Complete_notes_economics_NSSCO.pdf

ECONOMICS NSSC NOTES PREPARED BY PETRUS LEEVI (BHRM, BED HONOURS MATHEMATICS & ECONOMICS) 0 PL ECONOMICS NOTES #2020# NSSCO THEME 1: WHAT IS ECONOMICS? 1.1. Basic economic problem: scarcity and exercise of choice General objectives...

ECONOMICS NSSC NOTES PREPARED BY PETRUS LEEVI (BHRM, BED HONOURS MATHEMATICS & ECONOMICS) 0 PL ECONOMICS NOTES #2020# NSSCO THEME 1: WHAT IS ECONOMICS? 1.1. Basic economic problem: scarcity and exercise of choice General objectives  Understand and analyse the nature of the economic problem Specific objectives:  Describe the nature of the economic problem (limited resources and unlimited wants)  Explain and illustrate opportunity cost  Evaluate the implications of specific courses of actions in terms of opportunity cost. What is Economics?  Economics is the study of how people and institutions within a society makes choices and how these choices determine the use of the society’s resources.  Economics focuses on production, distribution and consumption of wealth in human society. NATURE OF ECONOMIC PROBLEM LO: Describe the nature of economic problem  The nature of Economic problem arises because there is a scarcity of economic resources to satisfy our unlimited needs and wants.  Scarcity of economic resources means there is limited or a shortage of resources.  Economic resources: are also known as factors of production. These are resources we need in order to produce goods and services that we consume. 1 PL ECONOMICS NOTES #2020# NSSCO OPPORTUNITY COST LO: Explain and illustrate opportunity cost  Because of the limited resources and unlimited needs and wants, people have to make choices in order to make optimum use of the available resources.  This leads to opportunity cost.  Opportunity cost is the best alternative given up in order to obtain the things we have chosen.  Example, a motorist have enough money to either buy petrol or food in the restaurant. So he choose to buy petrol. His choice is the petrol and the food is the opportunity cost. A firm may have to choose between different production methods. A government may have to choose between different development projects. Examples of opportunity costs  Government have to make a choice between building schools, hospitals or giving pension grant.  The government of Namibia has N$35 million. This money can either be used to buy learners’ textbooks or to help out HIV and AIDS victims. The cabinet decided to allocate the money to the Ministry of Health and social services to help people who are infected with HIV and AIDS pandemic.  NB: The opportunity cost is the amount that was supposed to be spend on buying textbooks.  You are given N$100 as pocket money. With that money you would like to buy a new pair of shoes or Economics module 1 study guide. You opted to buy the Economics module 1 study guide.  NB: The opportunity cost is the cost or price of new pair of shoes. 2 PL ECONOMICS NOTES #2020# NSSCO LO: Evaluate the implications of specific courses of actions in terms of opportunity costs  Since resources are scarce, people, firms and government have to make choices. These choices lead to opportunity cost as some of the products have to be sacrificed. Explain the following concepts  Economic goods: These are goods that are paid for. These goods involve opportunity cost. E.g. bread, cars, pen, books, etc.  Free goods: The goods that are not scarce and are always available for free to everybody. These goods have no choice or opportunity cost. E.g. air, sand in the desert, ice at the south pole. 1. Describe the economic problem 2. Define scarcity 3. Define opportunity 4. Given a case study illustrate opportunity cost. / 5. Differentiate between economic goods and free goods Tses village Council plans to increase the use of bicycles and public transport, due to increased traffic congestion. As a result of this the Council will have to spend a lot of money on buses and bus lanes, walk ways and cycling lanes. (a) How might the expenditure on the project results in opportunity cost? Solution Opportunity cost – Next best alternative forgone/given up inorder to obtain the best alternative. Due to the provision of many projects by the Village Council. The Village Council will have to make choices and sacrifices due to scarcity of resources. If the council choose to provide bus and bus lanes, walkways and cycling lane, it will have to give up other projects such as fixing of roads (pot holes), building of 3 PL ECONOMICS NOTES #2020# NSSCO  recreational facilities, sewerage systems, building of hall etc. Due to scarce/lack of resources limited budget. Opportunity cost will be other projects left out. 1.2 TYPES OF ECONOMIC SYSTEMS AND ECONOMIC RESOURCES General objective:  Demonstrate understanding of economic resources in different economic systems Learning objectives:  Describe the factors of production (land, labour, capital and entrepreneurship)  Explain allocation of resources in market, planned and mixed economic systems  Evaluate the merits and effectiveness of different economic systems  Describe and evaluate the causes of market failure through monopolies and externalities and in relation to the provision of public and merit goods. FACTORS OF PRODUCTION LO: describe the factors of production/economic resources 1. Land: Land include all natural resources we get from nature such as land, water, minerals, woods, fossil fuels, flora and fauna. 2. Labour: Labour refers to the human efforts, both mental and physical that is involved in the production of goods and services. 3. Capital: capital refers to the man-made resources used to produce goods and services such buildings, money, equipment, machinery etc 4. Entrepreneurship: entrepreneurship represents the human initiative to combine the resources to produce goods and services profitably. What is an entrepreneur? What is an enterprise? 4 PL ECONOMICS NOTES #2020# NSSCO ALLOCATION OF ECONOMIC RESOUCES LO: Explain allocation of resources in market, planned and mixed economic systems  The basic economic problem: the limited resources which cannot produce enough goods and services to satisfy all the people needs and wants led to people/societies to decide how these resources are to be used and managed  What should be produced?  How should goods be produced?  For whom the product should be produced? TYPES OF ECONOMIC SYSTEMS LO: Evaluate the merits and effectiveness of different economic systems (ADV +DIS) Free-market economy/capitalist economy/market economy It is an economic system whereby the allocation of resources is determined by the market mechanism, i.e. by the force of demand and supply. The decisions about what to produce or consume are made by individuals firms. The main features of a free market economy  Private ownership: All property/ factors of production are owned by private individuals not by the government.  Role of government: there is a very limited role of government. The government only maintain law and order  Freedom of choice: decisions about what to produce or what to consume are made by private individuals or firms  Profit motive: individuals or firms only produce profitable goods for which there is a demand. 5 PL ECONOMICS NOTES #2020# NSSCO   Self-interest: firms and Consumers will try to maximise their total satisfaction or utility i.e. they will spend their money or produce goods in a way which gives the greatest benefit to themselves.  People are free to buy or hire the factors of production and become producers to supply the goods and services demanded by the market.  Prices mechanism: Changes in the demand and supply of goods results in change in the prices (prices are determined by demand and supply).  There is high competition (many business selling same products) which can result in low prices. Advantages of free market economy [Why favoured]  People are free to choose to produce and consume whatever they can afford (economic freedom).  The price system makes sure that shortages and surpluses of goods and services do not last for long.  The price system does not need officials civil servants to decide what should be produced.The government has no part to play in the running of the economy so there is less bureaucracy.  Because production is undertaken for profit, firms which are more efficient, have lower costs of production and can therefore earn higher profits (efficiency).  There is competition and more technological innovations which can lower prices and leads to quality products to be produced.  The market system provides incentives to entrepreneurs in the form of profit and to workers in the form of higher wages. This encourages entrepreneurs to produce high quality products, innovation and workers to work hard. Disadvantages/market failure or why government intervene in the economy  The system is based on the ability to pay and not needs.  A free market economy will not produce public goods due to lack of profit incentives. 6 PL ECONOMICS NOTES #2020# NSSCO   Free market will not produce merit goods,  There are inequalities in distribution of income and wealth, the few who own land and capital might be very rich compared with the majority of people who would own only one resource, their own labour.  Because there is no government intervention, economic depression may occur (slump-when outputs & employment fall).  Because there is no government intervention, firms in the free market grow into monopolies (sole supplier of the good).  People who become unemployed are likely to suffer because there will be no social security system, e.g. pension fund or unemployment fund. NB: Public goods are those goods and services that people do not pay for directly as it is not easy to charge a price to an individual. e.g. Streetlight, road and defence. Merit goods refers to goods and services that the government think is necessary for each and every one to have. Or goods which the market alone will not provide in sufficient quantities and the government thinks that everyone should have them, government provide them at a minimum level. Example, education and health care and housing etc. If these are left to the free market not everyone will afford to pay for them. Centrally planned or command economy It is a system whereby all the resources are owned and controlled by the government and the government decides what should be produced and how to allocate the resources or the production. Features of centrally planned economy  The state owns all the factors of production as well as all businesses  The government decides what should be produced and how to allocate that production.  