Issuu on Google+

Faculty of Business & Economic Sciences Managing tomorrow

Study Guide 2008 BED 1: ECONOMICS I BED1011 / BED1022 / BED1220 / BED1131 / BED1310 / BED1510 / BED1511 / BED1522

Compiled by: B Ismail & S Tessendorf


CONTENTS PAGE GENERAL INFORMATION OBJECTIVE OF THE COURSE LECTURERS LECTURERS’ CONSULTING HOURS PRESCRIBED TEXTBOOK RECOMMENDED TEXTBOOK STATIONERY REQUIREMENTS PREPARATION HONESTY WRITTEN ASSIGNMENTS TUTORIALS CLASS TESTS ABSENCE FROM TESTS AND / OR TUTORIALS DP REQUIREMENTS CLASS MARK COMPOSITION OF THE EXAMINATION PAPER ABSENCE FROM THE EXAMINATION CALCULATION OF FINAL MARK PASSING THE MODULE SUPPLEMENTARY AND SPECIAL EXAMINATIONS TEACHING STRATEGY (a) Large group lectures: A team approach (b) Tutorials (c) Private study STUDY GUIDE INTRODUCTION ANSWERING SHORT-ANSWER QUESTIONS FURTHER INSTRUCTIONS AND REMINDERS CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 2: A CLOSER LOOK AT THE ECONOMIC PROBLEM Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 3: INTERDEPENDENCE BETWEEN SECTORS, MARKETS AND FLOWS) Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 4: MEASURING THE PERFORMANCE OF THE ECONOMY Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 5: THE SOUTH AFRICAN ECONOMY Learning outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 7: DEMAND, SUPPLY AND PRICES Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 8: DEMAND AND SUPPLY IN ACTION Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions

3 3 3 3 3 3 3 4 4 4 5 5 5 5 5 6 6 6 6 6 6 7 7 8 9 9 10 10 10 11 11 11 14 14 14 15 15 15 17 17 17 18 18 19 20 20 20


CHAPTER 9: ELASTICITY Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 10: BACKGROUND TO DEMAND: THE THEORY OF CONSUMER CHOICE Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 11: BACKGROUND TO SUPPLY: THE THEORY OF PRODUCTION AND COST Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 12: PERFECT COMPETITION Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 13: MONOPOLY AND IMPERFECT COMPETITION Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 14: THE LABOUR MARKET Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 15: THE MONETARY SECTOR Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 16: THE PUBLIC SECTOR Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 17: THE FOREIGN SECTOR Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 18: INCOME DETERMINATION IN A SIMPLE KEYNESIAN MACROECONOMIC MODEL Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 19: KEYNESIAN MODELS INCLUDING THE GOVERNMENT AND FOREIGN SECTOR Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 20: MORE ON MACROECONOMIC THEORY AND POLICY Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 21: INFLATION Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 22: UNEMPLOYMENT AND THE PHILLIPS CURVE Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions CHAPTER 23: ECONOMIC GROWTH AND DEVELOPMENT Learning Outcomes Written assignment questions / Tutorial questions / Self-study questions SOME IMPORTANT REMINDERS LIST OF REFERENCES

Economics I - Study Guide

Page 2

22 22 22 23 23 24 25 25 26 27 27 27 28 28 28 29 29 30 31 31 31 33 33 33 34 34 35 37 37 38 40 40 40 42 42 42 43 43 43 45 45 45 46 46 46 47 49

Revised: 2007


GENERAL INFORMATION OBJECTIVE OF THE COURSE The objective of this course is to provide the student with basic knowledge of the functioning of the economy. The student must be able to understand and interpret economic issues and form his / her own opinions. LECTURERS Name

Office Number* nd Missionvale 2 Avenue

Mr B Ismail (Course co-ordinator) Ms N Dyubhele Ms G Pereira Ms S Tessendorf * Subject to change

Telephone Number* nd Missionvale 2 Avenue

141 1143 1141

504 3809 504 3141 504 1143

120

504 3799

LECTURERS’ CONSULTATION TIMES Each lecturer will be available on a certain day(s) during a specific time interval for student consultation. Consultation times will be posted on each lecturer’s door. Students are strongly recommended to exploit the consultation hours set aside by each lecturer and to adhere to these consultation times. If a student is unable to consult during these times, please make an appointment with the respective lecturer. PRESCRIBED TEXTBOOK th

Mohr, P., Fourie, L. and Associates. 2007. Economics for South African students. 4 Pretoria: Van Schaik. (Suggested retail price: R314,95)

edition.

RECOMMENDED TEXTBOOK Dyubhele, N., Guzana, Z., Duze, N. and Mkonto, B. 2007. Isagama Sezoqoqosho / Economic st terms and concepts made simple. 1 edition. Pretoria: Van Schaik. (Suggested retail price: R99,95) Comprehension of the Economic profession’s peculiar terminology is especially difficult for English second-language speakers. This dictionary gives simple, easy-to-understand definitions for common economic concepts, listing Xhosa equivalents to English terms. STATIONERY REQUIREMENTS All Economics students will require the following stationery: • Black / Blue pen(s) • Pencils • Exercise book / examination pad • Sharpener • Erasers • Ruler • Calculator. PREPARATION Students are required to read through the relevant sections BEFORE it is discussed in class. Remember: you are required to assume responsibility for your own learning! In addition, students should go over their lecture notes each day and read the textbook and other references. Furthermore, it is suggested that students should spend at least three hours a week working on the written assignments. You are strongly advised to ensure that the work you submit for your written

Economics I - Study Guide

Page 3

Revised: 2007


assignments is your own (see below). That said, there is benefit to be gained in discussing the questions with your fellow students; they may well be able to help you gain a better understanding of the topic. HONESTY The Department of Economics and Economic History places a very high premium on the absolute honesty of every student. Any student who is found to have copied any tutorial, test or examination work from another student or who has been dishonest in complying with any of the requirements of the course will immediately be referred to the University Disciplinary Committee. WRITTEN ASSIGNMENTS Students will be required to hand in assigned questions each week. These assignments show the standards of performance you will have to meet during the course and in the tests and examinations. They also provide the means for pacing your learning activities throughout the period of the course. The required questions will be announced weekly during the lecture periods. The typed or handwritten answers to these questions are to be submitted on the Friday, the week before the tutorial session. You are expected to write full answers (making proper use of sentences and paragraphs) and to explain clearly how you reached your conclusions. When working out the answers to the questions you need to consider the mark allocation indicated in brackets. Each mark indicated requires one fact. In other words, you need to write a FULL explanatory sentence as an answer for each mark indicated. Your written assignments will NOT BE ACCEPTED FOR DP PURPOSES UNLESS: • your name is clearly written on each sheet handed in • each question is clearly numbered and a satisfactory attempt is made • you hand in your work on time. Your tutor will then mark your answers. These assignments will be returned to you in the tutorial session. TUTORIALS You will be allocated to a specific tutorial group. A notice will be placed on the Economics notice board / intranet to indicate the tutors’ name, times and venues of the various groups. You will be notified in class when the lists are up. If your name does not appear please see your lecturer immediately. Attendance at these tutorials is COMPULSORY in order to obtain a duly performed (DP) certificate (see DP Requirements , p. 5). It is very important that you treat tutorials seriously as they are designed to help you to prepare for your tests and examinations. Each week’s tutorial helps you to develop your understanding of the topic covered in the lectures and provides you with additional practice in understanding and solving economic problems. The types of questions that are set in the tutorials are similar to those you can expect to see in your test and examination papers. Therefore, you should make every effort to understand the material covered in each tutorial. Come to the tutorials prepared to ask relevant questions and to contribute to the discussions. As was the case, when working out the answers to the written assignment questions, you need to consider the mark allocation indicated in brackets. Each mark indicated requires one fact. It is not the job of the tutor or examiner to fill in the gaps in your argument; it is up to you to show that you understand the question by giving a complete answer. Please note that lecturers will only assist students who miss a tutorial if the student provides satisfactory evidence of having attempted the tutorial questions.

Economics I - Study Guide

Page 4

Revised: 2007


CLASS TESTS The lecturer will indicate the number of tests and when tests will be written. Venues and times will be announced in class. ABSENCE FROM TESTS AND / OR TUTORIALS Satisfactory documentary evidence is required for absence from all types of assessments. In the case of illness a medical certificate must be submitted. In the case of death in the family, a certified copy of the death certificate must be submitted. In terms of the University’s Policy “family” includes the following persons: the student’s spouse or life partner or the student’s parents, brother, sister, adopted parents, grandparent, child, adopted child, grandchild, or his / her legal spouse’s parents. Students taking part in any recognised sport, cultural or other student activity at provincial level or higher on the date of an assessment must also provide suitable documentary evidence (e.g. a letter from their coach / manager) to the relevant lecturer. Applications for absence from tutorials (attendance and submission) and tests must be made to the relevant lecturer no later than three (3) days after the evaluation. These requests for absence and alternative evaluation will only be considered under circumstances officially acknowledged in terms of University Policy. No late applications would be accepted. Students who miss a test without a valid reason will be assigned a mark of zero (0) and the relevant column on the tutorial attendance sheet will contain an ‘A’, meaning absent. The only alternative evaluation for semester tests will be an aegrotat test that will be written at the end of the semester and will cover all the work. The onus will be on the student, who has successfully applied for alternative evaluation, to contact the relevant lecturer in connection with the final arrangements relating to this test. Please note that the aegrotat test will be written by students that have missed either the first test or the second. It should not be assumed that if the first semester test has been missed, the second can be skipped because permission has been granted to write the aegrotat test. The aegrotat test mark will only be used for a test that the student has missed with an acceptable excuse. Note: the aegrotat test cannot be used to improve a student’s mark, i.e. NO so-called “makeup” test will be accommodated. DP REQUIREMENTS A student must obtain a DP certificate to gain admission to the examination. In order to obtain a DP, a student must attend a minimum of 80 per cent of the tutorial sessions and obtain a minimum class mark of 40 per cent. CLASS MARK The class mark will be calculated as the average of the number of formative assessments scheduled by your lecturer. Note that there is a sub-minimum class mark of 40 per cent required in order to write the examination. (Refer to rule G1 6.6 - this rule will be confirmed with you closer to the examination.) COMPOSITION OF THE EXAMINATION PAPER One final assessment of three hours will be written in the allocated examination period. The date, venue and time for this examination will be posted on campus notice boards closer to the time. Please note that students must produce their student card at the examination. You will not be permitted to write the examination without this identification. The examination paper will consist of not less than four (4) questions of 25 marks each, thus adding up to 100 marks. The number of questions may increase, which will enable the examiner to allow the student to exercise a choice among the questions in the examination paper.

Economics I - Study Guide

Page 5

Revised: 2007


Example: 4 Questions of 25 marks each 5 Questions of 25 marks each 6 Questions of 25 marks each

(Answer all 4 questions) (Answer any 4 questions) (Answer any 4 questions)

ABSENCE FROM THE EXAMINATION A student prevented from sitting for the Economics examination during the main assessment period due to circumstances beyond his / her control may be granted permission by the Faculty Management Committee to sit for a special examination. Such a student must submit a written application, supported by documentary evidence to the relevant Faculty Officer before the date on which the Economics examination is to be written, but no later than three (3) days after the examination. In the case of illness a medical certificate must be submitted, and in the case of death in the family, a certified copy of the death certificate must be submitted. CALCULATION OF FINAL MARK The class mark carries a weight of 40 per cent (40%) and the examination mark carries a weight of 60 per cent (60%). The final mark is obtained by adding the class mark to the examination mark after taking the respective weights into account. The final mark is calculated as follows: [Class mark (at least 40%) X 0.4] + [Examination mark (at least 40%) X 0.6 > 50%] PASSING THE MODULE A student must obtain a final mark of at least fifty per cent (50%), subject to a sub-minimum mark of forty per cent (40%) for the examination, in order to pass the module. A student passes the module with distinction if he / she attains a final mark of at least seventy-five per cent (75%). SUPPLEMENTARY EXAMINATIONS A student who has failed the original final assessment in a module may qualify for a re-examination (supplementary examination) provided that the student has: • attempted and failed the original final assessment; and • obtained a final mark of between 45% and 49%. If a supplementary examination is written, the student must obtain a mark of fifty per cent (50%) in the supplementary examination to pass the course. TEACHING STRATEGY The course is planned to occupy about 10 hours per week. The 10 hours will involve: • • • (a)

4 lectures per week (i.e. two double lectures per week) 1 tutorial per week Private study (reading, written assignments, etc.). Large group lectures: A team approach

Chiefly because of a high ratio of students to lecturers the course is predominantly lecture-based and the lectures are used as the main medium to facilitate the transmission of knowledge and demonstrating skills. The main purpose of the lectures will be to: • • •

introduce and give an overview of the main problems presented by the syllabus topics; introduce necessary subject-specific terminology; expose you to different lecturing styles.

Economics I - Study Guide

Page 6

Revised: 2007


Unfortunately large group lectures have their limitations. Of necessity they are periods of largely uninterrupted talk by us, the lecturers, during which the emphasis is on what the lecturer says and does and in which students play a relatively passive role. Because there is little, if any, two-way communication during the lectures it is extremely difficult for the lecturer to know how much learning is taking place or for you to pose questions. It is for this reason that the lectures are supplemented by tutorials. Perhaps a word of warning is appropriate here. Don't expect to learn everything you need to know just by attending lectures. It is mostly what you do after the lectures that really consolidate your knowledge. (b)

Tutorials

The functions of the tutorial groups are to: • •

give you the opportunity to practise and consolidate skills and to clarify points raised during the lectures give the lecturers, through the tutors, as much feedback as possible on the effectiveness of the lectures and teaching materials and on your individual progress.

