M B A Ec o n o m i c s

Dr. Rajashree Yalgi

March 18, 2023

REGENESYS’ INTEGRATED LEADERSHIP AND
MANAGEMENT MODEL

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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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 DEVELOPING REGENESYS GRADUATE
ATTRIBUTES
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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Facilitation Expectations
❖ Be open-minded
❖ Please raise the hand when you have to speak
❖ Listen carefully
❖ One conversation at a time
❖ Respect the opinions of others / if you disagree, do so politely
❖ Give constructive feedback
❖ Build on the ideas of others rather than destroying them
❖Take some risks and share new ideas
❖Have fun and enjoy the experience!

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LEARNING TECHNIQUES

At Regenesys we practice:

21st century active digital learning

Your facilitator will assume you are able to cover the course content and complete the quizzes, activities and
assessments on the portal yourselves. The facilitator will have broader discussions and facilitate debates and
other activities in class.

Using cognitive dissonance

Your facilitator will try to figure out some of your beliefs and provoke you academically to challenge them so that
– after experiencing cognitive dissonance – you end up either confirming those beliefs or adapting them where
necessary.

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GROUND RULES

Aim:

❖ To make ground rules for the group

Time:

❖ 5-minute discussion in pairs

❖ 10-minute brainstorm and agreement in plenary

Task:

❖ Suggest ground rules that will ensure maximum participation and smoothness for the
day

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ADDITIONAL GROUND RULES

❖ Be open-minded

❖ When speaking, use “I think”, “I feel”, etc (you are a very important aspect of this learning)
❖ Listen carefully

❖ One conversation at a time

❖ Respect the opinions of others

❖ Give constructive feedback

❖ Build on the ideas of others rather than destroying them

❖ Take some risks and share new ideas

❖ Have fun and enjoy the experience!

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Key Areas Covered in This Course
❖ Evaluate the different economic systems and their impact on an organisation
❖ Assess and evaluate the impact of macro-and micro- economic policies on the business
environment

❖ Critically evaluate a country’s labour market and its economic impact

❖ Assess the impact of globalisation on the economic development of a country

❖ Critically evaluate the impact of financial flows on a country

❖ Assess the value of integrating ethics issues and corporate social investment within the
economic domain

❖ Demonstrate the importance of economic information systems

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 Section 1
Introduction to Economics
Case Study – FlipKart

Source: Economic Times

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What is Economics?
❑ Of Greek origin: oikonomia; means: household (management)

❑ Social science: studies choices that individuals, businesses, governments,

and entire societies make

❑ As they cope with scarcity and incentives which influence and reconcile those
choices
❑ Many definitions but above = broad view
❑ Comes down to unlimited wants on one hand and limited resources on the
other

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What is Economics?

❖ Distinguishing between wants, needs and demand

❖ Want = desire for a good or service (can you do without it?)

❖ Need = necessity (essential for survival)
❖ Demand = is made for a good or service when means to
purchase it are available

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Scarcity, Choice and Opportunity
Costs
❖ Scarcity – resources available are simply not enough to satisfy the
human wants
❖ Choice – concerned with the decisions made in the allocation of
limited resources to competing alternatives. In the process of
resource allocation, some alternatives are preferred over others
❖ The opportunity cost of a choice is value of the best-foregone
alternative. Every time a choice is made, opportunity costs are
incurred
❖ Task questions (PPF, linear, move?)

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Production Possibility Curve
Concept of Scarcity Choice and Opportunity Costs Explained using PPF

❖ The production possibilities curve indicates combinations of any two goods or services
attainable when available resources (in business) are fully and efficiently employed
❖ In diagram: movement to right from A to C illustrates an increase in production of Product
B, while production of Product A decreases

❖ Trade-off between Products A and B (give up something to get something else)

❖ At points A, B and C, different levels of Product A and B can be produced
❖ Point Y is unattainable. Point X shows business not at full capacity
❖ Production efficiency when goods and services produced at lowest possible cost occurs at
all the points on the PPF
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Production Possibility Curve -
Figure
❖ PPF is curved – indicates presence of
opportunity costs;

❖ A “zero” opportunity costs; curve

would be straight-line
❖ Manufacturing is efficient with combo
of goods on PPF;
❖ Point X is inefficient; resource
utilization inefficient at this point

