LLB Economics - Elective
Santosh Nair | Mmathapelo De Jenga
September : 30, 2024
October : 1, 2, 3, 5, 7, 8, 9, 10 - 2024
REGENESYS’ INTEGRATED LEADERSHIP AND
MANAGEMENT MODEL
2
D E V E L O P I N G R E G E N E S YS G R A D U A T E A T 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:
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THE QUINTUPLE BOTTOM LINE
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
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Fac ilit at io n E xpec t at io ns
v Be open-minded
v Please raise the hand when you have to speak
v Listen carefully
v One conversation at a time
v Respect the opinions of others / if you disagree, do so politely
v Give constructive feedback
v Build on the ideas of others rather than destroying them
vTake some risks and share new ideas
vHave fun and enjoy the experience!
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Key A r eas Cover ed in This Cou r se
COURSE OUTLINE & SESSION PLAN
Introduction to Economics, Economic Systems and Modelling
PPF, Demand, Supply, Equilibrium and Elasticity
Production and Costs
Week – 1
30 Sept – 3 Oct.
Market Structures and Competition
Macroeconomic Indicators: GDP, Inflation, Fiscal & Monetary Policy
Week – 2
5 – 7 Oct
International Trade
6
L ear ning O u t c o mes
v Understand the task of economics and distinctions between
microeconomics and macroeconomics
v Analyse the relationships between demand, supply and market
equilibrium
v Show the relationships between production and cost
v Describe perfect and imperfect competition in the economic
environment.
v Distinguish between fiscal, monetary and trade policy
7
TAK E N OTE O F TH E S E S Y MBO L S … !
v Slides with this mark not part of this course
v Slides with this mark for knowledge;
Content NOT included in EXAMS…!
v SG # 1 – This means: Study Guide & Page
Number; You can locate content in this page!
SG# 7
8
Caution | Versigtigheid | Uqaphele
vPlease:
v DO NOT read Study Guide NOW!
v LISTEN – Allow Your EARS To Do Their JOB!
v Take Notes – It will help you to focus
9
I nt r o du c t io n
Activity – 10 Minutes
Aim: Acquaintance
Break-time is Democratized
Depends upon Attendees
Time: Keep it short
Task: Please introduce yourself:
v Name
v Professional background (if willing to share)
v Keen area of interest in Economics
10
Yo u r Take. . ? P lease…
v Why do you … want to study Economics?
v Why should you – a law-student know
Economics?
v What is the big – deal?
11
I nt r o du c t io n t o E c o no mic s – Soc ial Sc ienc e
“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
v Reference text: Regenesys Study Guide
v Key textbook: Parkin, M. 2019, Economics, Global Edition, 13th ed., Harlow, United Kingdom: Pearson Education
12
D ef init ion of E c onomic s
v Microeconomics - study of choices that individuals and
businesses make, way these choices interact in
markets, and influence governments.
v 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
E c onomic P r oblems
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 E c onomic Ter ms
SG# 6
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 E c onomic Ter ms
SG# 6
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 E c onomic Ter ms
SG# 7
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)
17
Fac t o r s o f P r o du c t io n
SG# 9
The Key 4 Ingredients in Economics of Production and Services
v
Land – geographical area; can be bought or rented
v
Labour – people who work in factories; only be rented
v
Capital – physical, machinery, equipment; bought / rented
v
Entrepreneurship: organisation of work under one common
goal; holding various parts together & make them work in unison
18
E ver yone Mu s t Make Choic es
Choices & Constraints
v Households – limited by income
v Businesses – profit seeking (mix of goods/services)
v Governments – must choose how to spend taxes
19
RECALL …!
The 4 Factors of Production?
20
D is t ingu ish Be t ween Mic r o and Mac r o
Microeconomics
v Deals with choices, individuals and businesses make;
v Interaction of choices in markets; influence governments policies;
v Focus - single economic variable: demand, supply, price, consumer;
v Include factors of production (labour, land, capital, entrepreneurship),
from a single owner to single user of these resources;
v Example: a business studying supply and demand for a specific product, production
capacity, and effects of regulation by government on this product.
21
D is t ingu ish Be t ween Mic r o and Mac r o
Macroeconomics
q Study of performance of national, regional, and global economies and
policy tools used;
q Influences performance (e.g. taxation, public expenditure, subsidies, interest
rate changes, etc)
q Focus - entire economy (e.g. aggregate factors), aggregate output, savings
unemployment rate etc.;
q Include aggregate flows of income and expenditure between different
economic sectors.
q Example: effect of changes in interest rate or minimum wage levels on the
larger economy
22
E c onomis t s – Mic r o and Mac r o L evel
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
23
E c onomic P r oblems
v
SG# 6
We are faced daily with finite resources and choices
(decisions) on how to make best use of them.
v
Knowledge and skills required for economic analysis and
decision-making are fundamental prerequisites for individuals,
teams, organizations, institutions, societies, and governments.
24
What H ow and f or Whom?
SG# 9
Economics of Choice and The Three Key Questions
Positive
Normative
v
Economics create theories to answer question: “What is?” and “What ought to be?”
v
Consider: every day, billions of people make economic choices that result in what,
how, and for whom goods and services are produced
v
Choices people make are in interest of self and society
v
Trade-offs – when one item is given away for another’s possession
v
Opportunity costs – choosing an alternative by sacrificing a benefit
25
What H ow and f or 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)
26
Ot her Gu ide t o Choic es ?
SG# 10
Interests: 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
27
Tr ade- of f s ?
Scarcity & Choices
q Scarcity and choices create trade-offs
q A trade-off is an exchange – giving up one thing to get something
else
q Concept of trade-off is central to all economics
q Trade-offs consider self and social interest decisions (“big tradeoff”)
28
Oppo r t u nit y Cos t s
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
29
RECALL …!
