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ECS101 – DEC 2009
MICROECONOMICS AND MACROECONOMICS –
MICROECONOMICS
The price of a single product
Changes in the price of a single product
The production of a product
The decisions of individual consumers
The decisions of individual firms or
businesses

MACROECONOMICS
The consumer price index
Inflation
The total output of all goods n services
The combined outcome of the decisions of all consumers in
the country
The combined decisions of all firms in S
...
Decisions or functioning of
decision makers such as individuals, households, firms or other orgs
...

Macroeconomics – is concerned with the economy as a whole
...
Emphasis on topic such as total production, income
and expenditure, economic growth, aggregate unemployment, inflation etc is studied
...

A technological improvement in the production of a good or service will cause a
rightward/outward shift of the PPC
Interest is income from capital
A capital intensive production system is dominated by capital goods
Capital, wealth and natural resources are stock variables, whereas investment, profit and losses are
flows
...

Under perfect competition information is complete and collusion is impossible
Monopoly – the ability to influence the market price and the market output
Oligopoly – the market is dominated by few large firms with market power ,the strategy can be to
join forces and it is called cartel forming
A change in the price of the other factors of production will shift labour demand curve
A trade union that bargains only for an increase in wages will cause unemployment
Minimum wages are propagated as a way to avoid exploitation of workers
...

An increase in both demand and supply will increase an equilibrium price
Under perfect competition market the participants(firms is a price taker

If a firm under in a perfectly competitive market raises its price above the market price sales will
drop to zero
Demand curve under PC – the demand curve is indicated by a horizontal line at the given market
price
A firm can expand production in the short run by employing more units of the variable factor of
production
...

Excess supply – when the quantity supplied is greater than the quantity demanded
When there is a market shortage the quantity produced will increase
The price of a product will decrease when there is a market surplus
Equilibrium in the market – Qd=Qs
Consumer to be in equilibrium – the weighted marginal utilities of the condition of goods are
equal of equal utility from the last rand spent on each product
Primary sector – raw materials are produced
Secondary sector – manufacturing part of the economy
When all firms earn normal profit = industry in equilibrium in the long run
The economic problem arises from the coexistence of unlimited wants and limited resources
Normative statement – factual , unemployment is the most important economic problem
worldwide
Factor of production – a national road, labour of households, arable land used for sowing
Economic systems are based on any or a combination of 3 coordinating systems, tradition,
command and market
Market capitalism most of the factors of production are privately owned with limited government
intervention
...

An increase in productivity of workers will shift supply curve right
Government set maximum prices to combat inflation
Fixing a maximum price below equilibrium price will result in excess demand
Black markets occur in any situation where market forces of demand and supply cannot eliminate
excess demand
In order for government price fixing to have an effect on the market the minimum price should be
set above the equilibrium price , minimum price and maximum price should be set at the same
level as the equilibrium price
Increase in supply of a product will lead to the supply curve shifting to the right and equilibrium
quantity will fall , the supply curve will shift right and demand curve will not shift
Price elasticity of demand varies from point to point along a linear demand curve
A perfectly elastic demand curve is horizontal
The aim of any consumer o to maximize utility
The cardinal utility involves the idea that values can be assigned to the amount of satisfaction ,
utility can be measured or quantified
The law of diminishing marginal utility states that the total utility increases at a decreasing rate as
the consumer consumes more units of a good
The marginal utilities of different goods must be equal and combination of goods must be
affordable for a consumer to be in equilibrium
The marginal utility approach can be used to derive the individual demand curve for a good
Negative utility is called disutility
Total revenue is at maximum when marginal revenue is zero, if the firm sells all units of its
product at the same price then its AR=P
Economic cost is the difference between total revenue and economic profit and the difference
between explicit costs and implicit costs
The concept of economic costs of production is based on the principle of opportunity cost
The law of diminishing return applies to a situation where at least one input is fixed
Production and cost in the short run – the shape of the unit cost curves give rise to the unit product
curves
A perfectly competitive firm faces horizontal demand curve because the market price is given
In PC – the firms marginal revenue and average cost are equal to the price in the market
Equilibrium condition – in the long run all costs of production are variable

