BBA – 1 Economics
Santosh Nair
March: 16 & 23 2024 | April 6, 2024
Assignment – April 11, 2024
R E G E N E S Y S ’ I N T E G R AT E D L E A D E R S H I P A N D M A N A G E M E N T
MODEL
2
D E V E L O P I N G R E G E N E S Y S G R A D U AT E AT T R I B U T E S
Getting a qualification is not enough, on its own, to prepare you to traverse the rapidly changing world of work, where industry 4.0 and
5.0 are rendering many professions obsolete. We will work with you throughout your studies to help you develop these critical attributes
to navigate the new world order, along with the skills and knowledge you need to excel in any environment:
3
T H E Q U I N T U P L E B O T TO M L I N E
While Regenesys’ Integrated Leadership and Management Model demonstrates the interconnected- ness of the individual with organisational layers and the
broader environment, the quintuple bottom line draws attention to the interrelationships between the actualisation of organisational purpose, and people, planet,
and prosperity, given the organisation’s ability to pivot
4
Facilitation Expectations
❖ Be open-minded
❖ Please raise the hand when you have to speak
❖ Listen carefully
❖ One conversation at a time
❖ Respect the opinions of others / if you disagree, do so politely
❖ Give constructive feedback
❖ Build on the ideas of others rather than destroying them
❖Take some risks and share new ideas
❖Have fun and enjoy the experience!
5
Key Areas Covered in This Course
COURSE OUTLINE
Introduction to Economics, Economic Systems and Modelling
PPF, Demand, Supply, Equilibrium and Elasticity
Saturday
16 - March
Production and Costs
Market Structures and Competition
Macroeconomic Indicators: GDP, Inflation, Fiscal & Monetary Policy
Saturday
23 - March
Saturday
6 - April
International Trade
6
Learning Outcomes
❖ Describe the nature and basic economic problem of South Africa’s economy
❖ Understand the task of economics and differentiate between microeconomics & macroeconomics
❖ Analyse the relationships between demand, supply and market equilibrium
❖ Show the relationships between production and cost
❖ Calculate and interpret various categories of price elasticity
❖ Describe perfect and imperfect competition in the economic environment
❖ Analyse the concept of the labour market
❖ Distinguish between fiscal, monetary and trade policy
❖ Measure economic performance
7
TAKE NOTE OF KEY POINTS ….!
❖ Slides with this mark is for knowledge;
Content NOT included in EXAMS…!
❖ Slide with this mark
Additional Learning | NOT covered in course / exam
❖ SG# 20 – This means: Study Guide & Page Number; You can
locate the content in this page!
8
Introduction
Activity – 10 Minutes
Aim: Acquaintance
Break-time is Democratized
Depends on Your Convenience
Time: Keep it short
Task: Please introduce yourself:
❖ Name
❖ Professional background (if willing to share)
❖ Keen area of interest in Economics
9
Your Take..? Please…
❖ Why do you … want to study Economics?
❖ Why should you – a law-student know
Economics?
❖ What is the big – deal?
10
Introduction to Economics &
Economic Problems
11
Introduction to Economics – Social Science
“Social science … studies choices that individuals, businesses,
governments and entire societies make while coping with scarcity
and incentives that influence and reconcile those choices.”
(Parkin, 2019:Pp 38)
Oikonomia: Greek term for Household management
❖ Reference text: Regenesys Study Guide
❖ Key textbook: Parkin, M. 2019, Economics, Global Edition, 13th ed., Harlow, United Kingdom: Pearson Education
12
Definition of Economics
❖ Microeconomics - study of choices that individuals and
businesses make, way these choices interact in
markets, and influence governments.
❖ Macroeconomics - study of performance of national
economy and global economy.
Macroeconomics deals with Aggregate Demand and Aggregate Supply; This stream was founded in the
aftermath of the Great Depression of 1930s by Lord John Maynard Keynes
13
Economic Problems
SG# 6
Scarcity
Choices
disincentives
Incentives – rewards / penalties determines our
choices
Traffic violation – penalty;
Bravery awards – saving lives
Limited by income, price, and time
14
Common Economic Terms
SG# 7
Economic Terms
Meaning / Explanation
Capital Goods
Goods not consumed but used in production of other goods
Examples: machinery, plant and equipment used in manufacturing and construction, of
buildings, residences, roads, dams etc.;
Capital goods do not yield direct consumer satisfaction, but permit more production and
satisfaction in future (Adapted from Mohr, 2015, p.7
Consumer Goods
Goods used or consumed by individuals or households (i.e., consumers) to satisfy wants
Examples: food, wine, clothing, shoes, furniture, household appliances etc.; (Adapted
from Mohr, 2015, p.7
Demand
Demand differs from wants, desires or needs; demand for good or service only if one has
financial ability to purchase; Demand should have purchasing power; (Adapted from
Mohr, 2015, p.4
15
Common Economic Terms
SG# 7
Economic Terms
Meaning / Explanation
Firms
A firm is an economic unit that employs factors of production and organises them to produce and
sell goods and services. (Adapted from Parkin, Powell, Matthews, 2017, p.44)
Households
People living under one roof considered households; do fundamental things vital to an economy
such as – Demand goods and services from product markets
Market
Markets: arrangement for buyers and sellers to access information and conduct business
Individuals and firms, pursuing self-interest, profited market-making – by buying or selling items
which they specialise; markets work only when property rights exist; (Adapted from Parkin,
Powell, Matthews, 2017, p.44)
Money
Any commodity or token generally accepted as means of payment; trade in markets can exchange
any item for any other item. Imagine complexity in barter; ‘invention’ of money makes exchange
much more efficient. (Adapted from Parkin, Powell, Matthews, 2017, p.44)
16
Common Economic Terms
Economic Terms
Meaning / Explanation
Needs
Needs are necessities, things essential for survival, food, water, shelter and clothing. Needs,
unlike wants, not unlimited; it is possible to calculate basic needs for a person / household to
survive. (Adapted from Mohr, 2015, p.4)
Services
Services: intangible things; medical, legal, financial services and services provided by public
servants. (Adapted from Mohr, 2015, p.7)
Wants
Wants human desires for goods and services; wants are unlimited – we all want everything. As
individuals or for society, always want or desire more or better goods and services. For
individuals, biological, spiritual, material, social wants; a group have collective wants, law and
order, justice and social security. (Adapted from Mohr, 2015, p.4)
SG# 8
17
Factors of Production
SG# 9
The Key 4 Ingredients in Economics of Production and Services
❖
Land – geographical area; can be bought or rented
❖
Labour – people who work in factories; only be rented
❖
Capital – physical, machinery, equipment; bought / rented
❖
Entrepreneurship: organisation of work under one common
goal; holding various parts together & make them work in unison
18
Everyone M ust Make Choices
Choices & Constraints
❖
Households – limited by income
❖
Businesses – profit seeking (mix of goods/ services)
❖
Governments – must choose how to spend taxes
19
RECALL …!
The 4 Factors of Production?
20
Microeconomics &
Macroeconomics
21
Dist inguish Between Micro and Macro
SG# 8
Microeconomics
❖ Deals with choices, individuals and businesses make;
❖ Interaction of choices in markets; influence governments policies;
❖ Focus - single economic variable: demand, supply, price, consumer;
❖ Include factors of production (labour, land, capital, entrepreneurship), from a
single owner to single user of these resources;
❖ Example: a business studying supply and demand for a specific product, production
capacity, and effects of regulation by government on this product.
22
Dist inguish Between Micro and Macro
SG# 8
Macroeconomics
❑ Study of performance of national, regional, and global economies and policy
tools used;
❑ Influences performance (e.g. taxation, public expenditure, subsidies, interest rate
changes, etc)
❑ Focus - entire economy (e.g. aggregate factors), aggregate output, savings
unemployment rate etc.;
❑ Include aggregate flows of income and expenditure between different economic
sectors.
❑ Example: effect of changes in interest rate or minimum wage levels on the
larger economy
23
Economists – M icr o and M acro Level
Common Economic Denominator – Interest Rate
A microeconomist will study, for example, the effects of low
interest rates on individual borrowers
A macroeconomist will study the effects of low interests rates on
national housing market or on unemployment rate
24
Economic Problems
❖
SG# 9
We are faced daily with finite resources and choices
(decisions) on how to make best use of them.
❖
Knowledge and skills required for economic analysis and
decision-making are fundamental prerequisites for individuals,
teams, organizations, institutions, societies, and governments.
25
What How and for Whom?
SG# 9
The Three Key Questions in Economics
Positive
Normative
❖
Economics create theories to answer question: “What is?” and “What ought to be?”
❖
Consider: every day, billions of people make economic choices that result in what,
how, and for whom goods and services are produced
❖
Choices people make are in interest of self and society
❖
Trade-offs – when one item is given away for another’s possession
❖
Opportunity costs – choosing an alternative by sacrificing a benefit
26
What How and for Whom?
SG# 9
The Three Key Questions in Economics
Economics attempts to answer:
•
What is? (Positive, realistic) higher wages higher GDP; empirically tested
•
What ought to be? (Normative, idealistic) higher wages good for labor; opinions /
subjective values matters
Choices based on:
•
What? to produce (goods and services; consumption – utility maximized)
•
How? to produce (factors of production; – cost minimized)
•
For Whom? to produce (distribution of income among factors of production and
income distribution among different individuals – purchasing power)
27
Other Guide to Choices ?
SG# 10
Interest: Self Vs. Society ?
Interest of self: buy a car/home for self; take care of
family;
Interest of society: building roads, electricity
networks, potable water connections, encouraging trade
– public goods
28
Trade - offs ?
Scarcity & Choices
❑ Scarcity and choices create trade-offs
❑ A trade-off is an exchange – giving up one thing to get something else
❑ Concept of trade-off is central to all economics
❑ Trade-offs consider self and social interest decisions (“big trade-off”)
29
Opportunity Costs
Benefits Sacrificed ?
An opportunity cost: benefit, profit, or value of something (e.g. time) that
must be given-up to acquire or achieve something else.
Factors of production (land, labour, capital, entrepreneurship) can be put to
alternative uses;
Every action, choice, or decision has an associated opportunity cost
30
RECALL …!