The tutor's role is thus a supportive one and his / her task is to identify the source of any difficulties you may have (or better still to help you identify them) and assist you in solving them. The tutor is also an important link between yourself and the lecturer. The tutor is not expected to give minilectures. As the tutorial sessions are intended to have a major role in giving feedback to your lecturers as well as providing learning activities for you, attendance, as mentioned previously, is compulsory. (c)

Private study

Although a lot of your time will be taken up with lectures and tutorials, most of your learning on this course will take place through your reading and your attempts at the written assignments and tutorial questions. These are the most important of all the learning activities and your attempts, even though incomplete or incorrect, should be handed in on the prescribed dates. Unless you do this neither you nor your tutor will be able to judge your progress. According to the current course structure it is advisable that you allocate at least 30 minutes of your private study time to preparing for your next Economics lecture. This preparation could include checking the course outline to see what topic will be dealt with in the upcoming lecture and to then complete the relevant reading assignment. Furthermore, it would be advisable to review the notes that you had made during the previous lecture. You are further advised to spend at least 1½ hours after each lecture reviewing your lecture notes.

Economics I - Study Guide

Page 7

Revised: 2007


STUDY GUIDE INTRODUCTION “Courses and modules in economics are typically regarded as being among the most challenging of all those presented at universities, technikons, business schools or other tertiary institutions. But studying economics can be fun, provided that you approach it correctly. Economics is not a subject that you can study by simply reading the material or trying to memorise it. Such an approach is bound to fail. You have to try and understand it (Mohr, Fourie and Associates 2004:xi)”. The subject Economics requires active learning. “Always study with a pen or pencil, working through the arguments, drawing the graphs and summarising the main points” (Mohr et al. 2007:xii). As a student, you are advised to “follow the economic news in the newspaper and on television, and try to relate it to what you are learning. You will be surprised how much you can understand by applying the basic tools of economic analysis along with some common sense” (Mohr et al. 2007:xii). In order to do well we, your Economics 1 lecturers suggest: • Don’t rely solely on your previous knowledge of economics. If you have studied economics at High School don’t be lulled into feeling that the course will be easy. While your previous knowledge of economic concepts will be very useful, it will not be enough to guarantee high marks in assessments as your lecturers will demand more detailed knowledge of concepts and ask you to apply them in new circumstances. •

Keep up with the course material on a weekly basis. As mentioned previously, you are advised to read the appropriate chapter in the textbook before your lecture. In this initial reading, don’t worry about details or arguments you can’t quite follow – just try and get a general understanding of the basic concepts and issues. As soon as the chapter has been covered in class complete the corresponding questions in the Study Guide.

Avoid cramming the day before or even just the week before an assessment. Economics requires practice and for this reason cramming is an almost certain recipe for failure. Remember: “The only place where success comes before work is in a dictionary” (Vidal Sassoon, Hair stylist).

Keep a good set of lecture notes.

Approach your lecturer / tutor if you need help. When you have questions or problems with course material, ask for help.

Form a study group. A very useful way to motivate your studying and to learn economics is to discuss the course material and problems with your fellow students.

Attend all the lectures and tutorial sessions!

Economics I - Study Guide

Page 8

Revised: 2007


ANSWERING SHORT-ANSWER QUESTIONS Read the instruction of the questions carefully and focus your answers on them. The table below has been prepared to help you interpret questions. Typical verbs used Calculate / compute Define Describe Discuss Distinguish Draw / Illustrate / With the aid of a graph Explain

Definition To ascertain or reckon mathematically Give the exact meaning of Communicate the key features of To examine in detail by argument Highlight the differences between Include relevant diagrams in your analysis Make clear or intelligible / state the meaning of Recognise, establish or select after consideration Use an example to describe or explain something Make a list of Find an answer to the question using mathematical procedures Express, fully or clearly, the details of / facts of Arrange in a table

Identify Illustrate List Solve State Tabulate For example, a question may read as follows:

“With the aid of an example, briefly explain the concept of opportunity cost.” You should firstly read the question carefully and then make sure that you understand what the examiner is asking before attempting to answer the question. In this case, the examiner wants you to explain what the idea of opportunity cost means. Furthermore, the examiner also wants you to provide a real example of that idea. Secondly, you need to take note of how the examiner wants you to answer the question. To “briefly explain” means that you need to write a short description of the idea, and “With the aid of an example” means that you must describe an actual situation or object. FURTHER INSTRUCTIONS AND REMINDERS When answering questions keep the following points in mind: 1.

You are expected to write full answers (making proper use of sentences and paragraphs) and to explain clearly how you reached your conclusions.

2.

Use diagrams wherever appropriate. Diagrams must be clearly and fully labelled. (Marks will be deducted if your diagrams are not labelled.)

3.

In questions involving calculations, part-marks will be awarded in cases where solutions are incorrect but the formulas and other workings are shown, provided that these are correct or partly correct.

4.

In deciding how much detail to provide, it is important to be guided by the mark allocation.

Economics I - Study Guide

Page 9

Revised: 2007


CHAPTER 1: WHAT ECONOMICS IS ALL ABOUT (pp. 3 – 16) Learning Outcomes: This chapter introduces students to economics and the economic way of thinking. After mastering the prescribed sections, students should be able to: • Explain what economics is all about; • Define economics; • Define the concept of opportunity cost; • Explain what the main economic problem is; • Illustrate and explain a Production Possibilities Curve / Frontier; • Explain reasons why economics is considered a social science; • Explain the difference between macroeconomics and microeconomics; • Distinguish between positive and normative economics; • Comment on the major reasons why economists disagree on certain issues; • Identify some common mistakes in reasoning about economics; and • Understand and / or define the important concepts listed at the end of the chapter. Written assignment questions / Tutorial questions / Self-study questions: 1 Explain what the subject economics is all about. In your answer, you need to refer to concepts such as ordinary business life, unlimited wants, limited means, scarcity and choices (pp. 4 – 5).

(3)

2

Define the concept “economics” (see Box 1-1, p. 5).

(2)

3

Explain the main economic problem. In your answer, you need to refer to concepts such as ordinary business life, unlimited wants, limited means, scarcity and choices and the TANSTAAFL principle (pp. 4 – 5 and p. 7).

(4)

4

Distinguish between the concepts “wants”, “demand” and “needs” (p. 6).

(3 X 1 = 3)

5

Distinguish between the concepts “scarcity” and “poverty” (p. 7).

(2 X 1 = 2)

6

Define the concept “opportunity cost”, clearly stating the main reason for its existence (p. 8).

(2)

7

Make use of a graph (Fig. 1-1, pp. 8 – 9) and explain the Production Possibility Curve / Frontier (PPC / PPF). In your answer, refer to the efficient, inefficient, attainable and unattainable production combinations, and explain why the curve is also known as the transformation curve.

(8)

8

9

2

2

A fictitious country producing two goods (X and Y) has the following PPC / PPF: X + 3Y = 225. Calculate the values of X and Y respectively. Plot the PPC / PPF and comment on the shape of the curve.

(5)

Explain why economics is regarded as a social science (p. 9). In your answer, include a discussion of how the natural sciences differ from the social sciences.

(3)

10

What is the difference between “microeconomics” and “macroeconomics”? example of an issue each branch of economics studies (see Box 1-2, p. 10).

11

Distinguish between the concepts “positive statements” and “normative statements” in economics and give examples of each (p. 11). (2 X 2 = 4)

12

Name and explain THREE reasons why economists often disagree on certain economic issues (pp. 11 – 12). (3 X 2 = 6)

13

Name and explain THREE common mistakes made in the reasoning about economics and economic issues (pp. 12 – 14). (3 X 2 = 6)

Economics I - Study Guide

Page 10

Give an (2 X 2 = 4)

Revised: 2007


14

15

To better see a soccer game, one spectator stands. Assuming that everyone trying to get a good view of the game can also stand represents an example of which common mistake people make when reasoning about economic issues?

(1)

A rooster crows and then the sun rises. The rooster thinks that the sun rises because he crows. And he is very proud of it. The rooster falls prey to which common mistake people make when reasoning about economic issues?

(1)

CHAPTER 2: A CLOSER LOOK AT THE ECONOMIC PROBLEM (pp. 17 – 38) Learning Outcomes: This chapter uses the three central economic questions – what, how, and for whom – to introduce a number of concepts, distinctions, factors of production, economic systems and ideas of famous economists. A mastery of this chapter should enable students to: • Name the three central economic questions; • Describe and identify the different types of goods and services that are produced; • Construct a PPC and explain economic growth / economic contraction with the assistance of a PPC; • Explain the major resources (factors of production) that are used to produce these goods and services and to list their rewards; • Discuss the differences between the major economic systems (i.e. traditional, command, market and mixed); • Briefly describe the major contributions of Adam Smith, Karl Marx and John Maynard Keynes; and • Understand and / or define the important concepts listed at the end of the chapter. Written assignment questions / Tutorial questions / Self-study questions: 1 What are the THREE central economic questions that all economies must answer (p. 17)? 2

(3)

Differentiate between the following concepts: a) b) c) d) e)

consumer goods and capital goods (p. 18); final goods and intermediate goods (p. 18); private goods and public goods (pp. 18 – 19); economic goods and free goods (p. 19); and homogeneous and heterogeneous goods(p. 19).

(5 X 2 = 10)

3

Name and explain the THREE different categories of consumer goods (p. 19).

4

The Production Possibility Curve / Frontier (PPC / PPF) was explained in Chapter 1. Illustrate and explain the effect(s) that improved production techniques will have on the PPC (Fig. 2-2 and 2-3, p. 23).

5

(3 X 2 = 6)

(6)

The following is a production possibilities table for war goods and civilian goods: Type of production Cars Missiles

a) b) c) d)

Production alternatives A 0 30

B 2 27

C 4 21

D 6 12

E 8 0

Show the data graphically (putting cars on the vertical axis and missiles on the horizontal axis). Ensure that you do the following: Label point G inside the PPC you have drawn. What does it indicate? Label point H outside the curve. What does this point indicate? What must occur before the economy can attain a level of production indicated by point H? Upon what specific assumptions is this PPC based? Explain how this curve reflects the law of increasing opportunity costs. What must the economy do to operate at some point on the PPC?

Economics I - Study Guide

Page 11

Revised: 2007

(5) (4) (2) (1)


6

Refer to Question 5. a) Suppose improvement occurs in the technology of producing missiles but not in the production of cars. Draw the new PPC and explain the effect that this improvement has had on the PPC. b) Now assume that a technological advance occurs in producing cars but not in producing missiles. Draw the new PPC. c) Finally, draw a PPC which reflects technological improvement in the production of both products mentioned in Question 5.

7

(2) (1) (1)

When does the Production Possibility Frontier have a bowed out shape rather than a straight line (p. 20)?

(2)

8

Name THREE factors that will cause the PPC to shift outward (pp.20 – 21).

(3)

9

Name THREE factors that will cause the PPC to shift inward.

(3)

10

Name the FOUR main factors of production used in the production process. Make sure you include the definition of each factor of production as well as the type of remuneration earned by each (pp. 22 – 25).

(8)

11

Explain the concepts “specialisation” and “division of labour” (see Box 2–1, pp. 23 – 24).

(2)

12

Name any THREE advantages of the division of labour (see Box 2–1, pp. 23 – 24).

(3)

13

Identify, from the worker’s point of view any TWO disadvantages of the division of labour (see Box 2–1, p. 24).

(2)

14

Differentiate among the following economic sectors (see Box 2-2, p. 27): a) the primary sector; b) the secondary sector; and c) the tertiary or service sector.

(3 X 1 = 3)

Note: All societies, past and present, have had to seek answers to the fundamental questions of what to produce, how to produce and for whom to produce. The first two questions deal with the issue of production and allocation, whereas the last one deals with the issue of distribution. For this purpose each society adopted an economic system that represented a method of allocating their productive resources to provide for the wants and needs of its citizens / consumers, thus dealing with the aforementioned fundamental questions. Generally, every economic system can be classified as a traditional, command, or market economy, although most are a combination of these yet are referred to only one type for political reasons. The following questions can be asked in order to categorise countries into the different market systems: • Who are the owners of the factors of production? (I.e. To whom are property rights assigned?); and • Do economic decisions occur in a centralised or decentralised manner? (I.e. what coordinating mechanism is in place to coordinate the economic activities of the participants in the economy?) (Mohr et al. 2007:28). 15

Explain and clearly differentiate among the following economic systems by referring to property rights and the coordinating mechanism: a) b) c) d)

the traditional system (pp. 26 – 27); the command system (pp. 27 – 29); the market system (pp. 29 – 31 and pp. 28 – 29); and the mixed economy (pp. 32 – 34 and pp.28 – 29).

Economics I - Study Guide

Page 12

(4 X 2 = 8)

Revised: 2007


Note: Each economic system has its own advantages and disadvantages. Some of these advantages and disadvantages are discussed below. Traditional System Advantages • The benefit of the traditional economy is that it minimises conflict among members because relatively little is disputed. Consequently, people in this system may cooperate more freely with one another. Disadvantages • Critics argue that the traditional system restricts individual initiative, is slow to adapt to changing conditions and stubbornly resists innovation. • The traditional system tends to be characterised by economic stagnation, i.e., an absence of economic progress (Tucker 2006:441). Command System Advantages • Economic change occurs much faster than in a traditional economic system. • Proponents also argue that the government will provide economic security and equity. They allege that central authorities ensure that everyone is provided food, clothing, shelter, and medical care irrespective of their ability to contribute to society. Disadvantages • Planners often do not set production goals accurately which either results in shortages or surpluses of goods and services. • Because profit is not the motive of producers in a command economy, quality and variety of goods also suffer. • People’s initiative is not encouraged. People are forced to do certain things which leads to resentment on their part (Greyling and Powell 2005:30-33; Tucker 2006:442-443). Market System Advantages • Producers are motivated by the opportunity to make profits and as such can be expected to produce high-quality output efficiently. Producers also have an incentive to develop new products and processes in order to make greater profits in the future. • The market system is flexible. It is able to adjust relatively quickly to changes in economic conditions. • Decision-making is decentralised and consumers are responsible for their own actions (private initiative is encouraged). Disadvantages • The main problem in a market economy is the unfair distribution of output. Output is divided in favour of people who earn higher incomes and own property. • Due to the duplication of many economic activities, much waste occurs. Producers often base decisions on incorrect perceptions which cause wastage and business failure. • Business cycles lead to fluctuations, causing high inflation and unemployment in the economy (Greyling and Powell 2005:30-33; Tucker 2006:444-445). Mixed economy Advantages • Through both private initiative and state intervention, the mixed market economy allows for greater stability, economic growth and job creation than in the other economic systems. • Private and public sector cooperation ensures the maximum use of resources and the satisfaction of needs. • Mixed market economies attract foreign investments due to the stability provided by the government and the functioning of the market mechanism. Disadvantages • Fair distribution of income does not occur and much money is spent on social upliftment programmes for the underprivileged. • It faces problems of unemployment, inflation and business cycles. • The threat of bureaucracy, corruption and wasting of resources exists, due to the participation of both the state and the private sector (Greyling and Powell 2005:30-33).

