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CHAPTER 1: WHAT IS ECONOMICS?
1.1
What is Economics?
Economics is the social science that studies the production and consumption of
measurable means.
It involves the analysis of the production, distribution and
consumption of goods and services. Domestic households are the outdated term for
economics.
Economics is called “positive” when it aims to explain the consequences of different
choices by means of a set of assumptions, and “normative” when it prescribes a certain
action.
The subject is broadly divided into two main branches: micro-economics, which is
concerned with individual institutions such as households and firms, and macroeconomics, which views the economy as ‘n whole (including inflation, unemployment,
industrial production and the role of the government).
Issues that specifically enjoy attention in economics are resource allocation,
production, distribution, trade and competition. Economics can in principle (and is
increasingly) used to address problems under scarce circumstances or that involves
the determination of value.
1.2 History of money
In this topic you are going to learn about Economics. We are going to look at:

Traditional institutions

Bartering

Promissory notes

Coins

Paper money

Electronic Banking

The role of money
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Traditional societies?
What type of money do you and your parents
use? Do you live in a traditional or modern
society? Before you answer these questions,
we are first going to look at how it differs from
traditional societies.
Modern societies
The most of us use coins, notes or debit or credit cards to pay for goods or services.
You can also do electronic banking these days, for example internet payments. When
we use this type of payment, we say that we are part of a modern society. A modern
society is an industrialised society that uses technology to produce goods for trade.
In a modern society people have specialised skills and they rely on other people with
different skills to produce goods and deliver services that they cannot make or deliver
for themselves. If you are, for example, a mechanic, you can repair cars, but you
cannot treat sick people. If you get sick, you will have to pay for medical services.
You sell your services as a mechanic for money, which you then use to pay other
people for their goods and services.
This car assembly line is an example of an
industry in an industrialised modern society.
Traditional societies
Traditional societies are very different from modern societies. A traditional society is
a society where a community uses basic methods to hunt and gather food. Traditional
societies have a lack of technology and the majority of their activities are existence
activities. This means that they consume the majority of goods that they produce and
not trade as much. These societies do not experience economic growth. Traditional
economics are primarily rural and agricultural areas and the people that live in these
societies are self-sufficient. This means that they do not rely on others for survival.
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This subsistence farming does not use technology and the residents consume most
of what they produce.
Many communities in South-Africa still use the lobola-system today. Lobal is a price
that a man pays to his fiancés family if he wants to marry her. It is still common that
the man pays this price in cattle.
As you can imagine, money is less important for people in traditional societies than for
people in modern societies.
Bartering:
However, traditional societies have limitations. The environment in which subsistence
farmers produce place limitations on what and how many these farmers can produce.
For example, a sheep farmer in the Karoo has a lot of wool and meat, but little wood,
because trees don’t grow naturally in the Karoo.
A woodcutter in the Knysna-
environment has a lot of wood, but the woods make it difficult to get good grazing for
livestock. These farmers each have something that the other one wants. The sheep
farmer can exchange sheep for wood that he can use to build structures and make
fire. The farmers can exchange their products without using money. We call that
bartering. People have exchanged goods and services with each other from the
earliest of times on earth. The earliest form
of money was cattle – farmers exchanged
cows, sheep and camels.
Later they
exchanged the crops they cultivated. The
articles that people exchange are called
commodities. Bartering was the first form of
trade used by the Settlers in the Cape.
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Trans-Sahara trade:
The trans-Sahara trade is a good example of bartering in the traditional societies in
Africa. Between approximately the 8th and the 16th century the countries in Asia and
Europe traded with countries in Africa by means of trade routes that ran through the
Sahara desert. Africa had gold, salt, ivory and slaves. Europe and Asia produced
textiles such as silk, as well as beads and ceramics. Communities from Africa, Europe
and Asia traded these commodities with each
other in a complicated bartering system.
Caravans of camels carried commodities
over the Sahara from the areas that are now
known as Algeria, Libanon and Egypt, to
parts of West Africa that are now Ghana, Mali
and Nigeria.
The bartering system of the trans-Sahara
trade
Trust was a very important part of the bartering system. The trade parties on these
routes, especially the trans-Sahara route, usually didn’t speak the same language. In
a type of bartering known as silent bartering, the one party would leave its commodity,
such as salt or gold, at a specific place. The other party would fetch these goods and
leave their goods there, and the bartering transaction would be completed without the
utterance of a single word.
However, bartering has disadvantages. People could not always get the goods they
needed or wanted through bartering. Your neighbours might not want your extra eggs,
because they have chickens themselves. If you exchange food, you cannot store it
for a long period of time. You are also likely to keep the cattle and crops for yourself
and only barter those that you do not need. This commodity might not be of the best
quality and therefore people might not want it. For example, how do you determine
how much wood is equal to the value of ten sheep? The disadvantages of the
bartering system eventually resulted in the use of money as a medium of exchange.
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Promissory notes (Proof of debt):
Suppose your friend sells his bicycle for R300 and you would like to buy it. You only
have R200, but you know your parents will give you money next month for your
birthday. Your friend is satisfied that you take the bicycle now and pay the R100 that
you owe him next month. He asks you to promise in writing that you will pay the R100
the day after your birthday. You therefore buy the bicycle with R200 plus a promise in
the form of a note. Promissory notes are based on this principle.
Promissory notes legally bind the buyer to pay a specific amount of money
unconditionally within a specific time to the seller. If promissory notes sound a lot like
a bank loan to you, you are correct. Promissory notes are a private version of a bank
loan. It declares that the person that issued the note, borrowed money from a private
organisation or individual that is not a bank. Just as bank loans, the promissory notes
can also specify an amount of interest on the loan. Promissory notes date back to the
8th century when the Chinese used it during the Tang-dynasty. Arabian traders also
used it in around the 12th century. It was useful for traders, since it meant that they
did not always have to carry large amounts of big, heavy coins over long distances. It
was too dangerous. This concept
worked so well that promissory
notes are stil used today.
A promissory note from America
dating from 1901
Coins
Is the value of a dozen of eggs
equal to three or four meters of cotton material? Is a sheep worth four or five chickens?
How much gold would you have to pay for two bags of salt? Will the families on the
opposite side of the river want to trade salf for my cattle if they have cattle of their
own?
One of the ways to solve the problems with the bartering system was that trading
countries developed methods of payment, or currency. A currency is a medium for
trade/bartering transactions. It represents the value of commodities. Instead of people
meeting trade partners on a trade route or in a local market, traders could now
exchange commodities for money.
A trader could sell her baskets for money and
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then use the money to buy, for example, wool. She didn’t need to look for someone
that wanted to trade wool and hope that that person would exchange it for her baskets.
In this way, she could save a lot of time and trouble, because it wasn’t necessary to
travel long distances to look for people with whom she could trade her baskets for
wool.
Very early forms of payment methods included receipts, including stored commodities
such as grains, as well as other forms of money such as Baie vroeë vorms van
betaalmiddels sluit ontvangste in, wat gestoorde kommoditeite soos graan ingesluit
het, asook ander vorms van geld soos kauri shells, ivory and metal cast blocks.
Because metal lasted for a long time, traders started to use metals such as gold, silver
and copper as methods of payment. Traders then exchanged standardised quantities
of these metals for commodities. It quickly developed to coins. Coins were stamped
to indicate their correct weight
and
value.
They
also
indicated the country or area
of origin.
A Photo of antique coins as
they were used by traders.
Traders
since
have
used
thetimes of
coins
ancient
Greece. Traders from India have used coins as long ago as the 6th century BC.
Paper money
Imagine that you are travelling through the Sahara desert or on the silk route with bags
and bags full of heavy coins that are enough to trade with for a whole year. Imagine
how it would be to go to the supermarket and buy a months’ worth of groceries with
R2 coins. To ease trade, traders started to use paper money in the form of promissory
notes and bank notes.
You already know that promissory notes are a promise to pay a certain amount of
money at a certain time. Bank notes are a medium of payment that represents value.
People are paid with money to do a certain type of work or when they want to sell
commodities with value. The money they are paid, represents the work that they have
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done or the commodity that they have sold. When people use their salaries to buy,
for example, a car, or a house or groceries, they are in reality, trading their labour for
the commodity. The money that they earned for their work represents the work that
they have done. We say that the paper money is representative. The money itself
isn’t worth anything, but it represents the wealth that you have in the bank.
These days, paper money is a popular medium of payment.
The Chinese started to use bank
notes in the 7th century and
Europe used it in the 14th
century.
The following figure
shows a timeline of the history of
money.
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20 000 years ago
People hunt, gather
and exchange.
9 000 – 6 000 BC
earliest forms of exchange
3 000 – 2000BC
The start of Banks
1 000 – 300 BC
Gravvel and knife money
was introduced in China
1 500 BC – 1950’s
In China, Arabia and Africa
shells was used as a
method of paymenty
640 – 26 BC
Coins of gold and silver
118 BC
The first banknotes
806 – 821 AC
The first paper money
1816
England accepts the gold
Standard
1880 - 1914
Most countries in the world
based the value of their
money on the gold
standard
1931
Britany moves away from
the gold standard
1971
America moves away from
the gold standard, the end
of this system
Today
There are many methods of
paying
for something. For example:
coins,
paper notes, plastic and
electronic money.
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Electronic Banking
Electronic banking is the latest development in the history of money. It involves the
use of the Internet, cell phones, Automatic Teller Machines (ATM’s), debit cards, credit
cards and the electronic transfer of funds (EFT) for financial transactions. When you
are doing electronic banking, you can move your money around without handling
coins, paper money, or tellers at the bank.
Purchases with a credit card
Online purchases
Electronic banking is a safer way to handle money,
because you don’t have to carry cash around.
Systems for electronic banking are however,
vulnerable to fraud. You must still be careful when
you are doing electronic banking.
The role of money
You now know something about the way in which money developed through history,
about the bartering system to electronic banking. You can see that money represents
the way in which societies have become more complex and organised over the years.
The simple system for the trade of commodities by means of bartering has now
developed to the worldwide use of money in different types of complex economies.
Money represents how society has changed. In the days of bartering and subsistence
farming, a person’s wealth was measured by how much land you owned. In the
modern society, a person’s wealth is measured by how much money you have. As
farmers started to harvest more crops than what they needed, they created a surplus.
They exchanged these surpluses for other commodities and eventually exchanged it
for money. When people started to exchange goods for money, people gathered at
certain places to make it easier for buyers and sellers to meet each other. These
places became established markets, around which towns and cities eventually
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developed. This urbanisation meant that people could exchange ideas easier, which
led to progress in science, technology and philosophy. Money enabled people to store
the payment for their labour for an unlimited time. In this way they could decide how
to use this payment.
Thus, money has the following roles:

It is a medium of exchange. It means that we can use it to buy goods and
services by exchanging it for these goods and services. For example, you can
exchange money for food in a supermarket.

It is a settlement unit. It means that it is a standard measure of how much
goods and services are worth. It helps us to decide if something is priced
reasonably and whether it is worth buying. For example, you know that a bread
costs approximately R9. If you go shopping and you see that the same bread
costs R15, you would not buy it, because you know that the bread is worth only
R9.

It is a bearer of value. It means that money keeps its value over time. For
example if you are paid R70 for a day’s work, you don’t have to spend the
money as soon as you receive it. You can keep the money until you want to
buy something with it. When you buy something with it, you can buy goods to
the value of R70. The value of the money did not change from the time that
you received it to the time that you spent it.
Consumer economics
The role of money is still a medium for the exchange and storing of value. We live in
a economy called the consumer economy. The consumer economy is an economy
where firms/businesses encourage consumers to spend as much money as possible
to buy their goods. Electronic banking and globalisation has made consumer spending
easier.
Consumer spending does however, place a lot of pressure on the
environment, since people consume or use more than what is produced. This means
that they consume materials faster than they can provide. Factories use raw materials
or natural resources to produce goods that consumers buy. For example, if more cars
are made, it implies that more petrol is necessary so that they can drive. There is
however a limited amount of fuel available in the world, and when it is used up, there
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isn’t any more. What will happen to the cars? Cars and factories that make them also
generate pollution and waste materials. It worsens the environmental problems.
Therefore the focus of people on spending more
and more money on consumer goods, have
become an unsustainable way of life.
The consumer economy produces waste by
encouraging consumers to buy more and more
goods.
1.3 Types of markets
What is a market?
A market can be described as any
contact or communication between
potential
buyers
and
potential
sellers of goods and services. In the
past a market was a specific place
where buyers and sellers came
together to negotiate about prices
and to exchange their goods. An
example of this is an agricultural
market where farmers exhibit their
goods, and clients come and look
what they want to buy.
Today
market activities are not limited to specific places. Thanks to technology such as cell
phones and the internet, buyers and sellers don’t have to meet each other face to face
to negotiate about the price of goods and services.
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The market for goods and services
Businsses produce goods and services. These goods and services are sold to the
households. The money paid for these goods and services, is the income for the
business.
Money
Businesses
Households
Good and
Services
A diagram illustrating the interaction between households and firms in a goods and
services market.
The market for goods and services can be defined as any interaction between
households and businesses to negotiate about the trade/exchange of goods and
services.
This market is also called the product market.
Consumer prices are
determined by the goods and services market. Consumer prices are determined by
two factors:

The amount of goods and services that businesses produce (supply).

The amount of goods and services that households want to and can buy
(demand).
Factor markets: Labour and financial markets
Earlier you learned how households and businesses exchange goods and services in
products market.
Now you are going to learn how households and businesses
exchange factors of production.
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The factors of production belong to households
The factors of production (land, labour, capital and entrepreneurship) belong to
households. These factors of production are used by businesses as inputs in the
production process.
Earlier you learned that businesses pay remuneration to
households for the use of factors of production. The remuneration paid for the use of
land (natural resources), is called rent. The remuneration paid for the use of capital is
interest.
The remuneration for the use of labour is wages or salaries and the
remuneration that entrepreneurs earn is profit.
Factors of production
The factor market
The factors of production are traded on the factor market. Businesses buy factors of
production from households on the factor market. Factor markets are also called
resource markets.
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Production factors
(land, wages, capital,
entrepreneurship
Businesses
Households
Compensation
(rent, wages, interest
and profit)
The illustration above shows tha interaction between households and firms on the
factor market when factors of production are traded for rewards/remuneration.
The factor market can be sub-divided into markets for each of the different factors of
production:

The labour market is the place where labour is sold. It is the market where
interaction between employees and employers take place.

The money and financial market is where financial capital is traded. The market
consists of banks and shareholders. It is the market where interaction takes
place between the people that want to invest money and those that want to
borrow money.