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Central Economic Questions
Production – Consumption – Distribution

❑ What do you understand by basic economic questions of “what”,

“how” and “for whom” to produce goods and services?
❑ What? – Output – tangible, intangible, public, private, final,
intermediate, durable, non- durable, semi-durable

❑ How? – Input – resources (FOP), natural, labour, capital,

entrepreneurship, technology
❑ For whom? – Distribution – those with means to demand them
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Economic Systems – Solve Economic
Questions
Traditional system
Goods and services produced and distributed in similar manner by each generation;
Importance to traditions, beliefs and social processes paramount;
Do not prefer changes; rigidity and resistance to evolve or innovate;
Example: indigenous tribal societies found in Africa, Asia, America (Amazon forest);
Life by Chiefdom with its own social system and structures – disconnected to the outerworld;

Command system
Economy controlled by central authority;
Decision on “what, how, and to whom to distribute” centralized through a planning authority;
Example: The former USSR (disintegrated since 1991); Cuba, North Korea, Venezuela etc.

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Economic Systems – Solve Economic
Questions
Modern Economies

Market system
System most commonly applied to economic problem;
Market contact between potential buyers and sellers of goods or service;
Most economies are mixed economies with some degree of government intervention;
In market economy only goods and services with market value produced and sold at a price;
Goods like, traffic lights, roads, street lights, parks, footpaths – these are considered public goods;
Building and maintenance is borne by govt. of the region;

Examples of modern market-economies: USA, Canada, Australia, New Zealand, Belgium, Switzerland etc.

Mixed economies: UK, France, Denmark, Finland, Sweden, India, South Africa etc.

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Economic Aggregates
What determines economic growth?

❖ GDP is “ market value of the final goods and services produced within a country in a
given time period”
❖ Unpacked definition – see guide

❖ Components of GDP 𝒀 = (𝑪 + 𝑰 + 𝑮 + {𝑿 − 𝑴})

❑ 𝒀 is GDP
❑ 𝑪 is Consumption (Public and Private)
❑ 𝑰 is Investment (Public and Private)
❑ 𝑮 (Government expenditure)
❑ NX {𝑿 − 𝑴} is Net exports is (Total Exports – Total Imports)

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Economic Aggregates
Variants of Aggregates

❖ Gross domestic product, determined using three different approaches:

production, income, and expenditure technique (we illustrated)

❖ Others (product, income) read more about

❖ Real versus Nominal

❑ Economists note, if total spending rises from one year to next, one of two
things must be true: (1) Economy produced a larger output of goods and
services, or (2) Goods and services sold at higher prices

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Economic Aggregates
Effects of Inflation

When studying changes in the economy over time, economists want to separate these two effects

Measure of total quantity of goods and services produced is not affected by changes in prices of those
goods and services – real GDP

Nominal GDP is “the value of final goods and services produced in a given year when valued at the
prices of that year. Nominal GDP is just a more precise name for GDP”

Real GDP is “the value of final goods and services produced in a given year when valued at the prices of
a reference base year.

By comparing value of production in two years at same prices, we reveal change in production

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Economic Aggregates
Practical Example

www.regenesys.co.za

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SCHOOL OF THOUGHT:
CLASSICAL

• Originated in 18th and 19th century

• Scottish economist Adam Smith the progenitor of classical
economic theory
• Focuses on economic growth and economic freedom
• Laissez faire
• Belief in free competition

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ADAM SMITH

Consumption is the sole end

and purpose of all production;
and the interest of the producer
ought to be attended to, only
so far as it may be necessary
for promoting that of the
consumer.

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SCHOOL OF THOUGHT: KEYNESIAN

- Late 1930s to mid-1960s

- General Theory of Employment, Interest and Money, 1936
- National income, employment, growth and economic
stabilisation
- A case for greater levels of government intervention,
especially in recession

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JOHN MAYNARD KEYNES

Successful investing is
anticipating the
anticipations of others

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SCHOOL OF THOUGHT:
MONETARISM

• Milton Friedman
• ‘Only money matters’
• Debate – what determines aggregate demand?
• Believed the role of government was to control inflation by
controlling money supply

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MILTON FRIEDMAN

‘I am in favour of cutting
taxes under any
circumstances and for any
excuse, for any reason,
whenever it is possible’

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SCHOOL OF THOUGHT: NEW
KEYNESIAN

