Grade 10 Economics Please find below Term 2's notes. Kindly work through it, and copy the notes in your book. Use the dates below: • • • • 14 May to 15 May 2020: Page 1-7 18 May to 22 May 2020: Page 8-28 25 May to 29 May 2020: Page 29-46 1 June to 5 June 2020: Page 47-62 Grade 10 Economics Term 2 Study Notes © e-classroom www.e-classroom.co.za Dynamics of Markets A market is any contact or communication between potential buyers and sellers to exchange goods or factors of production for money The interaction between demand and supply determines the prices and quantities of goods and services Value, Price and Utility Utility is the ability of a product or service to satisfy the needs or wants of consumers The more utility goods or services have, the greater the demand for them. These goods or services have value. © e-classroom www.e-classroom.co.za Characteristics of Utility Differs from person to person according to their needs and preferences e.g. one person may like video games, but another person may dislike them Utility can change e.g. a swimming pool has more utility in summer Utility is not the same as usefulness –a product that has utility e.g. cigarettes may be harmful, not useful Diminishing marginal utility – additional utility decreases when you buy more and more of a product The consumer will pay more for goods and services with higher utility The more satisfaction a consumer gets from the product, the more he or she is willing to pay for it © e-classroom www.e-classroom.co.za Value Barter value – when a product can be used in exchange for other goods and services A product has exchange value when someone is willing to pay for it; expressed in Rands and Cents © e-classroom www.e-classroom.co.za Relationship between Price, Value and Utility People will pay money for a product or service that has utility but is scarce. The commodity has a price Price of product or service = exchange value Therefore, high utility and high scarcity leads to high prices © e-classroom www.e-classroom.co.za Composition of a Market Market characteristics The seller who offers the best product will sell the product The buyer who offers the highest price will get the product Negotiation between a buyer and seller is called bargaining The deal is completed once the exchange of goods or services for a price takes place © e-classroom www.e-classroom.co.za Types of Markets Goods market – a market for consumer goods and services Factors market – a market for factors of production e.g. natural resources, labour, capital or entrepreneurship World markets – a market that serves the entire world; made more possible because of developments in electronic technology; using ecommerce, South African buyers can purchase goods and services from all over the world © e-classroom www.e-classroom.co.za Market Structures Perfect Markets Large number of buyers and sellers Perfect knowledge about market conditions No barriers to exit and entry All the goods and services on the market are homogenous (identical) No government interference regarding price No collusion between sellers to manipulate prices Example of a close-to-perfect market - the stock exchange © e-classroom www.e-classroom.co.za Market Structures Imperfect Markets Buyers and sellers influence product prices e.g. a seller can drop his prices and force someone else out of the market Producers can reduce quantity produced which increases the price Goods and services offered are not identical Buyers and sellers are not free to enter or leave the market Suppliers / producers sometimes collude to restrict quantity of product available e.g. OPEC countries with crude oil Barriers to entry often exist e.g. a vendor’s license may be required © e-classroom www.e-classroom.co.za Market Structures Types of Imperfect Markets Monopoly – only one seller of goods or services so provider can demand any price e.g. Eskom or Transnet Oligopoly – Only a few firms dominate the market e.g. Cell C, Vodacom, MTN Monopolistic competitive – Many buyers; many sellers with similar products therefore price variations occur e.g. a more expensive microwave may have extra functions or a better warranty © e-classroom www.e-classroom.co.za Prices (demand, supply and price formation) Theory of Demand The prices of goods or services are determined by the interaction between demand (of consumers) and supply (by producers). DEMAND Refers to the quantities of a product that potential buyers are willing and able to buy We need to consider the behaviour of consumers to understand demand Consumers will try to satisfy as much of their need as possible with their available resources (income) © e-classroom www.e-classroom.co.za Prices (demand, supply and price formation) NEEDS are consumers’ desires for goods or services which they need to survive WANTS are desired by consumers, but for comfort, not survival Individual demand - the quantity an individual consumer will buy in a