Bba2 Eco 2023 PDF

BACHELOR OF
BUSINESS
ADMINISTRATION
Economics II
Contact details:
Regenesys Business School
Tel: +27 (11) 669-5000
Fax: +27 (11) 669-5001
E-mail: info@regenesys.co.za
www.regenesys.co.za
This study guide highlights key focus areas for you as a student. Because the field of study in question is so
vast, it is critical that you consult additional literature.
Copyright © Regenesys, 2023
All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval
system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording or
otherwise) without written permission of the publisher. Any person who does any unauthorised act in relation
to this publication may be liable for criminal prosecution and civil claims for damages.
CONTENTS
1. STUDY MATERIAL ................................................................................................................................. 1
2. PRESCRIBED RESOURCES ................................................................................................................. 1
2.1 BOOKS .............................................................................................................................................. 1
2.2 ARTICLES.......................................................................................................................................... 2
2.3 MULTIMEDIA ..................................................................................................................................... 3
3. INTRODUCTION TO THIS COURSE ..................................................................................................... 5
3.1 LEARNING OUTCOMES ................................................................................................................... 5
3.2 RECAPPING WHAT WE KNOW ....................................................................................................... 6
3.2.1 ECONOMICS – A SOCIAL SCIENCE ..................................................................................... 6
3.2.2 ECONOMIC MODELLING AND THEORIES ........................................................................... 8
3.2.3 WHAT, HOW, AND FOR WHOM?......................................................................................... 12
3.2.4 THE CIRCULAR FLOW MODEL ........................................................................................... 15
3.2.5 ECONOMIC SYSTEMS ......................................................................................................... 18
3.2.6 ECONOMIC THEORIES AND THEORISTS.......................................................................... 20
3.2.7 THE IMPORTANCE OF GRAPHS IN ECONOMICS ............................................................. 23
3.2.8 THE PRODUCTION POSSIBILITIES FRONTIER (PPF) ...................................................... 24
3.2.9 GENERAL TERMS THAT GUIDE ECONOMIC THINKING .................................................. 25
3.2.10 KEY POINTS ......................................................................................................................... 27
3.3 THE MICROECONOMIC ENVIRONMENT...................................................................................... 28
3.3.1 MICROECONOMICS AND CONSUMER BEHAVIOUR ........................................................ 28
3.3.2 INTRODUCTION TO SUPPLY AND DEMAND EQUILIBRIUM............................................. 30
3.3.3 DEMAND ............................................................................................................................... 30
3.3.4 SUPPLY ................................................................................................................................. 34
3.3.5 MARKET EQUILIBRIUM........................................................................................................ 36
3.3.6 CONSUMER SURPLUS AND PRODUCER SURPLUS ........................................................ 37
3.3.7 CHANGE IN DEMAND .......................................................................................................... 39
3.3.8 CHANGE IN SUPPLY ............................................................................................................ 39
3.3.9 SIMULTANEOUS CHANGES IN DEMAND AND SUPPLY ................................................... 39
3.3.10 GOVERNMENT INTERVENTION ......................................................................................... 40
3.3.11 ELASTICITY AND TOTAL INCOME ...................................................................................... 41
3.3.12 MONOPOLY .......................................................................................................................... 45
3.3.13 KEY POINTS ......................................................................................................................... 50
3.4 THE MACROECONOMIC ENVIRONMENT .................................................................................... 51
3.4.1 RE-INTRODUCING MACROECONOMICS ........................................................................... 52
3.4.2 GROSS DOMESTIC PRODUCT ........................................................................................... 52
3.4.3 LABOUR MARKETS .............................................................................................................. 56
3.4.4 LABOUR PRODUCTIVITY .................................................................................................... 57
3.4.5 LABOUR PRODUCTIVITY POLICIES ................................................................................... 58
3.4.6 UNDERSTANDING SPECIALISATION ................................................................................. 58
3.4.7 UNPACKING UNEMPLOYMENT .......................................................................................... 59
3.4.8 DETERMINING THE DEMAND FOR LABOUR..................................................................... 61
3.4.9 DETERMINING THE SUPPLY OF LABOUR......................................................................... 61
3.4.10 DETERMINANTS OF WAGES .............................................................................................. 62
3.4.11 TRADE UNIONS .................................................................................................................... 63
3.4.12 WEALTH COEXISTS WITH EXTREME POVERTY .............................................................. 64
3.4.13 2015 MILLENNIUM DEVELOPMENT GOALS ...................................................................... 67
3.4.14 KEY POINTS ......................................................................................................................... 70
3.5 MACROECONOMIC POLICY, MONETARY SUPPLY, AND THE FOREIGN SECTOR &&& ......... 71
3.5.1 INTRODUCTION ................................................................................................................... 72
3.5.2 FISCAL POLICY .................................................................................................................... 72
3.5.3 MONETARY POLICY ............................................................................................................ 72
3.5.4 MONEY AND INFLATION ..................................................................................................... 74
3.5.5 THE INSTRUMENTS OF MONETARY POLICY ................................................................... 76
3.5.6 INTERPRETING AND PREPARING ECONOMIC FORECASTS.......................................... 77
3.5.7 EARLY WARNING INDICATORS.......................................................................................... 77
3.5.8 BORROWING FROM THE INTERNATIONAL MONETARY FUND ...................................... 79
3.5.9 INTERNATIONAL TRADE AND THE FOREIGN SECTOR ................................................... 80
3.5.10 TRADE POLICY..................................................................................................................... 82
3.5.11 THE BALANCE OF PAYMENTS ........................................................................................... 83
3.5.12 EXCHANGE RATES .............................................................................................................. 83
3.5.13 THE TERMS OF TRADE ....................................................................................................... 84
3.5.14 GLOBAL AND DOMESTIC TRENDS .................................................................................... 84
3.5.15 KEY POINTS ......................................................................................................................... 86
4. REFERENCES ...................................................................................................................................... 87
5. GLOSSARY OF TERMS ....................................................................................................................... 90
6. VERSION CONTROL ........................................................................................................................... 93
List of Tables
TABLE 1: MICROECONOMICS VS MACROECONOMICS ............................................................................. 7
TABLE 2: STEPS TO DEVELOP ECONOMIC THEORY ................................................................................. 9
TABLE 3: FACTORS OF PRODUCTION........................................................................................................ 15
TABLE 4: COMPARING CAPITALISM TO COMMUNISM ............................................................................. 19
TABLE 5: GRAPHS IN ECONOMICS ............................................................................................................. 23
TABLE 6: GENERAL ECONOMIC TERMS .................................................................................................... 25
TABLE 7: REAL-WORLD PRICE ELASTICITIES OF DEMAND .................................................................... 42
TABLE 8: CHARACTERISTICS OF MONOPOLY .......................................................................................... 46
TABLE 9: AN ORGANISATION'S DEMAND FOR LABOUR .......................................................................... 56
TABLE 10: BRICS INCOME INEQUALITY (GINI COEFFIECIENT) ............................................................... 65
List of Figures
FIGURE 1: THE SIMPLE CIRCULAR FLOW.................................................................................................. 16
FIGURE 2: THE FULL CIRCULAR FLOW MODEL ........................................................................................ 17
FIGURE 3: THE PRODUCTION POSSIBILITIES FRONTIER FOR PIZZAS AND COLD DRINKS ............... 24
FIGURE 4: THE LAW OF DEMAND ............................................................................................................... 31
FIGURE 5: MOVEMENTS AND SHIFTS ........................................................................................................ 32
FIGURE 6: SUBSTITUTES ............................................................................................................................. 33
FIGURE 7: COMPLEMENTS .......................................................................................................................... 33
FIGURE 8: THE LAW OF SUPPLY................................................................................................................. 35
FIGURE 9: MOVEMENTS AND SHIFTS ........................................................................................................ 36
FIGURE 10: EQUILIBRIUM ............................................................................................................................ 37
FIGURE 11: CONSUMER AND PRODUCER SURPLUS ............................................................................... 38
FIGURE 12: PRICE ELASTICITY OF DEMAND............................................................................................. 42
FIGURE 13: CROSS ELASTICITY OF DEMAND ........................................................................................... 44
FIGURE 14: ELASTICITY OF SUPPLY .......................................................................................................... 45
FIGURE 15: GROSS DOMESTIC PRODUCT ................................................................................................ 53
FIGURE 16: MILLENNIUM DEVELOPMENT GOALS - 2015 ......................................................................... 67
FIGURE 17: THE MONEY MARKET .............................................................................................................. 74
FIGURE 18: THE RELATIONSHIP BETWEEN MONEY AND INFLATION .................................................... 75
1. STUDY MATERIAL
Your material includes:
• This study guide;

• Prescribed reading and viewing;
• Digital assessments at the end of each section of your course;
• An individual assignment; and
• A group assignment.
These resources provide a starting point for your studies. You are
expected to make good use of your textbooks, the additional
resources provided via online links, and wider reading that you, as a
higher education student, will source yourself.
2. PRESCRIBED RESOURCES
Various resources are prescribed to help you complete this course.
2.1 BOOKS
The following textbook is prescribed and should be used to complete the course.
Mohr, P., & Fourie, L. (2020). Economics for South African students (6th ed). Van Schaik.
Please ensure that you order or download your textbook before you start the course.
© Regenesys Business School 1

2.2 ARTICLES
• Ahlersten, K. (2008). Essentials of microeconomics. https://library.ku.ac.ke/wp-

content/downloads/2011/08/Bookboon/Economics/microeconomics-uk.pdf (accessed 06 March 2023).
• Bean, C. (2016). Measuring the value of free. Project Syndicate. https://www.project-

syndicate.org/commentary/measuring-gdp-in-digital-economy-by-charles-bean-2016-05 (accessed 06 March 2023).
• Chigumira, G. (2014). South Africa mind the gap minimum wage.

https://www.researchgate.net/publication/330145245_South-Africa-Mind-the-Gap_-Minimum-Wage (accessed 06
March 2023).
• Chu, B. (2018). How we can learn from the history of protectionism.

https://www.independent.co.uk/news/long_reads/protectionism-history-how-learn-trump-trade-tariff-law-smoot-
hawley-a8384216.html (accessed 06 March 2023).
• Cohen, S.I. (2017). Islamic economics and modern economies: resetting the research agenda. Journal of Global
Economics.
https://www.researchgate.net/publication/318389967_Islamic_Economics_and_Modern_Economies_Resetting_the_
Research_Agenda (accessed 06 March 2023).
• Coyle, D. (2016). The trouble with GDP and emerging markets. World Economic Forum Agenda.
https://www.weforum.org/agenda/2016/04/the-trouble-with-gdp-and-emerging-markets (accessed 06 March 2023).
• Ellsworth, B. (2018), Venezuela to remove five zeros from ailing currency. https://www.reuters.com/article/us-
venezuela-economy/venezuela-to-remove-five-zeroes-from-ailing-currency-idUSKBN1KF36V (accessed 06 March
2023).
• Furman, J., & Shambaugh, J. (2016). Fiscal policy remains critical for much of the world economy. VoxEU.
http://voxeu.org/article/fiscal-policy-remains-critical-much-world-economy (accessed 06 March 2023).
• Hutt, R. (2016), TIIP: What does it mean for the future of Transatlantic trade? World Economic Forum,
https://www.weforum.org/agenda/2016/04/ttip--transatlantic-trade-obama (accessed 06 March 2023).
• Investopedia. (2020). Law of diminishing marginal returns.

http://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp#axzz25I3EXGvl (accessed 06 March
2023).
• Matthes, J. & Busch, B. (2016). The economic impacts of Brexit: results from a meta-analysis. VoxEU,
http://voxeu.org/article/meta-analysis-economic-impact-brexit (accessed 06 March 2023).
• Myers, J. (2016). The world’s free trade areas, and all you need to know about them. World Economic Forum.
https://www.weforum.org/agenda/2016/05/world-free-trade-areas-everything-you-need-to-know (accessed 06 March
2023).
• Parkin, M. (2016). Economics: Global and Southern African perspectives, (2nd ed). Pearson Education.
• PWC. (2013). Future of government.

http://www.pwc.com/gx/en/psrc/publications/assets/pwc_future_of_government_pdf.pdf (accessed 06 March 2023).

• Roubini, N. (2016). The global growth funk. Project Syndicate. https://www.project-
syndicate.org/commentary/global-growth-slowdown-factors-by-nouriel-roubini-2016-05 (accessed 06 March 2023).
• Schuldt, R., Woodall, D., & Block, W.E. (2012). Drowning the poor in excessive wages: The problems of the
minimum wage law. Humanomics, 28(4), 258-69.
https://www.emerald.com/insight/content/doi/10.1108/08288661211277326/full/html (accessed 06 March 2023).
• Sultan al Essa, T. (2016), Six reasons to invest in Africa, World Economic Forum,
https://www.weforum.org/agenda/2016/05/6-reasons-to-invest-in-africa (accessed 06 March 2023).
• Wallis, S. (2016), Five measure of growth that are better than GDP, World Economic Forum,
https://www.weforum.org/agenda/2016/04/five-measures-of-growth-that-are-better-than-
gdp?utm_content=bufferb0f6a&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer (accessed
06 March 2023).
2.3 MULTIMEDIA
• Cartwright, B. (2015). Determinants of supply [Video]. YouTube. https://www.youtube.com/watch?v=Sp3gJS8NyAc

(accessed 19 October 2022).
• Clifford, J. (2020a). Macro Unit 1 Summary (Updated Version) [Video]. YouTube.

https://www.youtube.com/watch?v=myeLTXMEhC4&list=PLD5BC727C84E254E5 (accessed 06 March 2023).
• Clifford, J. (2020b). Micro Unit 1 Summary (Updated Version) [Video]. YouTube.

https://www.youtube.com/watch?v=WqHikVZ4-D8&t=0s (accessed 06 March 2023).
• EconplusDal. (2017). Production possibility curves – PPC’s/PPF’s [Video]. YouTube.

https://www.youtube.com/watch?v=IzccVWouIxM (accessed 06 March 2023).
• EconPlusDal. (2020). Monopolistic competition [Video]. YouTube. https://www.youtube.com/watch?v=DHgSBazfTEk

(accessed 06 March 2023).
• eNCA. (2018). What role do trade unions play in the 21st century? [Video]. YouTube.
https://www.youtube.com/watch?v=QGpDQtRpwT8 (accessed 06 March 2023).
• One Minute Economics. (2019). Economies of scale in one minute [Video]. YouTube.
https://www.youtube.com/watch?v=rYvzM_tayY4 (accessed 06 March 2023).
• Political Briefs. (2017). A short history of trade unions [Video]. YouTube.

https://www.youtube.com/watch?v=gPPeDO4dMRA (accessed 06 March 2023).
• Regenesys Business School. (2015). An introduction to individual supply [Video]. YouTube.

https://www.youtube.com/watch?v=1YVSLmEIcj0 (accessed 06 March 2023).
• Regenesys Business School. (2015). Price elasticity of supply [Video]. YouTube.

https://www.youtube.com/watch?v=x8wjGBSx53M (accessed 06 March 2023).

• Regenesys Business School. (2016). An introduction to individual demand [Video]. YouTube.
https://www.youtube.com/watch?v=dtTzkadiyzk (accessed 06 March 2023).
• Teach Me Economics with Darren Landinguin. (2019). Fundamental economic concepts [Video]. YouTube.
https://www.youtube.com/watch?v=iA-qnNIGarA (accessed 06 March 2023).
• Welker, J. (2017). The determinants of demand [Video]. YouTube. https://www.youtube.com/watch?v=5Ei5OiIk_X0

• Welker, J. (2017). The utility maximization rule [Video]. YouTube. https://www.youtube.com/watch?v=6yjsiXAtSGE


3. INTRODUCTION TO THIS COURSE
The purpose of this course is to facilitate your understanding of the fundamental principles, concepts,
and processes of economics. This course teaches you about the relationships between the various
parts of the economy and uses economic models to illustrate these relationships.
It covers traditional areas of economics such as macroeconomics, microeconomics, international

trade, and monetary economics, as well as applied areas, such as economic policy analysis and
econometrics. Students are encouraged to use this study guide as a starting point to engage with
the subject matter. It should be read in conjunction with the prescribed texts and other current
reading materials.
3.1 LEARNING OUTCOMES
On completing this course, you should be able to:
• Analyse the dynamics between factors of production;

• Develop insights into applied microeconomics and macroeconomics;
• Analyse the public, monetary and foreign sectors;
• Evaluate international markets, economic policy debates and research;
• Assess the impact of international trade politics, custom unions and other regional economic
communities; and
• Develop an understanding of economic ethics.
The number of notional learning hours set out in the table under each section heading provides
guidance on how long to spend studying each section of this course. Set yourself a schedule to
ensure that you spend a suitable period of time on each section, covering the required sections
relevant to each assignment, and giving yourself enough time to prepare for the examination.

3.2 RECAPPING WHAT WE KNOW
Timeframe Minimum of 20 hours
Learning outcome • Analyse the dynamics between factors of production.
Prescribed book • Mohr, P., & Fourie, L. (2020). Economics for South African students (6th ed). Van Schaik.

https://www.youtube.com/watch?v=myeLTXMEhC4&list=PLD5BC727C84E254E5
Prescribed https://www.youtube.com/watch?v=WqHikVZ4-D8&t=0s (accessed 06 March 2023).
multimedia • EconplusDal. (2017). Production possibility curves – PPC’s/PPF’s [Video]. YouTube.
https://www.youtube.com/watch?v=IzccVWouIxM (accessed 06 March 2023).
• Teach Me Economics with Darren Landinguin. (2019). Fundamental economic concepts
[Video]. YouTube. https://www.youtube.com/watch?v=iA-qnNIGarA (accessed 06 March
2023).
The aim of this section is to provide an overview of economics and related terminology such as
micro- and macroeconomics, inflation, gross domestic product, gross national product, economic
Section overview
growth rate, fiscal and financial policy, exchange rate policy and trade policy. We’ll explain these
concepts with the aid of examples.
3.2.1 Economics – A Social Science
Economics is defined as:
A “social science that studies the choices that individuals, businesses, governments and entire
societies make as they cope with scarcity and the incentives that influence and reconcile those
choices.”
(Parkin, 2016, p.2)
Every day individuals make economic choices. For example, imagine that you have R200 in your
wallet. You could purchase a takeaway meal, a fruit juice, and a movie ticket; you could buy a data
bundle and spend the time completing an assignment; or you could buy flowers for your friend who
is in hospital, if you are especially responsible you could choose to save this money. Your inability
to do all of these things is called scarcity and therefore you make choices based on incentives, ie
you might be hungry, your assignment might be due tomorrow, or showing your partner how much
you care might be what you want most.

• In this example, what you can afford to buy is limited by your income, by the prices of goods
and services, and by time (there are only 24 hours in the day).
• Your inability to get everything you want is called scarcity; because you cannot get everything
you want; you must make choices.
• An incentive is a reward (or threat of penalty) that encourages you to make a choice.
Businesses and governments must also make choices. Businesses are profit seeking, which means
they make choices about which mix of goods and services will maximise their profits. Governments
must choose how to spend taxes (eg more on infrastructure to encourage increased investment,
which will in turn generate increased taxes; or more on education to provide the much needed skilled
labour to make the country’s exports more competitive and ultimately improve the country’s balance
of payments).
In economics we distinguish between:
• Microeconomics (and microeconomists, who study microeconomics); and

• Macroeconomics (and macroeconomists, who study macroeconomics).
For ease of discussion we have summarised some of the differences in Table 1.
TABLE 1: MICROECONOMICS VS MACROECONOMICS
Microeconomics Macroeconomics
Deals with the choices that individuals and businesses The study of the performance of national, regional, and
make, the ways in which these choices interact in global economies and the policy tools used to influence
markets, and the influence of governments on these performance (eg taxation, public expenditure, subsidies,
choices. and interest rate changes).
Focus is on single economic variables such as demand, Focus is on the entire economy and considers aggregate
supply, price, consumer, etc. factors such as aggregate output, the unemployment
rate, aggregate savings, etc.
Includes the flow of factors of production (labour, land, Includes the aggregate flows of income and expenditure
capital, entrepreneurship) from a single owner to a single between different economic sectors.
user of these resources.
Example: a business studying the supply and demand for Example: the effect of changes in the interest rate or
a specific product, production capacity, and the effects of minimum wage levels on the economy.
regulation by government on this product.
(Parkin, 2016, p.2)
A microeconomist will study, for example, the effects of low interest rates on individual borrowers,
whereas a macroeconomist will monitor the effects that low interests rates might have on the housing
market nationally or its effect on the unemployment rate.

