lOMoARcPSD|53370221
Economics 1A summaries
Economics 1A (Varsity College)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
lOMoARcPSD|53370221
Textbook pages 1-7
Friday, 04 March 2022
17:39
WHAT IS ECONOMICS?
Definition: Economics is the study of how our scarce productive resources are used to satisfy human
wants OR Economics is the study of how society manages its scarce resources.
SCARCITY, CHOICE AND OPPORTUNITY COST(OC)- 3 central economic concepts
Scarcity - Limited resources
Needs - Necessities of life, things that are basic to survive E.g. food , water, clothing etc
Wants - Unlimited hearts desires for goods and services
Demands - A want that has the necessary means to convert that want into demand (willing and able)
Opportunity Cost - The value of the best alternative that was forgone (2nd best choice)What is
sacrificed to get more of the other goods.
EVERYTIME A CHOICE IS MADE - OPPORTUNITY COSTS ARE INCURRED
Illustrating scarcity and opportunity cost- Production Possibilities Curve
- The PPC(Production Possibilities Curve) indicates the combinations of any 2 goods or services that
are attainable when the community resources are fully and efficiently employed.
- The PPC is a graph that can be used to illustrate scarcity, choice and opportunity cost.
Any 2 points on the line are
equally efficient .
Summary of PPC
Description
Illustrated by
Attainable combinations
All points on or in the PPC
Unattainable combinations
All points beyond the PPC
Efficient combinations
All points on the PPC
Inefficient combinations
All points inside the PPC
Economic growth or
Technological advancement
Outward shift of the PPC
Further applications of the production possibilities curve
Improved technique for producing one type of good
Capital goods
Consumer goods
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 1- What Economics is all about Page 1
Increase in productivity of available
resources - ECONOMIC GROWTH
lOMoARcPSD|53370221
What is Economics
Monday, 07 March 2022
Textbook pages 11-18
10:08
Economics as a social science
• It is Social because we study the behaviour of humans
• It is a Science because economics involves a systematic attempt to discover regular patterns of behaviour
• These patterns are used to explain what is happening, to predict what might happen and to help
policymakers to device or choose the best economic policy
SOCIAL SCIENCE - About people
EMPIRICAL SCIENCE - Uses data and actual observations
USES CONDITIONAL LAWS :
Qty demanded increase - ceteris paribus ( all other things being equal)-NB
MICROECONOMICS VS MACROECONOMICS
- Microeconomics focuses on the individual parts of the economy
E.g. the motor vehicle industry
- Macroeconomics on the other hand is concerned with the "bigger picture", the economy as a Whole.
Examples of each are in box 1-3 in the textbook on page 12
POSITIVE VS NORMATIVE ECONOMICS
- A Positive statement is a statement of Fact
- A Normative statement is based on opinion or value judgement .(should)
- TB12 for examples
A FEW POINTS TO NOTE
- ECONOMIC WAY OF THINKING
- BLINKERED APPROACH(or biased thinking)
- Fallacy of the composition- assuming that the whole is always equal to the sum of the parts. Something that is true in a
single case may not apply to all cases. Soccer match, one person stands to get better view but if all do the same….
- Post hoc ergo propter hoc( after this , therefore because of this ). When 2 events happen after each Oher people assume that the second event
was a consequence of the first.
- Correlation vs Causation - Assuming that is 2 events happen at the same time they must be linked . Correlation does
not imply causation.
- Levels and rates of change - Calculations : Level of change : New - Old
Rate of change/Inflation rate: New- Old
x100
Old
Goods and services
CONSUMER GOODS - goods used or consumed by individuals or households. E.g. food and clothing
Consumer goods can be broken into three groups :
- Non - durable: Goods that are used once only e.g. bottle of bear
- Semi- durable: Goods that can be used more than once and usually last a limited period of time e.g. clothing
- Durable: Goods which usually last several uses
CAPITAL GOODS - goods that are used in the production of other goods , e.g. plant and equip , machinery.
FINAL GOODS - goods intended for final consumption by individuals, households or firms e.g. loaf of bread
INTERMEDIATE GOODS - goods that are used in the production of other goods
In other words , intermediate goods are goods that are processed further before being sold to the end users- consumes ,households or firms
PRIVATE GOODS - this is a good that is consumed by private individuals or households . The defining feature of a private good
is that consumption by others can be excluded.
PUBLIC GOODS - In contrast to a private good the public good is used by the community in general. The defining feature of a
public good is that individual consumption cannot be excluded e.g. traffic light at a busy intersection
ECONOMIC GOODS - This is a good that is made using scarce resources, that is to say there is a cost involved in the
production of an economic good. Most goods fall into this category
FREE GOODS - This is a good that by its nature is not scarce. e.g. air, sun and sea.
HOMOGENOUS GOODS - Goods that are identical in all aspects
HETEROGENOUS GOODS - Goods that are different in any number of ways e.g. size, variety , brand , quality etc
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 1- What Economics is all about Page 2
lOMoARcPSD|53370221
Questions to understand for LU 1
Wednesday, 09 March 2022
18:31
On completion of this learning unit, you should be able to:
• Define the term “economics”;
• Explain why economics is a social science;
• Distinguish between microeconomics and macroeconomics;
• Identify positive and normative statements;
• Explain the difference between wants, needs and demand;
• List the three (3) key elements of the basic economic problem;
• Explain the concept of scarcity, choice and opportunity cost
with the aid of a production possibilities curve;
• Use a production possibilities curve to distinguish between
efficient, inefficient and unattainable combinations of output;
• Illustrate by using the production possibilities curve, how an
improvement in the use of resources or an increase in the
quantity of resources affect production;
• Apply critical reasoning to correlation and causation.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 1- What Economics is all about Page 3
lOMoARcPSD|53370221
Economic systems
Tuesday, 08 March 2022
12:01
Textbook pages 34-37
Introduction- 3 central economic questions
• 1. What - goods & services must be produced, & in what quantities (output)
• 2. How - will these be produced (allocation of resources) (input)
• 3. For whom – who will receive, & how much (distribution), i.e., who
gets what in the economy. (The issue of distribution can include more than just who gets what portion of the goods and services
produced. What about who owns what factors of production? This after all is the key factor in determining how income is distributed and
therefore what goods and services are made and finally whose wants are satisfied. Each factor of production generates a return for the
owner.)