The land market is the market where land and other natural resources are
traded.
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TYPES OF MARKETS
Goods-and-services market
A
goods-and-
services market is a
place where products
(such as vegetables,
cars,
furniture,
clothes
and
stationery)
services
gardening
or
(such
as
services,
telephone services or
banking services) are
sold. A market can be a physical place, such as a shop, or it can be a virtual place
such as a website on the internet. As technology improved, markets changed and
some has become more specialised. Many businesses now sell their products on the
internet. For example, someone in the Netherlands may want to buy an African art
print from someone who makes it in the Eastern Cape. If the person advertises the
print on his website, www.afriart.co.za, the person in the Netherlands can order and
pay it through the internet. The print will be delivered to the buyer in the Netherlands
via courier services. People can now choose from a wider variety of goods and
services.
Let’s look at the different types of goods-and-services-markets.
Wholesale markets
Wholesalers purchase large quantities of goods from different producers and
suppliers.
Clients visit the wholesaler and choose the goods that they want to
purchase. The wholesaler repacks the goods in smaller quantities for the clients. The
wholesaler’s clients are usually small businesses, also known as retailers.
Retailer markets
Retailers can purchase goods directly from producers or wholesalers. They also
purchase goods in large quantities and then sell it to consumers in very small
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quantities. Retailers include supermarkets, department stores, speciality stores such
as boutiques and shops that sell sportswear and equipment, as well as furniture and
equipment stores.
Farmers’ markets, craft and flea markets
The majority of these types of markets are
open once or twice a week. Farmers’ markets
sell fruit, vegetables and dairy products directly
from the farmer to the local community.
There are a few specialised craft markets that
are open seven days a week. These markets
offer people the opportunity to sel their crafts
or other products to the local community.
Craft markets offer different types of products
that are made by hand, such as cakes, rusks,
clothes, shoes, bags and wooden toys.
Fleamarkets provide a variety of products that people resell, such as second-hand
books, used goods such as cutlery, kitchenware, furniture, second hand clothes or
factory tailings.
Service markets
A service market is one where a service, expertise, skill or experience is sold. For
example, a lawyer sells his or her knowledge, skills and experience of the law to a
client that needs this type of service. A service market can be situated in a office or
shop, as in the case of doctors, architects and hairdressers, or the service provider
can go to the client in the case of electricians, plumbers and carpenters.
FACTOR MARKET – Labour and financial markets
Labour market
The labour market is the place where the employer and employee come into contact
with each other. It is not a specific place. Employers advertise posts in newspapers,
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magazines or on the internet, or they pay a staffing agency to find someone to fill the
post. The employee then applies for the post.
Labour includes the physical and intellectual work that employees do. The employees
sell their time, knowledge and experience to the business and the business pays then
in the form of wages and salaries. A salary is a fixed amount of money paid at the end
of each month.
Salaries are paid to semi-skilled and skilled workers such as
secretaries, accountants and supervisors. A wage is an hourly rate paid to workers
according to the amount of hours they have worked by the end of the week. Wages
are usually paid to unskilled and semi-skilled workers such as factory and mine
workers.
Financial markets
In a financial market, any type of
financial transaction takes place that
helps the business grow, or to help an
investor make money. There are two
types of financial markets, namely
capital and money markets.
Capital market
A capital market is where money in the
form of shares is obtained to help
establish large companies. The public
shares shares in a public company. The
company uses the money to buy assets
and to pay for labour and operaring
costs. The holders of these shares are
called shareholders. The company only
has contact with the shareholders
during the general annual meetings and when a dividend is being divided.
A dividend is a part of the profit that the shareholder receives according to the number
of shares that he or she owns. When the company starts doing well, other members
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of the public will want to buy shares in the company and so the price or the value of
the shares will increase until a shareholder is willing to sell all or some of their shares.
Examples of capital markets are:

members of the public buy shares in different companies and buy unit trusts;

brokers help people and companies to buy shares.
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CHAPTER 2: NEEDS AND WANTS OF CONSUMERS
Needs and Wants
I really need
a Playstation
I really need
something to
eat
An introduction to needs and wants:
In this chapter you will learn the difference between a need and a want. You will also
learn how people’s needs and wants form part of an important aspect of the economy
– the problem of how economics must satisfy people’s needs and wants with limited
resources.
A need is something without which you cannot survive. A want is something that you
really want, but don’t need, you can live without it.
You will agree that people need certain basic things to survive. This includes things
such as clean air to breathe, basic food such as maize, bread or rice, clean water to
drink, shelter fron heat or cold weather and clothes to protect your body from heat,
sun, rain and cold.
The things that you cannot live without are called needs. It is necessary that a boy
needs a computer game to survive? Definitely not, although he might feel that way.
Must a boy have something to eat? Yes, he can die if he doesn’t get food.
Goods that people really want, but don’t need, are called wants. Pizza, ice cream, cell
phones, modern clothes, CD’s, DVD’s, computers and Jacuzzi’s are all examples of
wants. You can survive without any of these things.
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Basic needs of individuals, families, communities and countries
What does needs and wants have to do with the economy?
Well, if you need
something, you’ve got to have it. You will get it by any means possible. If you want
something, you will decide if you have enough money for it, and then buy it from
someone that wants to sell it. People will always buy what they need first, before
buying what they want. If, for example, you want new jeans, but there isn’t any food
in the house, you will buy food before you buy jeans. In other words, people’s needs
and wants have an influence on the way in which they spend their money. Needs and
wants influence communities in the following ways:

They determine which type of products and services will be sold or offered in
the community.

It can have an influence on how communities work. If many people in your
community use drugs for example, there is likely to be al lot of gang activities,
crime and violence.

People in poor communities whose basic needs are not met, will not be able to
spend money in their local communities by supporting local shops and
businesses.

People in richer communities will be able to spend their money on shops and
businesses in their local community, and therefore those communities will
become wealthier.
Basic, primary and secondary needs
The two levels of needs that we are going to look at are called primary and secondary
needs.
Basic or primary needs
Basic or primary needs are physical needs (food, water, warmth, shelter and rest) as
well as security needs (safety and security). If these needs are not met, people cannot
survive. When people’s basic needs are met, they can focus on satisfying their
secondary needs.
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Secondary needs
People cannot meet their secondary needs if their primary needs are not met. The
basic or primary needs are therefore the most important needs.
Secondary needs are needs on which our survival does not depend. Although it is an
important part of human development, these needs are net essential for survival.
Secondary needs are also called wants or desires. We need food and shelter, but we
also want to reach our potential. We need a safe environment in which to live, but we
also want to go to the movies and have the latest clothes.
If we have satisfied our basic needs, and there is enough money left, we can look at
our secondary needs and wants. It is this constant want / desire to have a lifestyle
that satisfies both our needs and wants, which drives us to perform. We work hard,
we aim for a promotion; we study hard to qualify in order to earn a higher salary. We
try to continuously improve ourselves so that we can satisfy those needs and be able
to satisfy more desires and wants.
For example, Milo wants to buy a DVD-player and a couple of DVD’s. He knows he
has to pay his rent first, then buy groceries and then purchase his monthly bus ticket.
He must also buy airtime for the month. At the end of the month he only has R50 left.
He is currently studying through his work and he knows that if he passes all his exams
and does well, he will get a salary increase. He decides to work really hard and to buy
the DVD-player that he wants with his first salary increase.
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Unlimited needs and wants with limited resources
Individuals, families, communities and countries all have unlimited wants and needs.
For example, all of us want more money. Individuals want more money for things such
as food, clothes and luxury items. Families want more money for a more comfortable
lifestyle. Communities want more money for facilities such as libraries and sports
fields, and for services such as policing and health services. Countries want more
money for stronger economies.
However, individuals, families, communities and
countries all have limited resources. We don’t have enough resources to provide in
what we need.
People have always wanted more than what they have. Think about the bartering
system. People started to trade commodities because they wanted commodities that
they didn’t have, but that other people had. Money developed to enable people to
satisfy their wants and needs easier.
Today, people’s wants and needs drive businesses. The more goods and services
people want and need, the more businesses produce. And the higher the growth of
the world population, the larger the quantity of people with wants and needs that have
to be satisfied.
There is however only a limited amount of money in the world and the economic
activity can only satisfy a limited amount of needs and wants. The school’s governing
body might really want a new media centre with a computer and access to the internet
for each learner and a library with thousands of books, and printers and copiers for the
learners to do their homework and projects. However, the school has a budget. There
is a limited amount of money available to spend on all these aspects of the school, for
example to pay the teaching-, administrative and cleaning staff, to maintain the school
buildings and school grounds, to pay the electricity and water and to purchase
textbooks.
To get more money for the media centre, the school would have to
increase each learner’s school fees. Many families can however not afford to pay
higher school fees.
The government has thousands of schools across the country
that needs support. The school’s resources are therefore not enough to satisfy the
school’s needs and wants.
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The economic problem
The problem of unlimited needs and wants and limited resources are called the
economic problem. The economic problem asks the question: how can an economy’s
limited resources satify people’s unlimited needs and wants? How can people allocate
the resources that they have in order to satisfy their needs in the most efficient way
possible? How can a school in the example above, allocate the school fees to satisfy
learners’ needs for a media centre in the best way possible?
To what kind of resources does the economic problem refer? The most valuable
resources of any economy is the natural resources of labour and capital. Labour is
the capacity to work of all the people in the country. Capital is the money that a country
has to produce goods and services. The factors of production are the inputs that are
used to produce goods and services.
It includes labour, capital, land and
entrepreneurship. If a country has limited production inputs, it has to decide very
carefully what will be produced with those inputs. What do you think needs to be
produced to best satisfy the wants and needs of the citizens of a country?
A country with limited production inputs must, for example, not use its scarce
resources to produce luxury goods such as jewellery and expensive cars. The country
must use its resources to ensure that citizens have necessary services such as water,
sanitation, health care and necessary goods such as basic foodstuffs. Countries have
to think about their resources and decide:

what to produce

how much to produce

who will use the products
Countries cannot waste their resources to produce the wrong goods and services for
their citizens.
They must use their resources efficiently.
In economics and the
economic problem we say that there are two types of efficienty when it comes to the
use of resources:

Technical efficiency: which means that countires must use all the resources
(land, labour and capital) in full and in such a way that brings forth the most
production.
24

Efficient allocation: which means that countries must produce more goods of
services that has the biggest demand.
Can you see how the economic problem and primary and secondary needs are linked
to each other? A very poor country that does not produce enough food to feed its
people, cannot use the capital to set up factories to produce luxury goods. The country
must satisfy the basic needs of its citizens before they can think of providing luxury
goods. They must first invest in projects that will increase the agricultural outputs, so
that people can have food.
2.2 The circular flow
Introduction
SPENDING
INCOME
PRODUCTION
On television, on the radio or in conversations you have probably heard people talk
about “the economy”, “the South-African economy” or the “global economy”. Have
you ever wondered what an economy really is and what it consists of?
“Economy” is a term used to describe an environment in which consumers and
producers are involved with activities in which they produce goods and services to
earn money. The do this to try and solve the economic problem. The economic
problem describes the situation in which people have unlimited needs and wants, but
limited resources to satisfy these needs and wants. Economies can be described in
different ways.
25
We can describe the picture on the left as rural, or
related to agriculture, because the consumers and
producers in the picture is busy trying to solve the
economic problem against a rural or farming
background.
Households and firms as participants of the economic cycle
There are four participants in the economic cycle, but this year we will only study three
of them:

households

businesses / firms / producers

government.

The fourth participant is the foreign sector.
Households
Households consist of people that live together and make economic decisions
together. A household can be an individual, a family or any group of people that have
a joint income. Each person belongs to a household. Households own factors of
production (capital, labour, natural resources and entrepreneurship), and they sell
these to businesses in exchange for money. In the picture of the rural agricultural
economy, the households would be the farmers and the families that live in the informal
sector
Households use this money (interest, wages, rent and profit) to buy goods and
services to satisfy their needs and wants. The factor market is the market where
households sell their factors of production and where firms buy the factors of
production. Businesses will most likely use an employment agencyto advertise that
they need a specific person for a job. Households can also go to an employment
agency and agree to accept a job offer. The employment agency can be called a
26
factor market, because labour is bought and sold. The bank is also called a factor
market. There are therefore different types of factor markets.
The goods and services market is where businesses sell their goods and services and
where households purchase these goods and services. A market is where something
is bought and sold. It does not have to be a place, but it is a situation where buyers
and sellers meet. It can be a newspaper advertisement, the internet or over a cell
phone.
Businesses / firms
The purpose of firms is to make a profit. They do this by providing goods and services
to clients, which are households or other businesses. Examples of businesses in our
farming community is Henry’s General dealer, the food market, the informal craft
vendor, Ma Lulu’s Spaza, the sustainable development farm, Ravi’s fruit farm, Moola’s
Maize farm and the bus company.
Businsses need the factors of production (capital, labour, natural resources and
entrepreneurship) provided by households, to function. The money that they earn by
selling products and services are used to pay the households for the use of their
factors of production (interest, wages, rent and profit).
You would have noticed the following:

People have many roles. It would include roles of being a son or daughter,
brother or sister, grand child, a learner or a friend. Households do not only buy
goods and services, but they also sell their factors of production to businesses.

Households and businesses are dependent on each other. Households must
buy goods and services from businesses and businsses cannot operate without
the factors of production from households.
27
The real flow
Households
Production
factors
Goods and services
Factormarket
Goods and
services market
Production
factors
Goods and
services
Businesses
The above digram illustrates the flow of production factors from businesses, and the
flow of goods and services from businesses to households. In the economy this flow
is called the real flow.
The moneyflow
In the flow of money diagram illustrated above, money will be paid when something is
bought. The circulation of money is called the moneyflow. To complete cycle of the
flow of monies, we need to take a look at the following.
The government as participant of the economy
The government are also a participant in our economy. The government are also
involved in providing goods and services which businesses would also provide, but
would be nessesary for growth of the economy, for example education. When we refer
to the government as a participant, we are referring to a group of people that the
citizens chose to rule the country (local, district, provincial and national govenrments),
as well as businesses that are managed by the government, or partially ruled by the
government, for example Eskom. The government are also called the public sector
(government sector)
28
TAX
The government buys the production factors of households and provide households
and businesses with goods and services, for example garbage removal, infrastructure,
roads, education and healthcare. The government collects tax from households and
businesses to pay for these services and to manage government departments
The government also buys goods and services, for example stationary for office use.
The Department of Agriculture is also a government department. In rural areas it is
responsible for dipping of cattle with chemicals to ensure they do not die of
sicknesses.The economic cycle with the government includes the following:
Households
Market for
goods and
services
Government
Market for
production
factors
Businesses
29
In a closed economy can be classified as an economy where no exchange of hands
takes place outside of the local economy. Money only flows within a country between
households, businesses and the government.
An open economy is where money, goods and services (real flow) flow in and out of a
local economy. It happens when households, businesses and the government within
a country sells and buys goods and services and production factors from other
countries. Household, businesses and governments from other countries are called
the foreign sector.
30
CHAPTER 3: GOODS AND SERVICES PROVIDED BY THE
PRODUCER
3.1 The Production Procses
In this chapter of the economy we are going to look at:

Goods and services

Examples of goods and services

Producers and consumers

The role of households as producers and consumers

The efficient and effective use of goods and service

How to recycle and reuse goods and service to comply with our needs and
wants
Good and Services
Suppose you used spend monies on the following one Saturday morning:

You spend R50 airtime for your cellphone.

