Grade 10 Economics Term 2 - E-Classroom

Study Notes

Grade 10 Economics Term 2

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Dynamics of Markets

A market is any contact or communication between potential buyers and sellers to exchange goods or factors of production for money

The interaction between demand and supply determines the prices and quantities of goods and services

Value, Price and Utility

Utility is the ability of a product or service to satisfy the needs or wants of consumers

The more utility goods or services have, the greater the demand for them. These goods or services have value.



Characteristics of Utility

Differs from person to person according to their needs and preferences e.g. one person may like video games, but another person may dislike them

Utility can change e.g. a swimming pool has more utility in summer

Utility is not the same as usefulness –a product that has utility e.g. cigarettes may be harmful, not useful

Diminishing marginal utility – additional utility decreases when you buy more and more of a product

The consumer will pay more for goods and services with higher utility

The more satisfaction a consumer gets from the product, the more he or she is willing to pay for it



Value

Barter value – when a product can be used in exchange for other goods and services

A product has exchange value when someone is willing to pay for it; expressed in Rands and Cents



Relationship between Price, Value and Utility

People will pay money for a product or service that has utility but is scarce. The commodity has a price

Price of product or service = exchange value

Therefore, high utility and high scarcity leads to high prices



Composition of a Market

Market characteristics

The seller who offers the best product will sell the product

The buyer who offers the highest price will get the product

Negotiation between a buyer and seller is called bargaining

The deal is completed once the exchange of goods or services for a price takes place



Types of Markets

Goods market – a market for consumer goods and services

Factors market – a market for factors of production e.g. natural resources, labour, capital or entrepreneurship

World markets – a market that serves the entire world; made more possible because of developments in electronic technology; using e-commerce, South African buyers can purchase goods and services from all over the world



Market Structures

Perfect Markets

Large number of buyers and sellers

Perfect knowledge about market conditions

No barriers to exit and entry

All the goods and services on the market are homogenous (identical)

No government interference regarding price

No collusion between sellers to manipulate prices

Example of a close-to-perfect market - the stock exchange



Market Structures

Imperfect Markets

Buyers and sellers influence product prices e.g. a seller can drop his prices and force someone else out of the market

Producers can reduce quantity produced which increases the price

Goods and services offered are not identical

Buyers and sellers are not free to enter or leave the market

Suppliers / producers sometimes collude to restrict quantity of product available e.g. OPEC countries with crude oil

Barriers to entry often exist e.g. a vendor’s license may be required



Market Structures

Types of Imperfect Markets

Monopoly – only one seller of goods or services so provider can demand any price e.g. Eskom or Transnet

Oligopoly – Only a few firms dominate the market e.g. Cell C, Vodacom, MTN

Monopolistic competitive – Many buyers; many sellers with similar products therefore price variations occur e.g. a more expensive microwave may have extra functions or a better warranty



Prices (demand, supply and price formation)

Theory of Demand

The prices of goods or services are determined by the interaction between demand (of consumers) and supply (by producers).

DEMAND

Refers to the quantities of a product that potential buyers are willing and able to buy

We need to consider the behaviour of consumers to understand demand

Consumers will try to satisfy as much of their need as possible with their available resources (income)




NEEDS are consumers’ desires for goods or services which they need to survive

WANTS are desired by consumers, but for comfort, not survival

Individual demand - the quantity an individual consumer will buy in a specific period. Influenced by:

Consumer’s income, taste and preferences

The price of the product and prices of substitute products and complementary products

Size of household

Market demand is the total quantity of a specific product that all consumers in that market are willing to buy and it is influenced by the same factors



Law of Demand

The quantity demanded of a product increases as the price of the product decreases

The quantity demanded of a product decreases as the price of the product increases

So long as all other factors remain constant



The Demand Schedule and Curve

The individual demand schedule is a table that illustrates the relationship between the price of a product and one consumer’s demand for it

The individual demand curve is a graphical illustration of the relationship between the price of a product and one consumer’s demand for it



Example of Individual Demand Schedule & Demand Curve

Source: Via Afrika, 2020



Example of Individual and Market Demand Schedules

• There are three consumers: Sally, Sipho and Sarah.

• The table shows the individual demands of each consumer at different prices of the peaches.

• The last column shows the total market demand which is the sum of the individual demands.