The 3 KEY Questions in Economics
Scarcity & Trade-off
Opportunity Cost and an Example
30
E c onomic Sys t ems
SG# 10 - 11
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.;
31
E c onomic Sys t ems
SG# 10 - 11
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;
32
E c onomic Modelling and Theor ies
SG# 19
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
E c onomic Modelling
Three Key Steps
v Observation and measurement
v Model building
v Testing of model and development of theory
Typical economic model would appear like this
!"#$%&'() = *( + ,- . /012() + ,3 . !"4$%() + ,5 . 6784() + ,9 . %/6() + :()
34
D evelopment of E c onomic Theor y
SG# 21
Three Key Steps – Explained (in Text)
35
Obs t ac les t o E c o nom ic Models
SG# 22
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 o f an E c o no m is t
Three Key Task
v Devising methods and procedures for obtaining data
v Understanding and interpreting data
v Advising stakeholders on suitability of alternative
courses of action and allocation of scarce resources
37
RECALL …!
v 4 Economic Systems
v Economic Model
v Fallacy of Composition
v Post-hoc Fallacy
38
Gr aphs in E c o no m ic s
SG# 23-24
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; Delta △. Slope is: △y/△x
39
P r o du c t io n Po ssibilit y F r o nt ier ( P P F )
SG# 24 - 26
• 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
40
P P F f o r P izzas and Co o ldr ink s
Key Parts of PPF:
Dilemma of Two – what combo?
Efficient Frontier – only on the blue-line
SG# 24 - 26
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
41
P P F – Point s t o Remember
SG# 24 - 26
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
42
Task 4 You – Next Session
Assume your brother’s company produces pizzas and cool
drinks. Use graph to determine:
v Draw a PPF Curve / Graph to explain:
v If it makes 3-million pizzas how many cool-drinks can it
make?
v At14-million cool drinks how many pizzas can it make?
v What is the problem if company produces 2-million pizzas and
10-million cool drinks?
43
P P F – Real- t ime A pplic at ion
Textbook Ch-2 # 72
44
PPF – Real-time Application
Textbook
Ch-2 # 82
45
Market Structure and
Competition
46
A nal ysis o f Mar ke t S t r u c t u r e & Co m pe t it io n
Continuum of Market Structure
Monopoly /
Monopsony
Duopoly
Oligopoly
Monopolistic
Competition
Perfect
Competition
SG# 27 - 30
Perfect competition: (Ideal Condition)
Monopoly (imperfect competition)
Oligopoly (imperfect competition)
Monopolistic Competition
• Many sellers and many buyers;
• Identical goods / services
• No restrictions on entry into or exit from market
• Established firms have no advantage over new
ones
• Sellers and buyers are prices takers
47
Mo no po l y
SG# 27
Greek Words Meaning “One”
v Only one seller of a particular good; no competition; opportunity for exploitation
obvious.
v Monopolies exist for various reasons:
v Barriers to entry: entry might require large investment; (energy and transport sectors;)
v State intervention; (Eskom and Transnet in South Africa;)
v State award patent rights to certain companies (particular drug produced by
pharmaceutical company); and
v 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
48
Oligopol y
SG# 28
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
49
Mo no po lis t ic Co m pe t it io n
SG# 28
Common in Market Place
v Here firms have many competitors; each firm sell a slightly different
product;
v Many small businesses are of this kind;
v Common example, restaurant trade (excluding chain restaurants):
v Each restaurant is uniqueness; but all are competing for essentially
same customers (Economics online, 2015).
v Monopolistic competition is most common market structure you will
encounter
Product / service Differentiator is the key to Monopolistic Competition
50
Per f ec t Co m pe t it io n
SG# 29
v Many firms sell identical products (or services) to many buyers;
v There are no restrictions on entry into or exit from market;
v Established firms have no advantage over new ones; and
v Sellers and buyers are well informed about prices.
v Farming, grocery retailing, plumbing, dry cleaning, etc., reflect conditions for perfect
competition; Perfect competitive market structures exist with difficulty in real world.
v Organisations in perfect competition are price takers.
v Firm cannot influence market price because its production insignificant part of total market;
v Closest to perfect competition in the Foreign Exchange Market in the world
51
F r ee Mar ke t E c onomy – Per f ec t Co m pe t it io n
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.
52
F ir ms E nt r y and E xit
SG# 12
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
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)
53
RECALL …!
Perfect Competition
Oligopoly
Monopoly
Monopolistic Competition…
54
E c onomic sys t em
SG# 10 - 11
Examining Advantage and Disadvantage
v System of production, distribution and consumption of goods and
services of an economy.
v Principles and techniques to solve economic problems of scarcity
through allocation of limited productive resources;
v Market economy
v Command economy
v Mixed economy
à Comment on Open and
Closed economy
v Traditional economic system
55
F r ee Mar ke t ec onomy
SG# 12
Freedom for Market
v Firms and households act in self-interest; determine how resources get
allocated, what goods get produced and who buys the goods;
v No government intervention in pure market economy (“laissezfaire”)
v No truly free market economy exists in world;
v Separation of government and market;
v Prevents government from becoming too powerful, keep their
interests aligned with markets;
56
Advantages & Disadvantages of Free Market Economy
SG# 13
v Advantage – Free Market
Economy
v Efficiency in use of Factors of
Production
v Entrepreneurship encouraged
v More R&D, innovation and
v Only profitable goods/services;
v Healthy competition to produce
better products;
v Acceleration of technical
knowledge and processes;
v More engaged society
investments;
57
Advantages & Disadvantages of Free Market Economy
v Disadvantages – Free Market
Economy
v Firms do whatever is necessary to
make profit
v Distorted investment priorities
inequality
SG# 13
v Greater social divide between rich
and poor
v Disproportionate political influence
v Increase in corruption
v Increased exploitation of workers / v Environmental degradation
consumers
v “Self-first” and “anything for money”
v Increased social and economic
58
Command E c onomy – Commu nis t Cou nt r ies
v Government is central feature of economy; often involved in everything
from planning to redistributing resources; modelled on central planning
v Core of communist philosophy;
v Stable supply of resources; prices, full employment hallmark feature;
v Government owns key industries like utilities, aviation, and railroad;
v Erstwhile USSR, North Korea best examples;
v No private ownership of factors of production;
59
Command ec onomy
Advantages
v If executed correctly, government can mobilize resources
on a massive scale; Mobility can provide jobs for almost all
of the citizens;
v Government can focus on good of society rather an
individual; focus could lead to more efficient use of resource
60
Command ec onomy
Disadvantages
q Hard for central planners to provide for everyone’s needs;
q Consumption rationed by Govt., cannot calculate demand; only
sets prices;
q A lack of innovation since there is no need to take any risk;
q Workers are also forced to pursue jobs in government;
61
Mixed E c o no my
SG# 14
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
efficiency
> socialism;
< capitalism but
62
Mixed E c o no my
SG# 14
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
63
Mixed ec o no my
SG# 14
Advantages
v Less government intervention than command economy.