DIFFERENT ECONOMIC SYSTEMS
1. Traditional system
• The oldest solution to the three central questions is tradition.
• The same goods are produced and distributed in the same way by each successive generation.
• Each participant's task and methods of production are prescribed by custom.
• This is a rigid system; slow to adapt to changing conditions – tend to be subsistence economies
2. Command System
•In a command system the participants are instructed what to produce and how to produce it by a central
authority which also determines how the output is distributed. (also called centrally planned systems).
• The planners have to determine what consumer goods should be produced, how to produce them and
how they are to be divided among consumers – this is an extremely difficult task.
• Command economies are often described as socialist or communist systems.
• Central planning refers to the way in which economic activity is coordinated, while socialism and
communism refer to the ownership of the factors of production.
3. Market system
• Coordination of what, how & for whom is achieved through actions of free market.
• The forces of demand & supply drive the coordination of the market. Markets can be local, regional,
national or international.
• The most important element within the market system is market prices.
– Market prices indicate levels of scarcity which indicate:
 to consumers what they have to sacrifice to obtain the goods and services.
 to the owners of various factors of production how these can best be employed.
– According to Adam smith, economic activity is driven by self-interest (“invisible hand”).
The definition and conditions required for a market to exist
Definition of a market: A market is any contact or communication between potential buyers and potential
sellers of a good or service.
Conditions for a Market
• There must be at least one potential buyer and one potential seller of the good or service.
• The seller must have something to sell.
“Every individual endeavours to employ his capital so
• The buyer must have the means with which to purchase it.
that its produce may be of the greatest value. He
generally neither intends to promote the public
• An exchange rate – the market price – must be determined.
interest, nor knows how much he is promoting it. He
• The agreement must be guaranteed by law or by tradition.
intends only his own security, only his own gain. And
EXTRA :
• What will be produced? Only goods and services that consumer’s
he is in this led by an invisible hand to promote an
end which was no part of his intention. By pursuing his
own interest he frequently promotes that of society
more effectually than when he really intends to
promote it.”
Adam smith (The Wealth of Nations (1776))
are willing to spend income on and which can be provided profitably.
• How will it be produced? In the cheapest possible way
• For whom will it be produced? Goods and services will go to those
who can afford them
• Link between input & output received?
The greater one’s access to the factors of production (e.g. the quality of labour one has to offer, the amount of land one
owns, etc), the more input an individual can contribute, and therefore receive higher levels of output (e.g. wages, rent, etc)
will be received.
• In Capitalist market economy, participant's pursue self-interest by responding to monetary incentives. self-interest is kept in
check by competition.
•Competition among sellers protects consumers against exploitation, and promotes efficiency & growth
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 2- Economic Systems ^M Flows Page 4
lOMoARcPSD|53370221
Textbook pages 38-48
Tuesday, 08 March 2022
12:48
4. Mixed System
In reality, no economy is purely traditional, command or market.
•Today’s economies are a mixture of the three, with one form dominating.
•SA economy is a mixed economy in which private property, private initiative, self-interest and
the market mechanism all play a role.
•The SA economy is also characterised by substantial gov. intervention.
•In SA, some enterprises (or shares of them), are owned directly or indirectly by the state, e.g. Transnet,
Eskom
•Government selling these assets to the private sector is called privatisation.
•During early 1990’s, there was strong support for nationalisation, i.e. for the acquisition of
privately owned assets by the state.
•In a pure market system all prices are established through the market mechanism.
•SA has a long history of price control by govt.
Classifying Economic Systems
• 2 basic criteria
1. Property rights
2. Co-ordinating mechanisms
• Market Capitalism
Market capitalism is characterised by:
• Private ownership
• Minimal govt. intervention
• Decentralised decision-making
• Private freedom recognised
• Planned socialism-command
• Market socialism- market
The function of prices in a market economy
• Rationing function
Prices serve to ration the supplies of goods and services to those who place the highest value on them
(and can afford to pay for them)
• Allocative function
Prices serve as signals which direct the factors of production between the different uses in the economy
E.g. in a market excess demand leads to higher prices ceteris paribus.
The possibility of increased profits attracts additional factors of production (labour, capital . . . ) towards
the activities concerned.
- Adam’s ‘invisible hand’
The Role of Money in a Market system
• Economic activity is aimed at the max satisfaction of human wants not at making money.
• Money is a means to an end and NOT A FACTOR OF PRODUCTION
• It is a means of exchange
• In a barter system goods are directly exchanged for other goods.
• Double coincidence of wants is cumbersome and time consuming and so money eliminates the need for
this.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 2- Economic Systems ^M Flows Page 5
lOMoARcPSD|53370221
Textbook pages 52-56
Wednesday, 09 March 2022
20:42
PRODUCTION, INCOME AND SPENDING IN THE MIXED ECONOMY
Introduction:
Natural resources, labour,
capital, entrepreneurship
Production
Households( C )
Firms ( I )
Government (G)
Foreign sector ( X-Z )
Spending
Income
Rent
Wages and salaries
Interest
profit
Stocks versus a Flow:
Definition of a Stock: measured at a point in time (snapshot) e.g. wealth
Definition of a Flow: measured over a period e.g. income . ( it has a time dimension)
Sources of Production: the factors of production
Natural Resources (land)
► These are the free gifts of nature – they are fixed in availability (e.g. oil)
► There is variance in quantity & quality of these resources.
► They are mostly exhaustible or non-renewable.
Labour
► Def: Physical & mental activity which is used in the production of goods and services.
► There is variance in quality & quantity (skill, knowledge and health) of human resources.
► ~Specialisation & division of labour improves quality & output
► -Specialisation refers to the tendency of people to concentrate on activities to which
they are best suited.
► Division of labour – is when a production process is broken up into a series of parts
Capital
► Resources that are man-made, e.g. tools, machinery.
