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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 Households
Look on the diagrams for the
circular flow model

26

November 2012
6
...

[2] There are two sets of markets in a simple economy: goods markets and factor
markets
...

[4] In the simple circular flow of economic activity, “real” flows of goods and factors, and
financial flows move in opposite directions
...


Which of the following statements is/are correct?

a
...

c
...

A change in the price of potatoes will result in a change in the quantity of potatoes
demanded
...


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

All the statements are correct
...

Only b and c
...


Suggested solutions November 2012
6
7

Option 4
Option 3

27

Study Unit 4 & 5: Demand, Supply and
Prices & Demand and Supply in action
Demand
Demand represents a set of quantities of goods and services that would be purchased per each
given price level
...
For demand to be effective, willingness and ability (financial means to
purchase) have to be present
...

While demand illustrates a set of alternative quantities demanded at each and every price level,
quantity demanded refers to the quantity that is demanded at a specific price
...
The opposite is true
...
The downward sloping demand curve illustrates this relationship
Two reasons why the relationship between price and quantity demanded is inverse:




Substitution effect (If the price of a piece of KFC chicken increases relative to that of
Chicken Licken (ceteris paribus), consumers would shift to buying more Chicken Licken,
causing the demand for KFC chicken to drop)
Income effect (If the price of a piece of KFC chicken increases, this reduces the buying
power/purchasing power of KFC lovers, consequently reducing the amount of chicken
pieces they will afford to buy
...
These factors are the “other things” which we held
constant while we were defining demand in the beginning
...
These can be
 Substitutes (e
...
Hp Laptop and Dell, Bread and rolls, Tea and coffee0
 Complements (e
...
Toothbrush and Tooth-paste, Bread and Butter, Tyres and
Rims, Pen and Paper)
 Consumer price expectations
 Population size
 Weather
The list is endless
...


29

Supply
As with demand, supply represents a set of quantities of goods and services that can be
produced or supplies at each and every price level
...

The following is an example of a Supply schedule for Sasko bread:

Price (Rand per loaf)

Quantity Demanded (Loaves of Bread)

20

18

16

14

12

10

8

6

6

2

The law of Supply
The law of supply states that the higher the price, the higher the quantities of goods and
services producers are willing to supply ceteris paribus, and the opposite holds truth
...
Thus the supply curve is upward sloping
...

The student should again distinguish between Supply, which is a set of alternative goods and
services supplied at each and every price level while the Quantity supplied refers to a quantity
that is supplied at a specific price
...
A change in any of these factors will cause the supply
schedule to shift to a new higher/lower level:






Input prices (fuel, labour, electricity, raw materials)
Number of sellers
Increase/decrease in government subsidies
Producer expectation of the price level
Weather

30

Exam Practice questions
May/June 2011
11

The law of demand states that
[1]
[2]
[3]
[4]

prices and quantity demanded are inversely related, ceteris paribus
...

prices and quantity demanded are directly related
...


Use the graph below to answer questions 12 and 13
...

an excess supply of 130
...

no excess demand or excess supply
...

R20 000
...

R30 000
...

a decrease in the wages of farm workers
...

a decrease in the price of potatoes
...

increase
...

be indeterminate
...

Figure 3

32

16

Suppose Figure 3 represents the market for oil
...
If the price of
potatoes rises and people become at the same time concerned that French fries can lead
to an increase in “bad” cholesterol, then
[1]
[2]
[3]
[4]

18

the demand curve for French fries will shift from D2 to D1 while the supply curve of
French fries will not shift
...

the demand curve for French fries will shift from D2 to D1 and the supply curve of
French fries will shift from S1 to S2
...


Which of the following is likely to occur if a market is not in equilibrium?
[1]
[2]
[3]
[4]

19

demand curve will shift from D1 to D2 while the supply curve will not shift
...

demand curve will not shift, and the supply curve will shift from S2 to S1
...


The demand curve will shift to bring the market to equilibrium
...

The price will adjust to bring the market to equilibrium
...


In Figure 4, a price of R20 per dozen of roses would result in a ____ so that the price of
roses will have to ____
...
The price of beef
increases because of a decrease in the supply of beef, ceteris paribus
...


An increase in the price of soya milk, which is a substitute in consumption for dairy
milk
...

An increase in the income of the average household, with milk being a normal good
...


The demand curve and the supply curve of leather will shift
...

The supply curve of leather will shift to the left with an accompanying increase in the
equilibrium price and a decrease in the equilibrium quantity of leather
...