• Attempts to add microeconomic foundations to traditional

Keynesian economic theories
• Accepts that households and firms operate on basis of
rational expectations
• ‘Sticky’ prices and wages
• Slow response of wages to change in performance of a
company or the economy

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SCHOOL OF THOUGHT:
NEOCLASSICAL

• Assumes people have rational expectations and

strive to maximise utility
• Assumes people act independently on basis of all
the information they can attain

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SCHOOL OF THOUGHT: NEW
CLASSICAL

• Robert E Lucas, Nobel prize 1995

• All agents try to maximise their utility and have
rational expectations
• Supply-side economics and future government
policies
• Believes that the market clears at all times

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SCHOOL OF THOUGHT:
AUSTRIAN

• Human behaviour too idiosyncratic to model

accurately with mathematics
• Minimal government intervention best (contra
Keynesian economics)
• Useful explanations of business cycle, implications
of capital intensity, and importance of time and
opportunity cost

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 Section 2
The South African Economy
Performance of SA Economy
Comparison of SA Economic growth: Pre and Post Independence (1994)

❖ Trading Economics website – select countries and

compare
❖ Using the above resources, discuss how South Africa’s
economy compares with other economies – emerging and
developed.

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SA International Economic Position
❖ International organisations such as the World Bank and United Nations use few criteria to rank
countries’ economies on a global basis. These include GDP

❖ Nigeria deposed South Africa as Africa’s largest economy in 2014 when Nigeria rebased
its measure of GDP

❖ Nigeria, SA, Egypt, Algeria (2020)

❖ World Economic Forum report (2018) ranked South Africa 67th in terms of competitiveness,
citing market-size, infrastructure and well-developed financial system as strengths;

❖ South Africa’s growth – currently recession?

❖ What do you think: On competitiveness? – Global Competitiveness Report

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Banking Stability in South Africa

❖ South Africa’s banking sector rated among top globally;

❖ Its financial system continues to grow

❖ “Twin Peaks” model

❖ Prudential Authority part of South African Reserve Bank;

❖ FSB became dedicated market conduct regulator – Financial

Sector Conduct Authority
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South Africa – Factor Endowment
❑ Position regarding natural resources, labour, capital and
entrepreneurship

❑ Significant natural resources (rivers, lakes, fertile soil, minerals)

❑ Tourism (wildlife, fishing)

❑ Natural resources are affected by

❑ Droughts

❑ Hail damage

❑ Floods
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SA Factor Endowment
Capital

❑ Refers to all man-made (manufactured) assets; used in production of other

goods and services; machines, power -plants, buildings, roads, bridges, dams

❑ In Factors, capital refers to non-financial;

❑ Confusing, as capital sometimes refers to finance

❑ South Africa has poor capital base; most of its capital goods are imported.

❑ Specialised machinery and equipment must be imported.

❑ Large % of imports = CG

❑ SA however has good infrastructure, rail and communication

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SA Factor Endowment
Labor

❖ People are every organisation’s most prized resource.

❖ At national level, the importance of human resources or
human capital can never be overemphasised
❖ South Africa’s main problem, as we have seen, is a lack
of skilled labour

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SA Factor Endowment
Entrepreneurship

❖ An entrepreneur is a person who identifies opportunities and

takes calculated risks by combining the factors of production
in order to develop new markets in the pursuit of profit

❖ Entrepreneurial activity is vital for economic development and

South Africa

❖ Many SA entrepreneurs overseas

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SA Links With Rest of World
International Trade

❖ The South African economy open to rest of world; has strong links with other economies

❖ Mining products dominate composition of imports and exports

❖ Major trading partners are Germany, USA, UK, Japan, Brazil, Russia, India and China

❖ South African trade policy

❖ Customs tariff investigations, trade remedies and import and export control fall within
domain of International Trade Administration Commission of South Africa (ITAC)
❖ Fosters economic growth and development

❖ Effective system for administration of international trade

❖ Refer to task questions in your guide (own time)

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SA Links With Rest of World
Balance of Payments

❑ All countries measure

domestic transactions with
the rest of the world through
the balance of payments
❑ A country’s balance of
payments records its
international trading,
borrowing and lending
❑ Refer to the task question in
your guide and example of
BOP account

