Economics For Managers

SBL
(PBA4801)
Dr B Muchara
muchab@unisa.ac.za
mucharab@gmail.com

1
 Introductions
O Dr B Muchara: University of Zimbabwe,
University of Fort Hare and University of
KwaZulu-Natal
O Teaching and Research experience:
Microeconomics, Market price analysis,
Agricultural Economics, Natural Resources
Management (Land & Water), Value Chain
Analysis, Economic Research Methodology

2
 2. Basic history

O Contrary to popular beliefs Economics is NOT:

O Pro or anti Business in vacuum
O Pro or anti consumers in vacuum
O Pro or anti Labour in vacuum
O Pro or anti government in vacuum
O Economics studies and promotes ways to maximise societal welfare by:
- Maximising individual utility/ satisfaction , while
- Maximising business profits
– at some General Equilibrium point
• Logical economic advice is non-aligned
• In fact, economic advice is concerned with improving global welfare
(beyond borders)
• Unfortunately THE ENVIRONMENT has not featured explicitly in the
historical analyses
• But that is a discussion in advanced economic courses
3
 Overview of topics to be covered
TOPIC TOPIC DESCRIPTION
NUMBER
1-MICRO Basic economic concepts and models (Parkin et al 2013,
chs 1 & 2)
2-MICRO Markets and prices (Parkin et al 2013, chs 3–15)
3-MICRO Market failure (Parkin et al 2013, chs 16 & 17)
4-MACRO Economic indicators and macroeconomic concepts (Mohr
2017, chs 1–12; Parkin et al 2013, chs 21 & 22)
5-MACRO Macroeconomic models (Parkin et al 2013, chs 20–24)
6-MACRO Economic policy (Parkin et al 2013, chs30 & 31)
7-MACRO The global economy (Parkin et al 2013, chs 7 & 26)
4
 Microeconomics
Specific concepts from selected chapters:
O The cornerstone concepts are:
O Scarcity, Choice & Opportunity Cost
O In microeconomics these concepts apply to Consumer & Production
sectors
O For consumers: it is the choice - given what is available (resources)
PLUS the budget
O You cant consume what you cant afford
O In production: there are 3 basic questions:
- What gets produced? Choice
- How does it get produced? Limitations - Scarcity
- How does it the get distributed? Social Choice/Values
O To illustrate these concepts formally we use a Production Possibilities
Frontier (Curve or Boundary)

O The economic way of thinking: Making rational choice (A choice is a

trade-off) ; Benefit; Cost; Choices respond to incentives
5
 Scarcity & Choice & Opportunity Cost
on a Graph
O The Production Possibility Frontier (PPF)- is the
boundary between those combinations of goods and
services that can be produced and those that cannot.
O Model of a 2 product/goods economy (capital goods
vs consumer goods)
O Example of media houses: print vs electronic, Male
magazine vs Female magazine ; Mercedes Trucks vs
Luxury cars etc
O All decisions revolve around factors of production;
land , labour, capital , entrepreneurship, etc

6
 Scarcity & Choice & Opportunity Cost
on a Graph 1. The opportunity cost is the
sacrifice that you pay for
• Imagine an economy that produces two types of goods getting something.
- Consumer goods (e.g. agricultural goods) E.g. getting fewer consumer
- Capital goods (e.g. cars, computers) goods by moving from E to F,
capital goods: 20 to 60,

100 units
A consumer goods: 800 to 700.

2. Choice of producing at F not

G E, is value based.

3. D is inefficient given existing

55 F resources
Capital goods
4. G is not attainable with
35
D E existing resources – scarce
resources
5. A, B,E,F are all efficient

0 B
700 800 1000 units

Consumer goods 7
 3. Specific concepts from selected chapters:
Microeconomics
Scarcity & Choice & Opportunity Cost on a Graph
O The PPF also illustrated the
difference between economic
efficiency & economic growth
in simple terms
O What can move the PPF out?
O a new Technology
O Discovering a natural
resources, like oil
O Size of labour force (e.g.
migration)
O Economic decline: move of
PPF inward
O Because of Wars,
Mismanagement, Disasters,
etc.