Assume that leather belts and leather shoes are substitutes in production
...

leftward and the equilibrium price of leather shoes will rise
...

rightward and the equilibrium price of leather shoes will rise
...
An increase in costs of production
suppress production, shrinking (reducing)
supply
...

When there is a shortage, consumers bid up
the price, putting pressure on the price to
rise
When there is a surplus, producers are
desperate to sell their extra produce,
exerting downward pressure on the price
Dairy milk consumers will cut on their milk
intake, causing a fall in the demand for dairy

35

21

Option 3

22

Option 2

milk
Less production of one good leads to a fall in
production of the other and vice versa
Producers would shift resources (leather)
into the production of the substitute (leather
belts), increasing the supply of the more
preferred product (leather belts) and
reducing the supply of the less preferred
leather shoes
...
Consumers shift to the relatively
cheaper substitute (Roxy)
Check on the factors of Supply
Fill in all the missing values
An excess supply of 45 means Supply is
greater than demand by 45
...
Excess supply always puts
downward pressure on the price
Same explanation as above
Producers will manage to sell all since
consumers will be demanding more than
what the producers can supply
Demand for gasoline will fall as more fuel
efficient cars will make the motorist make
less frequent trips to the fuel station
This decision will limit the amount of oil
available to the rest of the world, thereby ↓
supply
Price of sugar ↑, lowering sugar quantity
demanded, decreasing the Demand for the
complement (Coffee), resulting in ↓ price
for coffee
Draw and represent the increases and
decreases in supply and demand
Normal good- Income ↑, consumption ↑ too
and vice versa (e
...
computers, bread,
cars)
Inferior good- Income ↑, consumption ↓
and vice versa (e
...
cabbage, second
hand goods)
Steel prices in the bicycle production
represent a cost of production
...


37

22

Option 1

The popularity of gardening books causes
an increase in demand,↑ the book price
...
Draw the
simultaneous increases on diagrams

23
24

Option 3
Option 2

25

Option 1

Same explanation as above
The discovery makes people want to
consume more coffee to relieve colds,
increasing coffee demand
...
Definitely quantities
have increased but the opposite price
movements have uncertain results
This reduces the demand for chocolate, no
effect on the supply

38

May 2012
Paper provided at the end of the booklet

Solutions to May/June 2012
10
11

Option 3

12

Option 3

13

Option 3

14
15

Option 4
Option 3

16

Option 3

17

Option 3

18

Option 2

19

Option 1

P Dvd↑,Quantity supplied of
Dvd↑, suppliers will divert
their resources from the
production of the substitute
(which is now less relatively
profitable)
...
e
...


Which of the following statements is/are correct?
d
...


8
...


Demand refers to plans of households, not events that have already occurred
...

The market demand curve is the horizontal sum of all the individual demand curves
...

Only a and b
...

Only a and c
...

[2] The demand for a product depends, amongst others, on the availability of the
product
...

[4] If A and B are complements, a fall in the price of A will lead to an increase in the
demand for B, ceteris paribus
...

Figure 2

41

9
...


A movement from point B to point C indicates an increase in demand
...

An increase in the quantity demanded is indicated by the movement from point B to
point C
...


Which of the following statements is/are correct?
a
...

c
...


An increase in the price of cool drink XYZ will result in an increase in the supply of
cool drinkXYZ
...

An increase in the wages of workers at the Volkswagen factory in Uitenhage will
result in a movement along the supply curve of Volkswagens, ceteris paribus
...


42

[1]
[2]
[3]
[4]
11
...


All the statements are correct
...

Only b and c
...


the supply curve for beans will shift to the left
...

the supply curve for broccoli will shift to the left
...


Which one of the following will shift the supply curve to the right, ceteris paribus?
[1]
[2]
[3]
[4]

An increase in the demand of the product concerned, which will cause an increase
in production
...

An increase in the price of the factors of production
...


Use figure 3 below to answer question 13
...


Q3 Q4

At price P3 in figure 3,
[1]
[2]
[3]
[4]

14
...

there will be a tendency for prices to rise
...

the quantity traded is Q4
...

b
...


A market can only be in equilibrium if demand is equal to supply
...

The allocative function of prices means that prices can ration the scarce supply of
goods and services
...

Only b and c
Only c
Only a and b

Use figure 4 below to answer question 15
...

Figure 4

44

15
...


If demand for coffee decreases as income decreases, coffee is
[1]
[2]
[3]
[4]

17
...

shortage of 50 loaves
...

surplus of 50 loaves
...

an inferior good
...

a normal good
...

