Grade 11 Economics Exam
November 2012.
MEMO
1.1.1
1.1.2
1.1.3
1.1.4
1.1.5
1.1.6
1.1.7
A
D
C
B
A
A
A
7 x 2 = (14)
1.2.1 1. income 2. expenditure 3. value added / production / output
1.2.2 GDP@bp = Primary sector
Secondary sector
Tertiary sector
264 474
496 016
1 292 997
R2 053 487 million
GDP@mp = Compensation of employees
Net operating surplus
Consumption of fixed capital
956 562
759 767
306 946
R2 023 275 million
1.2.3 Taxes and subsidies on production.
1.2.4 GDE =
(3)
C+I+G
1384979 + 464791 + 520305
R2 370 075 million
(6)
(3)
(3)
1.2.5 NDP@bp = GDP@bp – capital consumtion
2053487 – 306946
R1 746 541 million
(3)
1.2.6 Prices prevailing in the year of measurement i.e. 2008
(2)
1.3
The Lorenz curve is a graphical representation of the cumulative distribution
function of the empirical probability distribution of wealth; it is a graph showing the
proportion of the distribution assumed by the bottom y% of the values. It is often
used to represent income distribution, where it shows for the bottom x% of
Grade 11 Economics November 2012
households, what percentage y% of the total income they have. The percentage of
households is plotted on the x-axis, the percentage of income on the y-axis.
Every point on the Lorenz curve represents a statement like "the bottom 20% of all
households have 10% of the total income." A perfectly equal income distribution would be
one in which every person has the same income. In this case, the bottom "N"% of society
would always have "N"% of the income. This can be depicted by the straight line "y" = "x";
called the "line of perfect equality."
By contrast, a perfectly unequal distribution would be one in which one person has all the
income and everyone else has none. In that case, the curve would be at "y" = 0 for all "x" <
100%, and "y" = 100% when "x" = 100%. This curve is called the "line of perfect
inequality."
The Gini coefficient is the area between the line of perfect equality and the observed
Lorenz curve, as a percentage of the area between the line of perfect equality and the line
of perfect inequality. The higher the coefficient, the more unequal the distribution is. In the
diagram on the right, this is given by the ratio A/(A+B), where A and B are the indicated
areas.
(16)
/50/
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2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
2.1.6
2.1.7
D
A
C
C
A
B
B
2.2
Study the article below and answer the questions that follow:
Housing to get heavier weighting in inflation basket
HOUSING costs will carry a significantly larger weighting in a revamped measure for
consumer inflation that takes effect at the start of next year, Statistics South Africa said on
Tuesday.
The existing consumer price index (CPI) is monitored by the Reserve Bank when it makes
decisions on interest rates. It rose 5.5% in September, up from 5% in the previous month
and nearing the top of its official 3%-6% target range.
The contribution of housing costs to the CPI will rise to 22.8% from 21%, largely due to
double-digit increases in electricity prices, Stats SA said. The weighting of food and nonalcoholic beverages will fall to 17.5% from 18.3% at present. Transport costs will carry a
weight of 15.4%, down from 17.8%, reflecting a reduction in the importance given to
purchases of motor vehicles.
The calculations are based primarily on the outcome of the Income and Expenditure Survey
for 2010-11, released by Stats SA at the same time, but are supplemented by data from
retailers.
They showed there had been a substantial shift in spending away from goods to services.
This means that goods will account for just 49% of the weight of the overall CPI, compared
with 54% now, while services will make up 51% of the weight, compared with 46% at
present.
The last time Stats SA made changes to the index was in 2009, when the measure was
overhauled to reflect international best practice.
Source: Business Day, November 2012
2.2.1 The Consumer Price Index is South Africa's measure of consumer inflation.
(3)
2.2.2 The “importance” of prices of a category of goods or services.
(3)
2.2.3 i.
incomes...
ii.
(6)
Possible answers: more public transport, slowing of economy, fall in average
Possible answers: economy developing, services more expensive...
2.2.4 Based on a survey done in 2010 – already outdated
2.2.5 CPI currently based in 2008. Real figures will now use constant 2012 prices.
2.3
(4)
(4)
Demand-pull inflation happens when aggregate demand (AD) increases in an
economy and intersects the short run aggregate supply curve (SRAS) to the right of
where SRAS and long run aggregate supply (LRAS) cross. This causes some
inflation to occur in the short run, and even more in the long run as the economy
adjusts. Demand-pull inflation can occur for a reason that causes AD to
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Grade 11 Economics November 2012
increase but the most common are expansionary fiscal and monetary policy, and
positive expectations about the future (increased growth/income expectations).
Cost-push inflation happens when SRAS shifts to the left (decreases) and intersects the
AD curve to the left of where AD and LRAS cross. This will cause inflation in the short run,
but prices will drop back down again in the long run as the labor market adjusts back to
equilibrium (with wages dropping). Note that some classes ignore the long run, and only
care about where AD and AS cross and in this case cost-push inflation is a permanent
shift in the AS curve causing some amount of inflation.
(16)
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3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
B
C
B
D
D
C
D
3.2.1 Monopolistically competitive.
Downward-sloping demand curve
Lots of competitors
Differentiated product.
(4)
3.2.2 I = MR
II = MC
III = AR
IV = AC
(4)
3.2.3 £6.00 and 1500 pizzas
(4)
3.2.4 Zero
(2)
3.2.5 Either: Increase demand through say advertising (rightward shift of AR and MR
curves)
or: Decrease costs (shifting AC curve downwards)
Sketch worth 3 marks
(6)
3.3
Economies & diseconomies of scale