8
 3. Specific concepts from selected chapters:
Microeconomics – consumer sector/demand

O A free market allocates resources to be

consumed through forces of demand &
supply
O The interaction of Demand & Supply
determines: The Market Price & Market
Quantity

9
 3. Demand and Supply
O Demand- Want it, afford it, buy it

The law of demand – the higher the price of a

good, the smaller is the quantity demanded
(vice versa) “ceteris paribus”

10
 3. Specific concepts from selected chapters:
Microeconomics – consumer sector
• This demand function or curve or schedule:
Shows how much of a given product a household
would be willing to buy at different prices for a
given time period.
• On this curve/function: there is a quantity demanded
- The amount of a product that a Hh would buy in a given
period - at the going market price
• The curve is the DEMAND
• 10 gallons per week = quantity demanded (q) at $3
• From the curve: Law of demand - The negative
relationship between Price & Quantity Demanded (q)
• As P rises, q decreases; as P falls, q increases.
• Price changes lead to shift ALONG the curve
• Changes of the other factors (b,c,d,e) lead to shift OF the
curve itself
• Quiz:
• What would happen if price of the product changed from
$1 to $5?
• What would happen if the Hh expected its income/wealth
to decline?
• Demand on its own does not determine Market
Equilibrium and Price – Supply is the flip side

11
 3. Specific concepts from selected chapters: *****
Microeconomics – consumer sector

O A household’s decision about what quantity of a particular product,

to demand depends on a number of factors, including:

 a. The price of the product in question.*

 b. The income /wealth available to the household.*
 c. The prices of other products available to the household.
 d. The household’s tastes and preferences (values).
 e. The household’s expectations about future , i.t.o income,
wealth, prices, supply
 Formally: Dem = f(a,b,c,d,e)

12
 The Determinants of Demand
O Qdx = f (Px, Py, Pz, Y, W, A, E, T, U)
O Px, its own price (of the car)
O Py, the price of its substitutes (other brands/models)
O Pz, the price of its complements (like petrol)
O Y, the income (budget) of the purchaser
(user/consumer)
O W, the wealth of the purchaser
O A, the advertisement for the product (car)
O E, the price expectation of the user
O T, taste or preferences of user
 A Shift in Demand
Shift in demand to the right
Price
Qs

£20

£10
QD2

QD1

Quantity
1000 2000

McGraw-Hill
Education, 2013
 A Shift in Demand
Shift in demand to the left
Price
Qs

£20

£10
QD1

QD2

Quantity
1000 2000

McGraw-Hill
Education, 2013
 What is Supply
O Supply schedule/curve shows how much
of a product firms will sell at different O Supply curve
prices
O On this curve we see the law of supply :
positive relationship between P & q of a
good supplied Price
O An increase in market P will lead to an
increase in q supplied
O A decrease in market P will lead to a
decrease in q supplied. 400
O So Supply = f(P good, Te, P sub, P
inputs, Future P good)
O Again: Changed in P good => Move 300
ALONG curve
O Changes in all other factors => Shift of
curve
O The interaction of Demand and Supply
Curve determines Market Equilibrium (P
& q) 200 300
Quantity of product / year

16
The determinants of supply
O Price of a factor of production
O Price of a substitute
O Price of a complementary product
O Expected future price
O Number of suppliers
O Technology changes
O Natural events
O Market price of the product itself(movement
along the supply curve)
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 A Shift in Supply
Shift in supply to the right
Price
QS1

QS2

£20

£10

QD1
Quantity

1000 2000

McGraw-Hill
Education, 2013
 A Shift in Supply
Shift in supply to the left
Price
QS2