The 3 KEY Questions in Economics
Scarcity & Trade-off
Opportunity Cost and an Example
31
Economic Models
& Economist’s Role
32
Economic Modelling and Theories
SG# 18
Primer on Economic Models
Provide logical, abstract template to help organise analyst’s
thoughts about complex human behaviour (or interaction);
In ways that sheds some insight into a particular aspect of that
behaviour (or interaction)
Graphs, diagrams, or words (equations) represent model
33
Economic Modelling
Three Key Steps
❖ Observation and measurement
❖ Model building
❖ Testing of model and development of theory
Typical economic model would appear like this
𝑳𝒏𝑬𝑽𝑨𝑰𝑪𝒊𝒕 = 𝜶𝒊 + 𝜷𝟏 𝒙 𝑻𝒐𝒃𝑸𝒊𝒕 + 𝜷𝟐 𝒙 𝑳𝒏𝑴𝑽𝑨𝒊𝒕 + 𝜷𝟑 𝒙 𝑶𝑷𝑺𝑴𝒊𝒕 + 𝜷𝟒 𝒙 𝑨𝑻𝑶𝒊𝒕 + 𝝁𝒊𝒕
34
Development of Economic Theory
SG# 19 - 20
Three Key Steps – Explained (in Text)
35
Obstacles to Economic Models
SG# 20 - 21
Cause and effect and Ceteris paribus
• There are factor variables to consider – other things being equal
Fallacy of Composition
• Invalid conclusion of generalizing results
Post hoc Fallacy
• A false cause–and-effect relationship
Economic experiments not easy to
carry out; Economic behaviour have
simultaneous causes; Can’t be
certain of cause-and-effect
relationships
Technically: Partial equilibrium
(Pareto)
36
Task of an Economist
SG# 20
Three Key Task
❖ Devising methods and procedures for obtaining data
❖ Understanding and interpreting data
❖ Advising stakeholders on suitability of alternative courses of
action and allocation of scarce resources
37
RECALL …!
❖ 4 Economic Systems
❖ Economic Model
❖ Fallacy of Composition
❖ Post-hoc Fallacy
38
Graphs in Economics &
Production Possibility Frontier
PPF
39
Graphs in Economics
SG# 22 - 23
Y - axis
Axes:
Y coordinate (dependent)
X and Y coordinates
X coordinate (independent)
X - axis
Variables (Qty, Price etc.)
Scatter diagram
Correlation and causation
Patterns to look for: Direction of Variables Positive-same; Negative is opposite;
unrelated vars.; linear is straight-line;
Slope of a relationship: influence of one over another;
▪
Please refer to the Table 8 for detailed explanation on terms
Delta △. Slope is: △y/△x
40
Production Possibility Frontier (PPF)
SG# 23 - 25
• The Production Possibilities Frontier is a boundary between
those combinations of goods and services that can be produced
and those that cannot be;
• Shows limits to production of goods;
• Illustrates scarcity and alternating between choices;
• Involves opportunity cost to choices – makes curve bend
41
PPF for Pizzas and Cooldrinks
Key Parts of PPF:
Dilemma of Two – what combo?
Efficient Frontier – only on the blue-line
Constant Opportunity Cost implies that
resources can be substituted for alternative
purposes without any added cost. That makes
the opportunity cost = 1 and constant; if the
opportunity cost was not constant then in
increasing one product by a factor of 1 comes
at the expense of decreasing another by more
than 1 factor or vice versa
Beyond Realm – Unattainable or area beyond the blue-line;
Within Control – Attainable or area in the shade;
Presence of Opportunity Cost – Reason for the bend in the PPF –
curvature
Constant opportunity cost
makes PPF straight line
42
PPF – Points to Remember
SG# 24 - 25
Production efficiency achieved when goods and services produced at
lowest possible cost – outcome occurs at all points on PPF;
Points inside PPF, production is inefficient (resources are either unused or
misallocated or both).
Every choice on PPF involves trade-off (choices must be made).
Allocative efficiency is when goods/servicers produced at lowest
possible cost in quantities providing greatest possible benefit
Point out few critical aspects of PPF
43
Task 4 You – Next Session
Assume your brother’s company produces pizzas and cool drinks. Use
graph to determine:
❖ Draw a PPF Curve / Graph to explain:
❖ If it makes 3-million pizzas how many cool-drinks can it make?
❖ At14-million cool drinks how many pizzas can it make?
❖ What is the problem if company produces 2-million pizzas and 10million cool drinks?
44
PPF – Real- time Application
Textbook Ch-2 # 72
45
PPF – Real-time Application
Textbook
Ch-2 # 82
46
Economic Systems
47
Economic Systems
SG# 12 - 15
Traditional system:
Societies built on traditional beliefs, structure & customs;
Engage in agriculture based living and trading;
Limited inclination to progress or development;
Inuit; tribes of Amazon;
Command system (socialist or communist system):
System that runs on central planning, production and distribution;
No private ownership;
Prone to inefficiencies; govt. centricity
Former USSR, North Korea etc.;
48
Economic Systems
Market system:
Designed around free-market concept; Limited regulation;
Technologically advanced;
Social and other customs no hinderance to economic development; and liberal
US, Canada, UK; (US Post, National Railroad Passenger Corp. Amtrak is owned
by Federal Govt.; Canada Post; Great British Railways)
Mixed system:
Economic system with a balance between free-market;
Govt. intervention in limited manner and technologically progressive;
Social customs no hindrance to development; liberal;
Denmark, Finland, India, South Africa etc;
49
Economic system
Examining Advantage and Disadvantage
❖ System of production, distribution and consumption of goods and
services of an economy.
❖ Principles and techniques to solve economic problems of scarcity
through allocation of limited productive resources;
❖ Market economy
❖ Command economy
❖ Mixed economy
→ Comment on Open and
Closed economy
❖ Traditional economic system
50
Free Market economy
Freedom for Market
❖ Firms and households act in self-interest; determine how resources get
allocated, what goods get produced and who buys the goods;
❖ No government intervention in pure market economy (“laissez-faire”)
❖ No truly free market economy exists in world;
❖ Separation of government and market;
❖ Prevents government from becoming too powerful, keep their interests
aligned with markets;
51
Advantages - Disadvantages Free Market Economy
❖ Advantage – Free Market
Economy
❖ Efficiency in use of Factors of
Production
❖ Entrepreneurship encouraged
❖ More R&D, innovation and
❖ Only profitable goods/services;
❖ Healthy competition to produce
better products;
❖ Acceleration of technical
knowledge and processes;
❖ More engaged society
investments;
52
Advantages – Disadvantages: Free Market Economy
❖ Disadvantages – Free Market
Economy
❖ Firms do whatever is necessary to
make profit
inequality
❖ Greater social divide between rich
and poor
❖ Disproportionate political influence
❖ Distorted investment priorities
❖ Increase in corruption
❖ Increased exploitation of workers /
❖ Environmental degradation
consumers
❖ “Self-first” and “anything for money”
❖ Increased social and economic
53
Command Economy – Communist Countries
❖ Government is central feature of economy; often involved in everything from
planning to redistributing resources; modelled on central planning
❖ Core of communist philosophy;
❖ Stable supply of resources; prices, full employment hallmark feature;
❖ Government owns key industries like utilities, aviation, and railroad;
❖ Erstwhile USSR, North Korea best examples;
❖ No private ownership of factors of production;
54
Command economy
Advantages
❖ If executed correctly, government can mobilize resources on a
massive scale; Mobility can provide jobs for almost all of the
citizens;
❖ Government can focus on good of society rather an individual;
focus could lead to more efficient use of resource
55
Command economy
Disadvantages
❑ Hard for central planners to provide for everyone’s needs;
❑ Consumption rationed by Govt., cannot calculate demand; only sets
prices;
❑ A lack of innovation since there is no need to take any risk;
❑ Workers are also forced to pursue jobs in government;
56
Mixed Economy
Concept of mixed economy, is easily relatable to real world;
Demonstrates characteristics of both capitalism and socialism;
Allows level of private economic freedom in use of capital, but allows
governments interference in economic activities (legislate) to achieve
specific social aims;
Here in this economic system is efficiency
socialism;
<capitalism but efficiency
>
57
Mixed Economy
Three Key Points:
Most economies have twin-economic systems – both private & public work along;
Govt. use of resources; control private sector with taxes (promote social objectives);
Mixed economic systems: Private sector make profits; but ensures public good;
Companies nationalised if conduct is inappropriate;
Mixed economy: a blend of both Capitalism and Socialism; most cases market price
freedom exists; Sensitive sectors – prices managed;
Most countries are mixed economic system; example, India, S. Africa,
France etc., are mixed economies
58
Mixed economy
Advantages
❖ Less government intervention than command economy.
❖ Private businesses run efficiently, than government entity;
❖ Govt. use taxes to redistribute income, reduce inequality; run safetynet: healthcare or social security
❖ Govt. corrects market failures; break-up large monopolies
❖ Tax harmful products – cigarettes reduce negative externality of
consumption;
59
Mixed economy
Disadvantages
❖ Criticisms from both sides arguing sometimes too much
government intervention; sometimes there isn’t enough;
❖ Common problem is state run industries often subsidized by
government and run into large debts, they are uncompetitive;
60
Traditional economy
❖ Most traditional, ancient types of economies in world;
❖ These areas tend to be rural, second or third-world;
❖ Closely tied to the land, through farming;
❖ In this economic system, a surplus rare phenomenon;
❖ Vast portions of world still function under traditional economic system;
❖ Each member has specific and pronounced role – division of labour
❖ Societies close-knit, socially satisfied, but lack access to technology and
advanced medicine;
61
RECALL …!
MIXED Economy
COMMAND Economy
CAPITALIST Economy
TRADITIONAL Economy
62
Demand, Supply, Equilibrium And
Elasticities
63
Defining Market
•
SG# 38
Market - an arrangement, enables buyers and sellers to get
information and do business with each other;
•
Free market economies - work on assumption that market
forces, such as demand and supply, are best determinants of a
society’s or nation’s well-being and means to meet needs;
64
Understanding Movement in Market
Demand: societies looking for solutions;
Supply: source of solutions to societal problems
Market Equilibrium: point of agreement between
demand and supply on engagement and returns;
Elasticity: responsiveness of demand/supply to signals
65
Demand
SG# 39 - 42
Meaning & Law of Demand
•
Demand occurs when consumers want a product (or
service), can afford it, and plan to buy it.
