Eco 102 Chapter 11- Week 1 Lecture 1-2023 PDF

The South African Economy, Circular Flows and Economic Limitations Nwabisa Malimba: Office E22 van Rensburg et al. (2022), Mohr P.J. (2015)  Learning Outcomes ∙ By the end of this chapter, you should be able to understand: ○ South African population and land are...

The South African Economy, Circular Flows and Economic Limitations Nwabisa Malimba: Office E22 van Rensburg et al. (2022), Mohr P.J. (2015)  Learning Outcomes ∙ By the end of this chapter, you should be able to understand: ○ South African population and land area ○ Role players in the economy ○ Role of government in the economy ○ Economic flows and the circular flow diagram ○ Society’s economizing problem 2 2  South African population size Population refers to all the inhabitants of a particular place. South Africa’s land area covers approximately 1,219,090 square kilometers. ∙ The population of South Africa was 62 million in 2022, increasing from 51,7 million in 2011. ∙ Gauteng remained the province with the highest population (15 million), while Northern Cape has the smallest population at 1,3 million. ∙ About 56% of the country’s population lives in three provinces, namely Gauteng, KwaZulu-Natal and the Western Cape. The Western Cape has moved from being the 5th-largest province in terms of population size in 1996 to being the 3rd largest in 2022 (StatsSA, 2022). ∙ Black Africans remain the dominant population group (81,4%), followed by coloureds at 8,2%, whites at 7,3% and Indians/Asians at 2,7%. There has been a steady decline in the proportion of the white population, from 11% in 1996 to 7,3% in 2022. 3 3 Role players in the economy: Households/consumers CONCEPTSEXPLANATION Households may consist of a single person, a family, or a group of people who live together, depend on a common income, and exercise their choices within the limits of that income to meet their economic objective. Their primary function is to provide factors of production. The main function is to supply primary production factors to private businesses and government institutions. South Africa has approximately 16.2 million households (Stats,2017). Slightly over eight-tenths (80.1%) of South Africa households lived in formal dwellings in 2017, followed by 13,6% in informal dwellings and 5.5% in traditional dwellings. The highest % of HH that lived in formal dwellings was observed in Limpopo (91.7%), Mpumalanga (86.9%) and Northern Cape (86.0%). Approximately 20% of households lived in informal dwellings in North West and Gauteng. 4 4  Sources and distribution of HH income ∙ Households widely differ in terms of their main income sources across the income distribution. ∙ The two main types of income are income from work and social grants. ∙ Wages are paid to labour, rents, and interest are paid to owners of property resources, and profits are paid to the owners of corporations and unincorporated businesses. 5 5  Distribution of Income ∙ South Africa remains a dual economy with one of the world's highest and most persistent inequality rates, with a consumption expenditure Gini coefficient of 0.63 in 2023 (Statistica, 2024). ∙ High inequality is perpetuated by a legacy of exclusion and the nature of economic growth, which is not pro-poor and does not generate sufficient jobs. Inequality in wealth is even higher, and intergenerational mobility is low, meaning inequalities are passed down from generation to generation with little change over time (Worldbank, 2023). 6 6 Distribution of Income 7 7  Household as Spenders ∙ Households spend their income on goods and services produced by businesses. ∙ The South African Reserve Bank (SARB) categorizes expenditure into four categories: Durable, semi- durable, non-durable, and services. 8 8 Household as Spenders 9 9 Business enterprises/ firms ∙Economic decision-makers who aim to earn income or profit by supplying goods and services for which the economy has a demand. ∙ Their main function is to produce goods and services. ∙ Examples include a butcher shop, doctor, banks, factories, etc. 10 10  Business population ∙ Business population refers to the total number of businesses within a specific area or industry, categorized by various attributes such as size, sector, location, and legal structure. ∙ A plant is a physical establishment – a factory, farm, mine store, or warehouse - that performs one or more functions in manufacturing and distributing goods and services. ∙ A firm is a business organization that owns and operates plants. Some firms operate only one plant, but many own and operate several. ∙ An industry is a group of firms that produce the same or similar products. 11 11  Organizational structure of firms ∙ Multiplant firms may be organized horizontally, with several plants performing the same function. E.g. Pick n Pay stores. ∙ Firms may also be vertically integrated – owning plants that perform different functions in the various stages of the production process. ⮚ E.g., Nestle produces and distributes various food products, including breakfast cereals, dairy products, chocolate, coffee and bottled water. Nestle controls various stages, from sourcing raw materials to manufacturing and retailing. ∙ Some firms are conglomerates, so named because they have plants that produce products in several industries, eg, Tiger Brands produces breakfast cereals, baby food, soft drinks etc. 12 12 Legal forms of business There are three major legal forms of business. 1. A sole proprietorship is a business owned and operated by one person. 2. The partnership business organization is formed by two or more partners who agree to own and operate a business together. 3. A private or public company is a legal creation that can acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and perform the functions of any other type of enterprise. 13 13 Advantages and disadvantages of companies ∙ The advantages of companies include: ⮚ Limited liability ⮚ Ability to attract financial capital Continuity ∙ The disadvantages include the principal- agent problem. 14 14  Government/state/public sector ○ Government Includes all aspects of local, regional and national government. In economics we often refer to the public sector. ○ The main function is to create the environment in which the economy can operate freely and fairly. ∙ Government also collects tax to provide transfer payments and public goods and services for households and businesses. 15 15  Government intervention Government intervenes because of market failures.Market failures occur when the competitive market system: (1)Produces the ‘wrong’ amounts of certain goods and services. (2)Fails to allocate any resources whatsoever to the production of certain goods and services whose output is economically justified. Government also intervenes in the market because of the presents of public goods. Public goods are non-rivalry and non-excludable in nature. 