QS1

£20

£10

QD1
Quantity

1000 2000

McGraw-Hill
Education, 2013
 Market Equilibrium

O At a price where quantity demanded equals

quantity supplied the market clears
O There is no excess supply or demand
O When the price of product is $2, 40 000
bushels of soybeans are supplied & sold
O But government can set a price ceiling
(excess demand!) or floor (excess
supply!)
O Quiz:
O What happens when Quantity Demanded >>
Quantity Supplied?
O (e.g. in 2003 Zimbabwe)
O What happens when Quantity Demanded
<<< Quantity Supplied?
O What happens when Demand curve shifts
up/down and Supply stays the same
O What happens when Supply curve shifts
up/down & demand stays the same?
O Well this is why microeconomics used to be
called PRICE THEORY 20
 Elasticity – the concept
O The responsiveness of one variable to changes
in another
O When price rises, what happens
to demand?
O Demand falls
O BUT!
O How much does demand fall?
 ELASTICITY
• Elasticity is an index of reaction
• Elasticity is a measure of sensitivity or
responsiveness.
• It indicates the extent to which demand changes
when the price of a commodity changes.
• Thus in general, elasticity measures the
responsiveness of one variable (dependant) to
changes in another variable (independent).
Price elasticity of demand/supply

Income elasticity

Cross Elasticity
 Price Elasticity – the concept
• If price rises by 10% - what happens to
demand?
• We know demand will fall
• By more than 10%?
• By less than 10%?
• Elasticity thus measures the extent to which
demand will change
 Price Elasticity of Demand

– The responsiveness of demand

to changes in price
– Where % change in demand
is greater than % change in price – elastic
– Where % change in demand is less than % change
in price - inelastic
 Determinants of Price Elasticity of
Supply
• The number of producers.
• Nature of product
– Perishable vs durable products
• The existence of spare capacity.
• The time period
• Factor mobility
• Length of the production period
• Techniques of production
• Time period – the longer the time under consideration the more elastic a good is likely to be
• Number and closeness of substitutes –
the greater the number of substitutes, the more elastic
• The proportion of income taken up by the product – the smaller the proportion the more inelastic
• Luxury or Necessity - for example, addictive drugs
• Price expectations of buyers
• Other factors;
– Degree of complementarity
– Advertising
– Addiction
– Number of use of the product
 Demand Curve
Shapes and Elasticity
• Perfectly Elastic Demand Curve
– The demand curve is horizontal, any change in price can and will
cause consumers to change their consumption.

• Perfectly Inelastic Demand Curve

– The demand curve is vertical, the quantity demanded is totally
unresponsive to the price. Changes in price have no effect on
consumer demand.

• In between the two extreme shapes of demand curves are

the demand curves for most products.
Price elasticity—Cont!

O Price Elasticity of Demand for Rice

R8 B

R6 A

2 6 Can of Rice

28
 CATEGORIES OF ELASTICITY

• Unitary Elasticity: Ep = 1
• Elastic Demand: Ep > 1
• Perfectly Elastic: Ep = ∞
• Perfectly Inelastic: Ep = 0
• Inelastic Demand: Ep < 1
 Income Elasticity of Demand
– The responsiveness of demand
to changes in incomes
• Normal Good – demand rises
as income rises and vice versa
• Inferior Good – demand falls
as income rises and vice versa
 Cross Elasticity

• The responsiveness of demand

of one good to changes in the price of a
related good – either
a substitute or a complement

% Δ Qd of good t
_________________
Xed =
% Δ Price of good y
 Elasticity of Demand and
Changes in the Equilibrium

McGraw-Hill
Education, 2013
 Elasticity and decision making
Price ($)
Producer decides to lower price to attract sales

10 % Δ Price = -50%
% Δ Quantity Demanded = +20%
Ped = -0.4 (Inelastic)
5 Total Revenue would fall
Not a good move!

D
5 6
Quantity Demanded
 Elasticity and decision making
Price ($)
Producer decides to reduce price to increase sales
% Δ in Price = - 30%
% Δ in Demand = + 300%
Ped = - 10 (Elastic)
Total Revenue rises
10
Good Move!
7
D

5 Quantity Demanded 20
 Elasticity
• If demand is price • If demand is price
elastic: inelastic:
• Increasing price would • Increasing price would
reduce TR (%Δ Qd > % Δ increase TR
P) (%Δ Qd < % Δ P)
• Reducing price would • Reducing price would
increase TR reduce TR (%Δ Qd < % Δ
(%Δ Qd > % Δ P) P)
 Elasticity

