economics oligopoly essay

Essay on Oligopoly: Top 8 Essays on Oligopoly | Markets | Microeconomics

Here is a compilation of essays on ‘Oligopoly’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Oligopoly’ especially written for school and college students.

Essay on Oligopoly

Essay Contents:

• Essay on Payoff (Profit) Matrix

Essay # 1. Introduction to Oligopoly:

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Two extreme market forms are monopoly (characterised by the existence of a single seller) and perfect competition (characterised by a large number of sellers). Competition is of two types- perfect competition and monopolistic competition. In perfect competition, all sellers sell ho­mogeneous products while in monopolistic competition they sell heterogeneous products. In monopoly there is no rival.

So the monopolist is not concerned with the effect of his actions on rivals. In both types of competition, the number of firms is so large that the actions of any one seller have little, if any, effect on its competitors. An industry with only a few sellers is known as an oligopoly, a firm in such an industry is known as an oligopolist.

Although car-wash is a million rupee business, it is not exactly a product familiar to most consumers. However, often many familiar goods and services are supplied only by a few com­peting sellers, which means the industries we are talking about are oligopolies. An oligopoly is not necessarily made up of large firms. When a village has only two medi­cine shops, service there is just as much an oligopoly as air shuttle service between Mumbai and Pune.

Essentially, oligopoly is the result of the same factors that sometimes produce monopoly, but in somewhat weaker form. Honestly, the most important source of oligopoly is the exist­ence of economies of scale, which give better producers a cost advantage over smaller ones. When these economies of scale are very strong, they lead to monopoly, but when they are not that strong they lead to competition among a small number of firms.

Since an oligopoly con­tains a small number of firms, any change in the firms’ price or output influences the sales and profits of competitors. Each firm must, therefore, recognise that changes in its own policies are likely to elicit changes in the policies of its competitors as well.

As a result of this interdependence, oligopolists face a situation in which the optimal deci­sion of one firm depends on what other firms decide to do. And so there is opportunity for both conflict and cooperation. Oligopoly refers to a market situation in which the number of sellers is few, but greater than one. A special case of oligopoly is monopoly in which there are only two sellers.

Essay # 2. Characteristics of Oligopoly:

The notable characteristics of oligopoly are:

1. Price-Searching Behaviour :

An oligopolist is neither a price-taker (like a competitor) nor a price-maker (like a monopolist). It is a price-searcher. An oligopolist is neither a big enough part of the market to be able to act as a monopolist, nor a small enough part of the market to be able to act as a competitor. But each firm is a dominant part of the market.

In such a situation, competition among buyers will force all the sellers to charge a uniform price for a product. But each firm is sufficiently so large a part of the market that its actions will have noticeable effects upon his rivals. This means that if a single firm changes its output, the prices charged by all the firms will be raised or lowered.

2. Product Characteristics :

In oligopoly, there may be product differentiation as in monopolistic competition (called differ­entiated oligopoly) or a homogeneous product may be traded by all the few dominant firms (as in pure oligopoly).

3. Interdependence and Uncertainty :

In oligopoly no firm can take decision on price independently. It is because the decision to fix a new price or change an existing price will create reactions among the rival firms. But rivals’ reactions cannot be predicted accurately. If a firm reduces its price its rivals may reduce their prices or they may not. So there is lack of symmetry in the behaviour of rival firms.

This type of reaction of rivals is not found in perfect competition or monopolistic competition where all firms change their price in the same direction and by the same magnitude in order to remain competitive and survive in the long run. So the outcome of a firm’s decision is uncertain.

For this reason it is difficult to predict the total demand for the product of an oligopolistic industry. It is still more difficult, and in some situations virtually impossible, to estimate the share of an individual firm in industry’s output.

It is true that the consequences of attempted price variations on the part of an individual seller are uncertain. His rivals may follow his change, or they may not, but they will, in all likelihood, notice it. The results of any action on the part of an oligopolist or even a duopolist depend upon the reactions of his rivals. In short, it is not possible to define general price- quantity relations for an individual firm, since reaction patterns of rivals are highly uncertain and almost completely unknown.

4. Different Reaction Patterns and Use of Models :

It is not true to say that, in oligopoly, profit is always maximised. It is because an oligopolist does not have control over all the variables which affect his profit. Moreover, a variety of possible reaction patterns is possible in this market—there is a conjectural variation in this market.

Just as firm A’s profit depends on the output of firm B also, firm B’s profit, in its turn, depends on firm A’s output. This is why various models are used to describe the diverse behaviour of oligopoly markets where a variety of outcomes is possible.

5. Non-Price Competition :

As in monopolistic competition there is not only price competition but non-price competition as well in oligopoly (and, to some extent, in duopoly). For example, advertising is often a life and death question in this type of market due to strategic behaviour of all firms. In most oligopoly situations we find intermediate outcomes. Economists are yet to emerge with a definite behaviour pattern in oligopoly.

Essay # 3. Scope of Study of Oligopoly :

Here we study a few of the many possible reaction patterns in duopoly and oligopoly situa­tions. The focus is on pure oligopoly. Here we assume that all firms produce a homogeneous product. We do not discuss the case of differentiated oligopoly and the issue of selling cost (advertising) separately. Of course, we discuss briefly Baumol’s sales maximisation hypoth­esis—without and with advertising.

The focus here is on the interdependence of the various sellers’ reactions, which is the essential distinguishing feature of oligopoly. If the influence of one seller’s quantity decision from the profit of another, δπ i /δq j , is negligible, the industry must be either perfectly competi­tive or monopolistically competitive. If δπ i /δq j , is perceptible, the industry is duopolistic or oligopolistic.