specific period. Influenced by: Consumer’s income, taste and preferences The price of the product and prices of substitute products and complementary products Size of household Market demand is the total quantity of a specific product that all consumers in that market are willing to buy and it is influenced by the same factors © e-classroom www.e-classroom.co.za Law of Demand The quantity demanded of a product increases as the price of the product decreases The quantity demanded of a product decreases as the price of the product increases So long as all other factors remain constant © e-classroom www.e-classroom.co.za The Demand Schedule and Curve The individual demand schedule is a table that illustrates the relationship between the price of a product and one consumer’s demand for it The individual demand curve is a graphical illustration of the relationship between the price of a product and one consumer’s demand for it © e-classroom www.e-classroom.co.za Example of Individual Demand Schedule & Demand Curve Source: Via Afrika, 2020 © e-classroom www.e-classroom.co.za Example of Individual and Market Demand Schedules • There are three consumers: Sally, Sipho and Sarah. • The table shows the individual demands of each consumer at different prices of the peaches. • The last column shows the total market demand which is the sum of the individual demands. © e-classroom www.e-classroom.co.za Example of Individual and Market Demand Curves • The individual demand curves are shown on the graph for Sarah, Sipho and Sally, as well as the market demand curve (Total Market). These graphs are drawn by plotting the quantities from the Individual and Market Demand Schedule. • The demand curve has a negative slope – it goes downwards from left to right. • When the price of the product changes there is movement on the demand curve (up or down). © e-classroom www.e-classroom.co.za Illustrating Shifts in the Demand Curve If the price of the product remains constant, but any other factor changes, the whole demand curve will shift to the left or right and form a new demand curve Image source: Tutor2u.net, 2018 © e-classroom www.e-classroom.co.za Prices (demand, supply and price formation) Theory of Supply The definition of supply - the quantities of goods or services (products) that producers are willing and able to sell at certain prices We need to consider the behaviour of suppliers to understand supply Producers will always try to maximise their profit © e-classroom www.e-classroom.co.za Prices (demand, supply and price formation) Individual Supply – the quantity of a product an individual producer (seller) is willing to sell at a certain price. Influenced by: Price of products and alternate products Cost of production Other producers may enter or leave the market Changes in technology make new and cheaper production processes possible Natural factors such as drought or floods may affect supply Market Supply – This is the total quantity of a certain product that the producers of the product are willing to sell and it is influenced by the same factors. © e-classroom www.e-classroom.co.za Law of Supply The quantity supplied of a product increases as the price of the product increases The quantity supplied of a product decreases as the price of the product decreases So long as all other factors remain constant © e-classroom www.e-classroom.co.za The Supply Schedule and Curve The individual supply schedule is a table that illustrates the relationship between the price of a product and one producer’s supply of it The individual supply curve is a graphical illustration of the relationship between the price of a product and one producer’s supply of it © e-classroom www.e-classroom.co.za Example of Individual Supply Schedule & Supply Curve The supply curve has a positive slope – it goes upwards from left to right. When the price of the product changes there is movement on the supply curve (up or down). Image Source: Via Afrika, 2020 © e-classroom www.e-classroom.co.za Example of Individual and Market Supply Schedule • There are three producers: Joe, Sam and Ben. • The table shows the individual supply of each producer at different prices for the oranges. • The last column shows the total market supply which is the sum of the individual supplies. © e-classroom www.e-classroom.co.za Example of Individual and Market Supply Curves • The individual supply curves are shown on the graph for Joe, Sam and Ben, as well as the market supply curve (Total Market). These graphs are drawn by plotting the quantities from the Individual and Market Supply Schedule. • The supply curve has a positive slope – it goes upwards from left to right. • When the price of the product changes there is movement on the supply curve (up or down). © e-classroom www.e-classroom.co.za Illustrating Shifts in the Supply Curve Image source: Tutor2u.net, 2018 © e-classroom www.e-classroom.co.za Price Formation and Market