Example of Individual and Market Demand Curves

• The individual demand curves are shown on the graph for Sarah, Sipho and Sally, as well as the market demand curve (Total Market). These graphs are drawn by plotting the quantities from the Individual and Market Demand Schedule.

• The demand curve has a negative slope – it goes downwards from left to right.

• When the price of the product changes there is movement on the demand curve (up or down).



Illustrating Shifts in the Demand Curve

If the price of the product remains constant, but any other factor changes, the whole demand curve will shift to the left or right and form a new demand curve

Image source: Tutor2u.net, 2018




Theory of SupplyThe definition of supply - the quantities of goods or services (products) that producers are willing and ableto sell at certain prices

We need to consider the behaviour of suppliers to understand supply

Producers will always try to maximise their profit




Individual Supply – the quantity of a product an individual producer (seller) is willing to sell at a certain price. Influenced by:

Price of products and alternate products

Cost of production

Other producers may enter or leave the market

Changes in technology make new and cheaper production processes possible

Natural factors such as drought or floods may affect supply

Market Supply – This is the total quantity of a certain product that the producers of the product are willing to sell and it is influenced by the same factors.



Law of Supply

The quantity supplied of a product increases as the price of the product increases

The quantity supplied of a product decreases as the price of the product decreases

So long as all other factors remain constant



The Supply Schedule and Curve

The individual supply schedule is a table that illustrates the relationship between the price of a product and one producer’s supply of it

The individual supply curve is a graphical illustration of the relationship between the price of a product and one producer’s supply of it



Example of Individual Supply Schedule & Supply Curve

Image Source: Via Afrika, 2020

The supply curve has a positive slope – it goes upwards from left to right.

When the price of the product changes there is movement on the supply curve (up or down).



Example of Individual and Market Supply Schedule

• There are three producers: Joe, Sam and Ben.

• The table shows the individual supply of each producer at different prices for the oranges.

• The last column shows the total market supply which is the sum of the individual supplies.



Example of Individual and Market Supply Curves

• The individual supply curves are shown on the graph for Joe, Sam and Ben, as well as the market supply curve (Total Market). These graphs are drawn by plotting the quantities from the Individual and Market Supply Schedule.

• The supply curve has a positive slope – it goes upwards from left to right.

• When the price of the product changes there is movement on the supply curve (up or down).



Illustrating Shifts in the Supply Curve

Image source: Tutor2u.net, 2018



Price Formation and Market Equilibrium

In perfect competition, a market is regulated by the forces of demand and supply which can be plotted on the same graph e.g.

16000

14000

1200011000

10000

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60006000

8000

1000011000

12000

14000

16000

0

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1000 2000 4000 5000 6000 8000 10000

PRIC

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R)

QUANTITY OF PHONES

SUPPLY AND DEMAND OF PHONESDemand Supply

Market shortage

Market surplus



Price Formation and Market Equilibrium

Market equilibrium occurs when the quantity supplied matches the quantity demanded i.e. in the example, consumers intend to buy exactly the same number of phones that the producers intend to sell

Equilibrium point – where demand and supply curves intersect -any changes in demand and supply affect this equilibrium.

Equilibrium price – the price where the quantity demanded is the same as the quantity supplied (R11 000 in the example)

Equilibrium quantity – the quantity demanded and supplied at the equilibrium price (5000 phones in the example)



Market Surplus and Market Shortage

Market surplus – this occurs when the price goes above the equilibrium price and excess products are available. The quantity demanded will be less than the quantity supplied e.g. at R6 000, 10 000 phones are demanded, and 12 000 phones are supplied. Surplus = 2000 phones.

Market shortage – this occurs when the price goes below the equilibrium price and insufficient products are available. The quantity demanded will be greater than the quantity supplied e.g. at R4 000, 12 000 phones are demanded but only 10 000 phones are available. Shortage = 2000 phones.



Price Mechanism

Prices will change as soon as there is an imbalance in the market

Price mechanism - if there is a surplus of goods, prices will drop and if there is a shortage of goods, prices will go up

Buyers and sellers will negotiate to find a price that will keep both happy – they agree on an equilibrium price and quantity that suits each party



Functions of markets

Bringing supply and demand together: buyers want to get what they need at the lowest possible price and buyers wish to sell their products at the highest possible price to maximise profit. If sellers make too much profit, the buyers feel exploited. Sellers compete with each other which keeps the prices under control.

Allocating resources: the market‘s actions show producers how much to invest into producing a product. If they invest too much the product will be priced too highly for suppliers to pay.