► Different viewpoints:
- Accountant (money in bank or shares)
- Economist (money cannot make anything – convert to tools, etc)
► Suffer depreciation (“consumption of fixed capital”) & obsolescence.
Entrepreneurship
► Factor which combines all other factors of production
► Not “just” a manager (risk-taker).
Technology
MONEY IS NOT A FACTOR OF PRODUCTION
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 2- Economic Systems ^M Flows Page 6
lOMoARcPSD|53370221
Textbook pages 57-62
Thursday, 10 March 2022
11:49
Sources of income: the remuneration of the factors of production
• The returns (income received for) on the Factors of Production:
–Natural Resources (Land) generates Rent
–Human Resources (Labour) generates Wages and salaries
–Capital generates Interest
–Entrepreneurship generates Profit
• The more factors of production you own, the more income you will receive and invariably
the more wealth you will accumulate.
Sources of Spending: the four spending entities
Households:
• All the people who live together and who make joint economic decisions.
• The household is the basic decision-making unit in the economy.
• The total spending of all households on consumer goods and services is called total or
aggregate consumption expenditure, or simply total consumption (C).
• Households own the factors of production and sell these factors on the factor markets to
firms.
• In exchange for the services of their factors of production, households receive an income
which they use to purchase consumer goods and services in the goods markets.
• These goods and services are then consumed to satisfy human wants
Firm:
• The unit that employs factors of production to produce goods and services that are sold in
the goods markets.
• Basic productive units in the economy.
• Buyers in the factor markets and sellers in the goods markets.
• Firms mainly decide how goods and services will be produced.
• Aim to achieve maximum profit.
• Profit is the difference between revenue and cost.
• One of the factors of the production purchased is capital.
• Capital goods are man-made factors of production, such as tools, machinery and
equipment. The act of purchasing capital goods is called investment or capital
formation( I )
• Whereas households spend on consumer goods( C ), firms spend on capital goods ( I
Goods market:
• There are thousands of markets for consumer goods and services in the economy,
collectively known as “the goods market”.
Factor market:
• Factors of production are purchased and sold in many different markets. They are called
factor markets.
• The factor markets include the labour market and the markets for capital goods.
• (The subsections government, foreign sector and financial institutions are not prescribed for
this module).
NB CIRCULAR FLOW DIAGRAM IN TEXTBOOK
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 2- Economic Systems ^M Flows Page 7
lOMoARcPSD|53370221
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 2- Economic Systems ^M Flows Page 8
lOMoARcPSD|53370221
Questions to understand for LU2
Wednesday, 09 March 2022
18:58
On completion of this learning unit, you should be able to:
• Describe the three central economic questions;
• Briefly describe the main characteristics of a traditional, demand,
market and mixed economy;
• List the four factors of production and recognise the rewards paid for the
use of these factors;
• Identify the key participants (only households and firms are required for
this semester), main markets and three major flows in the economy
illustrating the relationship between them;
• Distinguish between the different sectors in the economy;
• Identify stock variables and flow variables, and give examples of each;
• Distinguish between the goods market and the factor market.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 2- Economic Systems ^M Flows Page 9
lOMoARcPSD|53370221
DEMAND
Wednesday, 09 March 2022
10:09
Introduction:
In a market system, the prices and quantitates traded in the goods markets are determined by the interaction
between demand and supply
DEMAND
When we talk about Demand we are referring to the quantities of goods and service that the potential buyers are
willing and able to buy
The law of demand states that other things being equal ( i.e. ceteris paribus ), the higher the price of a good, the
lower is the quantity demands
A demand schedule is a table which lists the quantities demanded at different prices when all other influence on
planned purchases are held constant
The market demand curve :
Substitute products
Complimentary products
Qd = number of tomatoes demanded in the market
Px = price of tomatoes
Pg = price of related goods
Y = total income of all prospective purchases of tomatoes
T = tastes of all prospective purchases of tomatoes
N = total number of potential consumers of tomatoes
…. = allowance for any other possible influences
Notes on the curve :
- A movement along a curve relates to the slope of the curve, while the shift of a curve relates to its position.
- An increase in price of a substitute will cause and increase in the demand for the product in question
- An increase in the price of butter will increase the demand for margarine, ceteris paribus
- Complements are goods that tend to be used jointly to satisfy a certain want, e.g. Cars and petrol or burger
and chips etc - A fall in the price of a complementary product( chips ) increases demand for the
product( burger ) and this is illustrated by a rightward shift of the demand curve.
- An increase in the price of the compliment(chips ) will lead to a decrease in demand for the
product(burger)Demand curve for the compliment( chips ) will shift to the left.
- The increased quantity of X box consoles demanded leads to an increase in the demand for Xbox games.
- If demand increases when income increases, the goods are normal goods.
- If demand decreases when income increases, the goods are inferior goods.
- An increase in the population will shift the curve to the right, ceteris paribus.
- If the price of the good is expected to fall, consumers will reduce current demand.
A common example : petrol
Distribution of income :
- If redistribute income to low income households, demand by low income households will increase and
demand in high income households will decrease
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 3 - Demand^J Supply and Prices Page 10
lOMoARcPSD|53370221
SUPPLY
Wednesday, 09 March 2022
22:27
SUPPLY
Supply can be defined as the quantities of a good or service that producers plan to sell at each possible price
during a certain period.
- The higher the price, the greater the quantity that the producer will plan to grow and sell, ceteris paribus
Quantities that the producer plans to sell at different prices will also depend on the cost of production
New technologies that enable producers to produce at lower costs will increase the quantity supplied at each price.
A change in quantity supplied
Changes in supply
Qs = number of tomatoes supplied in a particular period
Px = price of the product(tomatoes)
Pg = prices of alternative outputs
Pf = prices of factors of production and other inputs
Pe = expected future prices of the product
Ty = technology
N = number of firms supplying the product
…. = allowance for any other possible influences
- Subsidies on particular goods and services tend to raise their supply, while taxes tend to reduce their supply.
- Some products are produced jointly e.g. beef and leather
If productivity falls, production costs increase(ceteris paribus) and supply decreases
Market equilibrium occurs at the intersection of the demand and supply curves.