In PC if all firms are making normal profit then industry equilibrium will be established
In a monopolistic market the shape of the firms demand curve satisfies the law of demand
...
Therefore there will be excess demand
...
There will be a surplus
...
Qs>Qd
Non wage determinants of supply of labour are – new workers enter the market, no of workers
decrease,
Economics is a social science that studies human behaviour
Scarcity and choice are central elements of economics
The problem of scarcity arises because wants are unlimited and the resources limited
An economies capacity to produce is limited by the quantity and quality of the available resources
The opportunity cost of s choice is the value of the best forgone alternative or opportunity
Production possibility curve indicates the combination of goods n services which can be produced
when the communities resources are fully and efficiently employed
Points outside the PPC = unattainable
Points on the PPC = attainable
Points inside the PPC = not efficiently employed
Movement of PPC = principle of opportunity cost
Rates of changes is shown in percentages
Resources 3 types , natural, human and man made
Positive statement – is an objective statement of fact
Normative statement – involves an opinion or value judgement
Non durable goods – used only one
Durable goods – long lasting
Semi-durable – can be used more than once
Capital goods – used to produce other goods – cement to build a house
Final goods - consumed by individuals – loaf of bread
Intermediate goods – used to produce other goods – flour to bake bread
Private goods – consumed by individuals – food ,clothes
Public goods – used by community at large – traffic lights
Scarce or economic goods – produced at a cost from scare resources
Free goods – not scarce – air , sea water
Homogenous goods – identical
Heterogeneous goods – different varieties , qualities
Money is not a factor of production but rather a means of exchange
4 factors of production – natural , labour, capital , entrepreneurship and technology is the 5 th factor

Entrepreneur is the driving force in the production process
Capital is tangible things – goods – services intangible
Interest = income earned from capital
Wages and salaries = income earned from labour
Profit = income earned from entrepreneurship
Capital intensive production – dominated by machines
Labour intensive production – dominated by labour
Primary FOP – natural and labour
Secondary FOP – capital and entrepreneurship
Human resources – labour n entrepreneurship
Non human resources – natural and capital
Labour defined as the exercise of human and mental and physical effort in the production of goods
n services
Public sector – government sector
Private sector – the rest of the economy
Traditional system – prescribed by custom n tradition
...
Communication by means of phone, fax, computer etc
...

Market prices – are signals or indices of scarcity which indicate to consumers what they have to
sacrifice to obtain the goods or service concerned
Socialist system – FOP owned by state
Capitalist system – FOP owned privately
Privatisation – assets sold to private sector
Nationalisation – privately owned assets by the state
3 central questions – what ,how and for whom
Stock variable – measured at a particular point in time
Flow variable – measured over a period of time
Goods market – markets for goods n services
Factor market – markets for various FOP
Stock – wealth , assets, liabilities, capital , population
Flow – income , profit, loss, investment, savings
C = total consumption
Firms – defined as the unit that employs FOP to produce goods n services that are sold in the
goods market
Profit = difference between revenue n cost
Capital formation = I
Government expenditure = G
Taxes = T
Exports = X
Imports = Z
2 markets in the economy – goods and factor markets
Determinants of quantity demand – price of product , price of related products, income of
consumer, size of household, taste or preference of consumer (Qd = Px, Pg,Y, T, N, ……)
Law of demand states the higher the price of a good the lower the quantity demanded
Substitute – is a good that can be used in place of another
...
Shows the inverse relationship between the price and quantity demanded
Complements – are goods that tend to be used jointly to satisfy a want– fish n chips

Change in consumer income = change in demand
Decrease in consumer income = leftward curve – decrease in demand
Increase in consumer income = rightward curve – increase in demand
Individual market supply determinants – the price, the price of alternative products, prices of FOP
and other inputs, expected future prices, the state of technology
Qs = f (Px,Pg,Pe,Py)
Excess supply = Qs > Qd
Equilibrium = Qs = Qd
Prices plays 2 functions – rationing function ( prices serve to ration scarce supplies to those who
place the highest value on them , allocative function (excess supply results in falling prices and
losses, which drives FOP from the activities concerned
Source of increase in demand – increase in the price of substitute product, decrease in the price of
complementary product, increase in consumers income, greater consumer preference for product,
expected increase in the price of a product
...