v Private businesses run efficiently, than government entity;
v Govt. use taxes to redistribute income, reduce inequality; run
safety-net: healthcare or social security
v Govt. corrects market failures; break-up large monopolies
v Tax harmful products – cigarettes reduce negative externality of
consumption;
64
Mixed ec o no my
SG# 14
Disadvantages
v Criticisms from both sides arguing sometimes too much
government intervention; sometimes there isn’t enough;
v Common problem is state run industries often subsidized by
government and run into large debts, they are uncompetitive;
65
Tr adit ional ec onomy
v Most traditional, ancient types of economies in world;
v These areas tend to be rural, second or third-world;
v Closely tied to the land, through farming;
v In this economic system, a surplus rare phenomenon;
v Vast portions of world still function under traditional economic system;
v Each member has specific and pronounced role – division of labour
v Societies close-knit, socially satisfied, but lack access to technology
and advanced medicine;
66
RECALL …!
MIXED Economy
COMMAND Economy
CAPITALIST Economy
TRADITIONAL Economy
67
End of First Unit
68
Demand, Supply, Equilibrium
And Elasticities
69
D ef ining Mar ke t
•
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;
70
U nder s t anding Movement in Mar ke t
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
71
D emand
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.
72
D emand Relat ionship
Change in Quantify Demanded
P1 (highest price) = Q1 (lowest demand)
P3 (lowest price) = Q3 (highest demand)
73
D emand Relat ionship
Change in Demand – Six Main Factors
v
Price of related goods (substitutes and complements)
v
Expected future prices
v
Income levels
v
Expected future income and credit
v
Population
v
Preferences
74
The D emand E q u at io n
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: !" = $ − &'
Where:
Or
' = $ − &!"
Negative sign is due to inverse relation between quantity
demanded and price
($)*$&+,
What it means
'
Price
$ and &
Positive Constants
!"
Quantity Demanded
75
The D emand E q u at io n
The demand equation (Parkin, 2019:116) denotes three things:
1.
The price at which no one is willing to buy the good (where
! is zero).
2.
As the price falls, the quantity demanded increases.
3.
The constant (") tells us how fast the maximum price that
someone is willing to pay for good falls as quantity increases.
76
The D emand E q u at io n
Demand Equation Denotes Three Things:
' = $ − &!"
!" = $ − &'
77
D emand f or E ner g y Bar s
Real-time Example – Demand Curve
78
Su ppl y
•
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;
79
Su ppl y Cu r ve
Supply Relationship
P1 (lowest price) = Q1 (lowest supply)
P3 (highest price) = Q3 (highest supply)
80
Su ppl y Relat ionship
Six Main Factors of Change in Supply
q
The prices of factors of production
q
The prices of related goods and services produced
q
Expected future prices
q
The number of suppliers in the market
q
Technological advances
q
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
81
N o t ic e
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.
82
E q u ilibr iu m – Mar ke t E q u ilibr iu m
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
83
E q u ilibr iu m in Mar ke t
A Case of Energy 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
84
E q u ilibr iu m – I n E ner g y Bar s Mar ke t
85
E q u ilibr iu m – I n E ner g y Bar s Mar ke t
Follow example in your study
guide
Discuss on Consumer Surplus &
Producer Surplus
v Schedule
v Graph
S
Consumer Surplus
P1
Producer Surplus
D
86
Task 4 Yo u
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
87
E las t ic it y – Conc ep t
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)
88
P r ic e E las t ic it y
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
89
P r ic e E las t ic it y o f D emand
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}
90
P r ic e E las t ic it y o f D emand
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 $10 Quantity changes from 30 to 20
What is price elasticity of demand?
!" #$"
!"%$"
!
Elasticity of demand = &" #'
&"%'
!
=
# &"
!'
'
).'
=
!
+
'
!
$
+,
/
+0
=
. =
= −0.6
,
12
91
E las t ic it y of D emand
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
92
I nc o me & Cr o ss E las t ic it y o f D emand
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
93
E las t ic it y of D emand
Factors Influencing Elasticity of Demand
v Substitutes
v Closer the substitutes for a good or service, more elastic is the demand for it.
v Income spent of a product
v Greater the proportion of income spent on a good, more elastic (or less
inelastic) is the demand for it.
v The time elapsed since the price change
v Longer the time elapse since price change, more elastic is demand
94
E las t ic it y of Su ppl y
Degrees of Supply Elasticity
95
E las t ic it y of Su ppl y
Factors Affecting Price Elasticity of Supply
v Time Factor:
v Short Period – relatively less elastic (adjustments costly)
v Long Period – more elastic (blessed with time)
v Nature of Commodity:
v Perishable Goods – relatively less elastic (empty inventory quickly)
v Durable Goods – more elastic (inventory lasts longer)
v Production Technique:
v Complex Production Technique – supply remains inelastic (expensive to change)
v Simple Production Technique – supply is elastic (ease of change)
96
E las t ic it y of Su ppl y – Fac t o r s I m pac t
Apply These Factors to Specific Industry
v Spare Production Capacity: If plenty spare capacity business can increase output without
increasing cost, supply remain elastic in response to change in demand
v 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
v 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;
v Time Period and Production Speed: Supply is price elasticity if firm is allowed longer time to
adjust its production levels;
97
Production & Cost
98
Relat ionship Be t ween P r odu c t ion & Cos t
Three Important Concepts
q Short and Long Run (Periods of time)
q Short-run: period of less than 1 year;
q Long-run: period greater than 1 year;
q Increasing and diminishing marginal returns
q Economies and diseconomies of scale
99
Shor t A nd L ong Ru n
Profiting in Long-run
v Organisations make decisions with objective of achieving
maximum shareholder value;
v Employees of the firm are agents who are accountable to their
shareholders;
v Decisions relating to maximum attainable profit become
critical;
v Particularly those that affect the long-run prospects of the firm.