The government makes all decisions about production and distribution e.g. a plan for production say a five year period on what it can consider appropriate use of resources, e.g. the government might decide to use many resources on 7 PL ECONOMICS NOTES #2020# NSSCO  hospital and schools and use few resources producing pop records, fashionable clothing and television sets.  All workers are employed by state.  Prices and wages are set by the government (planner) e.g. prices of necessities like basic food and housing are kept very low so that everyone can afford it. Advantages of command economy  Factors of production can be organised to produce public & merit goods and services like education and health care  There is equal distribution of income or wealth because goods and services can be priced so that everyone can afford them  The government can make sure that factories do not cause pollution and that people are working in healthy and safe condition  Everybody is guaranteed a job, there is no or low unemployment rates Disadvantage of command economy  There is no economic freedom as consumer have no influence on what is produced. Planners make decisions and there is huge bureaucracy (red tape).  There is inefficient in the production of goods and services because there are no profit motives to reduce the cost by improving efficiency.  Poor quality goods and services may be produced.  It’s difficult to respond quickly to the needs of the people.  Consumers’ preferences and needs are not taken into consideration. Mixed economy The mixed economy is where some of factors of production are owned by the government and some are owned by private individuals (public sector and private sector). In mixed economy, the government provide (determine) the production of some merit goods& they are paid through taxation like streetlight and defence. 8 PL ECONOMICS NOTES #2020# NSSCO Advantages  Monetary and fiscal policy can be used to stabilise business cycles.  The community experience the benefits of private sector activities, such as efficiency and innovation.  The community experience the benefits of public sector participation in the economy, such as the provision of public and merit goods. Disadvantages  Private and public goods can duplicate goods or leave gaps such as a lack of services or goods.  Control measures by government such as fiscal policy can be ineffective because of delays to implement policies or red tape.  It brings about fear of nationalization (when government takes over ownership of individual firms) In the mixed economy the government has a variety of ways in which it influences what is produced:  It pays firms to produce a particular goods and services.  By taxing some goods to discourage consumption and therefore production.  By subsiding some goods and services to encourage consumption and production.  Can also seek to influence consumers by advertising as in health warning the danger of AIDS.  The government can insist that producers provide information to the public e.g. health warnings on cigarette packets. Explanation why most countries have mixed economies  Possible misallocation of resources if reliance is placed solely on the price mechanism  Possible market failure, e.g. merit goods, demerit goods, public goods, externalities etc, underprovided. 9 PL ECONOMICS NOTES #2020# NSSCO   Regulation and control of private firms in mixed economies needed.  Possible reasons for government influence on private producers through regulations, subsidies and taxes  The need of the government to try and achieve its macroeconomic aims. Activity 1. Resources are allocated according to consumer demand. To which economic system does this statement relate? 2. Define scarcity? 3. Differentiate between economic goods and free goods. 4. Differentiate between public goods and merit goods. 5. Define the factor of production capital. 6. State one advantage of a market economy. 7. What is the function of entrepreneurship in the production process? 8. Describe any one of the factors of production. 9. Explain how resources are allocated in a planned economic system. 10. (a) Explain what is meant by "the basic economic problem. (b) Contrast the operation of a market economy with a command economy. (c) Discuss why a mixed economy might be preferred to a market or command economy. 11. Namibia is a developing country with limited resources. (a) What is meant by the term resources? (b) Describe the basic economic problem. (c) Define opportunity cost and explain how opportunity cost could be applied to decisions relating to a consumer's expenditure. (d) Discuss how prices of resources are determined in a market economy when there is no movement of the supply curve. Use a diagram to illustrate your answer. 10 PL ECONOMICS NOTES #2020# NSSCO 1.3 SPECIALISATION AND DIVISION OF LABOUR General objective:  Appreciate the importance of specialisation and the division of labour Specific objectives:  Explain the meaning of specialisation and the division of labour.  Analyse the advantages and disadvantages of specialisation and the division of labour.  Discuss the various levels of specialisation (individual, regional, national). Definitions of specialisation and division of labour LO: Explain the meaning of specialisation and the division of labour  Specialisation is when a worker/firm or industry concentrate on the production of a particular product or task and become more expert.  Division of labour is when the production process is split up into different tasks and each worker performs one of these task. Differentiate between specialisation and division of labour Advantages and disadvantages of specialisation and the division of labour LO: Analyse the advantages and disadvantages of specialisation and the division of labour Advantages of specialisation and division of labour  People become faster or skilled at what they are doing.  Productivity will increase (more outputs will be produced).  Specialised machinery can be used (mechanical production –increase efficiency & high output).  If goods are cheaper to produce they can be sold at low prices (high sales).  Save time because workers do not need to move from one job to another. 11 PL ECONOMICS NOTES #2020# NSSCO   Each worker will do what they knows best or people can be employed in the job they are more suited (more job satisfaction). Disadvantages of specialisation and division of labour  Workers become bored and frustrated as jobs will be repetitive.  A strike by one group of workers will affect other groups of workers.  Specialised workers will find it difficult to change jobs or find jobs if they become unemployed.  Goods and services may lack variety.  People don’t feel involved in their work and don’t understand others work.  Specialise production means that both workers and machine are required to carry out operation at great speed. (mass production) Levels of Specialisation LO: Discuss the various levels of specialisation  Specialisation by Industry An industry specialise on a production or process of production. E.g. industry specialise in the production of oil, chemical etc.  Specialisation by Firms A firm specialise by making one part of the final product or by carrying out one of the several process of production, e.g. in the textile industry a firm may specialise in dying.  Specialisation by workers A worker specialise in a particular task or job e.g. nursing, hairdresser, etc.  Specialisation by Regions A region specialise in the production of a certain product. e.g. in Namibia the northern region specialise in the production of mahangu. 12 PL ECONOMICS NOTES #2020# NSSCO   International specialisation A country specialise in the production of a particular product because of differences in climate. e.g..South Africa specialise in the production of Gold. Activity 1. As part of the campaign to clean the town, the Keetmanshoop Municipality has allocated N$500 000 to buy a new refuse removal truck rather than spending the money on improving roads. (a) Define opportunity cost and use the extract to illustrate opportunity cost. (b) Identify and explain a factor of production from the extract. (c) Why do you think refuse removal is often provided by the public sector rather than private businesses? (d) The improvement of roads sometimes involves the use of specialised companies. (i) What is meant by specialisation? (ii) Analyse the advantages of specialisation. 13 PL ECONOMICS NOTES #2020# NSSCO THEME 2: NATURE AND FUNCTIONS OF ORGANISATIONS AND FINANCIAL INSTITUTIONS 2.1 BUSINESS ORGANISATONS General objective  Understand and analyse the different forms of business organisations in the public and private sector. Learning objectives:  Explain the difference between the private and public sector  Describe the different forms of business organisations; sole proprietors, partnerships, private companies, public companies, multi-nationals, co-operatives, close corporations, public corporations  Describe and evaluate the effects of changes in structure of business organisations. DIFFERENCE BETWEEN PRIVATE SECTOR AND PUBLIC SECTOR Private sector is made up by firms that are owned and controlled by private individuals while Public sector is made up by firms that are owned by the government and controlled by government appointees. The main distinction/difference between the private and public sector is principally THE OWNERSHIP. Public Sector:  Owned by the STATE  Funded by TAXATION  Public Corporations/Parastatals Private Sector:  Owned by SHAREHOLDERS  Funded by CUSTOMERS 14 PL ECONOMICS NOTES #2020# NSSCO (Sole Trader, Partnership, Close Corporation, Limited Companies Ltd &Pty, Multinationals) DIFFERENCE BETWEEN NATIONALISATION AND PRIVATISATION Privatisation is a process of state owned enterprises transferred to private ownership. Nationalisation is the process of private owned enterprises transferred to state ownership. The state buys the companies in an industry by paying shareholders a price which approximates to the market value of their shares. Reasons for privatisation  Efficiency – It is possible that private firms are usually more efficient as they have incentive to cut costs to employ better production and management methods, in order to make more profit.  