Economics I - Study Guide

Page 13

Revised: 2007


16

Briefly describe the major contributions of the following gentlemen behind the different economic systems: a) Adam Smith (pp. 34 – 36); b) Karl Marx (pp. 36 – 37); and c) John Maynard Keynes (pp. 37 – 38).

(3 X 3 = 9)

Note: In his book, The Wealth of Nations, Adam Smith wrote that a participant in a competitive market is “led by an invisible hand to promote an end which was no part of his intention.” As such, when economists refer to “the invisible hand,” they mean that market participants act in their own selfinterest, attempting to maximise their own well being, and the result is an efficient use of resources. This result occurs because the market forces of supply and demand invisibly guide resources to their highest valued uses. 17

Explain the following concepts: a) privatisation (p. 33 and p. 352); and b) nationalisation (p. 33 and p. 352).

(2 X 1 = 2)

CHAPTER 3: THE INTERDEPENDENCE BETWEEN SECTORS, MARKETS AND FLOWS (pp. 41 – 53) Learning Outcomes The purpose of this chapter is to show the interdependence that exists between the major sectors, markets and flows in a mixed economy. Once you have studied this chapter you should be able to: • Describe how total production, total income and total spending in the economy are related; • Distinguish between stocks and flows; • Distinguish between households and firms and show how their decisions and activities are interrelated; • Describe the government sector and show how it interacts with households and firms; • Show how the foreign sector interacts with the domestic economy; • Show where the financial sector fits into the overall picture; and • Show how the different sectors, markets and flows are interrelated. Written assignment questions / Tutorial questions / Self-study questions: 1 Outline how total production, total income and spending are related in an economy. In your answer, you need to refer to stocks and flows, as well as the goods market and the factor market (pp. 42 – 43, p. 46). 2

Give TWO characteristics for each of the following most common types of firms in South Africa (see Box 3-2, pp. 45 – 46): a) b) c) d) e) f)

3

individual or sole proprietorship; partnership; company; private company ((Pty) Ltd); public company; and close corporation (CC).

(6 X 2 = 12)

Tabulate ONE advantage and ONE disadvantage for each of the following forms of business organisation in South Africa (see Box 3-2, pp. 45 – 46): a) individual or sole proprietorship; b) partnership; and c) companies.

4

(5)

(3 X 2 = 6)

Differentiate between the “goods market” and the “factor market” (p. 46).

Economics I - Study Guide

Page 14

(2 X 1 = 2)

Revised: 2007


5

With the aid of a graph (Fig. 3-2, p. 47), explain the interdependence (circular flow) between households and firms.

(6)

6

With the aid of a graph (Fig. 3-4, p. 49), explain the position of the government in the circular flow of production, income and spending. In your answer, you need to refer to the THREE important flows involved in the government’s economic activity. (10)

7

Illustrate (Fig. 3-5, p. 51) and explain the interaction of the foreign sector in the circular flow of income and spending.

(5)

Note: The following equation summarises the expenditure approach to measuring GDP: GDP = C + I + G + (X – Z) The variables on the right hand side of the equation refer to: • C = Consumption: This is the spending by households on goods and services. Consumption thus includes purchases of durable goods e.g. TV's, cars; semi-durable goods e.g. clothes and light bulbs; non-durable goods e.g., food, petrol and services e.g. doctors services. • I = Gross private investment. The act of purchasing capital goods, e.g. machinery and buildings, is called investment or capital formation. It includes changes in inventories. • G = Government purchases: This includes expenditure on goods (e.g. hospital supplies) and services (e.g. hospitals, roads) (including factor services) Government purchases, however, excludes transfer payments. • (X - Z) = Net exports (Exports – Imports). South African exports are South African goods sold to people in other countries. South African imports are goods purchased by South Africans from other countries. 8

9

Aggregate spending in the economy is given by the equation A = Y = C + I + G + (X – Z). Illustrate (Fig. 3-7, pp. 52 – 53) and explain the major elements of the circular flow of income and spending. Ensure that you list the main injections into the circular flow of income and spending, and the main leakages from this flow.

(8)

What are leakages and injections? List and discuss the three leakages and injections that occur in a Full Circular Flow Model (i.e. a circular flow model containing the government in an open economy) (pp. 52 – 53)?

(8)

CHAPTER 4: MEASURING THE PERFORMANCE OF THE ECONOMY (pp. 55 – 72) Learning Outcomes The purpose of this chapter is to explain the standard macroeconomic objectives and to explain the criteria; concepts and techniques used to assess the performance of the economy. Once you have studied this chapter you should be able to: • Explain how the performance of the economy is measured; • Explain the five main macroeconomic goals; • Explain how the performance of each objective is measured; • Define the most important national accounting concepts; • Calculate Gross Domestic Product (GDP); • Show how the basic national accounting concepts are linked; • Define and interpret the Consumer Price Index (CPI); • Calculate the price level using the CPI; • Explain the balance of payments; and • Illustrate and explain a Lorenz curve and the Gini coefficient. Written assignment questions / Tutorial questions / Self-study questions: 1 Name AND explain the FIVE macroeconomic objectives which are used to evaluate the economic performance in a country (pp. 56 – 57). (5 X 2 = 10)

Economics I - Study Guide

Page 15

Revised: 2007


2

Define the following concepts: a) GDP (p. 57); b) double counting (p. 57); and c) purchasing power (p. 61).

(2) (1) (1)

3

What is the difference between a “final good” and an “intermediate good”? example of each of these types of goods (p. 18 and p. 58).

Give an (2 X 2 = 4)

4

Name and explain the THREE methods used to calculate GDP (pp. 58 – 59).

5

A gold mine extracts gold-bearing ore from the ground, which it sells to a refinery. The refinery sells the refined gold to a jeweller, who then manufactures various items of gold jewellery to sell to consumers. The sale values (measured in R millions) relating to these transactions are as follows:

(3 X 2 = 6)

GOLD BEARING ORE (Sold by the gold mine): 600 REFINED GOLD (Sold by the refinery): 750 JEWELLERY (Sold by the jeweller): 800 a) Calculate the Value Added at each stage of this production process. b) Calculate the Total Value Added. (There are two ways: explain both.) c) In the context of Value Added, what is meant by double counting? Use figures provided above to give an example of double counting. 6

Table 4.1 Steps 1. 2. 3. 4.

8

(2)

Table 4.1 describes the process by which a loaf of bread is sold to a consumer as a final good. In the first stage of the production process, the farmer raises the wheat and sells enough for one loaf of bread to the miller for R2.00. The miller grinds the wheat into flour and sells the flour to the baker for R3.50. The baker uses the wheat to bake a loaf of bread which is sold to a grocer for R6.00. Finally, the grocer sells the bread to a consumer for R7.50. a) Complete the last column of Table 4.1 by computing the value added at each of the four stages of the production process. b) What is the total value added for this loaf of bread? How does it compare with the expenditure on the loaf of bread as a final good?

7

(3) (3)

Farmer sells wheat to miller Miller sells flour to baker Baker sells bread to grocer Grocer sells bread to consumer

Price R2.00 R3.50 R6.00 R7.50

(2) (3)

Value added

Why do national income accountants include only final goods in measuring GDP for a particular year? Why don't they include the value of stocks and bonds sold? Why don't they include the value of used furniture bought and sold?

(3)

Differentiate between the following concepts: a) Subsidies and indirect taxes (p. 60); b) GDP at current / nominal prices and GDP at constant / real prices (pp. 61 – 62); and c) GDP and GNP (p. 57 and pp. 62 – 63).

(3 X 2 = 6)

Note: “The base year is the year in which the survey of household expenditure is done” (Mohr et al. 2007:68). It is also a year in which there have been few economic fluctuations. A census year is often chosen as the base year as Statistics South Africa has a lot of information for that year. The price index for the base year is always equal to 100 (Greyling and Powell 2005:63).

Economics I - Study Guide

Page 16

Revised: 2007


9

Ecoland produces only bananas and lobsters. The base year is 2004, and the table below (i.e. Table 4.2) gives the quantities produced and prices.

Table 4.2 Good Bananas Lobsters

2004 Quantity Price 1 000 bunches R2 a bunch 500 R20 each

2005 Quantity Price 1 100 R3 a bunch 525 R25 each

a) Calculate Ecoland’s nominal GDP in 2004 and 2005. (Show all your calculations.) b) Calculate Ecoland’s real GDP in 2005. (Show all your calculations.) 10

Define the concept “consumer price index (CPI)” and explain how the CPI figure is constructed by Statistics South Africa (p. 67).

(2) (1) (6)

Note: By using the prices and the contents of the CPI basket it is possible to calculate the CPI. The formula is: CPI =

11

Cost of basket in current period * 100 . Cost of basket in base period

In 2004, consumers in Snowville consumed only pencils, parkas and books. The prices and quantities for 2004 and 2005 are listed in the table below (i.e. Table 4.3). The reference base period for Snowville’s CPI is 2004. a) What is the CPI for Snowville in 2004? b) What is the CPI for Snowville in 2005?

Table 4.3 Base-period basket 200 Pencils 2 Parkas 5 Books 12 13

Base period Price R0.50 each R50.00 each R40.00 each

(2) (3)

Current period Price R0.70 each R75.00 each R30.00 each

Define the concept “balance of payments” and explain the TWO main accounts of the balance of payments (pp. 69 – 71).

(4)

Illustrate (Fig. 4-1, pp. 71 – 72) and explain the measurement of unequal distribution of income by means of the Lorenz curve. In your answer, you also need to define the concept “Gini coefficient”. Furthermore, by referring to your diagram, discuss the two extreme values between which the Gini coefficient can vary.

(8)

CHAPTER 5: THE SOUTH AFRICAN ECONOMY (pp. 75 – 89 Learning Outcomes This is a background chapter, which emphasises the major features, strengths and weaknesses of the South African economy. The macroeconomic objectives that were introduced in Chapter 4 are now applied to real South African data. Once you have studied this chapter you should be able to: • Describe the main sectors of an economy; • Discuss the balance of payments; • Explain the advantages and disadvantages of each of the macroeconomic goals; and • Describe South Africa’s factor endowment. Written assignment questions / Tutorial questions / Self-study questions: 1 Name the THREE main sectors of an economy and explain what each consists of (See Box 2-2, p. 27 and p. 76). (3 X 2 = 6)

Economics I - Study Guide

Page 17

Revised: 2007


2

Define the following concepts: a) jobless growth (p. 79); and b) balance of payments, clearly naming and explaining the three main components of the balance of payments (p. 80).

3

(1) (4)

Fill in the missing words: Hyperinflation is the term used to describe extremely (rapid / slow) _______ inflation where the impact on (real / potential) ___________ output and (employment / unemployment) __________ is devastating. The price level (falls / rises) __________ so dramatically that the usefulness of money as either a medium of exchange or a store of value is severely diminished.

4

(2)

Explain the advantages and disadvantages of pursuing each of the following macroeconomic objectives: a) b) c) d) e)

5

economic growth; full employment; price stability; the balance of payments stability; and a more equal income distribution.

(5 X 2 = 10)

Write notes on each of the following factors of production in order to assess South Africa’s factor endowment (see sub-section 5.4, pp.83 – 88): a) b) c) d)

natural resources; labour; capital; and entrepreneurship.

(4 X 2 = 8)

Note: The moment interest rates drop below a certain level, South Africa starts consuming imports on a large scale. As the economy accelerates the balance of payments soon turns negative. To remedy this situation, interest rates have to be pushed up (i.e. restrictive policies are applied), thereby dampening growth and import trade. Economists call this “the balance of payments constraint” (on growth). CHAPTER 7: DEMAND, SUPPLY AND PRICES (pp. 109 – 130) Learning Outcomes The purpose of this chapter is to introduce students to the fundamentals of microeconomic analysis of markets by focussing on demand, supply and the determination of market equilibrium prices. Once you have studied this chapter you should be able to: • Identify the most important determinants of the quantity demanded; • Show how demand can be expressed in words, numbers, graphs and equations; • Explain the difference between demand and quantity demanded; • Differentiate between a movement along a demand curve and a shift of a demand curve; • Explain the determinants of the quantity supplied; • Distinguish between a movement along a supply curve and a shift of a supply curve; and • Explain how the equilibrium price and quantity are determined. Note: Sub-section 7.1 This is a section on demand. It is important to pay particular attention to: • the various determinants of the quantity demanded and the four different ways of expressing individual demand (words, schedules, equations and graphs); • the ceteris paribus assumption; • labelling of the origin, the axes and the curve;

Economics I - Study Guide

Page 18

Revised: 2007


the determinants of market demand and the distinction between movements along the demand curve and shifts in the demand curve; possible causes of change in market demand; the distinction between substitutes and complements and the effects of a change in the income of households (or consumers); and Table 7-3 which summarises the discussion of market demand.