Economies of scale are the cost advantages that a business can exploit
by expanding the scale of production
The effect is to reduce the long run average (unit) costs of production.
These lower costs are an improvement in productive efficiency and can benefit
consumers in the form of lower prices. But they give a business a competitive
advantage too!
Illustrating Economies of Scale – the long run average cost curve
The diagram below shows what might happen to the average costs as a business expands
from one scale of production to another. Each short run average cost curve assumes a
given quantity of capital inputs. As we move from SRAC1 to SRAC2 to SRAC3, the scale
of production is increasing. The long run average cost curve (drawn as the dotted line
below) is derived from the path of these short run average cost curves.
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Grade 11 Economics November 2012
There are many different types of economy of scale and depending on the particular
characteristics of an industry, some are more important than others.
Internal Economies of Scale
Internal economies of scale arise from the growth of the business itself. Examples include:
Technical economies of scale: Large-scale businesses can afford to invest in expensive
and specialist capital machinery. For example, a supermarket chain such as Tesco or
Sainsbury can invest in technology that improves stock control. It might not, however, be
viable or cost-efficient for a small corner shop to buy this technology.
Specialization of the workforce: Larger businesses split complex production processes into
separate tasks to boost productivity. The division of labour in mass production of motor
vehicles and in manufacturing electronic products is an example.
The law of increased dimensions: This is linked to the cubic law where doubling the height
and width of a tanker or building leads to a more than proportionate increase in the cubic
capacity – this is an important scale economy in distribution and transport industries and
also in travel and leisure sectors.
Marketing economies of scale and monopsony power: A large firm can spread its
advertising and marketing budget over a large output and it can purchase its inputs in bulk
at negotiated discounted prices if it has monopsony (buying) power in the market. A good
example would be the ability of the electricity generators to negotiate lower prices when
negotiating coal and gas supply contracts. The big food retailers have monopsony power
when purchasing supplies from farmers.
Managerial economies of scale: This is a form of division of labour. Large-scale
manufacturers employ specialists to supervise production systems and oversee human
resources.
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Grade 11 Economics November 2012
Financial economies of scale: Larger firms are usually rated by the financial markets to be
more ‘credit worthy’ and have access to credit facilities, with favourable rates of borrowing.
In contrast, smaller firms often face higher rates of interest on overdrafts and loans.
Businesses quoted on the stock market can normally raise fresh money (i.e. extra financial
capital) more cheaply through the issue of equities. They are also likely to pay a lower rate
of interest on new company bonds issued through the capital markets.
Network economies of scale: This is a demand-side economy of scale. Some networks
and services have huge potential for economies of scale. That is, as they are more widely
used they become more valuable to the business that provides them. The classic
examples are the expansion of a common language and a common currency. We can
identify networks economies in areas such as online auctions,air transport networks.
Network economies are best explained by saying that the marginal cost of adding one
more user to the network is close to zero, but the resulting benefits may be huge because
each new user to the network can then interact, trade with all of the existing members or
parts of the network. The expansion of e-commerce is a great example of network
economies of scale – how many of you are devotees of the EBay web site or Facebook?
External economies of scale
External economies of scale occur within an industry and from the expansion of it
Examples include the development of research and development facilities in local
universities that several businesses in an area can benefit from and spending by a local
authority on improving the transport network for a local town or city.
Likewise, the relocation of component suppliers and other support businesses close to the
main centre of manufacturing are also an external cost saving.
Diseconomies of scale
A firm may eventually experience a rise in average costs caused by diseconomies of
scale.
Diseconomies of scale a firm might be caused by:
Control – monitoring the productivity and the quality of output from thousands of
employees in big corporations is imperfect and costly.
Co-operation - workers in large firms may feel a sense of alienation and subsequent loss
of morale. If they do not consider themselves to be an integral part of the business, their
productivity may fall leading to wastage of factor inputs and higher costs. A fall in
productivity means that workers may be less productively efficient in larger firms.
Loss of control over costs – big businesses may lose control over fixed costs such as
expensive head offices, management expenses and marketing costs. There is also a risk
that very expensive capital projects involving new technology may prove ineffective and
leave the business with too much under-utilized capital.
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4.1.1
4.1.2
4.1.3
4.1.4
4.1.5
4.1.6
4.1.7
B
B
D
C
A
C
B
4.2.1 A census is the procedure of systematically acquiring and recording information
about the members of a given population. It is a regularly occurring and official
count of a particular population.
(3)
4.2.2 Differences in levels of development/std of lining and income
(3)
4.2.3 In their own words... “the Treasury allocates the budget according to the number of
people living in a province. With Gauteng now confirmed as South Africa’s most
populous province, government is expected to allocate to the province a lion’s share
of its R1 trillion budget in February next year. On the flip side, the provinces that
have seen exoduses because of their dire prospects are set to get the short end of
the stick and become poorer.”
(4)
4.2.3 Easier to service population
More people have access to facilities
Closer mkts
Rural areas neglected
Heavy burden on govt to provide services – housing education etc
(10)
4.3