Revenue to the government – the government can raise revenue by selling off the state owned companies. The company will continue to provide the good or service it had been providing. The government can also then take tax from the privatised firm.  Increased competition – more firms mean greater competition and efficiency.  Reduced political interference – Government firms are always affected by the political interference from the government. A government may be short-sighted as it may only be focusing on the next election. Privatisation can overcome this problem. Arguments against privatisation There were criticisms that state assets were sold off by the government at too low a price and that the consequences of privatisation has been a decrease in investment and large scale reductions in employment as privatised businesses have sought to cut their operating costs. 15 PL ECONOMICS NOTES #2020# NSSCO Arguments for and against nationalization (P 113, Starting Economics) Arguments for nationalization  To avoid wasteful competition  Economies of scale  To help to manage the economy  Political arguments Arguments against nationalisation  It does not encourage efficiency (lack of competition and no fear of bankruptcy)  It is difficult to measure the efficiency of nationalized industries 16 PL ECONOMICS NOTES #2020# NSSCO  Namibia: Govt Advised to Partly Privatise Parastatals The Namibian, 12 March 2020 THE PRESIDENTIAL high-level panel on the economy has recommended downgrading Air Namibia and the partial privatisation of seven state-owned entities. The report - made public yesterday - includes recommendations on how to turn around the economy. Part of the report focused on the future of 22 public enterprises. The panel recommended that NamPost, NIP, Telecom, Meatco, NWR and Namport can be co-owned by private sector companies through joint ventures. The national railway company, TransNamib, can be privatised or can form a joint venture with private entities, the report added. The panel recommended that the government should liquidate Air Namibia and turn it into a regional airline. "The current SW [Air Namibia] should be liquidated. Codeshare or put commercial agreements with airlines currently serving Namibia - Qatar, KLM, Ethiopian, Lufthansa to take over international routes," the panel said. According to the report, Air Namibia needs to exit international routes in the most cost- economical and "contractually de-risked manner and become a regional and domestic airline with a proper board and management". The regional and domestic Air Namibia should then be merged with the Namibia Airports Company (NAC), the panel said. Another proposed merger is the Road Fund Administration and Roads Authority. a) What is meant by privatization? b) What are the arguments for and against privatisation FORMS OF BUSINESS ORGANISATIONS LO: Describe the different forms of business organisations SOLE TRADER/SOLE PROPRIETORSHIP Features/characteristics: One person owns and controls the business The owner provides funds for the start-up capital 17 PL ECONOMICS NOTES #2020# NSSCO  The owner takes all the responsibilities for running the business. The business ends if the owner dies The owner of the business has unlimited liability - means if the business goes bankrupt, the owner of the business could lose his personal belongings such as a house to pay for the debts. These are vendors at open market such as Oshikango Open Market, Ondangwa Open Market, Oshakati Open Market, Wanaheda Open Maket and Single Quarter Open Market. Define the term unlimited liability Advantages:  Very simple and flexible type of business as there are few legal requirements  All the profits belong to the owner  Easy to run because the owners also a manager  The owner has close conduct with his customers thus can respond quickly to their demands Disadvantages:  The owner has unlimited liabilities, meaning the owner has to pay the debts of the business & may lose his personal belonging if the business fail.  It is difficult for a sole trader to obtain financial assistance such as a loan.  If the owner becomes sick or dies, the business will close down. PARTNERSHIP Features:  Formed by 2 to 20 people that are called partners  Each partner contributes resources to the business in the form of capital, labour, land and entrepreneurial.  Each partner receives a share of profit of the firm. 18 PL ECONOMICS NOTES #2020# NSSCO   Partners have unlimited liability.  Examples include Lawyers, Doctors business, etc Advantages:  Partners can raise more capital.  Partners can share skills  Partners can specialise in certain aspect of the business e.g. in sales, administration Disadvantages:  Partners have unlimited liability (they too can lose their personal properties if the business fail).  If one partner dies or resign that will be the end of the business, new contract needs to be signed if they want to continue.  Partnership is limited numbers i.e. to 20 partners.  The profit is shared among a lot of people NB: Partnerships are common /popular in professions like Accounting, Law, Architecture and destiny where the objective are to provide services. And in farming, catering, retailing &building. CLOSE-CORPORATION (CC) Features:  It is owned by 1 to 10 people that are called members  Members have limited liabilities  Members are also owners, there is no separation of ownership and control  Small entrepreneur who want to get legal status as a juristic person with a limited liability.  Shareholding can be transferred to all members and it’s expressed as percentage. 19 PL ECONOMICS NOTES #2020# NSSCO   They will not lose their entire personal belongings if the cc bankrupt (wound up) (they have a limited liability).  Only natural persons can be members and cc cannot be a subsidiary of a company. Legal requirements for establishing a CC ⮚ The owners draw up a founding statement which includes: The name of a close-corporation. The postal address. Details of members and their membership. ⮚ The founding statement is sent to the Registrar of Companies. Advantages:  Owners have limited liability, meaning they cannot lose their personal properties to pay back the business debts.  The business has unlimited continuity (if one member die, the business will continue  Easy to set up because legal requirements are not that strict  It is easier to get a loan  Simple and less expensive, more flexible and less risky than a partnership.  The business is taxed on profit but not on profit received individual (no double taxation). Disadvantages:  The business cannot grow any further because members are limited to ten.  For the application of loans, the close-corporation needs to show audited financial statements that are expensive (audit costs money).  Members may disagree on the management of the business since they all have an interest in the business. 20 PL ECONOMICS NOTES #2020# NSSCO CO-OPERATIVES A co-operative is when a group of people find that they have common need. e.g. employment, cheap shopping, selling farm produce, saving and credits which is not being met and when they trust each other enough and join together to meet that need. A firm owned and controlled by its member, a group of people who agree to co-operate in order to achieve a common interest e.g. clothing workers who lose their jobs with a company may agree to form a co-operative in which they use their skills to continue producing clothes). Two types of co-operatives 1. Producer cooperative  Owned by all workers who produce the goods and services.  It is run by all the workers who produce the goods and services  Each worker will have put some of their own money into the business  Shares are not sold to the general public  Common in small business like printing, making leather goods etc 2. Retail co-operative(consumer co-operative)  They are owned by customers who can buy shares in local cooperatives shop  Members choose the management committee to run the cooperative and the management committee appoints shops staffs.  Any profit made is paid to customers in the form of dividend  Cooperatives are provided with their goods by Co-operative Wholesale Society (C.W.S.). Advantages of co-operative:  Services co-operatives save money because there is no owner to take the profits - customers are owners  Co-operatives are non-profit making - the purpose is not to make profit but to save money 21 PL ECONOMICS NOTES #2020# NSSCO  - In a workers' co-operative, surpluses are used to pay workers and to invest in the business - In services co-operatives, after bills are paid for operations and improvements, all profits are returned to co-operative members.  Co-operative operate for the benefits of the members/owners  In a worker co-operative owners are workers - they all want employment and good wages.  In a service' co-operative owners are customers & wants good value services  No conflicts hours, who will do what etc?  Economics democracy (Each member has an equal share in the decision making- how the business is to be run)  In worker co-operatives workers are highly motivated and committed to the enterprise.  Less risk of conflict - decision are taken by every one  The registrar of co-operative provides a free business advisory services to assist co-operative  Co-operative do not have to pay as much tax as other business because they are not aiming for profit  It is easier to borrow money for the business  Members liability may be limited to the value of the share they bought  Unemployed workers can pool their skill experience& resources and create new enterprise and employment by co-operating together. Disadvantages of cooperatives  It requires a longer decision making process since each member has to vote  It requires all members’ participation in order to succeed.  It has less incentives and high possibility of conflict among members. 22 PL ECONOMICS NOTES #2020# NSSCO LIMITED COMPANIES/JOINT STOCK COMPANIES  A company –is a group of people or individuals who come together in order to make profit-also known as a firm  All companies have limited liability that’s why (Ltd) is written next to the name of the company – meaning that the responsibility for paying the debt of the company is limited to the company itself and not the individual owners of the company.  