This is the point where buyers and sellers agree on the quantity of goods to be exchanges at the price at which
they will be exchanged.The market is in equilibrium when the quantity demanded is equal to the quantity supplied
Excess demand 9 or a market shortage )
Excess supply ( or a market surplus)
When there is excess demand :
As the price increases, the quantity supplied increases along the supply curve ( existing firms produce more ),
while the quantity demanded falls along the demand curve
When there is excess supply:
They cut their production and compete with each other o find buyers for their product by reducing their prices.
This process continues until equilibrium is reached where Qd = Qs
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 3 - Demand^J Supply and Prices Page 11
lOMoARcPSD|53370221
Graphs
Friday, 11 March 2022
20:13
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 3 - Demand^J Supply and Prices Page 12
lOMoARcPSD|53370221
Get from tasmiya
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 3 - Demand^J Supply and Prices Page 13
lOMoARcPSD|53370221
Theory notes for demand and supply
Wednesday, 13 April 2022
13:27
Citrus Paribus- other things being equal
The law of demand- is expressed using words using numbers and using graphs demand is a flow concept
and can be measured over a period of time it refers to the quantities of a good or service that potential buyers
are willing and able to buy
The law of demand states that other things being equal (i.e. citrus Paribus) ,the higher the price of a
good, the lower is the quantity demanded.
A demand schedule is a table which list quantity demanded at different prices and all other influences on
planned purchases are held constant.
Equilibrium -refers to a point where the quantity demanded is equal to the quantity supplied there is no
excess demand or supply at that point it is a state of Balance
Normal goods- are good we buy more off when we are in more money example Brandon name is normal
good are positively related to income because as income increases demand for normal goods increases and
vice versa
Inferior goods- are good we buy less of when we earn more money they are negatively related to income
because if we are more money we buy less inferior goods and more normal goods
Consumer surplus-is the difference between the consumers pay and what they are willing to pay and the
value they receive.
Producer surplus-is it is a positive difference between the lowest prices at which producers are willing to
supply and the different quantities and the price they actually receive the total gain is called the producer
surplus.
Absolute price- refers to the actual price in the market at any particular time
Relative price- is the ratio between the price and the prices of other goods the changes in relative prices are
the driving forces in the market mechanism.
Supply can be defined as the quantities of a good or service that produces plan to sell at each possible price
during a certain period.
The law of supply - the higher the price the greater the quantity that the produce of a plant to grow and sell at each
possible price during a certain period citrus Paribus
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 3 - Demand^J Supply and Prices Page 14
lOMoARcPSD|53370221
Demand and Supply in action
An increase in demand (shown as a rightward shift of
the demand curve) will result in an increase in the
price of the product and an increase in the quantity
exchanged, ceteris paribus.
The increase in demand can be the result of a change in
any of the determinants of demand except the price of
the product.
Sources of an increase in demand
• an increase in the price of a substitute product
• a decrease in the price of a complementary product
• an increase in consumers' income
• a greater consumer preference for the product an expected increase in the price of the product
What happens to supply and demand decreases?
A decrease in demand will result in a decrease in the price of the product and a decrease in the quantity
exchanged, ceteris paribus.
Sources of a decrease in demand
• a fall in the price of a substitute product
• an increase in the price of a complementary product
• a fall in consumers' income
• a reduced preference for the product an expected fall in the price of the product
An increase in supply will result in a fall in the price of the
product and an increase in the quantity exchanged, ceteris
paribus.
The supply curve shifts to the right (downwards), and more
goods are supplied at each price than before or, alternatively,
each quantity is supplied at a lower price than
before.
The shift of the supply curve could be the result of a change in
any of the determinants of supply other than the price of the
product.
Sources of an increase in supply
• a fall in the price of an alternative product or a rise in the price of a joint product
• a reduction in the price of any of the factors of production or any other inputs (Le, a decrease in the cost of
production) an improvement in the productivity of the factors of production (eg, as a result of technological
progress - this also lowers the cost of production)
A decrease in supply will result in an increase in the price of the product and a decrease in the quantity
exchanged, ceteris paribus.
The supply curve shifts to the left (upwards), and fewer goods are supplied at each price than before or,
alternatively, each quantity is supplied at a higher price than before,
The shift of the supply curve could be the result of a change in any of the determinants of supply other than the
price of the product
Sources of a decrease in supply
• an increase in the price of an alternative product or a fall in the price of a joint product
• an increase in the price of any of the factors of production or other inputs (i.e. an increase in
the cost of production) a deterioration in the productivity of the factors of production (which also raises the cost
of production)
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 4 - Demand and Supply in action Page 15
lOMoARcPSD|53370221
Different forms of government intervention
• setting maximum prices (price ceilings)
• setting minimum prices (price floors)
• subsidizing certain products or activities
• taxing certain products or activities
Reasons why governments set maximum prices
• to keep the prices of basic foodstuffs low, as part of a policy to assist the poor
• to combat inflation
• to limit the production of certain goods and services in wartime
There is thus a market shortage (or excess demand) equal to
the difference between Q-Q, (or ab)
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 4 - Demand and Supply in action Page 16
lOMoARcPSD|53370221
Allocating the available quantity supplied
(can be done in various ways):
• Consumers may be served on a "first come first served" basis, resulting in queues or waiting lists.
• Suppliers may set up informal rationing systems (e.g. by limiting the quantity sold to each consumer or
by selling to regular customers only).
• Government may introduce an official rationing system by issuing ration tickets or coupons which have
to be submitted when purchasing the product,
Three consequences of fixing prices below the equilibrium price:
Fixing prices below the equilibrium (or market clearing) price:
• creates shortages (or excess demand)
• prevents the market mechanism from allocating the available quantity among consumers
• stimulates black market activity by providing an incentive for people to obtain the good and resell it at
a higher price to those consumers who are willing to pay higher prices to obtain it
Agricultural prices - a justification for minimum prices Minimum prices (or price floors)
A market surplus usually requires further government intervention. The options are:
• Government purchases the surplus and exports it. Government purchases the surplus and stores
it (provided the product is non-perishable).
