Chapter 2

Basic concepts in economics

 Scarcity problem

• Economic means: (Labour, capital, natural resources & entrepreneurs).

Remuneration (wages, rent, interest & profit)

• Economic ends: 1) High & sustainable economic growth (economic

growth, GDP), 2) Price stability (inflation rate, purchasing power), 3) High
employment (unemployed, unemployment rate, natural rate of
unemployment), 4 )Balance of payments stability (balance of payments,
current account versus financial account, exports, foreign investment,
foreign currency, foreign exchange, exchange rate), 5) Equitable
distribution of income.
SA unemployment rate
Workbook Activities 13 & 14

APPLYING THE KNOWLEDGE…

 Activity 13
The following describe possible macroeconomic concerns.

Descriptions
1 Wage rates of maize farm workers in the Limpopo province.
2 The slump in the demand for new motor vehicles.
3 The increase in the cost of production factors in the manufacturing
sector.
4 Increases in the official unemployment rate in the South Africa.
5 Slump in the imports of textiles.

Number Agree Disagree

1

4
5
 Activity 14
The following are possible macroeconomic objectives.

Descriptions
1 Increasing the rate of growth in the real GDP from 1.5% to 2% per
annum.
2 Spending more money on the expansion of the manufacturing sector.
3 Keeping the rate of growth in inflation within the target range as set
by the South African Reserve Bank.
4 Reducing the official rate of unemployment from 27% to 23% in the
medium term.

Number Agree Disagree

1

4
 Ways to approach the scarcity problem
• Free market: (product market, factor market, financial market, foreign exchange
market, transaction, perfect markets)

• Market failure (public goods, imperfect competition, externalities, tragedy of anti-

commons).
• Role of government in a mixed economy: 1) government spending (exhaustive
expenditure, transfers, subsidy), 2) taxation (direct versus indirect taxation, progressive
taxation, regressive taxation, proportional taxation, privatisation), 3) National budget
(budget surplus, budget deficit, debt trap).
4) Government intervention through economic policy: (microeconomic versus macroeconomic
policy, fiscal policy, monetary policy, balance of payments policy, wage & price policy). Expansionary
versus restrictive policy.

Grammar of economic models

• Economic objects
– Goods vs services
– Real assets versus financial assets
– Capital goods
– Financial instruments (savings account, unit trusts, shares, dividends, capital gain,
government bond, maturity date, coupon payment)
– Real sector versus monetary sector
• Economic subjects
- Households (non-durable versus durable consumer goods, utility, law of diminishing
marginal utility)
- Firms (explicit versus implicit costs, final versus intermediate products)
- Financial intermediaries
- Government sector (national versus provincial versus local governments, public
enterprises)
- Foreign sector (trading partners, capital inflows, capital outflows, FDI, foreign
portfolio investment, foreign aid)
- Demand, supply & equilibrium, positive versus normative economic statements
Workbook Activities 5 and 6

APPLYING THE KNOWLEDGE…

 Activity 5
The following descriptions fit the profile of a financial asset.

Descriptions
1 Shares in a company listed on the Johannesburg Securities
Exchange.
2 A government bond with a maturity of 15 years or less.
3 A savings account at ABSA.
4 The purchase of production equipment on credit.
5 A unit trust account or endowment policy bought from a life
insurance company.
Number Agree Disagree
1

4
5
 Activity 6
The following statements deal with economic subjects, production factors
and opportunity costs.

Descriptions
1 An economy consists of economic subjects
with needs and the resources available to
Number Agree Disagree
satisfy such needs.
1
2 Making everyone in the world as wealthy as
those in the wealthiest economies is not 2
feasible given the current level of resources
3
and technology available on the planet.
3 The scarcity of labor, capital, natural 4
resources and entrepreneurship force
5
economic subjects to make choices.
4 Within the context of available incomes and
options, the best choice is the one that
carries the highest opportunity cost – since
this implies that it is the most valuable.
5 The trade-offs that accompany choices can
be measured by opportunity costs.
Video on how the economy works

• https://www.youtube.com/watch?v=1U2MbR1w720&t=408s