Owners are not responsible for paying the debts of the business they are only responsible for the amount they agreed to contribute.  Companies have a legal personality --- separate from its owners (meaning : - it can own assets in its own name, - It can enter into contracts, - it has continuity, - It can sue and be sued  People buy shares in the company and become owners (a share is a right to share in the profits of the company).  When people or firms buy shares they become shareholders or investors.  The shareholders elect a board of director to run the business for them.  In large companies directors are not necessary shareholders (in public companies) while in small companies (private companies) directors tend to be the main shareholders. Two types of limited company ❖ Public limited companies Features of a Public Limited Company  Public companies are larger business, formed by a minimum of 7 shareholders and no maximum  The company name ends with Ltd 23 PL ECONOMICS NOTES #2020# NSSCO   Share is in the public company can be sold to the public through the stock exchange. (Stock exchange is a market where the shares of public companies are bought and sold).  There is a Minimum of two Directors  Shareholder elects the board of directors (managers) to run the business during annual general meeting  No limit on transfer of shares  Shareholders (owners) are not manager - there is a separation of ownership and control e.g. Coca-cola. ❖ Private limited companies Features of a Private Limited Company  Are smaller and owned mostly by family members, friends or relatives.  Shareholders are limited to maximum of 50.  Minimum of one director.  The name of a private companies end with (PTY) Ltd - meaning proprietary (ownership) limited and it means that its owners have the right to decide who can buy shares in the company.  Shares are not sold to the general public on the stock exchange (not freely transferable).  Owners are usually involved in the management of their firms (shareholders are the board of directors). Differences between public limited and private limited companies  selling of shares  publishing of accounts  numbers of shareholders  name appearance 24 PL ECONOMICS NOTES #2020# NSSCO Types of shares People who own shares will receive a share of the profits of the company if profits are made. Profit paid out to shareholder-dividends. Two types of shares  Ordinary shares  Preference shares Ordinary shares  Ordinary shareholders have the voting rights at the Annual General Meeting (AGM)  Dividend on ordinary shares is not fixed  Amount paid each year depends on the profit made by the company  If the company did not make profit, ordinary shareholder will not be paid dividend.  The board of directors decides how much to pay ordinary shareholders  Ordinary shareholders are paid dividend only when loan interest are paid after preference shareholder received their dividends NB: Ordinary shareholders receive what remain after interest and preference shareholders are paid. This the risk type of investment, fluctuate from year to year therefore ordinary shareholders have the greatest say in the management and control of the enterprise-can change management Preference share  Preference shareholders vote only if their dividend has not been paid.  Dividends are the fixed amount each year.e.gN$1000 each year  It is only paid if profits are made  Dividends must be paid before ordinary shareholders receive theirs. 25 PL ECONOMICS NOTES #2020# NSSCO MULTINATIONAL COMPANIES A multinational company is a company that operate in many different countries, produce and sell in many countries.  Their head offices are in the home countries, usually in developed countries.  Most are public company  Some are medium-sized e.g. Pep and Shoprite with branches in Namibia, Botswana, Zambia and Swaziland etc  Other multinational companies are very large and operate internationally on a much larger scale. e.g. Coca-Cola, Microsoft, BP Petroleum Company etc.  The annual income of these multinational companies is often very much larger than the total output (income) of many developing countries.  Multinationals have a lot of influence in the economies of countries in which they operate. Reason for the growth of multinational (why companies become multinationals)  Limits to the size of the local market may make it seems attractive for companies to sell and produce in other countries.  To avoid barrier to trade put up by countries to reduce imports of goods (import duties or tariffs). Multinationals open factories and produce in those countries with trade barriers and export to other countries.  Essential raw material, cheap labour, tax advantage and other incentives may attract multinational to other countries.  Operating in more than one country help spread risk and gives more options in the choice of sites for production units. Advantages of multinationals  They increase employments in the host countries (creates employment).  Multinationals may transfer advanced technology from one country to another which contribute to economic growth and development (bring technology and new skills) 26 PL ECONOMICS NOTES #2020# NSSCO   They increase economic activities in the host countries  Capital will be transferred from the home country to host countries (bring in foreign currencies) which will have positive influence on the balance of payment of the host country.  Provide revenues to the government because their workers pay tax and company profit is taxed. Disadvantages  Profit is sent back to their home countries.  They used up (exploit) scarce and non-renewable primary resources in the host country  They pay workers low wages  They may cause unemployment if they decide to close down their operations in a country they operate.  They bring along their managers PUBLIC CORPORATIONS/PALASTATALS Features  Public corporations form part of the public sector  They are established by law(Act of Parliament, which sets up the corporation’s functions and organisation) and are wholly owned by the government  Public corporations run industries and services which are essential to the country like water, electricity, railways etc  They are owned by the government but the government does not directly operate the businesses  Government ministers appoint a Board of Directors who will be given the responsibility of managing the business  The government will make clear what the objective should be and directors are expecting to run the corporation according to these objectives. E.g. Nampower- generates and distributes, electricity in Namibia 27 PL ECONOMICS NOTES #2020# NSSCO   It earns its own income by selling electricity in bulk to municipalities. Examples of parastatals in Namibia  The Namibian Broadcasting Corporation (NBC) provides radio and television services to the Namibian population. Some of its funding comes from the central government by way of the ministry of information and broadcasting. It also earns its own income through advertising and license fees  Namwater  Nampower  Namibia Airports Company  Air Namibia  The Namibian Development Corporation (NDC) promote, develops and support all small business development in the Namibia economy. The difference between public limited companies and public corporations govt- owned companies Government owned companies  The government is the only shareholder  The minister appoints the board of directors, who appoint the managing directories TransNamib, the national transport company, Telecom, Nampost etc.  Main aim is to provide public and merit goods. Public limited companies  The shareholders are members of the public  Aim is to make profit  Raise fund through selling shares at the stock exchange. 28 PL ECONOMICS NOTES #2020# NSSCO INFORMAL SECTOR  Informal sector are businesses which are not registered with the ministry of trade and industry and do not pay tax. e.g. Hawkers or traders /producers. Effects of changes in the Structure of business:  There may be communication problems in an extended hierarchy of management as many people are involved in sending and receiving message.  There is a danger that senior managers may lose touch with the majority of employees who may also feel distanced from decision making.  Own initiatives, decision making and personal growth of branch managers is limited in centralised business structure because a large amount of supervision is coming from head office.  Business may suffer from diseconomies of scale as a result of administrative diseconomies, customers inquires may be channelled through many management and activity structures may cause a large external factor.  As a result of internal diseconomies of scale it might be very expensive to inform staff to run routine matter through internal memoranda. Activity 1. Explain two features of a partnership. 2. Explain why unlimited liability is a disadvantage to a sole trader. 3. A well-known private company takes over the ownership of NAMWATER from the government. What is this called? 4. Define a multi-national company. 5. Name one feature of a sole trader. 6. State two advantages of a partnership. 7. Name two features of a close corporation as a form of business organisation. 29 PL ECONOMICS NOTES #2020# NSSCO  8. What is meant by unlimited liability? 9. Explain two features of public limited companies. 10. What is meant by the limited liability of a public limited company? 30 PL ECONOMICS NOTES #2020# NSSCO 2.2 TRADE UNIONS Understand the role of trade unions in business organisations and the economy SPECIFIC LEARNING OBJECTIVES  Define a trade union  Identify the aims of trade unions  Describe the advantages of joining a trade union  Describe the types of trade unions in Namibia (e.g. white collar, blue collar, industrial, crafts unions)  Discuss the factors affecting trade unions activities in Namibia  Describe and evaluate the role of trade unions Definition of trade Union A trade unions is a group of workers who join together to protect their common interest. Workers organisation which represents workers in their dealings with the management and owners of a firm e.g. NANTU. Identify the Aims of trade unions  To protect their members against unfair dismissal at work.  