• Cross Elasticity:
• The responsiveness of demand
of one good to changes in the price of a
related good – either
a substitute or a complement
% Δ Qd of good t
__________________
Xed =
% Δ Price of good y
 USE OF PRICE ELASTICITY
• Used to determine pricing policy
• Firms can use it for planning e.g. by estimating the
effect of a price change, firms can plan the number
people to employ & the impact on cash flow
• Used when price discriminating to set price in each
market.
• Used by Gvt to estimate the impact of an indirect
tax in terms of sales & tax revenue.
• Used to estimate the impact on consumer spending,
producers’ revenue & income of any shift in supply.
Market Structure and Pricing
Market Structure
 Determinants of market structure
 Freedom of entry and exit
 Nature of the product – homogenous (identical), differentiated?
 Control over supply/output
 Control over price
 Barriers to entry (by laws or cost of entry)
 Degree of competition in the industry
 High levels of competition – Perfect competition
 Limited competition – Monopoly
 Degrees of competition in between
Price takers: Perfect Competition

 Market conditions
 many buyers, many sellers
 identical products

 freedom of entry and exit in the market

 perfect knowledge about prices and

products in the market.

Pricing in Perfect Competition

 Do not choose price.

 Choose output quantity. TC includes
opportunity cost of capital invested.
 What will be our profit (loss) from our output
decision?
 Should we produce now? (SR)
 Should we stay in the industry? (LR)
Price Makers: Monopoly
 literally defined as one seller
 monopoly power is maintained by ensuring
that barriers to entry into the industry are
maintained.
 the firm’s demand curve is the same as the
industry demand curve. Why?
 the firm is the industry
 because of this, the monopolist is in a
position to be a price maker.
Pricing in a Monopoly
 Profit maximization will be achieved by
setting price so that MC=MR.
 It is not reached by setting price as “high as
possible.”
 Like any firm, the monopolist is constrained
by their demand curve.
 One cannot choose both P and Q.
Market Types
PRICE DISCRIMINATION
 First Degree -Practice of charging each
customer their reservation price i.e. the max
price that the customer is willing to pay for each
unit bought.
 Second Degree –practice of charging different
prices per unit for different quantities of the same
good or service
 Third Degree – practice of dividing consumers
into two or more groups with separate demand
curves and charging different prices to each
group
 Intertemporal Price

Discrimination
Practice of dividing customers into high demand and
low demand by charging a price that is high at first but
falls later.
 E.g. selling the first versions of LCD monitors at high
price to a small group of customers who value product
highly and do not want to wait to buy it.
 Charging a high price for the first run movie and then
lowering the price after the movie has been out a year.
 Publishers charge a high price for the hardcover
edition of a book and then release the paperback
version at a much lower price a year later.
Other Pricing Strategies

 Block Pricing – charge different prices for

different quantities/blocks of goods

 The Two Part Tariff – charge entry & usage

fees e.g in parks

 Bundling – sell two or more products as a

package
 Market Failure

 Free market system only succeed if all

conditions of perfect competition are met.
 If it fails to provide public goods that society
deems important – govt might intervene to
correct the market failure
 Externalities are therefore the centre of
intervention: These are
 negative/positive production externalities
 Negative/positive consuption externalities
 Market efficiency

O Consumer surplus (Green)

O Producer surplus (Brown)
O Deadweight loss (Red)
O Economic efficiency is about R10
avoiding this loss
O Promoting market allocation of
resources aims at avoiding the loss
O Use your geometry to workout the R8
magnitudes of each of the 3 areas:
O Area of Triangle = ½ h X b
O What is the CS? 4
O What is the PS?
O NB: policy effectiveness is
measured against the size of 10 units
deadweight loss/ in taxation (excess
burden)

51
 Public Economics
Government
O Markets are not O Different tax systems have
own merits and demerits
perfect & they fail O They can be easy to
O One of the reasons for collect (low admin cost) –
but not equitable
government O They can lead high
intervention deadweight loss (excess
burden)
O By creating artificial O But having no tax system
markets at all may be worse than
having an imperfect
O E.g. taxation system system

52
 Public Economics
Government
O Types of taxes based on equity:

- Proportional – proportional to income (e.g. 10%

of income)

- Progressive -the proportion increases as income

increases – SA income tax system

- Regressive – falls as income increases (e.g. VAT –

as a proportion of income the rich pay less VAT)