16 16  Foreign Sector Foreign sector consists of a large number of individual states, each with its own government, consumers and business enterprises. The foreign sector is the fourth participant in the economy because there is no economy that operates in isolation from the rest of the world. 17 17 Markets There are three markets that facilitate the interaction of the economic participants. 1. The resource market is the place where resources or the services of resource suppliers are bought and sold. 2. The product market is the place where goods and services produced by businesses are bought and sold. 3. The financial market takes care of the flow of surplus funds in the economy. Savings in all forms are pooled together to create a source of funds for investment purposes. 18 18 The economic system Any economic system can be described as with reference to its role players and how they interact in the economy. The economic system may be shown by the economic flow of resources, goods, services and money as shown by the circular flow model below. 19 19 Role players in the economy who make the decisions in the circular flow diagram: Two-sector model 20 20 Role players in the economy who make the decisions in the circular flow diagram: closed economy 21 21 The four-sector model 22 22 Quick exercise 23 23 Limitation of the circular flow model ∙ The circular flow diagram does not show the flow of controlled labour to and from the foreign sector. This would take place through the resource market. ∙ South Africans provide labour abroad for which they receive income in the form of rent and salaries, wages and profits, and the pay foreign nationals for their labour provided to South Africa in the form of rent, salaries, wages and profits. 24 24  Society’s economizing problem ∙ Society must also make choices under conditions of scarcity, similar to the individuals, society faces an economizing problem. ∙ For example, should it devote more of its limited resources to criminal justice system or to education? If they decide to devote more resources to both, they are forgoing other goods and services like health, infrastructure development etc. 25 25 Scarce Resources Society has limited or scarce economic resources. Economists classify economic resources into four general categories. Land includes all natural resources (free gifts of nature) used in the production process, such as arable land, forests, mineral and oil deposits, and water resources. Labour consists of the physical and mental efforts of individuals used in producing goods and services. Capital includes all manufactured aids used in producing consumer goods and services. Included are all factory, storage, transportation and distribution facilities, tools and machinery. The purchase of capital goods is referred to as investment. Economists do not regard money as capital because it does not produce anything, money is simply a means for purchasing capital goods. Entrepreneurial ability is the special human resource, distinct from labour. The entrepreneur performs several functions: 26 26  Functions of an entrepreneur ∙ Entrepreneurs performs several functions: ∙ The entrepreneur takes the initiative in combining the resources of land, labour and capital to produce a good or a service. ∙ The entrepreneur makes the strategic business decisions that set the course of an enterprise.´The entrepreneur is an innovator. ∙ The entrepreneur is also a risk bearer because there is no guarantee of profit. ∙ Because land, labour, capital and entrepreneurial ability are combined to produce goods and services, they are called the factors of production. 27 27  Production Possibilities Model ´ Society uses its scarce resources to produce goods and services. The alternatives and choices it faces can be best be understood through a macroeconomic model of production possibilities. For simplification purposes, we assume that there is full employment, fixed resources, fixed technology and that the economy is only producing two goods: pizza and industrial robots. Pizza symbolize consumer goods while industrial robots symbolize capital goods. The Production Possibilities Table lists the different combinations of two products that can be produced with a specific set of resources, assuming full employment. 28 28 Table 1.2 presents a simple , hypothetical economy that is producing pizzas and industrial robots. 29 29 The Production Possibility Curve (PPC) 30 30  The Production Possibility Curve (PPC) ∙ The PPC displays the different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and constant technology. ∙ Each point on the production possibilities curve represents some maximum output of the two products. ∙ The curve is a ‘constraint’ because it shows the limit of attainable outputs. ∙ Points on the curve are attainable as long as the economy uses all its available resources. ∙ Points lying inside the curve are also attainable, but they reflect less total output and therefore are not as desirable as points on the curve. Points inside the PPC also indicates unemployed resources or inefficient use of available technology. ∙ Points outside the PPC are unattainable with the current availability of resources and technology. 31 31  Law of Increasing Opportunity Cost ∙ The law of increasing opportunity costs states that as the production of a particular good increases, the opportunity cost of producing an additional unit rises. ∙ The law of opportunity cost is reflected in the shape of the production possibilities curve: the curve is bowed out from the origin of the graph. ∙ Figure 1.2 shows that when the economy moves from A to E, it must give up successively larger amount of industrial robots (1,2,3 and 4) to acquire equal increments of pizzas (1,1,1 and 1). This is shown in the slope of the production possibilities curve, which becomes steeper as we move from A to E. 32 32  Economic Rational ∙ The economic rationale for the law of increasing opportunity costs is that economic resources are not completely adaptable to alternative uses. ∙ Many resources are better at producing one type of a good than at producing others. ∙ The lack of perfect flexibility, or interchange ability, on the part of resources is the cause of increasing opportunity costs for society. ∙ Any economic activity should be expanded as long as marginal benefit (MB) exceeds marginal cost (MC) and should be reduced if marginal cost exceeds marginal benefit. 33 33  Optimal amount of the activity The optimal amount of the activity occurs where MB=MC. No resources beyond that point should be allocated to the product. 34 34  Optimal amount of the activity In a world of no other goods, the price of a good is the opportunity cost of the next unit, which is the slope of the PPC at that point. This means that the opportunity cost can match the market price. In a world of no other goods, the rice of a good is the opportunity cost of the next unit, which is the slope of the PPC at that point. 35 35