The equilibrium quantity
...


45

[4] All of the above options
...

Figure 5

18
...


If the demand curve shifts from D1 to D2, one could say that
[1]
[2]
[3]
[4]
OQ2
...


OP2 and OQ3
...

OP2 and OQ1
...


the quantity demanded has decreased to Q1 and price has fallen to P2
...

there had been an increase in demand for good X
...

a decrease in the price of good X
...

an improvement in the technology of producing good X
...


Suppose there is an increase in both supply and demand for personal computers
...
In the market for personal computers, we would expect the
[1]
[2]
[3]
[4]

22
...

equilibrium quantity to rise and the equilibrium price to fall
...

equilibrium quantity to rise and the change in the equilibrium price to be ambiguous
...

[2] surpluses occur
...

[4] a price floor set below the equilibrium price will have no effect on the market
equilibrium
...


Which of the following options is correct?
[1]
[2]
[3]
[4]

24
...

If the demand of a product is inelastic, a change in price may cause total revenue to
change in either the opposite or the same direction
...

The price elasticity coefficient applies to demand, but not to supply
...
This indicates that demand for burgers is
[1]
[2]
[3]
[4]

unitary elastic
...

perfectly elastic
...


47

Suggested Solutions November 2012
7
8

Option 1
Option 2

9
10

Option 3
Option 2

11

Option 1

12
13
14
15

Option 2
Option 3
Option 3
Option 3

16
17

Option 4
Option 2

Product availability is not a factor of
Demand
The question is testing the student`s
knowledge of the difference between
Supply/Demand and the Quantity
Supplied/Quantity Demanded
P of Broccoli ↑, quantity of broccoli
supplied ↑,producers will ↓ supply of
substitute product (beans)
Read on the factors of supply

Shortage = 180-100
=80
Read on normal goods
Draw the simultaneous increases
graphically

48

18
19
20

Option 3
Option3
Option 1

21
22
23
24

Option 2
Option 2
Option 3

Factors of supply cause the supply
schedule to shift
Draw the increases on the diagram

Study Unit 6: Elasticity
Elasticity measures the responsiveness of one variable with respect to changes in another
related variable
...

Price Elasticity of Demand
Price elasticity of Demand measures the percentage change in quantity demanded brought
about by one percentage change in Price measures as follows:
Ẽ= Percentage change in Quantity demanded/Percentage change in Price
Ẽ= %Δ Qd/%ΔP
Properties of Price elasticity



Price elasticity of demand is usually a negative number because of the inverse
relationship between the price of a product and its quantity demanded
Price elasticity > 1 indicate price elastic demand (e
...
those goods with close
substitutes)

49



Price elasticity < 1 indicate price elastic demand (e
...
goods with fewer
substitutes/basic necessities like water, electricity, basic clothing)
 Price elasticity = 1 indicate unitary elasticity
 Price elasticity = 0 show no relationship between Price and Quantity demanded, (vertical
demand curve)
 Price elasticity = ∞ indicate infinity elasticity (horizontal demand curve)
 A linear demand curve has different elasticities along it, with elasticity of -∞ (elastic) at
the top portion, and elasticity of 0 at the bottom
Income Elasticity of Demand
Income elasticity of Demand measures the percentage change in demand brought about by a
one percent change in Income
...
Examples are second hand goods,
cabbage, public transport e
...
c

Cross Price Elasticity of Demand
Cross price elasticity of Demand measures the percentage change in demand for good X
brought about by a one percentage change in the price of good Y
...

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

24

2 percent
5 percent
10 percent
50 percent

Suppose that the coefficient of the price elasticity of demand for cigarettes is 0,4
...

infinite price elasticity of demand
...

a price elasticity of demand that is different at all prices
...

26

Figure 6 illustrates a linear demand curve
...

greater in the R2 to R4 range
...

greater in the R8 to R10 range when the price rises, but greater in the R2 to R4
range when the price falls
...

total revenue will decrease
...

quantity demanded will increase by more than 100 percent
...

unit elastic
...

inelastic

29

The cross elasticity of demand between Coke and Pepsi is

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

positive; that is, Coke and Pepsi are complements
...

negative; that is, Coke and Pepsi are complements
...


Mpho’s monthly income has just risen from R3 800 to R4 200
...
Her demand for
movies is
[1]

represented by a vertical line
...

income elastic
...