•
Law of demand states that (if all other factors remain equal)
the higher the price of a good, the less people will demand that
good. Likewise, the lower the price of a good, the greater will
be the quantity demanded.
66
Demand Relationship
Change in Quantity Demanded
P1 (highest price) = Q1 (lowest demand)
P3 (lowest price) = Q3 (highest demand)
67
Demand Relationship
Change in Demand – Six Main Factors
❖
Price of related goods (substitutes and complements)
❖
Expected future prices
❖
Income levels
❖
Expected future income and credit
❖
Population
❖
Preferences
68
Laws of Demand
Laws of Demand – Factors Influencing Changes
The Law of Demand (1) | The quantity of Chomp bars demanded
Decreases if:
The price of a Chomp bar rises
Increases if:
The price of a Chomp bar falls
Changes in Demand (2) | The demand for Chomp bars
•
•
•
•
•
•
Decreases if:
The price of a substitute falls
•
The price of a complement rises
•
The expected future price of a Chomp bar falls
•
Income falls*
•
Expected future income falls or credit becomes harder to •
get*
The population decreases
•
*A Chomp bar is a normal good
Increases if:
The price of a substitute rises
The price of a complement falls
The expected future price of a Chomp bar rises
Income rises*
Expected future income rises or credit becomes easier to
get*
The population increases
69
The Demand Equation
The law of demand states that a decrease in price of a good or service results in an
increased demand of that good or service.
The demand equation is: 𝑸𝒅 = 𝒂 − 𝒃𝑷
Where:
Or
𝑷 = 𝒂 − 𝒃𝑸𝒅
Negative sign is due to inverse relation between quantity
demanded and price
𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆
What it means
𝑷
Price
𝒂 and 𝒃
Positive Constants
𝑸𝒅
Quantity Demanded
70
The Demand Equation
The demand equation (Parkin, 2019:116) denotes three things:
1.
The price at which no one is willing to buy the good (where
𝑄 is zero).
2.
As the price falls, the quantity demanded increases.
3.
The constant (𝑏) tells us how fast the maximum price that
someone is willing to pay for good falls as quantity increases.
71
The Demand Equation
Demand Equation Denotes Three Things
𝑷 = 𝒂 − 𝒃𝑸𝒅
𝑸𝒅 = 𝒂 − 𝒃𝑷
72
Demand for Energy Bars
Real-time Example – Demand Schedule & Curve
Price
(rand per bar)
Quantity demanded
(thousands per week)
A
0.50
22
B
1.00
15
C
1.50
10
D
2.00
7
E
2.50
5
73
Demand for Energy Bars
Real-time Example – Demand Schedule & Curve
Original demand schedule
with original income
Price
(rand per
bar)
Quantity
demanded
(thousands
per week)
A
0.50
22
B
1.00
C
New demand schedule
with new higher income
Price
(rand per
bar)
Quantity
demanded
(thousands
per week)
A’
0.50
32
15
B’
1.00
25
1.50
10
C’
1.50
20
D
2.00
7
D’
2.00
17
E
2.50
5
E’
2.50
15
74
Supply
•
SG# 43 - 46
Organizations supply goods (or services) if they have
resources and technology to produce them, can profit from
producing them, and plan to produce and sell them;
•
The law of supply states that (ceteris paribus) higher the
price of a good, the greater quantity supplied, and lower
the price of good, the smaller quantity supplied;
75
Supply Curve
Supply Relationship
P1 (lowest price) = Q1 (lowest supply)
P3 (highest price) = Q3 (highest supply)
76
Supply Relationship
Six Main Factors for Change in Supply
❑
The prices of factors of production
❑
The prices of related goods and services produced
❑
Expected future prices
❑
The number of suppliers in the market
❑
Technological advances
❑
The state of nature
Supply of Energy Bars – Please refer
study guide
Check supply schedule & graph
Note what causes supply curve to
increase or decrease
77
Laws of Supply
Law of Supply – Factors Influencing Changes
The Law of Supply (1) | The quantity of Chomp bars supplied
Decreases if:
The price of a Chomp bar falls
Increases if:
The price of a Chomp bar rises
Changes in Supply (2) | The supply of Chomp bars
•
•
•
•
•
•
•
Decreases if:
The price of a factor of production used to produce
Chomp bars rises
The price of a substitute in production rises
The price of a complement in production falls
The expected future price of a Chomp bar rises
The number of suppliers of bars decreases
A technology change decreases Chomp bar production
A natural event decreases Chomp bar production
•
•
•
•
•
•
•
Increases if:
The price of a factor of production used to produce
Chomp bars falls
The price of a substitute in production falls
The price of a complement in production rises
The expected future price of a Chomp bar falls
The number of suppliers of bars increases
A technology change increases Chomp bar production
A natural event increases Chomp bar production
78
Notice
The concepts of demand and supply are fundamental to your
understanding of economics. Please ensure you complete the
recommended reading (Chapters 3 to 6 in Parkin, M. 2019,
Economics, Global Edition, 13th ed., Harlow, United Kingdom:
Pearson Education).
Failure to complete the recommended reading will compromise the
successful completion of your module.
79
Supply of Energy Bars
Real-time Example – Supply Schedule & Curve
Price
(rand per bar)
Quantity supplied
(thousands per week)
A
0.50
0
B
1.00
6
C
1.50
10
D
2.00
13
E
2.50
15
80
Equili brium – M ar ket Equili br i um
SG# 46 - 47
Market Equilibrium – When Demand Equals Supply
Equilibrium price is achieved when quantity demanded equals quantity
supplied and;
Likewise equilibrium quantity is the quantity bought and sold at the
equilibrium price
A market should move toward its equilibrium because:
• Price normalises buying and selling plans
• Price corrects when plans do not match
81
Equili brium in Market
A Case of Energy Bars (Chomp Bars)
At a price of R1.00 a bar, 15 million bars a week are demanded and 6 million are supplied, there is a
shortage of 9 million bars a week and the price rises;
If the price is R2.00 a bar, 7 million bars a week are demanded and 13 million are supplied, there is a
surplus of 6 million bars a week and the price fall;
If the price is R1.50 a bar, 10 million bars a week are demanded, and 10 million bars are supplied. There
is neither a shortage nor a surplus and the price does not change (equilibrium);
Price (Rand per
bar)
Qty Demand
0.50
1.00
1.50
2.00
2.50
22
15
10
7
5
Qty Supply
(million bars per week) (million bars per week)
0
6
10
13
15
Shortage (-) or
Surplus (+) (Million)
-22
-9
0
+6
+10
82
Equili brium – In Ener gy Bar s M ar ket
83
Equili brium – In Ener gy Bar s M ar ket
Follow example in your study
guide
Discuss on Consumer
Surplus & Producer Surplus
❖ Schedule
❖ Graph
S
Consumer Surplus
P1
Producer Surplus
D
84
Task 4 You
Activity for Home Study
Go to P.114 in Parkin, M. 2019, Economics: Global and Southern
African Perspectives, 13th Ed, Pearson Education UK;
Demand and Supply | Economics in News:
The Market for Orange Juice has Virtually Disappeared.
Read the article on Pg.#114 and,
Examine its Economic Analysis on Pg.#115
85
Elasticity – Concept
SG# 47 - 50
In economics, elasticity is the degree to which consumers (or producers)
change their demand (or change supply) in response to price changes.
Measure of elasticity varies depends on type of product (or service).
Relatively elastic (responsive)
Relatively inelastic (non-responsive)
86
Price Elasticity
Note, to calculate price elasticity of demand, we express change
in price as a percentage of average price and change in
quantity demanded as a percentage of average quantity
87
Price Elasticity of Demand
To calculate price elasticity of a good you need to know quantity
demanded of good at two different prices (when all other influences on
buying plans remain same).
ED = {(Q2 – Q1)/[(Q2 + Q1)/2]}/{(P2 - P1)/[(P2 + P1)]/2}
88
Price Elasticity of Demand
To calculate price elasticity of a good you need to know quantity
demanded of good at two different prices (when all other influences on
buying plans remain the same).
Price of a sandwich changes from $5 to $10 Quantity changes from 30 to 20
What is price elasticity of demand?
𝟐𝟎 −𝟑𝟎
𝟐𝟎+𝟑𝟎
𝟐
Elasticity of demand = 𝟏𝟎 −𝟓
𝟏𝟎+𝟓
𝟐
=
− 𝟏𝟎
𝟐𝟓
𝟓
𝟕.𝟓
=
𝟐
𝟓
𝟐
𝟑
−
=
−𝟐
𝟓
x
𝟑
𝟐
=
−𝟔
𝟏𝟎
= −𝟎. 𝟔
89
Elasticity of Demand
Here range of elasticity of demand is listed – these are various degrees of
elasticity – strength of response – based on the trigger: price;
Degrees are: Ed >1 | Ed <1 | Ed = 1
Value
Descriptive terms
Ed = 0
Perfectly inelastic demand
0 < Ed < 1
Inelastic or relatively inelastic demand
Ed = 1
Unitary elasticity, or unitarily elastic demand
1 < Ed < ∞
Elastic or relatively elastic demand
Ed = ∞
Perfectly elastic demand
90
Income & Cross Elasticity of Demand
Income elasticity of demand
Measures demand-response for a good when income changes of people, ceteris paribus.
Ratio of percentage change in demand to percentage change in income;
The cross-price elasticity of demand
Measures demand-response for one good to change in price of another good.
Percentage change in demand for A good in response to percentage change in price of B
good.
▪
Public Transport Example
▪
Refer to your Study Guide and complete the task questions that follow
91
Elasticity of Demand
Factors Influencing Elasticity of Demand
❖ Substitutes
❖ Closer the substitutes for a good or service, more elastic is the demand for it.
❖ Income spent of a product
❖ Greater the proportion of income spent on a good, more elastic (or less
inelastic) is the demand for it.