Formula for Elasticity = percentage change in the QD of the product divided by percentage change
in the price of the product
Determinants of price elasticity of demand – substitution possibilities, degree of complementary of
the product, the type of want satisfied by the product, the time period under consideration, the
proportion of income spent on a product, advertising durability, addiction, number of uses of
product, the definition of the product
...
Values can be
assigned to the amount of satisfaction
Ordinary utility – involves the ranking of different bundles of consumer goods n services in order
of preference
Indifference approach – size of utility differences cannot be established
Law of marginal utility / Goosens first law – states that marginal utility of a good or services
eventually declines as more of it is consumed during a given period
...
In other words the opportunity cost of a choice is the value
of the best forgone opportunity
...
Opportunity cost captures the essence of the problems of scarcity and choice
...
Canning fruit and veggies, processing minerals , manufacturing goods
Tertiary sector – services ,trade , transport, education, financial , personal
Circular flow of goods n services – FIRM → GOODS MARKET → HOUSEHOLDS →
FACTOR MARKET → FIRMS
The household offer their FOP for sale on the factor market where these factors are purchased by
the firms , firms combine these FOP and produce consumers goods n services , these goods n
services are offered on sale to households in the goods market
Consumers – members of the household
Qd = (Px , Pg, Y, T, N , …
...

Indifference approach – does not require the measurement of marginal utility and allows us to
distinguish between the income effect and the substitution effect of a price change
The assumption of completeness or law of comparison – it is assumed that a consumer is able to
rank all possible combinations/bundles of goods n services in order of preference
...
Properties are usually slope downwards from left to
right, shows various combinations of 2 goods n services which yield the same level of consumer
satisfaction level
...
Used to analyse the choice between FOP in the production
process, choice between work and leisure , choice between consumption and saving
...

Total profit = TR – TEC (total explicit costs)
Economic profit = TR – TC (explicit costs + implicit + normal profit)
Average product – simply the average number of units of output produced per unit of the variable
input – AP = TP (total product) ÷ N (number of variable input)
Marginal product – is the number of additional units of output produced by adding 1 additional
unit of the variable input
Law of diminishing returns – as more of a variable input is combined with one or more fixed
inputs in a production process , points will eventually be reached where first the marginal product
, then the average product and finally the total product start to decline
Average fixed cost = AVC = TFC ÷ TP
AVC = TF C ÷ TP
AC = TC ÷ TP or TC ÷ Q
AFC = TFC ÷ TP or TFC ÷ Q
AVC = TVC ÷ TP or TVC ÷ Q
MC = d(TC) ÷ d(TP) ÷ d(TC) ÷ Dq
dTP = small change in TC & Dtp= small change in TP

returns to scale – refers to the long run relationship between inputs and outputs
constant returns of scale = % increase in inputs will give rise to the same % increase to outputs
increasing returns of scale = % increase in inputs will lead to a larger % increase in outputs
decreasing returns of scale = % increase in inputs will give rise to a smaller % increase in output
economies of scale – is experienced if cost per unit of output falls as the scale of production
increases
...
economies of scale can be achieved
by increasing the quantity or productivity of only one or a few of the inputs and where all the
inputs are increased they do not necessarily have to increase by the same %
diseconomies of scale – occurs when unit costs rise as output increases
...

Rates if changes usually indicated by %
FOP – natural (land) , capital (machines , tools , buses, boats) , labour (people to construct
building , people to render a service) , entrepreneurship (planning , organizing, decision making)
Consumption – flow variable, investment – stock variable , capital – stock variable
Supply curve – movements = changes in quantity supplied illustrated by movements along the
supply curve
Shifts on supply curve = changes in supply illustrated by shifts in the supply curve

SU 4
Interaction between households & firms = Supply and Demand

Demand

Demand = the quantity of a good demanded by an individual (or household) in a
particular period is a function of the price of the good, prices of related goods,

the income of individual (or household), taste, the number of people in the
household and any other possible influence
...
)
 Qd = Quantity Demanded
 Px = Price of Good/Product
 Pg = Price of related goods
 Y = Household’s income during period
 T = Taste of consumer
 N = Number of people in specific household
 …
...