• • • •

Sub-section 7.2 • All the basic concepts and techniques introduced in sub-section 7.1 are applied in subsection 7.2 to analyse the supply side of the market. Written assignment questions / Tutorial questions / Self-study questions: 1 Define / Explain the following concepts: a) b) c) d)

demand (p. 111); the phrase “ceteris paribus” (p. 112). the inverse relationship between demand and price (p. 113); and market demand (p. 114);

(1) (1) (2) (1)

Give the equation (symbols) for quantity demanded and also state the factors that determine demand (p. 112, see Table 7-3, p. 120).

(3)

3

Illustrate (Fig 7-3, p. 115) a demand curve and explain how market demand is determined.

(3)

4

The following three diagrams represent the demand curves of three different consumers. Draw a diagram to show the market demand curve for the three consumers combined. Your diagram does not have to be drawn to scale, but it must show the values of total market demand clearly for two points on the curve.

(2)

2

P

P

P

25 15 D1 80 5

170

D2 35

Q

65

D3 100

Q

190

Differentiate between the following concepts: a) a movement along a demand curve and a shift of a demand curve (pp. 116 – 117); b) a change in demand and a change in quantity demanded (pp. 116 – 117); and c) substitutes and complements (pp. 117 – 118).

6

(2) (2) (2)

List reasons for the following: a) a movement along the demand curve (p. 116 and Table 7-3, p. 120); and b) a shift of the demand curve (p. 116 and Table 7-3, p. 120).

7

Q

(1) (3)

Define the concept “supply” and list any THREE factors that determine the supply of a product (p. 121 and p. 126).

(4)

8

Illustrate (Fig. 7-8, p. 124) and explain a supply curve.

(2)

9

Name any TWO factors that cause the supply curve to shift (see Table 7-5, p. 126).

(2)

Economics I - Study Guide

Page 19

Revised: 2007


10

Illustrate (Fig. 7-11, pp. 127 – 128) and explain how equilibrium in the market is established. In your answer, also indicate and explain the effects of the occurrence of excess supply and excess demand.

(4)

11

Name and explain the TWO important functions that prices serve in a market economy (pp. 127 – 128). (2 X 2 = 4)

12

Name the ONE factor which causes a movement on both the demand and supply curve.

13

Suppose the market for pizzas is competitive and is described by the following equations:

(1)

Q D = − 4 P + 160 Q S = 2P − 8 Where D Q = number of pizzas demanded, S Q = number of pizzas supplied, and P = price of one pizza D S subject to Q ≥0, Q ≥ 0, and P ≥ 0. a) Calculate the equilibrium price and quantity. b) Suppose the demand curve for pizzas shifts to the left. What would happen to the equilibrium price and quantity? c) Identify four factors that could cause the demand curve for pizzas to shift to the left.

(3) (2) (4)

CHAPTER 8: DEMAND AND SUPPLY IN ACTION (pp. 135 – 150) Learning Outcomes The purpose of this chapter is to show the application of demand and supply to the analysis of developments in different markets including the impact of government intervention. Following mastery of this chapter, students should be able to: • Explain how a change in demand affects the equilibrium price and quantity in the market; • Explain how a change in supply affects the equilibrium price and quantity in the market; and • Show what happens if the government interferes in the price mechanism by setting minimum or maximum prices. Written assignment questions / Tutorial questions / Self-study questions: 1 Illustrate (Fig. 8-1 (a), p. 136) and explain the effect(s) of an increase in demand on equilibrium price and quantity. Ensure that you have mentioned one factor that could have caused this increase in demand. 2

3

(5)

Illustrate (Fig. 8-1 (b), pp. 136 – 137) and explain the effect(s) of a decrease in demand on equilibrium price and quantity. Ensure that you have mentioned one factor that could have caused this decrease in demand.

(5)

Consumers can use either electricity or heating oil to warm their houses. Suppose the price of electricity increases. Use a demand and supply diagram to show the impact of the higher price of electricity on the market for home heating oil.

(4)

Economics I - Study Guide

Page 20

Revised: 2007


4

A market research team has come up with the demand and supply schedules for pizza in Cheeseboro. These schedules are given in the table below (i.e. Table 8.1). Use the data to analyse the situation in the market for pizza.

Table 8.1 Price (Rands per pizza) 5 6 7 8 9 10 11 12

Quantity demanded (pizzas per week) 750 700 650 600 550 500 450 400

Quantity supplied (pizzas per week) 300 400 500 600 700 800 900 1 000

a) Draw a figure showing the demand curve for pizza and the supply curve of pizza. What are the equilibrium price and quantity? b) Suppose the price is R10. Describe the situation in the market and explain how the price of pizza adjusts. c) The market research report also includes a prediction about the effect on the market for pizza in Cheeseboro following the publishing of a recent news article in the Cheeseboro Herald. The Cheeseboro Herald reported that pizza has been discovered to help prevent heart disease. Unfortunately, your dog chewed up the report and all you can read about the prediction is “quantity… by 150 at each price.” What does the prediction say? Use your graph to show the predicted effects on the market for pizza. What are the predicted equilibrium price and quantity? How will the market adjust? 5

6

(2) (3)

(6)

Illustrate (Fig. 8-3 (a), p. 137 and p. 139) and explain the effect(s) of an increase in supply on equilibrium price and quantity. Ensure that you have mentioned one factor that could have caused this increase in supply.

(5)

Illustrate (Fig. 8-3 (b), p. 137 and p. 139) and explain the effect(s) of a decrease in supply on equilibrium price and quantity. Ensure that you have mentioned one factor that could have caused this decrease in supply.

(5)

Note: Consumers, trade unions, farmers, business people and politicians are often dissatisfied with the prices and quantities determined by market demand and supply. Their dissatisfaction leads them to put pressure on government to intervene to influence prices and quantities in the market. This intervention (to correct market failures) can take different forms, including: • Taxing certain products or activities; • Subsiding certain products or activities; • Setting minimum prices (price floors) above the market-clearing price; and • Setting maximum prices (price ceilings) below the market-clearing price (Mohr et al. 2007:143). 7

Name THREE reasons why governments often set maximum prices (p. 144)

(3)

8

What will happen if a price ceiling is set above the equilibrium price (p. 144)?

(2)

9

Illustrate and explain the effect(s) on equilibrium when the government intervenes in the economy by setting: a) a maximum price (price ceiling; price control) below the market-clearing price (Fig. 8-9, pp. 144 - 146). Your discussion should include THREE ways in which the basic problem of how to allocate the available quantity supplied among consumers can be overcome. b) a minimum price (price floor; price support) above the market-clearing price (Fig. 8-12, pp. 148 – 149). Your discussion should include THREE steps that the government could take to address these consequences.

Economics I - Study Guide

Page 21

Revised: 2007

(4) (4)


10

Name THREE reasons why setting a price support above equilibrium prices is an inefficient way of assisting small farmers (p. 149).

(3)

CHAPTER 9: ELASTICITY (pp. 153 – 171) Learning Outcomes The purpose of this chapter is to explain the meaning and significance of various elasticity concepts. Students who have mastered the prescribed sections should be able to: • Define and calculate elasticity; • Explain the meaning and significance of price elasticity of demand; • Distinguish between five categories of price elasticity of demand; • Explain the relationship between price elasticity of demand and total revenue in the case where demand is elastic and demand is inelastic; • Define income elasticity and cross elasticity of demand; and • Explain the determinants of price elasticity of demand. Written assignment questions / Tutorial questions / Self-study questions: 1 Define the concept “price elasticity of demand” and give its formula (p. 154). 2

Illustrate (Fig. 9-1, p. 156) and explain price elasticity of demand at different points along a linear demand curve.

(2) (4)

Note: A technical problem is encountered when an attempt is made to calculate the percentage change between two different points on a demand curve as the answer will depend on which point is used as the basis for the calculation. The solution is to use the average of the two points as the basis. In this way, the same answer will always be obtained, irrespective of the basis or direction of change. The elasticity coefficient calculated by comparing two points on a demand curve is called arc elasticity (Mohr et al. 2007:157-158). 3

Suppose the price of flour increases from R0.80 to R1.00 a kilogram and the quantity demanded decreases from 100 kilograms to 95 kilograms. Using the arc elasticity method, what is the price elasticity of demand for flour? Is the demand for flour elastic or inelastic?

(4)

Figure 9.1 4

The figure above (i.e. Figure 9.1) shows the demand curve for pizza. By moving from point A to point B, calculate the a) percentage change in price. b) percentage change in quantity demanded. c) price elasticity of demand (using the arc elasticity formula).

Economics I - Study Guide

Page 22

(1) (1) (1)

Revised: 2007


5

6

Explain the meaning as well as the relationship between price elasticity of demand and total revenue for each of the FIVE different categories of price elasticity of demand as given in Table 9-2 (p. 163). Explain the relationship between price elasticity of demand and total revenue in the case where: a) demand is elastic (for a price increase and decrease) (pp. 162 – 163); and b) demand is inelastic (for a price increase and decrease) (pp. 162 – 163).

7 8

(5)

(2 X 2 = 4)

The price elasticity of demand for personal computers is 4.0. What would happen to the total revenue earned by firms making computers if they decreased their prices?

(2)

The price elasticity of demand for eggs is 0.3. What would happen to the total revenue earned by egg producers if they raised their prices?

(2)

9

Name and explain any THREE of the FIVE MAIN determinants of the price elasticity of demand (pp. 164 – 165). (3 X 2 = 6)

10

Define the following “other” elasticity concepts and give the formula for calculating each: a) income elasticity of demand (pp. 167 – 168); and b) cross elasticity of demand (pp. 168 – 169).

11

12

13

(2 X 2 = 4)

The income elasticities of demand for movies, dental services, and clothing have been estimated to be +3.4, +1.0, and +0.5 respectively. Interpret these coefficients. What does it mean if the income elasticity coefficient is negative?

(2)

A 10 per cent (10%) increase in income brings about a 15 per cent (15%) decrease in the demand for a good. What is the income elasticity of demand and is the good a normal good or an inferior good?

(2)

When the price of bananas rises by 2 per cent (2%), the quantity demanded of peanut butter falls by 4 per cent (4%). a) What is the cross elasticity of demand between these two goods? b) How are these goods related? c) If the price of bananas rises, how will that affect the demand curve for peanut butter?

14

If a 5 per cent (5%) fall in the price of chicken decreases the quantity of beef demanded by 20 per cent (20%), and increases the quantity of chicken demanded by 15 per cent (15%), calculate the cross elasticity of demand between chicken and beef.

CHAPTER 10: BACKGROUND TO DEMAND: THE THEORY OF CONSUMER CHOICE (pp. 175 – 195) Learning Outcomes The chapter shows how to analyse an individual consumer’s choice between different goods and services. Once you have studied this chapter you should be able to: • Define and calculate utility, marginal utility and weighted marginal utility; • Explain the relationship between total, average and marginal values; • Formulate the law of diminishing marginal utility; • State the conditions for consumer equilibrium; • Explain what indifference curves are and list their important properties; • Define the budget line and explain consumer equilibrium; and • Examine the effects of changes in income or prices.

Economics I - Study Guide

Page 23

Revised: 2007

(2) (1) (1)

(3)


Written assignment questions / Tutorial questions / Self-study questions: 1 Define the following concepts: a) b) c) d)

utility (p. 176); total utility (p. 177); marginal utility (p. 177); and the law of diminishing marginal utility (p. 177).

(4 X 1 = 4)

2

Define the concept “weighted marginal utility” and give its formula (p. 179)

(2)

3

Consider the following information for the total utility (TU) (measured in utils) corresponding to the total number of avocados and apples consumed. The consumer’s total income is R20, the price (P) of an avocado is R4 and the price (P) of an apple is R2.

Table 10.1 Avocados Number of products 0 1 2 3 4 5 6 7 8

TU 0 24 44 62 78 90 96 100 102

Apples MU –

MU P –

TU 0 10 18 25 31 36 40 43 45

MU –

MU P –

a) Complete the columns for marginal utility (MU) and MU/P. You may use the appropriate abbreviations for column headings (e.g. Q, MU). [Where applicable, round your answer off to 1 decimal place.] b) What is the optimal number of avocados and apples that the consumer should buy in order to maximise utility? 4

(6) (2)

By making use of the utility approach, name the TWO conditions that have to be met for the consumer to be in equilibrium (p. 182).

(2)

5

What does the completeness assumption in indifference curve analyses state (p. 186)?

(1)

6

What does the transitivity assumption in indifference curve analyses state (p. 186)?

(1)

7

What does the non-satiability assumption in indifference curve analyses state (p. 186)?

(1)

8

Define the concept “indifference curve” (pp. 186 – 187).

(2)

9

Illustrate (Fig. 10-3, pp. 187 – 188) and explain the indifference curve. In your answer, you need to refer to the following concepts: a) b) c) d) e)

10

different desired consumption combinations; law of substitution; marginal rate of substitution; law of diminishing rate of substitution; and slope of the indifference curve.

(5 X 1 = 5)

List THREE properties of an indifference curve (pp. 188 – 189).

(3)

Note: Any consumer’s consumption choices are limited by income and by prices. A person has a given amount of income to spend and cannot influence the prices of goods and services that he / she buys. The limits to a consumer’s consumption choices are described by the consumer’s budget line

Economics I - Study Guide

Page 24

Revised: 2007


(consumption-possibilities curve, expenditure curve, expenditure line, budget constraint). The budget line shows the different combinations of two goods that a consumer can afford with his / her income (Mohr et al. 2007:190). 11

Illustrate (Fig. 10-6, p. 190) and explain the concept “budget line”.