You visited the optomistrist to test your eyes.

You paid taxi monies to get to the optomistrist.

On your way home you spent monies on bread, wheat and milk.
When you arrived home, you had airtime for your phone and some groceries for the
monies you spent. Did you have something physical to show for the monies you used
for the taxi ride as well as the eye test at the optomistrist? Why is this possible? Airtime
and groceries are classified as goods, while the eye test and the taxi ride are classified
31
as services. To understand goods and services, you have to know that they come from
different sectors. There are three (3) business sectors:
Primary
Sector
Secondary
Sector
Tertiary
Sector
The Primary Sector
Businesses in the Primary sector form part of the first level of the economy. People
use natural resources directly in the sector. They produce raw materials that are used
as is or send to the secondary sector to produce goods. Primarty sector business is
also involved in processing and packaging of raw materials, for example factories that
package frozen fish for fishing companies. The the primary sector not only mined raw
materials, they are also responsible for the following activities in the Priamry Sector:

farming

fishing

forestry

mining

hunting
Businesses in the primary sector, for example farming and mining are very important
for the country. To produce goods which people can physically see and touch.
32
The Secondary sector
Businesses in the secondary sector are usually just out of town. This is the second
level of the economy. People use raw materials from the primary sector to produce
goods people can use. This is called the industries. Some examples include:

factories

shipbuilding sites and sites where airplanes are build

anything that forms part of building, engineering an work with metalsenigiets
wat met bouwerk, ingenieurswerk en werk met metale te doen het.
These businesse also produce goods that you can touch..
33
The tertiary sector
Businesses in the tertiary sector form part of the third level of the economy. People
give goods to the secondary sector to produce or provide services to the general public
in this sector. Some of these goods and services include:

schools for educational purposes

hospitals for healthcare services

banks for money management services

lawfirms for law services and jurisdictional purposes

restaurants for food and beverages

supermarkets for groceries

clothing stores for small retail goods

tourism and entertainment services.
The difference between goods and
services is that goods are articles that
people can see and touch, wheras
services can be classified as things
that other people do to help you and
cannot
nessasarily
be
seen
or
touched.
Businesses in the primary sector exploit and process raw materials directly, while
businesses in the secondary sector use these raw materials to produce goods and
services and businesses in the tertiary sector provide services. In poorer countries
most of the monies comes from the primary sector. This is because most people live
near the land the work, fish, farm or mine. In richer countries most of the monies comes
from the tertiary sector. This is because most busineses provide services to each
other. The tertiary sector needs the products that the secondary sector produces. If
one of the sectors coms to a hault, the other two sectors would not funtion properly.
34
Let’s for example look at the desk you are sitting at right now were made and flowed
between the different sectors.
PRIMARY SECTOR
(Raw materials = wood)
Trees from plantations
were cut down to produce
raw materials of wood.
SECONDARY SECTOR
(Manufactring = factories)
The wood are taken to a
factory wher other materials
are added, like glue to
produce a desk
TERTIARY SECTOR
(Goods = desks)
The desks are taken to
smaller retailers so that it
can be sold. In this case it
was sold to the university.
35
Examples of goods and services
Here are some examples of goods and services that can easily be identified around
you.
Goods:

Food and beverages for a restaurant

Equipment like desks and chairs

Stationery like shalk, penns, pencils, rulers and erasors

Computers and printers

Building materials such as doors, tiles, paint and taps

Sportequipment such as cricketbats, socecerballs and netballbals

Gardenplants and lawns

Your school and work uniform

Jou work bag or suitcase
Services

Education and Admin

Sportcoaching

Sell of food at restaurants

The cleaning of classes and bathrooms

Gardeniong and the upkeep of premisses

Computer support services (repair of compueters and networks)

Embroidery of badges onto uniforms

Constructionsites that contstructs schools and working sites

Municiple services like water, electricity and garbage removal

Velling services like busses and taxi’s
Producers and consumers
As seen previously, people are selling goods and services for thousands of years now.
They started of with bartering; whereafter different money systems were developed as
societies became more complex. U also saw that goods were not the only thing people
exchanged for money. Services became an important commodity in more developed
countries. In modern times, the exchange of goods and services for money are still
central for economic activities.
36
Most people that use resources to
produce goods or services are called
producers. People that buy these
goods
and
services
are
called
consumers. When you buy groceries at
the supermarket, you are the consumer
that
uses
the
groceries.
The
supermarket is then classified as the
producer of the goods you bought. The guests at a guesthouse are called the
consumers of the service provided by the guesthouse owner. The owner of the guest
house is called the producer, as he is providing a service that someone else is using,
because he is using his resources to provide accommodation.
The role of households as producers and consumers
The devision between producers and consumers is not always visable. This is the
case because people are not always just producers or just consumers. Take for
instance; your mother is a teacher. She provides her services at the school where she
teaches, and this makes her a producer. She also buys groceries, clothes, electricity
and makes use of health services, and this makes her a consumer. They use their
resources to produce goods or services, but they consume goods and services as well
The above picture illustrates how households can be producers as well as consumers.
In a modern society people have organised themselves in households with one or
more sources of incomes. A household is a place where one or more people live, sleep
37
and look after children. It does not have to be a house – it can be an apartment, a farm
or any form of informal house. The people that live there does not nessasarily have to
be family, although most household compromises of families. The person that lives
alone is also classified as a family. Households buy and use goods and services. They
also produce goods and services, by means of exchanging their their labour for
income. They are thus called the basic unit of economic production and usage.
Households are an important part of the economy, as well as businesses. Do you
remember the production factors that we looked at earlier? Households poseses all
these production factors, because they provide the inputs to businesses in the form of
labour, which they then in part use to produce goods and services. Thus we can say
they that they own the production factors.
Use goods and services effective and efficient
Earlier we briefly looked at consumereconomies. You saw how peoples focus on the
spending of money towards consumer goods became an unsustainable means of
living. We have to use goods and services effective as weel as efficient to ensure that
the resources that we use, are usedresponsibly. Goods that are used by households
are mainly consumer goods.
Consumer goods are goods that businesses produce in mass. It is goods that most
people want, use and can afford. These people will use it as soon as they have bought
it. Examples of consumer goods are clothing, electronics and motors. Businesees
design consumer goods to e bought and used in multitudes. Some consumer goods
such as electronica of a low quality, does not last very long. Thus people have to buy
new ones very quickly.
38
This cellphone factory produces consumer goods that consumers buy in multitudes.
Because these consumer goods are so freely available, consumers might think that
they do not need to uses these goods efficiently or effectively. It is thus important for
households to use these goods and services effective and efficient, because they are
paying for them. Consumers have to ensure that they are not wasting their monies by
not using these goods and services effectively or efficiently. If you for instance buy a
camera and do not look after it, it can easily break. This is money that you could have
saved.
The reuse and recycle of goods to satisfy our needs and wants
Manufactures uses precious resources to produce consumer goods. Most of these
resources, for example fossile resources that are used for electricity in the managing
of factories, cannot be replaced. Other resources like wood for furniture are produced
over many years. Factories are producing gas emmissions and packaging material
that cannot be recycled, which in turn produces a lot of wate. In truth, approximately
15% of all garbage that we produce in urban areas is from waste products. Packagin
also influences the price that consumers have to pay for certain products.
If we recycle as much as possible, we can decrease the garbage on our dumping sites
by atleast 50%.
39
To prevent waste and to use
resources wisely, we need to
recycle and reuse goods to
satisfy our needs and desires.
For example, industries like the
construction and motor vehicle
industry need large amounts of
steel
to
manufacture
their
products. However, it is a costly
process to make iron from iron
ore
and
consumes
large
quantities of electricity. This is the case because iron ore is heated to very high
temperatures when steel is manufactured. To provide these industries' need for steel
to make new products, they recycle steel products that no longer use people. It saves
resources like electricity and the coal that is burnt to produce it. It also satisfies the
needs of steel recycling plants, as the plants earn money from providing recycled steel
to the industries that need it.
The above picture illustrates a steel plant that uses a lot of electricity to produce steel,
and thus the recycling of steel products satisfies the needs of steel-making industries
to make their products.
40
Businesses that recycle other goods, such as paper, plastic and glass products, earn
an income from this recycling. People can reuse and recover goods in the following
ways to satisfy needs and desires:

Instead of throwing away what you do not use anymore, you can give it to
people that needs it dearly and will use it, or you can sell it to people who need
it.

Instead of buying new items like electronics, cars and cameras, you can buy
used goods. It's also cheaper!

Instead of throwing away damaged goods that are no longer working, you can
restore it.
It's not just big businesses that need to recycle. Anyone can recycle, especially
communities around schools. You can ask the principal if you can start a program for
recycling at school. Learners and parents can bring their paper, cans, plastic and glass
from their houses and place them in separate containers. You can arrange for a
recycling company to pick up the recycled goods when the containers are full.
PART 2 – The Production Process
The definition of production
Production is when businesses use raw materials in a production process to produce
products that the market needs. They change materials that one touches (such as
wood or gold) and materials that one cannot touch (such as knowledge and ideas) to
41
products or services that people can buy and use. It is an important part of a country's
economy
Inputs and outputs
The materials used by businesses in the production process are called inputs. Inputs
is goods that one uses in the production process to deliver products and services. The
products and services made by the production process are called outputs. Outputs are
good what one gets from the production process.
Inputs
Production
Process
Outputs
A business that makes wood furniture, for example, uses wood, nails and glue as
inputs in the production process to get the output of products such as tables, chairs
and bookshelves.
You will probably agree that the production process requires more than just materials
to produce products and services. Inputs are not only the raw materials that the
business uses to manufacture products. Businesses also need the following inputs in
the production process:

Natural resources

Human resources

Capital and

Entrepreneurship
42
Labour: the work that workers
perform to produce goods
Inputs in
the
production
process
Capital: the monies that are
used in the production process,
as well as to buy machines and
equiptment to produce goods,
vehicles to transport goods and
computers to run the business
Land: the natural resources that a
business use, such as land on which
factories are built, the land on which
the trees grow, water to run a
business, energy in the form of
electricity that are used in the
production process
Entrepreneurship: the
entrepreneurial way of thinking
that brings together the inputs to
organise a production process
successfully
The inputs in the production process are labor, capital, land and entrepreneurship.
Businesses use the inputs of labor, capital, land and entrepreneurship to change raw
materials into outputs of products and services. Not all outputs, however, are finished
products that consumers can buy.
Let's look at a furniture business as an example.The business uses wood as a raw
material to produce furniture. The wood they use is, however, an output of another
type of business - the forestry industry. The forestry industry uses seeds for trees, soil,
rainfall, nutrients in the soil and equipment like saws and axles as inputs. The forestry
industry's production process involves cutting down mature trees and changing them
in stumps. The stumps are the products that supply the business to the furniture
factory. Can you see that one industry's output is another industry's input?
43
Industry Sectors
Inputs and outputs differ from industry to industry because industries operate in
different sectors. A sector is a way in which business activities are grouped.
There are three main sectors of the economy:

the primary sector

the secondary sector

the tertiary sector.
They need each other to survive.
The primary sector
Businesses in the primary sector are mostly in rural areas. These businesses form the
first layer of the economy. People use the land in this sector. They need raw materials
(natural resources) to survive. The activities in the primary sector are:

farming

fisheries

forestry

mining

hunt and collect
Businesses in the primary sector, such as farming and mining, are very important for
a country.
44
The secondary sector
Businesses in the secondary sector are just outside of town. This is the second second
layer of the economy. Businesses use raw materials from the primary sector to make
or manufacture goods that people can use. These are industries. Here are some
examples:

Food and beverage factories

motor factories, shipyards and manufactures manufactured by aircraft

anything that has to do with building work, engineering work and metalworking
This car factory is part of the secondary sector. The output is cars.
The tertiary sector
Businesses in the tertiary sector are within towns. This is the third layer of the
economy. Businesses in this sector offer complete products and services to the public.
Completed products are sold by retailers such as supermarket stores, clothing stores,
and so on. Services to the public include the following:

Schools for Educational Services

hospitals for health care services

banks for money management services

legal firms and courts for legal services

Food and drink restaurants

Tourism for entertainment.
45
In poorer countries, most of the money comes from the primary sector. This is because
more people work near the ground. In richer countries, most of the money comes from
the tertiary sector. This is because most people deliver services to others.
The secondary and tertiary sectors are linked to the primary sector. The secondary
sector uses what the primary sector produces (raw materials). Businesses in the
secondary sector make ready-made products for other businesses to sell or export.
The tertiary sector consists of businesses that people can use. Examples of these
useful businesses are social services, financial services, tourism, education, health
care and environmental services. Information makes the tertiary sector successful.
The tertiary sector also needs products from the primary sector. This is because the
tertiary sector uses the products that manufacture the secondary sector. So if one
sector collapses, the other two sectors can not function properly.
The sectors involved in the production of potato chips
46
Sustainable use of resources
You have seen businesses in different economic sectors use resources as inputs to
produce outputs. Some of these resources are non-renewable, which means we can
not make it anymore if we have used up everything. Some of the resources that are
renewable are scarce. This means that very few of them are available. The earth has
a limited amount of resources that businesses can use. Examples of non-renewable
resources are water, coal and oil. If we have used all these resources, we can not
manufacture it anymore. Oil is used to make gasoline and diesel, which is very
important for the industries and the economy. We must think of other things to use
instead of oil and gasoline, because this resource is getting on.
This oil drill is looking for oil, a nonrenewable resource
Examples of renewable resources are wood, plants and solar energy. Metals like gold
and iron are also renewable because we can recycle them even if we can not renew
it by making new ones.
These
plantations
are
renewable
resources.
Although our resources like wood can be renewed by planting forests, we use wood
resources faster than we can renew them. This means that we do not use these
resources sustainable. Sustainable means that something can be used over the long
term and can last for a long time. Businesses must use resources sustainable if they
want to be able to keep business in the future.
47
Earth's resources belong to all, but some countries use much more than others.
Developed countries with industrial economies use more resources than developing
countries with economies that are not industrialized. Developed countries use
resources such as oil unsustainable because they can afford to access these
resources. Developing countries can not use these resources sustainably because
they can not afford access to it. However, both types of countries use resources
unsustainable.
The production process uses many different resources. For example, car
manufacturers use metal, plastic, material, rubber and many other tools to make cars.
Did you know however, that they also use about 148 000 liters of water to make a car?
Material Manufacturers use resources such as cotton plants to make materials. Did
you know that 6,000 gallons of water are needed to grow enough cotton to make a
denim trousers? Just imagine how much water it takes to make all the cars and all the
denim trousers in the world! These are just two examples of the large amount of
resources that use the production process. How can businesses use sustainably
sustainable?
Think of alternative resources
that can be used, for example
sun energy instead of using
oil for energy
Reduce the quantity of resources
that are used, for example to
make the production process
more efficient to use less
electricity and water
Use recycled products where
necessary, for example to reuse
the water a factory uses in one
production process for the next
production process, or to
encourage consumers to recycle
goods such as plastic or glass, so
that it can be used again.
Things that businesses can do to use production resources more sustainable
48
All countries, businesses and individuals are responsible for using the world's
resources in a sustainable way.
The meaning of productivity
All of us have days when we do not want to do any work. Was there a day when you
did not really have the pleasure of doing your homework, completing a project or
learning for a test? One can occasionally have such a day. However, if you have too
many of them, you will probably not do well in the exam at the end of the year.
When you leave the university one day, there will be days when you are not really
willing to work. You can once again have a day after leaving the university. However,
if you are lazy for too many days, it means you do not take your side for the business
you are working for.
This is what productivity really goes - to take part in the business you work for and to
make a difference to the country's economy.
In economy, productivity means how efficiently one uses your time to get things done.
Explain the picture to the left
using a pizza restaurant as
an example of productivity.
This
restaurant's
productivity is measured by
how Iong it takes to convert
the
inputs
ingredients)
(pizzas).
If
(pizza
to
outputs
Luigi
makes
many high quality pizzas in very little time, he is productive. If he makes less pizzas,
or pizzas that are not properly baked, and spends a lot of time doing it, he is not
productive.
49
The effect of productivity on economic growth
You know that economic growth is an increase in an economy's ability to produce
products and services over a specific period. You also know that productivity means
that as many products and services as possible can be produced in as little time as
possible. It follows that the more productive a country's labor force, the better the
country's economic growth. In South Africa, unemployment, low levels of schooling
and HIV / Aids make the country's labor force less productive. Unemployed people do
not produce goods or services. Unskilled workers can only produce limited goods and
services. People who are ill are not at work for a long time. The more productive South
Africa can make its labor force, the more the economy will grow.
Technology in the production process
Production processes have
become
more
technologically for as long
as humans made goods.
People have. for example,
previously harvested maize
by hand, but commercial
farmers now use machines
called poachers to do it.
Workers built cars by hand, but robots on production lines now do most of this work
Businesses use technology in the production process to make the process faster and
more efficient. Technology automates the production process. This means that a
manual-handed process will change to an automated process (a process done by a
machine). Technology in the form of machines and the computers they drive in the
production process has the following advantages:

They work faster than people

They make fewer mistakes than people

They are not tired and their attention is not distracted

They do not get sick and they do not leave

They can work for a very long time during the day or night
50

They do not have to be managed and they need to be paid monthly

They do not have to be trained.
It is therefore good for businesses to use technology in their production processes.
The contribution of technology to improving productivity and economic growth
Technology makes the production process faster, more accurate and standardised.
This is because computers and machines are built for one purpose only - to do specific
work. As you have seen in the previous section, they are not sick like workers, they do
not make mistakes, they do not need training and do not have to be managed. They
help businesses increase their capacity to produce more goods and services. This
means that they help the business to contribute to economic growth. They also help
businesses to produce goods and services in less time. They make the business more
productive. This increased productivity contributes to economic growth.
3.2 The Labour force of South Africa
South Africa faces different challenges of which unemployment is the most important.
The labour force is the topic of many a study and in this weblog we would like to tell
you more about the recent work done by Lyle, Kasongo, Moses and Yu which have
recently being published by ERSA.
After 1994 a whole bunch of new legislations have been enforced. It had the aim to
rectify injustices of the past and to promote a more equal community. Specifically the
labour laws brought in a new minimum standard of employment conditions,
encouraged the employment of non-whites and so begin with the rectifying and
lessening of the social inequalities which is so inherent to the South African
community.
Various studies have investigated the original impact of the new legislation in the years
directly after apartheid (the first 10 years or so) but the most recent research was done
up until 2013. They indicate that the biggest challenge of the SA-workforce is still the
high level of unemployment which keep on troubling the SA-economy. Various
reasons are being offered for this:
51

An education system which produces many new employees with inadequate
upbringing. The impact of the Bantu Education Act of 1953 has not yet been
rectified which means that uneducated young people are still entering the labour
market each year.

Wage rigidity as result of the new labour legislation which was supposed to give
more protection and rights to workers. This so called mimimum wage (which
sometimes is above the current market price level) means that employees can’t
employ as many people as they would like to.

Unrealistic wage reserves: Graduates expect a high salary and many individuals
are reluctant to enter the labour market and accept employment if it is not going
to be more than what they can earn through social grants by staying at home. It
is especially the case with people who have a lot of children or who have
pensioners living with them.

A small informal sector with huge barriers to entry: Meaning that people who
does not find work in the formal sector also do not find work in the informal sector
because of bad infrastructure and weak entry to credit markets.

Slow employment growth: The speed as to which new employment opportunities
are created is not fast enough to offer employment to all new employees and that
means that unemployment keeps on growing despite the availability of more job
opportunities since 1994.
Long term labour tendencies since 1994
The labour force has grown with more than 8.5 million people since 1994.
 An increase in the amount of people who entered the labour market as more
people seeked for jobs after 1994. Together with the strong growth in the
population it means that the labour market had more than 22 million people in
2014.

An increase in the amount of people who had a job from roughly 9 million in 1995
to 15 million in 2014.

Nagging high unemployment rate- taking into consideration the “narrow”
definition- growing from 17% in 1995 to 25% in 2014.
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How does the labour force looks today?

Labour
force
participation:
Black
people makes out the largest proportion
(76%), with 46.6% of the total labour
force being in Gauteng and the Western
Cape.
There has been a decrease in the amount
of people who do not have any training
and 17% of the labour force now has
some kind of grade 12 qualification. The
labour force in suburban areas also doubled (from 7.5 to 15.5 million people).

More than 3.5 million employment opportunities have been created :
Employment: More than 3.5 million job opportunities have been created since
1994. Black people now counts as 73% of everybody who has work while whites
count as 13%. The growth in black employment is the result of improved training
for black people and also affirmative action policies. It also contributed to increase
the portion of female employment from 39.1 to 43.9%. There was also a great
reduction in the portion of people who has no training (from 8.1% to 2.4%) and
young people (11.8% to 8.7%) in the labour market, while people above 45 now
makes out more than 28.9% of all workers. It shows that there is a growthof the
demand for schooled labour and it confirms the governments’ youth wage subsidy.

Unemployment: Unemployment has grown with nearly 2.8 million people over the
timespan; black people is still the population group with the highest unemployment
percentage. There was however a reduction in local unemployment as more
people migrated towards the cities, while unemployment amongst the youth is still
very high- more than 49%. The unemployment rate between men and women also
decreased, while white and coloured unemployment is still the lowest, although it
increased since 1994. A huge problem posed to be those who are unemployed
over the long term- so much so that 71% of people under the age of 24 years have
never done any work before. It implies that active labour force legislation is
essential to encourage the youth and to assist them in securing their first jobs.
53
Conclusion
Die arbeidsmag en arbeidsmagdeelname het sterk gegroei sedert 1994.

The labour force and labour force participation have increased since 1994. In
2013 the most unemployed people were black people under the age of 30 which
lived in the cities and who did not complete their high school education.

The slow growth in job creation means that unemployment does not decrease
and social inequalities do not increase or reduce significantly.

Race still plays a huge role in employment regardless of affirmative action and
black economic empowerment initiatives. Inequalities between black and other
races in South Africa still remain.

Because of structural changes in the South African economy ( a shift from
primary sector to tertiary sector goods and services) there were an increase in
the demand of schooled labour in the tertiary sector. It may also be the cause
why employment of older people has increased because of their experience and
higher capability levels.

The population has grown to be more educated and also legislation concerning
gender equality had a positive impact on the employment and wages of women.
54
3.3 Trade unions
Understanding of trade unions
South Africa, the same as
other
capitalistic
countries has a history in
which
entrepreneurs
exploited
workers
by
employing poor, illiterate
people for long hours in
uncomfortable conditions
for substandard wages.
Traditionally
entrepreneurs kept most
of
the
profits
for
themselves and workers
could not excel above
their low wages and bad
working
conditions.
Workers finally felt cheated by the capitalists who only attempted to make huge profits
for themselves and organised themselves in trade unions. A trade union is an
organisation which represents workers in the same profession or related professions
which apply themselves for better wages, working hours and working conditions for
their members.
A Trade union functions on the concept of “unity is power”. A group of people who
cooperates has more authority and negotiation power as individuals who act on their
own. In South Africa there are various trade unions for different professions or
categories of work. A few examples of trade unions include : SAMWU,( South African
Municipal Workers Union), SADTU ( South African Democratic Teachers Union),
NAPTOSA (National Professional teachers Organisation of South Africa) , NUM
(National Union of Mine workers) etc.etc.
55
Short historical development of trade unions
Although South Africa has experienced many strikes during the past two
decades, strikes are not something “new”. The first entry of a labour strike was
done during the 29th year of the reigning of Pharoah Ramses 111 in the 12th
century B.C. Strikes are a way to force the employer to negotiate with the
workers. Nowadays strikes are protected and organised by trade unions. The
South African Constitution makes provision for the right to join trade unions and
for trade unions to collectively bargain and strike. It wasn’t always the case as
trade unions were regarded as being suspicious by both employees and the
government.
After the discovery of gold and diamonds in South Africa during the late 1800’s
many tradesmen from Britain came to work here. These tradesmen who were
familiar with trade unions in Britain have initially brought the trade union shift to
South Africa. In 1922 there were widespread unrest and strikes at the mines in
the so called “Witwatersrand” because of inhuman working conditions.
The Chamber of Commerce tried to undermine the strikes and it’s recognition of trade
unions. In 1924 the government has accepted the first Industrial Conciliation Act
because of fear for a repetition of the 1922-mine unrest. It later changed to the Labour
Relations Act. A huge loophole in this Act was the fact that black people were
excluded from it. Many coloured and Indian industrial workers were allowed to join the
“white” trade unions to form a mixed trade union. In 1948 when the Nationalist Party
became the reigning party, legislation was put into place to prevent non-whites to be
appointed in managerial positions in mixed trade unions and no new trade unions were
allowed.
In 1955 the Amendment Act on Black Labour allowed workers to start committees
which had at least 20 black workers in employment. Under the South African apartheid
legislation the trade union movement made provision for White, Coloured and Indian
workers in separate unions. Few black trade unions existed and they were not really
acknowledged.
The growth in the South African trade union movements began in 1973 when 100 000
workers started striking for higher wages in Durban, KwaZulu-Natal. It was after these
strikes and the Soweto uproar in 1976 that the Wiehahn-commission was appointed
by the government in 1979 to investigate the labour relations in South Africa. The
56
report of the commission has convinced the government to allow collective bargaining
for black workers. (Before 1979 only trade unions with White, Coloured and Indian
members were acknowledged). It finally led to changes in the Labour Relations Act
which acknowledged black trade unions since 1979. It also lead to more trade unions
being formed.
Since 1973 to 1994 trade unions played an important role in the establishment of a
democratic South Africa. One of the key role players was the Congress of South
African Trade Unions (COSATU). The congress was established in December 1985
after four years of unified conversations between trade unions who was against
apartheid and committed to non-racial, non-sexist and a democratic South Africa.
COSATU is the largest federation of trade unions in South Africa. COSATU functions
as a tri-party alliance between the ANC, the SACP (South African Communist Party)
and COSATU. Two other trade union federations of note in the South African economy
is the Federation of Unions of South Africa (Fedusa) and the National Council of Trade
unions (Nactu).
In August 2012 the Marikana Lonmin platinum mine’s workers started to strike in
demand of higher wages. The strike on the 16th August will be remembered for the
killing of 34 mine workers by the police with 78 wounded.
Roles and responsibilities of trade unions in South Africa
The most crucial services which a trade union offers to its members is negotiation and
representation. The trade union has to determine the griefs of the members and
communicate it to the employee. Frequently the demands of the workers and the offers
of the employees differ. Trade union representatives negotiate on behalf of their
members to find a solution for these differences.
Employees also receive different benefits than members of trade unions. Trade union
officials are frequently experts in labour legislation as well as conditions of
employment. Union officials can advice workers regarding their number of days leave,
how much they will be paid during maternity leave, where to find legal representation
or advice and how to receive additional training. Many trade unions provide for courses
on topics such as retirement, health, security and other issues. Some trade unions
even organise financial discounts on behalf of their members such as reduced bond
repayment tariffs.
57
The Labour Relations Act (LRA) of 1995 guarantees the right of an employee to
participate in the formation of a trade union. The law also stipulates the conditions
under which registered trade unions must function. Trade unions must be administered
in a democratic way. Trade unions should further have a constitution which should
describe how officials will be nominated and chosen, their responsibilities and how
workers can become eligible as members. The constitution of a registered trade union
is regarded as a public document, meaning that it should be in the office of the
Registrar of labour relations for inspection by members of the public.
Trade unions attain funds to administer the organisation by charging a monthly
subscription from each member. Most of the members pay the subscription by means
of a debit order where the money is deducted from the workers’ salary and paid into
the account of the trade union. In exchange for paying the monthly subscription the
union members expect to receive the following benefits: representation, negotiation,
protection and other services. The trade union is liable to its members for it’s policy
and actions. It is expected of trade unions to let their vote via a ballot paper before
they organise a strike. Trade unions are expected to keep proper financial records,
records of member contributions and notes of all meetings for at least 3 years.
Effect of trade unions on businesses
The most important role of trade unions is to negotiate better working conditions and
payment for their members. Trade unions can insist for their workers to strike and
refrain from working until the employer complies with their demands. When employees
strike the employer loses income from sales because of an interruption in production
and services. Employees loose their salaries because no work means no pay. If strikes
lasts for a long period of time, employees may find that they cannot put out orders and
that clients might refrain from renewing their contracts.
The loss of income might mean that future production may decrease and that
employee jobs can be jeopardised because of retrenchment. Alternatively an increase
in wages might mean that the consumer will eventually pay a higher price for products
or services. In this way strikes may lead to price increases. Such price increases have
58
a ripple effect throughout the economy. An increase in the price of one commodity
leads to a price increase in the next item etc. Strikes can thus contribute to inflation.
Trade unions also succeeded in improving the working conditions and motivation of
workers through consultation with both employers and employees.
Contribution of trade unions to sustainable growth and development
Individual workers on their own is powerless. Workers become empowered if they are
organised in trade unions. That is why trade unions are referred to as “vehicles of
development”. Trade unions are a way for workers to improve their standard of living
and working conditions. It is mostly beneficial to the community in general. Trade
unions fought poverty by implementing minimum wages. Minimum wages raised the
wages of workers at the lowest end of the wage scale by providing them with a liveable
wage. It leads to improved standards of living for the lowest income earner and their
families. It leads to sustainable economic growth.
Trade unions also ensured that health and safety regulations are met in the work place
and that injured workers are compensated. Job related accidents in the past left
families in situations of utmost poverty because of high medical expenses and a lack
of future income. Employees who work in dangerous areas ,such as asbestos mines
which can damage the lungs of workers, were also implied. Trade unions negotiated
for healthier working conditions and environments as well as protective wear for
workers. A healthy labour force makes the work force more sustainable because
workers live longer. It saves the businesses money which can be utilised to recruit and
train new workers.
Trade unions compel businesses to be liable and responsible for the environment
which can lead to sustainable business practices. Trade unions also made HIV Aids a
focus point of their job. A labour force which is sick or infected with AIDS ,is not a
productive labour force. For economic growth to take place the labour force has to be
healthy and productive.
Worldwide and in South Africa trade unions accomplished a lot to fight child labour
and minimum wages for employment. Children who are forced to work long hours in
factories are deprived of the opportunity of education. Education is one way of uplifting
59
people from poverty. Educated and well trained staff contributes to a more productive
labour force.
Often the long hours and poor working conditions to which child
labourers are exposed is detrimental for their health and deprive them of a long healthy
and productive life. The South African Constitution ensure that the youth has a right to
education. The Basic Conditions of Employment Act prevents employment of people
under the age of 16.
60
CHAPTER 4: PRYCE THEORY
4.1 Demand
Demand
From all products available to consumers they only chose some to buy. How do
consumers decide to buy goods or services? How do they choose to buy how many
of certain goods and services they want? The decisions which consumers make in
terms of which products to buy mainly depends on their demand of goods and
services. In this chapter you will be taught about the factors which influences the
consumers demand for goods and services.
What is demand?
Demand is defined as the amount of a product or service which the consumer is willing
and able to buy at different prices. Demand does not only include which goods and
services people want, it also includes people who want a good or service and who can
pay the price of the seller. In other words, demand refers to the amount of a product
or service which people are able and willing to buy at a specific price.
Various factors determine the demand of a product:

The price of the product. The amount of a product bought by the consumer
depends on the price of the product. For example: if the price of chocolates are
low, more consumers will buy chocolates and if the price is high less consumers
will buy chocolates.

The amount of money available to consumers. The amount of products bought
by a consumer also depends on the amount of money they have available. If the
income of the consumer is high they will buy more products and if their income is
low they will buy less.

Marketing (advertisements). The advertisement of a product determines how
many will be bought by the consumer. If marketing is effective more consumers
will ask more of the product if marketing does not exist less products will be
demanded.

The price of other products. The price of other products could also have an
effect on the amount of products bought by the consumer. For example: if the
petrol price increases it can also have an effect on the demand of motor vehicles
by consumers.
61

Climate. The weather can also influence the amount of a product bought by
consumers. If the weather is cold and wet the demand for warm coats and rain
jackets will increase. If the weather is warm and dry the demand for warm coats
and rain coats jackets will be low.

Fashion. Fashion and other tendencies influence the amount of a product to be
bought. For example: if the popularity of skate boarding increases more
skateboards will be demanded.
Law of demand
The amount of goods demanded by consumers relies partially on the price of the
goods. If the price is low consumers will be willing to buy more of the goods. If the
price is high consumers will buy less. This reversed relationship between the price of
goods and the amount of goods which consumers are willing and able to buy, is called
the law of demand. According to the law of demand the following takes place: The
higher the price of a product or service, the lower the amount demanded by the
consumer.
Demand schedule
The law of demand thus determines that there is a real relationship between the
market price of a product such as wheat and the amount demanded, provided that all
other factors as mentioned above remain the same. This relationship between price
and the amount demanded is called the demand schedule and can be graphically
portrayed by means of a demand curve.
Graphical illustration of a demand curve
The following table is an example of a demand schedule for wheat. The numbers used
are only for illustration purposes and are not real prices or amounts. If we look at the
table we can see that at R5 per bag consumers will demand 9000 bags of wheat, at
R4 the demand will increase to 10 000 bags, at R3 the demand will further increase to
12 000 bags, at R2 per bag the demand of 15 000 is even higher while the demand at
the lowest price of R1 will increase to 20 000 bags of wheat.
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Price per bag in rands(R)
Amount demanded (Q)
A
5
9 000
B
4
10 000
C
3
12 000
D
2
15 000
E
1
20 000
4
3
1
2
PRICE (R)
5
6
We can use the figures of the table to illustrate the information graphically.
0
5000 10000 15000 20000 25000 30000 35000
Quantity (Q)
In the graph above the vertical axis (P) shows the different wheat prices as Rand per
bag. The horizontal axis (Q) shows the quantity of wheat (amount of bags) demanded
per month. Point 1 in the figure correlates with a price (P) of R5 and a quantity (Q) of
9000 bags of wheat. For point 2 the next price is R4 and the correlating quantity 10 000
from the horizontal axis. Points 3, 4, and 5 are marked with quantities of 12 000, 15 000
and 20 000 bags of wheat respectively.
We can draw a demand curve for any demand schedule. Note that P (prices) decrease
as Q (quantity) increases. This type of relation is called an inverse relation. An
important characteristic of the demand curve is that it slopes down from left to right
which indicates the inverse relation. This graph illustrates the Law of Demand which
is applicable to all types of goods, namely wheat, meat, pizza, beef burgers as well as
services such of those of hair dressers, doctors, attorneys and architects.
63
4.2 Supply
Supply
Entrepreneurs can decide to supply any product or service of their choice. How do
they make the decision about what to offer? How do they decide how many of a
product or service to supply? These decisions determine the supply of goods and
services which are available in the market. In this chapter you will learn more about
factors which influence demand.
What is supply?
Supply is the amount of goods and services which suppliers are willing and able to
produce at different price levels. The supply of a product or service is determined by
various factors which include the following:

The price of the product. The amount of a product which are offered by suppliers
depends on the price which consumers are willing to pay for the product. If the
price is higher the suppliers are willing to offer more. If the price is low the amount
they are willing to offer decreases and they will find more profitable goods to
manufacture.

The production cost. The number of goods and services which suppliers produce
depends on the production cost of that thing. If it is cheap to produce a product or
service the supplier will offer more of the product. If the production cost increases
suppliers will produce less of the product.

The production method. The amount of a product or service to be supplied
depends on the production method and the available technology. If technological
improvement takes place which allow them to produce more of a product the
supply will increase.

The number of producers. The amount of a product to be supplied depends on
the number of enterprises which supply the product. If more enterprises start to
supply the product there will be an increase in the supply of the product. If some
producers close their businesses the supply will decrease
The law of supply
The amount of a product which a producer is willing to supply relies partially on the
price of the product. If the price is low, producers will only be willing to offer a small
64
amount of the product. If the price is high producers will be willing to supply more. This
direct relation between the price of a product and the quantity which the suppliers are
willing to offer, is called the law of supply. The law of supply indicates that the higher
the price of a product or service the higher the quantity to be supplied by the producer.
The supply schedule
The supply schedule indicates the relation between the market price of a product and
the quantity of that product which producers are willing to supply to the market. This
relationship between the price of a product and the quantity supplied is known as the
supply schedule and can be graphically illustrated by means of a supply curve.
Graphic illustration of a supply curve
The following table is an example of a supply curve for wheat.
Price per bag in rands (R)
Amount supplied by the producers
( bags per month)
F
5
18 000
G
4
16 000
H
3
12 000
I
2
7 000
J
1
0
The figures which are used is only examples and not real prices or quantities. If we
look at the table we can see that at R5 per bag the quantity supplied will be 18 000
bags per month, at R4 the quantity decreased to 16 000 bags per month, at R3 it
reduced further to 12 000 bags per month, at R2 the quantity supplied is 7000 bags
per month and at the lowest price of R1 the quantity supplied decreased to zero bags
per month.
65
6
5
4
3
PRICE (R)
2
1
0
5000 10000 15000 20000 25000 30000 35000
Quantity (Q)
The above graph shows the different prices of wheat measured on the vertical axis as
Rand per bag. The quantities of wheat (per bag) are shown on the horizontal axis.
Point F in the figure correlates with a price of R5 and a quantity of 18 000 bags
supplied. Please note that the supply curve differs from the demand curve. With
reference to the demand curve the quantities of demand increased as prices
decreased.
With the supply curve the quantities supplied decrease as prices decreased (as
indicated by points G, H, I and J and the corresponding quantities of 16 000, 12 000,
7 000 and 0 bags supplied). In contrast with the demand curve, the supply curve slopes
upwards form left to right. It illustrates the law of demand which states that the higher
the price of a product, the more the quantity supplied and the lower the price the
smaller the quantity supplied.
4.3 Market Equilibrium
We are now familiar with the demand and supply curve. We actually do not know
exactly at which price the wheat will trade on the market. In order to answer this
question we have to combine the demand and supply curve. When the demand and
supply curves are combined there will be an equilibrium (balance) at a certain price.
This price is known as the equilibrium price.
66
The following table shows the market equilibrium schedule.
1
2
3
4
Price
Quantity demanded
Quantity
Effect on
(R per bag)
(bags per month)
supplied (bags
prices
per month)
A
5
9 000
18 000
Decrease
B
4
10 000
16 000
Decrease
C
3
12 000
12 000
Neutral
D
2
15 000
7 000
Increase
E
1
20 000
0
Increase
Let’s look at situation A in the above table where the price of a bag wheat is R5 per
bag. Can the price remain at R5 where producers supply the market with 18 000 bags
per month as indicated in colomn (3)? At the same price of R5 the quantity demanded
is indicated AS 9 000 bags as shown in colomn (2). This situation cannot continue
because 9 000 bags will not be sold each month. As the stock of wheat increases,
some suppliers will decrease their prices in order to sell more wheat. As indicated by
colomn (4), the price will tend to decrease, but will not reach zero.
If we look at situation E where the price of wheat is only R1 per bag, we can see that
this situation is not sustainable (cannot last). If we compare colomn 2 to colomn 3 it is
clear that product demand will exceed production. The shops will sell their wheat but
there will still be consumers who want to buy. Disappointed consumers will offer to pay
more to ensure that they get hold of wheat. Consumers will compete with one another
in order to fulfil their needs. This upwards pressure on prices are indicated in colomn
4 with an “upwards” arrow.
The only price which can be sustained is where the quantity supplied and the quantity
demanded is voluntarily and not forced. That is the equilibrium price where the supply
and demand curves are the same. Only at point C at a price of R3 the quantity
demanded (12 000 bags per month) is the same as the quantity supplied (12 000 bags
per month). This equilibrium price is not reached immediately and prices will fluctuate
more or less around the the right price until equilibrium is reached and the quantity
67
demanded is equal to the quantity supplied. Now we can illustrate tabel 3 graphically
1
PRICE (R)
2
3
4
5
6
as where the demand and supply curves are combined in one diagram.
0
5000
10 000
15 000
20 000
25 000 30 000
35 000
Quantity (Q)
The graph above shows the point where the supply curve “SS” intersect with the
demand curve “DD”. On the graph the equilibrium price is R3 per bag and the quantity
is 12 000 bags per month. It means that at R3 the quantity demanded is eaqual to the
quantity supplied. At a price lower than R3 the supply will be more than the demand.
Change in the quantity demanded and supplied
So far we have seen that there is a negative relationship between the price of goods
and the quantity demanded of the goods. This relationship is illustrated graphically by
the demand curve which shows a downward slope. Except the price of a product we
also listed other factors such as the price of products, income, personal preferences
and climate which can influence the quantity demanded of a product.
We will use the income of households as an example to illustrate a change in the
demand of wheat. If income increases and all other factors such as the price of
products, personal preferences and climate remain the same, the consumer will buy
more of certain goods or services. If income decreases they will buy less of certain
goods or services. A situation may also arise where the price of another product, for
example rice, becomes more expensive. Consumers who cannot afford to buy rice will
most probably buy more potatoes. Demand for certain products can also increase as
68
result of an increase in the population or the preference of some people for certain
products for example margarine instead of butter (because margarine contains less
fat). Whatever the case if the demand of a certain product increases, more of that
product will be bought at each price on the demand schedule for that product.
If there is a sharp decrease in the supply of a product, for example fruit and vegetables
can become very scarce during a drought, the prices of fruits and vegetables can
drastically increase. Similarly other factors such as technological developments in the
manufacturing of cell phones can result in a price decrease in the production costs of
cell phones. It means that if more of a product is supplied, the prices will be less.
Increase and decrease in demand and supply
An increase in the demand will result in an increase in the price of the product and the
quantity to be exchanged. The increase in the demand can be the result of:

An increase in the price of a substitute product, for example if the price of butter
suddenly increases more consumers will buy margarine and the demand for
margarine will thus increase.