100
Shor t Ru n
Time Frame
q Time frame where quantity of at least one factor of production is
fixed;
qFor most firms, capital, land, and entrepreneurship are fixed;
qLabour is variable factor of production;
q We call fixed factors of production “firm’s factory.”
q A restaurant might employ additional cooks due to seasonal
demand (short-run); but endure cost of Factors of Production that can’t
be changed;
101
L o ng Ru n
Time Frame
v A time frame in which quantities of all factors of production
can be varied.
v Long run is a period in which firm can change its factory;
v In long run restaurant might open second and third outlets; all
factors of production vary;
v There are minimal fixed costs and profit can be maximised
102
Beha vior of Cos t s
TABLE: PRODUCTION SCHEDULE
Total Fixed Costs
Total Variable Costs
Total Cost
Labour (workers per day)
Output (sweaters
per day)
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
Dollars per day
103
Sc hedu le of Aver ag e Cos t and Mar ginal Cos t
Labour
(workers
per day)
Output
(sweaters
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
104
Re t u r ns t o Sc ale C onc ep t
Laws of returns to scale a set of three interrelated laws:
v Law of increasing returns to scale – output increases by more
than proportional change in inputs;
v Law of constant returns to scale – output increases by same
proportional change as all inputs change; and
v Law of diminishing returns to scale – output increases by less
than proportional change in inputs.
105
I nc r easing and D iminishing Mar ginal Re t u r ns
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
106
Re t u r ns t o Sc ale: Res t au r ant Case
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
107
E xam ple – Res t au r ant – Task 4 Yo u
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”
108
L a w o f D iminishing Mar ginal Re t u r ns
v When marginal product of an additional worker is less than marginal
product of previous worker.
v Diminishing marginal returns: more workers using same capital;
working in same space.
v More workers added, very less for additional workers to do productive job.
v Law of diminishing returns: applies only in short run; long run, firms
increase size, relocate to bigger premises, employ more capital/equipment
109
E c onomies and D isec onomies of Sc ale
Scale Economies
Economies of scale (or economies of large scale) are:
q Efficiencies achieved through size of production (e.g. costs are reduced over large
production volumes)
q Example – automobile, ICT and peripherals etc.;
Major reasons for presence of economies of scale include:
q Division of tasks (increased specialisation per unit)
q Skilled and experienced employees per unit (learning curve)
q Reduction in waste
110
E c onomies and D isec onomies of Sc ale
Diseconomies of Scale Exist Through
q Difficulties in control and supervision (monitoring productivity
and quality of output across thousands of employees imperfect and
expensive)
q Slow decision making due to excessive size of administration
q Low employee motivation (e.g. just a number; sense of
alienation);
111
Sc hools of E c onomic Thou ght
SG# 18
Selection of well-known economic thoughts categorised for reference;
An explanation of each of these is beyond the scope of this course
Modern Schools of Thought (18th Century)
Economic System
Classical Adam Smith, Ricardo, Malthus
Capitalism and State Capitalism
Marxism (Karl Marx and Friedrich Engels)
Communism
Neoclassical (William Jevons, Carl Menger
and Leon Walras); preceded by classical thought
Socialism
Keynesian (John Maynard Keynes)
Shock Therapy (group of economic
policies to liberalize economy)
New Classical (Lucas Robert, Milton Friedman)
112
Sc hools of E c onomic Thou ght
SG# 18
Economic Cycles
Growth
Keynesian
Neoclassical Growth (Labor Capital & Tech led
Monetarism
New Growth Theory (Economic growth results in
The Phillips Curve
Creative Destruction (Schumpeter)
Permanent Income Hypothesis (Consumption spending)
Human Capital (incentive in seeking HC)
Rational Expectation (Decisions taken based on best available info)
Rule of Law (functions based on rules)
Time Consistency (Incentive to make and keep commitments is same)
Limits of Growth (economic growth limited by
economic growth)
unlimited human wants & desires)
nature set limits; derived on scarcity of resources)
Financial Accelerator (Financial market and economic conditions form a loop of reinforcement producing boom & bust periods)
Financial Instability Hypothesis (Prolonged prosperity in capitalist economy mover from stable finance structure (hedge fund) to instable
structure driven by (Ponzi-finance) speculative tendencies
Lender of Last Resort (Central banks of a country step in to support banks and financial institutions facing liquidity crises; coined by
Sir Walter Bagehot)
113
Sc hools of E c onomic Thou ght
Choice
Global Trade
• Comparative advantage
• Heckscher-Ohlin trade model
• Optimal Currency Area
• The Impossible Trinity
• New Trade theory (focus on
(Trilemma) is independent monetary
policy; fixed exchange rate and free
capital flows
(export product easy to produce)
economies of scale) and (network effects:
more users more the value from using the
product; MS Office, Mobile Apps;)
• Purchasing power parity
Tax and Spend Policies
•Tax incidence (division of tax between buyer & seller)
•Excess burden (cost of tax exceeds tax raised)
•Supply-side economics (supply induced economic growth; Arthur Laffer)
•Crowding out (excess govt borrowing can drive private enterprise out of capital
market driving up interest rate)
SG# 19
•Rational choice theory (human beings are rational decision makers)
•Game theory (optimal decision-making of independent and competing actors in a
strategic setting based on individual pay-offs)
•Public choice (Govt. decisions in public interest but benefits politicians too)
•Expected utility theory (attain utility under any circumstances)
•Prospect theory (loss aversion; investors weights more on perceived gains than
losses)
Markets
• Invisible Hand
• Marginalism
• Tragedy of commons (over
consumption of resources of society by a
few individuals)
• Property rights
• Polluter Pays Principle
• Adverse Selection (seller knows
more; Lemon market)
• Moral hazard (risky behaviour based
on guaranteed rescue)
• Efficient Market Hypothesis
• Rent seeking
114
SEMESTER TEST – 1
Theme 3.3
Learning outcomes
v Understand the task of economics and distinctions between micro
and macroeconomics
v Analyze relationships between demand, supply and market
equilibrium
v Show relationships between production and cost
115
End of Unit Microeconomics
116
Macroeconomics
117
Cir c u lar F low of I nc ome & E xpendit u r e
Scenario in an Economy
SG# 55
v Households that make consumption expenditures (C)
v Firms that make investments (I)
v Governments (G) buy Goods & Services, Taxes, Assistance
v The rest of the world that buys net exports (X – M)
v Firms that pay incomes to households (Y)
118
Cir c u lar F low of I nc ome & E xpendit u r e
SG#15
Economic Entities:
Households
Income
Expenses
Firms/Businesses
Govt.