The inverse relationship is called the law of demand
Market demand is obtained by horizontal summation of individual demands
...


Shift in Demand Curve
Happens when a change in any of the determinants of demands change OTHER
THAN PRICE
...

Supply is determined by:
 Price of good – The higher the price, the more the producer wishes to sell
 Prices of alternatives – Producers must consider the prices of alternatives
that they can produce with the same resources for more revenue
...
If costs increase, fewer products will be supplied at
the same cost as before
...

 Expected future prices – The higher the expected future price of the
product, the more the producer will plan to produce
...

Qs = f(Px, Pg, Pf, Pe, Ty)
 Qs = Quantity Supplied
 Px = Price of good
 Pg = Prices of alternative outputs
 Pf = Price of Factors of Production (FoP)
 Pe = Price of expected future prices
 Ty = Technology

Movement in Supply Curve

Movement along supply curve = Change in quantity supplied
The Supply Curve shows that the quantity supplied will increase if the price
increases, ceteris paribus
...
When the plans of households (buyers, demanders) coincide
with the plans of firms (sellers, suppliers)
...
The
equilibrium quantity is “Q”
...
The
excess demand is the “Shortage” or in this instance 43
...
The
excess supply is the “Surplus” or in this instance 50
...
Simultaneous Changes in Demand and Supply
When ONLY demand or ONLY supply changes, it is possible to predict what will
happen to equilibrium prices and quantities in the market
...

Changes in Demand Curve
Table 7-3 (Page 120)
Changes in Supply Curve
Table 7-5 (Page 126)
Increase in demand = increase in equilibrium price
Decrease in supply = increase in equilibrium price
THEREFORE
An increase in demand AND decrease in supply = increase in equilibrium price
We CANNOT predict what will happen to the equilibrium quantity exchanged in
the market
...
Table 8-1 (Page 139)
2
...
The equilibrium price and weekly traded quantity decreases
...
The equilibrium price and quantity traded increases
...
The equilibrium price of motorcars will increase and the
equilibrium quantity will decrease
...
This is illustrated by
a leftward (downward) shift in the demand curve
...

3
...
1
...
Managing this shortage is as
follows:
 Consumers served on a “first come, first served” basis causing queues and
waiting lists
 Suppliers may set up informal rationing systems (limits to each customer,
or selling only to regular customers)
 Government may introduce and official rationing system (tickets, coupons
etc
...
1
...
Black Markets
Consumers are willing to pay a certain price for a quantity of a good
...

Fixing prices below equilibrium price thus:
 Creates shortages (excess demand)
 Prevents market mechanism from allocating available quantity
 Stimulates black market activity by providing an incentive for people to
obtain a good and resell it at a higher price to consumers who are willing
to pay a higher price
...
2
...

Supply varies from season to season and is dependent on weather, alternative
crops etc
...
3
...
Governments often introduce minimum prices
(price floors), which serve as guarantees to producers
...

IF Minimum Price > Equilibrium price, it creates a surplus (excess supply)
...
When variables are
related, we often want to know how sensitive or responsive the dependent
variable is to changes in the independent variable
...
Price Elasticity of Demand
Price elasticity of demand = the percentage change in the quantity demanded if
the price of the product changes by 1%
...
This
implies that a 1% change in the price of the product will lead to a 2% change in
the quantity demanded
...
This ratio is called elasticity coefficient
...

Calculations
Calculate percentage change in quantity demanded
Percentage change in the
quantity demanded

=

Change in Quantity
Quantity

X 100

Calculate percentage change in price of product
Percentage change in the
price of the product

=

Change in Price
price

X 100

Price elasticity of demand is calculated as follows:
Price elasticity
of demand

=

Change in Quantity
Change in Price

X

Price
Quantity

NB: Between two price points we can get two separate answers, it is thus
important to use the average of the two points as the basis of the calculation, so if
price moves from 36 to 48, we use the average as a calculation i
...
(36 +48) / 2 =
42
...