53

Suggested solutions May/June 2011
23

Option 4

5*10=50 %

24

Option 3

25

Option 3

10/x = 0
...
4 =x
X=25
Check the diagram for unitary elasticity in
the textbook

26

Option 1

Refer to the graph showing different
elasticities along the demand schedule

27

Option 3

At a price of R6 revenue is R6*20 = R120
At a price of R4 revenue is
R4*30 = R120
Revenue is unchanged

54

28

Option 4

Demand will be inelastic/unresponsive to
price changes

29
30

Option 2
Option 4

Refer to notes on Cross elasticity

55

November 2011
27
...


If the cross elasticity of demand between two goods is negative, then the two goods are
[1]
[2]
[3]
[4]

29
...

fact that luxuries have high prices and necessities have low prices
...

high income elasticity of demand for luxuries and low income elasticity of demand
for necessities
...


inferior goods
...

complementary goods
...


Luxuries are distinguished from necessities by the
[1]
[2]
[3]

30
...

The price elasticity of demand becomes smaller in absolute value as price falls
...

The price elasticity of demand and the slope of the demand curve are the same
...
5
...

4
...
25
...

A decrease in price of 2% causes an increase in quantity demanded of 0%
...

The demand curve is horizontal
...

This means Price and
Quantity demanded move in
the same direction, violating
the law of demand
...
25
0
...
5 * 5/3 = 2
...
25
The situation represents a vertical
demand curve, with no responses in
quantity demanded per given price
change

59

60

Study Unit 7: The Theory of Consumer
Choice
Utility
Utility is an economic term referring to the total satisfaction received from the consumption of a
good or service
...

In this way, economists can measure utility in terms of economic choices that can be counted
...
In its simplest forms, utility can be measured in
people`s willingness to pay different amounts of money for different goods and services
...

Preferences have a continuous utility representation, as long as they are transitive, complete
and continuous
...


Cardinal Utility
When cardinal utility is used, the magnitude of utility differences is treated as an ethically or
behaviourally significant quantity taking numerical values (like 1, 2, 3 etc
...

Ordinal utility
Ordinal utility captures only ranking and not strength of preference
...


An indifference curve is a line that shows
[1]
[2]
[3]
[4]

33
...


diminishing returns
...

the marginal rate of substitution
...


At the point where the budget line is just touching an indifference curve,
[1]
[2]
[3]
[4]

35
...

how the quantity demanded of a good changes as its price changes
...

combinations of goods that have the same marginal rate of substitution
...

the marginal rate of substitution equals the relative price
...

Both answers [1] and [2] are correct
...
The price of a DVD is
R60, and the price of a CD is R120
...


A budget line is a straight line designed to show
[1]
[2]
[3]
[4]

37
...

all combinations of two goods that can be purchased with a given level of income
...

that if more money is spent on one good, the breadwinner must work all the harder
to maintain a satisfactory level of living
...

shifts parallel to the left
...

pivots on the axis of the more expensive good
...

38
...

would not be chosen because it is less desirable than point C
...

hasa total utility equal to point C
...


4

6

8

10

In figure 7 above, the consumer’s marginal rate of substitution at his optimum choice of
Xand Y is
[1]
[2]
[3]
[4]

–1
...

8
...


65

November 2012 Suggested solutions

32
33
34
35

Option3
Option3
Option 4
Option 1

36
37

Option 2
Option 2

38
39

Option 3
Option 1

600 = P(dvd) * Dvd P(Cd) *
Cd
600 = 60Dvd + 120 Cd

Both goods become less
affordable equally to the
consumer

66

May/June 2013

Paper provided at the end of the booklet

Suggested solutions May/June 2013
32
33
34
35
36
37
38

Option 3
Option 3
Option 1
Option 3
Option 2
Option 4
Option 3

67

Study Unit 8: Background to Supply, the
theory of Production and Cost
The primary objective of any firm/business is to make a profit, which is the difference between a
firm`s revenue and costs
...

Explicit costs
Explicit/accounting costs are those payments made to the factors of production
...

Implicit costs
These include the opportunity costsof production of employing the firm`s resources in
production
...
Other factors of production are Capital
(tools, machinery, and equipment) and Entrepreneurship
Costs of Production
These are the costs incurred by any business in the process of converting the factors of
production to produce goods and services for consumption by households
...
g Insurance, Rent, interest on borrowed funds, advertising) and Variable Costs (VC) (the
costs that change as output/production changes e
...
electricity, telephone, water, energy)
Fixed and Variable costs make up Total Costs (TC)
...
Given a
firm employing two factors of production (Capital & Labour), at least one of them remains fixed
while the other may vary
...