Rest of World (Foreign Sector)
119
Cir c u lar F low of I nc ome & E xpendit u r e
SG#15
Economic Entities:
Households
Firms/Businesses
Govt.
Rest of World (Foreign Sector)
Centre: Financial Sector
120
Mac r o ec o no m ic S c ho o ls o f Tho u ght
Developments in Macroeconomics
SG# 47
v 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.
v 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.
v 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.
121
Mac r o ec o no m ic S c ho o ls o f Tho u ght
Developments in Macroeconomics
SG# 47-48
v 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.
v Neo-Classical: assumes people have rational expectations, strive maximise
utility; people act independently basis of all information they can attain.
122
Mac r o ec o no m ic S c ho o ls o f Tho u ght
Developments in Macroeconomics
SG# 48
v 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;
v 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;
123
Agg r eg at e I nc o me = Agg r eg at e E xpendit u r e
SG# 49
The Economic Identity
! = #$
! = % + ' + ( + (* − ,)
Economic Identities
The Meaning
!
Income / Gross Domestic Product / Gross National Income
#$
Aggregate Expenditure
%
Consumption – Private and Public
'
Investments – Private and Public
(
Govt. Expenditure (Revenue expense, transfer of benefits)
(* − ,)
Net Exports – Exports – Imports (Current Account Deficit)
124
Agg r eg at e I nc o me = Agg r eg at e E xpendit u r e
SG# 51
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)
! = #$
! = % + ' + ( + (* − ,)
We will expand this
125
Agg r eg at e I nc o me = Agg r eg at e E xpendit u r e
SG# 52 - 53
The Economic Identity – Two Factor Economy – Firms & Households
! = #$
This means income = expenditure
! = % + ' + ( + (* − ,)
This is a full GDP Identity
! = % + ' + ( + (* − ,)
This is GDP Identity for 2 Factor Economy
! = (% + ') + ( + (* − ,)
. + /'
%=%
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;
0 = '1 Investment = Autonomous Investment (automatic)
# = % + ' Expenditure = Consumption & Investment
. + '1) 23 (% + ')
! = # = (%
Equilibrium Condition is met with Income is Equal to Expenditure
∴!= %+'
. + 65 + '1
5=%
. + '1
∴ 5−65= %
This is Keynesian
Marginal Propensity to
Consume
. + 65) = MPC
(%
. + '1
∴ (1−6)5= %
∴ 50 =
7
78/
. + '1)
(%
126
Agg r eg at e I nc o me = Agg r eg at e E xpendit u r e
The Economic Identity – Three Factor Economy – Firms, Households & Govt.
Factor
Market
Firms rent Factors
of Production
Three
Factor
Economy
Model
Household
Govt.
Assistance
Assistance
Firms Receives
Sales Income
Households
Receive Rent
Tax
Tax
Firms
SG# 53
Goods
Market
Households Pay for
Goods (Services)
! = #$
! = % + ' + ( + (* − ,)
We will expand this
127
Agg r eg at e I nc o me = Agg r eg at e E xpendit u r e
SG# 54
The Economic Identity – Three Factor Economy – Firms, Households & Govt.
! = #$
This means income = expenditure
! = % + ' + ( + (* − ,)
This is a full GDP Identity
! = % + ' + ( + (* − ,)
This is GDP Identity for 3 Factor Economy
! = (% + ' + ()
. + /'
%=%
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.
0 = '1 Investment = Autonomous Investment (automatic)
Expenditure = Consumption
# = % + ' + ( & Investment + Govt. Exp.
.)
! = (% + '1 + (
Equilibrium Condition is met with Income is Equal to Expenditure
. + 32)+ '1 + (
.)
∴ ! = (%
. + 32 + '. + (
.
2=%
. + '1 + +(
.
∴ 2−32= %
. + '. + +(
.
∴ (1−3)2= %
∴ 20 =
5
56/
This is Keynesian
Marginal Propensity to
Consume
. + 32) = MPC
(%
. + '1) + +(
.
(%
128
E c onomic Indic at or s
Analysis of Economic Performance & Predictions of Future Performance of Economies
v Unemployment rate, inflation rate, GDP, forex, etc.
v Characteristics:
v
Pro-cyclic Indicators: Move in same direction of economy; GDP, Exports etc.
v
Counter-cyclic Indicators: Move in opposite direction of economy; unemployment
v
Leading Indicators: Change before economy changes: manufacturing, consumer
confidence
v
Lagging Indicators: Do not change direction for a few months: consumer price inflation
and unemployment trends;
v
Coincident Indicators: Move at the same pace/time as economy – GDP
129
Cir c u lar F low of I nc o me & E xpendit u r e
SG#15
Household
Firms
Income
Expenses
Government
Foreign
Sector
130
Gr o ss D o m es t ic P r o du c t
Key Economic Indicator
SG# 55
v GDP - primary indicator of health of country’s economy (due to
decreasing unemployment and increasing wages)
v Expenditure approach [C + I + G + (X – M)]
v 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
131
Cir c u lar F low of I nc o me & E xpendit u r e
Expenditure
Method
Expenditure
Method
SG#15
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
132
Cir c u lar F low of I nc o me & E x pendit u r e
USD
(2016)
Percentage
of GDP
Employee Compensation
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
Statistical Errors
-237
-1.3
GDP Expenditure Method
18,569
100
Items
Income
Method
Income
Method
SG#15
133
GD P o f S o u t h A f r ic a – 2010 - 2020
SG# 56
Trading Economics 2020
Population of South Africa – 59.4 Mn.