Self-regulatory markets

prices that are too high result in lower sales so producers will have to reduce their prices in order to sell and they will make a loss

If prices are too low, it is not worthwhile for producers to make the product -only once the price increases will producers start making the product again



Scarcity, Choice and Opportunity Cost

The problems of scarcity and choice limit production, as producers never have the resources to produce everything

Producers must choose what to produce and how to produce it because they can’t use the same resources to produce another product e.g. a country has limited fertile land and must decide how to allocate the land to different crops

Opportunity cost – the real cost of choosing one thing over another e.g. if you take a vacation instead of spending the money on a car, the opportunity cost of the vacation is not getting the new car



Production Possibilities Curve

A production possibilities curve (PPC) visually illustrates the concept of scarcity and choice

A PPC shows the maximum amount of a product that can be produced with fixed resources (assuming all the factors of production are utilised and no wastage occurs)

Inputs – what a producer uses to make a product

Outputs – the goods or services that are produced



Production possibilities curve - example

A

B



Production Possibilities Curve - example

• If the factory makes 9 000 computers, they cannot make any text-books because they will have used all their resources on computers

• If they make 70 000 text-books, they cannot produce any computers because they will have used all their resources on text-books

• If the factory wants to make more computers, it must make fewer text-books

• The factory’s resources need to be combined in such a way that the maximum number of computers and textbooks can be made in order to maximise sales and profits: this is called efficiency

• Any point to the left of the curve e.g. A, indicates wastage. Any point to the right of the curve e.g. B, is impossible to produce, due to lack of resources



Efficiency and Unemployment in Economy

The economy of a country is efficient when all the available resources e.g. capital, labour, natural resources and entrepreneurship, are used in the production processes of the country

Unemployment occurs when some of these factors are not being used and production could be increased by utilising unused resources.



Shapes of PPC (rates of exchange) A PPC can be either a straight line, a convex curve or a concave curve.

Image source: Synthenomics, 2019



Position of the PPC

The position and shape of the PPC depends on these factors: physical resources; skills and technology; effort; investment in infrastructure, construction, research and innovation

Straight-line PPC – there is a constant rate of exchange (marginal rate of substitution : MRS) between products e.g. on the previous graph, for every additional 10 units of butter produced, production of guns reduces by 25 units

Convex or Concave PPC – the rate of exchange or MRS in no longer constant



Changes in the PPC

Internal factors may cause change in the PPC (producer has control) e.g. number of workers or size of production space

External factors may cause change in the PPC (producer has no control) e.g. the price of fuel or a drought or flood

Change in one output e.g. a a new harvesting machine may mean that more of one product (corn) can be produced in the same time as before

Image source: ReviewEcon, 2020



Changes in the PPC

Change in both outputs e.g. electricity becomes cheaper and this increases the number of robots that can be made, leaving more resources available for crop production, so more corn is produced. This means that more of both products are made than before.

With economic growth there is an increase in the amount and quality of resources and improvements in technology, resulting in greater production of all goods ( a higher Real GDP) Image source: ReviewEcon, 2020



Indifference Curves

An indifference curve is a graph that shows all the combinations of quantities of goods which will satisfy a consumer equally.

At Point A, the consumer has more of Good Y than Good X and at Point D, the consumer has much more of Good X than Good Y, but they are equally happy with (or indifferent about) either choice (or any choice on the curve)

Image source: Via Afrika, 2020



Multiple Indifference Curves

Consumers have more than one indifference curve. A collection of indifference curves is called an indifference map.

Changes in income mean that consumers can make different choices

If the consumer’s original income is represented by IC2 and his income increases, he will be able to buy more of both products (X and Y) and he would move to IC3

If his income decreases, he would be able to buy less of both products (X and Y) and he would move to Curve IC1

Changes in price of one of the products would affect the slope of the curve

Image source: Via Afrika, 2020



Effects of Inefficiencies

Market inefficiency refers to a market that does not produce the maximum output with minimum input; or income generated in the market is not fairly distributed amongst all the participants

Uneven distribution of income

This leads to absolute poverty for some at which point the government must provide help in the form of welfare grants and pensions (for elderly)

Poverty is accompanied by poor health, unhealthy living conditions and crime

The provision of government assistance increases the market and therefore businesses will produce more and the PPC moves to the right