While we might distinguish between micro- and macroeconomics, these fields of study are clearly
interconnected (systemic). For example, a change in macroeconomic policy (eg minimum wage
levels) results in changes made by individuals (eg workers may feel more valued and therefore
increase productivity) and businesses (eg companies may retrench employees and mechanise). As
the example demonstrates, the effect of economic changes can be both positive and negative.
Macro- and microeconomics are the two vantage points from which an economy is observed. When
we study microeconomics, it is primarily individual human beings and individual firms that we study.
Microeconomics studies the separate parts of human behaviour and shows us how individuals and
firms respond to changes in price and why they demand what they do at particular price levels.
Macroeconomics, by contrast, studies whole economies and bigger issues such as unemployment
and inflation (Ahlersten, 2008). It looks at the total output of a nation and the way the nation allocates
its limited resources (land, labour and capital) in an attempt to maximise production levels and
promote trade and growth for future generations.
Distinguishing Between Micro- and Macroeconomics
1. In your own words, explain the interaction between micro- and macroeconomics.
2. Assume that a colleague has a limited understanding of economics. Explain to this person how gaining an
understanding of micro- and macroeconomics can benefit him or her and your organisation.
Cement your understanding of the difference between micro- and macroeconomics:

https://www.youtube.com/watch?v=myeLTXMEhC4&list=PLD5BC727C84E254E5
https://www.youtube.com/watch?v=WqHikVZ4-D8&t=0s (accessed 06 March 2023).
3.2.2 Economic Modelling and Theories
The task of economists is to provide specialist advice based on their application of economic theory
and knowledge, and therefore economic modelling is at the centre of economic theory (Evans, 1987).
An economic model “provides a logical, abstract template to help organise the analyst’s thoughts”
about complex human behaviour in a way that “sheds some insight into a particular aspect of that
behaviour”. Graphs, diagrams or words are used to represent the model.
(Evans, 1987)

Ceteris paribus (defined later in this course), observing and measuring economic behaviour relating
to these elements, and by building (or refining) a model, the economist can develop certain theories.
Follow the example given below. The three steps to economic modelling are (Parkin, 2016:8):
1. Discover positive statements that are consistent with what we observe, collect the data, and
measure these observations (a positive statement is about what is; it says what is currently
believed about the way the world operates; it might be right or wrong but we can check it
against the facts);
2. Build models to explain these observations; and
3. Test these models for use and thereby develop theories.
• A normative statement is about what ought to be. It depends on values and cannot be tested.
Policy goals are normative statements.
• Economists need to discover how the world economy works. To understand this, economists
need to differentiate between positive and normative statements.
(Parkin, 2016:9)
TABLE 2: STEPS TO DEVELOP ECONOMIC THEORY
Step 1: All science requires data; therefore the first step is to observe and measure data of all aspects
Observation and of economic behaviour relevant to the observation. In the main, data is quantitative.
measurement
Examples of data include education levels, unemployment percentages, resource availability,
wage rates, working hours, goods and services produced and consumed, price levels, etc.
Step 2: Build an economic model including the features under study (and ignore those that are
Model building irrelevant).
For example, the effects of an increase in the price of cigarettes on developed countries and
developing countries.
Step 3: The model’s predictions might correspond to the facts or be in conflict with them. Through
Test models and comparing the model’s predictions with the facts, economists test their models and refine and
develop theory develop a theory. The economic theory is a generalisation that summarises what we think
about the economic behaviour – it provides a bridge between the model and the reality.
An example of a theory: For a 10% increase in the price of cigarettes, consumption drops by
4% in developed countries and 8% in developing countries.
(Parkin, 2016)
Economic theory is a way of explaining how, for example, goods and services move in a market.

The tasks of economists are vast:
• Devising methods and procedures for obtaining data (eg on interest rates, taxation,
employment levels, energy, health, transport, international development etc);
• Modelling, analysing, understanding, and interpreting data; and
• Advising stakeholders on the suitability of alternative courses of action and the allocation of
scarce resources as well as possibly influencing policy making.
Economic Theory
1. Brainstorm economic theories you have read or heard about in the media.
2. Has your company identified economic theories that provide insights into how its goods and services move in the
market? Identify examples (or possible examples). For example, the effect of a 1% rise in the interest rate on
specific products and services provided by your company.
Challenges to economic models
Economics (observation, model building, and testing and development of theories) is not without its
obstacles. Consider the following (Parkin, 2016):
• Cause and effect and ceteris paribus – Economists use the term ceteris paribus, which is
Latin for “if all other relevant things remain the same” to indicate that all the relevant factors
are held constant, except for the ones under investigation. However, economic experiments
may not be easy to carry out and economic behaviour may have simultaneous causes,
making it difficult to prove causality (Parkin, 2016, p.21).
Therefore economists often have to employ complementary approaches:
o Looking for pairs of events in which other things are equal (or similar) (eg comparing
the effects of HIV/AIDS on the unemployment rate in South Africa with Botswana);
and
o Using statistical tools such as econometrics.
For example, an econometric model that assumes that monthly spending by consumers is linearly
dependent on consumers’ incomes in the previous month.

Economists must also be aware of misconceptions, two of which are mentioned here – the fallacy of
composition and the post hoc fallacy (Parkin, 2016, p.9).
• Fallacy of composition – an invalid conclusion based on the assumption that what is true
of the parts is true of the whole.
Examples of the fallacy of composition:
A firm fires some workers to cut costs and improve profits. If all firms take similar actions, income
falls and so does spending; the firms sell less and their profits don’t improve. The fallacy of
composition is when an individual infers that something is true of the whole because it is true of
part of the whole. In economics, this reasoning often leads to incorrect conclusions.
• Post hoc fallacy – this is derived from the Latin phrase post hoc, ergo propter hoc, which
means “after this, therefore because of this”. This is an error of reasoning in that if situation
A occurs before situation B, then A is the cause of B (a false cause-and-effect relationship).
Example of a post hoc fallacy:
If the Department of Health releases information about the dangers of smoking (A) and, during the
next quarter cigarette sales decline (B), it cannot be said that A caused B. The reduction in smoking
could have been caused by an increase in price, the removal of cigarette advertising from public
view, or a reduction in disposable income, among multiple other factors.
The Fallacy of Composition
Argue for or against the following statement, using the fallacy of composition principle:
“If I saved 50% of my salary, I would be better off one year in the future. Therefore, if everyone saves 50% of
their salaries, we will all be better off one year from now.”
We are faced daily with economic problems and choices (decisions) that must be made. The
knowledge and skills required for economic analysis and decision-making are fundamental
prerequisites for individuals, teams, organisations, institutions, societies, and governments.
Economic processes and concepts are based on observation, modelling, testing, analysis, synthesis,
and theorising objectively. Once learned, they will serve you for life.

3.2.3 What, How, and For Whom?
Economics attempts to create theories that will answer the questions “What is?” and “What ought to
be?” Now consider that every day, billions of people make economic choices that result in what,
how, and for whom goods and services are produced (Parkin, 2016, pp.2 - 4).
Goods and services are what satisfy human wants. Whereas goods are physical objects (eg
equipment), services are tasks performed for people (eg repairs to equipment). In South Africa,
two thirds of what is produced is services (eg health care, education, banking); goods are a small
part of production.
What goods and services are produced varies from country to country and changes over time.
Primary and secondary activities (agriculture and manufacturing) are a small percentage of
production in developed countries such as the US, and a larger percentage of production in emerging
economies such as China (Parkin, 2016, p.3).
The services sector is also called the tertiary sector. As a country continues to develop, the
contribution of the tertiary sector increases. For example, in the US we see a significant contribution
being made by the services sector.
How goods and services are produced is reliant on the factors of production:
• Land (natural resources including land, minerals, oil, gas, coal, water, forests, and fish;
natural resources may be renewable, such as forests or and non-renewable, such as oil);
• Labour (work time and work effort; effort includes physical and mental effort; quality depends
on human capital, ie obtained from education and experience);
• Capital (tools, instruments, machines, buildings, etc used to produce goods and services);
and
• Entrepreneurship (the human resources that implement new ideas and bear the risks that
arise from these).
Who (individuals, businesses, governments etc) consume goods and services according to the
incomes they earn. These persons earn their incomes from the factors of production that they own,
eg rent on land, wages and salaries earned through providing labour, or profits earned from their
entrepreneurial efforts (Parkin, 2016, p.4).
Economics provides the answers to questions about what, how, and for whom goods and services
are produced.

The choices that persons make are in the:
• Interest of self (choices that you think are best for you, eg whether to buy a car or take the
train); or
• Interest of society (whether to turn your music down at 10pm, or to pick up your dog’s mess
while walking in the park).
The following examples demonstrate these choices.
Did you know that while water covers about 70% of the earth’s surface only about 2.5% of that is
fresh water and most of this is frozen in ice caps? Therefore only 0.007% of the world’s water is
available for human use and whilst the Convention on the Law of Non-Navigational Uses of
International Watercourses calls for the “equitable and reasonable use” of shared water systems,
this is not always done. To remedy this governments may act in self-interest in what we call
hydro-hegemony (eg as in the case of the Nile River), or they may co-operate with each other to
ensure water sustainability for all users.
Every day, we make self-interested choices to use electricity and petrol, which contribute to our
carbon footprints. We could lessen this by walking, riding a bike, taking a cold shower, or planting
a tree. Each of us is relied upon to make the right choices in society’s best interest (Parkin, 2016,
p.6).
Trade-offs
With scarcity and choices come trade-offs. A trade-off is an exchange – giving up one thing to get
something else (Parkin, 2016, p.6). The concept of trade-off is central to all economics.
Individual: you have R200, which could buy you a CD or a book, but not both.
Business: A firm may switch to an automated production plant and close its labour-intensive one
(trade labour for capital).
Government: The government collects taxes (revenue) and uses this money to build roads,
schools, hospitals, etc. To meet its budgetary constraints, government may have to trade-off road
infrastructure to build more hospitals, for example.
Trade-offs also consider self and social interest decisions, eg taxing the rich and making transfers
(grants) to the poor to bring about equality. However, keep in mind that redistribution confronts
society with what has been called the big trade-off (eg taxing productive activities means producing
less; the trade-off between efficiency and fairness) (Parkin, 2016, p.111).

“Think of a problem of how to share a pie that everyone contributes to baking. If each person
receives a share of the pie that is proportional to his or her effort, everyone will work hard and the
pie will be as large as possible [grow]. But if the pie is shared equally, regardless of contribution
[effort], some talented bakers will slack off and the pie will shrink. The big trade-off is one
between the size of the pie and how equally it is shared. We trade off some pie for increased
equality.”
(Parkin, 2016, p.111)
Opportunity cost
Since we have to make choices, we can say that the opportunity cost of an action is the highest-
valued alternative forgone (Parkin, 2016, p.30).
An opportunity cost is “a benefit, profit, or value of something (eg time) that must be given up to
acquire or achieve something else”. Since all factors of production (land, labour, capital,
entrepreneurship) can be put to alternative uses, every action, choice, or decision has an
associated opportunity cost.
(Parkin, 2016)
Consider these examples.
• If the US government spends $800-billion on the war in Syria, this is $800-billion it cannot
spend on education, health care, or cutting taxes.
• If a business spends R1-million on project A instead of project B, the opportunity cost is the
net profit from project B.
Trade-Off
1. What does the big trade-off tell us about self-interest versus social interest?
2. Identify examples of the big trade-off in your workplace and government.
3. What is the opportunity cost of your deciding to complete this qualification?

3.2.4 The Circular Flow Model
The circular flow economic model represents the main participants in the economy, and how they
interact. The two main sectors of an economy are households and firms. Firms make goods and
services and sell them to households. But in order to make goods and services, firms need inputs
or factors of production. The households provide these.
There are four factors of production. A brief description of each factor follows in Table 3.
TABLE 3: FACTORS OF PRODUCTION
Labour The effort that workers put into producing goods and services such as constructing a house,
building a car on an assembly line, designing a new computer, researching a new drug.
Workers are paid wages.
Capital Technically capital refers to the facilities, equipment, inventories and other physical resources
to produce goods and services. In the interest of clarity, we will call this physical capital to
distinguish it from financial capital – the funds necessary to start or maintain the business.
Financial capital must be available before a firm can acquire its physical capital. Providers of
capital are paid interest.
Land Land is a shorthand term that stands for plots of ground and the natural resources contained
therein. Land can be used to provide housing, agricultural production or raise livestock, just to
name a few uses. Land is paid economic rent.
Entrepreneurship The ability to see economic opportunities and organise the other three factors to exploit that
opportunity. The entrepreneur is paid profit.
Households own or control these factors and sell them to firms. Households provide the labour, their
savings flow into the financial markets and finance physical capital, they own the land, and they are
the entrepreneurs. Businesses buy these factors from households and use the inputs to produce
goods and services, which they then sell back to households. The expenditures of households are
financed by the income they earned selling the factors of production. This makes a giant rotating
circle of income and spending. We refer to the interaction between buyers and sellers of inputs as
the factor market, and the interaction between buyers and sellers of goods as the goods market.
This is a basic summary of how the different parts of the economy fit together. The circular flow of
income shows connections between different factors of production. It revolves around flows of goods
and services and factors of production between firms and households.
A simplified diagram of circular flow is provided in Figure 1.

FIGURE 1: THE SIMPLE CIRCULAR FLOW
Factor
Factor Markets Income
Payments
Firms Households
Sale Consumption
Receipts Expenditure
Product
Markets
The circular flow of income is a simple model of the economy, showing flows of goods and services
and factors of production between firms and households. In the absence of government and
international trade, this simple model shows that households provide the factors of production for
firms, which produce goods and services. In return, the factors of production receive factor
payments, such as wages that, in turn, are spent on the output of firms.
However, in reality, households do not spend all their current income. Some of the income is:
• Set aside for future spending;

• Paid to government in taxation; and
• Spent on foreign-made goods and services, ie imports that flow into the economy.
This is a leakage from the circular flow. In addition to the consumer spending, firms also carry out
investment spending. This is an injection into the circular flow of income, as it does not originate
from consumers’ current income.
The government and international trade sectors must also be included in this model, along with
additional leakages and injections. Government spending is injected into the circular flow and
taxation leaks from it. Export flows are injected and import flows leaked (Mohr & Fourie, 2020). A full
circular flow with leakages and injections is shown in Figure 2.

FIGURE 2: THE FULL CIRCULAR FLOW MODEL
(Adapted from Mohr & Fourie, 2020)
An economy is in equilibrium when the rate of injections equals the rate of withdrawal from the
circular flow. This model of the economy demonstrates that economic activity is a flow. In actual fact,
it can be considered as two flows:
• The flow of goods and services; and

• The flow of money.
The size of these flows is an indicator of the extent of economic activity. The circular nature of the
flows means that there will be a number of different ways to measure the size of each flow.
Economists maintain that there are three possible ways to measure the flow; in each way one looks
at a different part of the circular flow of income. But all methods should result in the same answer:
• The output method: the total amount of goods and service produced in one year;
• The expenditure method: the total amount of domestic spending by consumers, firms,
government and foreigners; and
• The income method: the total incomes earned by factors of production involved in the
production of goods and service in one year.
National income accounting is the process by which governments attempt to measure these flows.
The result of each of the three methods is the gross domestic product (GDP). An examination of the
national income accounts gives an insight into the economy. It provides data, which governments
and external agencies can use in a variety of different ways. These include:
• Determining the extent of economic growth;

• Measuring changes in living standards over time;
• Making comparisons between the economic performance and living standards of different
countries; and
• Examining and judging the performance of different sectors of the economy.
(Mohr & Fourie, 2020)
Learn more about the circular flow model:
• Teach Me Economics with Darren Landinguin. (2019). Fundamental economic concepts

[Video]. YouTube. https://www.youtube.com/watch?v=iA-qnNIGarA (accessed 19
October 2022).
3.2.5 Economic Systems
An economic system is the way in which an economy is structured, owned and managed. There are
several economic systems in the world today, the two best known being capitalism and communism.
Capitalism is characterised by the private ownership and free market mechanisms we described in
the previous section, while communism is characterised by state ownership and a centralised
management of the economy.
Although capitalism and communism have the same aim, which is the creation of maximum wealth
and development, they are two extremely different systems. In between these two extremes, there
are several other economic systems depending on the degree of state versus private ownership,
such as socialism, mixed economy, and state capitalism.
Capitalism and communism
The main characteristics of capitalism are:
• Means of production (capital, land, resources, assets) are privately owned;

• The role of the state intervention in economy is minimal:
o There is no central planning
o The state creates an enabling environment for private enterprises to grow, by promoting
competition
o The state stimulates certain industries to contribute towards global competitiveness
o The state promotes the local economy in order to attract foreign and local investment
o The state exists mainly to promote law and order
• Belief that competition leads to development;
• Freedom and choice:
o Freedom of consumption
o Freedom to choose occupation
o Freedom to save, invest and own privately
• Economy managed mainly via market mechanisms; and
• Profit-driven economic system.

The main characteristics of communism:
• Long-term central planning of production;

• State-owned means of production – the state decides what and how to produce; and
• Restricted economic freedom of choice – consumer has no influence on price and type of
products produced.
Table 4 presents the main advantages and disadvantages of capitalism and communism.
TABLE 4: COMPARING CAPITALISM TO COMMUNISM
Capitalism Communism
Advantages • Competition • Wealth distribution more even
• Effectiveness • Economic fluctuations decreased
• Efficiency • Promotion and development of certain
• Quality industries
• More freedoms • Considers the needs of the community (the
• Wealth creation collective)
• Sustainability (long term?)
• Entrepreneurship
• Innovation and creativity
• Investment and development of
technology
Disadvantages • Unequal distribution of wealth • Lack of freedom
• Division between rich and poor • State bureaucracy or management of
• Shortage of public goods and services economy leads to ineffectiveness, inefficiency
• Unemployment and corruption
• Monopolies by large multinationals • Economic balance between demand and
• Consumerism supply difficult to achieve without a price
• Greed mechanism
• Waste • Low productivity – no profit motive
• Neglecting public goods • Consumers’ needs and wants not considered
• Exploitation of human and natural
resources
• Question of sustainability
Socialism
Socialism is defined as “an economic and social theory that seeks to maximise wealth and
opportunity for all people through public ownership and control of industries and social services”
(Mohr & Fourie, 2020). Broadly, this means to maximise wealth and opportunity and to minimise
human suffering through the public control of industry and social services.
It is argued that socialists (eg Karl Marx) did not want to disrupt the “capitalist miracle” of abundant
production, but rather to distribute profits more fairly.

Marx saw workers as being caught in a trap (wage slavery), needing work but receiving only
subsistence wages. He argued that workers created surplus value (above that paid to them as
wages) and that capitalists expropriated this surplus value, which rightfully belonged to workers
(Mohr & Fourie, 2020). Socialists want to retain the productivity and efficiency of capitalism, but
eliminate the exploitation in the system.
We should not be blinded by ideological claims about “capitalism” and “socialism”. Any modern state
takes a considerable share of GDP for government purposes, even states most commonly
associated with free market principles.
Measure of Socialism
1. Do you consider that the measure (dividing government spending by nominal GDP) is a good measure of
socialism? Why, or why not?
2. Public spending as a percentage of GDP, on average, is much higher in wealthy democracies than in emerging
economies. Why do you think this is so?
The mixed economy
A mixed economy is one where the state and private sector direct the economy – most mixed
economies can be described as market economies, but with medium to strong regulatory oversight.
Mixed economies also provide evidence of a variety of government-run enterprises and
governmental provision of public goods.
The relative strengths or weaknesses of each component in a mixed economy can vary greatly
between countries (eg United States to Cuba). The term is also linked to welfare states such as the
Nordic countries.
State capitalism
It is argued that a new type of capitalism is emerging – state capitalism – in which “the state either
owns companies or plays a major role in supporting or directing them” (Mohr & Fourie, 2020).
3.2.6 Economic Theories and Theorists
The classical school
Adam Smith, who is known as the father of economics (after publishing An Inquiry into the Nature
and Causes of the Wealth of Nations in 1776), made the most important contribution to the classical
school of thought (scientific and industrial revolution were influenced by the classical school of
thought).