Output Measures
Total Product (TP) - the total amount of out produced by a firm over a given period of time
Average Product (AP) - the output per variable input: TP/Number of variable input units

68

Marginal Product(MP)– measures the change in Total Productresulting from employing
additional units of the variable input: ΔTP/ΔInput (Labor/Capital)

Labor
Input

Capital
Input

Total
Product
(TP)

Variable
Cost
(VC)

Fixed
Cost
(FC)

Total
Cost
(TC)

0
1
2
3
4
5
6

1
1
1
1
1
1
1

0
5
15
23
27
29
30

0
20
40
60
80
100
120

100
100
100
100
100
100
100

100
120
140
160
180
200
220

Marginal
Product
of
Labour
(MPL)
5
10
8
4
2
1

69

Past Exam practice questions
May/June 2011
32

Which of the following statement/s is/are correct?
In any production process, the marginal product of labour is the

33

(a)
(b)
(c)
(d)

total output divided by total labour inputs
...

change in total output resulting from a small change in the labour input
...


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

Only a and b
Only b and c
Only c
Only b

Which of the followings statement/s is/are correct?
In the presence of diminishing returns, holding at least one factor of production constant,

34

(a)
(b)
(c)
(d)

the marginal product of a factor is positive and rising
...

the marginal product of a factor is falling and negative
...


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

Only b and c
Only a and d
Only b
Only d

Mpho produces 100 bottles of orange juice with an average total cost of 50 cents per
glass and an average variable cost of 40 cents per glass
...

A decrease in the productivity of labour
...

A decrease in the demand for the goods the firm produces
...
Use
the table to answer questions 36 and 37
...

R5
...

R15
...

R21
...

R5
...


38

Output

Total cost

0
1
2
3
4
5
6
7
8

30

Average
cost

56
64
76
15
15

4
10
12
29

5
24
4
2

The difference between average total cost and average variable cost
(a)
(b)
(c)
(d)

is constant
...

gets smaller as output decreases
...


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

Only b and c
Only c and d
Only d
Only a

Average
fixed cost

6

What is the average cost of producing the 2nd unit of output?
[1]
[2]
[3]
[4]

40

Marginal
cost

What is the marginal cost of producing the 8th unit of the good?
[1]
[2]
[3]
[4]

39

Fixed cost

Table 3
Variable
cost
0
10
18
22

72

41

A firm producing 7 units of output has an average total cost of R15 and has to pay R35 for
its fixed factors of production, irrespective of whether it produces or not
...


The main difference between the short run and long run is that
[1]
[2]
[3]
[4]

41
...
At the end of the 1st
month, his total revenue was equal to R15 000
...
What is Thomas’s economic profit
or loss?
[1]
[2]
[3]
[4]

42
...

in the short run we have some factors of production fixed whilst in the long run all
factors of production are variable
...

total costs are equal to total variable cost in the short run
...

Economic profit of R3 000
...

Economic profit of R2 000
...

Total product start by increasing at an increasing rate and then increase at a
decreasing rate as the amount of the variable factor is changed in the short run
...

Only b and c
...

Only a and c
...
Use this table to answer Question 43 and Question 44
...


Average
Product

Labour

3

0

3

1

3

2

3

3

16

3

4

10

10
15

What is the maximum value of total product for this firm?
[1]
[2]
[3]
[4]

44
...
The table shows how short run costs
change as output changes
...


30

2

25

3

20

4

25

AVC

What is the value of total fixed costs?
30
20
60
100

What is the value of average fixed cost of producing 4 units?
[1]
[2]
[3]
[4]

47
...


MC

5
15
10
13
...
e
...
This is because there is a large number of
buyers and sellers to influence the price
...
Examples include farm produce
...
There are no
barriers to entry/exit

The Firm`s Profit
•

Profit = Total Revenue – Total Cost

Where TR = Price* Quantity

: P*Q

TR- TC…………
...
The firm should continue
production as long as MC≥MR
Since the Firm is a Price taker, MR=P=AR=D
Optimal output occurs where P=MC

82

To produce or not to produce
The mere fact that the firm is unprofitable does not mean the firm should close/shut down
...
If the firm shuts down, it might, in the short run, avoid its variable costs (cost that
vary/change with the level of production)
But what about the Fixed Costs? Those costs that do not depend with the level of
production/output
...