To represent their members at wages negotiations  To ensure that members get compensated for injuries at work  To ensure that members receive market related salaries and fringe benefits  To advise and encourage government to strive towards democracy freedom and justice for all. Negotiate  To discuss a problem with another individual or group in order to reach an agreement with which both parties are happy Workers representatives, negotiate with managers and owners of a firm on issues such as: 31 PL ECONOMICS NOTES #2020# NSSCO   High wages for their members  Shorter working days /hours  Sick leave and maternity leave  Racial and sexual discrimination Trade unions act as a means of communication and negotiation between employers and employees through a process called collective bargaining. This occurs when a trade union representative, who is voted into the position by colleagues, negotiates on behalf of the union's members (the workers) with the employer for better pay and working conditions. If negotiations fails, workers can use an industrial action such as  Strike – Trade union members refuse to work i.e they stop working  Consumer boycott (persuade the public not to buy the business product),  Go slow (decide to work very low),  Picketing (workers stand outside the business gate, prevent anyone to leave or enter the premises).  Work to rule: Trade union members literally work to fulfill the minimum requirements of their job and will not do anything outside what is written in their contract of employment.  Overtime ban: workers refuse to work beyond normal working hours  Sit-in: Workers turn up to work and occupy the premises but do not undertake their normal work. 1. Define collective bargaining. 2. Explain the types of industrial actions that employees can take when they are not happy with employers. 3. Discuss the effects of trade union to the economy. 32 PL ECONOMICS NOTES #2020# NSSCO Describe the Advantages of joining a trade union:  The rights of members are protected  Unions negotiate better working conditions  Members are protected against unfair dismissal at work  Trade unions ensure that members get compensated for work place injuries  Workers are represented during wages negotiations  Some unions have additional benefits for member’s e.g. NANTU, which provide counselling for members who are HIV positive.  Some unions give loans to members at reasonable interest rates. Disadvantages of trade union  Demanding of higher wage might lead to unemployment  Cost push inflation (inflation by increase in the production costs)  Labour unrest/industrial actions might discourage investment in the country Types of trade unions Craft union -Members are skilled workers who have undergone length specialised technical training and who possess technical skill such as: plumbers, carpenters, and electrician e.g. Namibian Building workers Union (NABWU) General Union Represent unskilled and semi-skilled workers from a wide variety of trades and industries. - Formed by different unions merging together and they are usually large unions. e.g. in Namibia, Namibia Domestic and Allied Workers Union (NDAWU) Industrial Union These unions represent workers who form a trade union in the clothing industry, mining, Railway 33 PL ECONOMICS NOTES #2020# NSSCO e.g. Mine workers union of Namibia (MUN) White collar Union Members include general office workers in the banking and insurance as well as those in management and professional occupations such as lawyers, teachers, etc Represent those in service industries. e.g. Namibia public Worker Union (NAPWU), Namibia National teacher union (NANTU) etc Discuss the Factors effecting trade union activities in Namibia  Capacity: most unions do not have the resources or skills to meet the need of their members. (Little funds available for skills training)  Co-option of leaders: little continuity of leadership. Leaders move on into the private sector and there is a need for costly training.  Lack of understanding: often employers do not understand the value of trade unions (how important it is). May not be well informed about social, political and economic issues locally and international and representatives will not argue effectively  Multinationals: many companies operating in Namibia are multinational and cannot resolve issues with Namibia workers in isolation with other workers elsewhere. e.g. in South Africa  Fear of repercussions (result of an event) - job losses, wage deductions or loss of benefits as a result of strike action. Explain and evaluate the role of trade union  The biggest role of trade union is to defend and protect the rights and interest of its member irrespective of colour and gender  Aim at making workers aware of their rights  Aim to advise and encourage government to strive for democracy freedom and justice for all. 34 PL ECONOMICS NOTES #2020# NSSCO   Many trade unions also aim to inform workers about HIV/AIDS because of the role it plays in destroying individuals and national productivity.  Unions aim to involve workers in developing government legislation on labour related issues and social affairs.  Trade union also works towards advancing rights through encouraging female leadership. Discuss the conditions under which the trade unions can negotiate for high wages Trade unions normally base claims for higher wages on one or more of the following:  A rise in the cost of living due to inflation has reduced the real income of trade union members.  Workers in comparable occupations have received a wage increase.  The increased profits in the industry justify a higher return to labour.  The productivity of labour has increased, again possibly justifying an increase in wages. Trade unions in Namibia There are four federations (umbrella body under which trade union fall or affiliate). National Union of Namibia Workers (NUNW) Was established by SWAPO before independence to protect rights of black workers. Ten trade unions fall under this body:  Mine workers union of Namibia(MUN)  Metal and allied Namibia workers union(MANWU)  Namibian public workers union(NPWU)  Namibian Farm Workers union(NAFWU)  Namibian Domestic And Allied workers Union (NDAWU)  Namibian Food and Allied Workers Union(NFAWU)  Namibian Transport and Allied Worker Union(NTAWU) 35 PL ECONOMICS NOTES #2020# NSSCO   Namibian National Teachers Union(NANTU)  Namibian Financial Institution Unions(NAFINU)  Namibian Music Industry Union(NAMU) The Namibian people social movement (NPSM) Affiliates are:  Namibian wholesale and retail workers union (NWRWU  Namibian Building Worker Union (NABWU)  Bank workers Union of Namibia  Bank Workers Union of Namibia  Namibian Banker Unions  Namibian Fishing and fisherman worker union Namibian Federation of Trade Unions (NAFTU)  Affiliates are: Local authorities of Namibia  Teacher Union of Namibia (TUN)  Namibian Telecommunications Union  Namibian Seamen EMPLOYERS ASSOCIATIONS (New curriculum) Explain the role of employers association  They offer training for members and provide recruitment support  They help members develop relationships with one another through forums and social events  They negotiate with trade unions on behalf of their members  They give advises on employments, health and safety, law and taxations to members  They organise bulk purchases for members and get discounts 36 PL ECONOMICS NOTES #2020# NSSCO Namibian Employers Federation and Allied Workers Union (NEF)  Agricultural employer Federation (NEF)  Chamber of mines of Namibia (CMN)  Construction industries federation of Namibia This is a collective of organizations or employers from the same industries working together for the interest of all member companies. Activity 1. In 2016, the conciliator of the Labour Commissioner’s office in Namibia, issued a certificate of resolved dispute to the Government and The Namibian Teachers Union (NANTU) after they failed to reach an agreement on various issues. This might have led industrial action. a) Define a trade union. b) Explain three types of trade unions and identify the type of union which teachers might join. c) (i) Outline three examples of industrial action. (ii) Consider why industrial action, in general, might not benefit the Namibia economy. 37 PL ECONOMICS NOTES #2020# NSSCO 2.3: FINANCIAL INSTITUTION GENERAL OBJECTIVE:  Demonstrate an understanding of the importance and activities of financial institutions SPECIFIC OBJECTIVE  Explain the need for exchange  Explain the functions, quality and types of money  Define and calculate exchange rate  Discuss the effects of fluctuating exchange rates on the economy  Describe and evaluate the functions of central banks, stock exchanges and commercial banks Explain the need for money Money is anything that is generally accepted to settle debt (anything that is generally accepted as a mean of exchange).e.g. Stones, shells, metal, cattle etc, were regarded as money in the past. FUNCTION OF MONEY: LO: Explain the functions of money  A medium of exchange Goods and services are exchanged for money. A person can sell his labour for money and then use this money to buy e.g. salt, potatoes and pay for the hospital.  A unit of account (measure of value) All goods and services can be expressed in money value and their relative values can be compared. e.g. How many sheep can be exchanged for one cow, by compare their prices. 38 PL ECONOMICS NOTES #2020# NSSCO   A store of value If people do not want to spend all their income they can save some for future consumption.  A standard of deferred payment Money can be used as a means of settling debts in the future as well as in the present, (means a price can be agreed for something now but the account can be settled in the future). (Promise to pay) e.g. hire purchase. QUALITIES OF MONEY Explain the quality of money  Divisible: Money should be able to be divided into smaller quantities without any inconvenience.  Acceptable: Money needs to be acceptable i.e. must be accepted as money and as a means of exchange.  Portable: Money must be easy to carry around.  Durable: Should be used for a long time without losing value.  Homogeneous: Every unit of money must be the same, hard to counterfeit (not easy to forge) and stable in value.  