“Laissez-faire philosophies, such as minimising the role of government intervention and taxation
in the free markets, and the idea that an ‘invisible hand’ guides supply and demand, are the key
ideas Smith’s writing is responsible for promoting.”
These are characteristics of the classical school:
• The forces of the free market should organise the economy, and government’s interference
should be minimal;
• Self-interest leads to collective interest, profits, development and natural harmony of interests
in the society; and
• Development of laws and economic principles:
o The law of diminishing returns
o Role of capital accumulation in economic growth
o Consumer freedom and autonomy
o Market as a platform for harmonising individual and societal interests and needs and
o Theory of comparative advantage.
Mercantilism
This school of thought originated in the European Renaissance during the geographical discoveries
which expanded commerce, promoted nationalism and justified economic, military and colonial
expansion.
The main characteristics of mercantilism are:
• Wealth measured by gold;

• Nationalism;
• Colonialism; and
• The rise and enrichment of merchant capitalists, the kings and governments.
Marxism and socialism
Marx believed that class exploitation, class privilege and class monopoly were morally unacceptable.
He believed in a natural law of social evolution, which involved the growing socialisation of the
process of production. This, he believed, carried with it a corresponding evolution in the field of
human relations, destined to result in a complete democratisation of economic affairs and the
achievement of a classless society.

The main contributions of Marx and characteristics of Marxism are:
• Contribution towards the labour theory of value in economics – although the idea of
workers being the source of all value is disputed by contemporary economists;
• Business cycles and economic fluctuations;
• Growth of monopolies;
• Theory of exploitation – arguing that the conditions of workforce continuously deteriorate
resulting in workers overthrowing capitalism because of exploitation;
• Analysis of capital accumulation – arguing that accumulation leads to decreasing profits
and unemployment due to improved technology; and
• Theory of class conflict – based on notion of class conflict and capital accumulation.
Neoclassical school
The proponents of the neoclassical school argue that the value of goods is not determined by the
production cost (as argued by the classical school), but by its usefulness to the consumer or end
buyer. The first contributor to the neoclassical school of thought was the 19th century British
economist Alfred Marshall.
The main characteristics of neoclassical school of thought are:
• Minimalist role of government in economy;

• Assumption that people act rationally, balancing present and future needs;
• Economic forces strive for equilibrium and after disturbances a new equilibrium is found;
• The role of an individual (or a firm) as the focal point in economic decision making; and
• Application of analytical, abstract, deductive methods in economic analysis.
Marshall’s main contribution was related to interpreting value in terms of both demand and supply
and not just one of them. His contribution was also made in the area of business competition and
monopolies. His most famous book is The Principle of Economics (1890).
Keynesian school of thought
The main characteristics of the Keynesian school of thought, which arose in response to the Great
depression of the 1930s, are:
• Macroeconomic approach, considering factors such as employment, consumption, savings,

income, investment and outputs;
• Promotes government’s fiscal intervention to improve employment, price stability and
economic growth;
• Government spending (and deficit) should be increased to stimulate economy;
• Money supply should be increased to reduce interest rates and promote investment; and
• Taxes should be reduced to encourage people to work, produce, save and invest.

3.2.7 The Importance of Graphs in Economics
It is important that you know how graphs are used in economics. You will be exposed to graphs
throughout the rest of this course so you need to be able to work flexibly with them. Table 5
summarises key terminology and concepts with which you should be familiar.
TABLE 5: GRAPHS IN ECONOMICS
Axes The vertical line is the Y-axis and the horizontal line is the X-axis. The scale on these axes
need not start at zero but must be in sequence, eg -2, -1, 0, 1, 2, or 200, 400, 600, etc.
X co-ordinate and We describe a point on a graph by the values of its x co-ordinate and its Y co-ordinate. The X
y co-ordinate co-ordinate plots the independent variable and the Y co-ordinate plots the dependent variable.
Variables In economics, a variable is an element or factor being analysed or studied to understand its
relationship to other factors. For example, in analysing the relationship between price and
quantity, price and quantity are factors (variables) that influence each other as a change in one
factor affects (+/-) another. The changes in the relationships between factors (variables)
enables analysis of behavioural patterns which can be plotted in graphs or expressed in
economic models.
Scatter diagram “A graph that plots the value of one variable against the value of another variable for a number
of different values of each variable” (Parkin, 2016, p.16). This type of graph helps us to see
whether a relationship exists between two variables, eg what the relationship might be between
price and quantity.
Correlation and Correlation occurs when there is a clear relationship between two variables in a scatter
causation diagram. When there is a high correlation, we can predict the value of one variable from the
value of the other variable. However, “correlation does not imply causation” (Parkin, 2016,
p.15).
Economic model While some graphs represent real-world data, a graph can also be used to describe economic
behaviour with repeating patterns, eg as income rises so does expenditure.
Patterns to look • Four cases:
for o Variables move in the same direction (positive or direct relationship; upward sloping
line)
o Variables move in opposite directions (negative or inverse relationship; downward
sloping line)
o Variables have a maximum or minimum
o Variables are unrelated
• A linear relationship is represented by a straight line
• The line may curve depending on the data (eg become more or less steep)
• Variables may have a maximum or minimum (eg curve slopes upward as it rises to its
maximum point, is flat at its maximum and then slopes downward)
Slope of a • The influence of one variable over another is measured by the slope of the relationship.
relationship • The Greek letter D (delta) is used to represent “change in”
• Slope = Dy / Dx
(Parkin, 2016, pp.12-24)

3.2.8 The Production Possibilities Frontier (PPF)
The production possibilities frontier provides our first example of graphing.
“The production possibilities frontier is the boundary between those combinations of goods and
services that can be produced and those that cannot.”
(Parkin, 2016, p.29)
The production possibilities frontier shows the limits to the production of goods – it illustrates scarcity.
We cannot attain the points outside the frontier. Consider the example provided by Parkin (2016,
p.29) and given in Figure 3.
FIGURE 3: THE PRODUCTION POSSIBILITIES FRONTIER FOR PIZZAS AND COLD DRINKS
(Parkin, 2016:29)
Use the Graph
Assume your company produces pizzas and cold drinks. Use the graph to determine:
1. How many cold drinks it can produce if it produces 3-million pizzas?

2. How many pizzas it can produce if it produces 14-million cold drinks?
3. Can the company produce 6-million pizzas? Justify your response.
4. What is the problem if the company produces 2-million pizzas and 10-million cold drinks?

Because resources are scarce, the curve shows us the constraints. However, assume the economy
grows and all other things remain constant. The economy will produce more, which will cause a shift
in the PPF outward (to the right). If, however, the economy were to shrink then this frontier would
shift inward (to the left). The things most likely to cause changes include advances in technology,
changes in resources, and improved education and training.
Key points to remember:
• We achieve production efficiency if we produce goods and services at the lowest possible
cost – this outcome occurs at all points on the PPF which shows different combination of
goods or services that can be consumed or produced considering scarcity of resources.
• At points inside the PPF, production is inefficient (resources are either unused or
misallocated or both).
• Every choice along the PPF involves a trade-off (choices have to be made).
• When goods and services are produced at the lowest possible cost and in the quantities that
provide the greatest possible benefit (eg to the organisation, the economy) we have achieved
allocative efficiency.
3.2.9 General Terms that Guide Economic Thinking
To conclude this introductory section we have included a range of general terms you should know.
TABLE 6: GENERAL ECONOMIC TERMS
Free market Where “buyers and sellers can make the deals, they wish to make without interference,
economy except by the forces of demand and supply”. The stock market is an example of this.
Interference refers to, for example, government regulations or subsidies. South Africa has a
free market economy with relatively few restrictions.
Acts that guide The stated purpose of the Competition Act, 1999 (as amended) (South Africa) is to promote
economies, eg and maintain competition in order to achieve the following objectives:
Competition Act,
• Provide all South Africans equal opportunity to participate fairly in the national
1999 (as amended)
economy
(South Africa)
• Achieve a more effective and efficient economy in South Africa
• Provide for markets in which consumers have access to, and can freely select, the
quality and variety of goods and services they desire
• Create greater capability and an environment for South Africans to compete
effectively in international markets
• Restrain particular trade practices which undermine a competitive economy
• Regulate the transfer of economic ownership in keeping with the public interest
• Establish independent institutions to monitor economic competition
• Give effect to the international law obligations of the Republic
Fiscal policy “Government’s revenue (taxation) and spending policies [are] designed to (1) counter
economic cycles in order to achieve lower unemployment, (2) achieve low or no inflation,
and (3) achieve sustained but controllable economic growth”. In a “recession, governments
stimulate the economy with deficit spending (expenditure exceeds revenue). During periods

of expansion, they restrain a fast-growing economy with higher taxes and aim for a surplus
(revenue exceeds expenditure).”
Monetary policy The regulation of the money supply and interest rates by a central bank, eg the South
African Reserve Bank in South Africa, and the Bank of England, in the UK.
Inflation, deflation Inflation is a “persistently rising price level” (Parkin, 2016, p.485). For example, a single jump
and hyperinflation in the price of bread is not inflation. However, a persistent rise in the price of bread is
inflationary. If the inflation rate is negative, we have deflation. The most serious type of
inflation is called hyperinflation (ie one that exceeds 50% a month). At the height of
hyperinflation workers are often paid more frequently (ie weekly) because money loses its
value so quickly.
Price stability and Price stability (ie low inflation) reduces uncertainty in the economy and, therefore, provides a
low inflation favourable environment for growth and employment creation. Further, low inflation
contributes to the protection of the purchasing power of all civilians, particularly the poor who
have no means of defending themselves against continually rising prices.
Interest rate The bank in charge of monetary policy sets the interest rate (eg the South African Reserve
Bank sets the interest rate in South Africa). The official interest rate in South Africa is known
as the “repo rate”. Interest rates are adjusted as a result of inflation and according to
monetary policies.
Foreign exchange Foreign exchange makes international transactions such as imports, exports, and the
movement of capital between countries (eg foreign direct investment) possible. The value of
one foreign currency in relation to another is the exchange rate, which may be floating or
fixed (pegged). The private market determines the floating rate based on supply and
demand; whereas a fixed (or pegged) rate is a rate the government (central bank) sets and
maintains as the official exchange rate.
You will learn more about these terms as you work through this course.
Economics
Watch this clip and then answer the questions that follow:
• EconplusDal. (2017). Production possibility curves – PPC’s/PPF’s [Video]. YouTube.

https://www.youtube.com/watch?v=IzccVWouIxM (accessed 19 October 2022).
Questions
1. Explain the purpose of the study of economics.
2. “Microeconomics and macroeconomics are interdependent.” Discuss this statement, using examples from your
organisation to support your response.
3. “Individual economic actions cannot be understood without the context of their economies, while economies cannot
be understood without understanding the individual actors that constitute them.” Justify this statement.
4. “Fiscal and monetary policies are guided by macro and microeconomic factors.” Discuss the interdependency
suggested in this statement.

5. Identify two acts that relate to micro- and macroeconomics in your home country. Is it accurate to say that all acts
are linked in some way to the micro- and macroeconomics of your home country? Justify your response.
6. Conclude by broadly explaining, in your own words, the task of economics (200 words).
3.2.10 Key Points
• Economics is a “social science that studies the choices that individuals, businesses,
governments and entire societies make as they cope with scarcity and the incentives that
influence and reconcile those choices”.
• In economics we distinguish between microeconomics and macroeconomics.
• Economists observe behaviour, build models to explain that behaviour, and then test their
models to develop their theories.
• Economists make use of assumptions, such as the ceteris paribus (“all other things being
equal”) assumption.
• Economists must guard against fallacies, such as the post hoc ergo propter hoc fallacy (“after
this, therefore because of this”).
• The central questions of economics are: what goods and services should be produced? how
should they be produced? and for whom should they be produced?
• The four factors of production are land, labour, capital, and entrepreneurship.

3.3 THE MICROECONOMIC ENVIRONMENT
Learning • Develop insights into applied microeconomics and macroeconomics; and

outcomes • Develop an understanding of economic ethics.

content/downloads/2011/08/Bookboon/Economics/microeconomics-uk.pdf (accessed 06
March 2023).
Recommended • Investopedia. (2020). Law of diminishing marginal returns.
reading http://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp#axzz25I3EXGvl
• Parkin, M. (2016). Economics: Global and Southern African perspectives, (2nd ed). Pearson
Education.
• Cartwright, B. (2015). Determinants of supply [Video]. YouTube.

https://www.youtube.com/watch?v=Sp3gJS8NyAc (accessed 06 March 2023).
• EconPlusDal. (2020). Monopolistic competition [Video]. YouTube.
https://www.youtube.com/watch?v=DHgSBazfTEk (accessed 06 March 2023).
• One Minute Economics. (2019). Economies of scale in one minute [Video]. YouTube.
https://www.youtube.com/watch?v=rYvzM_tayY4 (accessed 06 March 2023).
• Regenesys Business School. (2015). An introduction to individual supply [Video]. YouTube.
Recommended https://www.youtube.com/watch?v=1YVSLmEIcj0 (accessed 06 March 2023).
multimedia • Regenesys Business School. (2015). Price elasticity of supply [Video]. YouTube.
• Regenesys Business School. (2016). An introduction to individual demand [Video].
YouTube. https://www.youtube.com/watch?v=dtTzkadiyzk (accessed 06 March 2023).
• Welker, J. (2017). The determinants of demand [Video]. YouTube.
https://www.youtube.com/watch?v=5Ei5OiIk_X0 (accessed 06 March 2023).
• Welker, J. (2017). The utility maximization rule [Video]. YouTube.
https://www.youtube.com/watch?v=6yjsiXAtSGE (accessed 06 March 2023).
In this section we discuss microeconomics, which deals with decisions that individuals make, the
Section overview
factors that allow them to make those decisions and how those decisions affect others.
3.3.1 Microeconomics and Consumer Behaviour
In the previous section you learnt that a market consists of many buyers and sellers and, often, a
great deal of competition. This market is composed of supply and demand; ie the supply and or
demand of goods and services within an economy. It is important to remember that households are
the driving force behind the demand for goods and services, which are supplied by firms.

Market supply and demand are combined to obtain the equilibrium price and quantity of a product.
Related to this are the concepts of consumer and producer surplus, which are briefly described in
this section.
Read chapters 2, 3, 4 and 12 of:

October 2022).
Demand refers to the quantities of commodities that consumers are willing to buy at different prices
within a particular period. Supply refers to the quantities that producers are willing to sell at different
prices. The equilibrium between what is demanded and what is supplied results in a market price for
goods and services.
Utility
People buy goods and services because they expect to derive some benefit or satisfaction from their
use. The level of satisfaction derived by consumers when consuming goods and services is referred
to as utility. Consumers will spend their limited money where they receive the most utility – a process
that economists refer to as utility maximisation (Parkin, 2016, p.175).
Marginal utility is the level of satisfaction derived from consuming one additional unit of a particular
good or service.
MU = ∆TU / ∆Q
Where TU is total utility and Q is quantity (or number of units)
Learn more about marginal utility:

Consumers are said to maximise their utility if the ratio of the marginal utilities between (among) two
(or more) goods is equal to the reciprocated ratio of their prices. At this stage, consuming one more
unit of either of the commodities would mean that the consumer is worse off, because it would open
up room for improvement. How many additional units of a good we require will depend on the number
of units we already have. Assume that you are given a burger for lunch. If you are very hungry an
additional burger will be welcome.

However, if you are offered a third burger, you may value it less than the first two burgers, as you
may not be as hungry. This is often referred to as the law of diminishing marginal utility or the law of
diminishing returns (Mohr & Fourie, 2020).
3.3.2 Introduction to Supply and Demand Equilibrium
This section looks at the establishment of prices on the market and restrictions on the market
mechanism. It also examines the theories of demand and supply and how the forces of demand and
supply influence prices.
Please note that the content provided above is merely an introduction to the topic. You need to
work through the recommended reading and find your own sources of information to answer the
appropriate questions.
3.3.3 Demand
Demand is the outcome of decisions about which wants to satisfy given the available means. If you
intend to buy something, then you need to have the means to purchase it. When we talk of demand,
we refer to the quantity of a good or service that the potential buyers are willing and able to buy at
various given prices. It is a flow concept that is measured over time. Demand can be expressed in
words, schedules, curves and equations.
Individual demand
Individual demand refers to demand of a single economic agent such as an individual, a household
or a firm. A household is all the people who live together and who make joint economic decisions or
who are subject to others making such decisions for them (Mohr & Fourie, 2020).
Determinants of individual demand
There are two types of factors that affect demand for commodity; namely, exogenous and
endogenous factors. Endogenous factors are those that have a direct effect on demand; for example,
price. Exogenous factors affect demand from outside the model; for example, income and climate.
In terms of price, the quantity of a good demanded by an individual in a particular period depends
on the price of the good, the prices of related goods, the income of the individual, personal taste,
and the number of people in the household (Mohr & Fourie, 2020).
Determinants of demand are neatly summed up here:


The law of demand
Other things being equal (ie ceteris paribus), the higher the price of a good, the lower the quantity
demanded; and the lower the price of a good, the greater the quantity demanded (Parkin, 2016,
p.51).
A demand curve shows the relationship between the demanded quantity of a good and its price
when all other influences on consumers’ planned purchases remain the same. The figure below
illustrates the demand curve resulting from the demand schedule.
FIGURE 4: THE LAW OF DEMAND
(Mohr & Fourie, 2020, p.116)
Market demand
This is the sum of all individual demands; ie in a market system, the plans of all consumers and
producers of a good or service have to be taken into account.
Movements and shifts
A movement occurs along the same curve. The fall in the price of goods leads to a movement along
the demand curve for that good. A shift results in a new curve. Shifts are caused by factors other
than the price of the good eg income, taste, prices of related goods, etc.
A decrease in income will result in the demand curve shifting to the left and an increase in income
will shift the demand curve to the right. Therefore, more quantities will be demanded at the given
price level. Basically, changes in endogenous factors lead to the movement along the demand curve
and changes in exogenous factors lead to a shift in the demand curve (Mohr, Fourie and Associates,
2011).

In Figure 5, the movement along demand curve D0 from Point a to Point b as a result of the price
rising from $2 to $4 is a change in the quantity demanded. The shift of the demand curve from D0 to
the new demand curve D1 is a change in demand.
FIGURE 5: MOVEMENTS AND SHIFTS
(Parkin, 2016)
So, to recap on demand:

Change in the price of a related good
Substitute
A substitute is a good that can be used in place of another good to satisfy a certain want; eg butter
and margarine, beef and mutton, tea and coffee.
An increase in the price of a good will cause an increase in the demand for its substitute, ceteris
paribus. An increase in the price of butter will increase the demand for margarine, ceteris paribus. If
the price of butter increases, a greater quantity of margarine will be demanded at each price of
margarine than before (see Figure 6).

FIGURE 6: SUBSTITUTES
(Mohr & Fourie, 2020, p.117)
Complement
Two complements: videocassette recorders (VCRs) and videocassettes.
FIGURE 7: COMPLEMENTS
(Mohr & Fourie, 2020, p.118)
A decrease in the price of VCRs will cause an increase in the demand for videocassettes.

Illustrating the Law of Demand
1. What is the law of demand and how do we illustrate it?

2. Show the effect of a positive change in income on demand and the equilibrium price.
3. Comment on this change using the example of a 100% wage increase in the mining sector in South Africa.
3.3.4 Supply
Supply can be defined as the quantity of a good or service that producers plan to sell at each possible
price during a certain period (Mohr & Fourie, 2020, p.121). Supply refers to planned quantities; ie
the quantities that producers plan to sell at each price.
Supply is more than just the resources and technology used to produce something. Supply is a flow
concept just like demand, and it can be expressed in words, numbers, graphs and symbols.
Individual supply
Individual supply refers to supply by a single firm (Mohr & Fourie, 2020, p.122). A firm is a unit that
employs factors of production to produce goods and services that are sold in the market.
Determinants of individual supply
The quantity of a good supplied by a single firm in a particular period depends on the price of the
product, the prices of alternative products, the prices of factors of production and other inputs and
expected future prices.
Watch these explanations:
• Cartwright, B. (2015). Determinants of supply [Video]. YouTube.

https://www.youtube.com/watch?v=Sp3gJS8NyAc (accessed 06 March 2023).
Learn more about firms and profit:
• Chapter 7 of Ahlersten, K. (2008). Essentials of microeconomics. https://library.ku.ac.ke/wp-

March 2023).