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 Section 3
Demand & Supply
Demand
❖ If you intend to buy something, you must have means to purchase it
❖ Demand refers to quantity of goods or services that potential buyers are willing and
able to buy at given prices
❖ Individual demand – refers to demand for a household (people who live together
and who make joint economic decisions or others who make such decisions for them)
Aspects of microeconomics
❖ Market demand – sum of all individual demands. In a market system, plans of all
consumers and producers of a good or service must be taken into account

Aspects of macroeconomics

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Demand
❖ Determinants

❖ Quantity of a good demanded by an individual in a particular period

depends on price of the good; prices of related goods; income of
individuals; taste and number of people in household

❖ Law of demand
❖ Other things being equal (i.e. ceteris paribus), higher the price of
good, lower the quantity of good demanded

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Demand
Demand Curve – Movement & Shifts in Demand Curve

• A movement occurs along same curve;

• Fall in price of goods leads is movement

along demand curve for that good;

• A shift results in a new curve;

• Shifts caused by factors other than price of

goods, e.g. income, taste, prices of related
goods, etc.

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Demand
❖ Decrease in income results in demand curve
shifting to left.
❖ Increase in income shifts demand curve to right
❖ Therefore, more quantities will be demanded at
new, reduced prices
❖ Movement along demand curve D0 from point
a to point b, result of price rising from $2 to $4, a
change in quantity demanded.
❖ Shift of demand curve from D0 to new demand
curve D1 is change in demand

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Demand
Change in Price of Related Goods

❖ Substitute
❖ A substitute is good that can be used in place of
another to satisfy certain want; e.g. butter and
margarine, beef and mutton, or tea and coffee;
❖ An increase in price of substitute causes increase in
demand for product in question, ceteris paribus;
❖ For example: increase in price of butter will increase
demand for margarine, ceteris paribus;
❖ If price of butter increases, more margarine will be
demanded than before
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Demand
Example of substitute

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Demand
Complementary Demand

❑ Complements

❑ Two complements: video cassette

recorders (VCRs) and video cassettes, or
tennis balls and tennis racquets;

❑ A decrease in price of VCRs will cause

an increase in demand for video
cassettes and vice versa;

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Demand
Complementary Goods

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Supply
❖ Quantity of a good or service that producers plan to sell at each possible price during a
certain period

❖ Supply refers to planned quantities, i.e. quantities that producers plan to sell at each
price
❖ Individual supply refers to supply by a single firm

❖ Market supply is sum of all individual quantities supplied

❖ Quantity of goods supplied by a single firm in a particular period depends on price of

product; prices of alternative products; prices of factors of production and other inputs,
and expected future prices;

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Supply
Law of Supply

❖ Other things remaining same, higher the

price of a good, greater the quantity
supplied;
❖ Lower the price of a good, smaller the
quantity supplied;
❖ Why does a higher price increase quantity
supplied?
❖ Suppliers are motivated to supply more
because they receive more income from
each unit of goods supplied;
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Supply
Supply Curve – Movement & Shifts in Demand Curve

❖ Change in price results in a movement

along supply curve; is a change in quantity
supplied;
❖ Change in other factors shifts supply curve,
means a change in supply
❖ Movement along supply curve S0 from
point a to point b as a result of the price
rising from $2 to $4 is a change in the
quantity supplied. The shift of the supply
curve from S0 to the new supply curve S1 is
a change in supply
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Supply – Shifting

❖ What happens if costs increases ? (inflationary periods)

❖ Supply curve shifts left – less can be produced at any given price

❖ Falling cost? (deflationary periods)

❖ More can be produced at lower prices – supply curve shifts right

❖ Other possible influencing factors – weather, taxes (left shift),
etc.

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Demand & Supply Interactions
Market Equilibrium

❖ Equilibrium is “a situation in which Too many goods;

too few buyers

opposing forces balance each other;

❖ Equilibrium in market occurs when price
balances buying plans and selling plans”
❖ Price regulates buying and selling plans Too many buyers;
too few goods
❖ Price readjusts when plans don’t match

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 Market Equilibrium
Equilibrium Price and Output
Market equilibrium is
determined by the intersection
of both the demand and supply
curve. Table lists the quantity
demanded and quantity
supplied of 'Pilot' pens at each
price level, as well as shortages
and surpluses.

