the existing one. Better quality
education would mean better skilled people in the future, resulting in
them taking an active part in the development of the economy of the
country.
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4.1.3 Improving health outcomes
R86.9 million was budgeted for health in the year 2009. In preparation
for the anticipated influx of visitors who will be coming into the country for
the 2010 FIFA World Cup, the state of the country’s health facilities
needed to be improved. Aside from the FWC preparations, the HIV/AIDS
pandemic that has affected 1 in 10 South African’s required for the
government to improve the state of its health department. A certain
portion of that allocated budget would go toward Anti-Retroviral
Treatment which would improve the quality of life of those infected with
the HI-Virus and reduce the mortality rate. A key factor in improving the
economy of the economy of the country – healthy people who are
employable.
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4.1.5 Fighting crime and corruption
Again with the South Africa hosting one of the world’s biggest sporting
events, the FIFA World Cup, fighting crime and corruption is a priority
that cannot be left unattended to. In addition to the FWC, to attract FDI
into the country safety and security of civilians would be important to
those investors wanting to invest in the country in relation to their asset
as well as the skilled labor/personnel that they would be coming with.
Therefore, a lot more money than budget for had gone into this priority.
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REFERENCE:
http://www.everbank.com/002CurrencySouthAfrica.aspx
http://PGordhan/MediumTerm/Budget/Policy/Statement/2009.webarchive
http://upload.wikimedia.org/wikipedia/commons/d/d7/Economics_Perfect_co
mpetition.png
Jackson, J. and McIver, R. (2000), Microeconomics, 6th Edition, McGraw-Hill, Sydney.
McTaggart, D., Findlay, C. and Parkin, M. (2003), Microeconomics, 4th Edition, Addison
Wesley, Melbourne.
Mohr. P., Fourie. L and Associates. (2004), Economics for South African students, 3rd
Edition, Van Shaik Publishers, Pretoria.
Mwilima, N. (2003) Foreign Direct Investment in Africa. Social Observatory Pilot Project,
Final Draft Report – FDI, African Labour Research Network, Labour Resource and
Research Institute
Sloman, J. and Norris, K. (1999), Microeconomics, Addison-Wesley, Sydney.
Stiglitz, L. E. (1993), Principles of Microeconomics, Norton, New York.
Swann, M. and McEachern, W. A. (2003), Microeconomics – A Contemporary
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