Low Standards of Living
The best broad indicator of the standard of living is the per capita national income. It
gives an indication of the average amount of money that is available to households to
meet their needs. Most less Developed Countries (LDC’s) have relatively low per capita
incomes compared to so-called ‘first-world’ economies. The more visible consequences
of the low per capita income is found in poor housing, low literacy and numeracy rates,
and health problems due to poor hygiene and sanitation.
Low-income levels tend to trap people in what is known as the ‘poverty cycle’ or the
‘poverty trap’. Low-income earners seldom have the opportunity to get a full education.
They are often forced to leave school early in order to earn money to support big
families. Due to their limited education they are likely to have low paying jobs and so
their children will again be likely to be poor and have a limited education themselves.

Low Levels of Productivity
Productivity refers to the rate at which workers produce goods. Increased productivity
means an increase in the output per worker. Low productivity is the result of a number
of factors including low levels of education and training, poor management practices,
inadequate machinery and capital equipment, as well as poor nutrition leading to
physical deterioration and regular absenteeism amongst workers.
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Grade 11 Economics November 2012

High Population Growth Rate
Often birth rates far exceed economic growth rates. Families are often very large with
well over 4 children per household. In the average first-world economy families are
more likely to have 2 children whereas in the LDC’s one would not be completely
surprised with a family of 8 or even 10 children.

High and Increasing Levels of Unemployment
A low rate of economic growth coupled with a high birth rate results in increasing
unemployment and underemployment. The formal sector around the world is
undergoing a process of downsizing and streamlining and consequentially there are
few jobs in this sector. Most jobs have to be created in small and medium sized
businesses.

Dependence on the Primary Sector
Most LDC’s rely heavily on agriculture and other primary industries such as fishing,
mining or forestry. The LDC’s export these raw materials and import processed and
manufactured products from the more developed countries of the first-world. The main
reason for this is that the LDC’s do not have the human or capital resources to
undertake the manufacturing process themselves.