53
 Public Economics
Government
O The philosophy of equitable tax
O Pay as you benefit (benefits received principle) – e.g. e-tolls
- Difficult for most public goods (non excludability – e.g. street
lights)
- Public goods: hard to exclude others & non rivalry (does not
diminish with consumption – e.g. solar energy)
O Pay as you earn (ability to pay principle) – e.g. proportional
income tax – irrespective of benefits (distributional)
O Horizontal equity – Everyone in the same income bracket is
treated the same way
O Vertical equity – Those with greater ability should pay more
O Easier to think about? Hard to apply?
- How is the ability measured? By how much more to pay? 54
 Public Economics
O Tax burden
Government
- the cost of tax to society
- i.e. Consumer & producer surplus
O Tax on wine supply
transferred to govt revenue
O Tax incidence
- how the burden is shared
S+T
O Burden can be SHIFTED – away from
those it is intended for Tax
O The fig. shows the size of tax burden on
wine & how it is shared S
O Tax affects supply of wine Pc E1
O Parallel shift of S
P0 E0
O The Burden = Blue + Red areas
O Incidence:
Pp
- Blue – transfer from consumers
D
- Red – transfer from producers
• You can calculate these areas
• But that is not the only cost to
q0
society !!!!! All areas depend on elasiticities55
• DEADWEIGHT LOSS/EXCESS =
GREEN
 Macroeconomics
O If Adam Smith = Microeconomics
Then John Keynes = Macroeconomics
Outcomes:
O Macroeconomics - deals with the economy as a whole?
O Revisit the circular flow of payments
O We are interested in creating an Aggregate Demand & Aggregate
Supply Model
O Agg. Demand: we learn about Keynes Model that links Aggregate
Expenditure to National Income/Output (Y)
O Aggregate Expenditure is composed of Hh & Firms & Government &
(International Mkts) on the Y- Axis
O National Income/Output is on the X-axis (size of an economy)
O Then we predict size of economy (i.e. National Income X-axis), given
changes in components of Aggregate Expenditure
O This is a stepwise process – starting with Hhs, Firms, Govt, etc
O After this we specify Aggregate demand
O Aggregate Supply is much simpler
O We conclude by combining the aggregates for a complete model 56
In typical textbooks the flows are considered
among these stakeholders (payments for
goods/services)

57
 Economic indicators and
macro-economic concepts
O Economic indicators reported in the media are
rather financial indicators.
O Examples of economic indicators are:
O GDP
O GNP
O CPI
O Producer Price Index (PPI)
O Budget deficit
O National Debt
O Unemployment
O Inflation

58
 Indicators cont!
O Gross Domestic Product (GDP) – Is the market value of the
final goods and services produced within a country in a given
time period.
O Can be measured in two ways:
i. Expenditure Approach(AE) i.e [C,I,G, (X-M)]
ii. The Income Approach (Y) . Also defined as the total
amount for the services of the factors of production used
to produce final goods and services eg. wages, interest, rent
and profit
O GDP=AE=Y=C+I+G+(X-M)
C=consumption, I –Investment, G=govt expenditure, X=Exports,
M=Imports
O Real GDP vs Nominal GDP
59
 3. Macroeconomics Demand:
Goods & Services
O We will go back to Investment & Interest Rate link when dealing with Money
Market
O With AE = C + I, we want to know where Income is located (Equilibrium Output)
O Where is Spending = Income (AE = Y) (The 45 degree line represents equality)
O Y = AE = C +I (Intersection pt of 45 line & AE = C+I)
O The Consumption Function is Key in Determining this equilibrium level of income
O And solve for Y in the equation: Y = C + I, when
- C = 100 + 0.75 Y (consumption function)
- I = 25
- Y = C + I = [100+ 0.75Y] + 25
- Y – 0.75Y = 100 + 25
- 0.25Y = 125
- Y = 125/0.25 = 500 units
- Equilibrium income = 500 units
- This is the recipe will always be the way to work out Equilibrium Income even
when we include government sector
- At Y = 500 ; as well S=I (see proof in textbook)
60
3. Macroeconomics Demand:
Goods & Services