• Government introduces production quotas to limit the quantity supplied to the quantity demanded at the
minimum price.
• Government purchases and destroys the surplus.
• Producers destroy the surplus.
Another alternative:
• Surpluses can be donated to the poor.
Reasons why setting minimum price above equilibrium price is inefficient in assisting small farmers:
• All consumers, including poor households, have to pay artificially high prices.
• The bulk of the benefit accrues to large farmers or farming concerns owned by big companies.
• Inefficient producers are protected and manage to survive.
• The disposal of market surpluses usually entails further cost to taxpayers and welfare losses to society.
• Fig 5-9 and Fig 5-11 are also NB
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 4 - Demand and Supply in action Page 17
lOMoARcPSD|53370221
Elasticity
Elasticity can be defined as the percentage change in a dependent variable if the
relevant independent variable changes by one percent.
FORMULA FOR CALCULATING ELASTICITY:
Elasticity = percentage change in dependent variable
percentage change in independent variable
4 types of elasticities:
• Price elasticity of demand
• Income elasticity of demand
• Cross elasticity of demand
• Price elasticity of supply
Price Elasticity of Demand
The price elasticity of demand is the percentage change in the quantity demanded if the price of the product changes
by one percent, ceteris paribus.
ep = percentage change in Qd
percentage change in price
A 10% increase in the price leads to a 40% decrease in the Qd
ep = -40% = -4 = -4
+10%
+1
• This means that this good is elastic as a 1x change in the price leads to a 4x change in Qd (ep >1, therefore it is elastic)
• We ignore the negative sign for this elasticity as the relationship between price and Qd is always negative.
• The percentages cancel out and we just have a number (coefficient)
Calculating a percentage change in quantity (or price):
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 5 - Elasticity Page 18
lOMoARcPSD|53370221
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 5 - Elasticity Page 19
lOMoARcPSD|53370221
Total revenue is calculated as follows:
Total Revenue = Price of the good x Quantity sold
TR = PQ
Total Revenue when Demand is ELASTIC
• If the change in price (P) leads to a relatively larger change in quantity demanded (Q), total revenue (TR)
will change in the opposite direction to the price change.
• If the change in price leads to an equi-proportional change in quantity demanded, total
revenue will remain unchanged.
Total Revenue when Demand is INELASTIC
• If the change in price leads to a relatively smaller change in quantity demanded, total revenue
will change in the same direction as the price change.
When ep is greater than 1, TR increases as the quantity of hamburgers increases.
When ep is equal to 1, TR is at a maximum.
When ep is less than 1, TR falls as the quantity of hamburgers increases.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 5 - Elasticity Page 20
lOMoARcPSD|53370221
Determinants of the Price Elasticity of Demand
• Substitution possibilities – the greater the available substitutes, the greater the elasticity
Examples: beef (mutton), butter (margarine).
• Degree of complementarity of the product - the greater the complementarity, the smaller the elasticity
Examples: sugar (tea, coffee), petrol (motorcars), salt (food), etc.
• Type of want satisfied by the product
Necessities: basic foodstuffs, petrol, electricity
Luxuries: entertainment, luxury motor vehicles
• Time period under consideration – the shorter the time period, the less elastic
Charging different prices to different sets of customers = price discrimination
• The proportion of income spend on the product
The smaller the proportion, the lower the price elasticity of demand will be.
Oher possible determinants of the price elasticity of demand:
The definition of the product
The broader the definition of the product, the smaller the measured price elasticity of
demand will tend to be. For example, price elasticity of demand for beef is greater than the
price elasticity of demand for meat.
Advertising
Price elasticity of demand for a particular brand (e.g. OMO) will be greater than the
price elasticity of demand for the product (washing power), because of the substitution
possibilities.
Durability
The more durable the good, the more elastic the demand will tend to be, ceteris
paribus.
Number of uses of the product
The greater the number of uses of a particular product, the greater the price elasticity of
demand will tend to be.
Addiction
Products that are habit-forming (e.g. cigarettes, alcohol, drugs) will tend to have a
relatively low price elasticity of demand.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 5 - Elasticity Page 21
lOMoARcPSD|53370221
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 5 - Elasticity Page 22
lOMoARcPSD|53370221
Income elasticity of demand
ey = percentage change in the quantity demanded of a product
percentage change in consumers’ income
ey = %ΔQd
%ΔY
INCOME ELASTICITY TABLE
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 5 - Elasticity Page 23
lOMoARcPSD|53370221
Cross elasticity of demand
ec = percentage change in the quantity demanded of product A
percentage change in the price of product B
ec = %ΔQdA
%ΔPB
If it is positive it is a substitute
If it is negative it is a complement
• A 10% increase in the price of Samsung tablets leads to a 20% increase in the Qd of Apple iPads (= +20%/+10%)
• a 10% increase in the price of iPads leads to a 30% decrease in Qd of APPs (= -30%/+10%)
Price elasticity of supply
es = percentage change in the quantity supplied of a product
percentage change in the price of the product
5 Different categories and diagrams
Determinants for the price elasticity of Supply
- Expectations
- Stockpiling
- Availability of inputs
- Excess capacity
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 5 - Elasticity Page 24
lOMoARcPSD|53370221
Theory of Demand
Saturday, 14 May 2022
19:54
Introduction - Utility
Definition of Utility
Cardinal Utility - utility can be measured in some way (TB 7.1 and 7.2)
Ordinal Utility - involves the ranking of different bundles of goods and services in order of preference (TB
Chapter 8)
Marginal Utility - the extra or additional utility that a consumer derives from the consumption of an
additional good
Law of Diminishing Marginal Utility - the marginal utility of a good /service eventually declines as more of it is
consumed over a period.