134
GD P o f U nit ed K ing do m – 2010 - 2020
Trading Economics 2020
Population of United Kingdom – 67.3 Mn.
135
GD P o f I ndia – 2010 - 2020
SG# 57
Trading Economics 2020
Population of India – 1.38 Bn.
136
Measu r es o f GD P
Inflation Matters
SG# 57
v 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;
v Real GDP - measure of total quantity of goods & services economy
produces not affected by price changes of those goods and services.
v
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)
137
GD P B ase Year - 2018 - Task 4 Yo u
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
Price * Quantity
Total
SG# 58
Nominal GDP for year
2018
2019
2020
Year
Price * Quantity
Total
Real GDP for year
2018
2019
2020
138
GD P – Gr o ss D o m es t ic P r o du c t
SG# 58
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
150
Price
Quantity
Nominal GDP for year
Year
Price
Quantity
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
139
GD P – Gr o ss D o m es t ic P r o du c t
SG# 58
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
150
Price
Quantity
Nominal GDP for year
Year
Price
Quantity
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
140
Gr o ss D o m es t ic P r o du c t
SG# 59
Estimation of GDP Deflator
!"#$%&' ()*
v GDP Deflator =
- .//
+,&' (*)
Year
Calculation
GDP Deflator
2013
(R200 / R200) x 100
(R600 / R350) x 100
(R1200 / R500) x 100
100 (always 100)
2014
2015
171
240
141
Gr o ss D o m es t ic P r o du c t
SG# 59
Estimation of GDP Growth
-.(&#/ 0 − -.(&#/ 2
!"#$#%&" '(#)*+ =
3 244
-.(&#/ 2
Economic Growth:
5 2060 7$ 8 5 209: 7$
5 209: 7$
3 244
9;
3 244
209:
0.03079 3 244
Real Economic Growth:
3.079 %
Real GDP (approx. 3.1%)
142
Gr o ss D o m es t ic P r o du c t
Some Uses and Limitations
SG# 59 - 60
v Uses for GDP
v Standard of living over time
v Business cycles
v Limitations of Real GDP
v Different currencies
v Purchasing power parity
143
L imit at io ns o f Real GD P
Some Uses and Limitations
SG# 61
v Firstly, real GDP of one country must be converted into same
currency units as real GDP of other country (typically, USD is
used)
v 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)
144
Agg r eg at e D emand
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;
SG# 61
Aggregate Demand shifts
Determinants of Aggregate
Demand
v Consumer wealth
v Household indebtedness
v Taxes
v Consumer expectations
v Real interest rates
v Real interest rate & Expectations of
Returns
Effect of Net Exports on Aggregate
Demand
v Foreign incomes and Exchange rate
(depreciation)
145
Agg r eg at e Su ppl y
In long run economy uses all factors of production efficiently,
SG# 62- 63
∴ 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
v Prices of factors of production:
v Technology:
v Exchange rate:
v Business taxes can
Price of labour, capital, land changes
AS Curve shifts left
Value of the Rand decreases, this
increases the cost of importing
foreign factors of production;
Increase in technology shifts AS curve
shift right;
Affect output decisions of firms
curve shift
AS
146
Shor t - r u n E q u ilibr iu m
Short run-in macroeconomic analysis, market economic condition
changes, prices (& wages) fail to adjust quickly to maintain equilibrium;
SG# 62- 63
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
147
L o ng- r u n E q u ilibr iu m
Long-run (LR) macroeconomic equilibrium when Actual GDP = Potential GDP
SG# 64
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
148
E c onomic Cyc les – E xpand & Cont r ac t
Economic fluctuation: Btw periods of expansion (growth) & contraction
(recession)
SG# 65
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 economy hits lowest point and growth recovers
Peak
Peak
Expansion
Expansion
Expansion
Contraction
Trough
Contraction
Trough
149
Consu mer P r ic e I ndex and I nf lat ion
SG# 65
v The CPI is measure of average price level of consumer goods and
services purchased by households.
v Used as key indicator of price changes:
v
In economy
v
In standard of living (tells about value of money in wallet)
v South Africa – CPI basket: check www.statssa.gov.za (latest)
!"$0 "1 !), 23$4'0 30 !%(('#0 )(*+'$
!"#$%&'( )(*+' ,#-'. =
. 566
!"$0 "1 !), 23$4'0 30 23$' )'(*"- )(*+'$
150
Biases in Consu mer P r ic e I nf lat ion
How Bias Impact Estimation of CPI
q New Goods: Ignores new goods introduced in market;
q Unmeasured Quality Changes: Does not account for quality and
value addition;
q Substitution bias: Preference over cheaper alternatives
unaccounted;
q Outlet substitution bias: Use of Discount and Convenience Store
unaccounted;
151
CP I and I nf lat ion & Cau ses
SG# 62
,-! &.'/ 0*%1 − ,-! $%/& 0*%1
!"#$%&'(" )%&* =
3 455
,-! $%/& 0*%1
v Demand-pull Inflation
Aggregate Demand > Productive Capacity in economy;
Central bank increases money supply through lower reserves (monetary policy);
v 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)
v Monetarist Approach
Sustained high economic growth causes inflation; view of quantify theory of money –
speed of money
152
I nf lat io n – T ypes
Two Forms of Inflation – PPI and CPI
SG# 66 - 67
v PPI: Producer Price Index – this is price of factors of production at
factory gate;
v Useful for computation of cost of intermediate goods; feeding into
CPI; (called wholesale price index (WPI) in some countries)
v CPI: Consumer Price Index: prices consumers pays at retain stores;
153
I nf lat io n – P ic t o r ial P r esent at io n
Food inflation
154
E f f ec t s of Inf lat ion
v Distribution Effects – Benefits borrowers; costs lenders; real-value
SG# 67 - 68
of money is reduced;
v Economic Effects – decreased economic growth, higher
unemployment; productive investment replaced by speculative
practices for maintenance of real value of their wealth
v Social & Political Effects – Cause different groups to blame each
other; deteriorating standards of living cause political unrest
155
D ef lat ion & Cau ses
SG# 67 - 68
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
156
Mo ney S u ppl y
Vital Three Functions
v Medium of exchange:
vCurrency - physical notes and coins in different currencies; (USD, ZAR)
vDemand Deposits - money used to make / receive payments;
v Unit of account:
vMeasure for stating price of goods and services;
vPrice of a kilogram of fillet steak R105 at one supermarket and R85 at another;
v Store of value:
vCan be held and exchanged for goods and services at later date;
vTo use it as a store of value low inflation rate needed; (held as savings)
157
L iq u idit y and Mo ne t ar y Agg r eg at es
Degrees of Liquidity
High
M0 & M1: (highest liquidity): notes & coins in circulation & demand 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
158
E c onomic Sec t or s
South African Economy – Political Structure
v
Republic of South Africa has a constitution; her supreme law;
v
Constitution of Republic of South Africa, 1996 defines
SG# 70
composition of government and its operations
v
Extent and composition of government expenditure are directly
or indirectly outlined in Constitution.