Equilibrium In perfect competition, a market is regulated by the forces of demand and supply which can be plotted on the same graph e.g. SUPPLY AND DEMAND OF PHONES Demand Supply 18000 PRICE OF PHONES (R) 16000 16000 14000 16000 14000 Market surplus 12000 12000 10000 10000 8000 6000 8000 11000 14000 12000 10000 Market shortage 8000 6000 6000 4000 2000 0 1000 2000 4000 5000 6000 8000 10000 QUANTITY OF PHONES © e-classroom www.e-classroom.co.za Price Formation and Market Equilibrium Market equilibrium occurs when the quantity supplied matches the quantity demanded i.e. in the example, consumers intend to buy exactly the same number of phones that the producers intend to sell Equilibrium point – where demand and supply curves intersect - any changes in demand and supply affect this equilibrium. Equilibrium price – the price where the quantity demanded is the same as the quantity supplied (R11 000 in the example) Equilibrium quantity – the quantity demanded and supplied at the equilibrium price (5000 phones in the example) © e-classroom www.e-classroom.co.za Market Surplus and Market Shortage Market surplus – this occurs when the price goes above the equilibrium price and excess products are available. The quantity demanded will be less than the quantity supplied e.g. at R6 000, 10 000 phones are demanded, and 12 000 phones are supplied. Surplus = 2000 phones. Market shortage – this occurs when the price goes below the equilibrium price and insufficient products are available. The quantity demanded will be greater than the quantity supplied e.g. at R4 000, 12 000 phones are demanded but only 10 000 phones are available. Shortage = 2000 phones. © e-classroom www.e-classroom.co.za Price Mechanism Prices will change as soon as there is an imbalance in the market Price mechanism - if there is a surplus of goods, prices will drop and if there is a shortage of goods, prices will go up Buyers and sellers will negotiate to find a price that will keep both happy – they agree on an equilibrium price and quantity that suits each party © e-classroom www.e-classroom.co.za Functions of markets Bringing supply and demand together: buyers want to get what they need at the lowest possible price and buyers wish to sell their products at the highest possible price to maximise profit. If sellers make too much profit, the buyers feel exploited. Sellers compete with each other which keeps the prices under control. Allocating resources: the market‘s actions show producers how much to invest into producing a product. If they invest too much the product will be priced too highly for suppliers to pay. Self-regulatory markets prices that are too high result in lower sales so producers will have to reduce their prices in order to sell and they will make a loss If prices are too low, it is not worthwhile for producers to make the product - only once the price increases will producers start making the product again © e-classroom www.e-classroom.co.za Scarcity, Choice and Opportunity Cost The problems of scarcity and choice limit production, as producers never have the resources to produce everything Producers must choose what to produce and how to produce it because they can’t use the same resources to produce another product e.g. a country has limited fertile land and must decide how to allocate the land to different crops Opportunity cost – the real cost of choosing one thing over another e.g. if you take a vacation instead of spending the money on a car, the opportunity cost of the vacation is not getting the new car © e-classroom www.e-classroom.co.za Production Possibilities Curve A production possibilities curve (PPC) visually illustrates the concept of scarcity and choice A PPC shows the maximum amount of a product that can be produced with fixed resources (assuming all the factors of production are utilised and no wastage occurs) Inputs – what a producer uses to make a product Outputs – the goods or services that are produced © e-classroom www.e-classroom.co.za Production possibilities curve - example B A © e-classroom www.e-classroom.co.za Production Possibilities Curve - example • If the factory makes 9 000 computers, they cannot make any text-books because they will have used all their resources on computers • If they make 70 000 text-books, they cannot produce any computers because they will have used all their resources on text-books • If the factory wants to make more computers, it must make fewer textbooks • The factory’s resources need to be combined in such a way that the maximum number of computers and textbooks can be made in order to maximise sales and profits: this is called efficiency • Any point to the left of the curve e.g. A, indicates wastage. Any point to the right of the curve e.g. B, is impossible to produce, due to lack of resources © e-classroom www.e-classroom.co.za Efficiency and Unemployment in Economy The economy of a country is efficient when all the available