The Indifference Approach
Describe an indifference curve (Chapter 8)
An indifference curve is a curve which shows all the combinations of 2 products that will provide the
consumer with equal levels of satisfaction or utility
Assumptions of Indifference Curves
• Assumption of completeness - consumer is able to rank all possible combinations or bundles of goods
• Assumption of consistency - consumers act consistently
• Assumption of non-satiation - consumers are not yet fully satisfied and prefer more to less
Law of Substitution
Law of Substitution - the scarcer a good becomes, the greater its substitution value will be. In other words,
the marginal utility of the good that becomes less plentiful rises in relation to the marginal utility of the good
that becomes more plentiful
Also called law of diminishing marginal rate of substitution
At EQM MRS = AQy/ AQX = MUX/MUY = Px/PY
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 6 - Theory of Demand Page 25
lOMoARcPSD|53370221
Saturday, 14 May 2022
20:33
Summary of properties of Indifference Curves
For each level of satisfaction there will be a unique IC
It is possible to draw an infinite amount of indifference curves
A collection of IC - indifference map
Given the assumption that he/she is non- satiated, he/she will derive more utility from consuming
more of both goods, and so move to a higher IC IC never intersect each other because of the
assumption of consistency.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 6 - Theory of Demand Page 26
lOMoARcPSD|53370221
BACKGROUND TO SUPPLY: THE THEORY OF PRODUCTION AND COST
Saturday, 14 May 2022
20:38
Introduction
• Types of firms
• The goal of the firm
• The Principal-agent problem (Box 9-1 TB145)
• Short Run vs Long Run
The SR is the period where at least one of the input is fixed.
The LR is the period where all the inputs are variable. (TB146)
Total, Average and Marginal Revenue
• Total revenue
TR = Price X Quantity (TR = PQ)
• Average revenue
AR = TR/Q
• Marginal revenue
MR = change in total revenue ÷ change in quantity
MR = ΔTR/ ΔQ
Costs
• Total cost (TC)
is the cost of producing a certain quantity of the
firm’s product.
• Average cost
is the total cost divided by the number of units
(or quantity) of the product produced.
AC = TC/Q
• Marginal cost
Marginal cost (MC)is the addition to total cost (ΔTC) required
(extra) unit of the product (ΔQ).
to produce an additional
MC = ΔTC/ ΔQ
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 7 - Backgroud to supply Page 27
lOMoARcPSD|53370221
Costs
• Total (or accounting) profit is the difference between total revenue and total cost.
• Normal profit is equal to the best return that the firm’s resources could earn elsewhere, and forms part of the cost
of production.
• Economic profit is the positive difference between total revenue and total explicit and implicit costs.
Economic profit & accounting profit explained
Joe, a woodwork teacher, earns R120 000 a year working at a
school. He decides to start his own business making furniture.
The opportunity cost of starting his own business is the R120
000 annual salary his is giving up. This is his implicit cost.
He has expenses (for rent, raw materials, labour, etc) of R150
000.
The total revenue from sales is R280 000 per year.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 7 - Backgroud to supply Page 28
lOMoARcPSD|53370221
Economic profit and accounting profit explained:
Conclusion
Economic costs = Total costs (TC)
If total revenue is greater than total costs, the firm makes economic profit.
Economic profit: TR > TC
If total revenue is equal to total costs, the firm makes a normal profit.
Normal profit: TR = TC
If total revenue is less than total costs, the firm makes economic loss.
Economic loss: TR < TC
Production in the Short Run -Assumptions for analysing production in the short run
• The firm produces only one product.
• All units of a given input are identical or homogeneous.
• The inputs can be used in infinitely divisible amounts.
• The technical relationship between inputs and output, called the production function, is given and cannot be changed.
• Prices of the product and of the inputs are given.
• The firm uses fixed inputs and one variable input.
Explain what happens to the marginal, average and total product when a third labourer is added to
the same fixed factor
• Marginal product: the marginal product is 34 tons (ΔTP/ΔN)
• Average product: average product = TP/N = 78/3 = 26 tons.
• Total product: Total product increases by the value of the marginal product: 44 tons + 34 tons = 78 tons.
Marginal product peaks with the hiring of the fourth laborer at 35 tons.
The law of diminishing marginal returns states that as more of a variable input is combined with one or more fixed
inputs in a production process, points will eventually reached where first the marginal product, then the average
product and finally the total product starts to decline.
Audio 1
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 7 - Backgroud to supply Page 29
lOMoARcPSD|53370221
product and finally the total product starts to decline.
Audio 1
Audio recording started: 13:38 Thursday, 30 June 2022
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 7 - Backgroud to supply Page 30
lOMoARcPSD|53370221
Costs in the Short Run
Fixed and Variable costs
• Fixed costs are defined as those costs that do not change even when the level of output changes.
• Fixed cost are sometimes also called overhead costs, indirect costs or unavoidable costs. E.g. rent
• Variable cost are costs that change when output changes. They are sometimes also called direct costs, prime costs
or avoidable costs
E.g. labour
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 7 - Backgroud to supply Page 31
lOMoARcPSD|53370221
Perfect competition
Saturday, 14 May 2022
22:08
Conditions for any firm
The shutdown rule
- The firm must decide whether or not it is worth producing at all. Under certain conditions it may be in
the firm's best interest to shut down
- ARRAVC OR TRASTVC in the short run
The profit-maximising rule
- If the firm decides that it is worth producing, then the firm must decide on the quantity it is going to
produce that will maximize the firm's profits.
- MR = MC
Perfect Competition - Relevance
- Perfect competition provides a starting point for analysing determination of price and output.
- Perfect competition represents a standard against which the functioning of all other markets can be
compared.
- TB168
Perfect Competition - 7 Requirements
- There must be a large number of buyers and sellers of the product - the number is so large
that no individual buyer or seller can influence the market price.
- There must be no collusion between sellers - each seller acts independently.
- All the goods sold in the market must be identical or homogeneous.
- Buyers and sellers must be completely free to enter or leave the market.
- All the buyers and sellers must have perfect knowledge of market conditions.
- No government intervention influencing buyers or sellers.
- All factors of production must be perfectly mobile.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 8 - Perfect Competition Page 32
lOMoARcPSD|53370221
The Shut Down Rule
• A firm should only produce if total revenue is equal to or greater than total variable cost.