(3)

12

Michael is on holiday and wants to bring souvenirs home to family and friends. His souvenir budget is R100, and he can choose between T-shirts, which cost R20 each, and key chains, which cost R5 each. a) Draw a graph of Michael’s budget line (with key chains on the vertical axis). b) What is the slope of Michael’s budget line? How does that slope represent an opportunity cost? Suppose that Michael now finds a shop where T-shirts are on sale for R10 each. (Key chains still cost R5 each). c) Draw the new budget line in the figure. d) What is the slope of the new budget line?

13 14

15

(2) (2)

(1) (1)

Illustrate (Fig. 10-7, p. 191) and explain consumer equilibrium in terms of the indifference approach.

(5)

Illustrate (Fig. 10-9, p. 193) and explain the effect of an increase in income on the consumer’s equilibrium position as explained in (13) above, clearly differentiating between the concepts “inferior goods” and “normal goods”.

(5)

By making use of budget lines and indifference curves illustrate (Fig. 10-10a, pp. 193 – 194) and explain the effect(s) of an increase in the price of a commodity on the consumer’s equilibrium position.

(5)

16

What is the difference between the “income effect” and the “substitution effect” (see Box 72, pp .121 – 122 and pp. 193 – 194)? (2 X 1 = 2)

17

Jennifer divides her income between coffee and croissants. An early frost in Brazil causes a large increase in the price of coffee in the South Africa. a) Draw an indifference curve – budget line graph (similar to Figure 10-11 on p. 195) showing the income and substitution effects associated with an increase in the price of coffee, a normal good. Put coffee on the horizontal axis. b) In words, describe the effect of this price increase on coffee consumption in terms of the substitution effect and income effect.

CHAPTER 11: BACKGROUND TO SUPPLY: THE THEORY OF PRODUCTION AND COST (pp. 197 – 220) Learning Outcomes The purpose of this chapter is to examine firms’ decisions about how many units of a good or service to supply at each price. This chapter also introduces the basic concepts of production and costs. This chapter provides the foundation for Chapter 12 and Chapter 13 where average variable cost (AVC), average cost (AC) and marginal cost (MC) are used to evaluate the profit or loss position of a firm. Once you have studied this chapter you should be able to: • Define and calculate the various revenue, cost and profit concepts; • Distinguish between the total, average and marginal product of a variable input; • Draw the average and marginal product curves; • Explain the relationship between the law of diminishing returns and the shapes of the total, average and marginal product curves in the short run; • Distinguish between the short-run and long-run; • Distinguish between total, average and marginal cost; • Draw the total, average and marginal cost curves; and • Explain the relationship between the product curves and the cost curves in the short run.

Economics I - Study Guide

Page 25

Revised: 2007

(4) (2)


Written assignment questions / Tutorial questions / Self-study questions: 1 Differentiate between the concepts total revenue (TR), average revenue (AR) and marginal revenue (MR) and give the equation for each (see Box 11-2, p. 199). Example: TR = P x Q. 2

(3 X 2 = 6)

Define the following concepts: a) b) c) d) e) f)

opportunity cost (p. 7 and p. 200); profit (p. 202); economic / excess profit / abnormal profit (p. 202); normal profit (p. 202); negative profit (economic loss) (p. 203); and the law of diminishing returns (p. 207).

(6 X 1 = 6)

3

What is the difference between “explicit costs” and “implicit costs” (p. 200)?

(2 X 1 = 2)

4

Define “total product”, “marginal product” and “average product” (pp. 207 – 208).

(3 X 1 = 3)

5

With the aid of a graph (Fig.11-2, p. 207), differentiate between the concepts total (TP), average (AP) and marginal product (MP) of labour.

(6)

What is the relationship between average product and marginal product when drawing a diagram of them (pp. 207 – 208)?

(3)

6 7

Differentiate between “fixed inputs” and “variable inputs” and give examples of each (p. 209). (2 X 2 = 4)

Note: The short-run production function is the relationship showing how output varies when the quantity of labour employed varies, holding constant the quantity of capital and the state of technology. We can thus say that the short run production function shows the maximum output the firm can produce when only one of its inputs can be varied, the others remaining fixed. Assuming two inputs, capital and labour, and that capital is fixed and labour is the variable factor, we can write the short run production function as follows:

Q = F ( L , K ) where the bar over the symbol for capital

units indicates that it is a constant amount. The long run production function shows the maximum output the firm can produce when all its inputs can be varied. Assuming two inputs, capital and labour, we can write this using the same notation as before: i.e. 8 9

Q = F( L , K)

Illustrate (Fig. 11-4, p. 210, and p. 212) and explain the difference between total (TC), total variable (TVC) and total fixed (TFC) costs.

(6)

With the aid of a graph (Fig. 11-5 or Fig. 11-6, p. 212), differentiate between marginal cost (MC) and average cost (AC).

(4)

Note: Students often wonder why average total costs initially decrease and then increase as output increases. To answer this question one must realise that initially, as output increases, both average fixed cost and average variable cost decrease. So, average total cost decreases at first. But as output increases further, diminishing returns set in and average variable cost begins to increase. Eventually, average variable cost increases more quickly than average fixed cost decreases, so average total cost increases.

Economics I - Study Guide

Page 26

Revised: 2007


10

Table 11.1 gives the total cost structure for one of many identical firms in a perfectly competitive industry. Complete the table by computing total variable cost, average total cost, average variable cost and marginal cost at each level of output. (14)

Table 11.1

11

Quantity (units per day)

Total cost (Rands)

0 1 2 3 4 5 6

12 24 32 42 54 68 84

Average total cost (Rands)

Average variable cost (Rands)

Marginal cost (Rands)

Complete Table 11.2 by computing the profit (per day) for the firm at each level of output if the price of output is R9, R11 or R15.

Table 11.2 Quantity (units per day) 0 1 2 3 4 5 12

Total variable cost (Rands)

Profit (price = R9)

Profit (price = R11)

(9)

Profit (price = R15)

Consider the profit-maximising output decision of the firm mentioned in Question 11 at alternative prices. How much will the firm produce if the price of output is R9? R11? R15? Explain each of your answers. (3 X 2 = 6)

CHAPTER 12: PERFECT COMPETITION (pp. 223 – 238) Learning Outcomes The purpose of Chapter 12 is to explain perfect competition, analyse the decisions of an individual firm operating under conditions of perfect competition and analyse the equilibrium of a perfectly competitive industry. Once you have studied this chapter you should be able to: • List the conditions which have to be met for perfect competition to exist; • Explain the demand curve facing the firm under perfect competition; • Draw the demand curve for a product of a firm under perfect competition; • Draw the marginal and average cost curves of the firm; • Explain the short-run equilibrium of the firm under perfect competition; • Explain the long-run equilibrium of the firm and the industry under perfect competition; and • Explain allocative and productive efficiency. Written assignment questions / Tutorial questions / Self-study questions: 1 Name THREE characteristics of / conditions for the existence of perfect competition (p. 252) 2

Illustrate (Fig. 12-1, p. 254) and explain the demand curve for the product of the firm under perfect competition.

3

Explain the so-called “shut-down rule” and “profit-maximising rule” (pp. 255 – 256).

4

With the aid of a graph (Fig. 12-4, p. 258), explain the difference between total revenue (TR), total cost (TC) and total economic profit.

Economics I - Study Guide

Page 27

Revised: 2007

(3) (4)

(2 X 1 = 2) (6)


5

Illustrate (Fig.12-6, p. 262) and explain the following short-run equilibrium positions under perfect competition: a) economic / positive profit (Fig. 12-6 (a)); b) normal / zero profit (Fig. 12-6 (b)); and c) negative profit / economic loss (Fig. 12-6 (c)).

6

(3 X 3 = 9)

Illustrate (Fig. 12-8, p. 265) and explain the respective positions of the firm and the industry when long-run equilibrium exists under conditions of perfect competition.

(5)

7

Illustrate (Fig. 12-9, p. 265) and explain the long-run effects on both the industry and a firm (10) when the firm initially earns an economic profit under conditions of perfect competition.

8

Illustrate (Fig. 12-10, p. 266) and explain the long-run effects on both the industry and a firm when the firm initially makes an economic loss under conditions of perfect competition. (10)

9

In the long run, perfectly competitive firms cannot earn an economic profit. Why (p. 266)?

10

What is the difference between allocative and productive efficiency (pp. 237 – 238)?

(4)

(2 X 2 = 4)

CHAPTER 13: MONOPOLY AND IMPERFECT COMPETITION (pp. 241 – 275) Learning Outcomes The purpose of this chapter is to introduce monopoly, monopolistic competition and oligopoly and compare these market forms with each other and with perfect competition. After careful study, students should be able to: • Summarise the most important differences between perfect competition, monopolistic competition, oligopoly and monopoly; • Discuss barriers to entry which may give rise to a monopoly; • Explain the short-run equilibrium position of a monopolist with the aid of the cost and revenue curves; • Discuss the key features of price discrimination; • Discuss the kinked demand curve; • Discuss the arguments against monopolies; and • Explain the purpose of competition policy. Written assignment questions / Tutorial questions / Self-study questions: 1 With reference to Table 13-1 (p. 243), differentiate between the following market structures by referring specifically to the number of firms, the nature of the product and the firm’s control over the price of the product: a) b) c) d) 2

perfect competition; monopoly; monopolistic competition; and oligopoly.

(4 X 3 = 12)

What are the four-firm concentration ratio and the Herfindahl index? In your answer, include a short explanation of how both of these measures are calculated (pp. 243 – 246).

(3)

3

Name and explain THREE barriers to entry which may give rise to a monopoly (see Box 131, pp. 245 - 246). (3 X 2 = 6)

4

Make use of a graph (Fig. 13-2, p. 249) to illustrate and explain the short-run situation where a monopolist makes an economic / positive profit.

(5)

5

What is price discrimination (p. 251)?

(1)

6

Why do firms price discriminate (p. 251)?

(1)

7

What conditions must be met in order for a monopolist to price discriminate (p. 251)?

(2)

Economics I - Study Guide

Page 28

Revised: 2007


8

Name and explain the different types of price discrimination (p. 251).

9

With reference to Figure 13-6 (pp. 260 – 261) illustrate and explain the equilibrium position of the oligopolist, clearly explaining the so-called “kinked” demand curve.

10

(3 X 2 = 6) (6)

The following questions pertain to the theory of the “kinked” demand curve, devised in 1939 by the American economist, Paul Sweezy. a) What TWO assumptions about a rival’s response to price changes underlie the kinked demand curve for oligopolists (p. 260)? b) What is the shortcoming of the kinked demand model (p. 260)? c) How does the kinked demand curve explain the characteristic of stable prices and output levels (p. 261)?

(2) (1) (1)

Note: The gap in the MR curve results from the abrupt change in the slope of the demand curve at the going price. 11

Name THREE arguments against monopolies (pp. 267 – 268).

(3)

12

Name THREE ways in which the government can react to the problem of supernormal profits to prevent abuses of market power (pp. 270 – 271).

(3)

13

Explain the purpose of competition policy (p. 271).

(3)

14

“In terms of the Competition Act of 1998, the Competition Commission seeks to provide all South Africans with an equal opportunity to participate fairly in the national economy, in order to promote a more effective and efficient economy. The Competition Commission is responsible for investigating complaints made against firms engaging in restrictive business practices, and for evaluating, approving or prohibiting mergers and acquisitions” (http://www.compcom.co.za/annualreportbook2/annualbook02.htm). In the context of competition policy, identify THREE restrictive business practices that firms may engage in that could be construed by the Competition Commission as anti-competitive in nature (p. 271).

(3)

CHAPTER 14: THE LABOUR MARKET (pp. 277 – 306) Learning Outcomes The purpose of this chapter is to introduce the most important features of the labour market particularly the supply, demand and remuneration of labour. Once you have studied this chapter you should be able to: • Illustrate and explain the backward bending supply curve for labour; • Explain the main determinants of the supply of labour; • Explain why the demand for labour is a “derived demand”; • Explain what marginal revenue product (MRP) stands for; • Explain why the firm maximises profits (is in equilibrium) when it employs workers up to the point where MRP equals the wage rate; • Analyse various labour market imperfections; • Explain, with the aid of a diagram, the impact of the imposition of a minimum wage in a perfectly competitive labour market; • Explain why wages differ; • Discuss factors affecting the labour force participation rate (LFPR); • Calculate the LFPR; and • Explain what is meant by the informal sector.

Economics I - Study Guide

Page 29

Revised: 2007


Written assignment questions / Tutorial questions / Self-study questions: Note: Statistics South Africa uses the following definition of unemployment as its official definition. The unemployed are those people within the economically active population who: (a) did not work during the seven days prior to the interview, (b) want to work and are available to start work within two weeks of the interview, and (c) have taken active steps to look for work or to start some form of self-employment in the four weeks prior to the interview. The expanded definition of unemployment excludes criterion (c). The expanded definition therefore includes persons who said they were unemployed but had not taken active steps to find work in the four weeks prior to the interview (i.e. discouraged work-seekers). 1

Define the following concepts: a) b) c) d)

2

the total supply of labour (p. 302); the labour force (p. 302); the economically active population (p. 302); and the labour force participation rate (LFPR) (p. 304).

(4 X 1 = 4)

Illustrate (Fig. 14-2, pp. 280 – 281) and explain the backward bending supply curve for labour. In your answer, you need to clearly differentiate between the so-called substitution effect and income effect.

(5)

3

Name TWO factors that may shift the supply curve for labour (pp. 281 – 282).

(2)

4

Why is the demand for labour a “derived demand” (p. 282)?

(2)

5

Explain the equation MRP = MPP x P, clearly defining the various concepts involved in the equation (p. 283).

(2)

Note: To determine whether or not it will be profitable to employ an additional unit of labour, the MRP has to be compared to the marginal cost of labour. As long as MRP is greater than the wage rate (w), is greater than the cost of hiring him or her, it will be profitable to expand employment. Equilibrium (i.e. maximum profit) is achieved when MRP is equal to the wage rate (w) (Mohr et al. 2007:283-284). 6

The table below (Table 14.1) has the marginal product schedule for a firm. If the firm is a perfect competitor and the price of the product is constant at R2 a unit, complete the table. If the wage rate is R8 an hour, how many workers does the firm hire?