The law of supply
Ceteris paribus, the higher the price of a good, the greater the quantity supplied; and the lower the
price of a good, the smaller the quantity supplied.
Why does a higher price increase the quantity supplied? Suppliers are motivated to supply more
because they will receive more from each unit of good supplied. The relationship between price and
quantity supplied can be explained by using the supply schedule and supply curve (Mohr & Fourie,
2020, p.124).
FIGURE 8: THE LAW OF SUPPLY
(Mohr & Fourie, 2020, p.124)
Market supply
This is the sum of all individual quantities supplied.
Movements and shifts
A change in price results in a movement along the supply curve, which is change in the quantity
supplied. A change in other factors shifts the supply curve, which is a change in supply.
In Figure 9, the movement along supply curve S0 from point a to point b as a result of the price rising
from $2 to $4 is a change in the quantity supplied. The shift of the supply curve from S0 to the new
supply curve S1 is a change in supply.

FIGURE 9: MOVEMENTS AND SHIFTS
(Parkin, 2016)
Eliminating Excess Demand and Supply
Explain what is meant by excess demand and excess supply in a goods market, and how market forces eliminate them.
3.3.5 Market Equilibrium
Market equilibrium is determined by supply and demand. Equilibrium is "a situation in which opposing
forces balance each other" (Parkin, 2016, p.60). There is excess supply (a market surplus) when the
quantity supplied is greater than the quantity demanded at that specific price. Excess demand (a
market shortage) occurs when the quantity demanded is greater than the quantity supplied at that
specific price. Therefore, we can say that:
“ A market moves toward its equilibrium because:
• Price regulates buying and selling plans

• Price adjusts when plans do not match.
(Parkin, 2016, p.60)
Consider Figure 10 (Parkin, 2016, p.61). The equilibrium price is the price at which the quantity
demanded of an item (in this case Chomp bars) equals the quantity supplied. The price is a regulator
– if the price is too high, the quantity supplied exceeds the quantity demanded. A surplus (as seen

in the example) forces the price down, and a shortage forces the price up, until the market reaches
equilibrium.
FIGURE 10: EQUILIBRIUM
(Parkin, 2016, p.61)
Reaching Market Equilibrium
1. Explain what you understand by the terms excess supply and excess demand. Provide examples.
2. How is market equilibrium reached?
As can be observed in the Chomp example, changes in exogenous factors may lead to changes in
demand. For example, if income increases, the demand curve might shift to the right, thereby
creating excess demand at the same price. As a result, prices will increase towards the new
equilibrium. In other words, the income increase might be inflationary.
3.3.6 Consumer Surplus and Producer Surplus
Consumer surplus refers to:
“ “The difference between what consumers pay and the value that they receive, indicated by the
maximum amount that they are willing to pay.”
(Mohr & Fourie, 2020, p.129)
Consumer surplus means that the consumer receives a good deal on the goods or services he or
she purchases (Investopedia, 2013a). For example, if a consumer is prepared to pay R15 for

notebook but discovers that the desired notebook is being sold for only R10, then the consumer
surplus is R5.
Producer surplus refers to:
“ “An economic measure of the difference between the amount that a producer of a good receives
and the minimum amount that he or she would be willing to accept for the good. The difference, or
surplus amount, is the benefit that the producer receives for selling the good in the market.”
(Mohr & Fourie, 2020, p.129)
Consider this example:
Assume that a farmer is prepared to sell 1000 bags of apples at R10 a bag and consumers are
prepared to pay R15 for a bag of apples. If the farmer sells all the bags of apples to the consumer
for R15, he or she will receive R15,000. The producer surplus is calculated by subtracting the
amount the farmer received by the amount she was willing to accept. Therefore, in this case, the
producer surplus is R5,000 (R15,000 – R10,000).
FIGURE 11: CONSUMER AND PRODUCER SURPLUS
(Mohr & Fourie, 2020, p.130)
The Role of the Surplus
1. What is the difference between consumer surplus and producer surplus?

2. Why is it important to understand the notion of consumer surplus and producer surplus both for you, personally,
and for your organisation?

3.3.7 Change in Demand
If the demand for a good or service increases, the demand curve shifts to the right. As a result, the
equilibrium price rises and the equilibrium quantity increases, keeping supply constant. If the
demand for a good or service decreases, the demand curve shifts leftward. As a result, the
equilibrium price falls, and the equilibrium quantity decreases. Supply does not change, and the
supply curve does not shift. Instead, there is a change in the quantity supplied and a movement
along the supply curve, keeping other factors constant.
What’s the Difference?
1. Use examples to distinguish between a change in demand and a change in quantity demanded.
2. Use examples to distinguish between a change in supply and a change in quantity supplied.
3.3.8 Change in Supply
If the supply of a good or service increases, the supply curve shifts to the right. As a result, the
equilibrium price falls, and the equilibrium quantity increases. If the supply of a good or service
decreases, the supply curves shifts leftward. As a result, the equilibrium price rises, and the
equilibrium quantity decreases. Demand does not change, and the demand curve does not shift.
Instead, there is a change in the quantity demanded and a movement along the demand curve.
3.3.9 Simultaneous Changes in Demand and Supply
It is possible to predict what will happen to equilibrium prices and quantities in the market if we deal
with change in demand and change in supply (Mohr & Fourie, 2020, p.141). However, if demand
and supply change simultaneously, the precise outcome cannot be predicted. This is a special case
of a more general problem in economic theory.
Setting a Maximum Price
Explain, with the aid of a diagram, the effect of setting a maximum price below the equilibrium point of a particular good.

3.3.10 Government Intervention
The changes explained in the previous section will occur only if the market forces of supply and
demand are free to establish the equilibrium prices and quantities of goods and services.
If consumers, trade unions, farmers, businesspeople and politicians are not satisfied with the prices
and quantities determined by demand and supply, governments may intervene to influence the
prices and quantities in the market. In general, governments intervene in markets if there exist
market imperfections such as public goods, short supply of necessities such as medicine and
education services, externalities, and collusion (Mohr & Fourie, 2020).
Government intervention can take different forms, including:
• Setting maximum prices (price ceilings): This is mostly for necessities such as fuel, food
items, medicine, and education. If government does not intervene, these commodities can
be supplied at very high prices, thereby eroding away the welfare of consumers;
• Setting minimum prices (price floors): This is mostly aimed at protecting farmers and other
venerable producers in order that they may realise considerable gains from their efforts;
• Subsidising certain products or activities: Certain products are important and necessities
such as food items and medicine. Their cost of production might be high. As such,
government comes in to subsidise either the production cost or the supply. In this way, the
product is made affordable for consumers. The provision of subsidised ticket fees for train
commuters by the South African government is an example of this type of intervention; and
• Taxing certain products or activities: If certain products are not required, one way to
control their consumption is through taxation (Mohr & Fourie, 2020).
Government intervention in the market tends to introduce market distortions.
Government Intervention
1. Explain the various forms of government intervention, in detail, and provide relevant examples to demonstrate
your understanding of each.
2. Is government intervention a characteristic of perfect competition? If not, what are the characteristics of perfect
competition?

3.3.11 Elasticity and Total Income
Introduction
This section examines the relationship between elasticity and total income.
The content provided in this section is merely an introduction to the topic. You need to work
through the recommended reading and supplement this with your own sources of information.
Appropriate Pricing
Suppose that you are appointed as the chief executive officer of Executive Cars at a time when it is making a loss on
luxury sports cars costing more than R2 million. You are informed that the price elasticity of such cars is 0.75. What
pricing strategy would you follow in your attempt to restore profitability to Executive Cars?
The price elasticity of demand
In general, elasticity measures responsiveness. The price elasticity of demand measures how
responsive demanders are to a change in the price of the good. This information is often useful for
both businesses and governments (Mohr & Fourie, 2020, p.154).
Calculating the price elasticity of demand
The price elasticity of demand is a unit-free measure of the responsiveness of the quantity demanded
of a good to a change in its price when all other influences on a buyer’s plans remain unchanged.
The price elasticity of demand is equal to the absolute value of:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Inelastic and elastic demand
If the price elasticity of demand is less than 1.0, the good is said to have an inelastic demand. In
this case, the percentage change in the quantity demanded is less than the percentage change in
price. A good is considered to have perfectly inelastic demand if the quantity demanded remains
constant when the price changes. The price elasticity of demand is 0 and the good’s demand curve
is a vertical line.
If the price elasticity of demand is equal to 1.0, the good is said to have a unit elastic demand. In
this case, the percentage change in the quantity demanded equals the percentage change in price.

If the price elasticity of demand is greater than 1.0, the good is said to have an elastic demand. In
this case, the percentage change in the quantity demanded exceeds the percentage change in price.
If the quantity demanded changes by an infinitely large percentage in response to a tiny price
change, then the good is said to have perfectly elastic demand (Parkin, 2016). The price elasticity
of demand is infinite. The three positions are shown in the diagrams that follow.
FIGURE 12: PRICE ELASTICITY OF DEMAND
(Parkin, 2016, p.78)
Table 7 lists some real-life examples of elasticity:
TABLE 7: REAL-WORLD PRICE ELASTICITIES OF DEMAND
Good or service Elasticity

Furniture 1.26 Elastic demand
Motor vehicles 1.14 Elastic demand
Clothing 0.64 Inelastic demand
Banking and insurance services 0.56 Inelastic demand
Food 0.12 Inelastic demand
(Parkin, 2016, p.81)
Elasticity along a straight-line demand curve
With the exception of a vertical demand curve and a horizontal demand curve (along which the
elasticity is 0 and infinite respectively), the price elasticity of demand changes when moving along a
linear demand curve. At points on the demand curve above the midpoint, the price elasticity of
demand is elastic while at points below the midpoint; the price elasticity of demand is inelastic. At
the midpoint, the price elasticity of demand is unit elastic (Parkin, 2016, pp.79 - 80).

Total revenue and elasticity
The total revenue from the sale of a good equals the price of the good multiplied by the quantity sold.
If demand is elastic, a one-percent price cut increases the quantity sold by more than one percent
and total revenue increases. If demand is unit elastic, a one-percent price cut increases the
quantity sold by one percent and total revenue does not change. If demand is inelastic, a one-
percent price cut increases the quantity sold by less than one percent and total revenue decreases
(Parkin, 2016, pp.79 – 80).
Income elasticity of demand
The income elasticity of demand is a measure of the responsiveness of the demand for a good to a
change in the income, ceteris paribus.

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
(Parkin, 2016, p.84)
Let’s recap on price elasticity:
• Regenesys Business School. (2015). Price elasticity of supply [Video]. YouTube.

Cross-elasticity of demand
The cross-elasticity of demand is a measure of the responsiveness of the demand for a good to a
change in the price of a substitute or compliment, ceteris paribus.

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑠𝑢𝑏𝑠𝑡𝑖𝑡𝑢𝑡𝑒 𝑜𝑟 𝑐𝑜𝑚𝑝𝑙𝑒𝑚𝑒𝑛𝑡
(Parkin, 2016, p.84)
The changes in the quantity demanded and the price are percentages of the average price and
quantity demanded over the range of change. The cross elasticity of demand is positive for
substitutes and negative for complements (Parkin, 2016, pp. 82–83).

FIGURE 13: CROSS ELASTICITY OF DEMAND
(Parkin, 2016, p.83)
The price elasticity of supply
The elasticity of supply measures how responsive suppliers are to a change in the price of the good.
The elasticity of supply measures the responsiveness of the quantity supplied to a change in the
price of a good when all other influences on selling plans remain unchanged.
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
(Parkin, 2016, p.85)
Three cases of elasticity of supply
Supply is perfectly inelastic if the elasticity of supply equals 0. In this case, the supply curve is
vertical. Supply is unit elastic if the elasticity of supply equals 1. In this case, the supply curve is
linear and passes through the origin. If any supply curve is linear and passes through the origin, the
supply is unit elastic; the slope of the supply curve is irrelevant. Supply is perfectly elastic if the
elasticity of supply is infinite. In this case, the supply curve is horizontal (Parkin, 2016, p.87).

FIGURE 14: ELASTICITY OF SUPPLY
(Parkin, 2016, p.87)
The key for perfectly elastic supply is that the particular good has a very large number of close
substitutes.
3.3.12 Monopoly
According to Mohr and Fourie (2020), “monopoly” – the opposite of perfect competition – is derived
from the Greek words monos (meaning “single”) and polein (meaning “sell”). In its purest form, a
monopoly is a market structure in which there is one seller of a good or service that has no
substitutes; and entry to the market is blocked.
This has important consequences for price setting and quantity production. Monopolies may arise
for political reasons, because of patents and exclusive rights, market structures that automatically
shut down competition, or strategic limitations (Ahlersten, 2008).
Read Chapter 11 in Ahlersten:

content/downloads/2011/08/Bookboon/Economics/microeconomics-uk.pdf (accessed
06 March 2023).

Pure monopoly
Monopoly is the least competitive market structure of all. A pure monopoly is a market in which a
single producer produces 100% of the output. Consumers have the least choice in such a market.
TABLE 8: CHARACTERISTICS OF MONOPOLY
One seller The classic monopoly has, by definition, only one seller. We also use this market structure
to analyse industries that have essentially one producer controlling almost all the output.
Unique product Since there is only one producer, or effectively one producer, the product it makes cannot
be compared to alternatives. It is unique. This is important in understanding why a company
such as Pepsi is not a monopoly, even though it is the only company that can produce its
version. The product is not unique.
Information largely Whether the information is good or bad is essentially irrelevant, since no comparative
irrelevant product exists.
Barriers to entry As in an oligopoly, firms are not able to move resources into and out of this market easily or
cheaply. The barriers to entry include:
Artificial barriers to entry keep new firms from entering. These are generally structural
features that make entry difficult or impossible, such as patents, government licenses,
control of a raw material, network advantage, and high start-up costs. A monopoly that
mainly exists because of artificial barriers is called a non-natural monopoly. Since there are
no or few cost advantages to this company, it will result in higher prices and lower output for
the consumer.
Natural barriers: There is one natural barrier – large economies of scale – that discourages
new producers from trying to enter. A new producer is reluctant to enter because it cannot
produce at the low cost offered by the established competitor. The cost efficiency would, by
itself, lower prices and raise outputs, but the lack of competition works in the opposite
direction, so we are unable to predict the effect on price and quantity in the case of a natural
monopoly. If the economy of scale is great enough, it is possible that the consumer could
get more output at a lower price than if the market were competitive.
(Parkin, 2016, pp.281-283)
Monopolies may not always be bad for consumers. Natural monopolies have large cost efficiencies;
consumers may benefit from having a large, unified network; and the temporary monopolies caused
by patents may foster the development of new products and technology. In general, though, we view
this market structure with suspicion, owing to the likelihood that the dominant company may make
greater than normal profits and be less responsive to consumer needs.
Learn about monopolistic competition:
• EconPlusDal. (2020). Monopolistic competition [Video]. YouTube.

https://www.youtube.com/watch?v=DHgSBazfTEk (accessed 06 March 2023).

Government responses to monopolies
The government has four potential policy paths to pursue when faced with a monopoly or powerful
oligopoly – it can ignore it, break it up, regulate it, or nationalise it. The course of action selected
depends on the nature of the market.
• Ignore it: If the non-competitive market were temporary and based on patents, it would make
no sense for the government to intervene. The whole purpose of patent law is to give the
innovator a temporary period of market power as an inducement to invest in research and
development and as compensation for the risks involved in new products. Certainly, this is
the easiest and cheapest policy (Ahlersten, 2008).
If the non-competitive market has very large economies of scale or network advantages, then the
consumers may actually be better off with the monopoly or powerful oligopoly than with a more
competitive industry. This is most likely to be true if the good or service being sold has an elastic
demand – if firms were to raise price, they would lose a lot of sales. In the early days of the telephone
industry, there were large economies of scale and even larger network advantages – large
companies could offer larger networks of people to call and were, therefore, more attractive.
It made sense to have one integrated telephone network that used common technology and systems.
The phone was a luxury for most people, which gave the phone company relatively little power.
Under the Kingsbury Agreement (1913), the US government agreed to leave the emerging virtual
monopoly AT&T alone in return for an undertaking to extend universal telephone access to rural
isolated communities (Mohr & Fourie, 2020).
• Break it up: If there are no patents, large economies of scale or network advantages, then
consumers gain no benefit from the lack of competition. The only effect of the non-competitive
structure will be to raise price, lower quantity and reduce the incentive of firms to be
responsive to the needs and wants of consumers. In such cases, the best action would be a
break-up of the company. Under this logic, the US government broke up American Tobacco,
the railroad and sugar trusts and Standard Oil early in the 1900s. In 1982, the US government
broke up AT&T, a monopoly that had been largely left alone for many decades, even though
the company did not meet the criteria for this tactic.
AT&T had large economies of scale, a network advantage and major patent development.
Furthermore, the company was broken up into regional monopolies rather than a truly competitive
industry. As a consequence, the average telephone consumer saw their phone bill rise significantly
in the first year after the breakup.
• Regulate it: If the non-competitive market offers advantages to consumers such as

economies of scale or network advantage that we do not wish to lose but companies abuse
their market power or have potential to abuse their market power, we could regulate them.
Under this strategy, the government would oversee the industry, setting limits on its actions
and prices, but allow the company or companies to continue to exist as non-competitive
entities.

Electricity utilities are a common example of regulated monopolies. The economies of scale are
enormous, but electricity is such a necessity to households, businesses and communities that, if left
alone, the monopolies would have too much power. As a result, they are regulated. Ideally, the
regulatory body would like to replicate the socially optimal production and price combination that a
highly competitive industry would naturally create. In reality, this is not likely to happen even if the
board is objective and sincerely tries to find the socially optimal point – no one else in the market
wishes them to find it.
In order to prevent excessive profits, the regulatory commission or agency could regulate the non-
competitive industry by setting its price. The problem is that the firm wants the price to be above the
competitive market solution so that it can maximise profits, while the consumers want the price to be
below the competitive market solution so that they save money. Both sides have no interest in aiding
the regulatory board in establishing the fair price, from a societal point of view.
If price is set too high, the buyers of this product will have less money for other purchases and
activities. It will represent a needless hardship to buyers with inadequate financial resources. Small
businesses may move or shut down if electricity rates are excessive, costing the community jobs.
Low-income consumers could lack sufficient heat or cooling because of high electricity rates.
If price is set too low, the sellers of this product will not make a normal rate of return on their
investment. They are likely to cut services, quality, maintenance or investment in order to boost their
profits. Over time, insufficient maintenance may cause large costs to repair or replace equipment
and facilities – at that time the board would have no choice but to raise price to cover necessary
expenses. Insufficient investment may mean that the industry will not produce all the goods or
services needed in the future. This is a problem in industries like electricity utilities, where the lead-
time on new facilities is several years (Mohr & Fourie, 2020).
Monopolies
1. Critically evaluate the pros and cons of monopolies. Provide relevant examples to defend your argument.
2. Recommend ways in which government should address the problem of monopoly power.