The Shut Down Rule
The shutdown decision depends on how Total Revenue (TR) compares to Total Variable
Cost (TVC) at the optimum output level
...

the marginal cost
...

the average revenue
...

the goods being sold are mostly the same
...

that firms can freely enter or exit the market
...

marginal revenue equals average revenue
...

marginal cost equals marginal revenue
...

zero economic profit
...

supernormal profits
...

As long as marginal revenue exceeds marginal costs, the firm should increase its
output to increase its profits
...

If profits are defined in terms of per unit costs, then a perfectly competitive firm
maximises profit at the point where marginal revenue equals marginal costs
...

exit, producing at the minimum part of their long run average cost curve
...

enter, making economic losses
...
The market price of the toys is R10 each and Sarah
produces 100 toys
...
Given this information

85

[1]
[2]
[3]
[4]
49

Sarah will maximise her profit by producing fewer than 100 toys
...

Sarah is maximising her profits
...


Which of the following statement/s is/are correct?
In a perfectly competitive market, each firm
(a) produces as much as it can
...

(c) faces a perfectly inelastic demand for its product
...

[1]
[2]
[3]
[4]
50

All of the above statements are correct
Only b
Only a and c
Only c
For a perfectly competitive firm, at short term equilibrium its marginal revenue

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

is less than the market price
...

equals its normal profit
...


86

Suggested solutions May/June 2011
42
43

Option 3
Option 4

44

Option 4

45
46
47
48
49
50
51

Option 4
Option 4
Option 1
Option 1
Option 2
Option 4
Option 3

In the long run, all firms earn
normal profits
Profit maximising condition
MC=MR

P=MR=Demand Curve

87

November 2011
Paper provided at the end of the booklet

Suggested solutions November 2011
44

Option 3

45
46
47

Option 3
Option 2
Option 4

48

Option 3

49
50

Option 3
Option 4

51
52
53

Option 4
Option 3
Option 1

Look on characteristics of
perfect competition
MC=MR
AFC = TFC/Q
= 100/4
= 25
MC of producing 4th unit is
R180
Profit maximizing position is
given by MC=MR
Therefore out will be 4units
AFC = ATC – AVC
= 35 – 28
=7

88

May/June 2012

Paper provided at the end of the booklet

Suggested solutions May/June 2012
44
45
46

Option 3
Option 2
Option 3

47

Option 1

48

Option 3

49
50
51

Option 4
Option 2
Option 2

At an output level of zero,
TVC = 0
In Perfect competition
MR=AR=Demand
Because of our assumption
of freedom of entry and exit,
any economic profits will
attract entrance of new firms,
and this will erode those
realised abnormal profits

Firm already at profit
maximising output since
MC=MR

89

52

Option 1

53

Option 4

Profit per unit = Price per unit
– Cost per unit
=P – ATC
=8 – 6
=2

November 2012
48
...


There is no government intervention
...

Sellers have freedom to enter and leave the market
...


Which of the following profit maximizing conditions are correct for a perfectly competitive
firm in the long run?
[1]
[2]
[3]
[4]

P = MC =AR
AR =AC =MC
MC = AVC =AC
MR = AVC =AR

Table 3 below shows how revenue and costs change as the perfectly competitive firm
varies its output
...

Table 3
Q

TR

AR

TC

2

12

6

8

3

12

MC

90

4

17

5

6

6
50
...


R7
R6
R5
R4

If a perfectly competitive firm is making economic losses in the short run, what should
happen for long run equilibrium to be attained?
[1]
[2]
[3]
[4]

54
...


4
5
6
3

What is the price the firm is charging per unit?
[1]
[2]
[3]
[4]

52
...

More outside firms will move in, supply increases resulting in price falling and hence
normal profits being earned
...

As long as the firm is able to cover its variable costs, short run equilibrium will be the
same as long run equilibrium
...

sales will remain unchanged
...

all the other firms will do the same
...
Which of the following criteria is the same for both the perfect competitor and the
monopolist?
[1]
[2]
[3]
[4]

Information about market conditions
...

The number of firms in the industry
...


Suggested solutions November 2012 provided at the back

Imperfect Competition and the Labour
Market
Imperfect competition is a market where some rules of Perfect Competition are not followed
...

In imperfect competition, the Price of the good can rise above its Marginal Cost (MC), P>MC
Thus have consumers will decrease their level of purchase and there will be inefficient levels of
production
...

The Labor Market
The market for labour is just like the market of any other good or service, determined by the
interaction of demand and supply for labor, with the equilibrium price equal to the wage rate
...