Effects of Inefficiencies Monopolies

If there is not enough competition in a market, monopolies may develop

A monopoly exists when there is only one supplier of a product

The monopoly can then dictate the prices of certain products and exploit consumers, especially with essential goods and services such as basic foods, fuel, electricity, medication, public transport

The government forbids monopolies to avoid exploitation

If more producers join the market, efficiency improves, the PPC shifts to the right and consumers benefit




Inflation and extreme fluctuations in business cycles

High inflation rates > economic instability

Reserve bank tries to control the rate of inflation

Extreme peaks and dips in the business cycle causes instability which undermines investor confidence in the economy

The state intervenes by using monetary policy instruments (government spending and/or interest rates) and fiscal policy instruments (taxation)to even out the impact of the business cycle across the whole economy

In a stable economy, businesses don’t need to keep as much cash in savings, and can use it in production, which shifts the PPC to the right




Pollution and exhausted natural resources Sadly, many businesses will pollute the environment and

deplete natural resources to make profits The government establishes and enforces laws to control

this Adhering to these laws can lead to increased costs for

producers The PPC moves to the left with increased production costs



Public sector

Central government represents the core of the public sector and includes departments of Education, Transport and Social Welfare and Parliament

The next layer of the public sector is general government including the nine provincial governments

The final level includes public corporations owned by government such as SABC.



Reasons for Government Intervention in Economy

Making health care and education available for everyone

Private sector does not provide enough services for all citizens

Protection of the public against monopolies e.g. by setting maximum prices for certain commodities

Prevention of exploitation of workers, therefore wages and working hours are regulated

Control of strategic enterprises > provision of electricity and water



Ways that Government Intervenes in Economy

Government takes care of the following:

Maintains justice, law and order

Collects taxes

Spends tax money

Owns some company shares e.g. in Transnet or Spoornet as establishing the cost of the infrastructure of these companies is too much for private companies to manage

Influences prices and quantities e.g. sets price ceilings; sets price floors; subsidises certain products and services; and taxes certain products and services



Kinds of Intervention – Direct Taxes Direct taxes - money that individuals pay out of their

wages or salary, or that businesses pay out of their profits, to the South African Revenue Service (SARS)

Tax-paying consumers and businesses have less money to spend

People have less disposable income or less ‘take-home’ pay

Taxes cause the demand curve to shift to the left and the equilibrium point moves from E to E1.



Kinds of Intervention - Indirect Taxes

Indirect taxes are taxes charged on goods and services

Value-added tax (VAT) is an example of an indirect tax - it is charged as a percentage of the price of an item (currently 15%)

Unit price tax e.g. excise tax on cigarettes and alcohol as a flat rate per unit regardless of unit price

Reasons for indirect taxes

Increase government income

Reduce demand for products

Increase price of imported goods which encourages local buying

Effects of indirect taxes

Makes certain products more expensive thereby reducing the demand for them

Businesses sell less

People buy locally

Disposable income decreases



Graphs Showing Effect of Indirect Taxes on Market Equilibrium

Effect of Excise Tax on supply

Effect of VAT on supply (ad valoremtax)



Kinds of Intervention - Subsidies

The government uses money received from taxes to provide subsidies to help poor citizens buy products and services and to help producers supply basic products at fair prices

Subsidies to consumers -

Encourage consumers to buy more of a certain product

Demand for the product therefore increases

Achieved by reducing the indirect taxes on a product i.e. VAT or excise duty

Governments may sometimes give consumers subsidies in the form of vouchers or grants towards buying particular items

How subsidies can harm an economy -

Interference with the working of a market economy

Leads to ineffective use of scarce resources, as producers are enabled to continue with production that would not be possible without the subsidy



Subsidies to Consumers

Governments will pay an amount to consumers to subsidise the cost of certain products and demand for that product will then increase. Example Eskom will pay part of the cost if you buy a solar-powered water heating system as the government wants to ease electricity shortages. When this was announced, the demand for solar heaters increased and the demand curve moved right (D*D*). Since the quantity demanded exceeded the quantity supplied, the equilibrium price moved up from P to P* and the equilibrium quantity moved up from Qe to Q0.



Kinds of Intervention - SubsidiesSubsidies to producers –

The government pays a subsidy to the producer on condition that the producer then sells the product or service to consumers at a lower price

Governments often pay subsidies to farmers, so that they can produce cheaper food which helps poorer people

The South African government used to subsidise the price of bread

Subsidies may be paid in the form of cash, or in the form of a tax reduction, to encourage producers to export goods.