resources e.g. capital, labour, natural resources and entrepreneurship, are used in the production processes of the country Unemployment occurs when some of these factors are not being used and production could be increased by utilising unused resources. © e-classroom www.e-classroom.co.za Shapes of PPC (rates of exchange) A PPC can be either a straight line, a convex curve or a concave curve. Image source: Synthenomics, 2019 © e-classroom www.e-classroom.co.za Position of the PPC The position and shape of the PPC depends on these factors: physical resources; skills and technology; effort; investment in infrastructure, construction, research and innovation Straight-line PPC – there is a constant rate of exchange (marginal rate of substitution : MRS) between products e.g. on the previous graph, for every additional 10 units of butter produced, production of guns reduces by 25 units Convex or Concave PPC – the rate of exchange or MRS in no longer constant © e-classroom www.e-classroom.co.za Changes in the PPC Internal factors may cause change in the PPC (producer has control) e.g. number of workers or size of production space External factors may cause change in the PPC (producer has no control) e.g. the price of fuel or a drought or flood Change in one output e.g. a a new harvesting machine may mean that more of one product (corn) can be produced in the same time as before Image source: ReviewEcon, 2020 © e-classroom www.e-classroom.co.za Changes in the PPC Change in both outputs e.g. electricity becomes cheaper and this increases the number of robots that can be made, leaving more resources available for crop production, so more corn is produced. This means that more of both products are made than before. With economic growth there is an increase in the amount and quality of resources and improvements in technology, resulting in greater production of all goods ( a higher Real GDP) © e-classroom Image source: ReviewEcon, 2020 www.e-classroom.co.za Indifference Curves An indifference curve is a graph that shows all the combinations of quantities of goods which will satisfy a consumer equally. At Point A, the consumer has more of Good Y than Good X and at Point D, the consumer has much more of Good X than Good Y, but they are equally happy with (or indifferent about) either choice (or any choice on the curve) Image source: Via Afrika, 2020 © e-classroom www.e-classroom.co.za Multiple Indifference Curves Consumers have more than one indifference curve. A collection of indifference curves is called an indifference map. Changes in income mean that consumers can make different choices If the consumer’s original income is represented by IC2 and his income increases, he will be able to buy more of both products (X and Y) and he would move to IC3 If his income decreases, he would be able to buy less of both products (X and Y) and he would move to Curve IC1 Changes in price of one of the products would affect the slope of the curve Image source: Via Afrika, 2020 © e-classroom www.e-classroom.co.za Effects of Inefficiencies Market inefficiency refers to a market that does not produce the maximum output with minimum input; or income generated in the market is not fairly distributed amongst all the participants Uneven distribution of income This leads to absolute poverty for some at which point the government must provide help in the form of welfare grants and pensions (for elderly) Poverty is accompanied by poor health, unhealthy living conditions and crime The provision of government assistance increases the market and therefore businesses will produce more and the PPC moves to the right © e-classroom www.e-classroom.co.za Effects of Inefficiencies Monopolies If there is not enough competition in a market, monopolies may develop A monopoly exists when there is only one supplier of a product The monopoly can then dictate the prices of certain products and exploit consumers, especially with essential goods and services such as basic foods, fuel, electricity, medication, public transport The government forbids monopolies to avoid exploitation If more producers join the market, efficiency improves, the PPC shifts to the right and consumers benefit © e-classroom www.e-classroom.co.za Effects of Inefficiencies Inflation and extreme fluctuations in business cycles High inflation rates > economic instability Reserve bank tries to control the rate of inflation Extreme peaks and dips in the business cycle causes instability which undermines investor confidence in the economy The state intervenes by using monetary policy instruments (government spending and/or interest rates) and fiscal policy instruments (taxation)to even out the impact of the business cycle across the whole economy In a stable economy, businesses don’t need to keep as much cash in savings, and can use it in production, which shifts the PPC to the right © e-classroom www.e-classroom.co.za Effects of Inefficiencies