❖ The time elapsed since the price change
❖ Longer the time elapse since price change, more elastic is demand
92
Elasticity of Supply
Degrees of Supply Elasticity
93
Elasticity of Supply
Factors Affecting Price Elasticity of Supply
❖ Time Factor:
❖ Short Period – relatively less elastic (adjustments costly)
❖ Long Period – more elastic (blessed with time)
❖ Nature of Commodity:
❖ Perishable Goods – relatively less elastic (empty inventory quickly)
❖ Durable Goods – more elastic (inventory lasts longer)
❖ Production Technique:
❖ Complex Production Technique – supply remains inelastic (expensive to change)
❖ Simple Production Technique – supply is elastic (ease of change)
94
Elasticity of Supply – Factors Impact
Apply These Factors to Specific Industry
❖ Spare Production Capacity: If plenty spare capacity business can increase output without
increasing cost, supply remain elastic in response to change in demand
❖ Stocks of Finished Products & Components: If stocks of finished and inventory at high level
firm capable to respond to change in demand; supply remain elastic; perishable commodities
harder/expensive to store
❖ Ease of Factor Substitution / Mobility: If capital / labour are mobile, elasticity of supply high;
resources can be shifted to meet excess demand – relocating labour to different tasks;
❖ Time Period and Production Speed: Supply is price elasticity if firm is allowed longer time to
adjust its production levels;
95
End of Today’s Session
16 March 2024
96
Production & Cost
97
Relationship Between Production & Cost
SG# 50 - 53
Three Important Concepts
❑ Short and Long Run (Periods of time)
❑ Short-run: period of less than 1 year;
❑ Long-run: period greater than 1 year;
❑ Increasing and diminishing marginal returns
❑ Economies and diseconomies of scale
98
Short And Long Run
Profiting in Long-run
❖ Organisations make decisions with objective of achieving maximum
shareholder value;
❖ Employees of the firm are agents who are accountable to their
shareholders;
❖ Decisions relating to maximum attainable profit become critical;
❖ Particularly those that affect the long-run prospects of the firm.
99
Short Run
Time Frame
❑ Time frame where quantity of at least one factor of production is fixed;
❑For most firms, capital, land, and entrepreneurship are fixed;
❑Labour is variable factor of production;
❑ We call fixed factors of production “firm’s factory.”
❑ A restaurant might employ additional cooks due to seasonal demand
(short-run); but endure cost of Factors of Production that can’t be
changed;
100
Long Run
Time Frame
❖ A time frame in which quantities of all factors of production can be
varied.
❖ Long run is a period in which firm can change its factory;
❖ In long run restaurant might open second and third outlets; all
factors of production vary;
❖ There are minimal fixed costs and profit can be maximised
101
Behavior of Costs
TABLE: PRODUCTION SCHEDULE
Labour (workers
per day)
Output
(sweaters per
day)
Total Fixed
Costs
Total Variable
Costs
A
0
0
25
0
25
B
1
4
25
25
50
C
2
10
25
50
75
D
3
13
25
75
100
E
4
15
25
100
125
F
5
16
25
125
150
Total Cost
Dollars per day
102
Schedule of Aver age Cost and M ar ginal Cost
Labour
(workers
per day)
Output
(sweater
s per
day)
Total
Fixed
Costs
Total
Variable
Costs
Total
Cost
Marginal
Cost
(Calculated as
the 8.33 in
example earlier)
Dollars per day
Average
Fixed
Cost
Average
Variable
Cost
Average
Total
Cost
Dollars per sweater
A
0
0
25
0
25
0
-
-
-
B
1
4
25
25
50
6.25
6.25
6.25
12.50
C
2
10
25
50
75
4.17
2.50
5.00
7.50
D
3
13
25
75
100
8.33
1.92
5.77
7.69
E
4
15
25
100
125
12.5
1.67
6.67
8.33
F
5
16
25
125
150
25
1.56
7.81
9.38
Change of
Quantity
Change of Cost
Marginal Cost
0 to 4 =
Change - 4
Cost Added 25
25 / 4 = 6.25
4 to 10
Change - 6
Cost added 25
25/ / 6 = 4.17
10 to 13
Change -3
Cost added 25
25 / 3 = 8.33
13 to 15
Change -2
Cost added 25
25 / 2 = 12.5
15 to 16
Change - 1
Cost added 25
25 / 1 = 25
MR
103
Returns to Scale Concept
SG# 51 - 53
3 Laws of Returns to Scale
Laws of returns to scale a set of three interrelated laws:
❖ Law of increasing returns to scale – output increases by more
than proportional change in inputs;
❖ Law of constant returns to scale – output increases by same
proportional change as all inputs change; and
❖ Law of diminishing returns to scale – output increases by less
than proportional change in inputs.
104
Increasing and Diminishing Marginal Returns
Two Key Relationship Exist Between Production & Cost
•
Increasing and,
•
Diminishing marginal returns.
Marginal product of labour is increase in total product that results
from one-unit increase in quantity of labour employed, with all other
inputs remaining same.
A case of increasing, constant & diminishing
returns to scale
105
Returns to Scale: Restaurant Case
SG# 51
Restaurant employs one cook; kitchen has capacity for two cooks; restaurant decides to
add takeaway service to its offerings.
Takeaway orders increase; additional cooks added to complement. With two cooks,
marginal product rises; on employing third, fourth, and fifth cooks total product increases,
but marginal output declines (e.g. cooks are getting in each other’s way; insufficient
equipment; increasing waiting time, etc).
Cooks
Total product
Marginal Product
0
1
2
3
4
5
0
20
50 (20 + 30)
75 (50 + 25)
95 (75 + 20)
110 (95 + 15)
20
30
25
20
15
106
Example – Restaurant – Task 4 You
Follow example of a restaurant given in your Study Guide:
Cooks
Total product
Marginal product
As you saw with restaurant example, most production processes experience
increasing marginal returns initially, but “all production processes
eventually reach a point of diminishing marginal returns”
107
Law of Diminishing Marginal Returns
SG# 51
❖ When marginal product of an additional worker is less than marginal
product of previous worker.
❖ Diminishing marginal returns: more workers using same capital; working in
same space.
❖ More workers added, very less for additional workers to do productive job.
❖ Law of diminishing returns: applies only in short run; long run, firms
increase size, relocate to bigger premises, employ more capital/equipment
108
Economies and Diseconomies of Scale
SG# 52
Scale Economies
Economies of scale (or economies of large scale) are:
❑ Efficiencies achieved through size of production (e.g. costs are reduced over large
production volumes)
❑ Example – automobile, ICT and peripherals etc.;
Major reasons for presence of economies of scale include:
❑ Division of tasks (increased specialisation per unit)
❑ Skilled and experienced employees per unit (learning curve)
❑ Reduction in waste
109
Economies and Diseconomies of Scale
Diseconomies of Scale Exist Through
❑ Difficulties in control and supervision (monitoring productivity
and quality of output across thousands of employees imperfect
and expensive)
❑ Slow decision making due to excessive size of administration
❑ Low employee motivation (e.g. just a number; sense of
alienation);
110
Labour Market & Policies
111
Labor Market
SG# 55 - 64
Key Concepts | Difference Between Labor and Goods Market
Labor Market – Intermediary between Buyers and Sellers of Labor;
Labor deals with Human Beings and NOT inanimate objects (goods and services)
Labor – factor of production gets Wages in return
Labour Market
Goods Market
Link between potential sellers (households) and
potential purchasers (firms)
Physical presence is necessary
Link between sellers (firms) and potential purchasers
(households)
Physical presence not necessary
Labour services not transferable
Goods are fully transferable
Labour is always rented
Goods can be sold
Characterised by trade unions
These are absent from the goods market
Labour is heterogeneous
Goods can be homogeneous
Noneconomic considerations are important
Noneconomic considerations are not important
Remuneration is affected by a number of factors, e.g.
Prices of goods are determined by costs and demand
taxation, standard of living, etc.
112
Labor Market
SG# 56
❑ The macroeconomic view of the labour market difficult to capture; few data points
hints its health;
❑ Unemployment - during economic stress, demand for labour falls behind supply
drive unemployment up; high unemployment exacerbate economic stagnation;
❑ Cause Social upheaval - deprive large population opportunity to lead fulfilling lives
❑ All industries need labour - hospitality, construction, mining, telecommunications…
❑ A competitive labour market where firms demand and households supply (Parkin,
2016).
113
Labor Market
SG# 57
Labor Productivity Measures
❖ *Labour productivity measures hourly output of a country's economy
❖ Charts amount of “Real” GDP produced by an hour of labour
❖ Growth in labour productivity depends on three main factors:
▪ Saving and investment in physical capital,
▪ New technology, and
▪ Human capital
*Please read the in-section page on calculating labor productivity on Pg.# 57
114
Labor Market
SG# 57
Labor Productivity Measures
❑ Labour productivity directly linked to improved standards of living; signal higher
consumption;
❑ Labour productivity grows, more goods and services produced for same amount of
relative work; increase in output increases consumption of goods and services for a
reasonable price;
❑ Indicate short-term and cyclical changes in economy even turnaround; If output
increases but labour hours remains static, signals labour force is productive;
❑ Workers increase effort when unemployment rises to avoid losing jobs
115
Labor Market
Labor Productivity Policies
❖ Number of ways to improve productivity – capital investment, quality education and
technological progress;
❖ Investment in physical capital: Capital investments like infrastructure from
governments and the private sector help productivity and lower business costs;
❖ Quality of education and training: Opportunities to upgrade skills, offering affordable
education and training; help raise economy's productivity;
❖ Technological progress: Developing new technologies – hard-tech - computerisation
or robotics; soft-tech - modes of organising a business or pro-free market reforms and
policies enhance worker productivity;
116
Labor Market
Unemployment
❖ Unemployment when a person actively seeking employment unable to find work; cited
as measure of economic health; major life event with devastating impact; affects
unemployed, family and community;
❖ Unemployment rate: total unemployed people divided by total labour force;
❖ A key economic indicator; two categories of unemployment - voluntary and involuntary
unemployment;
❖ Voluntary – Person has left his job willingly
❖ Involuntary - Person has been fired or laid-off and must now seek new job
117
Labor Market
SG# 58
Unemployment Types
❖ Frictional unemployment: After a person leaves employment voluntary takes time to find another job; is
short-lived and least problematic for an economy; market processes of job search recruitment job-fitment
takes time;
❖ Cyclical unemployment: variation in unemployed workers over course of economic cycles; unemployment
rises during recession; declines during economic boom; various economic policy initiative by govts. to
tackle unemployment during recessionary economic trends;
❖ Structural unemployment: Technological change impacts labour market; changes, like automation of
manufacturing, workers displaced from jobs which are no longer needed;
❖ Institutional unemployment: due to permanent institutional factors, incentives in economy. Policies, like high
minimum wage, social benefits, restrictive occupational licensing; labour institutions, like unionisation
contribute to institutional unemployment;
118
Labor Market
SG# 58
Policies Dealing with Unemployment
❑ Govt. interested in labour market; creating jobs key macroeconomic objective with positive social effects. SA
has serious youth unemployment problem; lack of skills and experience impeding economy growth;
❑ Active labour market policies: Prevent unemployment; provide productive jobs; develop labour market
operations; enrich and improve labour demand-supply; at community level (households); make jobs more
appealing for young people;
❑ Passive labour market policies: regarded as generous - like unemployment-dole (e.g. unemployment
benefits and early retirement schemes); increasing wages often viewed as job destroyers; Unemployment
Insurance Fund (UIF) and proposed Basic Income Grant (BIG); may be to reduce unemployment in SA;
❑ Welfare State Vs. Enablers: Unemployment support by State is socialistic-welfare view (US, UK, EU SA
etc.); True capitalistic market make “employment enablers” no unemployment support (Singapore.)