Reasons for farming subsidies –

Farming is risky business (many potential natural hazards e.g. drought or floods)

Farmers have very high input costs e.g. farm machinery, fertilisers and pesticides

Farmers are essential for the country’s food security



Subsidies to Farmers

• A subsidy is paid to a farmer lowering production cost and the quantity of maize produced increases

• The supply curve shifts downwards to the right, forming a new curve (S*S*) that intersects the existing demand curve at E*

• Thus the subsidy causes an increase in quantity supplied (Qe to Q0) and a decrease in market price from P to P*

Many farmers in the USA and countries in the EU receive subsidies which means they can sell their produce cheaper. Countries who don’t receive subsidies find this unfair as consumers will buy imported products if they are cheaper, and then local farmers are forced out of the market.



Kinds of Intervention - Welfare

Many governments including South Africa give welfare grants each month to people who are not able to work. Examples of welfare grants include old-age pensions, disability grants and child support grants

Welfare grants are a form of transfer payment (taking from richer people and giving it to the poorer people)

Sometimes the government pays welfare grants to producers in order to benefit poor people



Kinds of Intervention - Maximum and Minimum Prices

Maximum Prices

A price ceiling is the legal maximum price a supplier can charge for a product e.g. bread

This is so that poorer people are still able to buy it

Price ceilings usually lead to market shortages (Q2-Q1)

Often the formation of a black market (usually illegal) results in which products are sold for higher than the normal price



Kinds of Intervention - Maximum and Minimum Prices

Minimum Prices

A price floor is a guaranteed minimum price for a certain product

This is done to keep certain producers e.g. farmers in business and guarantee them an income

If the price floor is above the equilibrium price there will be a surplus of products and producers struggle to sell them

Image source: Wikipedia, 2020



Kinds of Intervention: Production of Goods by Public Sector

The public sector produces two kinds of products -

Public goods which are used by the community or society - for example, street lighting, roads, libraries, clinics

Merit goods which are goods or services that benefit the whole community but are not profitable for a private company to produce - for example, child inoculations

Government-owned companies e.g. Telkom, Transnet, Sasol and Eskom. Since 1994, the government has started to privatise these companies, which means that some of them have been wholly or partly sold to private investors

Public goods are non-excludable (benefit all) and have non-rivalry (not profitable for private companies)

The effects of government production:

Products and services provided at a lower cost or for free

More people will use the products or services

Demand for these products and services therefore increases



Kinds of InterventionMinimum Wages

In South Africa, farm workers, domestic workers and some workers in restaurants earn a minimum wage to prevent them from being exploited by employers

This is intended to raise the income and living standard of the very poor

Unfortunately, the demand for workers often drops which leads to increased unemployment



References

Badenhorst, I., Mabaso, G., Mbotho, J., Maliehe, T., Tshabalala, H., & van Zyl, J. (2011). Via Afrika economics. Cape Town: Via Afrika.

Business Jargons. (2020). Demand Curve Obtained from Individual Demand Schedules [Image]. Retrieved from https://businessjargons.com/market-demand.html

Synthenomics. (2019). Production Possibilities Frontiers [Image]. Retrieved from http://synthenomics.blogspot.com/2012/03/exercise-in-production-possibilities.html

Tutor2u. (2018). Shifts in the Demand Curve [Image]. Retrieved from https://www.tutor2u.net/economics/reference/shifts-in-market-demand

Tutor2U. (2018). Shifts in Market Supply [Image]. Retrieved from https://www.tutor2u.net/economics/reference/shifts-in-market-supply

Via Afrika. (2020). Demand, supply and price [Image]. Retrieved from https://viaafrika.com/wp-content/uploads/2019/07/Eco-G10-studyguide.pdf

Via Afrika. (2020). Indifference Curve [Image]. Retrieved from Via Afrika. (2020). Multiple Indifference Curves [Image]. Retrieved from https://viaafrika.com/wp-content/uploads/2019/07/Eco-G10-studyguide.pdf

Via Afrika. (2020). Multiple Indifference Curves [Image]. Retrieved from https://viaafrika.com/wp-content/uploads/2019/07/Eco-G10-studyguide.pdf

Wikipedia. (2020). Price Floor [Image]. Retrieved from https://en.wikipedia.org/wiki/Price_floor



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Grade 10 Economics Term 2 - E-Classroom