Caselet: Water Shortage in a Natural Disaster
An earthquake has broken the pipes that deliver drinking water to your city. Bottled water is available, but
there is no tap water. What is a fair way in which to allocate the bottled water?
Market price: Suppose that if the water is allocated by market price, the price jumps to R80 a bottle (five times its
normal price). At this price, the people who own water can make a large profit by selling it. People who are willing and
able to pay R80 a bottle get the water. And because most people cannot afford the R80 price, they end up either
without water or consuming just a few drops a day. Here water is being used 'efficiently' – there is a fixed amount
available, some people are willing to pay R80 per bottle and the water goes to those people. The people who own
and sell water receive a large producer surplus and total surplus is maximised.
Nonmarket methods: Suppose that by a majority vote, the citizens decide that the government will buy all the water,
pay for it with a tax, and use one of the non-market methods to allocate the water to the citizens. The possibilities are
now:
• Command – someone decides who is the most deserving and needy. Perhaps everyone is given an equal
share, or perhaps government officials and their families end up with most of the water.
• First come, first served – water goes to the first off the mark or to those who place the lowest value on their
time and can afford to wait in line.
These methods do not deliver an allocation of water that is either fair or efficient.
Market price with taxes: Another approach is to allocate the scarce water using the market price but then to alter
the redistribution of buying power by taxing the sellers and providing benefits to the poor. Suppose water owners are
taxed on each bottle sold and the revenue from these taxes is given to the poorest people. People are then free,
starting from this new distribution of buying power, to trade water at the market price. Because the owners of water
are taxed on what they sell, they have a weaker incentive to offer water for sale and the supply decreases. The
equilibrium prices rises to more than R80 a bottle. There is now a deadweight loss in the market for water. So the tax
is inefficient and unfair because it forces the owners to make a transfer to others.
Economists have a clear criterion of market efficiency but no comparably clear criterion of fairness.
(Parkin, 2016, pp. 109–110)

Answer these questions:
1. Explain the following statement: "In a natural disaster higher prices achieve an efficient allocation of scarce
resources".
2. Now explain the following statement: "It is not fair if the result is not fair."
3. Offer a solution to the above problem and justify your argument in economic terms.

3.3.13 Key Points
In this unit we discussed the microeconomic environment. Note that:
• The equilibrium between what is demanded and what is supplied results in a market price for
goods and services;
• Consumers will spend their limited money where they receive the most utility – a process that
economists refer to as utility maximisation;
• There are two types of factors that affect demand for commodity; namely, exogenous and
endogenous factors;
• A substitute is a good that can be used in place of another good to satisfy a certain want;
• Equilibrium is a situation in which opposing forces balance each other;
• The equilibrium price is the price at which the quantity demanded of an item equals the
quantity supplied;
• Consumer surplus refers to the difference between what consumers pay and the value that
they receive, indicated by the maximum amount that they are willing to pay;
• Producer surplus refers to an economic measure of the difference between the amount that
a producer of a good receives and the minimum amount that he or she would be willing to
accept for the good.

3.4 THE MACROECONOMIC ENVIRONMENT
• Develop insights into applied microeconomics and macroeconomics; and

Learning outcomes
• Develop an understanding of economic ethics.

March 2023).
syndicate.org/commentary/measuring-gdp-in-digital-economy-by-charles-bean-2016-05
• Chigumira, G. (2014). South Africa mind the gap minimum wage.
https://www.researchgate.net/publication/330145245_South-Africa-Mind-the-Gap_-
Minimum-Wage (accessed 06 March 2023).
• Cohen, S.I. (2017). Islamic economics and modern economies: resetting the research
agenda. Journal of Global Economics.
https://www.researchgate.net/publication/318389967_Islamic_Economics_and_Modern_E
conomies_Resetting_the_Research_Agenda (accessed 06 March 2023).
Recommended • Coyle, D. (2016). The trouble with GDP and emerging markets. World Economic Forum
reading Agenda. https://www.weforum.org/agenda/2016/04/the-trouble-with-gdp-and-emerging-
markets (accessed 06 March 2023).
• Schuldt, R., Woodall, D., & Block, W.E. (2012). Drowning the poor in excessive wages:
The problems of the minimum wage law. Humanomics, 28(4), 258-69.
https://www.emerald.com/insight/content/doi/10.1108/08288661211277326/full/html
https://www.weforum.org/agenda/2016/05/6-reasons-to-invest-in-africa (accessed 06
March 2023).
• Wallis, S. (2016), Five measure of growth that are better than GDP, World Economic
Forum, https://www.weforum.org/agenda/2016/04/five-measures-of-growth-that-are-
better-than-
gdp?utm_content=bufferb0f6a&utm_medium=social&utm_source=facebook.com&utm_ca
mpaign=buffer (accessed 06 March 2023).
Prescribed https://www.youtube.com/watch?v=QGpDQtRpwT8 (accessed 06 March 2023).
multimedia • Political Briefs. (2017). A short history of trade unions [Video]. YouTube.

The focus of this section is on macroeconomics. We look at the whole economy and how key
macroeconomic variables influence economic stability. We assess one of the main economic
variables of interest to policy makers, business, and society. We assess the main determinants
of gross domestic product – the measurement of economic growth and its implications for
inflation.
Next, we highlight the key features and policy implications of an economy in the long run,
Section overview
focusing on the classical model of savings and investment, consumption, open versions of
long run economies, the Solow-Swan model, and endogenous growth models.
The long run economic implications are followed by a set of succinct highlights of an economy
in the short run, focusing on the IS-MP model; and open economy applications. Lastly, we
assess the implications of minimum wages laws on employment, monetary economics and
inflation, exchange rate and international trade.
3.4.1 Re-introducing Macroeconomics
Macroeconomics is the field of study that focuses on the behaviour of the aggregate economy. It
examines economy-wide phenomena such as a change in unemployment, national income, growth
rate, gross domestic product, inflation, and price levels. Factors studied by macroeconomics will
affect microeconomics and vice versa.
In this section, we will consider macroeconomic policies and variables that could assist in the task
of expanding the economy; eg:
• Should we increase government spending (G) and decrease taxes (T), ie use fiscal policy?
• Should we decrease interest rates (i/r) and change money supply (monetary policy)?
• Should we decrease import tariffs and protect specific industries (trade policy)?
• Should we implement wage controls (labour policy)? and
• What about supply-side policies? How can we stimulate productivity through investment and
encourage profitability?
3.4.2 Gross Domestic Product
Gross domestic product, or GDP, is the value of the final goods and services produced within the
borders of a country during a given year (Mohr & Fourie and Associates, 2020). Final goods and
final services are counted, not intermediate goods and services. In this way we avoid counting more
than once in the production process. These are excluded to avoid double or multiple counting:
• Primary and intermediate goods;

• The sake of used goods;
• Goods produced in one year but sold in another year; and
• Purely financial transactions.

In every transaction, one person’s expenditure is another person’s income. Transactions involve the
transfer of a product or service. Therefore, the measurement of a country’s wealth or gross domestic
product (GDP) can be measured through income, expenditure or revenue.
FIGURE 15: GROSS DOMESTIC PRODUCT
(Mankiw & Taylor, 2014)
Explanation of Figure 15:
• GDP is the market value: The price people are willing to pay for the relevant good or service.
• ‘Of all’: GDP attempts to measure the aggregate value of all output. It only ‘counts’ legal
activities.
• ‘Final’: GDP only measures final goods. If a car is produced in South Africa, economists
measure the value of the car, and not the component parts of the car, as part of GDP.
• ‘Goods and services’: GDP includes both tangible goods (food, clothing and cars) and
intangible services (such as haircuts, house-cleaning and doctor visits).
• ‘Produced’: GDP includes only goods and services currently produced. It does not include
re-sales and transactions produced in the past.
• ‘Within a country’: GDP measures the value of production within the geographic confines
of a country. This is irrespective of the nationality of the producer.
• ‘In a given period of time’: GDP is usually measured for a year, but is also recorded
quarterly (ie every three months) (Mankiw and Taylor, 2014).
Components of GDP
To understand how the economy is using its scarce resources, economists measure GDP by the
spending in an economy. This is called the expenditure approach of computing GDP or national
income.
To do this, according to John Maynard Keynes, we divide GDP (which we denote as Y) into four
components: Consumption (C), investment (I), government purchases (G) and net exports (NX),
which is the difference between exports and imports. We can derive the identity:

𝐸 ≡ 𝑌 = 𝐶 + 𝐼 + 𝐺(𝑋 − 𝑀)
• Y is GDP or total expenditure in the economy;

• C is the spending by households on goods and services, with the exception of purchases of
new housing;
• I is spending on capital equipment, inventories and structures including household purchases
of new housing;
• G is spending on goods and services by national, provincial and local government; and
• NX, or net exports, is the spending on domestically produced goods by foreigners (exports),
minus spending on foreign goods by domestic residents (imports) (Mankiw & Taylor, 2014).
Calculating GDP growth
Economists use the following growth formula to calculate a number of ‘growth’ aggregates in the
economy:
𝑝𝑒𝑟𝑖𝑜𝑑 2 − 𝑝𝑒𝑟𝑖𝑜𝑑 1
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑔𝑟𝑜𝑤𝑡ℎ = × 100
𝑝𝑒𝑟𝑖𝑜𝑑 1
For example, South African GDP in 2003 is R1.15bn and in 2004 it is R1.32bn; therefore, GDP
growth for the year is:
𝑝𝑒𝑟𝑖𝑜𝑑 2 − 𝑝𝑒𝑟𝑖𝑜𝑑 1
𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝐷𝐺𝑃 = × 100
𝑝𝑒𝑟𝑖𝑜𝑑 1
Real versus nominal GDP
Economists note that, if total spending rises from one year to the next, one of two things must be
true: (1) the economy is producing a larger output of goods and services, or (2) goods and services
are being sold at higher prices. When studying changes in the economy over time, economists want
to separate these two effects. In particular, they want a measure of the total value of goods and
services the economy is producing that is not affected by changes in the prices of those goods and
services (Mankiw & Taylor, 2014).
Economists place great importance on the need to report or quote variables based on prices in a
constant period called “base year” as a period of comparison. To do this we use a measure called
Real GDP, which answers a hypothetical question: What would be the value of the goods and
services produced this year if we valued these goods and services at the prices that prevailed in
some specific year in the past? This allows economists to view the real quantitative change in the
economy, and not one that might have been caused by rising prices (Mankiw & Taylor, 2014).

Step 1: The following table is a simplified depiction of the output of country X.
Year Price of an Apple Quantity of Apples Price of an Orange Quantity of Oranges

2017 R1 100 R2 50
2018 2 150 3 100
2019 3 200 4 150
Step 2: Calculate NOMINAL GDP
Year Price Quantity Price Quantity Nominal GDP for Year

2017 (R1 x 100) (R2 x 50) R200
2018 (2 x 150) (3 x 100) R600
2019 (3 x 200) (4 x 150) R1,200
Step 3: Calculate REAL GDP (setting a base year = 2016)
Year Price Quantity Price Quantity Real GDP for Year

2017 (R1 x 100) (R2 x 50) R200
2018 (1 x 150) (2 x 100) R350
2019 (1 x 200) (2 x 150) R500
Step 4: Calculating the GDP deflator
Year Calculation Deflator

2017 (R200 / R200) x 100 100
2018 (R600 / R350) x 100 171
2019 (R1200 / R500) x 100 240
The GDP deflator is defined as a measure of the price level calculated as the ratio of nominal GDP
to real GDP times by 100. It is used to deflate nominal values and turn them to real levels.
Economists, just like many other professionals including business practitioners, avoid working with
overinflated numbers. In this way, the value of the product is analysed while removing the effect of
inflation (adapted from Mankiw & Taylor, 2014).

Some economists argue that we should rethink GDP:

syndicate.org/commentary/measuring-gdp-in-digital-economy-by-charles-bean-2016-05
• Coyle, D. (2016). The trouble with GDP and emerging markets. World Economic Forum
Agenda. https://www.weforum.org/agenda/2016/04/the-trouble-with-gdp-and-emerging-
markets (accessed 06 March 2023).
• Wallis, S. (2016), Five measure of growth that are better than GDP, World Economic Forum,
gdp?utm_content=bufferb0f6a&utm_medium=social&utm_source=facebook.com&utm_cam
paign=buffer (accessed 06 March 2023).
What measures would you change if you could? And how would the public availability of this
information change what you did in your organisation?
3.4.3 Labour Markets
The macroeconomic view of the labour market can be difficult to capture, but a few data points can
give investors, economists, and policymakers an idea of its health. The first is unemployment. In
times of economic stress, the demand for labour lags behind supply, driving unemployment up. High
rates of unemployment worsen economic stagnation, contribute to social upheaval, and deprive
large numbers of people the opportunity to lead fulfilling lives. Labour is required in all industries, eg
hospitality, construction, mining, telecommunications, etc. A competitive market is one in which
many organisations demand labour and many households supply labour. Consider the following
analysis of an organisation’s demand for labour. The marginal product of labour is “the increase in
total product that results from a one-unit increase in the quantity of labour employed, with all other
inputs remaining the same” (Parkin, 2016, p.235).
TABLE 9: AN ORGANISATION'S DEMAND FOR LABOUR
The Law of Demand

The Quantity of Labour Demanded by a Firm
Decreases if: Increases if:
The wage rate increases The wage rate decreases
Changes in Demand
A Firm’s Demand for Labour
Decreases if: Increases if:
• The price of the firm’s output decreases • The price of the firm’s output increases
• The price of a substitute for labour falls • The price of a substitute for labour rises
• The price of a complement of labour rises • The price of a complement of labour falls
• A new technology or new capital decreases the • A new technology or new capital increases the
marginal product of labour marginal product of labour
(Parkin, 2016)

3.4.4 Labour Productivity
Labour productivity measures the hourly output of a country's economy. Specifically, it charts the
amount of real gross domestic product (GDP) produced by an hour of labour. Growth in labour
productivity depends on three main factors: saving and investment in physical capital, new
technology, and human capital.
To calculate a country's labour productivity, you would divide the total output by the total number
of labour hours. For example, suppose the real GDP of an economy is R10 trillion and the
aggregate hours of labour in the country is 300 billion. The labour productivity would be R10
trillion divided by 300 billion hours, equalling about R33 per labour hour. If the real GDP of the
same economy grows to R20 trillion the next year and its labour hours increase to 350 billion, the
economy's growth in labour productivity would be 72 percent.
The growth number is derived by dividing the new real GDP of R57 by the previous real GDP of
R33 and you subtract 1 multiply by 100. Growth in this labour productivity number can sometimes
be interpreted as improved standards of living in the country, assuming it keeps pace with
labour’s share of total income.
The importance of measuring labour productivity
Labour productivity is directly linked to improved standards of living in the form of higher
consumption. As an economy's labour productivity grows, it produces more goods and services for
the same amount of relative work. This increase in output makes it possible to consume more of the
goods and services for an increasingly reasonable price (Mohr & Fourie, 2020). Labour productivity
can also indicate short-term and cyclical changes in an economy, possibly even turnaround. If the
output is increasing while labour hours remains static, it signals that the labour force has become
more productive (Mohr & Fourie, 2020). In addition to the three traditional factors outlined above,
this is also seen during economic recessions, as workers increase their labour effort when
unemployment rises and the threat of lay-offs looms to avoid losing their jobs.
A GDP component as it is, consumption has an immediate impact on it. An increase of consumption
raises GDP by the same amount, other things equal. Moreover, since current income (GDP) is an
important determinant of consumption, the increase of income will be followed by a further rise in
consumption: a positive feedback loop is then triggered between consumption and income. An
autonomous increase of consumption, if at the same level of income, would reduce savings, but the
positive loop or multiplier will promote an increase of income level with a positive impact on future
savings.
If directed to goods and services produced abroad, an increase of consumption will immediately
push up imports, while a similar indirect effect will result from consuming domestic products requiring
foreign raw materials, energy, semi-manufactured goods. To an extent, firms decide to invest by
forecasting future demand and by comparing it with present production capacity, an increase of
consumption may result in new investment.

Labour productivity, also known as workforce productivity, is defined as real economic output per
labour hour. Growth in labour productivity is measured by the change in economic output per labour
hour over a defined period. Labour productivity is directly linked to improved standards of living in
the form of higher consumption. As an economy's labour productivity grows, it produces more goods
and services for the same amount of relative work. This increase in output makes it possible to
consume more of the goods and services for an increasingly reasonable price.
3.4.5 Labour Productivity Policies
There are a number of ways that governments and companies can improve labour productivity
namely investment in capital, increasing the quality of education and training, and encouraging
technological progress.
• Investment in physical capital: Increasing the investment in capital goods including

infrastructure from governments and the private sector can help productivity while lowering
the cost of doing business (Parkin, 2016);
• Quality of education and training: Offering opportunities for workers to upgrade their skills,
and offering education and training at an affordable cost, help raise a corporation’s and an
economy's productivity (Parkin, 2016); and
• Technological progress: Developing new technologies, including hard technology like
computerisation or robotics and soft technologies like new modes of organising a business
or pro-free market reforms in government policy can enhance worker productivity (Parkin,
2016).
3.4.6 Understanding Specialisation
Specialisation occurs when workers are assigned specific tasks within a production process (Parkin,
2016). Workers will therefore require less training to be an efficient worker and this will lead to an
increase in labour productivity and firms will be able to benefit from economies of scale (lower
average costs with increased output) and increased efficiency (Mohr & Fourie, 2020).
Specialisation can also mean that individual countries can produce certain goods that they are
best at producing and then exchange them with other countries. The theory of comparative
advantage states countries should specialise in producing those goods where they have a lower
opportunity cost (relatively best at producing).
Specialisation and trade mean that countries that produce no oil can consume oil products and
countries with large reserves of raw materials can export them in exchange for other goods that they
need (Parkin, 2016). This helps reduce the problem of scarcity in individual countries and enables
countries production possibilities curves to shift outwards.

If there is increased trade, there will also be increased competition. This means that domestic
monopolies will now face competition from abroad and have no choice now but to cut prices and be
efficient (Parkin, 2016).
3.4.7 Unpacking Unemployment
Unemployment occurs when a person who is actively searching for employment is unable to find
work (Parkin, 2016). Unemployment is often used as a measure of the health of the economy. The
most frequent measure of unemployment is the unemployment rate, which is the number of
unemployed people divided by the number of people in the labour force (Parkin, 2016).
Unemployment is a key economic indicator because it signals the ability (or inability) of workers to
readily obtain gainful work to contribute to the productive output of the economy (Mohr & Fourie,
2020).
More unemployed workers mean less total economic production will take place than might have
otherwise. Unlike idle capital, unemployed workers still need to maintain at least subsistence
consumption during their period of unemployment (Parkin, 2016). This means an economy with high
unemployment has lower output without a proportional decline in the need for basic consumption.
High, persistent unemployment can signal serious distress in an economy and even lead to social
and political upheaval.
Conversely, a low unemployment rate means that the economy is more likely to be producing near
its full capacity, maximising output, and driving wage growth and raising living standards over time
(Parkin, 2016). However, extremely low unemployment can also be a cautionary sign of an
overheating economy, inflationary pressures, and tight conditions for businesses in need of
additional workers.
The two broadest categories of unemployment are voluntary and involuntary unemployment (Mohr
& Fourie, 2020). When unemployment is voluntary, it means that a person has left his job willingly in
search of other employment. When it is involuntary, it means that a person has been fired or laid off
and must now look for another job. The coronavirus pandemic affecting South Africa and the world
in 2020, for example, is causing massive levels of involuntary unemployment.
Unemployment is a major life event. It can have a devastating impact on people’s lives. It affects not
just the unemployed person but also family members and the wider community. The impact
of unemployment can be long-lasting. As unemployment becomes more long-term, its impact
becomes more far reaching, often affecting living standards in retirement. The loss of income by the
parents can damage the prospects of the next generation
Quite apart from the personal impact, unemployment is a loss of valuable productive resources to
the economy. The impact of job loss in rural and regional areas flows through the local community
damaging businesses as family expenditure is reduced. Further damage to local communities may
result from people leaving in search of work.