Arc Elasticity of Demand between 2 points
Arc elasticity of
demand

=

(Q2 – Q1) / (Q1 + Q2)
(P2 – P1) / (P1 + P2)

Categories of price elasticity of demand
Perfectly Inelastic Demand (ep = 0)
Inelastic Demand (ep lies between 0 and 1)
Unit Elastic Demand (ep = 1)
Elastic Demand (ep lies between 1 and infinity)
Perfectly Elastic Demand (ep = infinity)
NB: Price Elasticity of Demand = Elasticity Coefficient
Table 9-2 (Page 163) Price Elasticity of Demand: a Summary

Inelastic demand (ep < 1): Salt, matches, toothpicks, cigarettes, bread, milk, petrol,
electricity, water, eggs, potatoes, meat, postage stamps, medical care, legal service,
car tyres etc
...


2
...


Income Elasticity of Demand =

Percentage change in the quantity
Demanded of a product
--------------------------------------------Percentage change in consumer’s
Income

Goods with a positive income elasticity of demand are called normal goods
Goods with a negative income elasticity of demand are called inferior goods
Income elasticity of demand > 1 THEN good is Luxury Good
Income elasticity of demand >0 AND <1 good is essential good
3
...


Cross Elasticity of Demand =

Percentage change in the quantity
Demanded of product A
--------------------------------------------Percentage change in the Price
Of Product B

In the case of substitutes (butter vs margarine) the cross elasticity of demand is
positive
...

In the case of complements the cross elasticity of demand is negative
...


4
...
To the consumer it does not matter whether he gets
one portion of meat and six loaves of bread per week or two portions of meat
and three loaves of bread
...

This illustrates the law of substitution: The scarcer the good becomes, the
greater its substitution value will be
...

This rate is called marginal rate of substitution (MRS)
Perfect Complements = Goods that can only be used together eg
...

Indifference curve will be L shaped

Perfect Substitutes = Consumer regards Sasol as a perfect substitute for Caltex
...

Budget line

The budget line indicates all combinations of the two products that a consumer
can afford to purchase with the income at his disposal
...

When a consumer’s income changes, the equilibrium quantities of the goods
concerned do not always change in the same direction
...

When an increase in income causes a decrease in the quantity demanded, the
good is called an inferior good
...
A fixed input is
an input whose quantity cannot be altered in the short run
...

There is a relationship between the quantity of the inputs and the maximum
output that can be obtained from these inputs
...

Although the price of a unit if labour is given, the quantity of the labour is
variable and therefore the cost of labour is also variable
...

Variable costs = direct costs = prime costs = avoidable costs
Cost Calculations
Marginal Cost
Marginal Cost is the cost a company incurs when producing one more good
...
This difference is the
marginal cost of going from two to three
...

MC = TC(3) – TC (2)
Total Cost
The total cost is simply all the costs incurred in producing a certain number of
goods
...

TC(3) = TC(2) + MC(3)
Fixed Cost
Fixed costs are the costs that are independent of the number of goods you
produce, or more simply the costs you incur when you do not produce any
goods
...

FC = TC value @ 0 units
Total Variable Costs
These are just the opposite of fixed costs; these are the costs that do change
when we produce more
...

TVC(4) = TC(4) – FC

Average Total Costs
Our average total cost is our fixed costs over the number of units we produce
...

Requirements for perfect competition:
 Large number of buyers and sellers of the product
 No collusion between sellers – each must act independently
 All goods sold must be identical
 Buyers and sellers must be completely free to enter or leave the market
 All buyers and sellers must have perfect knowledge of market conditions
 There must be no government intervention
 All factors of production must be perfectly mobile

Graph on left shows that price of product is determined by demand and supply
...

Graph on the right is the demand curve (which is perfectly elastic) for the
product
...

Difference between monopolistic competition and monopoly lies in the barriers t
entry
...

Difference between monopolistic competition and perfect competition is found
in the nature of the product
...
Perfectly competitive firms produce identical
products
...
NonMonetary factors, such as location and working conditions, are more
important in labour markets
...

 Relationship between suppliers and demanders involves considerations
such as humanity, loyalty, fairness etc
...

 Labour is intrinsically heterogeneous and unlike goods cannot be
classified or standardized
 There are a variety of labour markets/segments
...

 Remuneration of labour does not only consist of price, but may include
non-wage benefits such as housing, medical etc
...
e
...