119
Labor Market
Determinants of Labor Demand
❖ Businesses require labour and capital as inputs to production process;
❖ Demand for labour derived from demand for a firm's output; if economy grows demand
increase with it labour demand increase and vice versa; Labour market factors drive
supply-demand for labour;
❖ Employees will supply labour in exchange for wages;
❖ Closely linked with business cycle; for example, when economy stimulated, consumer
demand rises, output increases to meet demand; labour needed to meet output
increment
120
Labor Market
Determinants of Labor Supply
❖ The labour supply curve for any industry or occupation will be upward sloping. This is because, as wages
rise, other workers enter this industry attracted by the incentive of higher rewards;
❖ Real wages: Higher wages raise factor rewards; boost number of people willing and able to work;
❖ Overtime: earnings boost come via overtime payments, productivity-linked pay and stock options;
❖ Substitute occupations: real wages in competing jobs affect wages; earnings differential between
occupations; For example increased earnings for trained plumbers and electricians cause people to switch
jobs;
❖ Barriers to entry: Artificial limit to labour supply (eligibility criteria) restrict supply; forces higher pay levels –
case in point - legal services, medicine; strict ‘entry criteria’ applicable;
❖ Improving occupational labour mobility: more trained hands with key skills for particular occupation;
121
Labor Market
SG# 63 - 64
Determinants of Wages
Wage differentials exist when different workers earn different wages even if all wage markets are in equilibrium. These
wage differentials are permanent phenomena. Some of the determinants of wage differentials (Mohr and Fourie, 2020):
Job-related differences; Worker-related differences; Market structure-related differences; Discrimination-related
differences; and Productivity-related differences;
❑ A binding minimum wage is a minimum wage where the wage
is set above the equilibrium wage.
❑ A non-binding minimum wage is a minimum wage where the
wage is set below the equilibrium wage.
Binding minimum wage
120
120
Price of Labor (Wage)
Price of Labour (Wage)
Non-binding minimum wage
100
80
60
40
20
Deficit Labor
0
100
Surplus Labor
80
60
40
20
0
1
2
3
4
5
6
7
8
9
10
1
2
3
Units of labour (Quantity)
Quantity Demand of labour
Quantity supplied of labour
4
5
6
7
8
9
10
Units of labour (Quantity)
Minimum Wage
Quantity Demand of labour
Quantity supplied of labour
Minimum Wage
122
Market Structure and
Competition
123
Market Structure & Competition
SG# 27 - 30
Continuum of Market Structure – An Analysis
Monopoly /
Monopsony
Duopoly
Oligopoly
Monopolistic
Competition
Perfect
Competition
Perfect competition: (Ideal Condition)
Monopoly (imperfect competition)
• Many sellers and many buyers;
Oligopoly (imperfect competition)
• Identical goods / services
Monopolistic Competition
• No restrictions on entry into or exit from market
• Established firms have no advantage over new ones
• Sellers and buyers are prices takers
124
Monopoly
Greek Word – Meaning ‘One’
❖ Only one seller of a particular good; no competition; opportunity for exploitation
obvious.
❖ Monopolies exist for various reasons:
❖ Barriers to entry: entry might require large investment; (energy and transport sectors;)
❖ State intervention; (Eskom and Transnet in South Africa;)
❖ State award patent rights to certain companies (particular drug produced by pharmaceutical
company); and
❖ Control of certain key resource in certain niche market (exclusive ownership of raw materials)
SARB has a monopoly to print South African Rand
De Beers in Central Selling Organization (CSO)
South African Breweries (SAB) with very few small brewers
125
Oligopoly
Cartelization of Market
Oligopoly is indication of imperfect competition – a few players control market.
South African cellular phone industry originally consisted of Vodacom and MTN.
Today, other competitors include Cell C and Telkom.
In oligopoly market-entry difficult; high costs and significant barriers to entry;
Organisations in oligopoly have substantial pricing power and possible evidence of
collusion.
Cartels (collusion) usually prohibited by antitrust
laws (in SA prohibited by Competition Commission
SA)
Banking: First Bank, Standard Bank, Nedbank,
ABSA
Retail: Pick n Pay and Shoprite (Duopoly)
Energy: ESKOM and SASOL
126
Monopolistic Competition
Common in Market Place
❖ Here firms have many competitors; each firm sell a slightly different product;
❖ Many small businesses are of this kind;
❖ Common example, restaurant trade (excluding chain restaurants):
❖ Each restaurant is uniqueness; but all are competing for essentially same
customers (Economics online, 2015).
❖ Monopolistic competition is most common market structure you will encounter
Product / service Differentiator is the key to Monopolistic Competition
127
Perfect Competition
❖ Many firms sell identical products (or services) to many buyers;
❖ There are no restrictions on entry into or exit from market;
❖ Established firms have no advantage over new ones; and
❖ Sellers and buyers are well informed about prices.
❖ Farming, grocery retailing, plumbing, dry cleaning, etc., reflect conditions for perfect
competition; Perfect competitive market structures exist with difficulty in real world.
❖ Organisations in perfect competition are price takers.
❖ Firm cannot influence market price because its production insignificant part of total market;
❖ Closest to perfect competition in the Foreign Exchange Market in the world
128
Free Market Economy
SG# 29
All decisions are driven by pursuit of a single objective:
increasing shareholder value through maximisation of
economic profit.
Economic profit is equal to total revenue minus total cost, with
total cost measured as opportunity cost of production.
129
Firms Entry and Exit
New firms
enter a market
in which
existing firms
are making an
economic
profit
As new firms
enter a market,
the market
price falls and
the economic
profit of each
firm decreases
SG# 13
Firms exit a
market in
which they are
incurring an
economic loss
As firms leave
a market the
market price
rises and the
economic loss
incurred by the
remaining
firms
decreases
Entry and exit
stop when
firms make
zero economic
profit
Market structure determines fluidity in market - fluidity with which firms may enter / exit;
More FLEXIBLE its structure more dynamic the industry; (monopolistic)
More RIGID its structure less dynamic the industry (oligopoly, duopoly, monopoly)
130
RECALL …!
Perfect Competition
Oligopoly
Monopoly
Monopolistic Competition…
131
End of Microeconomic Concepts
Learning outcomes
❖ Understand the task of economics and distinctions between micro
and macroeconomics
❖ Analyze relationships between demand, supply and market
equilibrium
❖ Show relationships between production and cost
132
End of Unit Microeconomics
133
Macroeconomics
134
Schools of Economic Thought
135
Macroeconomic Schools of Thought
SG# 67 - 68
Developments in Macroeconomics
❖ Classical: Hold prices, wages, and rates flexible; markets always clear all goods and
services available for sale “invisible hand”; a metaphor for unseen forces moving free
market economy; individual self-interest and freedom of production as well as
consumption, best interest of society, as a whole, are fulfilled.
❖ Keynesian: largely founded on basis of works of John Maynard Keynes; focus on
aggregate demand as principal factor in unemployment and business cycle. termed
“laissez-faire” no government intervention in economy; makes a case for greater levels of
government intervention only in recession; government spending to offset fall in private
investment.
❖ Monetarists: The Monetarist school is largely credited to the works of Milton Friedman.
Monetarist economists believe that the role of government is to control inflation by
controlling the money supply.
136
Macroeconomic Schools of Thought
Developments in Macroeconomics
❖ New Keynesian: attempts to add micro foundations to traditional Keynesian
economic theories. accept households firms operate on rational expectations;
maintains variety of market failures, including “sticky” prices and wages that is
resists change; prices seldom change despite changes in input cost or demand
patterns; on wages, workers tend to respond slowly to changes in performance of
company or economy.
❖ Neo-Classical: assumes people have rational expectations, strive maximise
utility; people act independently basis of all information they can attain.
137
Macroeconomic Schools of Thought
Developments in Macroeconomics
❖ New Classical: built on neoclassical school give importance to micro; models that
behaviour; assume agents maximise their utility have rational expectations; macro strives
to provide neoclassical micro foundations for its analysis; rivals new Keynesian school, uses
price stickiness and imperfect competition to generate macro models like Keynesian;
believe market clears at all times;
❖ Austrian: Older school, believes human behaviour is too idiosyncratic to model with
math; minimal government intervention best; contradicts Keynesian economics; has
useful theories on business cycle, implications of capital intensity, importance of time,
opportunity costs in determining consumption and value;
138
Economics of Aggregates
139
Economic Aggregates
SG# 69
Macroeconomics & Economic Identity
Macroeconomics - study of behaviour of aggregate economy; examines economy-wide phenomena change in unemployment, national income, growth rate, gross domestic product, inflation, and price levels.