Marginal Revenue Product for Labour

92

This is the increase in revenue a firm gets by employing one additional worker/ unit of labor
...
Government usually intervene in the labour market
by imposing minimum wages
...


93

Past Exam Practice
May/June 2011
56

In a monopoly, economic profit is possible in the long run because
[1]
[2]
[3]
[4]

57

Interdependence between the firms is a distinctive feature in
[1]
[2]
[3]
[4]

58

the product sold is homogeneous
...

demand for the product is perfectly elastic
...


oligopoly
...

perfect competition
...


Firms operating under monopoly set their equilibrium price
[1]
[2]
[3]
[4]

below the average revenue
...

above the marginal revenue
...


Figure 9 below relates to the short-run monopoly equilibrium
...

Figure 9

94

59

The total profit of the monopoly is equal to
[1]
[2]
[3]
[4]

60

The monopolist profit per unit is equal to
[1]
[2]
[3]
[4]

61

R100
...

R280
...


The total cost of the monopolist is equal to
[1]
[2]
[3]
[4]

62

R28 000
...

R18 000
...


R28 000
...

R18 000
...


Which one of the following is NOT aform of barrier to entry in oligopoly?

95

[1]
[2]
[3]
[4]
63

Which one of the features below is unique to the labour market?
[1]
[2]
[3]
[4]

64

Non-monetary factors are not important in the labour market
...

Labour cannot be classified or standardised
...


The real wage is defined as
[1]
[2]
[3]
[4]

65

Advertising
Product differentiation
Brand proliferation
Price competition

the amount of money that is to be paid to a worker at a specific point in time
...

the amount of money actually earned during a specific period, including bonuses
...


Suppose that the nominal wage increases by 4 percent while the price of goods and
services increases by 7 percent
...

decrease by 7 percent
...

decrease by 3 percent
...
Use the figure below to
answer question 66
...

a decrease in the price of a product for the market in question
...

a decrease in the number of firms supplying a product
...

a rightward shift of the labour demand curve
...

a rightward shift of the labour supply curve
...
Complete the table and
answer question 68
...

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

69

5
1
4
2

Trade unions can attempt to raise the wage rate by
[1]
[2]
[3]

encouraging an increase in labour supply
...

increasing the demand for the product of the industry
...


Figure 11 below illustrates the imposition of a minimum wage in a perfectly competitive labour
market
...

Figure 11

Wage rate
(Rands)

S

R1,000
R800

70

If the minimum wage is set at R1 000, there will be
[1]
[2]
[3]
[4]

an excess demand for labour of 70 workers
...

an excess supply of labour of 120 workers
...

Number of Workers

D

98

Suggested solutions May/June 2011
56

Option 4

57
58
59

Option 1
Option 3
Option 4

60

Option 1

61

Option 2

62
63
64

Option 4
Option 3
Option 2

Check monopoly
characteristics

Profit = Q [P- AC]
= 250 [280-180]
= 25 000
Profit per unit = P – AC
= 280-180
= 100
TC = Q*AC
= 250*180
= 45 000

Real Wage = Nominal
Wage/Price

99

65

Option 4

66

Option 1

67
68

Option 2
Option 4

69
70

Option 3
Option 3

November 2011

Paper and solutions provided at the end of the booklet

May/June 2012

Paper and solutions provided at the end of the booklet

Change in real Wage
=Change in NominalChange in Prices
=4 – 7
= -3 (a decrease of 3%)
If the wage rate in other
occupations increase, this
attract the workers to flock to
that industry (assuming
perfect mobility of labour)
...


Which one of the features below is unique to the labour market?
[1]
[2]
[3]
[4]

Labour is intrinsically homogeneous
...

The remuneration consists only of wages
...


Complete the following table and answer questions 64 and 65
...
The
sandals sell at a R100 a pair
...


0

0

0

1

13

13

2

23

10

3

32

9

4

40

8

5

47

7

Which one of the following regarding table 4 is correct?
[1]
[2]
[3]
[4]

65
...
Lin
[1]
[2]
[3]
[4]

66
...

The product price remains the same because under perfect competition the market
price is determined by the interaction between market demand and market supply
...

It is possible to determine the profit maximizing level of employment from this table
...

decides that the wage rate is not important and employ all the workers as long as
their marginal revenue product is positive
...

will employ 4 workers
...

under perfect competition employ labour until MRP = Wage rate
...

increase employment as long as the marginal revenue product is less than the
marginal cost of labour
...