Money wages = nominal wages = the amount of money ACTUALLY received by a
worker per hour, day, week, month or year
...
Real wages are the purchasing power of money wages
...

Calculation of marginal revenue product of labour
# workers
0
1
2

Total
Physical
Product
0
10
18

Marginal
Physical
product
0
10
8

Price per
product
50
50
50

Marginal
revenue
product
0
500
400

The market demand of labour
A shift in the market demand for labour could be as a result of:
 Number of firms (employers) change
 Price of a product changes – Change in price = change in demand
 Marginal Physical Product MPP (or productivity) of labour changes since
this will change marginal revenue product (MRP)
 A new substitute for labour becomes available – Example automation
 Price of a substitute factor of production changes
...

 Price of complimentary factors of production changes
...

Trade Unions
There are two categories of trade union:
Craft Union
Consists of workers with a common set of skills (plumbers, electricians, printers)
who are joined together in a common association, irrespective of where, or for
whom, they work
...
Supply control include: restricting membership, controlling the
length of training or apprenticeship or raising the standards for entry
...

Industrial union
Tries to organize all workers (skilled and unskilled) in a particular industry in a
single bargaining unit
...
It can now force firms in the industry to
bargain exclusively with the union over wages and other conditions of
employment
...

Minimum Wages
If minimum wage rate is fixed above the equilibrium price, and excess supply of
labour will develop (unemployment)
...
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4

Study Unit 1
What Economics is all about
Economics is a social science that studies how people use scarce resources to satisfy their
unlimited wants
...
The main aspects in Microeconomic theory are supply, demand,
scarcity, choices and opportunity cost
...
Some are important for
day-to-day living, such as food, water, clothing, shelter and health care
...
Some of the things that the human being wishes to accumulate are not really
necessary for a living
...
Examples include sports cars, jewellery, fancy
clothing and luxurious accommodation
...
Our needs and want are
never ending, yet the means to satisfy them are limited in supply
...
This is the basis
of Economics
...
Money, housing, time, food,
labour, machinery, cars all come in limited quantities such that we can`t all get everything that
we need to satisfy our needs and wants
...


5

Opportunity Cost and Choice
Opportunity cost is one of the very important concepts in Economic theory
...

Opportunity cost is the value of the next (second) best alternative forgone or sacrificed when a
certain choice is made
...
Because our wants and needs are unlimited/endless, and the resources to
satisfy them are limited, this leaves us with no option but to make choices between competing
alternatives
...
If let’s say you have R1 000 for
use and you choose to use R500 on airtime, it automatically leaves you with R500 for use on
other competing needs
...
Take Tebogo for example
...
His opportunity cost of
Studying will be Laundry, and that of Laundry will be Chatting
...
Note that every time the opportunity cost will be the value of the next
best alternative forgone, not the values of all the alternatives forgone
...
Should we
erect more hospitals or build more schools, use the land to construct factories for production of
cars and computers or instead use that land for farming to produce maize, wheat and milk?
After the what question has been answered, the how to produce question has to be addressed
...
Say a family of 4 gets 100kg of maize, 50kg
wheat and 20 litres of milk per month while a family of 6 gets 150kg of maize, 70kg wheat and
8litres of milk or should we produce only for those who can afford?

6

Production Possibility Curve/Frontier
A production possibility curve is a graph/boundary line that emphasizes the concept of
opportunity cost and choice further
...
This schedule shows that there are limits I
production so an economy must decide the combinations of goods and services to be produced
to achieve efficiency
...

Take an example of an economy that can produce only wine and cotton
...
Point X represent an inefficient
use of resources, while point Y represent unattainable production levels (with the given
resources) at least in the short run
...
Those points above the curve are in-achievable or simply not feasible
...
If it decides to produce more cotton, it must divert some of
the resources from wine production and consequently reduce the amount of wine produced
...
This means more grapes and cotton can be
produced (with a given level of land, labour and capital)
...
When this happens, we know there is growth in the
economy, as point Y (which earlier had been impossible) will now be attainable and represent
efficient use of resources
...
A movement of the PPC inwards would represent a dwindling economy and
this will result in a fall in output
...
This may
emanate from a specific industry, but the effects may be felt in several related industries
(positive spill-over effect)
...
This would swivel the curve out along the axis of that
good
...