• Produce only if TR ≥ TVC
• Which also implies that the firm should produce only if AR ≥AVC
Note that as long as the output is at the point where MR= MC, the firm is in equilibrium,
To see what the profit situation is when the firm's output is at MR = MC (equilibrium), compare the
AR to AC at the MR = MC level of output.
In the short run, three situations could occur:
• MR = MC (equilibrium) and AR»AC: economic profit
• MR = MC (equilibrium) and AR = AC: normal profit
• MR = MC (equilibrium and AR < AC: economic loss
The output level at the point where MR = MC is not the break-even point*.
At the output level where MR = MC, it is only the last unit produced that costs as much to make as
the price at which it will sell. On every unit produced (and sold) before this unit, MR was greater
than MC, and added to
the firm's profits.
* The break-even output level occurs when TR = TC (and thus when AR=AC).
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 8 - Perfect Competition Page 33
lOMoARcPSD|53370221
Compare profit if output is opposed to profit at output 725 units (output level where AC is at a
minimum) minimum
Average profit =AR-AC
= R600 - R480
= R120 per unit
Total profit = average profit x quantity
= R120 x 725
= R87 000
Compare profit if output is at minimum of AC, as opposed to profit at output where MR = MC:
900 units (output level where MR = MC)
Average profit = AR - AC
= R600 - R500
= R100 per unit
Total profit = average profit x quantity
= R100 x 900
= R90 000
Compare profit if output is at minimum of AC VS where MR = MC.
By continuing to produce beyond the output level where AC is at its minimum, up to where
MR=
MC, the firm was able to make an extra R3 000 profit.
Conclusion:
• When MR is greater than MC, output should be expanded
• When MR is equal to MC, profits are maximised
• When MR is lower than MC, output should be reduced.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 8 - Perfect Competition Page 34
lOMoARcPSD|53370221
Monopoly and Imperfect Competition
Saturday, 14 May 2022
23:15
Monopoly
• There is only one seller of the good/service.
• The product has no close substitutes.
• Entry to the market is completely blocked.
• The firm is a price maker - but the monopolist cannot set its sales and its price independently of each
other.
• The profit-maximising rule applies: profit is maximised where MR = MC.
• In a monopoly, the marginal revenue from the sale of an extra unit of output is less than the price at
which all units of the products are sold
• When marginal revenue (MR) is positive, total revenue increases.
• When marginal revenue is zero, total revenue remains the same.
• When marginal revenue is negative, total revenue falls.
These relationships apply to all forms of imperfect competition.
• Also note the monopoly does not have a supply curve
Price Discrimination
• First degree - when a consumer is charged the maximum price he able to pay for each unit of the
product. For example pricing tactics in a flea market.
• Second degree - when a producer charges customers different prices based on quantities purchased,
e.g., bulk purchases receive a discounted price.
• Third degree - when consumers are grouped into different markets which are independent of each
other, e.g., SAA ticketing (business travellers pay higher fares than tourists) and Eskom, which
charges different tariffs to households and industrial users.
Note that as long as the output is at the point
where MR = MC, the firm is in equilibrium,
In the short run:
MR = MC (equilibrium) and AR>AC: economic
profit
In the long run:
Because entry to the industry is blocked, the
monopolist can continue to earn economic profits
in the long run.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 9 - Monopoly and Imperfect Competition Page 35
lOMoARcPSD|53370221
Monopolistic competition (a monopolistic competitive firm)
Conditions for monopolistic competition:
• Each firm produces a distinctive, differentiated product.
• Each firm therefore faces a downward-sloping demand curve for its
particular product.
• A large number of firms operate in the industry.
• There are no barriers to entry or exit.
The essential difference between monopolistic competition and monopoly lies in the barriers to entry.
- Whereas entry is not restricted under monopolistic competition, it is completely blocked in the case of a
monopoly,
The essential difference between monopolistic competition and perfect competition is found in the nature of
the product.
- Whereas monopolistic competitors produce differentiated (heterogeneous) products, perfectly
competitive firms produce identical (homogeneous) products.
Barriers to entry - Box 11.1 TB181
- The existence of a natural monopoly - when one firm can supply the entire market at a lower price than
two or more firms can. A natural monopoly occurs when the economies of scale are so large that there ls
room for only one firm in the industry.
- Limited size of the market
- A firm may have exclusive ownership of raw materials.
- A firm may own a patent.
- A patent is the legal right granted to the inventor of a product, technique or process that allows him or
her temporary exclusive use of the patented concept.
- Licensing: Licences may be used to control entry into certain industries, occupations or professions.
- Sole rights to a particular product or service can be purchased by a firm, for example SuperSport buying
rights to broadcast Super 15 rugby matches.
- Import restrictions imposed by gov could create a barrier to entry from foreign competitors which will
give a local supplier monopoly power.
- Established firms can create their own barriers to entry by applying strategies aimed at discouraging
new firms from entering the market such as predatory pricing or maintaining excess capacity.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 9 - Monopoly and Imperfect Competition Page 36
lOMoARcPSD|53370221
Oligopoly
• Under oligopoly, a few large firms dominate the market.
• Oligopoly is the most common market form in modern economies.
Three key features of oligopoly markets
- High degree of interdependence between firms - the degree to which the actions of one firm affect (or are
determined by) the actions of other firms.
- High degree of uncertainty: Firms are interdependent, and they can never be certain of the policies of
their competitors.
- The existence of barriers to entry, which may vary from industry to industry,
Oligopolists may follow two broad strategies:
 They can join forces and act as if they were a monopoly (the collusion option).
 They can compete with their rivals to gain a larger share of industry profits for them (the competition
option). The competition, in turn, can be price competition or non-price competition.
-Oligopolistic firms tend to refrain from price competition. Instead, they use advertising and other forms of
non- price competition to maintain or increase their share of the market.
Conditions for successful collusion:
⚫ The number of firms must be small and they must be well known to each other.
⚫ The firms should have similar production methods and average costs and therefore have an incentive to
change prices at the same time by the same percentage.
⚫ The product should be homogeneous rather than heterogeneous, making it easier to agree on price.
⚫ There should be significant barriers to entry which reduce the possibility of disruption by new firms.