Pollution and exhausted natural resources Sadly, many businesses will pollute the environment and deplete natural resources to make profits The government establishes and enforces laws to control this Adhering to these laws can lead to increased costs for producers The PPC moves to the left with increased production costs © e-classroom www.e-classroom.co.za Public sector Central government represents the core of the public sector and includes departments of Education, Transport and Social Welfare and Parliament The next layer of the public sector is general government including the nine provincial governments The final level includes public corporations owned by government such as SABC. © e-classroom www.e-classroom.co.za Reasons for Government Intervention in Economy Making health care and education available for everyone Private sector does not provide enough services for all citizens Protection of the public against monopolies e.g. by setting maximum prices for certain commodities Prevention of exploitation of workers, therefore wages and working hours are regulated Control of strategic enterprises > provision of electricity and water © e-classroom www.e-classroom.co.za Ways that Government Intervenes in Economy Government takes care of the following: Maintains justice, law and order Collects taxes Spends tax money Owns some company shares e.g. in Transnet or Spoornet as establishing the cost of the infrastructure of these companies is too much for private companies to manage Influences prices and quantities e.g. sets price ceilings; sets price floors; subsidises certain products and services; and taxes certain products and services © e-classroom www.e-classroom.co.za Kinds of Intervention – Direct Taxes Direct taxes - money that individuals pay out of their wages or salary, or that businesses pay out of their profits, to the South African Revenue Service (SARS) Tax-paying consumers and businesses have less money to spend People have less disposable income or less ‘take-home’ pay Taxes cause the demand curve to shift to the left and the equilibrium point moves from E to E1. © e-classroom www.e-classroom.co.za Kinds of Intervention - Indirect Taxes Indirect taxes are taxes charged on goods and services Value-added tax (VAT) is an example of an indirect tax - it is charged as a percentage of the price of an item (currently 15%) Unit price tax e.g. excise tax on cigarettes and alcohol as a flat rate per unit regardless of unit price Reasons for indirect taxes Increase government income Reduce demand for products Increase price of imported goods which encourages local buying Effects of indirect taxes Makes certain products more expensive thereby reducing the demand for them Businesses sell less People buy locally Disposable income decreases © e-classroom www.e-classroom.co.za Graphs Showing Effect of Indirect Taxes on Market Equilibrium Effect of Excise Tax on supply © e-classroom Effect of VAT on supply (ad valorem tax) www.e-classroom.co.za Kinds of Intervention - Subsidies The government uses money received from taxes to provide subsidies to help poor citizens buy products and services and to help producers supply basic products at fair prices Subsidies to consumers Encourage consumers to buy more of a certain product Demand for the product therefore increases Achieved by reducing the indirect taxes on a product i.e. VAT or excise duty Governments may sometimes give consumers subsidies in the form of vouchers or grants towards buying particular items How subsidies can harm an economy Interference with the working of a market economy Leads to ineffective use of scarce resources, as producers are enabled to continue with production that would not be possible without the subsidy © e-classroom www.e-classroom.co.za Subsidies to Consumers Governments will pay an amount to consumers to subsidise the cost of certain products and demand for that product will then increase. Example Eskom will pay part of the cost if you buy a solar-powered water heating system as the government wants to ease electricity shortages. When this was announced, the demand for solar heaters increased and the demand curve moved right (D*D*). Since the quantity demanded exceeded the quantity supplied, the equilibrium price moved up from P to P* and the equilibrium quantity moved up from Qe to Q0. © e-classroom www.e-classroom.co.za Kinds of Intervention - Subsidies Subsidies to producers – The government pays a subsidy to the producer on condition that the producer then sells the product or service to consumers at a lower price Governments often pay subsidies to farmers, so that they can produce cheaper food which helps poorer people The South African government used to subsidise the price of bread Subsidies may be paid in the form of cash, or in the form of a tax reduction, to encourage producers to export goods. Reasons for farming subsidies – Farming is risky business (many potential