Macroeconomic factors affect microeconomics and vice versa; Consider macroeconomic policies and
variables that could help to expand economy – say, whether we should:
▪ Increase government spending (G) and decrease taxes (T) (i.e. use fiscal policy);
▪ Decrease interest rates (i/r) and change money supply (monetary policy);
▪ Decrease import tariffs and protect specific industries (trade policy);
▪ Implement wage controls (labour policy); and
▪ Supply-side policies? Can we stimulate productivity through investment, and encourage profitability?
140
Circular Flow of Income & Expenditure
SG# 10 - 11
Scenario in an Economy
❖ Households that make consumption expenditures (C)
❖ Firms that make investments (I)
❖ Governments (G) buy Goods & Services, Taxes, Assistance
❖ The rest of the world that buys net exports (X – M)
❖ Firms that pay incomes to households (Y)
141
Circular Flow of Income & Expenditure
SG# 15
Economic Entities:
Households
Income
Expenses
Firms/Businesses
Govt.
Rest of World (Foreign Sector)
142
Circular Flow of Income & Expenditure
SG# 10 - 11
Economic Entities:
Households
Firms/Businesses
Govt.
Rest of World (Foreign Sector)
Centre: Financial Sector
143
Aggregate Income = Aggregate Expenditure
SG# 68 - 73
The Economic Identity
𝒀 = 𝑨𝑬
𝒀 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴)
Economic Identities
𝒀
𝑨𝑬
The Meaning
Income / Gross Domestic Product / Gross National Income
Aggregate Expenditure
𝑪
Consumption – Private and Public
𝑰
Investments – Private and Public
𝑮
Govt. Expenditure (Revenue expense, transfer of benefits)
(𝑿 − 𝑴)
Net Exports – Exports – Imports (Current Account Deficit)
144
Aggregate Income = Aggregate Expenditure
The Economic Identity – Two Factor Economy – Firms & Households
Firms rent Factors
of Production
Two Factor
Economy
Model
Factor
Market
Household
Firms
Firms Receives
Sales Income
Households
Receive Rent
Goods
Market
Households Pay for
Goods (Services)
𝒀 = 𝑨𝑬
𝒀 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴)
We will expand this
145
Aggregate Income = Aggregate Expenditure
SG# 71
The Economic Identity – Two Factor Economy – Firms & Households
𝒀 = 𝑨𝑬
This means income = expenditure
𝒀 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴)
This is a full GDP Identity
𝒀 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴)
This is GDP Identity for 2 Factor Economy
𝒀 = (𝑪 + 𝑰) + 𝑮 + (𝑿 − 𝑴)
෡ + 𝒄𝑰
𝑪=𝑪
Consumption = Autonomous consumption (subsistence) + Induced
consumption based on Income (travel, car, house, luxury purchases);
Therefore, it is MPC a factor of say, 0.5 or 0.3 etc;
𝒊 = 𝑰෠ Investment = Autonomous Investment (automatic)
𝑨 = 𝑪 + 𝑰 Expenditure = Consumption & Investment
෡ + 𝑰෠) 𝒐𝒓 (𝑪 + 𝑰)
𝒀 = 𝑨 = (𝑪
Equilibrium Condition is met with Income is Equal to Expenditure
∴𝒀= 𝑪+𝑰
෡ + 𝑐𝑌 + 𝑰෠
𝑌=𝑪
෡ + 𝑰෠
∴ 𝑌−𝑐𝑌= 𝑪
This is Keynesian
Marginal Propensity to
Consume
෡ + 𝑐𝑌) = MPC
(𝑪
෡ + 𝑰෠
∴ (1−𝑐)𝑌= 𝑪
∴ 𝑌0 =
𝟏
𝟏−𝒄
෡ + 𝑰෠)
(𝑪
146
Aggregate Income = Aggregate Expenditure
SG# 72
The Economic Identity – Three Factor Economy – Firms, Households & Govt.
Factor
Market
Firms rent Factors
of Production
Three
Factor
Economy
Model
Tax
Tax
Household
Govt.
Firms
Assistance
Assistance
Firms Receives
Sales Income
Households
Receive Rent
Goods
Market
Households Pay for
Goods (Services)
𝒀 = 𝑨𝑬
𝒀 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴)
We will expand this
147
Aggregate Income = Aggregate Expenditure
SG# 72
The Economic Identity – Three Factor Economy – Firms, Households & Govt.
𝒀 = 𝑨𝑬
This means income = expenditure
𝒀 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴)
This is a full GDP Identity
𝒀 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴)
This is GDP Identity for 3 Factor Economy
𝒀 = (𝑪 + 𝑰 + 𝑮)
෡ + 𝒄𝑰
𝑪=𝑪
Consumption = Autonomous consumption (subsistence) + Induced
consumption based on Income (travel, car, house, luxury purchases);
Therefore, it is MPC a factor of say, 0.5 or 0.3 etc. + Govt. Exp.
𝒊 = 𝑰෠ Investment = Autonomous Investment (automatic)
Expenditure = Consumption
𝑨 = 𝑪 + 𝑰 + 𝑮 & Investment + Govt. Exp.
෡)
𝒀 = (𝑪 + 𝑰෠ + 𝑮
Equilibrium Condition is met with Income is Equal to Expenditure
෡ + 𝑐𝑌)+ 𝑰෠ + 𝑮
෡)
∴ 𝒀 = (𝑪
෡ + 𝑐𝑌 + 𝑰෡ + 𝑮
෡
𝑌=𝑪
෡ + 𝑰෠ + +𝑮
෡
∴ 𝑌−𝑐𝑌= 𝑪
෡ + 𝑰෡ + +𝑮
෡
∴ (1−𝑐)𝑌= 𝑪
∴ 𝑌0 =
𝟏
𝟏−𝒄
This is Keynesian
Marginal Propensity to
Consume
෡ + 𝑐𝑌) = MPC
(𝑪
෡ + 𝑰෠) + +𝑮
෡
(𝑪
148
Economic Indicators
Analysis of Economic Performance & Predictions of Future Performance of Economies
❖ Unemployment rate, inflation rate, GDP, forex, etc.
❖ Characteristics:
❖
Pro-cyclic Indicators: Move in same direction of economy; GDP, Exports etc.
❖
Counter-cyclic Indicators: Move in opposite direction of economy; unemployment
❖
Leading Indicators: Change before economy changes: manufacturing, consumer
confidence
❖
Lagging Indicators: Do not change direction for a few months: consumer price inflation
and unemployment trends;
❖
Coincident Indicators: Move at the same pace/time as economy – GDP
149
End of Today’s Session
23 March 2024
150
Circular Flow of Income
& GDP & Calculation
151
SG# 10
Circular Flow of Income & Expenditure
Household
Firms
Income
Expenses
Government
Foreign
Sector
152
Gross Domestic Product
SG# 74
Key Economic Indicator
❖ GDP - primary indicator of health of country’s economy (due to
decreasing unemployment and increasing wages)
❖ Expenditure approach [C + I + G + (X – M)]
❖ Income approach (summing incomes firms pay households for
services of factors of production rented; e.g. wages for labour,
interest for capital, rent for land, and profit for entrepreneurship).
The modern-day GDP formula was systematically produced by Simon
Kuznets in his report to US Congress with the help of US Dept. of
Commerce, in 1934
153
Circular Flow of Income & Expenditure
Expenditure
Method
Expenditure
Method
Items
Symbol
USD
(2016)
Percentage
Personal
Consumption Exp.
C
12,758
68.7
Gross Private Dom.
Investment
I
3,036
16.3
Govt Expenditure
G
3,277
17.7
Net Exports (Export Import)
X–M
-502
-2.7
GDP Exp. Method
Y
18,569
100
of GDP
154
Circular Flow of Income & Expenditure
USD
(2016)
Percentage
of GDP
10,085
54.3
Net Interest
676
3.6
Rental Income
705
3.8
Corporate Profits
1,676
9.0
Proprietor’s Income
1418
7.7
Net Domestic Income at Factor
Cost
14,560
78.4
Indirect Taxes Less Subsidies
1,336
7.2
Net Domestic Income at Market
Place
15,896
85.6
Depreciation
2,910
15.7
GDP Income Approach
18,806
101.3
-237
-1.3
18,569
100
Items
Employee Compensation
Income
Method
Income
Method
Statistical Errors
GDP Expenditure Method
155
GDP of South Africa – 2010 - 2020
Trading Economics 2020
Population of South Africa – 59.4 Mn.
SG# 75
156
GDP of United Kingdom – 2010 - 2020
Trading Economics 2020
Population of United Kingdom – 67.3 Mn.
157
GDP of India – 2010 - 2020
Trading Economics 2020
Population of India – 1.38 Bn.
SG# 75
158
Measures of GDP
SG# 75 - 76
Inflation Matters
❖ Nominal GDP - measure of total quantity of goods & services economy
produces affected by changes in prices of those goods and services;
uses current market price to estimate GDP;
❖ Real GDP - measure of total quantity of goods & services economy
produces not affected by price changes of those goods and services.