Quantity Quantity
Market conditions(surplus (+) or Market
Price demanded( supplied(
shortage (-)) prices
units) units)
5 2 10 10 – 2 = 8 Surplus Fails
4 4 8 8–4=4 Surplus Fails
3 6 6 6–6=0 Equilibrium Equilibrium
2 8 4 4 – 8 = -4 Shortage Rises
1 10 2 2 – 10 = -8 Shortage Rises
Change in Demand
❖ If demand for a good or service increases, demand curve shifts rightward;

❖ Equilibrium price rises and equilibrium quantity increases;

❖ If demand for a good or service decreases, demand curve shifts leftward;

❖ Equilibrium price falls and equilibrium quantity decreases

❖ Supply does not change and the supply curve does not shift

❖ Instead, there is a change in the quantity supplied and a movement

along the supply curve

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Change in Supply
❖ If supply of a good or service increases, supply curve shifts rightward

❖ Equilibrium price falls and equilibrium quantity increases;

❖ If supply of good, or service, decreases, supply curve shifts leftward;

❖ Equilibrium price rises and equilibrium quantity decreases

❖ Demand does not change and the demand curve does not shift.
Instead, there is a change in the quantity demanded and a movement
along the demand curve

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Simultaneous Change in Demand & Supply
Unpredictability in Equilibrium

❖ It is possible to predict what will happen to equilibrium prices and

quantities in market if we deal with changes in demand and changes in
supply;

❖ However, if demand and supply change simultaneously, a precise

outcome then becomes unpredictable;

❖ This is a special case of a more general problem in economic theory

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Consumer Surplus & Producer Surplus
Consumer Surplus

❖ Difference between prices consumer is willing to pay and

actual price he/she pays;
❖ A is willing to pay R8,000 for an iPad; actual price is
R6,000; consumer surplus, is R2 000
❖ Consumer surplus is the area below demand curve and
above market equilibrium price – refer the arrow;
❖ Based on theory of marginal utility; satisfaction varies with
person high for some; low for others;
❖ It is opportunity costs customers willing to bear for
marginal benefit derived from consuming additional unit of a
product
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Consumer Surplus & Producer Surplus
Producer Surplus

❖ Difference between price firm receives and price firm

is willing to sell at;

❖ Apple willing to sell iPhone at R 4500; but actually sells

at R.6,800; producer surplus here is R,2300;

❖ Producer surplus is area below the market equilibrium

sales-price and above the market supply curve;

❖ Opportunity costs firms are willing to bear for not

producing one additional unit of a product

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Government Intervention
❖ Changes explained above occur only if market forces of supply and demand are free to
establish equilibrium prices and quantities of goods and services;
❖ Consumers, trade unions, farmers, business people, and politicians are unsatisfied
with prices and quantities as determined by market demand and supply;
❖ Therefore, government intervenes to influence prices and quantities in market
❖ Setting maximum prices (price ceilings) House rental ceilings (regulated)

❖ Setting minimum prices (price floors) Minimum wages; minimum prices for agro-produce

❖ Subsidising certain products or activities Food coupons and subsidies

❖ Taxing certain product or activities Luxury taxes; wealth taxes; estate taxes etc.

❖ Self-fulfilling expectations

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Supply and Demand
Current Reading

• Corona virus – (decrease demand) oil (https://www.atlanticcouncil.org/blogs/new-atlanticist/coronavirus-and-the-oil-market-the-

effects-thus-far-and-what-to- expect-next/)

• Corona virus – (increase supply) oil – price war (https://www.ft.com/content/59dcba56-61a2-11ea-b3f3-fe4680ea68b5)

• Corona virus – hand sanitizer & oat milk (https://www.marketwatch.com/story/demand-for-oat-milk-is- outpacing-hand-sanitizer-as-

americans-stock-up-on-coronavirus-supplies-2020-03-06)

• Corona virus – cheaper petrol but exchange rate poor (money rather in safe havens) & interest rates ?