⚫ The market should be stable.
⚫ There should be no government measures to curb or prohibit collusion.
Policy regards to Monopoly and imperfect competition - Types of intervention (TB202)
• Government can levy taxes on the firms concerned to reduce their profits.
• Government can decide to establish an enterprise supplying the good (thus becoming a competitor), or it
can purchase (or simply take over) private monopolists.
• Government can impose regulation in the form of laws, rules or regulations to prescribe the conditions
under which the firms can do business.
• Government can formulate and impose competition policy.
Competition Policy (TB203)
• To prevent existing monopolies and other powerful firms abusing their power (monopoly policy).
• To regulate the growth of market power through mergers and acquisitions (merger policy).
• To prevent the application of restrictive practices, particularly by oligopolistic firm (restrictive practice
policy).
Competition Policy responsibilities (TB204)
• Investigating complaints against firms engaging in restrictive business practices.
• Evaluating and subsequently approving or prohibiting mergers and acquisitions.
• Conducting research, providing policy inputs, educating and informing stakeholders, and conducting
regulatory and legislative reviews.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 9 - Monopoly and Imperfect Competition Page 37
lOMoARcPSD|53370221
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 9 - Monopoly and Imperfect Competition Page 38
lOMoARcPSD|53370221
Differences between labour market and goods market:
1. Workers have to be physically present when their services are used, non-monetary factors such as
location of employment and working conditions are more important than for other factors of production.
2. The service provided by labour is not transferable as the ability to do a job is in the individual, and cannot
be transferred from one person to another.
3. Labour differs from other factors of production as labour can only be rented, not sold.
4. Labour deals with human beings; therefore many non-economic factors affect the functioning of the
labour market, e.g., fairness, loyalty, trust and compassion.
5. Labour markets are influenced by trade unions, collective bargaining & government intervention.
6. Labour contracts are mostly long-term; labour is not traded at the best price on a daily basis.
7. Labour is heterogeneous - each person is unique in terms of attitude, skill, etc.
8. Labour markets are diverse and cater for differing abilities and skills. As there are different markets for
different occupations, different skills, and different locations, the labour market is often described as a
segmented market.
9. Remuneration for the services of labour is not only wage based, but also nonwage based, benefits such
as medical aid, car allowance, etc.
10. Remuneration of labour is affected by several factors not related to labour market conditions, such as
taxation, perception of "living wage", etc.
Basic Concepts relating to remuneration of labour
❖ Wage refers to the basic amount of money (excluding benefits & allowances) paid for the use of labour.
❖ Earnings are a broad concept which reflects the amounts actually earned by a worker during a specified
period, including all bonuses, fringe benefits, etc.
❖ Nominal wage is the actual amount of money that a worker gets paid after working for, say, one month.
For example, if you earn R10 000 per month, then your nominal wage is R10 000.
❖ Real wage is based on the buying power of the nominal wage - what goods and services can your R10
000 actually buy? Real wage is your nominal wage, which has been adjusted to take into account inflation
levels. If, for example, inflation is 10%, and your nominal wage increases by 12%, then your real wages
increase by 2%.
❖ Wage rate refers to the amount of money to be paid to a worker for working a specified period (e.g. R30
per hour) or for performing a specified number of tasks (e.g. R10 per basket of apples picked).
Requirements for perfectly competitive labour market
1. There must be a large number of buyers (employers) and a large number of sellers (employees) in the market. No
individual must be able to influence the market.
2. Labour must be homogeneous, i.e. workers must have identical skills.
3. Labour must be completely mobile (free entry and exit to labour markets).
4. There must be no government intervention.
5. All participants must have perfect knowledge of market conditions.
6. There must be perfect competition in the goods market.
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 9 - The labour Market Page 39
lOMoARcPSD|53370221
Factors affecting demand for labour
○ The number of firms (employers) changes - the greater the number of firms, the greater the demand for
labour.
○ The price of the product changes - if the price of the good increases, the MP will increase and therefore
demand for labour will increase.
○ A change in the level of productivity (a change in the marginal physical product of labour, causing a change in
the marginal revenue product and demand for labour).
○ A new substitute for labour becomes available, e.g. ATMs.
○ The price of a substitute factor of production changes. If the price of the substitute increases, the demand for
labour will rise; but if the substitute's price decreases, the demand for labour will fall.
○ The price of a complementary factor of production changes - if it more truck drivers to drive the trucks
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 9 - The labour Market Page 40
lOMoARcPSD|53370221
Reasons why labour markets may be imperfect:
•
•
•
•
Workers organised in a trade union can act as a monopolistic supplier of labour.
There could be only one buyer of labour (monopsony).
Labour is heterogeneous, not homogeneous (each worker has unique attributes)
Labour is not completely mobile. Labour market is a segmented market, and workers often cannot move
freely between the segments.
• Government intervention - legislates conditions of employment, minimum wages, etc.
• Employers and employees have imperfect knowledge (information) about market conditions.
Trade union as a countervailing force
 Workers band together to form trade unions to pursue certain common aims and to serve as a
countervailing force to the bargaining power of employers.
 Wages and other conditions of service are then negotiated on a collective basis between employees and
employers.
Issues addressed in collective bargaining
□
□
□
□
□
□
□
Wages
Hours of work
Job security
Overtime
Fringe benefits
Job evaluation
Procedures for settling grievances
Craft Union
A craft union consists of workers with a common set of skills (e.g. plumbers, teachers) who are joined
together in a common association, irrespective of where, or for whom, they work.
E.g. SADTU.
Industrial Union
An industrial union tries to organize all workers (both skilled and unskilled) in a particular industry in a single
bargaining unit. E.g. National Union of Mineworkers (NUM).
The impact of minimum wage set below the equilibrium wage rate
If government were to set a minimum wage below the current equilibrium wage rate, it would have no effect on
the functioning of the labour market.
Only if the minimum wage is set above the current market equilibrium wage, that the labour market is affected
Downloaded by AdiTiya Leigh Pillay (aditiyalpillay@gmail.com)
LU 9 - The labour Market Page 41