Table 14.1 Quantity of labour (workers)

Marginal product (units per hour)

Marginal revenue product (Rands)

1

10

____

2

8

____

3

6

____

4

4

____

7

Name THREE factors that cause the demand curve for labour to shift (pp. 284 – 285).

(3)

8

Define the concept “collective bargaining” (p. 288).

(1)

9

“A trade union is an organisation of workers that promotes and protects the interests of its members in issues such as wages and working conditions, especially through negotiations with employers” (http://www.services.gov.za/en-za/RegisterTradeUnion.htm). a) Name the THREE methods that trade unions can use to attempt to increase the wage rate (p. 289).

Economics I - Study Guide

Page 30

Revised: 2007

(3)


10 11

b) Illustrate and explain ONE of the three methods you mentioned in Question 9 a) (see Fig. 14-8, pp. 288 – 291).

(5)

Illustrate (Fig. 14-10, p. 296) and explain the impact of the imposition of a minimum wage in a perfectly competitive labour market.

(4)

“Workers in South African factories are exploited. The government must introduce a minimum wage to rectify this situation.” Comment on this statement. Use a diagram to assist you with your assessment of the aforementioned statement.

(6)

12

Name and explain THREE reasons why wages differ in the market (pp. 298 – 301).

13

Give the equation for calculating the LFPR (p. 304).

(1)

14

UPPIEland uses the same method to calculate the Labour Force Participation Rate as we do in South Africa. Working-age people employed in the formal sector 7 271 Working-age people employed in the informal sector 4 124 Working-age people without jobs who want jobs 4 369 Working-age people without jobs who don’t want jobs 13 394 Total female population aged 15 – 64 years 15 408 Total male population aged 15 – 64 years 13 998 Total population of UPPIEland 46 686 Calculate the Labour Force Participation Rate for UPPIEland.

(3)

15

Name and explain any THREE factors which determine the LFPR (p. 304).

(3 X 2 = 6)

(3 X 2 = 6)

Note: “The informal sector is made up of those firms that don’t register themselves as employers or taxpayers, so that the government is not aware of them. Examples include hawkers, shebeen owners, backyard mechanics or shoe-shiners” (Hartzenberg, Richards, Standish, Tang, Wentzel and Hutchings 2005:103). “The formal sector is made up of firms that are legally registered, comply with the relevant laws and regulations and pay income tax” (Marx, van Rooyen, Bosch and Reynders 1998:91). 16

Name THREE reasons why people engage in informal sector activities (p. 305).

(3)

CHAPTER 15: THE MONETARY SECTOR (pp. 313 – 335) Learning Outcomes This chapter introduces money, the financial sector and monetary policy. The learning outcomes are the ability to: • Define money; • Describe the functions of money; • Define M1, M2 and M3; • Describe the main functions of the South African Reserve Bank; • Explain the demand for money; • Explain how the supply of money is determined; and • Explain the basic instruments of monetary policy. Written assignment questions / Tutorial questions / Self-study questions: 1 Define money and list its functions (pp. 314 – 315).

(4)

2

Name and explain THREE functions of money (pp. 314 – 315).

(3)

3

A R650 price tag on a pair of running shoes is an example of money functioning as a __________.

(1)

Economics I - Study Guide

Page 31

Revised: 2007


4

Define / Explain the different measures of money, namely: a) the conventional measure (M 1) (p. 316); b) a broader definition of money (M 2) (p. 317); and c) the most comprehensive measure of money (M 3) (pp. 317 – 318).

5

Explain the equation for money: M = C + D (p. 317).

6

Define the following concepts:

(1) (1) (1) (1)

a) demand deposits (p. 316); b) financial intermediary, with an example (p. 318); and c) the opportunity cost of holding money (p. 325). 7

(3 X 2 = 6)

Fill in the missing words: When ______ is granted to a person or institution the piece of paper that is normally issued in exchange for the funds and which stipulates the _______ at which the funds are loaned as well as _____ and ____ the loan is to be repaid is known as the credit instrument. Examples include bills of exchange, promissory notes and bankers’ acceptances.

(2)

8

Name and explain THREE functions of the South African Reserve Bank (SARB) (pp. 320 – 321). (3 X 2 = 6)

9

Explain how demand deposits are created (p. 322).

(3)

10

How do banks create money (p. 322)?

(2)

11

If the cash reserve requirement of the banking system is 20 per cent (20%) and banks hold no excess reserves, then the value of the money multiplier will be ____. Ensure that you include the equation for the money multiplier in your answer.

(2)

If a commercial bank increases its cash reserves (held at the Reserve Bank) by R5 million, what change in demand deposits will this bring about? Assume the Reserve Bank insists on a minimum cash reserve requirement of 4 per cent (4%) and that the banks hold no excess reserves.

(3)

If the cash reserve requirement is 5 per cent (5%) and the increase in demand deposits amounts to R5000, what change in cash reserves will this bring about?

(3)

12

13 14

A commercial bank receives new deposits equal to R200 000 and the required cash reserve ratio is 10%. a) Calculate the change in required cash reserves. b) What is the amount of new loans the bank can make?

(2) (2)

15

Name THREE factors which influence the money supply (pp. 322 – 325).

(3)

16

Discuss changes in the required cash reserve ratio and open market transactions as TWO tools that the SARB has at its disposal to increase the quantity of money (pp. 323 and 333).

(2)

Name and explain the Keynesian motives for holding money and state the respective determinants of each motive (pp. 325 – 327).

(6)

Explain the inverse relationship between the demand for money and the level of interest rates (p. 327).

(2)

Explain the accommodation policy as the most important policy instrument used by the SARB (pp. 332 – 333).

(3)

17 18 19

Economics I - Study Guide

Page 32

Revised: 2007


Note: Public debt management • “This involves decision-making with regard to the composition and repayment of loans to the central government. • Short-term government loans on the domestic market to settle foreign public debts have a negative effect on the supply of money – money is withdrawn locally and ‘spent’ overseas” (Greyling and Powell 2005:74). 20

Public debt management and intervention in foreign exchange markets are two of four market-orientated policy instruments used by the SARB to encourage financial institutions to take certain actions on a voluntary basis. Name and explain the other TWO (pp. 332 – 334). (2 X 2 = 4)

Note: “Direct or non-market-orientated policy instruments refer to those measures taken by the central bank in order to achieve the aims of monetary policy by limiting or prescribing the behavioural pattern of market participants. These instruments are usually associated with a suspension of market forces, either through rigid rules or by fixing certain important variables. Should market participants not adhere to these rules, they may be liable to prosecution or penalties (Oster 2003:45).” Non-market orientated policy instruments include: credit ceilings, deposit rate control, statutory liquidity ratios, directed credits and bank-by-bank rediscount quotas. Credit ceilings • Credit ceilings are attempts to limit commercial banks’ ability to create money by restricting their capacity to issue loans, irrespective of their level of reserve requirements. • Credit ceilings will therefore restrict the growth in the money supply (Keating 2005:190). Deposit rate control (discontinued in SA) • The SARB can directly control the money supply by laying down the maximum deposit rate that may be offered or paid by the banks. • By controlling the deposit rate, the SARB is in effect controlling the money supply (Keating 2005:190). • The main reason for the imposition of this type of control was to prevent an increase in home mortgage rates at times when the general level of interest rates tended upwards (Oster 2003: 46). 21

Name and explain TWO non-market-orientated policy instruments used by the SARB to restrict bank credit (see Note and p. 335). (2 X 2 = 4)

CHAPTER 16: THE PUBLIC SECTOR (pp. 339 – 365) Learning Outcomes Once you have studied this chapter you should be able to: • Explain why government participates in economic affairs; • Discuss the arguments for and against privatisation; • Explain what fiscal policy means; • Explain what monetary policy means; • Discuss government spending and financing; • Discuss the criteria for a good tax; • Discuss the various types of taxes; • Explain the impact of an excise tax (with and without the use of a diagram); and • Analyse who bears the burden of a specific excise tax. Written assignment questions / Tutorial questions / Self-study questions: 1 Name and explain THREE reasons why the government intervenes in the economy because of so-called market failures (see sub-section 16.2, pp.341 –348). (3 X 2 = 6) 2

Discuss TWO arguments for and TWO arguments against the privatisation of state-owned assets (pp. 352 – 353). (2 X 2 = 4)

Economics I - Study Guide

Page 33

Revised: 2007


3

Differentiate between the concepts “fiscal policy” and “monetary policy” and state the two main elements which each consists of (p. 354). (2 X 2 = 4)

4

Explain how you will implement a monetary and / or a fiscal policy in order to: a) stimulate / expand the economy (p. 354); and b) cool down / contract the economy (p. 354).

(2 X 2 = 4)

5

Name and explain THREE possible explanations for the trend of higher government spending in South Africa (pp. 355 – 356). (3 X 2 = 6)

6

Name and explain the THREE main ways in which government spending is financed (pp. 356 – 357). (3 X 2 = 6)

7

Fill in the missing words Public debt is the accumulated (debt / credit) __________ or (underspending / overspending) ________ of a country.

(1)

8

Name and explain THREE criteria for a good tax system (p. 358).

(3 X 2 = 6)

9

Differentiate between “direct” and “indirect” taxation and give examples of each (p. 359).(2 X 2 = 4)

10

Differentiate between the concepts “progressive taxes”, “proportional taxes” and “regressive taxes” and provide an example of each (p. 359). (3 X 2 = 6)

11

Ms Jones has a taxable income of R30 000, and she must pay R3 000 in taxes. Mr Smith has a taxable income of R60 000. How much tax must Mr Smith pay for the tax system to be: a) progressive? b) regressive? c) proportional?

12 13 14

(2) (2) (2)

Illustrate (Fig. 16-3, pp. 363 – 364) and explain the incidence of an excise tax on cigarettes. Ensure that you have mentioned all the groups that share the burden of this excise tax.

(7)

Explain how the employees of the cigarette companies share the burden of the excise tax (p. 363).

(2)

The burden of an excise tax is shared by three groups: the consumers of cigarettes, the owners of the cigarette companies and the employees of the cigarette companies. What determines the distribution of the burden of the excise tax between the three groups (p. 364)?

(1)

CHAPTER 17: THE FOREIGN SECTOR (pp. 369 – 401) Learning Outcomes The purpose of this chapter is to explain the interaction between the foreign sector and the domestic economy. Once you have studied this chapter you should be able to: • Explain why international trade occurs; • Explain the concepts of absolute advantage and comparative / relative advantages; • Analyse the impact of an import tariff; • Describe the major elements of the balance of payments; • Distinguish between the current account and the financial accounts of the balance of payments; • Explain the foreign exchange market for American dollars / Euros (etc.) in South Africa; and • Explain the effects of a decrease / increase in the supply of dollars (foreign currency) on the value of the Rand. • Explain the effects of a decrease / increase in the demand for dollars (foreign currency) on the value of the Rand.

Economics I - Study Guide

Page 34

Revised: 2007


Written assignment questions / Tutorial questions / Self-study questions: 1 Define the following concepts: a) b) c) d) e) f) g) 2

openness of an economy (p. 370); balance of payments (p. 384); trade balance (p. 384). exchange rate (p. 390); depreciation (p. 390 and p. 392); appreciation (p. 390 and p. 392); and terms of trade, together with its equation (pp. 400 – 401).

(1) (2) (1) (1) (1) (1) (2)

Fill in the missing words: a) Self-sufficiency (also known as ________) is the ability of a country to (produce everything / only a few of the goods and services) ________ that its citizens require (p. 371). b) Devaluation is the forced (decrease / increase) ________ in the value of one currency in terms of another currency activated by the government. c) Revaluation is the forced (decrease / increase) ________ in the value of the one currency in terms of another currency activated by the government.

3

Name and explain THREE reasons why countries trade with one another (pp. 372 – 374).

(1) (1) (1) (3)

Note: A country has an absolute advantage in the production of a good or service if its output per unit of inputs for that good or service is higher than that of another country. For example, Country A can produce maize more efficiently than country B, and country B can produce diamonds more efficiently than country A. A country has a comparative (relative) advantage in producing a good or service if it can produce it at a lower opportunity cost than any other country. For example, Country A can produce maize and diamonds more efficiently than country B, but it is much more efficient than country B in the production of maize relative to its efficiency in the production of diamonds. 4

The following table (Table 17.1) shows the maximum amount of coffee and tea that can be produced by South Africa and Brazil using the same quantity and quality of inputs, if all inputs are used to produce one product only (e.g. South Africa could produce 162kg of tea and 0kg of coffee, or it could produce 54kg of coffee and 0kg of tea).

Table 17.1 South Africa Brazil

Tea (T) (kilograms) 162 216

Coffee (C) (kilograms) 54 108

a) Which country has an absolute advantage in producing tea? Provide a reason for your answer. b) Which country has an absolute advantage in producing coffee? Provide a reason for your answer. c) Calculate the opportunity cost of tea in South Africa. d) Calculate the opportunity cost of coffee in South Africa. e) Calculate the opportunity cost of tea in Brazil. f) Calculate the opportunity cost of coffee in Brazil. g) Which country has a comparative advantage in producing tea? Provide a reason for your answer. h) Which country has a comparative advantage in producing coffee? Provide a reason for your answer. Suppose South Africa and Brazil wish to maximise their combined total output and they agree to trade with each other in tea and coffee at a favourable price. i) Which country should specialise in tea and which country should specialise in coffee, or should each country produce a combination of both goods? Provide reasons for your answer.