Types of unemployment
Frictional unemployment
This occurs as a result of people voluntarily changing jobs within an economy. After a person leaves
a company, it naturally takes time to find another job. Similarly, graduates just entering the workforce
add to frictional unemployment. Usually, this type of unemployment is short-lived. It is also the least
problematic from an economic perspective (Mohr & Fourie, 2020).
Frictional unemployment is a natural result of the fact that market processes take time and
information can be costly. Searching for a new job, recruiting new workers, and matching the right
workers to the right jobs all take time and effort, resulting in frictional unemployment (Mohr & Fourie,
2020).
Cyclical unemployment
Cyclical unemployment is the variation in the number of unemployed workers over the course of
economic upturns and downturns, such as those related to changes in oil prices (Mohr & Fourie,
2020). Unemployment rises during recessionary periods and declines during periods of economic
growth.
Preventing and alleviating cyclical unemployment during recessions is one of the key reasons for
the study of economics and the purpose of the various policy tools that governments employ on the
downside of business cycles to stimulate the economy (Mohr & Fourie, 2020).
Structural unemployment
This comes about through technological change in the structure of the economy in which labour
markets operate (Mohr & Fourie, 2020). Technological changes, such as the replacement of horse-
drawn transport by automobiles, or the automation of manufacturing, lead to unemployment among
workers displaced from jobs that are no longer needed.
Retraining these workers can be difficult, costly, and time consuming, and displaced workers often
end up either unemployed for extended periods or leaving the labour force entirely (Mohr & Fourie,
2020).
Institutional unemployment
Institutional unemployment results from long-term or permanent institutional factors and incentives
in the economy. Government policies, such as high minimum wage floors, generous social benefits
programs, and restrictive occupational licensing laws; labour market phenomena, such as efficiency
wages and discriminatory hiring; and labour market institutions, such as high rates of unionisation,
can all contribute to institutional unemployment (Mohr & Fourie, 2020).

3.4.8 Determining the Demand for Labour
When producing goods and services, businesses require labour and capital as inputs to their
production process. The demand for labour is an economics principle derived from the demand for
a firm's output (Mohr & Fourie, 2020). That is, if demand for a firm's output increases, the firm will
demand more labour, thus hiring more staff. And if demand for the firm's output of goods and services
decreases, in turn, it will require less labour and its demand for labour will fall, and less staff will be
retained. Labour market factors drive the supply and demand for labour (Mohr & Fourie, 2020).
Those seeking employment will supply their labour in exchange for wages. Businesses demanding
labour from workers will pay for their time and skills.
Labour demand has close ties with the business cycle; for example, when the economy is stimulated
and consumer demand is rising, output rises to meet that demand. The demand for labour increases
to meet the rise in output requirement. That is, if demand for a firm's output increases, the firm will
demand more labour, thus hiring more staff. And if demand for the firm's output of goods and services
decreases, in turn, it will require less labour and its demand for labour will fall, and less staff will be
retained.
3.4.9 Determining the Supply of Labour
The supply of labour is the number of hours people are willing and able to supply at a given wage
rate (Parkin, 2016). The labour supply curve for any industry or occupation will be upward sloping.
This is because, as wages rise, other workers enter this industry attracted by the incentive of higher
rewards (Parkin, 2016). They may have moved from other industries or they may not have previously
held a job, such as housewives or the unemployed.
Key factors affecting labour supply
1. The real wage rate on offer in the industry itself: Higher wages raise the prospect of increased
factor rewards and should boost the number of people willing and able to work;
2. Overtime: Opportunities to boost earnings come through overtime payments, productivity-
related pay schemes, and share option schemes;
3. Substitute occupations: The real wage rate on offer in competing jobs affects the wage and
earnings differential that exists between two or more occupations. For example an increase
in the earnings available to trained plumbers and electricians may cause some people to
switch their jobs;
4. Barriers to entry: Artificial limits to an industry's labour supply (eg through the introduction of
minimum entry requirements) can restrict labour supply and force pay levels higher – this is
the case in professions such as legal services and medicine where there are strict ‘entry
criteria’;
5. Improvements in the occupational mobility of labour: For example, if more people are trained
with the necessary skills required to work in a particular occupation.

3.4.10 Determinants of Wages
Wage differentials exist when different workers earn different wages even if all wage markets are in
equilibrium. These wage differentials are permanent phenomena. Some of the determinants of wage
differentials (Mohr & Fourie, 2020):
• Job-related differences;
• Worker-related differences;
• Differences related to market structure;
• Differences as a result of discrimination; and
• Differences in productivity.
Minimum Wage
“Minimum wages inevitably result in an increase in unemployment.” Do you agree? Why, or why not?
Case Study
Extract from ‘The average intern's salary is R3,940 per month – why is it so low?’
The average salary for an internship is R3,940 per month in South Africa – close to minimum wage, which comes in at
R3,500 per month. These salary estimates are based on 453 salaries submitted anonymously in the past 36 months to
Indeed*, a US-based worldwide employment-related search engine for job listings.
And though the graduate unemployment rate is still lower than the overall youth unemployment rate, it increased in
2019, with an unemployment rate of 31% among graduates up to the age of 24, according to StatsSA. This exceeds
the overall unemployment rate in SA, which this year reached a high of 29%.
This appears scant repayment for the investment made by graduates in their education. According to recent data
published by Old Mutual, parents/students can expect to pay R64 200 for the first year of university in 2019 – and on
average, this is expected to rise to R107 600 by 2025 and as much as R165 600 by 2030.
Meanwhile, the costs of trying to obtain and retain employment are high. Law for All compared the cost of living to that
of an intern salary, finding that the average intern's basic expenses – including money they were expected to spend on
equipment or to carry out their daily tasks – far outweighed their earnings.
Are interns then required to pay tax?

Although interns are not regarded as permanent employees, they are still expected to pay tax. Interns are liable to
pay tax as they are considered to be earning an income. However, this only applies if they earn a monthly salary/
stipend of R6 500 and above, which equates to an annual salary of R79,000 and more, SARS told Fin24.

But why are intern salaries so low?
Tony Healy, labour consultant at Tony Healy and Associates, says an intern is typically like an article clerk in a law
firm, seeking knowledge and work experience. In Healy's view, interns are not typically employees, but rather trainees
because they arrive at the job lacking key knowledge or skills.
A 22-year-old Cape Town-based intern, who asked to remain anonymous, begs to differ. According to her, graduates
have received field-related training, and in fact, some interns are overworked because they have mastered necessary
skills quickly and are being trusted with essential responsibilities – often equivalent to much higher job grades – but
with the minimum wage. Many work overtime, but without compensation, she adds.
She further argues that being a trainee does not absolve an intern of responsibilities they might have towards family,
as well as travelling expenses, rent and other costs.
Intern Sidima Mfeku believes that if interns are not regarded as normal employees, they should be exempted from
some responsibilities and deductions. "If interns are not regarded as employees, why are they paying UIF? Shouldn't
they be exempted from having to adhere to the responsibilities of a normal employee?" Mfeku asks.
"For as long as I have been an intern, I've always paid UIF, meaning I am a registered employee. [The fact that I
don't] have an employee number should raise eyebrows."
Mfeku says that as an intern, he performed his duties so well that his line manager quickly trusted him to perform
duties associated with a much more senior role, even asking him to stand in during said manager's absence or to
oversee other employees. But his stipend remained the same.
"I deserved to be paid more," he says.

(Tom, 2019)
Task
Evaluate the theoretical impact of imposing higher wages for interns in a market economy and contrast this with the
findings of the case study.
3.4.11 Trade Unions
Trade unions are organisations of workers that seek through collective bargaining with employers to
protect and improve the real incomes of their members, provide job security, protect workers against
unfair dismissal and provide a range of other work-related services including support for people
claiming compensation for injuries sustained in a job (Mohr & Fourie, 2020).
What have trade unions done for us and what is their role today?
https://www.youtube.com/watch?v=QGpDQtRpwT8 (accessed 06 March 2023).
• Political Briefs. (2017). A short history of trade unions [Video]. YouTube.

Main roles of trade unions
• Protecting and improving the real living standards of their members;

• Protecting workers against unfair dismissal (employment rights);
• Promoting improvements in working conditions, workload, and health and safety issues;
• Workplace training and education, accumulation of human capital; and
• Protection of pension rights for union members.
Advantages of trade unions
Industries with trade unions tend to have higher wages than nonunionised industries. Trade unions
can pursue collective bargaining giving workers a greater influence in negotiating a fairer pay
settlement (Mohr & Fourie, 2020). Trades unions can also protect workers from exploitation and help
to uphold health and safety legislation. Trades unions can give representation to workers facing legal
action or unfair dismissal (Mohr & Fourie, 2020).
Trades unions can help to negotiate and implement new working practices that help to increase
productivity. For example, in wage negotiations, firms may agree to increase pay, on the condition
of implementing new practices, which lead to higher productivity. If the trade union is on board, then
they can help create good working relationships between the owners and workers (Mohr & Fourie,
2020).
Disadvantages of trade unions
If labour markets are competitive, and trade unions are successful in pushing for higher wages, it
can cause disequilibrium unemployment. Union members can benefit from higher wages, but outside
the union, there will be higher unemployment (Mohr & Fourie, 2020).
It is also argued that if unions are very powerful and disruptive, it can discourage firms from investing
and creating employment in the jobs. If firms fear frequent strikes and a noncooperative union, they
may prefer to invest in another country with better labour relations.
If unions go on strike and work unproductively (work to rule) it can lead to lost sales and output.
Therefore their company may go out of business and be unable to employ workers at all. In many
industries, trade unions have created a situation of a confrontational approach (Mohr & Fourie,
2020). Also if unions become too powerful they can bargain for higher wages above the rate of
inflation. If this occurs it may contribute to wage-inflation.
3.4.12 Wealth Coexists with Extreme Poverty
The sun rises each morning for people across our earth, but people view it from widely different
contexts. Some families have a reasonably good life where parents have the necessary education
or training to secure regular employment. They are able to shelter, clothe, feed and educate their
families, while saving a pension for their old age.

Four and a half of the earth’s seven billion people, however, face the new day with worries about
their inadequate shelter, hunger, poor health and unemployment. Although the sun is rising they
have little hope for any improvement in their quality of life. Wealth coexists with extreme poverty, not
only across different continents, but also within countries and often on different sides of the same
city.
“Although South Africa does not have a single official poverty line, $2 a day or R531 a month per
person (in 2015 prices, updated to 2017) can be used as a rough guide. Using this indicator, the
proportion of people living below the poverty line was about 53% in 1995 and fell to 40% in 2015.
This is a very high level of poverty for a middle-income economy. The diffusion of social grants
was the most important contributor to falling income poverty from 2000.”
(NPC, 2010)
The World Bank publishes the Gini index (or Gini coefficient) per country.
“The Gini index measures the extent to which the distribution of income (or in some cases
consumption expenditure) among individuals or households within an economy deviates from a
perfectly equal distribution. Thus, a Gini index of 0 represents perfect equality, while an index of
100 implies perfect inequality.”
(World Bank, 2013)
The table below shows the global rankings for BRICS countries including the Gini coefficient. Notably
South Africa has the greatest income inequality index – 0.63.
TABLE 10: BRICS INCOME INEQUALITY (GINI COEFFIECIENT)
BRICS Country Gini Coefficient Global Rank Reporting Year

South Africa 0.63 1 2011
Brazil 0.51 10 2015
China 0.42 49 2012
Russia 0.38 78 2015
India 0.35 99 2011
(Index Mundi, 2017)
Development economics takes as its focal point the reality of the masses of poor, malnourished
peoples of Africa, Asia and Latin America; recognising that the futures of all people on our shrinking
earth are becoming increasingly interdependent. Economics is a social science and as such cannot
claim scientific laws or universal truths.
The concept of economic development is therefore value laden. Goals like social equality, the
elimination of poverty, participatory democracy or personal fulfilment, are all pregnant with subjective
value judgments.
On the other hand, the sanctity of private property, however acquired, or the right to accumulate
unlimited personal wealth are also implicit value judgments dictating what is good and desirable, and
what is not. This is aptly synthesised by Soedjatmoko, a former rector of the United Nations
University in Tokyo:
“ Looking back … in their preoccupation with growth and its stages and with the provision of
capital and skills, development theorists have paid insufficient attention to institutional and
structural problems and to the power of historical, cultural and religious forces in the
development process.”
(Soedjatmoko, nd)
Hence economies need to be seen as social systems rather than simply economic entities. This will
include the attitudes people have towards life and work; public and private structures; religious and
cultural traditions etc.
These noneconomic variables cannot simply be excluded from the analysis since they are often
crucial to the success or failure of development initiatives. Traditionally development meant the
capacity of an economy to generate and sustain an annual increase in its gross national product
(GNP). Similarly, per capita GNP takes into account the ability of a nation to expand its output at a
rate faster than the growth of its population. GNP figures fail, however, to recognise that income is
unequally distributed within any nation. A further stumbling block occurs when developing countries
engage in international exchanges.
Firstly, they exchange primary products such as minerals and food under conditions determined by
the developed countries. Although these goods often fetch low world prices, developing countries
cannot afford to develop industries that process raw materials since they need the income to pay off
foreign debts and interest payments.
Moreover, the experiences of the 1950s and 1960s when many developing nations achieved their
economic growth targets yet the levels of living of the bulk of these populations remained unchanged
(or worsened), signalled that something was amiss. Instead economic development came to be
redefined according to how the problems of poverty, unemployment and social inequality had been
tackled. If one, two or three of these factors had worsened, even though GNP had increased, one
could hardly claim development had occurred. The World Bank in its 1991 World Development
Report conceded as much when it stated:
“ The challenge of development … is to improve the quality of life. Especially in the world’s poor
countries... it involves much more (than higher incomes). It encompasses … better education,
higher standards of health and nutrition, less poverty, a cleaner environment, more equality of
opportunity, greater individual freedom and a richer cultural life.
(World Bank, 1991)

3.4.13 2015 Millennium Development Goals
The United Nations (UN) advocates the 2015 Millennium Development Goals:
FIGURE 16: MILLENNIUM DEVELOPMENT GOALS - 2015
End Poverty and

Maternal Health
Hunger
Universal Education Combat HIV/Aids
Environmental
Gender Equality
Sustainability
Child Health Global Partnership
(United Nations, 2013)
Fact sheets on the millennium development goals can be found at:
Goal 1: Eradicate extreme poverty and hunger

http://www.un.org/millenniumgoals/pdf/MDG_FS_1_EN.pdf (accessed 06 March 2023).
Goal 2: Achieve universal primary education
Goal 3: Gender equality
Goal 4: Reduce child mortality
Goal 5: Improve maternal health
http://www.un.org/millenniumgoals/pdf/MDG_FS_5_EN_new.pdf (accessed 06 March 2023).
Goal 6: Combat HIV/AIDS, malaria and other diseases
Goal 7: Ensure environmental sustainability
Goal 8: Develop a global partnership for development
https://www.un.org/millenniumgoals/pdf/MDG_FS_8_EN.pdf (accessed 06 March 2023).

Important successes have been observed in education and health targets. However, millions remain
affected by poverty (Ban Ki-moon, 2013, in his address to the African Union Summit).
African Union Summit
Read the following address to the African Union Summit (Ban Ki-moon, 2013) and then answer the
questions that follow:
“As Secretary-General of the United Nations, I have visited nearly 30 African countries during the last six years. In
each place, I listened – to the leaders and the people. I have seen countries emerging from war and those with long-
established peace. I have seen innovation, imagination and tremendous determination of Africa’s people to thrive
and prosper. Africa has the experience to forge solutions to its own challenges and contribute to our global goals of
inclusive growth, social justice and protecting our environment.
Some of the world’s fastest-growing economies are in Africa…. Many countries have made important gains towards
the Millennium Development Goals. More African children are in schools, especially girls. More clinics are helping
more women survive childbirth.
More African women sit in Government and key decision-making positions…. I look forward to working very closely
with the new AU leadership…. Ladies and gentlemen, I welcome this progress. But like you I am still concerned
about the hundreds of millions of Africans living in poverty.
That is why we are pushing for results. I count on all of you to attend the Special Event on the MDGs [Millennium
Development Goals] at the General Assembly in September this year at the United Nations. We must accelerate our
efforts as we near the 2015 deadline for the Millennium Development Goals.
At the same time, we are looking beyond the 2015 development agenda. Next week, the High-Level Panel of
eminent persons on the Post-2015 Development Agenda will meet in Monrovia, Liberia…. Success will depend on
ownership by governments and civil society. Our destination is clear: A future where Africa’s wealth enriches all of
Africa’s people. Where misrule is only found in history books. Where Africa’s goods get a fair price on the global
market. Where global partnerships mean shared prosperity.
African countries averaged a remarkable 5 per cent growth over the past decade – and are projected to grow by
even more than 5 per cent by 2014. But economic expansion is not an end in itself. Wealth cannot remain in the
hands of the few. Inequality is a recipe for instability.
Africa is the world’s youngest continent. Youth here yearn for jobs and a life of dignity. We must invest in them. Last
week, I appointed a Special Envoy for Youth. Let us put a special focus on Africa’s girls and women. They can drive
peace and development. Later today, we will spotlight our goal of ending maternal deaths.
We must also stand against all forms of violence. We especially need to speak out against rape and sexual violence
in conflict. Governments must support victims and end the culture of impunity. I urge the males here to join my
Network of Men Leaders and all to support our COMMIT to End Violence against Women campaign.
I applaud the African Group for leading the General Assembly’s adoption of its first-ever resolution calling for an end
to female genital mutilation. Africa has made tremendous progress in reducing both HIV infection and AIDS deaths.

The United Nations will continue to support you as we work for an AIDS-free generation, especially by ending HIV in
new-borns.
All of these gains will contribute to sustainable development. But lasting progress demands that we also address
climate change. The United Nations is proud to support the Great Green Wall for the Sahara and Sahel Initiative. I
hope all African countries will continue to contribute to progress on climate change and my Sustainable Energy for
all Initiative. This can open the way for enormous gains.
Next year, I am going to convene a summit meeting to mobilize political leadership for a legally binding global treaty
on climate change – this we have to make by 2015 and allow five more years so that we will have an effective,
legally binding climate change treaty. I count on your leadership. At the same time, the international community
must honour its commitments and step up development assistance to Africa. It is not enough for leaders to set
targets on aid and trade. They have to follow through with results. With so many donors facing fiscal pressures, I
have warned them against reducing official development assistance. We need investments in development in order
to fix the world economy.
And beyond practical economic considerations, we have a moral obligation to help the poor and vulnerable people
of our world.”
Tasks
1. Discuss South Africa’s successes and failures in achieving the 2015 goals.
2. What are the similarities and differences between “economics” and “development economics”?
3. In your own words, define “development economics”.
Development economics, like traditional economics, is concerned with efficient resource allocation
and the growth of productive output over time. It recognises the need to coordinate economic, social
(public sector) and institutional mechanisms to bring about rapid, large-scale improvements in the
quality of life of the poor. It includes the traditional economic questions of what, where, how and for
whom goods and services should be produced.
On a national level it asks who makes these economic decisions and in whose interests these are
made. On an international level, it analyses which nations and which powerful groups within nations
exert power over technology, information and finance and in whose interests, this is done? There
can no longer be two futures on this one earth: one for the minority of rich and the other for the
majority of poor. There is only one future, or we run the risk of losing everyone’s future (Todaro,
2000).
Modernisation Theory
1. Read about “Rostow’s five-stage modernisation theory”. Explain how this theory helps governments to evaluate
the stage at which their country is at and what the appropriate actions are to advance the economy.
2. According to Rostow’s five-stage theory, at what stage is Lesotho? Justify your selection. What is the next stage
in development for Lesotho?

3.4.14 Key Points
In this unit, which dealt with the macroeconomic environment, the following key points should be
noted:
• Macroeconomics is the field of study that focuses on the behaviour of the aggregate
economy;
• Gross domestic product, or GDP, is the value of the final goods and services produced within
the borders of a country during a given year;
• According to John Maynard Keynes, we divide GDP (which we denote as Y) into four
components: Consumption (C), investment (I), government purchases (G) and net exports
(NX), which is the difference between exports and imports;
• Economists note that, if total spending rises from one year to the next, one of two things must
be true: (1) the economy is producing a larger output of goods and services, or (2) goods
and services are being sold at higher prices;
• A distinction can be made between real and nominal GDP;
• The labour market is considered to be the cornerstone of economic activity;
• The creation of employment opportunities is an important macroeconomic objective and
unemployment is generally regarded as the most important economic problem in most
countries;
• Wage differentials exist when different workers earn different wages even if all wage markets
are in equilibrium;
• Wealth coexists with extreme poverty, not only across different continents, but also within
countries and often on different sides of the same city;
• The Gini index measures the extent to which the distribution of income (or consumption
expenditure) among individual or households, deviates from perfectly equal distribution of
income;
• Development economics takes as its focal point the reality of the masses of poor,
malnourished peoples of Africa, Asia and Latin America, recognising that the futures of all
people on our shrinking earth are becoming increasingly interdependent;
• Traditionally development meant the capacity of an economy to generate and sustain an
annual increase in its gross national product (GNP).