A decrease in the price of complimentary products (example coffee and milk)

An increase in the income of consumers

A greater preference for a product, for example cell phones

An expected increase in the price of a product
A decrease in demand will result in an increase in the price of the product and a
reduction in the quantity exchanged. The decrease in the demand can be a result of:

A decrease in the price of a substitute product

An increase in the price of a complimentary product

A reduction in the income of consumers

Reduction in the preference for a product

An expected decrease in the price of a product
An increase in supply will result in a decrease of the price of the product and an
increase in the quantity exchanged. An increase in supply can be the result of:

A decrease in the price of an alternative product
69

A decrease in the price of any of the factors of production or other inputs such
as resources

An improvement in the productivity of the factors of production as a result of
developments in technology.
A decrease in supply will result in an increase in the price of the product and a
decrease in the quantity exchanged. A decrease in supply can be the result of:

An increase in the price of an alternative product

An increase in the price of any of the factors of production or other inputs

A decrease in the productivity of the factors of production
Graphical illustration of the change in demand and the change in supply
A change in demand is illustrated in the table below, namely a demand schedule which
illustrates the old and new relationship between quantity demanded and price.
Price per bag(R)
New quantity demanded
(bags per month)
A
9 000
13 500
B
10 000
15 000
C
12 000
18 000
D
15 000
22 500
E
20 000
30 000
This schedule can now be graphically represented in the graph below which shows an
increase in demand. This graph shows the old demand curve “dd” with the new
demand curve “d’d’”.
70
6
5
4
3
PRICE (R)
2
1
0
5000
10 000
15 000
20 000
25 000 30 000
35 000
Quantity (Q)
It demonstrates that an increase in demand resulted in a shift to the right of the
demand curve. If there is a decrease in demand the demand curve will shift to the left.
The demand curve will shift either to the left or the right depending on a price increase
or decrease because of any other factor except price of a product, example price of
other products, income of households, personal preferences, climate and other
factors.
Grapical illustration of a change in supply
A change in supply can be illustrated by the table below- a supply schedule which
illustrate the new and old relationship between price and the quantity supplied.
Price (R
Old quantity supplied
New quantity supplied
per bag)
(bags per month)
(bags per month)
A
5
18 000
27 000
B
4
16 000
24 000
C
3
12 000
21 000
D
2
7 000
16 000
E
1
0
8 000
The graph below shows the old supply curve “ss” with the new supply curve
s’s’”.
71
6
5
4
3
PRICE (R)
2
1
0
5000
10 000
15 000
20 000
25 000 30 000
35 000
Quantity (Q)
This demonstrates that an increase in supply will result in a shift to the right of the
whole supply curve. If there is a decrease in supply, it will result in a shift to the left of
the supply curve. The supply curve will shift from left to right as a result of an increase
or decrease of supply because of the price of other products, income of households,
personal preferences, climate and other factors.
Graphical illustration of the change in the demand and supply curves as a result
of a change in price
If a change in price occurs there will be no shift in the demand or supply curves. There
will rather be a movement down the demand and supply curves as illustrated in the
two graphs below.
72
HOOFSTUK 5: ECONOMIC SYSTEMS
lntroduction
An economic system is a set of principles which addresses the problems of the
economy eg: scarcity problem, by apportioning a limited amount of production
resources. An economic system consists of people, institutions, rules and
relationships.
Economic systems exists since the days of bartering and existence farming. It was
however only in the 1700’s and the 1800’s that people began to theorise about
economic policy. Two people who shaped economic theory and the implementation of
economic policy was Adam Smith with his publication “The Wealth of Nations” in 1776
and Karl Marx with his publication of “Das Kapital” in 1867. Adam Smith and Karl Marx
had different opinions on economic policy. Adam Smith is regarded as the “father of
capitalism” while Karl Marx is regarded as the “father of socialism and communism”.
You will discover more about the meaning of these concepts as you work through the
chapter.
The three most important economic systems are a planned economy, a market
economy and a mixed economy.
What about South Africa?
During the apartheidsera the government mostly controlled the production of goods
and services as well as the labour market. The government reserved jobs for whites
and non-whites were not allowe to do certain jobs. Enterprises such as Telkom, The
Post office, Escom, Sasol and Iscor were controlled by the government. After 1994
when South Africa became a democratic country and apartheid was abolished, may
enterprises like Sasol and Iscor privatised. It means that private enterprises were
allowed to buy businesses which were previously state owned and managed. In this
regard we can describe South Africa’s economic system as market orientated with the
country on its’ way to greater market freedom. It means that more private businesses
and individuals are allowed to buy enterprises.
73
Karl Marx was a philosopher who lived from
1818-1883. He spent a lot of his time to write
about the nature of the society and how he
believed it could be improved. Marx believed
that capitalism (the free market economy)
was not the best way to work with economies.
He was of the opinion that labour was
exploited by the capitalistic system and that a
competitive society incited people against each other. Marx believed the economy was
controlled by the rich middle and upper class. He saw it as a system where people
only worked for their own benefit where the rich became richer and the poor poorer.
Marx believed the solution for the capitalistic problem was communism. He described
it as a system where individuals contributed according to their capabilities and
received according to their needs. Marx believed the ideal to be a classless socialistic
society. In a socialistic society private ownership of resources are replaced by
cooperative or shared ownership as means of production.
It was only in the early 20th century, a few decades after the death of Marx, that his
theories started having an impact. After the conclusion of the Bolchevik revolution of
1917 in Russia, capitalism was replaced from 1918-1921 with war communism.
Vladimir
Lenin,
the
leader
of
the
Bolchevik’s ,was the first person who tried
to implement Marx’s ideas. Lenin spent
many time on studying the literature of
Marx. Lenin wanted to convert Russia in a
communistic ans socialistic state to solve
the economic problems of those times. Under the leadership of Lenin industries and
land were taken over by the state and nationalised. Existence farmers had to work the
land and surplus food had to be given to the state to be redistributed amongst those
working in the cities. Lenin’s aim was a centralised planned economy which would be
run by workers committees for the benefit of all.
74
War communism did not work out in the way which Lenin aimed for. There were huge
food scarcities. In 1921 Lenin substituted war communism with his New Economic
Policy. Under the New Economic Policy farmers were again allowed to sell food on the
open market and to keep their profits. Because of the new policy food production
increased.
After Lenin’s death in 1924 Josef Stalin took over the
reign of Russia. Under Stalin Russia became more
Burocratic and more controlled by the government.
Workers were not allowed to have any input in the
economy or how society was run.
Russia became more of a planned economy, almost
totally controlled by the stateplanners. The New Economic Policy was substituted with
Five year plans. The state controlled resources in order to achieve its goals, as set out
in Stalin’s Five year plans. Factories, mines, transport and farms were owned by the
state (government). The labour force was also owned by the government and people
were told where and how they should work. The government also decided on the
number of workers and how they should be paid.
After World War Two many other countries also ran planned economies. Countries
which are ran as planned economies today include Cuba and China. For a few years
the Soviet Union (previously called Russia) was a successful example of a planned
economy. Russia developed from a poor, backward country to a super power which
at one stage, was the country which the United States of America feared the most. In
1991 the Soviet Union was disengaged and the new Russian Federation did not
identify themselves with Marxism any longer.
Adam Smith explained in his ‘Wealth of Nations” how different societies and individuals
may operate by free market powers and generate economic powers. He believed that
individuals will attempt to maximise their profits or wages by utilising themselves or
their capital in the most efficient way. Smith believed that when an individual act out
of self interest in order to maximise his or her income the person indirectly promotes
society. He believed that the free competition of a free market system is to the benefit
75
of the whole society by keeping prices low. Competition would also mean that a wide
variety of goods and services will be available to all members of society. Smith
believed that free trade was the best way to develop the economy of a country.
5.1 Planned Economy
In a planned economy the government or labour councils take all decisions in terms
of production and consumption of goods and services based on their idea of what is
good for the people of that country.
Characteristics of a planned economy
The four main characteristics which define a centrally planned economic system is as
follow:

The government controls the factors of production. In a centrally planned
economy all land and capital are owned and controlled by the government. The
government thus decides how the resources of the country will be utilised to the
benefit of all citizens of a country.

The government decides which goods and services to produce. In a centrally
planned economy the government plays the role of entrepreneur and decides
what will be produced. Central planners decides which goods and services are
needed by the society and they also determines optimal production. The
government is responsible to satisfy the need and wants of the citizens of a
country.

The government decides how production will take place. As part of the process
of resource allocation, the central planners decide how the factors of production
will be utilised in the production process. The government makes a decision on
the type of production process according to its economic goals. For example, if
government wants to reduce unemployment, they will choose a method of
production which uses a lot of labour and if they have concerns about
environmental issues, they will choose production techniques which will not be
harmful to the environment and which will not cause pollution.
76
Advantages of a planned economic system
Not all people believe that a centrally planned economy is the best manner to
solve the problem of scarcity. People who however do support planned
economic systems, argue that it has the following advantages:

Resources are utilised for the benefit of all. The government has control
over all factors of production, thus private individuals cannot utilise the
resources for their own needs. It means that in a planned economy
everybody in the country will benefit from the resources of the country.

Economic vulnerable people are protected. The government decides how
goods and services will be distributed to ensure that everybody in the
country receives what they need. Even the poorest people has access to
essential products and services in a planned economic system and no one
lives in utmost poverty.

Economic equality is achieved. The government distributes goods and
services fairly to all individuals in the country. In a centrally planned
economy there is not a huge difference in the standard of living or level of
wealth between rich and poorer people.
Disadvantages of a planned economy

It can hamper economic growth and renewal because entrepreneurship
does not exist.

No freedom of choice for consumers.

Control of consumers wants do not always work. Consumers have little
choices of types of products to buy and the government supply a limited
variety of items such as clothes and food types. Consumers have to buy
what is provided by the government.

It is non flexible systems which do not adapt quickly to changes.

There is no motivation for workers to do their jobs well.

It is difficult to motivate workers to excel.
77
5.2 Market Economy
A market economy is an unplanned economy where land, property and businesses
are owned by private individuals and not the government. Strictly speaking there are
no countries with a pure market economy. The reason being that governments of
nearly all countries in the world intervene in their economies. We can however say
that developed countries such as the USA, UK, Germany and Japan have market
economies because their governments intervene as little as possible in order to allow
businesses to maximise their profits.
Characteristics of a market economy
A market economy is defined by the following characteristics:

Private individuals own and control the factors of production. Individuals may
utilise economic resources which they own as they wish. Individuals use the
factors of production which they own to generate income. Individuals who own
more factors of production can earn a higher income than people who have
access to less resources.

Entrepreneurs decide what to produce. In a free market economy all decisions
regarding what to produce, how many to produce and the method of production
are taken by private individuals. Individuals base these decisions on the profits
which they can earn. Possible profits provide entrepreneurs with information
about what to produce and how many to be supplied to the market.

Entrepreneurs decide how production should take place. Private individuals
decide on the method of production and how to combine the factors of
production. These decisions are made on grounds of the price of the factors of
production. Entrepre –neurs chooses the cheapest method of production in
order to maximise profits.

Individuals decide which goods and services are to be used. In a market
economy individuals make their own choices of what to buy. What individuals
prefer to use depends on their ability and willingness to buy the goods or
services. A consumer’s ability to pay for goods and services depends on their
level of income. Who receives what, is determined by income distribution. That
is why people in the free market have the saying “ Cash is king”
78
Advantages of a market economy

It is very flexible and can quickly adapt to change because individuals do
not have to wait for government to tell them how to adapt. Individuals can
choose what they want to produce and for how much to sell the goods.

Consumers have a wide variety of products and services to choose from.

Renewal and technical development are compensated.

It is god for economic growth because capital naturally flow to places where
return is the highest.

Economic freedom exist where people are remunerated if they work hard
and they can improve their standard of living.
Disadvantages of a market economy

There are huge discrepancies regarding the prosperity of the citizens of a
country- some become rich while others stay poor.

It is based on profit rather than the well being of the citizens.

The government control the economy as little as possible thus the
enterprises may become too powerful.

Products and services which may be potentially harmful for consumers is
produced and made available.
5.3 Mixed Economy
A mixed economy is a blend of individual as well as government control over the
economy. The government as well as individuals own land and natural resources.
Characteristics of a mixed economy
Any economy which is a blend of a free market system as well as a centrally planned
economic system, is a mixed economy. People who supports a mixed economy
believe that the government of a country should supply some goods and services.
They also believe that individuals and privately owned businesses should own the
factors of production and must be free to choose what to produce.
79
A mixed economy has the following characteristics:

The private sector controls part of the natural resources and the government the
rest.

The government plays an important role in solving the economic problems
experienced by the society.

Private enterprises and governments work together to produce goods and to solve
fundamental economic issues coherently.

The government also supply services such as education, health, defense and
infrastructure to society.

The government influences the decision of which goods to produce.
Advantages of a mixed economy

It combines privately and state owned enterprises for economic growth.

The government works to promote a balanced growth in the economy in order for
income to be more equal as in a market economy.

Private enterprises are encouraged to make contributions towards the charity of
citizens.

Competition is promoted but citizens are being protected.
Disadvantages of a mixed economic system

Economic growth may be hampered because the government allocates a lot of
resources to the well being of citizens.

Huge government involvement in the economy by means of regulation makes the
government bureaucratic and more susceptible for corruption.
5.4 Global Economy
The study guide is adequate
Enriching Information:
Faithfulness and a move away from globalization to self-sufficiency is the tendency of
world economies and a mindset that may soon be on its own.
80
That's what Prof. André Roux, professor of economics at the Stellenbosch University
Business School, said at 2016's Fruit Festival. Roux was the guest speaker at the
Okols Hall in Malmesbury. Farmers, businessmen and interested parties listened to
the current state of the country's economy and possibly submitted.
Roux believes that events in foreign markets can definitely have an effect on local
markets. He says another trend in economic development is a concern about
sustainability - both socially and ecologically.
"We have had so-called wonderful economic growth for 10 years, but it largely
financed debt. The old way of doing has meant economic growth, but in the long run
it can lead to a complete demolition of the (economic) system.
"Slow growth (what we currently experience) may not be a bad thing. Some see it as
a period of mediocrity, but it can also be seen as a time of sustainability and realism,
"said Roux.
Locals wanted to know more about the state of the country's workforce, the role of
their unions in productivity and expressed their concern about their skills levels. "No
one owes you a job and that's something that the rest of the world already knows, but
something that South Africans still have to learn," Roux said.
81
HOOFSTUK 6: South African Economy
6.1 The National Government
What is the government?
The word government is used to refer to a group of people who manage and manage
a country. In South Africa, the government is chosen by means of a democratic voting
process. All citizens over the age of 18 may vote. The government is made up of
representatives of the inhabitants and acts on behalf of the citizens. The Union
Building in Pretoria is the official seat of the South African government. The office of
the president of South Africa is also here
The government is developing systems, establishing agencies and making laws to
maintain order in the country. Each country's government plays an important role in its
economy. Of the many functions of a government are:

Make and apply laws

Protect its residents from threats and attacks by other countries

Provide the goods and services that the land requires and which are not locally
produced or which are not sufficiently produced
In some countries, government plays an important role in the economy and make laws,
regulate businesses and provide many goods and services. In other countries, the
government is less involved in economic decisions and does not provide so many
goods and services.
82
In addition to fulfilling these functions, the South African government has other goals,
such as:

Promoting economic growth

The fair and fair redistribution of resources

Maintaining stability with regard to price changes
Different levels of government and their roles
Government is divided into different levels so that all its objectives can be achieved
and all necessary functions can be carried out. There are 3 levels of government. Each
level fulfills different functions.

Local government. This Level is the part of the public sector that deals with
local issues in towns or municipal areas. There are three types of municipalities:
metropolitan, local and district municipalities. Local issues handled at this level
include electricity supply, municipal roads, libraries, traffic management and
waste disposal.

Regional Government. This government level is the part of the public sector
that deals with economic issues that are specific to a particular region or
province. This is sometimes called the provincial government. South Africa has
nine provincial governments and each province has its own plan for developing
its economy and improving service delivery, including housing, health services
and education.