Political Instability
LDC’s are riddled with despots and dictators, military governments and civil warfare.
Such circumstances are seldom conducive to economic progress and in fact can be
debilitating to a country. LDC’s need stable economic and political leadership to
overcome the varied hardships. Many LDC’s subscribe to socialist economic policies
often as a backlash to a history of colonial exploitation.

Uneven Distribution of Income
In many LDC’s the wealthiest 10% of the population are in possession of 80% of the
wealth and resources whilst the poorer 90% have access to a mere 20% of the
country’s wealth.
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SECTION A TOTAL: /100
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Grade 11 Economics November 2012
SECTION B: Answer BOTH questions from this section.
QUESTION 5: Inflation
The South African Reserve Bank regards its primary goal in the South African economic
system as "the achievement and maintenance of price stability".
Explain the reasons why the South African Reserve Bank fights inflation and discuss the
methods that it uses to do so.
(50)
There is widespread agreement that high and volatile inflation can be damaging both to
individual businesses and consumers and also to the economy as a whole.
However, economists disagree about the relative seriousness of inflation. The notes below
cover some of the main economic and social costs associated with persistent inflation in
goods and services.
Distributional effects: inflation affects the distribution of income and wealth among the
various participants in the economy



inflation benefits debtors at the expense of creditors. Inflation can also cause a
reduction in the real value of savings - especially if real interest rates are negative.
This means the rate of interest does not fully compensate for the increase in the
general price level. In contrast, borrowers see the real value of their debt diminish.
redistributes income from the elderly to the young. Consumers and businesses
on fixed incomes will lose out. Many pensioners are on fixed pensions so inflation
reduces the real value of their income year on year.
redistributes income from the private sector to the government (via bracket
creep – the so-called Fiscal dividend).
Economic effects: inflation may result in lower economic growth and higher
unemployment than would otherwise occur because:



entrepreneurs / decision makers attempt to anticipate inflation rather than
concentrating on output decisions. Inflation can also cause a disruption of
business planning – uncertainty about the future makes planning difficult and this
may have an adverse effect on the level of planned capital investment. Budgeting
becomes a problem as firms become unsure about what will happen to their costs.
If inflation is high and volatile, firms may demand a higher nominal rate of return on
planned investment projects before they will go ahead with the capital spending.
These hurdle rates may cause projects to be cancelled or postponed until economic
conditions improve. A low rate of new capital investment clearly damages long-run
economic growth and productivity
inflation reduces South Africa’s competitiveness. If South Africa has higher
inflation than the rest of the world it will lose price competitiveness in international
markets. This assumes a given exchange rate. Ultimately, this will lead to a fall in
the rate of economic growth and the level of employment. If the exchange rate
depreciates, this may help to restore some of the lost competitiveness.
it leads to higher nominal interest rates that should have a deflationary effect on
GDP.
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Grade 11 Economics November 2012