3.5 MACROECONOMIC POLICY, MONETARY SUPPLY, AND THE
FOREIGN SECTOR &&&

• Analyse the public, monetary and foreign sectors;
• Evaluate international markets, economic policy debates and research; and
Learning outcomes
• Assess the impact of international trade politics, custom unions and other regional
economic communities.
• Mohr, P., & Fourie, L. (2020). Economics for South African Students. (6th ed). Van
Prescribed book
Schaik.
• Chu, B. (2018), How we can learn from the history of protectionism,

https://www.independent.co.uk/news/long_reads/protectionism-history-how-learn-trump-
trade-tariff-law-smoot-hawley-a8384216.html (accessed 06 March 2023).
• Ellsworth, B. (2018), Venezuela to remove five zeros from ailing currency.
https://www.reuters.com/article/us-venezuela-economy/venezuela-to-remove-five-zeroes-
from-ailing-currency-idUSKBN1KF36V (accessed 06 March 2023).
• Furman, J., & Shambaugh, J. (2016). Fiscal policy remains critical for much of the world
economy. VoxEU. http://voxeu.org/article/fiscal-policy-remains-critical-much-world-
economy (accessed 06 March 2023).
• Hutt, R. (2016), TIIP: What does it mean for the future of Transatlantic trade? World
Economic Forum, https://www.weforum.org/agenda/2016/04/ttip--transatlantic-trade-
obama (accessed 06 March 2023).
• Matthes, J. & Busch, B. (2016). The economic impacts of Brexit: results from a meta-
analysis. VoxEU, http://voxeu.org/article/meta-analysis-economic-impact-brexit
Prescribed articles (accessed 06 March 2023).
• Myers, J. (2016). The world’s free trade areas, and all you need to know about them.
World Economic Forum. https://www.weforum.org/agenda/2016/05/world-free-trade-
areas-everything-you-need-to-know (accessed 06 March 2023).
http://www.pwc.com/gx/en/psrc/publications/assets/pwc_future_of_government_pdf.pdf
syndicate.org/commentary/global-growth-slowdown-factors-by-nouriel-roubini-2016-05
https://www.weforum.org/agenda/2016/05/6-reasons-to-invest-in-africa (accessed 06
March 2023).
When there is macroeconomic instability, such as high unemployment or high inflation,

monetary policy can be used to stabilise the economy. A monetary policy that lowers interest
Section overview rates and stimulates borrowing is known as an expansionary monetary policy or loose
monetary policy.

Conversely, a monetary policy that raises interest rates and reduces borrowing in the
economy is a contractionary monetary policy or tight monetary policy. This module will
discuss how expansionary and contractionary monetary policies affect interest rates and
aggregate demand, and how such policies – both fiscal and monetary – will affect
macroeconomic goals like unemployment and inflation.
3.5.1 Introduction
Macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms,
the goal of macroeconomic policy is to provide a stable economic environment that is conducive to
fostering strong and sustainable economic growth, on which the creation of jobs, wealth and
improved living standards depend. The pillars of macroeconomic policy are: fiscal policy, monetary
policy, and exchange rate policy.
3.5.2 Fiscal Policy
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor
and influence a nation's economy. It is the sister strategy to monetary policy through which a central
bank influences a nation's money supply.
The two main instruments of fiscal policy are government taxation and expenditure. There are three
main stances in fiscal policy: neutral, expansionary, and contractionary. Even with no changes in
spending or tax laws at all, cyclic fluctuations of the economy cause cyclic fluctuations of tax
revenues and of some types of government spending, which alters the deficit situation; these are not
considered fiscal policy changes.
Fiscal policy operates through changes in the level and composition of government spending, the
level and types of taxes levied and the level and form of government borrowing (Mohr & Fourie,
2020). Governments can directly influence economic activity through recurrent and capital
expenditure, and indirectly, through the effects of spending, taxes and transfers on private
consumption, investment and net exports (Mohr & Fourie, 2020).
As an instrument for stabilising fluctuations in economic activity, fiscal policy can reflect discretionary
actions by government or the influence of the “automatic stabilisers” (Mohr & Fourie, 2020). A fiscal
stimulus package is an example of discretionary action by government intended to support
aggregate demand by increasing public spending and or cutting taxes.
3.5.3 Monetary Policy
In South Africa, the Reserve Bank (SARB) is responsible for setting monetary policy. Monetary policy
decisions are implemented by changing the cash rate (the interest rate on overnight loans in the
money market). The cash rate is determined in the money market by the forces of supply and
demand for overnight funds (Mohr & Fourie, 2020).

Through open market operations the Reserve Bank can target the cash rate by increasing or
decreasing the supply of funds that banks use to settle transactions among themselves.
If the Reserve Bank wants to lower the cash rate it can supply more exchange settlement funds
than the commercial banks want to hold. In this case, banks will respond by offloading funds, which
pushes the cash rate lower.
By changing the cash rate the Reserve Bank can influence interest rates across the financial system.
Changes in interest rates in turn can influence economic activity by affecting savings and investment
behaviour, household expenditure, the supply of credit, asset prices and the exchange rate (Mohr &
Fourie, 2020).
If demand pressures are building up in the economy, reflected in rising prices, the Reserve Bank
can tighten monetary policy, thereby dampening demand. Conversely, in the face of weak demand,
reflected in deflationary pressures, the Reserve Bank can loosen monetary policy to support
economic activity.
The instruments of monetary policy
Accommodation policy
The classical cash reserve system requires a holding of 2.5% cash reserve with the Reserve Bank.
Where shortages are experienced, banks can borrow from other banks or from the Reserve Bank to
finance the shortages. These borrowings are charged at the interbank rate (between commercial
banks) or at the repo rate (when money is borrowed from the Reserve Bank). The accommodation
system is effective only if the repo rate changes are reflected in the changes in interbank overnight
rate; ie the interbank rate is less than the repo rate (Mohr & Fourie, 2020).
The accommodation policy of the Reserve Bank is mainly composed of changes in the repo rate
and other conditions on which cash is made available to banks, ie regulation of the quantity of
money through variations in the cost of credit.
Open-market policy
This involves the sale or purchase of domestic financial assets (National Treasury bills and
government bonds) by the Reserve Bank to influence interest rates and the quantity of money. When
money supply increases, the Reserve Bank buys government bonds on the open market. When
supply decreases, the Reserve Bank sells government bonds on the open market.
Other players are influenced to participate by attractive (low) prices. The transactions can be used
to support the accommodation policy (Mohr & Fourie, 2020).

Other instruments
These refer to nonmarket measures, eg credit ceilings and deposit rate control, changes in hire
purchase agreements, Reserve Bank intervention in foreign exchange markets and public debt
management. Other instruments can also involve “moral suasion” – through consultation and
persuasion (Mohr & Fourie, 2020).
Independent Central Bank
1. What does it mean to say the South African Reserve Bank or an equivalent bank in your country is independent?
2. Why is this independence and objectivity necessary to achieve economic growth and development goals?
3.5.4 Money and Inflation
Money supply is determined by the interaction between demand for money and the interest rate
level.
The money market
FIGURE 17: THE MONEY MARKET

Figure 17 shows that an increase in money supply (MS) triggers a decrease in interest rates.
Here are the key characteristics of money and inflation:
• The quantity theory of money determines the dollar value of the economy’s output;
• The rate of growth of MS determines the rate of inflation;
• The Fisher equation highlights the relationship between real and nominal interest rates; ie
the real interest rate is equal to the difference between the nominal interest rate and the
expected rate of inflation;
• The one-to-one relationship between inflation and the nominal interest rate is called the
Fisher effect;
• The expectations theory hypothesises that changes in the term structure of interest rates are
determined by changes in expectations about future interest rates; and
• Changes in money supply do not affect real variables (money neutrality).
Key findings with regard to the relationship between money and inflation are illustrated in Figure 18.
FIGURE 18: THE RELATIONSHIP BETWEEN MONEY AND INFLATION
Inflation is perceived a
'bad' becasue people
Due to the fact that
take costly steps to
growth in money
avoid it with no
supply determines the
offsetting benefits.
rate of inflation, we can
Inflation also causes
infer that whoever
people to economise
controls the money
needlessly on the
supply controls the rate
benefits offered by the
of inflation
use of money to
conduct transactions
Policy implications
The reserve or central bank plays an important role in controlling money supply in the economy and,
therefore, in controlling inflation. A country can stop inflation by stopping the printing of money.
Money Supply Tools
Research how your country’s central bank can manipulate money supply using:
1. The repo rate;

2. Key interest rates; and
3. Open market operations.

3.5.5 The Instruments of Monetary Policy
The key instruments of monetary policy are discussed below (Mohr & Fourie, 2020, pp. 332–335):
Accommodation policy
The classical cash reserve system requires holding of 2.5% cash reserve with the Reserve Bank.
Where shortages are experienced, banks can borrow from other banks or the Reserve Bank to
finance the shortages: ie interbank rate or repo rate.
The accommodation system is only effective if the repo rate changes are reflected in the changes in
the interbank overnight rate; ie repo rate > interbank rate.
In 2001, to address the shortcomings of the accommodation policy, Reserve Bank introduced the
following measures:
• Fixing of the repo rate (to prevent uncertainty about bank’s policy stance);
• Reducing of the spread between repo rate and interbank overnight rate to enhance
participation and competition;
• Weekly repo auctions (one-week maturity) replaced daily auctions to encourage interbank
market transactions;
• Announcing the market’s daily liquidity shortage prior to repo auctions was discontinued (to
encourage interbank market transactions); and
• Calculating a weighted average overnight lending rates and put on the market, thereby
providing a benchmark reference rate for interbank and enhancing its effective functioning.
The accommodation policy of the Reserve Bank is composed mainly of changes to the repo rate
and other conditions on which cash is made available to banks; ie regulation of the quantity of
money through variations in the cost of credit.
Open-market policy
This involves the sale or purchase of domestic financial assets (Treasury bills and government
bonds) by the reserve bank to influence interest rates and the quantity of money. When money
supply increases, the bank buys government bonds on the open market. When supply decreases
the bank sells government bonds on the open market. By buying bonds from the general public, the
reserve bank increases the amount of cash circulating in the economy, and by selling bonds, it mops
up liquidity. Attractive (low) prices influence other players to participate. The transactions can be
used to support the accommodation policy.
Other instruments
These involve nonmarket-oriented measures such as credit ceilings and deposit rate control, terms
of hire purchase agreement changes, reserve bank intervention in foreign exchange markets, and
public debt management. Other instruments involve moral suasion – through consultation and
persuasion.
3.5.6 Interpreting and Preparing Economic Forecasts
Economic forecasting is the process of attempting to predict future economic conditions by using
various economic variables and indicators.
Economic forecasting involves the building of statistical models with inputs of several key
variables, or indicators, typically in an attempt to come up with a future gross domestic product
(GDP) growth rate. Primary economic indicators include inflation, interest rates, industrial
production, consumer confidence, worker productivity, retail sales, and unemployment rates.
Economic forecasting makes use of historical data points that have been released in previous
economic reports for countries or geographical regions. Economic forecasting is often centred on
predicting the growth in gross domestic product (GDP) for an economy.
Businesses use economic forecasts to plan their operating activities. If the growth in GDP is
expected to be strong, they can expect to have more disposable income and they may decide to
ramp up their capital expenditures. Governments use forecasts to plan their policy-making efforts,
and fiscal and monetary policies are implemented based on expectations of GDP growth.
If the growth in GDP is expected to be strong, the government may enact tighter policies. On the
other hand, if GDP growth is expected to be slow, the government may enact expansionary
policies.
3.5.7 Early Warning Indicators
An economy generates what are known as indicators, which are data points relating to the economy.
The indicators relate to the economic cycle, which is the state of the economy that is being
experienced. There are two types of indicators: lagging indicators and leading indicators.
A lagging indicator is an observable or measurable factor that changes sometime after the
economic, financial, or business variable it is correlated with changes. Lagging indicators confirm
trends and changes in trends. They can be useful for gauging the trend of the general economy,
as tools in business operations and strategy, or as signals to buy or sell assets in financial
markets.
A lagging indicator is an observable economic variable that changes significantly after a change
has been observed in the real economy. Lagging indicators are used to inform which stage of the

business cycle an economy is in. They are also used to identify the overall trend of the economy and
are used by individuals, businesses, and government entities to make informed decisions.
Examples of lagging indicators:
• Gross domestic product (GDP) growth rate;

• Unemployment rate;
• Consumer price index (CPI);
• Central bank interest rates;
• Corporate earnings; and
• Balance of trade.
The common characteristic among the lagging indicators is that the shift in them occurs only after
there has been a shock to the economy.
During the 2008 global crisis, corporate earnings of companies were not observed to have fallen
until after the housing market in the US burst.
A leading indicator is an observable economic variable that changes significantly before a change
has been observed in the real economy.
A leading indicator is any measurable or observable variable of interest that predicts a change or
movement in another data series, process, trend, or other phenomenon of interest before it
occurs. Leading economic indicators are used to forecast changes before the rest of the
economy begins to move in a particular direction and help market observers and policymakers
predict significant changes in the economy.
Leading indicators are used to predict when changes in the economic cycle may occur and predict
other significant shifts in the economy. Leading indicators are critically important in economic
forecasting, since they are the main inputs in the statistical models used to forecast economic
conditions.
Data points are gathered from the past, and the past does not necessarily inform future conditions.
Therefore, leading indicators are not always accurate, but they provide some insights and are
widely used by individuals, businesses, and government entities.

Examples of leading indicators are:
• Yield curve;
• Housing starts;
• Retail sales;
• Jobless claims;
• Corporate capital expenditures;
• Purchasing managers index (PMI);
• Consumer confidence index;
• Industrial production; and
• Worker productivity.
The common characteristic among the indicators above is that the shift in them occurs before there
is a shock to the economy.
With the outbreak of the Covid-19 pandemic in 2020, businesses across the world suffered
massively before the impact on the real economy had been felt.
3.5.8 Borrowing from the International Monetary Fund
When a country borrows from the International Monetary Fund (IMF), the government of that country
agrees to adjust its economic policies to overcome the problems that led it to seek financial aid.
These policy adjustments are conditions for IMF loans and serve to ensure that the country will be
able to repay the IMF (IMF, 2021). This is known as conditionality and is designed to promote
national ownership of strong and effective policies.
The principal motivation behind conditionality is that the recipient country has some sort of
economic trouble requiring the loan, debt relief, or aid. In order to prevent the existing situation
continuing or deteriorating and potentially requiring more funding later, conditions are attached
that are designed to improve the underlying situation in the country, so that the funds are used
effectively and the country moves on to a self-sustaining economic path.
(Kenton, 2019)
Most IMF financing is paid out in instalments and linked to demonstrable policy actions. This is
intended to ensure progress in program implementation and reduce risks to IMF resources.
Programme reviews provide a framework for the IMF executive board to assess whether the program
is on track and whether modifications are necessary (IMF, 2021).

Policy commitments agreed with country authorities can take different forms. They include:
• Prior actions, or the steps a country agrees to take before the IMF approves financing or
completes a review. They ensure that a programme will have the necessary foundation for
success;
• Quantitative performance criteria (QPCs) which are specific, measurable conditions for IMF
lending that always relate to macroeconomic variables under the control of the authorities.
Examples include monetary and credit aggregates, international reserves, fiscal balances,
and external borrowing;
• Indicative targets (ITs). Along with QPCs, ITs may be set for quantitative indicators to assess
progress in meeting a programme’s objectives. Sometimes ITs are set instead of QPCs
because of uncertainty about economic trends; and
• Structural benchmarks (SBs) or reform measures that often are non-quantifiable but are
critical for achieving programme goals and are intended as markers to assess programme
implementation.
(IMF, 2021)
If a country misses a QPC condition, the IMF executive board may approve a waiver if it is satisfied
that the program will still succeed on its path to economic recovery. This may be because the
deviation was minor or temporary or because national authorities are taking corrective actions.
Missed structural benchmarks and indicative targets do not require waivers, but are assessed in the
context of overall programme performance (IMF, 2021).
The IMF’s publicly available database for the monitoring of fund arrangements covers all
aspects of programme conditionality. Read more here:
https://www.imf.org/external/np/pdr/mona/index.aspx
(IMF, 2021)
3.5.9 International Trade and the Foreign Sector
Countries trade in order to gain self-sufficiency (Mohr & Fourie, 2020). Countries in autarky – the
state of not engaging in international trade – believe that they can produce everything needed within
the country. However, this is practically impossible; hence, countries only specialise in activities they
are best at, exporting the surplus and importing what they cannot produce. As a result of limitations
on factors of production, countries choose what to produce based on the following (Mohr & Fourie,
2020):
Absolute advantage
Countries concentrate on the products they can produce more efficiently and economically than their
trading partners. For example, if one worker in South Africa can produce 100kg of cement and 100
bricks per week whereas a worker in Zimbabwe produces 50kg of cement and 24 bricks per week,
South Africa will produce both cement and bricks, as it can produce a larger quantity of the good,
assuming the inputs for producing each good remain the same across countries.

Comparative advantage
The alternative measure for examining production is based on opportunity cost. The theory behind
comparative advantage is that even though one country can produce absolutely more goods than
another, each country should specialise in and export those goods for which it has a low opportunity
cost of producing. Comparative advantage can come from many sources and these include:
technology, resource endowments and differences in tastes between trading partners.
New trade theory (NTT)
New trade theory (Krugman in Pettinger, 2013) suggests that a critical factor in determining
international patterns of trade are the substantial economies of scale and network effects that can
occur in key industries.
“Economies of scale and network effects can be so significant that they outweigh the more
traditional theory of comparative advantage. In some industries, two countries may have no
discernible differences in opportunity cost at a particular point in time. But, if one country
specialises in a particular industry then it may gain economies of scale and other network
benefits from its specialisation.”
(Pettinger, 2013)
Pettinger (2013) also argues that an early entrant can become a dominant firm in the market (the
firm achieves economies of scale against which new entrants cannot compete – some say an unfair
advantage). This leads to a form of monopolistic competition.
Consider that poorer, developing economies may struggle to develop industries because they lag
too far behind the economies of scale enjoyed in the developed world. This is not due to any
inherent comparative advantage but has more to do with the economies of scale and potential
networks developed by the early entrant.
This may suggest that governments have a role to play in supporting new industries (tariff
protection and domestic subsidy, especially when large capital outlays are required). If the
industry gets support for a period of time it will be able to exploit economies of scale and
networks and go on to be competitive without government support (the “infant industry”
argument).
In your opinion, is free trade and laissez faire government policy undesirable for developing
economies, which might find themselves unable to compete with established multinationals?

Barriers to Trade
Suppose you are hired by a group of South African clothing manufacturers to prepare a case for the introduction of new
barriers to international trade in the clothing industry. List the arguments that you would use.
3.5.10 Trade Policy
Trade policy encompasses all activities aimed at regulating the direction and operations of
international exchange of goods and services. Countries can choose either to be more inward
looking or outward looking. Inward-looking countries are those that adopt a protectionist trade policy
to concentrate on production within the country. Outward-looking countries are those that open up
their boarders to international trade; they do not adopt protectionist activities to protect the local
industry.
These protection measures may take the following forms (Mohr & Fourie, 2020):
• Import tariffs: These are duties or taxes imposed on imports. They are used to protect
domestic firms from international competition or to raise revenue for the government. The
types of tariffs include specific tariffs (fixed amounts levied per import unit) and ad valorem
tariffs (tariffs levied as a percentage of import value);
• Quantitative restrictions: They include the imposition of import quotas;
• Subsidies: They help to make domestic products cheap and thus give them the competitive
edge over cheap imports;
• Exchange controls: They involve reducing the amount of foreign currency available to
import goods;
• Exchange rate policy: This involves depreciating the domestic currency to make imports
more expensive;
• Nontariff barriers: This involves administrative discrimination practices such as channelling
government contracts to domestic firms; eg BEE policy; and
• South African trade policy: This is based on import substitution or replacement. Import
surcharges and quotas are used to reduce domestic demand of imports so as to improve the
balance of payments position. Exemptions are made on imports that stimulate exports.
Balance of Payments
The balance of payments must always balance. Does this mean that policymakers need not be concerned about the
balance of payments? Explain your answer.