natural hazards e.g. drought or floods) Farmers have very high input costs e.g. farm machinery, fertilisers and pesticides Farmers are essential for the country’s food security © e-classroom www.e-classroom.co.za Subsidies to Farmers • A subsidy is paid to a farmer lowering production cost and the quantity of maize produced increases • The supply curve shifts downwards to the right, forming a new curve (S*S*) that intersects the existing demand curve at E* • Thus the subsidy causes an increase in quantity supplied (Qe to Q0) and a decrease in market price from P to P* Many farmers in the USA and countries in the EU receive subsidies which means they can sell their produce cheaper. Countries who don’t receive subsidies find this unfair as consumers will buy imported products if they are cheaper, and then local farmers are forced out of the market. © e-classroom www.e-classroom.co.za Kinds of Intervention - Welfare Many governments including South Africa give welfare grants each month to people who are not able to work. Examples of welfare grants include old-age pensions, disability grants and child support grants Welfare grants are a form of transfer payment (taking from richer people and giving it to the poorer people) Sometimes the government pays welfare grants to producers in order to benefit poor people © e-classroom www.e-classroom.co.za Kinds of Intervention - Maximum and Minimum Prices Maximum Prices A price ceiling is the legal maximum price a supplier can charge for a product e.g. bread This is so that poorer people are still able to buy it Price ceilings usually lead to market shortages (Q2Q1) Often the formation of a black market (usually illegal) results in which products are sold for higher than the normal price © e-classroom www.e-classroom.co.za Kinds of Intervention - Maximum and Minimum Prices Minimum Prices A price floor is a guaranteed minimum price for a certain product This is done to keep certain producers e.g. farmers in business and guarantee them an income If the price floor is above the equilibrium price there will be a surplus of products and producers struggle to sell them Image source: Wikipedia, 2020 © e-classroom www.e-classroom.co.za Kinds of Intervention: Production of Goods by Public Sector The public sector produces two kinds of products - Public goods which are used by the community or society - for example, street lighting, roads, libraries, clinics Merit goods which are goods or services that benefit the whole community but are not profitable for a private company to produce - for example, child inoculations Government-owned companies e.g. Telkom, Transnet, Sasol and Eskom. Since 1994, the government has started to privatise these companies, which means that some of them have been wholly or partly sold to private investors Public goods are non-excludable (benefit all) and have non-rivalry (not profitable for private companies) The effects of government production: Products and services provided at a lower cost or for free More people will use the products or services Demand for these products and services therefore increases © e-classroom www.e-classroom.co.za Kinds of Intervention Minimum Wages In South Africa, farm workers, domestic workers and some workers in restaurants earn a minimum wage to prevent them from being exploited by employers This is intended to raise the income and living standard of the very poor Unfortunately, the demand for workers often drops which leads to increased unemployment © e-classroom www.e-classroom.co.za References Badenhorst, I., Mabaso, G., Mbotho, J., Maliehe, T., Tshabalala, H., & van Zyl, J. (2011). Via Afrika economics. Cape Town: Via Afrika. Business Jargons. (2020). Demand Curve Obtained from Individual Demand Schedules [Image]. Retrieved from https://businessjargons.com/market-demand.html Synthenomics. (2019). Production Possibilities Frontiers [Image]. Retrieved from http://synthenomics.blogspot.com/2012/03/exercise-in-production-possibilities.html Tutor2u. (2018). Shifts in the Demand Curve [Image]. Retrieved from https://www.tutor2u.net/economics/reference/shifts-inmarket-demand Tutor2U. (2018). Shifts in Market Supply [Image]. Retrieved from https://www.tutor2u.net/economics/reference/shifts-inmarket-supply Via Afrika. (2020). Demand, supply and price [Image]. Retrieved from https://viaafrika.com/wp-content/uploads/2019/07/EcoG10-studyguide.pdf Via Afrika. (2020). Indifference Curve [Image]. Retrieved from Via Afrika. (2020). Multiple Indifference Curves [Image]. Retrieved from https://viaafrika.com/wp-content/uploads/2019/07/Eco-G10-studyguide.pdf Via Afrika. (2020). Multiple Indifference Curves [Image]. Retrieved from https://viaafrika.com/wpcontent/uploads/2019/07/Eco-G10-studyguide.pdf Wikipedia. (2020). Price Floor [Image]. Retrieved from https://en.wikipedia.org/wiki/Price_floor © e-classroom www.e-classroom.co.za
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