Economics I - Study Guide

Page 35

Revised: 2007

(2) (2) (2) (2) (2) (2) (2) (2)

(4)


5

Differentiate between import tariffs and quotas as policy instruments used by authorities to influence international trade and capital movements (p. 376 and p. 379). (2 X 2 = 4)

6

Illustrate (Fig. 17-1, p. 377) and explain the economic impact of implementing an import tariff.

7

The following diagram shows the demand and supply curves for a country’s domestic cloth market.

a) If the cloth market is closed to international trade, what would be the equilibrium price and quantity in the domestic cloth market? 2 b) If the cloth market is opened to international trade, and the world price of cloth is $60/m , what would be the level of i. domestic demand;(1) ii. domestic supply; iii. imports? 2 c) The government now imposes a tariff of $24/m on cloth imports. Determine the direct effects of the tariff on i. the domestic price (the price consumers would pay); ii. domestic demand; iii. domestic supply; iv. the quantity of imports; and v. government revenue 8

(6)

(2)

(1) (2) (2) (1) (1) (2) (2)

Three arguments used to promote trade barriers are the dumping argument, the infant industry argument and the national security argument. Explain each of these arguments and evaluate whether each one has any flaws (pp. 380 – 382). (3 X 2 = 6)

Note: The balance of payments consists of two major accounts (components), namely the current account and the financial account (previously called the capital account). Transactions in these two accounts are either indicated as debits (-) or credits (+). The net effect of the two accounts adds up to either a surplus (+) or deficit (-), which influences the third component of the balance of payments, namely the change in the country’s gold and other foreign reserves. This is also referred to as the balancing item. 9 a) Name and explain the THREE main accounts / components of the balance of payments (pp. 384 – 388, p. 80 and note above). (3 X 2 = 6) b) Name and explain THREE sets of items that flow through the current account of the balance of payments (pp. 384 – 385). (3 X 2 = 6)

Economics I - Study Guide

Page 36

Revised: 2007


c) Name and explain the THREE main components of the financial account of the balance of payments (pp. 385 – 387). (3 X 2 = 6) d) Explain the item “gold and other foreign reserves”, clearly stating what causes the level of reserves to increase or decrease (p. 387). (2) 10

Name THREE reasons why “gold and other foreign reserves” are the most important figure / total in the balance of payments (pp. 387 – 388).

(3)

11

Name THREE ways / options in which exports can be promoted (p. 388).

(3)

12

Name TWO factors each which will cause: a) a demand by South Africans for foreign currency (p. 391 and p. 393). b) a demand by foreigners for South African Rands (pp. 391 – 392 and p. 393). c) a supply of Rands internationally (p. 391).

13

Illustrate (Fig. 17-3, pp. 391 – 392) and explain the foreign exchange market for American dollars in South Africa. In your answer, differentiate between the following concepts: a) excess demand and excess supply for dollars; and b) depreciation and appreciation on the y-axis.

14

15

16

(2) (2) (2)

(2 X 2 = 4) (2)

Illustrate (Fig. 17-4, p. 392) and explain the effects of a decrease in the supply of dollars on the value of the Rand. Ensure that you have mentioned one factor that could have caused this decrease in supply of dollars.

(6)

Consider the following situation. Tourism from South Africa to the United States increases sharply because of a fare ware among airlines. Illustrate and explain the effects of this situation on the exchange rate between the Rand and the United States dollar ($).

(5)

Consider the South African market for Japanese Yen. a) Illustrate what will happen to the exchange rate between the Rand and the Japanese Yen (¥) if South African exports to Japan increase. Remember to label your diagram. b) Has the price of the Japanese Yen (¥) increased or decreased in Rand terms as a result of the increase in exports? c) Did the increase in exports lead to an appreciation or a depreciation of the Rand against the Yen (¥)?

17

Explain the effect of a depreciating Rand on South Africa’s terms of trade (p. 393).

CHAPTER 18: INCOME DETERMINATION IN A SIMPLE KEYNESIAN MACROECONOMIC MODEL (pp. 405 – 426) Learning Outcomes The purpose of this chapter is to explain the equilibrium level of national income determination in an economy without a government and the foreign sector and to explain the Keynesian multiplier. The expected outcome is that students should be able to: • Explain with or without the aid of a diagram the three important characteristics of the consumption function; • Differentiate between autonomous and induced consumption; • Explain the inverse relationship between the interest rate and the expected return on investment spending; • Explain the relationship between consumption and savings; • Explain with the aid of a diagram the equilibrium level of income; • Describe what the multiplier is and explain how it works; and • Calculate i. private consumption expenditure ii. the level of autonomous spending iii. the multiplier iv. the equilibrium level of income.

Economics I - Study Guide

Page 37

Revised: 2007

(4) (1) (1) (2)


Note: a) Y = total production, output or income in the economy, which is simply called national product or national income (i.e. GDP or GNI). b) A = total or aggregate spending / demand. c) At any given time, THREE relationships exist between production, income and spending, which can be summarised as: i. ii. iii.

A = Y (equilibrium) A > Y (disequilibrium: level of production and income tend to increase) Y > A (disequilibrium: level of production and income tend to fall)

Written assignment questions / Tutorial questions / Self-study questions: 1 By means of an illustration (Fig. 18-1 and Fig. 18-2, p. 410), explain the THREE important functions of the consumption function. 2

(6)

Explain the following concepts and give the equation for each: a) autonomous consumption (p. 410 and p. 411); b) induced consumption (p. 410 and p. 411); and c) marginal propensity to consume (pp. 410 – 411).

(3 X 2 = 6)

Note: The marginal propensity to save (s) is the proportion of an increase in income that is saved (the fraction of any change in disposable income which households save). In symbols the marginal propensity to save may be expressed as:

s= 3

∆S ∆Y

(Also refer to p. 413.)

By means of a graph (Fig.18-2, p. 410), differentiate between “autonomous consumption” and “induced consumption”.

(5)

4

Name and explain any THREE non-income factors which determine the level of consumption (see Box 18-3, pp. 411 – 412). (3 X 2 = 6)

5

Give and explain the equations for the following: a) the consumption function (p. 410 and p. 411); b) the investment function (p. 416); and c) the multiplier (pp. 422 – 423 and pp. 424 – 425).

6

(3 X 2 = 6)

Explain the inverse relationship between the interest rate and the expected return on investment spending (p. 414).

(2)

Illustrate AND explain the following: (Remember to label the axes correctly and to indicate the name / meaning of every curve by means of an abbreviation). 7

The aggregate spending function (Fig.18-5, p. 416 and p. 417).

(7)

8

The 45-degree line, clearly indicating the A-Y relationships (Fig.18-6, p. 416 and p. 417).

(6)

9

The equilibrium level of income, clearly differentiating between and indicating the concepts “excess demand” and “excess supply” (Fig. 18-7, p. 416 and p. 418).

(6)

The multiplier process which is initiated by an increase in autonomous spending, for example an increase in investment (Fig. 18-9, p. 423 or Fig. 18-10, p. 426). In your answer, also refer to the equation for the multiplier.

(8)

10

Note: Equations 18-1 through to 18-7 in Chapter 18 need to be understood by students.

Economics I - Study Guide

Page 38

Revised: 2007


11

Answer the following questions, assuming that:

C = 50+ 2 Y 3 a) b) c) d) 12

and I = I = 50 .

Calculate the multiplier. Calculate the equilibrium level of income. Discuss briefly, what you understand by the multiplier. Assume that investment increases by 50 in the above example. Calculate the change in equilibrium income.

(2) (3) (2) (4)

Assume the following model:

Y = A = R80 million A=C + I C = R 40 million I = I = R80 million c = 2 (two − thirds) 3 C = C + cY a) What is the slope of the consumption function? b) Calculate and briefly explain what the difference is between induced and autonomous consumption. c) Derive the equilibrium income level. 13

(1) (3) (4)

Suppose an economy was characterised by the following initial assumptions: • No Depreciation • No Government Sector (No government spending, no taxes) • No External Sector (No foreign factor income, no exports or imports)

C = C + cY I = I = 300 C = 180 c = 0.6 a) Calculate the equilibrium level of income. b) Derive the equation that describes aggregate spending (as a function of Y). c) Calculate the value of C at equilibrium.

(3) (3) (3)

d) Derive the savings function, Vertical axis intercept = - C and the slope = (1-c). e) Calculate the value of savings at equilibrium. Compare this value to the value of planned

(3)

f)

investment ( I ). Calculate the multiplier.

(2) (2)

g) Suppose planned investment ( I ) rises from 300 to 500 calculate the new level of equilibrium income.

Economics I - Study Guide

Page 39

Revised: 2007

(3)


CHAPTER 19: KEYNESIAN MODELS INCLUDING THE GOVERNMENT AND FOREIGN SECTOR (pp. 431 – 451) Learning Outcomes The purpose of this chapter is to extend the model introduced in Chapter 18. In Chapter 18, we explained that aggregate / total spending (A) consists of consumption (C) plus investment (I) to give the equation A = C + I. We now include the government and the foreign sector to examine the impact of government spending, taxes, exports and imports on aggregate spending, the multiplier and the equilibrium level of income. Once you have studied this chapter you should be able to: • Explain how government spending affects the level of production, income and the multiplier; • Describe how the introduction of a proportional income tax affects: i. private consumption expenditure ii. autonomous spending iii. the multiplier iv. the equilibrium level of income; • Use the simple Keynesian model to analyse the effects of fiscal policy; • Explain how exports and imports affect the level of income in the domestic economy; and  Calculate i. the level of autonomous spending ii. the multiplier iii. the equilibrium level of income iv. the required change in government spending to reach full employment. Written assignment questions / Tutorial questions / Self-study questions: 1 Illustrate and explain the multiplier effect when aggregate spending in the economy increases because of an increase in government spending (Fig.19-2, pp. 433 – 434).

(8)

Assume that the government decides to increase its spending by R4000 and that the

2

marginal propensity to consume (c) is equal to a) b)

9

10

.

By means of the expenditure multiplier calculate the change in total income. Use the Keynesian 45 degree diagram to illustrate and explain the effect of the aforementioned increase in government spending on aggregate spending in a closed economy (i.e. an economy that does not trade with the rest of the world).

(3)

(5)

Illustrate AND explain the following: (Remember to label the axes correctly and to indicate the name / meaning of every curve by means of an abbreviation). 3

Taxation as a function of income (Fig.19-3, p. 436).

(5)

4

The impact of the introduction of taxes on the consumption function (Fig. 19-4, p. 437).

(5)

5

The multiplier effect / impact of autonomous net exports (Fig. 19-8 (b), pp. 447 – 448).

(7)

6

Explain the following concepts and give the equations of each: a) autonomous government spending (p. 432); b) disposable income (p. 436); and c) aggregate spending for an open economy with a government sector (p. 445 and p. 450).(3 X 2 = 6)

Note: Equations 19-1 through to 19-23 in Chapter 19 need to be understood by students.

Economics I - Study Guide

Page 40

Revised: 2007


7

Using the following information, derive the equilibrium level of income:

C = C = 50

c = 3 (three − quarters) 4

I = I = 150

and

t = 1 (one − third ) 3 G = G = 300 (3)

8

Consider the following model:

A=C + I +G C = C + cY T = tY I=I G =G Y=A The values of the parameters and exogenous variables are as follows:

a) b) c) d) 9

C = C = 100

c = 3 (three − quarters) 4

I = I = 150

and

t = 1 (one − fifth) 5 G = G = 250

Calculate the value of the multiplier. Calculate the equilibrium level of income. What is the value of consumption C at the equilibrium income level? If full-employment equilibrium income Yf = 2300, calculate by how much government spending would have to be increased to achieve Yf.

(3) (3) (3) (2)

The table below (Table 19.1) lists the components of aggregate planned expenditure for Green Bay. The numbers are measured in billions of Rands, the currency of Green Bay:

Table 19.1 A 1 2 3 4 5 6 a) b) c) d) e) f) g)

a b c d e

B Y 100 200 300 400 500

C C 110 170 230 290 350

D Ī 60 60 60 60 60

E

F

G

X

50 50 50 50 50

60 60 60 60 60

G Z 15 30 45 60 75

Calculate the value of autonomous expenditure. What is the marginal propensity to consume? What is the marginal propensity to save? What is aggregate planned expenditure when real GDP is R200 billion? If real GDP is R200 billion, what is happening to inventories? Explain your answer. If real GDP is R500 billion, what is happening to inventories? Explain your answer. What is the equilibrium level of real GDP and aggregate expenditure?

Economics I - Study Guide

Page 41

Revised: 2007

(3) (2) (1) (2) (3) (3) (2)


10

Consider the following model: Equilibrium real GDP and A is at R400 billion Autonomous consumption = R200 million Investment spending = R100 million Government spending = R200 million Exports = R200 million Imports = R100 million Multiplier = 2 Full employment level of income is R1300 a) Calculate autonomous spending. b) The equilibrium level of income. c) The change in government spending required to attain full employment.

(2) (2) (2)

CHAPTER 20: MORE ON MACROECONOMIC THEORY AND POLICY (pp. 453 – 471) Learning Outcomes The purpose of this chapter is to use aggregate demand (AD) and aggregate supply (AS) curves to analyse monetary and fiscal policies and supply shocks. Once you have studied this chapter you should be able to: • Describe the effects of expansionary monetary and fiscal policy in the AD – AS framework; • Describe the effects of an increase in the cost of production in the AD – AS framework; • Explain how three major schools of thought differ in their understanding of how the economy functions; and • Describe the major features of supply-side economics. Note: Sub-section 20.1 This sub-section is very important. It shows how AD and AS can be combined to analyse a variety of macroeconomic issues and should be studied in detail. Here are some important hints: • students must know the factors causing shifts in the AD and AS curves; and • students must be able to use the AD-AS model to explain the impact on the price level and total production (or income) of: a) expansionary and contractionary monetary and fiscal policies b) a change in aggregate supply (e.g. a supply shock). Written assignment questions / Tutorial questions / Self-study questions: 1 What factors would cause the AD curve to shift (see Table 20-1, p. 456)?