Limited in supply: The amount of money must be limited in supply /limited to a certain amount. TYPES OF MONEY Explain the types of money  Commodity money Is something to trade with items which were used as money because they held value of their own, such as coin. The value of coin depended upon the amount of gold and silver it contained. 39 PL ECONOMICS NOTES #2020# NSSCO   Representative money Because it was heavy to carry large bags of gold coins around and people ran the risk of being robbed, they began depositing their coins with the goldsmith (a person who makes objects from gold). In the exchange they were given a slip of paper on which the goldsmith promised to pay the value of their gold. This slip of paper was known as an IOU IOU began to be used as money because people knew they would be able to exchange them for their value in gold. The paper IOU represented the gold which had been deposited at the goldsmith. It was representative money (money which has no value of its own (like a piece of paper) but could be exchanged for a specific commodity such as gold or silver.  Fiat money Fiat means “let it be done” Fiat money is money because the government says it is money. It cannot be converted into gold. The money we use today is fiat money because it cannot be converted into gold. You can exchange them for any good or service you want. EXCHANGE RATE Define and calculate exchange rates Exchange rate is the price/value of a country’s currency expressed in terms of another country’s currency. How to calculate exchange rates: When exchanging from a base currency to a secondary currency: MULTIPLY When exchanging from a secondary currency to a base currency: DIVIDE NB: BASE CURRENCY is the currency you are selling while SECONDARY CURRENCY is the currency you are buying. 40 PL ECONOMICS NOTES #2020# NSSCO  Suppose the exchange rate between the Namibia dollar and the British pound is £1 = N$14,50. How much will Namibian consumers pay for a car which costs £10 000? Show your calculations. Discuss the effects of fluctuating exchange rates on the economy Fluctuations refers to price change. The value of the Namibian dollar will fluctuate according to the supply and demand of the currency and it will affect the economy: a) When the currency appreciates in value (value increases), imports become cheaper thus people will spend more on foreign goods. In return, local firms will be forced to lower their prices in order to remain competitive. As a result, people will have enough money to spend and save and have improved living standards. b) However, when the currency depreciates (value decreases), exports will become cheaper to foreigners which will cause inflation on the local prices. TYPES OF FINANCIAL INSTITUTIONS THE CENTRAL BANK LO: Describe and evaluate the functions of central banks  The central bank is the bank of the government (owned and established by the government)  Operate the monetary policy and is the link between government and commercial banks. e.g. Bank of Namibia THE FUNCTIONS OF THE CENTRAL BANK  The government bank: It handles the income and expenditure of the government. Borrows on behalf of the government and make payment on behalf of the government (pays interest and repay loans) 41 PL ECONOMICS NOTES #2020# NSSCO   Issue banknotes and coin: The central bank is the only (sole) bank allowed to print notes and issue coin  Lender of last resort: Rescue the bank system if a shortage of cash appears in the commercial banks  Keep the nation gold and the stock of foreign reserve currency  The banker’s bank: Commercial banks, central banks of other countries and other institutions in monetary sector hold current accounts (keep cash) at the central bank (Bank of Namibia)  Manage Monetary Policy: Control the money supplied in the country (control the interest rates) and the prices of money.  Control the exchange rate: Can limit the amount of foreign currency spend abroad by Namibian citizens COMMERCIAL BANKS Describe and evaluate the functions of commercial banks The common commercial banks in Namibia are  Bank Windhoek Limited  First National Bank Namibia Limited  Nedbank Namibia Limited.  Standard Bank Namibia Limited.  Trustco Bank Namibia Limited.  Banco Atlantico.  Bank BIC Namibia Limited.  Letshego Bank Namibia Limited Functions of commercial banks  Accept deposit: current account and saving accounts deposits –where you can withdraw anytime you like  Keeping of notes and coins 42 PL ECONOMICS NOTES #2020# NSSCO   Provide secured loans to discount house (where you can buy goods cheaply)  Provide market loan to other banks and institutions  Provide advances such as loans and overdrafts to individuals - Loans –with interest to be paid on the whole amount borrowed - Overdrafts –when you are allowed to withdraw more money on your account => interest opt be paid only on the amount you overdrawn  Make payments –cash transmission facilities  Offering investment advices Describe the functions of commercial banks such as FNB. STOCK EXCHANGE  Stock exchange is a market place where shares of public companies are sold.  It can also be defined as the market place where securities (share and debentures) are traded (bought and sold).  The Namibian stock exchange is Namibia Stock Exchange (NSX).  Some of the common international stock exchanges include New York Stock Exhange, London Stock Exchange, Hong Kong Stock Exchange, Johannesburg Stock Exchange (JSE), Shanghai Stock Exchange, Singapore Stock Exchange etc. The functions of the stock exchange  It provides the mechanism through which the investor can turn his or her assets into cash without damaging the company in which he/she has invested.  It helps public companies and the government to borrow money on a long-term basis.  It provides a means of valuing financial assets.  It enables stocks and shares to be bought and sold. 43 PL ECONOMICS NOTES #2020# NSSCO   It bring buyers and sellers of stocks and shares together.  It enables firms to raise finance.  This thus contribute to economic growth.  It indicates economic performance by looking at index price of stocks and shares.  Its rules provide a safeguard of investors’ funds. The benefits of SX to companies  Increased value  Higher profile  Easier access to capital  Higher collateral value of the securities  Higher returns  Deferred taxation  Enhances branding and corporate value APPENDIX FOR THE COMPANIES LISTED ON NSX Company Symbol Sector African Oxygen AOX Chemicals Agra Limited AGR Food Producers ANIREP ANE Financial Services Anglo American Plc ANM Mining Astoria Investments ARO Financial Services B2Gold Corporation B2G Mining 44 PL ECONOMICS NOTES #2020# NSSCO  Bannerman Resources BMN Mining Barloworld BWL Support Services Bidvest Namibia BVN General Industrials Bravura Holdings CMB Financial Services Capricorn Investment Group CGP Banks Celsius Resources Limited CER Mining Clover Industries CLN Food Producers Deep Yellow DYL Mining Eco (Atlantic) Oil & Gas EOG Oil & Gas Producers Firstrand FST Financial Services FNB Namibia Holdings FNB Banks Forsys Metals Corporation FSY Industrial Metals & Mining Investec IVD Financial Services Letshego Holdings (Namibia) LHN Financial Services Limited Marenica Energy WAM Mining Mediclinic International MEP Health Care Equipment & Services Momentum Metropolitan Holdings MMT Insurance 45 PL ECONOMICS NOTES #2020# NSSCO  Namibia Asset Management NAM Financial Services Namibia Breweries NBS Beverages Nedbank Group NBKNA Banks Nictus Holdings NHL General Retailers Oceana Group OCS Food Producers Old Mutual Limited OMM Financial Services Old Mutual Plc OLM Insurance Oryx Properties ORY Real Estate Investment Trusts Paladin Energy PDN Mining PSG Konsult KFS Financial Services Sanlam SLA Insurance Santam SNM Insurance Shoprite Holdings SRH Food & Drug Retailers Standard Bank Group SNB Banks Stimulus Investments SILP Financial Services Tadvest TAD Real Estate Investment & Services Trevo Capital TRVP Financial Services Trustco Group Holdings TUC Financial Services 46 PL ECONOMICS NOTES #2020# NSSCO  Truworths International TRW General Retailers Vukile Property Fund VKN Real Estate Investment Trusts Trustco Group Holdings is one of the companies listed on the Namibian Stock Exchange. a) Describe the features of companies such as Trustco Group Holdings. b) Analyse the benefits for Trustco Group Holdings for listed on NSX. Activity 1. Comment on the functions of money when a student opens a savings account and uses some of the money later to buy goods and services. 2. Explain portability as one of the qualities of money. 3. If the rate of exchange were N$1 = R2.00, the price of a dollar would be R2.00. What would the price of a Rand be in dollars? 4. Name any two qualities of money. 5. Suppose the exchange rate between the Namibia dollar and the British pound is £1 = N$14,50. How much will Namibian consumers pay for a car which costs £10 000? Show your calculations. 6. Trustco was the first Namibian-based company to be listed on the Johannesburg Stock Exchange. State two functions of a stock exchange. 7. What does it mean if a company’s shares are listed on the stock exchange? 47 PL ECONOMICS NOTES #2020# NSSCO THEME 3: THE MARKET 3.1 What is a market? General objective:  Demonstrate an understanding of the role of a market Specific objective:  Explain a market  explain different types of markets Market Definition Is a place where buyers and sellers come together to exchange goods and services with money. Types of market structures Learning objective:  Explain different types of markets (market structure): Labour market Factor market Market structure is best defined as the organisational and other characteristics of a market. Market structure describes how a market is organized in terms of number of producers and sellers. Reasons for competition  Increase customer base  Increase sales  Expand market share (proportion of total volume sold or total sales revenues)  Achieve product superiority  Enhance image  Maximize profits 48 PL ECONOMICS NOTES #2020# NSSCO Factors that determine the types market structure  Number of firms  Barriers to entry  Choice  Knowledge and information Types of market structure  Perfect competition  Monopoly market  Monopolistic competition Perfect competition Definition of perfect competition Perfect competition refers to the market structure in which there are many utility- maximising buyers and profit-maximising sellers of a homogeneous good or service in which there is perfect mobility of factors of production and buyers, sellers have perfect information about market conditions, and entry into and exit from the industry is very easy. Characteristics of perfect competition Features or characteristics of perfect competition (add to the one in the textbook on page 69)  Large number of sellers Perfectly competitive industries are characterised by a large number of more or less equally sized firms. Because the contribution of each firm to the total output of the industry is small, the output decisions of any individual firm are unlikely to result in a noticeable shift in the supply curve. Thus, the output decisions of any individual firm will not significantly affect the market price.  