(https://www.fin24.com/Economy/South-Africa/oil-crash-could- speed-up-rate-cuts-in-south-africa-20200310)

• Mask shortage https://www.bloomberg.com/news/articles/2020-03-10/the-global-mask-shortage-may-be-about-to-get-much-worse

• GDP decline https://www.fin24.com/Economy/South-Africa/brace-for-record-decline-in-gdp-in-the-next-few-months-analysts-

20200324-2

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 Section 4
Elasticity and Total Income
Price Elasticity of Demand
Definition and Formula

❑ Measure responsiveness

❑ Price elasticity of demand measures responsiveness of demand to a change in price of

good

❑ Measure of responsiveness of quantity demanded of a good to a change in its price

❑ Calculation (absolute values for interpretation because answer will be a negative – law of
demand)

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Warm up Question:

Suppose that you are appointed chief executive officer of

Transnet (a South African state-owned company) at a time
when it is making a loss on passenger transport. You are
informed that the price elasticity of passenger rail services is
1.4.
What pricing strategy would you follow in your attempt to
restore profitability at Transnet?

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 Degrees of Elasticity
Less than unit elastic demand or relatively
inelastic(ep<1):When percentage change in quantity
demanded is less than percentage change in price, the
demand for the commodity is said to be less than unit
elastic demand or relatively inelastic.

Price of cloth Demand

per meter(R) (mt.)
20 10
60 05
Case 1
Brent crude oil prices have continued to recover and are now
exceeding US$60/bbl. This is up about 35% from this year's low,
and 10% above our 2018 forecast of US$55/bbl. According to our
global oil team, oil prices have responded to:
1) the drop in global oil inventories, with the US alone having
shed about 80m barrels since the peak reached in March 2017;
2) expectations for an extension of OPEC production cuts; and
3) a stagnant and modestly falling US oil rig count(“a weekly census
of the number of drilling rigs actively exploring for or developing oil or natural
gas in the United States and Canada).
Case 1
Considering India is a net oil importer with inelastic demand, movement in
global crude oil prices tend to have an important bearing on the macro stability
risks (inflation, current account deficit [CAD] and fiscal deficit) and hence economic
growth prospects. If the Brent price averages around US$60/bbl in FY18 (versus
US$55/bbl UBS estimate), the macro stability risks will widen but will still be
manageable. The Monetary Policy Committee (MPC) would prefer to go in for a
prolonged pause (versus scope of one more 25bp rate cut priced in as per our base
case, assuming a stable fiscal position). However, strengthening in oil prices above
US$70-75/bbl could lead to terms of trade shock and could have a significant
impact on growth, inflation, CAD and fiscal balance. In such a scenario, there is a
risk of further tightening in policy rates.

Analysis: As a fastest-growing economy, India's demand for energy

is tremendous. To achieve increasing demand for the economic
growth, India has to consume more oil. Hence, India is having
inelastic demand for oil even though the prices are increasing.
 Degrees of Elasticity
Unit elastic demand(ep=1):When percentage change
in demand is equal to percentage change in price, the
demand for the commodity is said to be unit elastic.

Price of cloth per Demand

metre(R) (mt.)
20 100
30 50
 Degrees of Elasticity
More than unit elastic demand or highly
elastic(ep>1):When percentage change in demand is more
than percentage change in price, the demand is said to be
more than unit elastic demand or highly elastic.

Price of cloth per Demand

meter(R) (mt.)
20 500
30 100
 Degrees of Elasticity
Perfect inelastic demand(ep=0):When quantity
demanded does not change at all in response to
change in price of a commodity, the demand for that
commodity is said to be perfectly inelastic.

Price of cloth per Demand

meter(R) (mt.)
20 20
30 20
40 20
 Degrees of Elasticity
Perfectly elastic demand[ep=∞(infinity)]:When the demand
for a commodity expands or contracts to any extent without
any change or with very little change in price, the demand for
the commodity is said to be perfectly elastic or infinitely elastic.
In real life, we rarely come across such a situation.

Price of cloth per Demand

meter(R) (mt.)
30 100
30 400
Price elasticity of demand

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 Problem 1
Q1.When the price per unit of a
commodity is R20,quantity
demanded is 200 units. But when
price falls to R15 per unit, demand
expands to 300 units. Calculate
elasticity of demand.
 Solution 1
Q1.When the price per unit of a commodity is
R20,quantity demanded is 200 units. But when price
falls to R15 per unit, demand expands to 300 units.
Calculate elasticity of demand.