it distorts the operation of the price mechanism and can result in an inefficient
allocation of resources. When inflation is volatile, consumers and firms are unlikely
to have sufficient information on relative price levels to make informed choices
about which products to supply and purchase.
it leads to an increase in search times to discover more about prices. Inflation
increases the opportunity cost of holding money, so people make more visits to
their banks and building societies (known as “shoe leather costs”).
it results in extra costs to firms of changing price information (known as menu
costs). This can be important for companies who rely on bulky catalogues to send
price information to customers.
it can lead to higher wage demands as workers try to maintain their real standard
of living (the wage-price spiral). Higher wages over and above any gains in labour
productivity causes an increase in unit labour costs. To maintain their profit margins
they increase prices. The process could start all over again and inflation may get
out of control. Higher inflation causes an upward spike in inflationary expectations
that are then incorporated into wage bargaining. It can take some time for these
expectations to be controlled.
Anticipated and unanticipated inflation
When inflation is volatile from year to year, it becomes difficult for individuals and
businesses to correctly predict the rate of price inflation that will happen in the near future.
When people are able to make accurate predictions of inflation, they can anticipate what is
likely to happen and take steps to protect themselves. For example, people can bid for
increases in money wages so as to maintain their real wages. Savings can be shifted into
accounts offering a higher rate of interest, or into assets where capital gains might outstrip
general price inflation. Companies can adjust their prices; lenders can adjust interest rates.
Unanticipated inflation occurs when economic agents (people, businesses and
governments) make errors in their inflation forecasts. Actual inflation may end up well
below, or significantly above expectations.
Monetary policy are the measures taken by the SARB (monetary authority) to influence the
quantity of money or the rate of interest in an attempt to achieve the macroeconomic goals
of stabile prices, full employment and economic growth. There are two approaches to
monetary policy:
i.
ii.
direct measures (used by the SARB in the 1970’s) or
market-orientated measures (used by the SARB now)
Direct policy means the monetary authority instructs the banking sector what to do with
respect to lending and borrowing using measures such as credit ceilings. Failure to comply
results in penalties/fines.
Market-oriented policy means that the monetary authority seeks to guide/encourage the
banking sector to take certain actions. The monetary authority uses various instruments to
create incentives/disincentives for the banking sector. These instruments include:
Accommodation policy.
This is the prime instrument of the SARB. All other instruments are used to support
accommodation policy.
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When banks are short of liquidity they can either borrow from other banks or convert
assets into cash. If they are unable to borrow from other banks they are able to turn to the
SARB as lender of the last resort and obtain funds via the repurchase tender system.
Under this system banks bid on a daily basis for an amount of money made available to
them by the SARB. Certain government bonds and Reserve bank bills are offered under a
repurchase agreement to the SARB in return for this money. The bank that offers the
highest rate of interest secures first option on the money made available by the SARB.
The repo rate is the average of the successful banks bids.
Banks unable to secure funds (bids too low or SARB did not supply enough funds) can
borrow additional funds from the SARB at a higher rate called the marginal lending rate.
Therefore, the SARB controls the quantity of money by manipulating the cost of credit.
Changes in the repo rate lead to changes in rates that banks charge their clients.
Open market policy.
The SARB can buy or sell domestic financial assets in order to influence interest rates and
the quantity of money.
e.g. to increase the quantity of money, the SARB buys bonds (from banks and other
financial institutions) on the open market. This means that banks now have excess
reserves that they may use to create demand deposits. This works in reverse when the
SARB wishes to reduce the quantity of money.
The SARB has to raise the price of bonds in order to encourage financial institutions to
sell. This implies that the yield (or interest rate) falls. By the same token, the SARB has to
lower the price of bonds in order to encourage financial institutions to buy. This implies that
the yield (or interest rate) rises. Thus we can conclude that an inverse relationship
exists between the price of a bond (or any other security) and the interest rate. (This
is best explained by means of an example).
Reserve asset requirements.
Banks are required to hold 2.5% of the value of their total liabilities in a non-interest
bearing account with the SARB. In addition, banks are required to hold 5% of their total
liabilities to the public in the form of approved liquid assets. The required cash reserves
may not be counted as part of these liquid reserves. They include:







cash reserve deposits with the SARB
banknotes and coins in vaults and ATMs
gold coin and bullion
short-term Treasury bills
short-term Land Bank bills
medium-term SARB securities
medium-term government stock
Although the cash reserve requirements can be varied for monetary policy purposes, they
should be seen as a structural and prudential requirement to ensure the liquidity of all
banking institutions in South Africa.
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Other instruments