Free entry and exit This characteristic allows firms to easily reallocate productive resources to be able to exploit the existence of economic profits. This characteristic generally means that additional firms can enter the market if economic profits are being earned, and firms are free to leave market if they are sustaining losses. 49 PL ECONOMICS NOTES #2020# NSSCO   The products are homogeneous This implies that the output of one firm cannot be distinguished from that of another firm in the same industry. The purchasing decisions of buyers, therefore, are based entirely on the selling price. Hence, individual firms are unable to raise their prices above the market-determined price for fear of being unable to attract buyers. Conversely, price cutting is counterproductive because firms can sell all their output at the higher, market- determined, price.  Price taker A price taker is a firm that cannot influence the market price because its production is an insignificant part of the total market.  There are many buyers Since no buyer purchases a significant proportion of the total output of the industry, the actions of any single buyer will not result in a noticeable shift in the demand schedule and, therefore, will not significantly affect the equilibrium price of the product.  Horizontal demand curve The demand curve of individual firm is a horizontal straight line showing that the firm can sell infinite volume of output at the same price. This implies that the individual firms have perfectly elastic demand curve.  Perfect information Firms and individuals have perfect information about costs, prices, consumer demand and anything else which may affect the market. Additionally, producers understand the production capabilities known to other producers in the market and have immediate access to any resources used by other sellers in producing a good.  There are not transaction costs There are no transaction costs such as the cost of traveling to a store; if one firm charged a slightly higher price than the other firms, consumers would not shop at that firm but instead would purchase from a firm charging a lower price.  Many firms selling homogenous items  Best use of scare resources  Low prices due to high competition 50 PL ECONOMICS NOTES #2020# NSSCO   Small market shares  Cannot make own prices  Elasticity/Flexibility  No government restrictions  Perfect knowledge of market  Many substitutes  Price taker – firms do not set their own prices, they are determined by the market forces Advantages of perfect competition  Variety of same goods  Consumers are in charge  Lower prices  Fast response in supply  Efficient Disadvantages of perfect competition  Lack of capital for research and development  Lack of variety Monopoly Definition A monopoly market is a firm that dominates the whole industry with a product or service and faces no competition. Examples in Namibia include Nampower, Namwater, Nampost and NBC. Reasons for monopoly  One firm can produce cheaper than two separate firms and thus a natural monopoly is set up and the fixed cost is so high that no one else tries to enter the market  Brand loyalty from customers  Firm owns its own resources and has copyrights thus not allowing competitors  Legal monopoly policies such as licenses, nationalization and franchises 51 PL ECONOMICS NOTES #2020# NSSCO Features or characteristics of monopoly market (Add the one in the textbook on page 70 NAMCOL TEXTBOOK)  In a monopoly type of market structure, there is only one seller, so a single firm will control the entire market.  It can set any price it wishes since it has all the market power (Price setter)  Consumers do not have any alternative and must pay the price set by the seller.  There are barriers to entry into the market  The firm sells a unique product that has no close substitutes  Downward sloping demand curve Advantages Disadvantages Economies of Scale High prices Investment possibilities and research & Low output development power Abnormal profits encourage them to produce Barriers Large profits with no Natural monopolies efficiency Could pass on low cost to consumers No incentive for efficiency Less consumer choice Low product quality Monopolistic competition It combines features of perfect competition and monopoly. Characteristics of monopolistic competition  There are many buyers and small sellers  There is freedom of entry and exit  The product is similar but differentiated  In the short run some firms make supernormal profits while others make losses  Profits are maximized by equating MC = MR 52 PL ECONOMICS NOTES #2020# NSSCO 3.2 Market forces General objective:  Apply the principles of demand and supply Specific objectives:  Define demand and supply  Discuss and illustrate the principle of equilibrium price  Analyse simple market situations with changes in supply and demand  Discuss the causes of changes in demand and supply conditions and analyse such changes to show effects on price 3.2.1 Demand Define demand: Demand is defined as want or willingness of consumers to buy goods and services at a price, at a specific time and place. In economics willingness to buy goods and services should be accompanied by the ability to buy (purchasing power) and is referred to as effective demand. Demand can also be defined as the quantity demanded at any given price over some given period of time. Key words: willingness, ability, price Law of demand  It states that when price increases, the amount demanded will fall and when prices fall, the amount demanded will rise. This phenomenon when plotted on a graph is known as Demand Curve.  Law of demand is an inverse relationship that exists between price and quantity demanded (negative).  A normal demand curve is downward sloping to the right. A demand curve shows the amount of goods and services people are willing to and able to buy at a specific price. Types of demand Individual demand: Demand for one customer/consumer (the willingness of an individual consumer to pay the given price for the product. 53 PL ECONOMICS NOTES #2020# NSSCO  Market demand: is the total demand for a product from all of its consumers. Effective demand: People must actually have the money to make the purchase. Composite demand: It is when a good is demanded for two or more uses. For example oil may be used to run a car or as a fuel in a factory. Joint demand (complement goods): It is when two goods are bought together. Mouse is bought with a mouse pad. Competitive demand (substitute goods): Goods that are substitute ( two or more alternative goods that could be used for the same purpose) e.g. taxi or bus travel, tea or coffee, coca-cola or pepsi, butter or margarine Derived demand: It is when demand for one good occurs as a result of demand for another. Example, If more goods are made, more labour is needed. Hence demand for labour is derived demand. 1. Define demand 2. Differentiate between complement goods and substitute goods with examples. 3. Describe the law of demand 54 PL ECONOMICS NOTES #2020# NSSCO Demand curve Demand schedule  A demand schedule is a table that shows the quantity demanded of a good or service at different price levels. A demand schedule can be graphed as a continuous demand curve on a chart where the Y-axis represents price and the X-axis represents quantity (as the one above). Describe the demand curve and demand schedule 55 PL ECONOMICS NOTES #2020# NSSCO Movement along the demand curve Extension of demand Extension of demand is the increase in demand due to the fall in price, all other factors remaining constant. Contraction of demand Contraction of demand is the fall in demand due to the rise in price, all other factors remaining constant. Activity What factors might change the demand for these products a) Ice Cream b) Butter c) Chicken d) Pizza e) Unleaded Petrol f) Cadbury Diary Milk g) Bus Travel h) Umbrella 56 PL ECONOMICS NOTES #2020# NSSCO Shift in the demand curve Usually demand curves are drawn based on the assumption except for price all other factors remain the same. But there might be instances when demand may be affected by factors other than price. This will result in the change in demand although the price will remain the same. This change in demand may cause the demand curve to SHIFT inwards or outwards. Shift of demand curve OUTWARDS (right) shows an increase in demand at the same price level. It is known as INCREASE IN DEMAND. Shift of demand curve INWARDS (left) shows that less is demanded at the same price level. It is known as a FALL IN DEMAND. Factors affecting demand SO: Discuss the causes of changes in demand conditions and analyse such changes to show effects on price Change in people’s income: More the people earn the more they will spend and thus the demand will rise. A fall in income will see a fall in demand (Normal and inferior goods) Changes in population: An increase in population will result in a rise in demand and vice versa. 