3.5.11 The Balance of Payments
A balance of payments is a balance relating to the flow of funds between countries. The balance of
payments consists of the following (Mohr & Fourie, 2020):
Current account
This is where a recording of exports and imports of goods, together with net gold exports, is done.
The result of the difference between exports and imports is referred to as the trade balance.
Capital (financial) account
This is where all financial transactions, such as the purchase of shares or bonds, are recorded.
These are shown on a net basis.
If the receipt of foreign currency exceeds payments, a country’s foreign currency reserves increase
(BoP surplus); the opposite results in a deficit.
The Effect of Exchange Rates
Explain how exchange rate changes can affect exports and imports and, therefore, the trade balance.
3.5.12 Exchange Rates
An exchange rate is the price of one currency in terms of another currency; eg R14/$ (direct quote)
or $/R14 (indirect quote). An increase in the value of a currency is called appreciation and a decrease
is called depreciation.
• The foreign exchange market:

o This is a market where foreign currency is traded
• Exchange rate policy:
There are three options that can be used:
o Determination of exchange rate through market forces;
o Determination of exchange rates through managed float; and
o Determination of exchange rates through use of interest rates.

3.5.13 The Terms of Trade
Terms of Trade (TOT) is the ratio between export prices (expressed as an index) and import prices
(expressed as an index) (Mohr & Fourie, 2022).
!"#$%& (%)*+ ,-.+"

𝑇𝑂𝑇 = ,/#$%& (%)*+ ,-.+" 𝑥 100
An improvement in TOT, ceteris paribus, means that the welfare of the nation has increased. It is an
indication that the country exported more goods and services than it imported, which translates to
improved welfare for the people. A fall in TOT, ceteris paribus, indicates a welfare loss (Mohr &
Fourie, 2020).
The Significance of Trade Terms
Define the terms of trade for South Africa and explain their significance.
3.5.14 Global and Domestic Trends
Various global and domestic trends affect society, and by extension businesses and the public
sector. Trends influence strategic business decisions and therefore change the business
environment. A change in population might signify a growing (or ageing or shrinking) market, and if
the former, a shortage of jobs, which might signal cheaper labour, outsourcing opportunities –
particularly to regions where labour is both inexpensive and educated – or a growing pool of
disposable income, greater need for disease control (as in malaria areas), and so on.
Natural disaster might precipitate movement of people from one area to another, for example from
earthquake-prone or drought-stricken areas to safer places. A shift in understanding and sentiment
– for example a greater awareness of man’s role in climate change, or the conditions under which
cheap goods are manufactured, can also lead consumers to change the nature of their perception
of goods and services, to the detriment or success of producers.
“Effective global trade is central to economic growth and development. Trade agreements are an
integral part of making this a reality” (Myers, 2016). In early 2016 there were 406 regional trade
agreements in place governing movement of goods and services largely through imposition (or not)
of tariffs.

Identifying Key Trends
Read Myers’ brief but excellent overview of trade pacts, with links to more detail about the main ones:
• Myers, J. (2016). The world’s free trade areas, and all you need to know about them. World
Economic Forum. https://www.weforum.org/agenda/2016/05/world-free-trade-areas-everything-you-
need-to-know (accessed 06 March 2023).
Many other global and domestic trends can affect organisations. Here are pointers to a few:
Trends that will affect the public sector:

http://www.pwc.com/gx/en/psrc/publications/assets/pwc_future_of_government_pdf.pdf (accessed 06
March 2023).
Lessons from the crisis of 2008:

• Furman, J., & Shambaugh, J. (2016). Fiscal policy remains critical for much of the world economy.
VoxEU. http://voxeu.org/article/fiscal-policy-remains-critical-much-world-economy (accessed 06
March 2023).
Can you trust modelling as the basis for a big decision?

• Matthes, J. & Busch, B. (2016). The economic impacts of Brexit: results from a meta-analysis.
VoxEU, http://voxeu.org/article/meta-analysis-economic-impact-brexit (accessed 06 March 2023).
• Hutt, R. (2016), TIIP: What does it mean for the future of Transatlantic trade? World Economic
Forum, https://www.weforum.org/agenda/2016/04/ttip--transatlantic-trade-obama (accessed 06
March 2023).
When hopes, fears, modelling and reality collide:

syndicate.org/commentary/global-growth-slowdown-factors-by-nouriel-roubini-2016-05 (accessed 06
March 2023).
Opportunities for the bold:

https://www.weforum.org/agenda/2016/05/6-reasons-to-invest-in-africa (accessed 06 March 2023).
Questions
1. Research and identify key global and domestic social-political and economic trends.
2. Explain the impact of these trends on organisations in general, and yours (or a single organisation of your choice)
in particular.
3. Do you still feel that the macroeconomic initiatives you mooted in the policy-making exercise earlier in this section
were justified? Why?
4. Summarise your findings.

3.5.15 Key Points
• Macroeconomic policy is concerned with the operation of the economy as a whole.

• In broad terms, the goal of macroeconomic policy is to provide a stable economic
environment that is conducive to fostering strong and sustainable economic growth, on which
the creation of jobs, wealth and improved living standards depend.
• The key pillars of macroeconomic policy are: fiscal policy, monetary policy and exchange
rate policy.
• Fiscal policy operates through changes in the level and composition of government spending,
the level and types of taxes levied and the level and form of government borrowing.
• Governments can directly influence economic activity through recurrent and capital
expenditure, and indirectly, through the effects of spending, taxes and transfers on private
consumption, investment and net exports.
• In South Africa, the Reserve Bank (SARB) is responsible for setting monetary policy.
• Monetary policy decisions are implemented by changing the cash rate (the interest rate on
overnight loans in the money market).
• The cash rate is determined in the money market by the forces of supply and demand for
overnight funds.
• Through open market operations, the Reserve Bank can target the cash rate by increasing
or decreasing the supply of funds that banks use to settle transactions among themselves.
• Inflation can happen if the money supply grows faster than the economic output under
otherwise normal economic circumstances.
• Inflation, or the rate at which the average price of goods or serves increases over time, can
also be affected by factors beyond the money supply.
• Central banks today primarily use inflation targeting in order to keep economic growth steady
and prices stable.
• If prices rise faster than that, central banks tighten monetary policy by increasing interest
rates or other hawkish policies.
• No country can be entirely self-sufficient. All countries need some commodities or goods from
abroad and must export some of their own products to pay for what is imported.
• Countries usually specialise in the activities they are best at, exporting the surplus and
importing what they cannot produce.
• No individual economy is immune from global trends and innovation, so a change in one
country’s circumstances can affect many others, and require them to make adjustments in
monetary and other policy;
• Trade policy encompasses all activities aimed at regulating the direction and operations of
international exchange of goods and services;
• A balance of payments is a balance relating to the flow of funds between countries;
• An exchange rate is the price of one currency in terms of another currency; and
• Terms of trade (TOT) is the ratio between export prices (expressed as an index) and import
prices (expressed as an index).

4. REFERENCES
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content/downloads/2011/08/Bookboon/Economics/microeconomics-uk.pdf (accessed 19 October
2022).
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syndicate.org/commentary/measuring-gdp-in-digital-economy-by-charles-bean-2016-05 (accessed
19 October 2022).
Cartwright, B. (2015), Determinants of Supply [video],

https://www.youtube.com/watch?v=Sp3gJS8NyAc (accessed 19 October 2022).
Chigumira, G. (2014), South-Africa-Mind-the-Gap -Minimum-Wage,

https://www.researchgate.net/publication/330145245_South-Africa-Mind-the-Gap_-Minimum-Wage
Chu, B. (2018), How we can learn from the history of protectionism,

https://www.independent.co.uk/news/long_reads/protectionism-history-how-learn-trump-trade-
tariff-law-smoot-hawley-a8384216.html (accessed 19 October 2022).
Clifford, J. (2020a), Macro Unit 1 Summary (Updated Version) [video],

https://www.youtube.com/watch?v=myeLTXMEhC4&list=PLD5BC727C84E254E5 (accessed 19
October 2022).
Clifford, J. (2020b), Micro Unit 1 Summary (Updated Version) [video],

https://www.youtube.com/watch?v=WqHikVZ4-D8&t=0s (accessed 19 October 2022).
Cohen, S.I. (2017), Islamic Economics and Modern Economies: Resetting the Research Agenda,
Journal of Global Economics,
https://www.researchgate.net/publication/318389967_Islamic_Economics_and_Modern_Economie
s_Resetting_the_Research_Agenda (accessed 19 October 2022).
Coyle, D. (2016), The trouble with GDP and emerging markets, World Economic Forum Agenda,
https://www.weforum.org/agenda/2016/04/the-trouble-with-gdp-and-emerging-markets (accessed
19 October 2022).
EconplusDal. (2017), Production Possibility Curves – PPC’s/PPF’s [video],

https://www.youtube.com/watch?v=IzccVWouIxM (accessed 19 October 2022).
EconPlusDal. (2020), Monopolistic Competition [video],

https://www.youtube.com/watch?v=DHgSBazfTEk (accessed 19 October 2022).

Ellsworth, B. (2018), Venezuela to remove five zeros from ailing currency,
https://www.reuters.com/article/us-venezuela-economy/venezuela-to-remove-five-zeroes-from-
ailing-currency-idUSKBN1KF36V (accessed 19 October 2022).
eNCA. (2018), What role do trade unions play in the 21st Century? [video]
https://www.youtube.com/watch?v=QGpDQtRpwT8 (accessed 19 October 2022).
Furman, J., & Shambaugh, J. (2016), Fiscal policy remains critical for much of the world economy,
VoxEU, http://voxeu.org/article/fiscal-policy-remains-critical-much-world-economy (accessed 19
October 2022).
Hutt, R. (2016), TIIP: What does it mean for the future of Transatlantic trade? World Economic
Forum, https://www.weforum.org/agenda/2016/04/ttip--transatlantic-trade-obama (accessed 19
October 2022).
Investopedia. (2020), Law of diminishing marginal returns,

http://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp#axzz25I3EXGvl
Matthes, J., & Busch, B. (2016), The Economic impacts of Brexit: results from a meta-analysis,
VoxEU, http://voxeu.org/article/meta-analysis-economic-impact-brexit (accessed 19 October
2022).
Myers, J. (2016), The world’s free trade areas, and all you need to know about them, World
Economic Forum, https://www.weforum.org/agenda/2016/05/world-free-trade-areas-everything-
you-need-to-know (accessed 19 October 2022).
One Minute Economics, (2019), Economies of Scale in one minute [video],

https://www.youtube.com/watch?v=rYvzM_tayY4 (accessed 19 October 2022).
Parkin, M. (2016), Economics: Global and Southern African Perspectives, (2nd ed). Cape Town:
Pearson Education.
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https://www.youtube.com/watch?v=gPPeDO4dMRA (accessed 19 October 2022).
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http://www.pwc.com/gx/en/psrc/publications/assets/pwc_future_of_government_pdf.pdf (accessed
19 October 2022).
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https://www.youtube.com/watch?v=1YVSLmEIcj0, (accessed 19 October 2022).
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https://www.youtube.com/watch?v=x8wjGBSx53M, (accessed 19 October 2022).

Regenesys Business School, (2016), An introduction to individual demand [video],
https://www.youtube.com/watch?v=dtTzkadiyzk (accessed 19 October 2022).
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syndicate.org/commentary/global-growth-slowdown-factors-by-nouriel-roubini-2016-05 (accessed
19 October 2022).
Schuldt, R., Woodall, D., & Block, W.E. (2012), Drowning the poor in excessive wages: The
problems of the minimum wage law,
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October 2022).
Sultan al Essa, T. (2016), Six reasons to invest in Africa, World Economic Forum,
https://www.weforum.org/agenda/2016/05/6-reasons-to-invest-in-africa (accessed 19 October
2022).
Teach Me Economics with Darren Landinguin. (2019), Fundamental economic concepts [video],
https://www.youtube.com/watch?v=iA-qnNIGarA (accessed 19 October 2022).
Wallis, S. (2016), Five measure of growth that are better than GDP, World Economic Forum,
gdp?utm_content=bufferb0f6a&utm_medium=social&utm_source=facebook.com&utm_campaign=
buffer (accessed 19 October 2022).
Welker, J. (2017), The Determinants of Demand [video],

https://www.youtube.com/watch?v=5Ei5OiIk_X0 (accessed 19 October 2022).
Welker, J. (2017), The Utility Maximization Rule [video],

https://www.youtube.com/watch?v=6yjsiXAtSGE (accessed 19 October 2022).
World Bank, 2015, GDP ranking PPP based, http://data.worldbank.org/data-catalog/GDP-PPP-

based-table (accessed 19 October 2022).
World Bank, 2016, GDP ranking PPP based,

http://databank.worldbank.org/data/download/GDP_PPP.pdf (accessed 19 October 2022).

5. GLOSSARY OF TERMS
Term Description
Balanced trade A situation in which the value of a country’s imports and exports are in balance.
Central planning The determination by the state of what should be produced and what resources or factors
of production should be allocated to what sectors and industries.
Closed economy An economy in which there is no trade or other relations with the outside world.
Common market A form of economic integration, in which there is free trade, a common external tariff and
the free movement of goods, services and capital.
Comparative The relatively lower cost of producing a product by one country relative to another.
advantage
Credit rating An assessment of the ability of a government or another borrower to honour its debt
obligations.
Debtor nation A nation with a balance of payments deficit.
Demand-pull inflation Price increases due to excessive aggregate demand, or when demand exceeds productive
capacity.
Development banks Banks providing medium to long-term credit, often at concessional rates for development
programmes.
Economic efficiency Achieving the lowest price for a given quality and quantity of inputs.
Economic The total stock of physical and financial capital embodied in roads, railways, waterways,
infrastructure water and sanitation supply, financial institutions, electricity and public services such as
health and education.
Economic integration The merger of the economies and economic policies of neighbouring countries.
Economic planning The deliberate attempt by the state to determine the allocation of factors of production.
Economic policy The objectives and methods of achieving a set of economic objectives through the use of
policy instruments.
Exchange control A policy to control the outflow of domestic currency or to prevent a worsened balance of
payments situation by controlling the amount of foreign exchange that can be obtained by
citizens.
Exchange rate The rate of exchange of one currency against another.
Exports The value of goods and non-manufactured services sold to the rest of the world.
Foreign direct Overseas investments by private companies.
investment
Foreign exchange Claims on a country held by another held in the form of currency of that country.
Foreign reserves The total value of currency, gold and special drawing rights held by a country.

Free trade Unrestricted trade, without tariffs, quotas and other protectionist measures.
Full employment A situation in which everyone who wants to work at a prevailing wage rate is able to get a
job.
Income per capita The gross national product of a country, divided by its total population.
Industrial policy Deliberate efforts by a country to guide markets by planning and coordinating industrial
activity.
Inflation targeting A monetary policy framework intended to achieve price stability over a certain period of
time. The reserve bank and government agree on a target rate to be achieved over a
stipulated period.
Informal sector The part of developing economies characterised by small competitive, individual and family
firms, petty retail trade and services, labour-intensive productive methods, outside the
formal or regulated economy.
Inputs Resources used in the production of goods and services.
Macro-economic A situation in which a country has high inflation and a rapidly expanding money supply.
instability
Market failure A situation resulting from the existence of market imperfections, including monopoly power,
lack of factor mobility, etc.
Mass production The large scale production of goods or services.
Money supply The amount of money in an economy.
Monopoly A situation in which a product that does not have substitutes is produced and sold by a
single producer.
Multinational An international company with headquarters in one country but operations in other
Corporation (MNC) countries.
National budget The projected revenue and expenditures that flow through the National Revenue Fund.
Includes transfers to provinces or local government, but not their spending from own
revenues.
National income The total value of all goods and services produced by a country over a year.
Outcomes The ultimate effects of outputs on the community or broader society.
Outputs The services or products delivered by departments, which are measurable in terms of
quality, quantity, timelines, and cost.
Policy objectives The target plans of the department on which funds are spent in support of its aim.
Political economy An attempt to merge economic analysis with political practice.
Poverty A situation in which the population is only able to meet its bare necessities for survival.
Primary products Products derived from extractive processes.
Primary sector The portion of the economy comprising agriculture.
Private sector The part of the economy whose assets are under the control of nongovernmental units,
namely families and firms.

Privatisation The process of selling-off state owned assets to the private sector.
Public good A good or service that is enjoyed simultaneously by the public.
Public sector The part of the economy, which is under the control of the state.
Scarcity A situation in which there is less of something than is required.
Self-sustaining Economic growth that continues over the long run based on savings, investment and
growth public and private activities.
Subsidy A payment by government to a producer to maintain production or low prices.
Sustainable A pattern of development that enables future generations to live at least as well as the
development current generation.
Tariff A tax on imports levied at the port of entry.
Trade deficit A situation in which import expenditure is less export receipts.
Trade surplus An excess of export receipts over import payments.

6. VERSION CONTROL
Date of Publication: May 2021

Publisher: Regenesys Management
Place of Publication: Sandton
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Your material includes:

• This study guide;

Various resources are prescribed to help you complete this course.

© Regenesys Business School 1

• Ahlersten, K. (2008). Essentials of microeconomics. https://library.ku.ac.ke/wp-

• Bean, C. (2016). Measuring the value of free. Project Syndicate. https://www.project-

• Chigumira, G. (2014). South Africa mind the gap minimum wage.

• Chu, B. (2018). How we can learn from the history of protectionism.

• Investopedia. (2020). Law of diminishing marginal returns.

• PWC. (2013). Future of government.

© Regenesys Business School 2

• Cartwright, B. (2015). Determinants of supply [Video]. YouTube. https://www.youtube.com/watch?v=Sp3gJS8NyAc

• Clifford, J. (2020a). Macro Unit 1 Summary (Updated Version) [Video]. YouTube.

• Clifford, J. (2020b). Micro Unit 1 Summary (Updated Version) [Video]. YouTube.

• EconplusDal. (2017). Production possibility curves – PPC’s/PPF’s [Video]. YouTube.

• EconPlusDal. (2020). Monopolistic competition [Video]. YouTube. https://www.youtube.com/watch?v=DHgSBazfTEk

• Political Briefs. (2017). A short history of trade unions [Video]. YouTube.

• Regenesys Business School. (2015). An introduction to individual supply [Video]. YouTube.

• Regenesys Business School. (2015). Price elasticity of supply [Video]. YouTube.

© Regenesys Business School 3

• Welker, J. (2017). The determinants of demand [Video]. YouTube. https://www.youtube.com/watch?v=5Ei5OiIk_X0

• Welker, J. (2017). The utility maximization rule [Video]. YouTube. https://www.youtube.com/watch?v=6yjsiXAtSGE

© Regenesys Business School 4

It covers traditional areas of economics such as macroeconomics, microeconomics, international

3.1 LEARNING OUTCOMES

On completing this course, you should be able to:

• Analyse the dynamics between factors of production;

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Timeframe Minimum of 20 hours

Learning outcome • Analyse the dynamics between factors of production.

• Clifford, J. (2020a). Macro Unit 1 Summary (Updated Version) [Video]. YouTube.

3.2.1 Economics – A Social Science

Economics is defined as:

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In economics we distinguish between:

• Microeconomics (and microeconomists, who study microeconomics); and

For ease of discussion we have summarised some of the differences in Table 1.

TABLE 1: MICROECONOMICS VS MACROECONOMICS

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Distinguishing Between Micro- and Macroeconomics

Cement your understanding of the difference between micro- and macroeconomics:

3.2.2 Economic Modelling and Theories

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TABLE 2: STEPS TO DEVELOP ECONOMIC THEORY

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Challenges to economic models

Therefore economists often have to employ complementary approaches:

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Examples of the fallacy of composition:

Example of a post hoc fallacy:

The Fallacy of Composition

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The following examples demonstrate these choices.

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Consider these examples.

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TABLE 3: FACTORS OF PRODUCTION

A simplified diagram of circular flow is provided in Figure 1.

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• Set aside for future spending;