The market demand for labour
[1]
[2]
[3]
[4]

68
...


is the horizontal summation of all the individual demand curves
...

will decrease if the number of firms in the industry increases
...


Every worker brings a different skill to the market place
...

In real life employers and employees have limited knowledge about market
conditions
...


Trade unions can simultaneously raise the wage rate and the level of employment by
[1]
[2]
[3]
[4]

restricting or decrease the supply of labour
...

by forcing the employer to accept a wage higher than the equilibrium wage
...


Figure 9 below explains the introduction of a minimum wage of R30 per hour in the
market for bus drivers
...


With the introduction of a minimum wage of R30,
[1]
[2]
[3]
[4]

the market wage being the effective wage will be lower than the market wage
...

only 45 000 bus drivers to be employed
...


October/November 2011 Solutions
1
...
4 21
...
3 41
...
4 61
...
1 12
...
1 32
...
2 52
...
4
3
...
2 23
...
4 43
...
1 63
...
4 14
...
2 34
...
3 54
...
3
5
...
4 25
...
1 45
...
1 65
...
3 16
...
2 36
...
2 56
...
1
7
...
2 27
...
3 47
...
3 67
...
2 18
...
1 38
...


3 58
...
2

9
...


1 29
...
1 49
...
2 69
...
1 20
...
2 40
...
4 60
...
2

104

May/June 2011 Solutions
1
...
3
3
...
3
5
...
4
7
...
2
9
...
2

11
...

13
...

15
...

17
...

19
...


1
3
2
3
2
4
1
3
3
2

21
...

23
...

25
...

27
...

29
...


3
2
4
3
3
1
3
4
2
4

31
...

33
...

35
...

37
...

39
...


2
3
3
3
2
3
2
4
2
3

41
...

43
...

45
...

47
...

49
...


2
3
4
4
4
4
1
1
2
4

51
...

53
...

55
...

57
...

59
...


3
2
1
2
3
4
1
3
4
1

61
...

63
...

65
...

67
...

69
...


2
4
3
2
4
1
2
4
3
3

31
...

33
...

35
...

37
...

39
...


2
3
3
4
1
2
2
3
1
2

41
...

43
...

45
...

47
...

49
...


4
1
1
1
2
1
1
2
2
2

51
...

53
...

55
...

57
...

59
...


1
1
1
1
1
4
4
1
4
4

61
...

63
...

65
...

67
...

69
...


4
2
2
2
4
2
1
2
4
3

October/November 2012 Solutions
1
...
2
3
...
2
5
...
3
7
...
2
9
...
2

11
...

13
...

15
...

17
...

19
...


1
2
3
3
3
4
2
3
3
1

21
...

23
...

25
...

27
...

29
...


2
4
3
4
4
3
2
3
4
4

105

May/June 2010 solutions
QUESTION 1
1
...
1 If consumers expect P beef to ↓, the Demand for beef will ↓ from D1 to D0
1
...
2 Supply increase, the supply curve shifts from S0 to S1
1
...
3 Supply increases from S0 to S1
1
...
4 Increase in demand from D0 to D1
1
...
5 Supply of beef increases from S0 to S1
1
...
1 Price level increases, causing quantity demanded to fall, causing divergence towards the
equilibrium price and quantity
1
...
2 Quantity supplied exceeds quantity demanded (excess supply) and there is a surplus in
the market
1
...
3 A shortage will exist
1
...
4 Quantity demanded will exceed quantity supplied, creating a shortage
QUESTION 2
2
...
1 Total revenue ↑
Quantity demanded stays the same
2
...
2 Total revenue would be zero
Quantity demanded zero
2
...
This would increase total revenue
...
3 Raise revenue by increasing the price
...
1Economic loss
3
...
The firm should not produce if it fails to cover its total variable
costs
...
3
...
3
...
3
...
3
...
1 Draw the diagram
4
...
3 Equilibrium condition for the individual firm in a perfectly competitive labour market
4
...
5 Three factors that could cause a decline in labour demand are :
Trade union activity where they try to influence the wage rate
Government intervention in the labour market through the imposition of minimum wages
above the equilibrium wage rate
Factor immobility
Section B
1
...
3
3
...
2
5
...
3
7
...
2
9
...
2

11
...
2
13
...
3
15
...
2
17
...
1
19
...
1

21
...
2
23
...
3
25
...
5
27
...
3
29
...
2

31
...
2
33
...
3
35
...
1
37
...
5
39
...
3



---