57 PL ECONOMICS NOTES #2020# NSSCO  Change in fashion and taste: Commodities or which the fashion is out are less in demand as compared to commodities which are in fashion. In the same way, change in taste of people affects the demand of a commodity. Changes in Income Tax: An increase in income tax will see a fall in demand as people will have less money left in their pockets to spend whereas a decrease in income tax will result in increase of demand for products and services because people now have more disposable income. Change in prices of Substitute goods: Substitute goods or services are those which can replace the want of another good or service. For example margarine is a substitute for butter. Thus a rise in butter prices will see a rise in demand for margarine and vice versa. Change in price of Complementary goods: Complementary goods or services are demanded along with other goods and services or jointly demanded with other goods or services. Demand for cars is affected the change in price of petrol. Same way, demand for DVD players will rise if the prices of DVDs’ fall. Advertising: A successful advertising campaign may affect the demand for a product or service. Climate: Changes in climate affects the demand for certain goods and services. E.g Ice Cream, blankets, tea and coffee, air corn, Interest rates: A fall in Interest rate will see a rise in demand for goods and services. As people will borrow more money and have a high purchasing power. 3.2.2 Supply Define supply Supply refers to the amount of goods and services firms or producers are willing and able to sell in the market at a possible price. Simply means the amount which traders are prepared to offer for sale. Law of supply  It states that when the price of a commodity rises, the supply for it also increases. The higher the price for the good or service the more it will be supplied in the 58 PL ECONOMICS NOTES #2020# NSSCO  market. The reason behind it is that more and more suppliers will be interested in supplying those good or service whose prices are rising. Types of supply  Joint supply: When goods are in join supply, the production of one of the goods automatically creates a supply of the other good. Example, mutton and sheepskins, beef and hide.  Fixed supply: the supply of goods and services does not change due to a change in price (in the short-run), seats in the sport stadium, number of classes in the school.  Total supply of a product: It is the total quantity of a product which is available for sale at a price Supply curve Movement along the supply curve Extension of supply It refers to the increase in supply of a commodity with the rise in price, other factors remaining unchanged. 59 PL ECONOMICS NOTES #2020# NSSCO Contraction of supply It refers to the fall in supply of a commodity when its prices fall, other factors remaining unchanged. Shift/change in supply curve When factors other than price affect the supply it results in the shift of supply curve. The supply curve may move inward or outward. A shift of supply curve outwards to the right will mean an increase in supply at the same price level. When the supply curve moves inwards to the left it means that less is being supplied at the same price level. 60 PL ECONOMICS NOTES #2020# NSSCO  1. Define a supply 2. Different between movement along the supply curve and a shift in supply curve Factors affecting supply SO: Analyse simple market situations with changes in supply  Price of the commodity: A rise in price will result in more of the commodity being supplied to the market and vice versa.  Prices of other commodities: For example if it is more profitable to produce LCD TVs then producers will produce more LCD TVs as compared to PLASMA TVs. Thus the supply curve for PLASMA TVs will shift inwards i.e. a fall in supply.  Change in cost of production: Increase in the cost of any factor of production may result in the decrease in supply as reduced profits might see producers less willing to produce that commodity.  Tax and subsidies: If the government places a tax on a good, for example, charging VAT, this will cause a fall in supply and thus a rise in price. A subsidy will help the producers to increase their supply. With a help of a supply curves, explain the effects of tax and subsidies on quantity supplied. 61 PL ECONOMICS NOTES #2020# NSSCO   Technological advancement: Improvement in technology results in lowering of cost of production and more profits for the producer and thus more supply of that commodity.  Climate: Climate and weather conditions affect the supply of commodities especially agricultural goods. Explain two reasons why the supply curve of a product may shift to the right. [4 marks] Any Two reasons must be identified along with a brief explanation for each. Government subsidy: a government subsidy will reduce costs of production/provides an incentive to produce more Falls in costs of production : a fall in costs of production means that firms can produce more at the same price Advances in technology: advances in technology lower costs of production Good weather: good weather can increase the supply of agricultural products Seasonal factors: when a crop is in season, the supply increases Reduction in indirect tax: reduction in indirect tax lowers costs of production Changes in the price of other products produced: if the price of one product firms produce falls, they may move resources to this product. Using an appropriate diagram, explain how the following changes affect the supply or the quantity supplied in each scenario: a) Beijing raises the minimum wage for factory workers by 20 per cent. b) Drought causes vegetable prices to soar in France. c) New technology boosts productivity at Tata Motors, India's largest car-maker. d) The US government subsidises the output of hybrid cars. e) South Korea's Samsung launches new tablet computers to rival Apple's iPad. 3.2.3 Market equilibrium LO: discuss and illustrate the principle of equilibrium price  Market equilibrium refers to the point where demand curve meets the supply curve. 62 PL ECONOMICS NOTES #2020# NSSCO   Equilibrium price can be defined as the price at which the quantity demanded is equal to the quantity supplied.  Equilibrium quantity: the amount that is traded at the equilibrium price.  Market Price can be defined as the price prevailing in the market. Prices are determined by supply and demand forces.  It is not necessary that Market Price is equivalent to Equilibrium price. In the graph below the point at which the demand curve meets the supply curve is the equilibrium price. Excess demand and supply Excess supply is the situation where the price is above its equilibrium price (Price floor). The quantity willing supplied by the producers is higher than the quantity demanded by the consumers. Excess demand is the situation where the price is below its equilibrium price (price ceiling) 63 PL ECONOMICS NOTES #2020# NSSCO Discuss the causes of changes in demand and supply conditions and analyse such changes to show effects on price 1. Explain, using a demand and supply diagram, how a subsidy can affect the equilibrium price and equilibrium quantity in a market. 2. Describe the factors that can affect the demand for a product. 3. Explain what is meant by price elasticity of demand. 4. Using a demand and supply diagram, analyse the effect of introducing an indirect tax on a product on its equilibrium price and its equilibrium quantity. 5. Explain two reasons why the supply curve of a product may shift to the right. 6. Using an appropriate demand and supply diagram, explain the impact on the market price and quantity traded in each of the following cases: a) The market for air travel following the imposition of higher fuel taxes. b) The market for Pepsi Cola following a fall in the price of Coca-Cola. c) The market for sushi following a successful marketing campaign promoting the health benefits from eating rice and raw fish. d) The market for Samsung digital cameras following new technologies that improve productivity in its factories. 64 PL ECONOMICS NOTES #2020# NSSCO 65 PL ECONOMICS NOTES #2020# NSSCO 66 PL ECONOMICS NOTES #2020# NSSCO 3.3 Price elasticity General objective:  understand the concept of price elasticity Specific objectives:  Define price elasticity of demand and supply  Discuss and apply price elasticity of demand and supply  Perform simple calculations of elasticity and inelasticity of demand and supply 3.3.1 Price elasticity of demand Definition The responsiveness of quantity demanded, or how much quantity demanded changes, given a change in the price of goods or service is known as the price elasticity of demand. It describes the responsiveness of the quantity demanded to a change in price 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅 Price Elasticity of demand (PED)= 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆 Types of Elasticity of demand  If a good is price elastic it is highly responsive to a change in price (has a PED>1). Or a small change in price cause a relatively large change in the quantity demanded.  If a good is price inelastic it is relatively unresponsive to a change in P (has a PED1).  Inelastic supply: Quantity Supplied changes by a smaller extent than price. Or when the percentage change in the quantity supplied is less than the percentage change in the price. (PES < 1).  Perfectly inelastic supply: a situation where a change in price has no effect on the quantity supplied (PES = 0).  Perfectly elastic: The supply curve is horizontal; there is extreme change in demand in response to very small change in prices (PES = ∞). Factors affecting PES/ Determinants of PES (Elastic or Inelastic) LO: discuss and apply price elasticity of supply Supply could be elastic for the following reasons:  If there is space capacity in the factory.  If there are stocks available  Manufacturing products  In the long term, supply will be more elastic because capital can be changed. 71 PL ECONOMICS NOTES #2020# NSSCO Supply could be inelastic for the following reasons:  Firms operating close to full capacity.  Firms have low level of stocks, there are no surplus goods to sell.  In the short term, capital is fixed.  If it is difficult to employ factors of production  Agricultural products. State two reasons why the supply of jeans might be elastics. Calculations of PES LO: perform simple calculations of elasticity and inelasticity of supply Examples 1. If the price of a cappuccino increases by 10% and the supply increases by 20%. 2. If the PES is 2.0 for CDs and the form supplied 4000 when the price was $30. If the price increased from $30 to $36, what will be the quantity? 3.4 Advertising General objective:  Demonstrate an understanding of the role of advertising Specific objectives  Define advertising  Describe the purpose and m