❖
Economists use it to make real (actual) comparisons of the nation’s
change in outputs / GDP (also known as constant-price GDP and
inflation-corrected GDP)
159
GDP Base Year – 2018 – Task 4 You
Year
Price of a Lollipop
Quantity of
Lollipops
Price of a Pie
Quantity of Pies
2018
R4
10
R5
15
2019
R5
15
R6
10
2020
R6
20
R7
50
Year
Price * Quantity
Total
Price *
Quantity
Total
Nominal GDP for
year
2018
2019
2020
Year
Price * Quantity
Total
Price *
Quantity
Total
Real GDP for
year
2018
2019
160
2020
GDP – Gross Domestic Product
Key Economic Indicator – Nominal and Real
Year
Price of a hot
dog
Quantity of hot
dogs
Price of a
burger
Quantity of
burgers
2016
R1
100
R2
50
2017
R2
150
R3
100
2018
R3
200
R4
Price
Quantity
Year
Price
Quantity
150
Nominal GDP for
year
2016
(R1 x 100) = R100
(R2 x 50) = R100
R 200
2017
(R2 x 150) = R300
(R3 x 100) = R300
R 600
2018
(R3 x 200) = R600
(R4 x 150) = R600
R1 200
Nominal GDP considers current prices – price prevalent in the year
161
GDP – Gross Domestic Product
Key Economic Indicator – Nominal and Real
Year
Price of a hot
dog
Quantity of hot
dogs
Price of a
burger
Quantity of
burgers
2016
R1
100
R2
50
2017
R2
150
R3
100
2018
R3
200
R4
Price
Quantity
Year
Price
Quantity
150
Nominal GDP for
year
2016
(R1 x 100) = R100
(R2 x 50) = R100
R 200
2017
(R1 x 150) = R150
(R2 x 100) = R200
R 350
2018
(R1 x 200) = R200
(R2 x 150) = R300
R 500
Real GDP considers constant prices – price prevalent in the “base” year – here it is 2016
162
Gross Domestic Product
SG# 77
Estimation of GDP Deflator
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
❖ GDP Deflator =
𝑥
𝑹𝒆𝒂𝒍 𝑮𝑷𝑫
Year
2013
2014
2015
Calculation
(R200 / R200) x 100
(R600 / R350) x 100
(R1200 / R500) x 100
𝟏𝟎𝟎
GDP Deflator
100 (always 100)
171
240
163
Gross Domestic Product
SG# 77
Estimation of GDP Growth
𝑷𝒆𝒓𝒊𝒐𝒅 𝟐 − 𝑷𝒆𝒓𝒊𝒐𝒅 𝟏
𝑬𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝑮𝒓𝒐𝒘𝒕𝒉 =
𝒙 𝟏𝟎𝟎
𝑷𝒆𝒓𝒊𝒐𝒅 𝟏
Economic Growth:
𝑹 𝟏𝟐𝟕𝟐 𝑴𝒏 − 𝑹 𝟏𝟐𝟑𝟒 𝑴𝒏
𝑹 𝟏𝟐𝟑𝟒 𝑴𝒏
𝒙 𝟏𝟎𝟎
𝟑𝟖
𝒙 𝟏𝟎𝟎
𝟏𝟐𝟑𝟒
0.03079 𝒙 𝟏𝟎𝟎
Real Economic Growth:
3.079 %
Real GDP (approx. 3.1%)
164
Gross Domestic Product
SG# 77 - 78
Some Uses and Limitations
❖ Uses for GDP
❖ Standard of living over time
❖ Business cycles
❖ Limitations of Real GDP
❖ Different currencies
❖ Purchasing power parity
165
Limitations of Real GDP
Some Uses and Limitations
❖ Firstly, real GDP of one country must be converted into same
currency units as real GDP of other country (typically, USD is
used)
❖ Secondly, goods and services in both countries must be valued at
same prices, e.g. using purchasing power parity (PPP).
For PPP Refer: Economists Big Mac Index: realistic FX Rates
Big Mac in SA: R.33.50; in India: 245; in PPP terms INR/R = 7.31
Market FX Rate: INR / Rand = 5.25 (median)
166
Aggregate Demand-Supply
Short-run-Long-run
Equilibriums
167
Aggregate Demand
SG# 79 - 82
AD shows quantities of Real GDP buyers collectively buys at different price
levels
Is downward sloping but not for same reason as micro-demand curve
A downward sloping aggregate demand curve means when price level drops,
quantity of output demanded increases; national income increases;
Aggregate Demand shifts
Determinants of Aggregate
Demand
❖
❖
❖
❖
❖
Consumer wealth
Household indebtedness
Taxes
Consumer expectations
Real interest rates
❖ Real interest rate & Expectations of
Returns
Effect of Net Exports on Aggregate
Demand
❖ Foreign incomes and Exchange rate
(depreciation)
168
Aggregate Supply
In long run economy uses all factors of production efficiently,
∴ Long run AS is a vertical line at potential GDP.
Potential output – highest level of Real GDP sustainable over long term.
Determinants of Aggregate Supply
Factors other than price level shifts supply curve
❖ Prices of factors of production:
Price of labour, capital, land changes
AS Curve shifts left
❖ Exchange rate:
Value of the Rand decreases, this
increases the cost of importing
foreign factors of production;
❖ Technology:
Increase in technology shifts AS curve
shift right;
❖ Business taxes can
Affect output decisions of firms
curve shift
AS
169
Short - run Equili brium
Short run-in macroeconomic analysis, market economic condition
changes, prices (& wages) fail to adjust quickly to maintain equilibrium;
Failure of equilibrium cause long periods of shortage / surplus; economy
fails to achieve natural employment and potential output.
Occurs when Real GDP demand is equal to GDP supply.
SRAS
Price level
SRAD
Short-run Equilibrium
Output
170
Long- run Equilibri um
Long-run (LR) macroeconomic equilibrium when Actual GDP = Potential GDP
When Real GDP > Potential GDP, is inflationary gap; Real GDP < Potential GDP is
recessionary gap
Real GDP determined when LR AD Curve intersect LR AS Curve.
Point of LR macroeconomic equilibrium where economy achieve full potential output
LRAS
Price level
LRAD
Short-run Equilibrium
Output
171
Economic Cycles – Expand & Contract
SG# 82
Economic fluctuation: Btw periods of expansion (growth) & contraction
(recession)
Economic indicators: GDP, Interest rates, Employment, Consumer spending
Four stages of economic cycle:
Expansion, economy growth rapid, interest rates low, production
increases, inflation builds-up.
Peak is when growth is Max; imbalances in economy needs corrected;
Correction occurs with contraction: growth slows, employment falls,
prices stagnate;
Trough is reached when
Peak economy hits lowest point and growth recovers
Peak
Expansion
Expansion
Expansion
Contraction
Contraction
Trough
Trough
172
Inflation – Causes, Types
&
Deflation
173
Consumer Price Index and Inflation
SG# 83 - 86
❖ The CPI is measure of average price level of consumer goods and
services purchased by households.
❖ Used as key indicator of price changes:
❖
In economy
❖
In standard of living (tells about value of money in wallet)
❖ South Africa – CPI basket: check www.statssa.gov.za (latest)
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑪𝑷𝑰 𝑩𝒂𝒔𝒌𝒆𝒕 𝒂𝒕 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑷𝒓𝒊𝒄𝒆𝒔
𝑪𝒐𝒏𝒔𝒖𝒎𝒆𝒓 𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙 =
𝒙 𝟏𝟎𝟎
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑪𝑷𝑰 𝑩𝒂𝒔𝒌𝒆𝒕 𝒂𝒕 𝑩𝒂𝒔𝒆 𝑷𝒆𝒓𝒊𝒐𝒅 𝑷𝒓𝒊𝒄𝒆𝒔
174
Biases in Consumer Price Inflation
How Bias Impact Estimation of CPI
❑ New Goods: Ignores new goods introduced in market;
❑ Unmeasured Quality Changes: Does not account for quality and value
addition;
❑ Substitution bias: Preference over cheaper alternatives unaccounted;
❑ Outlet substitution bias: Use of Discount and Convenience Store
unaccounted;
175
CPI and Inflation & Causes
𝑪𝑷𝑰 𝒕𝒉𝒊𝒔 𝒚𝒆𝒂𝒓 − 𝑪𝑷𝑰 𝒍𝒂𝒔𝒕 𝒚𝒆𝒂𝒓
𝑰𝒏𝒇𝒍𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 =
𝒙 𝟏𝟎𝟎
𝑪𝑷𝑰 𝒍𝒂𝒔𝒕 𝒚𝒆𝒂𝒓
❖ Demand-pull Inflation
Aggregate Demand
> Productive Capacity in economy;
Central bank increases money supply through lower reserves (monetary policy);
❖ Cost-push Inflation
When cost of factors of production increases; Wage increases (under union pressure);
Supply shocks or constraints (Ukraine- Russian conflict; China’s Covid restrictions)
❖ Monetarist Approach
Sustained high economic growth causes inflation; view of quantify theory of money –
speed of money
176
Inflation – Types
Two Forms of Inflation – PPI and CPI
❖ PPI: Producer Price Index – this is price of factors of production at
factory gate;
❖ Useful for computation of cost of intermediate goods; feeding into
CPI; (called wholesale price index (WPI) in some countries)
❖ CPI: Consumer Price Index: prices consumers pays at retain stores;
177
Inflation – Pictorial Presentation
Food inflation
178
Effects of Inflation
❖ Distribution Effects – Benefits borrowers; costs lenders; real-value
of money is reduced;
❖ Economic Effects – decreased economic growth, higher
unemployment; productive investment replaced by speculative
practices for maintenance of real value of their wealth
❖ Social & Political Effects – Cause different groups to blame each
other; deteriorating standards of living cause political unrest
179
Deflation & Causes
General decline in prices for goods and services; money supply and credit
in economy contracts; & a concern for economists
Causes purchasing power to rise over time nominal costs of capital, labour,
goods, and services to fall; benefits consumers with more purchasing
power with same nominal income
Opposite of inflation and is negative; harms borrowers, pay-off debts
worth more than they borrowed
180
Money Supply & Interest Rates
181
Money Supply
Vital Three Functions
❖ Medium of exchange:
❖Currency - physical notes and coins in different currencies; (USD, ZAR)
❖Demand Deposits - money used to make / receive payments;
❖ Unit of account:
❖Measure for stating price of goods and services;
❖Price of a kilogram of fillet steak R105 at one supermarket and R85 at another;
❖ Store of value:
❖Can be held and exchanged for goods and services at later date;
❖To use it as a store of value low inflation rate needed; (held as savings)
182
Liqui dity and Monetary Aggregates
Degrees of Liquidity
M0 & M1: (highest liquidity): notes & coins in circulation & demand
High
Liquidity
deposits (cheque & transmission, demand deposits);
M2: M1 + Short-term time deposits + money market accounts of 24
hour withdraw limit; (less liquid than M1)
M3: M2 + Long-term time deposits + money market accounts longer
than 24 hour limit; (less liquid than M2)
M4: (lowest liquidity) M3 + other financial assets
Least
Liquidity
183
South Africa – Economy and
Sectors
184
Economic Sectors
SG# 30 - 36
South African Economy – Political Structure
❖
Republic of South Africa has a constitution; her supreme law;
❖
Constitution of Republic of South Africa, 1996 defines
composition of government and its operations
❖
Extent and composition of government expenditure are directly
or indirectly outlined in Constitution.