159
E c onomic Sec t or s
Constitutional Framework
v Constitutional right to tax,
levies; funds for constitutional
duties
v Sec. 75 allow money bills process
(bills confer right to tax)
v Parliament’s money bill makes tax,
levies fair;
v Tax payroll and workforce;
v Tax on property;
v Domestic tax on goods and
services;
v Tax on international trade
transaction; and
v Stamp duties and fees.
v Central govt tax categories:
v Tax income and profits
(corporate);
160
E c onomic Sec t or s
Public Economics
v
SG# 71
Public economics focuses on decisions around expenditure,
taxation, financing, and regulation;
v
Public sector has regulation element implemented through law
enactment and declaratory orders that result in different allocation of
resources;
v
Views on role of government in an economy include
q
Individualistic or mechanistic view – models free-market economy;
q
Public interest, or collectivist or organic view – collectivism paramount
q
Most countries follow a combination of two views
161
E c onomic Sec t or s
Composition of Public Sector
SG# 72 - 73
v Central government (e.g. government departments),
v General government (e.g. Provincial and Local
governments)
v Public sector, include public enterprises and
corporations like Eskom, South African Airways;
162
E c onomic Sec t or s – SA– P u blic S ec t o r
SG# 73
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
163
E c onomic Sec t or s
Resource: Allocation Distribution and Stabilization
SG# 73 - 74
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
164
E c onomic Sec t or s
Two Other Sectors – Foreign and Monetary Sectors
SG# 74
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
165
E c onomic Sec t or s
Two Other Sectors – Foreign and Monetary Sectors
SG# 74
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;
166
E c onomic Sec t or s
Productivity Relationship Among Entities
SG# 74
Productivity relationship among public, private, foreign, and financial sectors;
v
Public sector: goods and services such as roads, hospitals, schools, etc.; make
laws to influence trade;
v
Private Sector: - involve trade (import and export) and financing activities;
v
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.
167
F isc al Polic y & Mone t ar y Polic y
Details
Fiscal Policy
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
Policy Maker
Ministry of Finance / Govt. of South Africa and its
Parliament
South Africa Reserve Bank
168
F isc al Polic y
Tax Revenue – Source of Govt. Funds
SG# 75
v Taxes on income and profits (largest source of revenue for
government; include taxes paid by individuals & businesses on their
incomes – direct)
v Domestic taxes on domestic goods and services (VAT, airport tax indirect)
v Taxes on international trade and transaction (customs duties)
v Taxes on payroll and workforce (skills development levy)
v Taxes on property (transfer duties and estate duty)
169
F isc al Polic y – Gover nm ent B u dg e t
Revenue balanced against govt. expenditure (budget) as:
v
SG# 76
Economic classification, type of expenditure incurred say,
(payments such as government salaries, transfers and
subsidies, and payments for capital assets)
v
Functional classification, categorize expense according to
purpose or social objectives say, (education, defence,
housing, etc. support reduction of income inequality)
170
P u blic N at io nal D ebt
Public Finance
v What a government borrows to make sure it can finance all its planned
expenditure, i.e. make up its budget deficit.
v A budget surplus, a government would not in principle need to
increase its debt.
v When debt is used to fund economic expansion, current and future
generations stand to reap rewards.
v Debt used to fuel consumption only presents advantages to the current
generation.
171
SA Govt . B u dg e t Valu e
In ZAR Million
Source: Trading Economics, 2019 (Quarterly Data)
172
Mo ne t ar y Po lic y
Mandate of Reserve Bank / Central Bank
SG# 77
q Most important responsibility, influence over amount of money in
circulation;
q Aim is to create price stability
q 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;
173
Mo ne t ar y Po lic y I ns t r u ment s
Mandate of Reserve Bank / Central Bank
SG# 78
v Accommodation policy: composed of changes in repo rate; other
conditions like regulation of quantity of money through variations in cost of credit’
v 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;
v 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
174
Sou t h A f r ic a Reser ve Bank
Policy Tools of SARB
SG# 79
v Inflation Targeting: SA uses flexible inflation-targeting framework in
2000 (a 3% to 6% band)
v Required Reserve Ratios: Banks required to maintain cash balance with
S.A. Reserve bank as a 2.5% of few categorized deposits;
v Repo Rate: Rate SA Reserve Bank charges banks for borrowing – measure
to infuse liquidity (7.25%; revised in Jan’2023 by 25 bps)
v Open-Market Operations: measure instituted to either remove excess
liquidity or infuse liquidity in banking system
175
Sou t h A f r ic a Mone t ar y S t at s
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)
176
Change in Repo Rate
Open Market
Operations
Banks
Stock
Market
Savings &
Credit
Services
S.A.