61
 3. Macroeconomics Demand:
Goods & Services***
O The only difference is that the government taxes income and
this alters the Consumption Function
O After taxes Consumption Depends on income after tax (Y – T)
O So: C = 100 + 0.75 (Y – T)
O But government also invests like firms in an economy
O Otherwise deriving equilibrium income with Government stays
the same: AE= Y = C+ I + G
O So is deriving the G multiplier which is still 1/MPS
O Study the rest of the multipliers
O We are now move from goods/services to money markets
O We said the connection between the 2 markets was the Interest
Rate & Investment
62
 GDP cont!
O Uses of GDP
O To compare standards of living over time
(GDP per capita )
O To compare the standards of living across
countries
O Real GDP fluctuations- the business cycle
O Expansion, Recession, Peak, Trough

63
64
 Consumer Price Index
(CPI)
O CPI- a measure of the average of the prices paid by urban consumers for a
fixed basket of consumer goods and services.
O Always calculated from a base year for urban consumer:
O CPI = [Cost of basket at current prices/cost of basket at base yr]x100
O The CPI Basket in SA
O Housing and utilities (24.1%)
O Transportation(15.8%)
O Food and non-alcoholic beverages (14.8%)
O Miscellaneous goods and services (15.1%)
O Household contents and services (5%)
O Alcoholic beverages and tobacco (5.5%)
O Recreation and culture (4.5%)
O Clothing and footwear (4.2%)
O Communication(2.9%)
O Restaurants and hotels (3.6%)
O Education (3.0%)
O Health (1.5%)
65
 3. Macroeconomics Demand:
Money Mkts
O Interest rate (r) is the price of money
O Like in microeconomics demand
O Price = Y axis
O Money (Quantity) = X-axis
O Because supply of money (notes) does not
depend on r, and
O Central Bank uses reserve ratio, repo rate mkt
ops to control Ms
O Ms is vertical line
O Where Md = Ms we have Money Market
Equilibrium
O Increase in Md  increase in r
O Increase in Ms  decrease in r
O On the other hand decrease in r  increase in
Investment  increase AE  increase Y 
increase Md, which again  increase r, etc.
O Circular connection of Goods/Services &
Money Markets 66
 3. Macroeconomics Demand:
Money Mkts
O Already we can discuss O Investment Schedule
policy effects from
Keynesian Economics: (IS) curve
O Expansionary Policies:
- Fiscal policy: to increase
Y: increase G & decrease
T which will increase AE
then Y
- Monetary policy: to
increase Y: increase Ms to
decrease r to increase
Investments to increase
AE to increase Y

67
 Labour market
O StatSA calculates three indictors of the state of
the labour market:
O The unemployment rate (number of
unemployed/labour)%
O The absorption rate (number of people
employed/Working-age population)%
O The labour force participation rate (labour
force/working-age population)%

68
Types of unemployment
O Frictional unemployment
O Structural unemployment
O Cyclical unemployment
O Natural unemployment (frictional & structural
without cyclical)

69
Labour Markets - briefly

70
Macro-economic models
O Phillps curve

O AS/AD Model

O Distinguish between Expansionary and

Contractionary policies

71
 The Phillips Curve
O The Phillips curve shows the relationship
between unemployment and inflation in an
economy.
O The curve suggested that changes in the level
of unemployment have a direct and
predictable effect on the level of price
inflation.

72
Short run Phillips Curve

73
Phillips curve explanation
An increase in AD, would trigger the following sequence
of responses:
OAn increase in the demand for labour as government
spending generates growth.
OThe pool of unemployed will fall.
OFirms must compete for fewer workers by raising
nominal wages.
OWorkers have greater bargaining power to seek out
increases in nominal wages.
OWage costs will rise.
OFaced with rising wage costs, firms pass on these cost
increases in higher prices.