When a particular individual or group has a particular argument to make, they will include
subjective statements about what ought to happen, or what should happen, depending on the
individual`s opinion
...

These are called Normative statements, and are very difficult to prove right or wrong as they
represent an individual`s opinion
...
Positive statements deal with objectivity and are facts which are prone to
testing for acceptance or rejection
...

an overall view of the operation of the economic system
...

the combined decisions of all firms in South Africa
...

the use of policy to refute facts and hypotheses
...

a study of how limited resources can be used to satisfy limited wants
...

total spending, total income and total production
...

total income, total savings and total consumption
...
Suppose your neighbour’s instalment increases by 2 percent
while yours increases by 5 percent
...

Your neighbour’s instalment increase in rand terms is more than yours
...

None of the options is correct
...

is the organisation of production, consumption and distribution to answer the basic
economic questions
...


10

[4]

6

is a plan or scheme which allows a firm to make profit at some other firm’s expense
...

the amount of labour that must be used to produce one unit of any product
...

the amount of one product that must be given up to produce one more unit of
another product
...


Combination
A
B
C
D
E
7

Pens
16
14
11
7
0

Assume that one pencil costs 25 centsand one pen costs 50 cents
...

50 cents
...

R1
...

[1]
[2]
[3]
[4]

2
4
6
8

11

Use the production possibilities curve below to answer questions 9 and 10
...

Figure 1
Production Possibilities: CapitalandConsumer Goods

Capital Goods

C
•X
B

A

•Y

0

A’

B’

D’

C’

Consumer Goods

9

Assume that there is a major technological breakthrough in the consumer goods industry,
and the new technology is widely adopted
...
Which curve in the diagram would represent the new
production possibilities curve?
[1]
[2]
[3]
[4]

BD’
AA’
CC’
BB’

12

Suggested Solutions May/June 2011
1

Option 3

2
3
4

Option 3
Option 2
Option 3

5

Option 2

6

Option 4

7

Option 3

8

Option 2

9

Option 1

10

Option 2

Economics is a social
science that studies how man
allocates scarce resources
towards satisfying unlimited
needs
...
02=R100
 You instalment
increase:
R2 000*0
...
All systems seek
to organise production,
distribution and consumption
as efficiently as possible to
answer the basic economic
problem (What to produce,
how to produce and for
whom to produce)
Refer above on opportunity
cost
Opportunity cost:
½ (14-11) * R0
...
75
Opportunity cost = 10-6
=4 pencils
Read up on ‘swivel of the
PPC’
...
The PPC swivels,
pivoted at the good without
production improvements
The ban will cause a drop in
overall economic output, i
...

a fall in the production of both

13

goods
November 2011
1
...

society manages its scarce resources
...

to avoid having to make trade-offs
...
Points on the production possibilities curve (PPC) are
[1]
[2]
[3]
[4]

efficient
inefficient
unattainable
normative

Use figure 1 below to answer Questions 3-5
...

If the economy is operating at Point C, the opportunity cost of producing an additional 15
units of bacon is
[1]
[2]
[3]
[4]

10 units of eggs
...

30 units of eggs
...


4
...


[1] the opportunity cost of 20 additional units of eggs is 10 units of bacon
...

[3] the opportunity cost of 20 additional units of eggs is 30 units of bacon
...

Point F represents
[1]
[2]
[3]
[4]

a combination of production that can be reached if we increase the production of
eggs by 20 units with the current resources available
...

a combination of production that can be reached if technology becomes outdated
...


6
...


a
...

c
...

Whether the economy is operating on the production possibility curve or inside it
...


[1]
[2]
[3]
[4]

Statements a & c
Only statement b
Statements a & b
Only statement c

Which of the following statements represents positive statements?
a
...

c
...

Government policies give higher priority to curing inflation than to curing
unemployment
...

Statements a & c
Only statement b
Only statement c

15

[4] Statements b & c
November 2011 Suggested solutions
1

Option 2

2

Option 1

3

Option 2

4

Option 4

5

Option 4

6
7

Option 3
Option 2

Economics is a social
science that studies how
man/society
allocates/manages
scarceresources to satisfy
his unlimited needs
Refer
above
on
the
Production Possibility Curve
Moving from point B to point
C implies giving up 20 units
of eggs
...
Note that this is
only possible if the economy
is producing below full
capacity
All points above the PPC are
not possible
Note the objectivity in this
statement
...