Ans. ∆P = (15-20) = -5
∆Q = (300 – 200) = 100
P1 = 20
Q1 = 200
Ep = 100/-5 * 20/200 = -2
The demand for the commodity is elastic.
Demand Elasticity
The Various Measures

❖ Inelastic demand
❖ Less than 1.0, good is said to have an inelastic demand 𝒅<𝟏
❖ Here, percentage change in quantity demanded is less than percentage change in price
❖ Perfectly inelastic demand

❖ If quantity demanded remains constant when price changes, then:

❖ Price elasticity of demand is 0 and good’s demand curve is a vertical line

❖ Unit elastic demand

❖ If price elasticity of demand is equal to 1.0, good is said to have unit elastic demand

❖ Percentage change in quantity demanded equals percentage change in price 𝒅=𝟏

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Demand Elasticity
The Various Measures

❖ Elastic demand

❖ If price elasticity of demand is greater than 1.0, then: 𝒅>𝟏

❖ If percentage change in quantity demanded exceeds percentage change in price

❖ Perfectly elastic

❖ If quantity demanded changes by an infinitely large percentage

❖ In response to tiny price change, good is said to have perfectly elastic demand

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Case 3 The price of the iPhone and the elasticity of demand

The iPhone 8GB, an internet and multimedia smart phone

created by Apple, was launched in the US market in June
2007. The launch price was $599. In early September of the
same year Apple announced a reduction in the price of the
iPhone 8GB of 33 per cent, from $599 to $399.
Why such a big reduction in the price a mere two months
after the launch?
Overestimated

• One possibility is that Apple overestimated its demand

for the iPhone and not many customers were willing to
Demand

buy at that price. In this case, a price cut may be

justified. This possibility, however, seems implausible.
Demand for iPhones was high; customers were queuing
outside Apple stores for hours in order to buy one.
Case 3 The price of the iPhone and the elasticity of demand

• Maybe the price cut was due to the fact that Apple

Lower Cost
discovered that the cost of making the iPhone was lower
than expected. This possibility also seems quite implausible.
According to the market research company iSupply, the cost
of making the iPhone 8GB was $280.83 when the iPhone
was launched. This was the cost when the price was $599 and
also when the price was reduced.
Inelastic Demand

• A more plausible explanation is related to the idea of the

elasticity of demand. The iPhone can be viewed as a luxury
good with few direct substitutes. This would imply that the
price elasticity of demand for the iPhone should probably be
low. In pricing the iPhone, Apple would like to set a price
such that the elasticity of demand is close to -1. It turned out
that this was not the case.
Case 3 The price of the iPhone and the elasticity of demand

• Indeed, it seems that the demand for iPhone was

more elastic than that. Various estimates found
an elasticity of demand between -3 and -5 per
Elastic Demand
cent.
• According to analysis, if the initial price is on the
highly elastic part of the demand curve, a
reduction in the price increases total
expenditure, that is, price multiplied by
quantity. But total expenditure represents the
total revenue received by the firm that is selling
the good. So a decrease in price when demand is
quite elastic will increase the revenues obtained
by the firm.
Case 3 The price of the iPhone and the elasticity of demand

• To have a rough idea of the elasticity of demand for

the iPhone we can use the sales data from Apple.
• In the first three months after the iPhone was
Elastic Demand launched, Apple sold 2,70,000 iPhones and the
price was mainly $599. In the fourth quarter of
2007 (from October to December), Apple sold
1,11,9000 iPhones when the price was $399.

P1 599 Q1 270000
P2 399 Q2 1119000

%∆P -0.4008
%∆Q 1.222462

E= -3.05004
Case 3 The price of the iPhone and the elasticity of demand

• Using the arc elasticity of demand equation

with those data, the elasticity of demand is
Elastic Demand approximately -3.06 per cent. While this is a
rough measure, it still gives us an idea of how
elastic the demand for iPhones is. According to
this rough measure, a decrease in the price by
1 per cent will increase quantity demanded
(and so sold) by 3 per cent.
• Obviously the cut in the price made the
customers who bought the iPhone at $599
quite unhappy. A $100 discount voucher to be
spent in Apple stores was given to those
customers to partially compensate them.
Will your answer change for -
Warm up Question:
Suppose that you are appointed chief executive officer of
Transnet (a South African state-owned company) at a time
when it is making a loss on passenger transport. You are
informed that the price elasticity of passenger rail services is
1.4.
What pricing strategy would you follow in your attempt to
restore profitability at Transnet?