National government. This level is responsible for the overall management of
the country and addresses national issues such as security and security,
foreign affairs and international trade. The national government is also called
the central government.
Did you know?
In South Africa, the national government includes the National Departments of Health,
Education, Environmental Affairs and Tourism. They are responsible for the
development of national policies and the co-ordination of services in all nine provinces.
The national government also includes public service organizations such as the
Scientific and Industrial Research Council (CSIR) and the South African Bureau of
Standards (SABS).
83
Government's interaction with households
There are several types of interactions between government and households. The
word "households" is used to refer to those people in the economy who own the
production factors (land, labor, capital and entrepreneurship). Households are also
consumers of goods and services. In this chapter we investigate the different ways on
which interaction in the economy between government and households takes place.
Public goods and
services Subsidies
and grants
Households
Taxes
Government
The government’s interaction with households
The government buys production factors at households
To provide public goods and services, the government must act as a producer. The
government must therefore establish public corporations, employ a workforce and use
other factors of production. The government therefore buys production factors in
households and uses it to produce public goods.
The people employed by government are called civil servants. Public servants are
members of households who sell their labor to government. Public servants include
teachers in state schools, the police, doctors and nurses in state hospitals, as well as
other government officials working in government departments.
The government sometimes uses land or capital belonging to households. The
government may rent a land at a private person and then use the land to provide public
goods and services. Similarly, the government can also lend capital to households
when it needs more money than can be collected from taxes.
84
Public corporations are businesses owned and controlled by government and
established to provide public goods and services. They are sometimes also called
state-owned enterprises. Eskom, Transnet and the SABC are examples of public
corporations.
Government provides resources and services to households
The government supplies different goods and services to households. It is called public
goods and services. For example:

Education

Health Care

Housing

Infrastructure (roads, electricity, water and sewerage services, garbage
disposal)

A national army

A police force, judicial system and prisons
Education
Policing
Healthcare
National Army
Examples of public goods and services provided by households to households
85
Many of the goods and services provided by government are made available to
households free of charge, such as police services and street lighting services.
However, there are also public goods and services for which households have to pay,
for example electricity. These payments are used to cover a portion of the cost of
providing public goods and services and help ensure that households do not abuse it.
The government also sometimes provides grants and grants in the form of money
directly to households. For example, the government pays a pension to the elderly
who have no source of private income. Unemployed disabled people also receive
grants from the government. The government also provides housing subsidies to
households that can not afford a home. This form of social welfare is one of the ways
in which the government tries to reduce poverty in our country.
The government levies taxes to be paid by households
The government must collect money to pay for the public goods and services it
provides. This is done by levying taxes on households. There are different taxes
collected from households. Three examples of this are:

Income tax. It is tax that households pay on any money they deserve. For
example, if someone works and receives a salary, the government claims a
portion of this salary as income tax.

Consumption Tax. This is the tax to be paid on the goods and services that
households buy. Value added tax (VAT) is an example of consumption tax.
Every time you buy goods or services, add the business where you buy VAT to
the price. This tax is then paid to the government by the business.

Duties Tax. This tax is levied on luxury (not essential) items that the
government does not want people to consume. For example, the government
levies a very high tax on alcohol and cigarettes to discourage households from
buying these goods.
If the government does not collect taxes, it will be impossible to provide goods and
services or any form of social welfare syndication to households.
86
Government's interaction with businesses
Interaction between government and businesses takes place in different economies.
The word "businesses" refers to the manufacturers and producers of goods and
services in the economy. Businesses are sometimes called firms or companies.
Public goods and services
Infrastucture
Subsidies and grants
A good and lawful business
envronment
Businesses
Government
Taxes
The governments interaction with businesses
The government provides resources and services to businesses
Businesses need different public goods and services (such as roads and electricity) to
produce goods and services. The government provides it in the form of infrastructure.
Infrastructure is the word used to describe all the physical resources needed to support
economic activity. Infrastructures include things like roads, airports, harbors, bridges,
rail transport and public transport.
The government provides the infrastructure that businesses need to produce goods
87
The government also provides services such as a police force and fire brigade,
used by businesses.
Sometimes the government also provides grants and incentives to businesses to
encourage certain types of economic activities. For example, if the government wants
to stimulate economic activity in a poor part of the country, it may offer incentives in
the form of money that can be used to set up a business in that area. Similarly, the
government can offer subsidies to businesses in the manufacturing industry to
encourage them to build factories and thereby create jobs.
The government creates an orderly and legitimate business environment
The government is also responsible for creating a legal and orderly environment in
which businesses can function. It is very difficult to do business in an area where there
is no law and order or no property rights. The government must therefore take care of
legislation that regulates the business practices of businesses and a legal system for
applying the laws of the country. Providing a law and punishment system is an
important function of any government, as there will be very little growth in business
activities if no economic order exists
The government offers support and advice to businesses
The government wants to stimulate economic growth and encourage the expansion of
businesses. Owners of businesses and entrepreneurs are supported and advised. The
purpose of this is to help entrepreneurs start their own businesses and expand existing
businesses. The Department of Trade and Industry is an example of a state agency
that offers this kind of support to businesses in South Africa. Visit the dti website
(www.thedti.gov.za) to find out more about what they do.
Businesses pay taxes to the government
Businesses pay taxes to the government. Businesses have to pay company taxes to
the government. This tax is calculated as a percentage of the profit earned by a
business. The more money a business deserves, the more company tax is payable to
the government
88
6.2 The National Budget
The National Budget sets out how much money a government has received and how
much money has been spent in the year. The National Treasury manages the finances
of South Africa's national government. The Minister of Finance decides how to spend
the money that the South African government receives as taxes, levies and debts.
State Revenue
The government of a country is responsible for public goods and services such as
street lights, garbage disposal and clean drinking water. The money the government
makes is called state revenue. The government progresses two forms of taxation to
generate income:

direct taxes

indirect taxes.
Direct taxes
The people of a country pay taxes to government for the goods and services provided
by the government. These taxes are called direct taxes because people pay it directly
to the government.
There are two main forms of direct taxation:

Income tax: Pay on the money that one deserves (PAYE)

Business tax: is paid on the profits of a business.
These taxes are directly linked to the economy. The better the economy, the more
money makes businesses, the more people earn and the more taxes pay both. The
government must keep the economy healthy to get more income from direct taxes.
Indirect taxes
The government also earns income from indirect taxes. Indirect taxes are taxes that
people pay indirectly to the government, for example through a business or
municipality.
There are several forms of indirect taxation:

VAT (value added tax): Pay on goods or services we buy. "Sin tax" is paid on
cigarettes and alcohol to discourage people from buying these articles.
89

Customs duty: Paid on invoices.

Import taxes: Pay on goods we buy in another country.

Municipal tax: is paid directly to municipalities for garbage disposal, sewerage,
water, etc.

Fuel tax: On diesel, petrol, oil, etc. Pay and will be added to the price

Transport tax: On train and airline tickets, toll roads, etc.
Some of the indirect taxes, such as import taxes and customs duties, are increased to
discourage people from buying overseas goods so that they are cheaper to buy South
African products. Another type of tax, sin taxes, is meant to make cigarettes and
alcohol so expensive that fewer people will buy these products or that people will buy
less of these products.
The government also earns money from property that it leases and interest on
investments. Governments also lend money, for example, when there are fewer
taxpayers because the economy is not growing and people lose their jobs. The figure
below shows how government earns income.
Interest on
investments
Company Tax
Personal
Tax
Electricity Levy
Property
Tax
Rent
Direct and
Indirect taxes
Government
Sin tax
Costs
Sale of goods and services
that are produced by
governemnt
Sale of government
assets
Airport Tax
Fuel Levy
BTW
Liabilities
This is how the government receives their income
90
Government spending on services
The Minister of Finance decides every month in February how much money goes to
the national departments, provinces and municipalities. However, the government is
paying back its debt. The government also retains money if there is a drought or flood
or any other urgent need during the year. It is called an emergency fund
Government
Income
Pay Debt
Provincial
Government
National
Government
Emergency
Fund
Local
Government
Above figure shows how the government spends their monies.
National
Budget
Provinces
National
Government
SA Police
Service
Courts
Universities
Water
Local
Governments
Housing
Schools
Hospitals /
Clinics
Social
Services
Refuse
removal
91
How the government allocates its income to national, local and provincial reqerinqs for
services rendered
As government gains most of its money from labor force tax, government wants to
encourage job creation and economic growth. The government does it by spending:

public transport to get workers cheap and quick at work

job creation projects that require unskilled workers.
As an example of the state's spending of money on services, we are going to look at
the National Budget for 2012. The 2012 budget focuses on government's investment
investment campaign. It is a campaign to spend more money on infrastructure such
as electricity, water, transport, telecommunications, hospitals and housing.
Improved infrastructure in areas like these is good for economic growth and giving
citizens a better standard of living. In the 2012 budget, the government said they
planned to spend R844 billion on roads, hospitals, schools, dams, electricity plants,
ports and rail systems from 2012 to 2014. They also planned to spend the following:

R41,6 billion of defense

R145 billion in economic affairs

R121.9 billion health, including R450 million in improving nursing colleges and
R426 million in upgrading five major hospitals

R2073 billion of education

R98 billion of public security

R120.1 billion of housing and community facilities

R157.9 billion social protection
92
Social grants are an important part of government spending. Social grants are
amounts of money that the government gives to poor people and old people. In the
2012 budget, government plans to increase social grants, as shown in the table below.
Type of Grant
Spending in 2011/12
Spending in 2012/13
Grants for the elderly
R1 140
R1 200
Grants for the elderly above 75
R1 160
R1 220
Grants for war veterans
R1 160
R1 220
Dissability grants
R1 140
R1 200
Fostercare grant
R741
R770
R1 140
R1 200
R265
R280
Grants for care dependants
Child grant
Government spending on social grants
National Budget
Spending on
education
People receive
skills
The government
collects more tax
Working peple
pays taxes
People start
businesses
Taxes creates jobs
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The influence of the National Budget on growth and the rectification of
inequalities in the economy
Before the first democratic elections in 1994 there were imbalances where certain
groups of people did not get the same benefits as other groups of people. The
government is now trying to correct these mistakes by spending more on:

social grants

Free education for the poor

Free primary health care for the poor

Free water and electricity for the poor.
During apartheid, black South Africans from the city center were moved to townships
on the side of urban areas. This meant that they had to travel far far. They have also
been sent to homelands far away from our industrial centers. There was no public
transport system for mass or proper infrastructure.
The democratic government is trying to change it by spending money on railways, new
trains and more buses, and by getting unsafe taxis off the road. If people get to work
faster, they can be more productive
Die Gautrain, a new public transport system in Gauteng
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The apartheid education system did not regard indigenous knowledge as important.
New education policies encourage Irish people to see how important South Africa's
indigenous knowledge systems are.
During apartheid, meme received education according to the color of their skin. Bantu
education trained black people for unskilled labor. Such work in the mines. It did not
give black people the skills to start their own businesses or to work with technology.
Today, South Africa has too many unskilled workers and not enough skilled workers.
To correct this, the South African government provides free skills training to poorer
communities. They also build roads, new power stations, homes, clinics, schools and
training colleges and improve airports and railways. This construction program
provides job opportunities and skills training for many South Africans.
In his national budget speech in parliament in 2012, minister Pravin Gordhan referred
to the government's vision of how they hope the economy will see it in 2030. This
speech does not only refer to 2012, it refers to a longer term government vision of how
they plan to use the national budget to encourage economic growth and address
economic inequalities. You can read the full speech at
http://www.info.gov.za/speech/DynamicAction ?pageid=461&sid=25270&tid=57402.
Minister Gordhan focused on the following:

The need for the South African economy to be aware of what is happening in
the global economy, especially after the global financial crisis of 2008

The need for government to reduce the budget deficit

Plans to expand the infrastructure so that businesses can become more
competitive, thus increasing growth and employment

Plans to make larger investments in agriculture, industry and technology

The need to invest more in job creation, health services, social services and
education so that people can be developed to empower themselves
economically and improve their circumstances
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
Plans to reduce personal income tax from low income earners, along with plans
to ensure that people pay income tax. This will increase the country's tax base
and ensure that everyone contributes equally to the economy.

The need for households to save more money in South Africa

An improvement in how the government spends its taxpayers 'money, to ensure
that taxpayers' money is not wasted by corruption or poor financial planning

The need for the South African economy to measure must be flexible and
adaptable so that it can change if necessary

Exports increase

Increase the output of mines

Tax relief for small businesses to make it easier for people to start their own
businesses and create their own jobs

Plans to allocate more money to SANParks so that tourism infrastructure can
develop, enabling more people to earn and live from these industries

The need to spend more money on defense and public security, for example by
allocating money to new courts

The establishment of the new national health insurance service, which will give
South Africans access to better health services

Plans to eliminate corruption and financial mismanagement when government
allocates tenders

The need to recognize the role of women in the South African economy.
In the last part of his speech, Minister Gordhan explained the following about poverty
and inequality and how it is addressed by the national budget:
Reducing unemployment is the centerpiece of our approach to poverty reduction, Mr
Speaker, but it is not the only measure.
Social spending comprises 58 percent of government spending next year, 49 percent
a decade ago. The budget provides social assistance to almost a third of the
population, paying for largely free services at health facilities and for 6000 learners at
non-fee schools, and paying for taxes, water and electricity in poor community
shelters. The average value of the social wage for a family of four is approximately R3
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940 a month in 2012/13. This represents a significant emphasis on household living
standards, funded by a broad progressive tax structure
Social life insurance and the phasing in of national health insurance will improve the
efficiency and coherence of redistribution by fish, but of course, redistribution is not a
substitute for economic growth and job creation. And the quality of poverty reduction
we achieve will depend on the success we achieve with the development of
development to include historically disadvantaged sectors and communities, as we
see in our New Growth Path and draft Development Plan
Bron: http://www.info.gov.za/speech/DynamicAction?pageid=461&sid=25270
6.3 Socio Economic Matters
LIVING STANDARDS:
This two families have different standards of living. The first family has ‘n higher
standard of living that the second family. How do we know this?
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Lifestyles
Lifestyle is the way individuals, families
(households) and societies live. It
includes style, attitudes and belongings
and the things that are done in. Lifestyle
is a behavior and is shown in a person's
attitudes, values, the way in which they
spend their resources and what they do
in their spare time. Lifestyle also shows
people's culture, family and friends.
Marketing experts analyze the lifestyle
of their target market to determine how
Lifestyles are depicted by what we
do in our free time
the group makes their decisions to buy
something.
Self-sustaining communities
A self-sustaining community can survive and cater for their needs without any help
from outside. People in self-sustaining communities learn essential skills from previous
generations about the growth and conservation of food, making and repairing tools
and equipment. The Khoi-Khoi and San are examples of early self-sustaining
communities in South Africa.
A self-sustaining community can also be seen as independent of state or government.
Today there are degrees of self-sustainability. For example, there are a few
communities that do not rely on government for water or electricity and who produce
their own food and raw materials. However, these communities still need to sell their
products to generate income and thus remain self-sufficient. The Amish people in
America are an example of a modern self-sustaining society
Modern societies
In a modern society, people are less dependent on survival. They depend on their
employees for their income and on stores and supermarkets for food, clothing and
other manufactured products.
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People depend on their income to survive.
People must work to earn money to pay for the
goods and services they need. In modern
society, social culture and relationships
develop at work and in social groups, such as
church, sports, other interest groups such as
the Lions and Rotarians. Individuals are very
aware of their own goals, status and
achievements.
Some people will sell their farm
products to receive an income
Modern
societies
are
identified
by
specialization, social groups and increased
movement of production factors. Let's look at some features of a modern society.