R. B.
Financial
Services
Nonbanks
Monetary Transmission of Interest Rates
Ripple Effects of
Insurance
Cos
177
E xpansionar y & Cont r ac t ionar y
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.
178
I nt er nat io nal Tr ade
International Trade and Trade Theories
SG# 80 - 81
v Absolute Advantage: Countries focus on products they can produce more
efficiently and economically than other trading partners
v Comparative Advantage: Based on opportunity cost (Mohr and Fourie,
2020). Theory suggests each country will tend to specialise in and export those
goods in which it has low opportunity cost of production
v New Trade Theory (Krugman in Pettinger, 2013): suggests a critical factor in
determining international patterns of trade are substantial economies of scale and
network effects that occur in key industries
179
I nt er nat io nal Tr ade
International Trade Policy
SG# 81 - 82
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.
180
The South African
Economy
181
Sou t h A f r ic an E c onomy
The Context
q Prudent fiscal monetary policies helped SA to weather global shocks
(2008)
q Abundant natural resources
q Well-developed regulatory system
q Established manufacturing base
q World-class legal framework governing commerce, labour, and maritime
issues
q Laws on competition, copyright, patents, and banking regulation, to
name a few, all conform to international norms and standards
182
Sou t h A f r ic an E c onomy
The Context
q Contains marked duality; with sophisticated financial and industrial
economy, growing alongside an underdeveloped informal
economy
q “Second economy” presents both development opportunities and
challenges
q National Treasury point outs, “development not just about pursuit of
growth, also about creating a more equitable future”
183
E f f ec t of SA F isc al Polic y
v
World Bank (2014) reported South Africa has lifted “3.6 million
people out of poverty; cut extreme poverty by half, its use of fiscal
policy;”
v
Achieved mainly through cash transfers such as child support,
disability grants, and old age pensions;
v
South Africa’s National Development Plan sets ambitious
targets of eliminating poverty and cutting Gini coefficient to
0.6 by 2030; {Gini Coefficient (2020) is 63 (ranges from 0 – 1)}
184
Sou t h A f r ic a – The Challeng es
v
To continue boosting economic growth, SA need to address
infrastructure constraints (e.g. energy), broaden structural
reforms if it is to succeed in further reducing high levels of
unemployment and inequality;
v
Many new social policy proposals (e.g. National Health
Insurance Scheme);
v
Possibility of a fiscal cliff (unable to sustain current or
expanded spending levels on health, education, and welfare);
185
Task Q u es t io n / Ac t i vit y – Task 4 Yo u
Refer to your study guide
(Article) Why we need a new economic model
186
Task Q u es t io n / Ac t i vit y – Task 4 Yo u
Sustainable Development
What solution to future sustainability
development can your propose for South
Africa?
187
SA Mone t ar y Polic y – A n I ssu e
The Debate Continues
v
Adopted flexible inflation targeting framework 14 years ago (3% to 6%)
and success of this continues to be debated;
v
Flexible inflation targeting approach helped South African Reserve Bank
respond to global turbulence and periods of slow growth at home;
v
However, not been easy – inflation not always been within target range
(i.e. significant exchange rate changes and volatile oil prices have
challenged framework);
188
SA Mone t ar y Polic y – A n I ssu e
v
Resistance to inflation-targeting framework from; example, labour
movements (significant wage increases have inflationary effect on
economy)
v
Monetary Policy Committee and intensive stakeholder
consultations;
v
Following 25-basis point increase in repo rate in July 2014, Cosatu’s
response was one of “bitter disappointment”, laying blame for low
growth at door of conservative monetary and fiscal policies;
189
Sou t h A f r ic an E c onomy – Task 4 Yo u
Key Facts – Explore and Populate The Fields (Use IMF or CIA Factbook)
Region and population
Size
Growth
Infrastructure
Resources
Global economic strategy
Ease of doing business
Sovereign ranking
https://www.cia.gov/the-world-factbook/countries/south-africa/#economy
190
Practice Question Series
191
P Q # 1 | Fac t or s of P r odu c t ion & Inc ome
q 4 Factors of Production & Income
v LAND
v Rental Income
v LABOUR
v Wage Income
v CAPITAL
v Interest Income
v ENTREPRENEURSHIP
v Profit Income
192
P Q # 2 | Cat egor ize GD P of Cou nt r y X
Particulars
Amount in Rand
Serame bought a car from a savings costing:
R250
Nicolette took her children for a movie show
Bulelwa took her kids out for magic show and lunch
Thembisile bought a new office to run her law firm
R40
R35
R100
Mackinzie Investments gave financial assistance to Eskom
R700
Kalipa Auto exported trucks to South Africa
R200
Cosmo Mines & Metals, UK imported some Platinum from South
Africa
R120
Categorize these into GDP Identities
193
P Q # 3 | D emand- Su ppl y Sc hedu le & Gr aph
Demand-Supply Schedule
Price
Quantity-D Quantity-S
10
500
100
15
400
200
20
300
300
25
200
400
30
100
500
Draw a graph from this demand – supply schedule
Make a demand – supply schedule and explain
Demand – Supply Graph
600
500
400
300
200
100
0
1
2
Price
3
Quantity-D
4
5
Quantity-S
Please note:
You need NOT draw diagrams in QP
194
P Q # 4 | Cat egor ize GD P of Cou nt r y Z
Particulars
Amount in Rand
T bought a study table
250
N went out for lunch
S gifted a toy to child
M started a new business
50
35
300
P invested in debenture issue by an airline
300
CAL exported t-shirts to South Africa
200
XRP imported gas from South Africa
135
Categorize these into GDP Identities
195
P Q # 5 | Fou r Sec t or s of an E c onomy
Sectors
Activities
Households
Lends factors of production; buys goods and services
from goods market
Firms
Rents factors of production; pays income to factor
owners
Govt.
Charges taxes and offers subsidies and assistance
Rest of World
Engages in exports and imports
196
P Q # 6 | T wo- sec t o r E c o no my
Sectors
Activities
Households
Lends factors of production; buys goods and services from
goods market
Firms
Rents factors of production; pays income to factor owners
197
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LLB Economics
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Answer
199
T H A N K YO U
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