credit ceilings
terms of hire purchase agreements
exchange control regulations
intervention in foreign exchange markets
moral suasion.
QUESTION 6: Theory of the firm
“Monopoly and perfect competition represent two extremes along a continuum of market
structures. At the one extreme is perfect competition, representing the ultimate of
efficiency achieved by an industry that has extensive competition and no market control.
Monopoly, at the other extreme, represents the ultimate of inefficiency brought about by
the total lack of competition and extensive market control.”
To what extent do you agree with this statement?
(Your answers should compare, contrast and explain the long run equilibrium position of a
perfectly competitive industry with that of a monopoly and should include well labelled and
relevant diagrams)
(50)
The usual textbook argument against monopoly power in markets is that existing
monopolists can continue to earn abnormal (supernormal) profits at the expense of
economic efficiency and the welfare of consumers and society.
The standard case against monopoly is that the monopoly price is higher than both
marginal and average costs leading to a loss of allocative efficiency and a failure of the
market mechanism. The monopolist is extracting a price from consumers that is above the
cost of resources used in making the product and, consumers’ needs and wants are not
being satisfied, as the product is being under-consumed.
The higher average cost of production if there are inefficiencies in production also means
that the firm is not making optimum use of its scarce resources. Under these conditions,
there may be an economic case for some form of government intervention to limit or
reduce the scale of monopoly power, for example through the rigorous application of
competition policy or by a process of market deregulation (liberalisation).
X Inefficiencies under Monopoly
X inefficiency is a term first coined by Harvey Libenstein. The lack of real competition may
give a monopolist less of an incentive to invest in new ideas or consider consumer welfare.
It can also be argued that even if the monopolist benefits from economies of scale, they
will have little incentive to control production costs and 'X' inefficiencies will mean that
there will be no real cost savings.
Comparison between Monopoly and Perfect Competition
A competitive industry will produce in the long run where market demand = market supply.
Consider the diagrams below. Equilibrium output and price is at Q1 and Pcomp on the left
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Grade 11 Economics November 2012
hand diagram and Pcomp and Q1 on the right hand diagram. At this point, Price = MC and
the industry meets the conditions for allocative efficiency.
If the industry is taken over by a monopolist the profit-maximising point (MC=MR) is at
price Pmon and output Q2. The monopolist is able to charge a higher price restrict total
output and thereby reduce economic welfare. The rise in price to Pmon reduces consumer
surplus. Some of this reduction in consumer welfare is a pure transfer to the producer
through higher profits, but some of the loss is not reassigned to any other economic agent.
This is known as the deadweight welfare loss and is equal to the area ABC.
A similar result is seen in the next diagram which makes the working assumption of
constant long run average and marginal costs under both competition and monopoly. The
deadweight loss of economic welfare under monopoly (whose profit maximising price is P1
and Q1) is shown by the triangle ABC. The competitive price and output is Pc and Qc
respectively.
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Potential Benefits from Monopoly
A high market concentration (fewness of sellers) does not always signal the absence of
competition; sometimes it can reflect the success of leading firms in providing better
quality products, more efficiently, than their smaller rivals
It is important in essays and data questions when you are analyzing imperfectly
competitive markets where the concentration ratio is high to mention some of the potential
advantages of suppliers having monopoly power.
One difficulty in assessing the welfare consequences of monopoly, duopoly or oligopoly
lies in defining precisely what a market actually constitutes! In nearly every industry the
market is segmented into different products, and the impact of globalisation makes it
difficult to gauge the true degree of monopoly power that might exist in an industry at any
moment in time. Increasingly markets where a monopoly appears to exist are actually
becoming more contestable because of the effects of growing international competition.
So what are the main advantages of a market dominated by a few sellers?
Economies of Scale
A monopolist might be better positioned to exploit economies of scale leasing to an
equilibrium which gives a higher output and a lower price than under competitive
conditions. This is illustrated in the next diagram, where we assume that the monopolist is
able to drive marginal costs lower in the long run, finding an equilibrium output of Q2 and
pricing below the competitive price.
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Monopoly Profits, Research and Development and Dynamic Efficiency
As firms are able to earn abnormal profits in the long run there may be a faster rate of
technological development that will reduce costs and produce better quality products for
consumers. This is because the monopolist will invest profits into research and
development to promote dynamic efficiency.
Monopoly power can be good for innovation, according to research by Professor Federico
Etro, published in the April 2004 edition of the Economic Journal. Despite the fact that the
market leadership of firms like Microsoft is often criticised, their investments in research
and development (R&D) can be beneficial to society because they expand the
technological frontier and open new ways to prosperity. Many technological innovations
are developed by firms with patents on the leading-edge technologies. These firms
perpetuate their leadership and their market power through innovations. Etro's research
argues that providing that a market is characterised by free entry, then the market leader
will actually have more incentives than any other firm to invest in R&D.
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