185
Economic Sectors
Constitutional Framework
❖ Constitutional right to tax,
levies; funds for constitutional
duties
❖ Sec. 75 allow money bills process
(bills confer right to tax)
❖ Parliament’s money bill makes tax,
levies fair;
❖ Tax payroll and workforce;
❖ Tax on property;
❖ Domestic tax on goods and
services;
❖ Tax on international trade
transaction; and
❖ Stamp duties and fees.
❖ Central govt tax categories:
❖ Tax income and profits
(corporate);
186
Economic Sectors
Public Economics
❖
Public economics focuses on decisions around expenditure,
taxation, financing, and regulation;
❖
Public sector has regulation element implemented through law
enactment and declaratory orders that result in different allocation of
resources;
❖
Views on role of government in an economy include
❑
Individualistic or mechanistic view – models free-market economy;
❑
Public interest, or collectivist or organic view – collectivism paramount
❑
Most countries follow a combination of two views
187
Economic Sectors
Composition of Public Sector
❖
Central government (e.g. government departments),
❖
General government (e.g. Provincial and Local
governments)
❖
Public sector, include public enterprises and
corporations like Eskom, South African Airways;
188
Economic Sectors – SA–Public Sector
Central Govt. receive funds from
budgets, levies, other non-tax
income;
Local & Provincial Govt. focus on
service delivery;
Politics influence expenses;
financed from tax and charges on
electricity and water.
Entities borrow funds and repay from taxes.
Public enterprises: Eskom, Transnet, SABC and SAA; Govt major,
shareholder
189
Broad Functions – Govt.
Resource: Allocation Distribution and Stabilization
Allocative Role: Govt determine allocation of resources like: roads, education,
healthcare etc.;
Distributive Role: Free market results in unequal income distribution; Govt.
intervention to correct this anomaly; benefits like state housing, public schools
to bridge gap;
Stabilization Role: market stabilization paramount; Govt. intervention to
correct any market manipulation or market disorders; instruments: fiscal policy
by govt.; monetary policy by central bank
190
Economic Sectors
Two Other Sectors – Foreign and Monetary Sectors
Foreign Sector:
Consists imports and exports (trade), foreign direct investment,
foreign portfolio investments; transactions with external economies;
affects domestic economy; if imports high, affects exchange rate:
demand increase for foreign currency, rand depreciates; price of petrol
and diesel increases, drives inflation above target; key to track
developments in foreign sector
191
Economic Sectors
Two Other Sectors – Foreign and Monetary Sectors
Monetary Sector:
Domain of central bank of any country; main instrument monetary
policy and exchange control regulations;
Objective is stability of prices & country’s currency; involves
management of financial markets;
192
Economic Sectors
Productivity Relationship Among Entities
Productivity relationship among public, private, foreign, and financial sectors;
❖
Public sector: goods and services such as roads, hospitals, schools, etc.; make
laws to influence trade;
❖
Private Sector: - involve trade (import and export) and financing activities;
❖
Globalisation & Integration: goods, services & financial markets make
relationships among public, private, foreign, and financial sectors
inevitable; Cross-border investors look for economies which are less risky,
well functioning well regulated; also look for policy stability and certainty.
193
Fiscal, Monetary Policies
& Trade Theories
194
Fiscal Policy & Monetary Policy
Details
Fiscal Policy
SG# 89 - 95
Monetary Policy
Principles
Price Stability; Economic Growth; Full employment;
Reduction of Inequality
Price stability (stable inflation), stable interest rate
regime; stable financial sector and foreign exchange
rate;
Definitions
Deals with government revenue collection and
expenditure to manage domestic economic affairs;
Exercising monetary controls to ensure price stability,
interest rate and FX rates in domestic economy
Policy Tools
National budget to manage financial affairs of
national, provincial and local govt.; using tax rates or
govt. expenditure policy including subsidies for
economic management;
Cash reserve ratio management of monetary
aggregates;
Repo-rate for interest rate management; apart from
banking regulations
Ministry of Finance / Govt. of South Africa and its
Parliament
South Africa Reserve Bank
Policy Maker
195
Fiscal Policy
Tax Revenue – Source of Govt. Funds
❖ Taxes on income and profits (largest source of revenue for
government; include taxes paid by individuals & businesses on their
incomes – direct)
❖ Domestic taxes on domestic goods and services (VAT, airport tax indirect)
❖ Taxes on international trade and transaction (customs duties)
❖ Taxes on payroll and workforce (skills development levy)
❖ Taxes on property (transfer duties and estate duty)
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Fiscal Policy – Government Budget
Revenue balanced against govt. expenditure (budget) as:
❖
Economic classification, type of expenditure incurred say,
(payments such as government salaries, transfers and
subsidies, and payments for capital assets)
❖
Functional classification, categorize expense according to
purpose or social objectives say, (education, defence,
housing, etc. support reduction of income inequality)
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Public National Debt
Public Finance
❖ What a government borrows to make sure it can finance all its planned
expenditure, i.e. make up its budget deficit.
❖ A budget surplus, a government would not in principle need to
increase its debt.
❖ When debt is used to fund economic expansion, current and future
generations stand to reap rewards.
❖ Debt used to fuel consumption only presents advantages to the current
generation.
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SA Govt. Budget Value
In ZAR Million
Source: Trading Economics, 2019 (Quarterly Data)
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Monetary Policy
SG# 91
Mandate of Reserve Bank / Central Bank
❑ Most important responsibility, influence over amount of money in
circulation;
❑ Aim is to create price stability
❑ Price stability: situation whereby prices of goods and services
offered in marketplace either change very slowly or do not
change at all – factors affecting this include employment and
inflation;
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Monetary Policy Instruments
Mandate of Reserve Bank / Central Bank
❖ Accommodation policy: composed of changes in repo rate; other conditions
like regulation of quantity of money through variations in cost of credit’
❖ Open Market policy: involves sale / purchase of domestic financial assets
National T-bills / Govt. bonds) by SARB to influence interest rates and quantity
of money;
❖ Other Instruments: nonmarket measures – credit ceilings, deposit rate
control, changes in hire purchase agreements; SARB intervenes in forex
markets and public debt management; and moral suasion
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South Africa Reserve Bank
Policy Tools of SARB
❖ Inflation Targeting: SA uses flexible inflation-targeting framework in 2000 (a
3% to 6% band)
❖ Required Reserve Ratios: Banks required to maintain cash balance with S.A.
Reserve bank as a 2.5% of few categorized deposits;
❖ Repo Rate: Rate SA Reserve Bank charges banks for borrowing – measure to
infuse liquidity (7.25%; revised in Jan’2023 by 25 bps)
❖ Open-Market Operations: measure instituted to either remove excess liquidity
or infuse liquidity in banking system
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South Africa Monetary Stats
Key Stats – South Africa Reserve Bank
•Reserve Requirement Ratio: Total Liabilities: South Africa, set as 2.5 % in Feb 2023
•South Africa Reserve Requirement Ratio data updated monthly, available Feb 1994 to Feb 2023
•The data is reported by CEIC Data #
•In the latest reports, South Africa Money Supply M2 increased to 225.9 USD Bn. YoY in Jan 2023
•Foreign Exchange Reserves in South Africa was measured at 47.3 USD Bn. in Jan 2023.
•The Foreign Exchange Reserves equalled 5.0 Months of Import in Jan 2023
•South Africa Domestic Credit reached 287.6 USD Bn. in Jan 2023, representing an increase of 10.3 % YoY
•The country's Non Performing Loans Ratio stood at 4.7 % in Dec 2022, compared with the ratio of 4.6 % in
the previous month
•Household Debt of South Africa reached 40.7 % in Sep 2022, accounting for 40.7 % of the country's
Nominal GDP
#
Source
https://www.ceicdata.com/en/indicator/south-africa/reserve-requirement-ratio
https://www.bis.org/mc/currency_areas/za.htm (additional information BIS, Data)
203
Ripple Effects of
Open Market
Operations
Banks
Stock
Market
S.A.
R. B.
Savings &
Credit
Services
Financial
Services
Nonbanks
Monetary Transmission of Interest Rates
Change in Repo Rate
Insurance
Cos
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Expansionary & Contractionary
Examining Fed Funds Rate - USA
General logic behind why Fed changes target range of FFR: if banks pay a higher rate on money
borrowed overnight from other banks, they’ll charge a higher interest rate on loans to their
customers. When banks charge their customers higher rates, consumers and producers borrow less
money, leads to less economic activity. This is contractionary monetary policy
If Fed lowers target range of FFR, and banks now pay a lower rate on interbank loans, they’ll also
lower interest rates they charge customers on loans. When banks charge their customers lower
rates, producers and consumers borrow more money, which generates more economic activity. This
is expansionary monetary policy
Source: https://basu.substack.com/p/a-very-basic-primer-on-interest-rates#:~:text=The%20IORB%20rate%20is%20the,less%20than%20the%20IORB%20rate.
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International Trade
SG# 94 - 95
International Trade and Trade Theories
❖ Absolute Advantage: composed of changes in repo rate; other conditions like
regulation of quantity of money through variations in cost of credit’
❖ Comparative Advantage: involves sale / purchase of domestic financial
assets National T-bills / Govt. bonds) by SARB to influence interest rates and
quantity of money;
❖ New Trade Theory: nonmarket measures – credit ceilings, deposit rate
control, changes in hire purchase agreements; SARB intervenes in forex
markets and public debt management; and moral suasion
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International Trade
International Trade Policy
Trade Policy (Nations): Outlines protection measures to protect country’s domestic
firms from foreign competition.
Market size strongly influence foreign and domestic investment; changes in
technology, liberalisation policies towards trade and investment; growing global
supply chains by multinational enterprises (MNEs) make trade policies at home and
host countries crucial in encouraging foreign and domestic investment
Maximise contribution of investment to national development; national trade policy is
complex process; requires decisions involving various levels of govt., companies,
business associations, consumer organisations, trade unions, and civil society.
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Question
&
Answer
208
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209
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