2
...

i
ii
iii
iv

the production of a single product
the consumer price index
the decisions of individual firms or businesses
the combined outcome of all firms in South Africa

[1]
[2]
[3]
[4]

None of the above
Only (i) and (iii)
Only (ii) and (iv)
Only (i), (ii) and (iii)

What does normative economics involve and on what is it based?
[1]
[2]
[3]
[4]

3
...


Which of the following statement(s) is/are correct?
A capitalist market economy is characterized by _____
...


Only (i) and (ii)
Only (ii) and (iv)
Only (i), (ii) and (iii)
All of the above

The opportunity cost of a good is _____
...


private ownership of the factors of production
economic decisions are made predominantly through the market with limited
government intervention
decentralized decision making that rests with the owners of the factors of production
economic decisions that are made by individual households and firms, with a large
presence of the government in the economy

the time lost in finding it
the quantity of other goods sacrificed to obtain another unit of that good
the expenditure on the good
the lack of opportunity to buy a good

A household is _____
...


Which of the following statement(s) is/are correct?
i
ii
iii

[1]
[2]
[3]
[4]

The circular flow of income and spending is a monetary flow
...

The circular flow of income and spending is in a opposite direction to the flow of
goods and services
...

Figure 1

ORANGES

•D
•B

•A

•C

APPLES

8
...


[1] inefficient allocation of resources
...

[3] attainable but inefficient resource allocation
...

The movement from point B to point C on the PPF reflects
[1]
[2]
[3]
[4]

scarcity
...

unlimited wants
correct resource allocation

20

Suggested solutions May/June 2012
1
2

Option 2
Option 2

3
4

Option 2
Option 3

5
6
7
8
9

Option 2
Option 3
Option 3
Option 4
Option 2

Read up on the descriptions
of Positive and Normative
statements
Option iv talks about a “large”
presence of the Government
in the Economy
...
This is the
opportunity cost of Apples

21

November 2012
1
...


“Unemployment is the only important economic problem in South Africa” is an
example of a normative statement
...
Scarcity is a problem in poor countries only
...
40% (per cent) of 100 is greater than 76% of 50
...

Only a and b
...

Only a and c
...

Figure 1

22

2
...

output combinations A, D, E and C all represent full and efficient resource use
...

the production of goods X and Y require similar factor inputs in similar proportions
...
The outward shift of the production possibility frontier from AC to BC could arise from
[1] technological progress that affects good X production and good Y production
equally
...

[3] an improvement in labour productivity only in the industry producing good Y
...

4
...
Production is a stock and income is a flow
...
The total number of motor vehicles manufactured in South Africa in 2011 is a stock
variable
...
The monthly expenditure of a household is a flow variable
...

Only c
...

Only a
...

This is a swivel as discussed
above, not a shift
Textbook page

24

Study Unit 3: The interdependence between the major
sectors, markets and flows in the mixed economy
The 3 major flows in an economy are:
 Income
 Spending
 Production
The Circular of Income and Spending
A model is a simplified way of explaining a complicated concept
...

Households buy goods and services in the goods market (Households spend on the goods
market), while firms buy factors of production in the factor market (Firms spend on the factor
market)
...
)Remember a market does not necessarily need to be a physical place like Tshwane
Market, it can just be a set-up which allows for the interaction of buyers and sellers
(Kalahari
...
The key element is that households make decisions that are mutually agreed
upon
...

Firms
These are economic units formed by profit seeking entrepreneurs who employ factors of
production (land, labour and capital) to produce goods and services for sale and consumption
by households
...

Injections
Injections in the circular flow model represent additions to the current flow of income
...
Major leakages are
taxes, savings (part of the income which is not consumed) and imports (spending on foreign
products)

25

Past Exam Practice questions
Please note there are no relevant questions on this topic in the following past exam papers:



May 2011
November 2011

May/June 2012
Paper provided at the end of the booklet

Suggested solution May/June 2012
6
7

Option 3
Option 3

Read up under Househol

---