Specialization
Workers become specialized in a specific field, skill or task. Tasks are distributed to
other workers. This division of labor increases productivity when everybody becomes
an expert in his field, thus making his part of the work faster than when they had to
make the product themselves.

Social groups
People form social groups within their social circle. Their social circle depends on their
lifestyle and living standards. Eventually, humans will replace all the people in their
social group with their family or community as the main support structure. Their choice
of a social group reflects their individual interests, goals and ambitions.

Increased movement of production factors
Improved communication and transportation will make the world more and more in a
world-wide village, and it requires all production factors to become more mobile. Labor,
money and raw materials can be moved anywhere in the world to increase productivity
and profit. Workers will change their career a number of times in their lifetime.
Rural communities
Rural communities form away from the villages and towns in the countryside. Fewer
people live in rural areas than in towns or cities. There are fewer jobs in rural areas
and people in these communities spend a lot of time producing food for their families.
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Although most people from rural communities rely on subsistence farming, some form
co-operatives where they can manufacture and sell vegetables to generate income for
themselves. Family, culture and customs are a very important part of the rural
community. Extensive family is just as important for rural communities as rural families.
They support each other emotionally and financially. The term ubuntu is often used to
describe rural communities. Ubuntu means we are what we are thanks to the people
around us
The effect of community development
Development always has an impact on the community. However, the size and severity
of the effect differ depending on what is being developed and how it develops. By law,
developers must estimate the expected impact on the environment before receiving
permission to continue with their plans. When development is uncontrolled, much
damage to the environment can be done. The table below lists examples of possible
negative effects of environmental development and the people living in the area.
Effect of
Consequences of
Development
development
Deforestation
Problems that create it
The permanent destruction of 
indigenous forest and
woodland to provide firewood
and building materials


Water pollution
Destruction of wetlands for

development, increased
industrialization, mining and
energy requirements from the 
construction of dam.
One third of all CO2
emissions are caused by
people and
development.
Soil erosion leads to the
rinsing of lakes, dams
and rivers.
Destruction of habitats
leads to the extinction of
indigenous plants and
animal life
It raises minerals and
salts in the water,
causing health problems.
Fertilizers and industrial
waste poison damage to
microorganisms, birds
and other aquatic
animals
.
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Air Pollution
Solid waste
Air pollution is caused by

harmful gases and particles
in the exhaust gases of
vehicles, the dust of
agriculture and industry and
smoke of burning wood and
crops
Solid waste is classified as

hazardous (pesticides,
medical, toxins) and not
hazardous (refuse, waste,
sewage, scrap material, cans,
plastic, packaging)

Increased asthma and
other chronic health
problems.
Open landfills comprise
valuable land and the
dumping of any solid
waste is harmful to soil,
water and air,
Municipalities spend a
lot of money in an effort
to manage solid waste.
Unemployment
Unemployment is when someone actively searches for work, but does not get it or
when someone does not have a regular income job. Unemployment is a serious
problem and is often seen as an indicator of how healthy an economy is. A large
number of unemployed people in a country can indicate a struggling economy. A
country measures its unemployment rate by dividing the number of unemployed
people by the number of people in the labor force. Unemployment is a common cause
of depression and other health problems.
Causes of unemployment
Poor education and an uneven balance of skilled, semi-skilled and unskilled workers
is an important cause of unemployment. South Africa has more unskilled workers than
skilled workers. If businesses are unable to fill vacancies with skilled South African
employees, they are forced to recruit skilled people from other countries. It does not
help to alleviate the unemployment situation. Minimum wage structures, strict labor
laws and powerful unions led companies to employ the absolute minimum number of
employees. These factors increase the number of unemployed in the country.
The effect of unemployment
Unemployment has very serious consequences

Loss of income and a decrease in living standards
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
Demand for local products and services leading to lower sales and less profit
for business owners

government loses income from reduced income tax

People turn to bed and crime

divorce, ill health and alcoholism
Productive use of resources to promote a healthy environment
Sustainability is the key to resource utilization in a way that
promotes a healthy environment. Efficiency is to use
resources in the best possible way. 'Green productivity'
deals with the development in an environmentally friendly
and sustainable way. A 'green' policy will:

Increase productivity

Improve health and safety

Promote environmental protection

Promote
development
that
will
prevent
the
destruction of natural resources.
This is one of the ways in
which we can promote a
healthier environment
Below are a few examples of the productive use of resources to promote a healthy
environment:

Use recycled paper for packaging

use of energy efficient appliances and lights ensure proper management of
household waste at municipal level

Encourage recycling by industry, businesses and households

Use natural fertilization and pest management methods.
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INEQUALITY AND POVERTY
Causes of socioeconomic imbalances
South Africa's history of apartheid has caused imbalances between people's access
to resources. We call these imbalances socio-economic imbalances. Socioeconomic
imbalances are imbalances in people's access to resources such as housing, health
care, education and a proper living standard
The above pictures show an example of socioeconomic imbalances. The picture
above shows a neighborhood that has no services like proper housing, running water,
clinics and legal electricity. Many of the people in this neighborhood do not work and
can not afford education. The standard of living here is very low. The picture below
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shows a neighborhood that has good services like running water, sanitation and
electricity. The people in this neighborhood have the education and skills to get work
and can afford education for their children. They can afford good health care. The
standard of living here is high. Can you see that there is an imbalance between the
people in these neighborhoods?
The people living in these neighborhoods do not have the same access to socioeconomic resources. The cause of these imbalances is apartheid. Apartheid has
discriminated against people on the basis of race. Apartheid laws prevented black
people, colored people and Indians from receiving good education. This meant that
these people did not develop the skills to get good work. Therefore, they could not
afford access to good health care or education for their children. Hulie is not allowed
to work in certain positions or to stay in certain areas. Their and their children's
standard of living remained low and there was no way for them to improve their lives
and to gain access to better services. This is because they were unlawful to do so.
Eighteen years after the end of apartheid, there are still socio-economic imbalances
between South Africans. Why is that so? What causes this maladian now? If apartheid
in the past caused these imbalances, and apartheid no longer exists, why is there still
a big gap between rich and poor people in South Africa? Well, apartheid lasted from
1948 to 1994-this is 46 years. During this time, many generations of South Africans
denied socio-economic rights. Think how long it takes to give someone a good
education. You will be in school for 12 years and learn the skills you need to get a
good job. It takes 12 years to breed a gender. It will take many years to balance
people's living standards.
Education is the
key to
accessing
economic resources. Another cause of
socioeconomic
imbalances
in
South
Africa is the government's poor service
delivery. The fact that apartheid is over is
not enough to ensure that all South
Africans
can
access
socio-economic
resources. Many South Africans feel that
104
local government and municipalities do not deliver services such as housing and
sanitation fast enough. They feel the government has failed to fulfill promises made
during the election campaigns.
Inequality in South Africa
In the South African Constitution, the
Bill of Rights states that all South
Africans are equal. However, as you
saw in the previous section, there are
still
socio-economic
imbalances
between South Africans. In 2011
almost half of all South Africans lived
under the breadline. The bread line is
the line where people earn US $ 1 a day. It is considered the minimum amount of
money one can earn to meet your basic needs. If you earn more than one day, you
live above the breadline. If you earn less than it, you live under the breadline.
In 2000 it was. South Africa signed the United Nations Millennium Declaration.
Countries that have signed this Declaration try to reach the United Nations Millennium
Development Goals. These are goals that have been set up internationally and which
aim to reach the following by 2015:
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There was strong economic growth in South Africa since the country in 1994 became
a democracy. However, this growth does not benefit all South Africans. Income in
South Africa is not equal. For example, the table below shows the differences between
people's income in 2000
Racial groups
Inkomste
Black people
R7 283
Brown people
R14 126
Indians
R23 938
Whites
R62 360
As you can see from the table above, there are very big differences between the
income of different South Africans. This is because black people, brown people and
Indians have been denied access to resources such as work and education during
apartheid. In 2012, the picture of income inequality changed a little. Where the income
differentials were the largest among racial groups in 2000, many blacks began by 2012
to earn much higher salaries. The inequality between South Africans is therefore no
longer just based on race. For example, within the race group of black people there is
now great inequality. This is because black people begin to gain access to better
education and job opportunities, and some begin to earn big salaries and to become
part of a black middle class. The inequality between racial groups is thus getting
smaller, but the inequality within racial groups is getting bigger. South Africa has one
of the world's highest inequality rates. Poverty and inequality rates do not slow down
quickly
Education and skills to combat inequality and injustice
When we looked at the causes of socioeconomic imbalances in Suif Africa earlier, we
saw that the lack of education and skills was one of the main causes of these
imbalances. Education and skills are the most important ways to combat inequality
and injustice in South Africa. Without education and skills, it is not possible to get a
good job and to participate fully in the economy.
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Schools in South Africa
face many challenges.
The Bill of Rights gives all
South Africans, including
adults, the right to basic
education.
The
government spends more
of its total expenditure on
education than any other
country in the world. By
the
year
2000,
government spending is for education. Schools in South Africa, however, face many
challenges.
In 2011, 70,200 of the learners passed Grade 12, and only 24,300 of them achieved
marks that were high enough to continue studying. Many learners are also forced to
leave school before Grade 12. They must go to work to help maintain their families.
There is a major skills shortage in South Africa. This is the case because most of the
population under apartheid did not have access to education and training and were
not allowed to do skilled employment in businesses. In order to keep unskilled people,
the apartheid government's way of preventing people from participating in the
economy. Today, 41% of companies say that a shortage of skills is the main reason
why they can not expand their businesses. It is bad for the country's economic growth.
107
Skills shortages in South Africa mainly occur in the following areas:
Management
Engineering
Education
Skill
shortages in
SA
Information
and
Communicati
on
Technology
Services (ICT)
Medical
Services
The government has realized the importance of improving education and skills. They
promulgated laws such as the Skills Development Act to improve the skills of the South
African labor force. In terms of the Skills Development Act, businesses must work with
government to improve the skills of workers. They do this by paying 1% of their
employees' salaries to the Skills Development Fund every month. The government
then uses this money to offer skills development programs. These programs include
learnerships. Learnerships work for a business and at the same time gain in-service
training.
Urban and rural challenges
In 2010, 62% of South Africa's population remained in urban areas. This number
increases continuously as people move to urban areas in search of work. Earlier we
learned from poor service delivery. Because people leave rural areas, service delivery
in urban areas is considered more important than service delivery in rural areas. There
is inequality between rural and urban people in South Africa.
For many years, workers have left rural areas to work in urban areas to make a living.
They support their families by sending money back to the rural areas. This means that
rural economies do not grow as fast as urban economies. There is more poverty in
108
rural areas than in urban areas. The populations of rural areas are much smaller and
more spread than large, densely urban populations. It is easier for politicians to forget
about rural populations. Political power is thus centralized in the urban populations of
the cities.
When rural people move to urban areas, indigenous knowledge is often lost.
Languages, cultures and traditions are being distorted, and it becomes more difficult
to see the difference between people from different areas. It is important that people
use indigenous knowledge not only in rural areas.
Rural
people
and
their
agricultural
economies
are
regarded as less
important
urban
and
than
people
their
industrial economies. It is also more difficult for the government to provide services to
rural areas, where people are spread over long distances. There are fewer taxpayers
in rural areas because the population density is so low. Rural workers generally also
earn less than urban workers. There is thus less money available for rural
development.
About 7000 of the poor people in South Africa live in rural areas. Many of them can
not get jobs because rural areas have so little infrastructure. They are waiting for their
family members who work in the city to send for their money. People in the countryside
often have to build their own infrastructure, including roadways and water pumps. Most
of the crops grown in rural areas are grown on commercial farms, it goes to cities to
feed urban populations. There are few schools and schools are often so far away from
the children's homes that they can not attend.
109
Urban areas also have challenges. Even though urban economies are stronger than
rural economies, cities and towns have problems like:

Unemployment

Overcrowding

poor service delivery

crime

HIV / AIDS

environmental damage.
The apartheid system has separated cities (segregated) by race. This means that
black people are not allowed to stay in 'white' areas. They had to stay in townships
that were far from the workers' places of work. The apathy government has not
invested in infrastructure in these townships, so there are not enough clinics, schools
and hospitals. South African cities are still divided according to race and class today,
even if there is no longer legislation that obliges people to stay in specific areas.
Population in townships and informal settlements is high, crime is a problem and lack
of sanitation in some areas causes health problems to spread easily and quickly.
About 5000 of the black
people in Cape Town and
Durban stay in squatters
in informal settlements.
The government can not
keep
up
with
the
demands for housing in
the cities.
Many parts of cities, such as the above informal settlement, do not have proper
infrastructure. Diseases spread fins due to lack of sanitation. Industries in urban areas
are biodally important to the environment. An example of this is the gold mining
industry in Gauteng and Mpumalanga. This industry causes drainage of acid mine.
When water mines and tunnels are no longer used, mix the water with metals in the
rocks and produce a hazardous chemical. This chemical substance then ends up in
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the underground water and makes it glossy. People and animals drinking this water
get sick.
The industries in urban areas damage the environment This picture shows the
drainage of acid mine in Gauteng
Creating sustainable employment opportunities
Unemployment is a major problem in South Africa. The unemployment rate in South
Africa was 23,900 at the end of 2011. Job creation is an important part of reducing
inequality and poverty because more people can participate in the economy.
However, it is important that the work created in South Africa is sustainable.
Sustainable job opportunities are job opportunities that:

keep for a long time so employees will benefit from it (the work will not be
removed after a short while and will leave people unemployed again)

in industries that are driven by economic and environmental sustainability
(meaning the work is not in a business that has to be closed after a short period
of time because it has used up all resources in the area, for example, or
because there is no money in the Industry over is to keep the job).
The problem in South Africa is that there is work available - you have already seen
businesses in, for example, medicine, engineering and education, unable to get people
with the necessary skills to employ. The millions of unemployed people in South Africa
are simply not skilled enough to do this job. The country must therefore create the
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kinds of work that the unemployed people can do. These jobs must also be
sustainable. This means they must be able to last for a long time.
To create jobs, the government began in 2004 with the Expanded Public Wake
Program (U0WP). This program targets unskilled and unemployed people. It gives
them jobs that do not require proficiency, and it gives them training to develop their
skills while working. These workers can move to work that requires more skills. The
UOWP is therefore sustainable because it continues to prepare South Africans for
better and better works. Examples of EMCDDA jobs are:

Environmental works such as Jobs at Water (Work for Water is the Department
of Environmental Affairs's program to get rid of invasive plants that use water)

road construction

community-based healthcare

works in early childhood development.
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