74
Long-run Phillips curve

75
 Macroeconomics
O Caution
O Aggregate Demand & Aggregate Supply
- Are NOT SUMS of market Demand & Supply
!!!
O Aggregate Demand = Goods & Services
Market & Money Market in a country
O Aggregate Supply = Aggregate Productive
Capacity (Technology/Human
capital/Innovation, etc) of a country

76
 Macroeconomics:
Aggregate Demand
O Now we are ready to derive the
AGGREGATE DEMAND curve which
connects two markets (goods & services
AND Money):
O The AD curve is a relationship between
overall price level & National Income
O AD falls when the Price Level increases
because higher price level (inflation) leads
Central Bank to raise interest rate
O This decreases investment which decreases
National income (Y)
O The AD curve reflects a negative relationship
between P & Y
O AD rises when: Ms & G go UP or when T
falls 77
 Macroeconomics:
Aggregate Supply
O Much easier to derive
O aggregate supply: The
total supply of all goods and
services in an economy
O It is better thought of as a
“price/output response” curve
O a curve that traces the price
decisions and output decisions
of firms given different levels
of AD (A to A’)
O The firms are not price takers
78
 Macroeconomics: Aggregate Supply
O The output decisions relate to capacity to
produce with increasing Demand
O In the 1980s Supply Economists +
(Reagan/Thatcher) said Supply will Create
its Demand O AD/AS together
O The aim was to encourage any productive/
economic activity, e.g. entrepreneurship
O To improve productive capacity:
technology; skills; favourable labour
market conditions; tax cuts for business
and individuals; stable institutions (pro
production/business economics)
O Think: Washington Consensus
O policy to stimulate production is supply side
expansionary policy
O As the economy reaches full productive
capacity the AS curve becomes vertical
O On the other hand: Stimulation via AD
measures leads inflation Po to P1

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 Some AD/AS policy considerations
O AD expansionary measures:
- for SR stimulation of Y
AS
- Recession/Depression (e.g.
1930/2008) measures
P
- Fiscal & Monetary Policies
- AE = C + I + G + (M)
- Challenge: AD pull inflation/ heating
up – see graph P
O AS expansionary measures are for
stimulating Y (SR) & Growth (LR)
- improve productivity of L & K (SR) Y
– on PPF
AS
- Expand stock of L & K (LR) – shift
PPF P
- Lower inflation
• Labour Markets (L) &
Technology/Innovation (K) are NB
parts of LR - AS policy measures AD
Y
• So - LM & Growth Chapters are NB
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Economic growth

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 ECONOMIC POLICY
TYPE OF POLICY VARIABLES INSTITITUTIONS
Fiscal policy Govt spending, taxes, National treasury,
borrowing minister of finance
Monetary policy Interest rates, quantity of SARB, monetary policy
money and credit committee, National
Treasury
Exchange Rate Policy Exchange rate controls, SARB, National Treasury
Exchange rate

Trade/Industrial Policy Import tariffs, Export DTI

subsidies
Competition Policy Quotas, subsidies Competition commission,
Tribunal
Labour market Policy Prohibitions, Fines, Depart of Labour 82
Labour legislation
 Globalisation
The Business problem:
The world is global
O– Global communications
O– Global transport
O– Global brands
How can business take advantage of
the global economy?

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Why is the global economy developing?
1. Culture
– Globalization is a cultural suspension of time and space,
aided by:
•Travel
•Film and media industries
•Technology communications
2. Politics
– Political recognition of the economic benefits of trade and
the costs of trade restrictions
3. Creation of international and regional trade bodies
– International
• GATT, WTO, BRICS
– Regional trade blocs
• EU, NAFTA, ASEAN; COMESA,
• Leading to a progressive reduction in trade restrictions
over time
4. Economic
O– Importance of comparative advantage
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 Trade Restrictions
Reasons:
•To protect infant industries,
• Ao protect strategic sectors,
• A way of life/norm by other countries; eg command economies

Types of restrictions:
– Tariffs
• Act as a tax on imports
– Quotas
• Limit the amount of imports

Negative impact:
• Trade restrictions limit trade
• Trade restrictions limit the exploitation of comparative advantage

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Why do firms become global
• Revenue growth
• Cost reductions
• Exploit sources of international competitiveness
– National, – Industrial, – Firm specific
•Accessing cheap sources of labour
• Accessing productive skilled labour
• Accessing cheap raw materials
• Accessing cheap technology/capital
• Accessing or exploiting?
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 Thank You

And Good Luck!

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