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Business Relevance of Demand Elasticities

Knowledge of Price elasticity of demand (PED) is

useful to help understand price variations in a
market, the impact of changing prices on consumer
expenditure, sales revenue and government indirect
tax receipts.
A very good example of price variations in a market
is the price of tickets to watch a major sporting event.
In 2012, the UK hosted the Olympic Games. The price
of tickets to watch athletics events ranged from $140
to $650, the cheapest tickets being for the heats of
field and track events with the most expensive being
for the last day when medals were being awarded for
the main events.
Business Relevance of Demand Elasticities
Variations in price elasticity of demand can also be
used to explain:
▪ the difference between peak and off peak rail
travel in some countries
▪ why it is usually cheaper to purchase airline tickets
a few months rather than a few days ahead of
travel
▪ why restaurant meals are more expensive during
religious festivals.
In all of these cases, businesses are using price
variations to try to maximise their revenue. They are
well aware that there are variations in price elasticity
of demand in their markets and therefore trying to
exploit the opportunities presented to them.
Factors Affecting Price Elasticity of Demand

Availability of substitutes
The better & more numerous the substitutes
for a good, the more elastic is demand
Percentage of consumer’s budget
The greater the percentage of the
consumer’s budget spent on the good, the
more elastic is demand
Time period of adjustment
The longer the time period consumers have
to adjust to price changes, the more elastic
is demand
Price Elasticity of Demand
Total Revenue Elasticity

❑ The total revenue from sale of good equals price of good multiplied by quantity sold
❑ If demand is elastic, a one percent price cut increases quantity sold by more than one
percent, and total revenue increases
❑ If demand is inelastic, a one percent price cut increases quantity sold by less than one
percent, and total revenue decreases
Calculations
❑ If price of an ice cream increases by 5%; result is10% decrease in quantity
demanded,, then price elasticity of demand equals:
𝟏𝟎%
❑ Price elasticity of demand = 𝑷𝒆𝑫 = =2
𝟓%
❑ A 1% change in price of product will lead to 2% change in quantity demanded
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Income Elasticity of Demand
❖ The income elasticity of demand is measure of
responsiveness of demand for a good to a change in
income, other things remaining same

❑ Assume that consumer’s income rises by 10% as economy is booming; as a result

quantity of fruit consumed increases by 3%. Income elasticity can be calculated as
follows:

𝟑%
❑ Income elasticity of demand = 𝑰𝒆𝑫 = = 𝟎. 𝟑
𝟏𝟎%
❑ This means that a 1% change in income will lead to a 0.3% change in the quantity
demanded

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Cross Elasticity of Demand
❖ Measure of responsiveness of demand for a good to a change in price of a
substitute or complement, other things remaining same;

❖ Cross elasticity of demand is positive for substitutes and negative for

complements

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Price Elasticity of Supply
❖ Responsiveness of suppliers to change in price of goods;

❖ Elasticity of supply measures responsiveness of quantity supplied to change in price of goods

when all other influences remain unchanged
❖ Companies hope to keep price elasticity of supply high, to be nimble if price of their products shift

❖ Improving technology used, such as upgrading equipment and software to improve efficiency;

❖ Supply is relatively inelastic if elasticity of supply less than 1; 𝒆<𝟏

❖ Supply is unit elastic if elasticity of supply equals 1 – linear and 𝒆=𝟏
passes through origin
❖ Supply is relatively elastic if elasticity of supply is greater than 1; 𝒆>𝟏
❖ Perfectly inelastic – if supply = “0” 𝒆=𝟎
❖ Perfectly elastic – if supply = ∞ 𝒆=∞
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Market Structure
The Continuum → Monopoly / Monopsony Duopoly Oligopoly Monopolistic Competition

❖ Monopoly: one producer or seller | Monopsony: one large buyer

❖ Duopoly
❖ Two firms (limited) make up industry; high barriers to entry

❖ Oligopoly
❖ Few firms (limited) make up the industry – high barriers to entry
❖ Automobile industry – same product but different models and makes

❖ Monopolistic competition
❖ Characteristics of competition and monopoly
❖ Many firms selling similar but differentiated products;
❖ Differentiation through, superiority, advertising, image, attributes, features etc.
❖ Pizza Hut and Domino’s Pizza differentiated by taste, ingredients, etc.

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