(5)

2

What factors would cause the AS curve to shift (see Table 20-2, p. 456)?

(4)

3

Discuss the shape of the short-run aggregate supply curve (pp. 456 – 457). Hint: To answer this question it is best to analyse the AS curve as having three distinct phases. (3 X 2 = 6)

4

Illustrate (Fig. 20-3, pp. 457 – 458) and explain the effect of expansionary monetary and fiscal policy in the AD – AS framework. Ensure that you have stated under what conditions this policy will be used.

(5)

Illustrate (Fig. 20-4, p. 458) and explain the effect of an increase in the cost of production, e.g. increased imported oil price in the AD – AS framework. Ensure that you mention what situation this scenario will give rise to.

(5)

Using the AD – AS model, explain with the aid of a diagram how an increase in the interest rate will affect the level of prices, production and income in the economy.

(5)

The price of oil increased to more than $84 per barrel on 12 October 2007, and this pushed the price of petrol up. Using the AD – AS model, explain with the aid of a diagram, what the inflationary effect will be. Furthermore, mention what situation this scenario will give rise to.

(5)

5

6 7

Economics I - Study Guide

Page 42

Revised: 2007


8

Assume that the government announces a 10 per cent (10%) reduction in personal income tax rates. a) Indicate whether the government is applying an expansionary monetary or an expansionary fiscal policy. b) Using the AD – AS model, explain with the aid of a diagram, what the expected effect on the equilibrium price level and level of real output will be. c) When will the government apply the policy you indicated in Question 10 a)?

9 10

Name TWO of the main lags that have to be taken into account with attempts to stabilise the economy (pp. 464 – 465).

12

(4) (1) (2)

Explain how the following major schools of thought differ in their understanding of how the economy functions (see sub-section 20.4, pp. 467 – 470): b) the Classical school; c) the Keynesians; and d) the Monetarists.

11

(1)

(3 X 2 = 6)

Explain the concept “supply-side economics” (see sub-section 20.4, pp. 470 – 471). In your answer you also need to outline the THREE main elements of supply-side economics.

(4)

What is the Laffer curve (p. 470)?

(2)

CHAPTER 21: INFLATION (pp. 473 – 494) Learning Outcomes The purpose of this chapter is to define inflation, the different types and effects. Once you have studied this chapter you should be able to: • Define inflation; • Distinguish between different measures of inflation; • Calculate CPI; • Calculate the GDP deflator; • Explain why inflation is regarded as a problem; • Explain, using diagrams, the difference between demand-pull and cost-push inflation; • Identify the factors that give rise to demand-pull and cost-push inflation; and • Explain “inflation targeting” as a policy measure that can be used to combat inflation. Written assignment questions / Tutorial questions / Self-study questions: 1 Define the concept “inflation” (p. 474). 2

(2)

Explain each of the following methods whereby the rate of inflation is measured: a) the consumer price index (CPI) (p. 475 and p. 67); b) CPIX (p. 476); and c) the production price index (PPI) (p. 477).

(3 X 1 = 3)

Note: The CPI for metropolitan areas is known as the Headline Inflation Rate and is referred to as the “official inflation rate”. 3

Tabulate THREE of the main differences between the CPI and the PPI (p. 477).

(3 X 2 = 6)

Note: The GDP deflator is the index value used to eliminate the effect of inflation. It thus reveals the average change in prices of all the goods and services that are included in GDP from year to year. We calculate the GDP deflator by using nominal GDP and real GDP in the formula: GDP deflator =

GDP at current prices * 100 GDP at constant prices

Economics I - Study Guide

Page 43

or

Nominal GDP * 100 Real GDP Revised: 2007


Question 4 is based on the table below (i.e. Table 21.1) Table 21.1 Year 2004 2005 2006

Nominal GDP (billions of Rands) 5 200 5 500 5 750

Real GDP (billions of Rands) 4 800

GDP deflator 112

5 000

a) What is the GDP deflator for 2004? b) The above table (i.e. Table 21.1) gives the real and nominal GDP of a hypothetical nation. What was real GDP in 2005? [Please round off your answer to the nearest whole number.] c) The above table gives the real and nominal GDP or a hypothetical nation. What was the GDP deflator in 2006?

(2) (3) (2)

Question 5 is based on the table below (i.e. Table 21.2) Table 21.2 Year 2004 2005

Nominal GDP (billions of Rands) 2500

Real GDP (billions of Rands) 2400

GDP deflator 105 117

a) Using the data in the above table (i.e. Table 21.2), what is real GDP in 2004? [Please round off your answer to the nearest whole number.] b) Using the data in the above table (i.e. Table 21.2), what is nominal GDP in 2005?

(3) (3)

Note: A major purpose of the CPI is to measure inflation. The inflation rate is the percentage change in the price level from one year to the next. The inflation formula is:

(CPI of this year - CPI of the previous year) * 100 CPI of the previous year 6 7

8

If the consumer price index at the end of 1998 was 100 and at the end of 1999 was 120, then the rate of inflation for 1999 was ___.

(2)

If the consumer price index was 128 at the end of 1994 and 136 at the end of 1995, what was the rate of inflation for 1995?

(2)

In 2004 the CPI was 105; in 2005 it was 112. The inflation rate between 2004 and 2005 was ______.

(2)

9

Name and explain the THREE main effects of inflation (pp. 479 – 482).

10

Write a short note on each of the following:

(3 X 2 = 6)

a) demand-pull inflation (p. 485); and b) cost-push inflation (p. 486). 11

12

(2) (2)

Identify THREE different factors that could give rise to demand-pull inflation. You are not required to explain why these factors give rise to demand-pull inflation, but it is important to state the direction of change (p. 485).

(3)

Identify THREE different factors that could give rise to cost-push inflation. You are not required to explain why these factors give rise to cost-push inflation, but it is important to state the direction of change (p. 486).

(3)

Economics I - Study Guide

Page 44

Revised: 2007


13

Illustrate and explain the following types / causes of inflation: a) demand-pull inflation (Fig. 21-1, p. 485). Ensure that you have mentioned what causes demand-pull inflation; and b) cost-push inflation (Fig. 21-2, p. 486). Ensure that you mention the phenomenon that is likely to occur due to this type of inflation.

(5) (5)

14

Define the concept “stagflation” (p. 468 and p. 486).

(1)

15

Explain THREE key features of inflation targeting as a policy measure that can be used to combat inflation in South Africa (p. 493).

(3)

16

Discuss TWO advantages and TWO disadvantages of inflation targeting as a monetary policy framework (pp. 493 – 494). (2 X 2 = 4)

CHAPTER 22: UNEMPLOYMENT AND THE PHILLIPS CURVE (p. 561 – 573) Learning Outcomes The purpose of this chapter is to introduce students to the definition, cost and types of unemployment. In addition, students must be able to describe the trade-off principle of the Phillips curve. Once you have studied this chapter you should be able to: • Distinguish between the different types of unemployment; • Discuss the policies that can be used to reduce unemployment; • Explain what the Phillips curve means; and • Explain the “incomes policy” as a policy measure that can be used to combat inflation. Written assignment questions / Tutorial questions / Self-study questions: 1 Name and explain the different types of unemployment (pp. 499 – 500). 2

(4 X 2 = 8)

A recent accounting graduate from a major university is searching for a place to begin his career as an accountant. This individual is best considered as ____________ unemployed.

(1)

Suppose that over a period of years the country of Quasiland switched from being an agriculturally-based economy to a technologically-based economy. As a result, many people lost jobs because they lacked the correct skills. These people would be considered part of the ___________ unemployed.

(1)

4

Name THREE reasons for the existence of structural unemployment (p. 500).

(3)

5

Name THREE supply-side policies to reduce unemployment (p. 501).

(3)

6

Name THREE demand-side policies to reduce unemployment (pp. 501 – 502).

(3)

7

What is the mechanism behind the Phillips curve (p. 503)?

(2)

8

Illustrate (Fig. 22-2, pp. 503 – 504) and explain the trade-off principle embodied in the Phillips curve.

(5)

Explain an incomes policy as a policy measure that can be used to combat inflation and mention one reason why an incomes policy is usually ineffective (pp. 505 – 506).

(2)

3

9

Economics I - Study Guide

Page 45

Revised: 2007


CHAPTER 23: ECONOMIC GROWTH AND DEVELOPMENT (pp. 509 – 526) Learning Outcomes The purpose of this chapter is to examine the definition, measurement and causes of economic growth, the definition of the business cycle and the difference between economic growth and economic development. After mastering the prescribed sections, you should be able to: • Define economic growth and economic development; • Explain difficulties in measuring economic growth; • Explain what is meant by the business cycle; • Identify the major sources of economic growth; and • Enumerate the major problems experienced by developing countries. Written assignment questions / Tutorial questions / Self-study questions: 1 Define the concept “economic growth” (p. 510).

(2)

2

Name and explain THREE problems associated with GDP (and GNI) as measures of economic growth in a country (p. 510). (3 X 2 = 6)

3

Explain how unrecorded activities affect the measurement of GDP.

(2)

4

Illustrate (Fig. 23-1, pp. 511 – 513) and explain the business cycle, clearly differentiating between the exogenous and endogenous factors which cause fluctuations in the level of economic activity.

(5)

5

With reference to Box 23-2 (p. 513), give TWO characteristics / features of each of the following stages of the business cycle: a) b) c) d)

6 7

latter stages of the downswing; early stages of the upswing; latter stages of the upswing; and early stages of the downswing.

(4 X 2 = 8)

Name the THREE most important leading indicators used in South Africa which tend to signal what to expect as far as economic activity is concerned (pp. 514 – 515).

(3)

Name and explain THREE major supply-side sources of economic growth (pp. 515 – 516). (3 X 2 = 6)

Note: The supply-side sources of economic growth all contribute to the country’s production capacity, or the potential output of the economy.] 8

Name the THREE demand factors that play an important role in contributing to economic growth (p. 517).

(3)

9

Define the concept “economic development” (p. 521).

(2)

10

Name and explain THREE features and problems faced by developing countries which are detrimental to their economic development (pp. 522 – 523). (3 X 2 = 6)

11

Briefly name and describe Rostow’s stages of economic growth (p. 523).

(5 X 2 = 10)

--- ooo ---

Economics I - Study Guide

Page 46

Revised: 2007


SOME IMPORTANT REMINDERS

Opportunity cost of an increase in X in terms of Y =

Consumer Price index =

∆Y ∗ (−1) ∆X

Cost of basket in current period * 100 . Cost of basket in base period

Change in own price of a good causes a movement along the demand curve or supply curve, not a shift in these curves; other factors cause demand and supply curves to shift. D

S

In market equilibrium, Q = Q . Price elasticity of demand (not the arc elasticity formula) =

percentage change in quantity demanded percentage change in price of product ∆Q P ep = ∗ (drop the minus sign) ∆P Q ep =

Price elasticity of demand (arc elasticity formula) =

ep =

(Q2 − Q1 ) /[(Q1 + Q2 ) / 2] (P2 − P1 ) /[(P1 + P2 ) / 2]

or e p =

(Q2 − Q1 ) / (Q1 + Q2 ) (drop the minus sign ) (P2 − P1 ) / (P1 + P2 )

Cross-price elasticity of demand =

ec =

percentage change in the quantity demanded of product A percentage change in the price of product B

(

%∆ Q D A ec = %∆PB

)

Income elasticity of demand =

ey =

percentage change in the quantity demanded of the product percentage change in consumers' income

ey =

%∆ Q D %∆Y

( )

Marginal utility =

MU =

∆TU ∆Q

Utility-maximising condition assuming entire budget is spent:

MU x MU y = Px Py

Economics I - Study Guide

Page 47

Revised: 2007


Marginal product of labour = MP (or MPL) =

∆TP ∆L

Total cost (TC) = total fixed cost (TFC) + total variable cost (TVC) (this refers to the short run) Total revenue = TR = P x Q But, remember: for a purely competitive firm, MR = P. Profit-maximising condition for a firm: MC = MR Average costs:

Average revenue =

Marginal cost =

TFC Q TVC AVC = Q TC ATC = Q AFC =

MC =

∆TC ∆Q

AR =

PQ Q

Marginal revenue =

MR =

∆TR ∆Q

Labour force participation rate = LFPR =

Labour force (or economically active population) Working - age Population Marginal revenue product = MRP = MPP * P

Money multiplier =

1 b

Change in demand deposits =

Change in cash reserves =

1 ∆D = ∗ R b

∆R = b(∆D)

You must be able to apply the equations in Chapters 18 and 19.

GDP deflator =

GDP at current prices * 100 GDP at constant prices

Inflation rate =

(CPI of this year - CPI of the previous year) * 100 CPI of the previous year

Economics I - Study Guide

Page 48

or

Nominal GDP * 100 Real GDP

Revised: 2007


LIST OF REFERENCES Greyling, C. and Powell, J. 2005. Economics: HG and SG: Grade 11. Cape Town: Maskew Miller Longman. Hartzenberg, T., Richards, S., Standish, B., Tang, V., Wentzel, A. and Hutchings, C. Economics: Fresh Perspectives. Cape Town: Pearson.

2005.

Keating, L. 2005. Instructor’s manual for Economics. Cape Town: Oxford University Press. Marx, S., van Rooyen, D.C., Bosch, J.K., and Reynders, H.J.J. 1998. Business Management. Pretoria: Van Schaik. th

Mohr, P., Fourie, L. and Associates. 2007. Economics for South African students. 4 edition. Pretoria: Van Schaik. Oster, G.L. 2003. The determinants of short-term interest rates. Unpublished Masters dissertation, University of South Africa, Pretoria. th

Tucker, I.B. 2006. Survey of Economics. 5 edition. United States of America: South-Western.

Economics I - Study Guide

Page 49

Revised: 2007


BED1 - Economics 1 Study Guide