The optimum quantity and maximum profit of a duopolist or oligopolist depend upon the actions of the firms belonging to the industry. He can control only his own output level (or price, if his product is differentiated), but he has no direct control over other variables which are likely to (or do) affect his profits. In truth, the profit of each oligopolist is the result of the interaction of the decisions of all players in the market.

Since there are no generally accepted behavioural assumptions for oligopolists and duopolists as is found in other market forms, there are diverse patterns of behaviour and many different solutions for oligopolistic and duopolistic markets. Each solution is based on different types of models and each model is based on a different behavioural assumption or a set of assumptions.

Here we start with one or two simple duopoly models. The same analysis (solution) can be extended to cover any oligopolistic market. The earliest model of duopoly behaviour is the Cournot model, with which we may start our review of different oligopoly models. We end with the game theoretic treatment of oligopoly which shows decision-making under conflict.

Essay # 4. Models of Oligopoly:

1. the cournot model :.

The Cournot model (presented in 1838) is based on the analysis of a market in which two firms produce a homogeneous product. Augustin Cournot (a French economist) noticed that only two firms were producing mineral water for sale. He argued that each firm would choose quan­tity that would maximise profit, taking the quantity marketed by its competitor as given.

Two main features of the model are:

(i) Each firm chooses a quantity of output instead of price; and

(ii) In choosing its output each firm takes its rival’s output as given.

In Cournot’s model, then, strategies are quantities of output. Here we assume that firms produce a homoge­neous good and know the market demand curve.

Each firm must decide how much to produce, and the two firms make their decisions at the same time. When taking its production decision, each duopolist takes into consideration its competitor. It knows that its competitor is also de­ciding how much to produce, and the market price will depend on the total output of both firms.

The essence of the Cournot model is that each firm treats the output level of its competitor as fixed and then decides how much to produce. Each Cournot’s duopolist believes that the other’s quantity will not change. In Fig. 1 when I produces Q M , II maximises its profit by producing 1/4Q C . In order to sell Q M plus Q c , the price must fall to P 1 . Here Q M is the mo­nopoly output which is half the competitive output Q c .

The inverse demand function, stating price as a function of the aggregate quantity sold, is expressed as:

P =f (q 1 ) + q 2 … (1)

where q 1 and q 2 are the output levels of the duopolists. The total revenue of each duopolist depends upon his own output level as also as that of his rival:

R 1 = q 1 f 1 (q 1 + q 2 ) = R 1 (q 1 , q 2 )

R 2 = q 2 f 2 (q 1 + q 2 ) = R 2 (q 1 , q 2 ) … (2)

The profit of each equals his total (sales) revenue, less his cost, which depends upon his output level above:

π 1 = R 1 (q 1 , q 2 ) – C 1 (q 1 )

π 2 = R 2 (q 1 , q 2 ) – C 2 (q 2 ) … (3)

The basic behavioural assumption of the Cournot model is that each duopolist maximises his profit on the assumption that the quantity produced by his rival is invariant with respect to his own decision regarding output quantity. Duopolist I maximises π 1 with reference to q 1 , treating q 2 as a parameter, and duopolist II maximises π 2 , with reference to q 2 , treating q 1 as a parameter. Setting the partial derivatives of (3) equal to zero, we get:

The solution of (7) is

Here OM is the marginal cost of producing the commodity. The second firm’s price is p 2 . The first firm’s profit function is composed of three segments. When p 1 < p 2 , the first firm captures the entire mar­ket, and its profit increases as its price increases. When p 1 > p 2 , the two firms split the total profits equal to distance CA, and each makes a profit equal to CB. When p 1 >p 2 , the first firm’s profit is zero because it sells nothing when its price exceeds the second firm’s price.

Criticisms:

The Bertrand model has been criticised on two main grounds. First, when firms produce a homogeneous good, it is more natural to compete by setting quantities rather than prices. Second, even if firms do set prices and choose the same price (as the model predicts), what share of total sales will go to each one? The model assumes that sales would be divided equally among the firms, but there is no reason why this must be the case.

However, despite these shortcomings, the Bertrand model is useful because it shows how the equilibrium out­come in an oligopoly can depend crucially on the firms’ choice of strategic variable.

3. The Stackelberg Model :

The Stackelberg model (presented by the German economist Heinrich von Stackelberg) is a modified version of the Cournot model. In the Cournot model, we assume that two duopolists make their output decisions at the same time. The Stackelberg model examines what happens if one of the firms can set its output first. The Stackelberg model of duopoly is different from the Cournot model, in which neither firm has any opportunity to react.

The model is based on the assumption that the profit of each duopolist is a function of the output levels of both:

π 1 = g 1 (q 1 , q 2 ) π 2 = g 2 (q 1 , q 2 ) … (1)

The Cournot solution is found out by maximising π 1 with reference to q 1 , assuming q 2 to be constant and π 2 with reference to q 2 , assuming q 1 to be constant. In general, each firm might make some other assumption about the response (reaction) of its only rival. In such a situation, profit-maximisation by the two duopolists requires the fulfillment of the following two condi­tions:

Since the firm’s demand curve is kinked, its combined marginal revenue curve is discon­tinuous. This means that the firm’s cost can change without leading to price change. In this figure, marginal cost could increase but would still equal marginal revenue at the original out­put level. This means that price remains the same.

The kinked demand curve model fails to explain oligopoly pricing. It says nothing about how marginal revenue firms arrived at the original price P̅ to start with. In fact, some arbitrary price is taken as both the starting and end point of our journey. Why firms did not arrive at some other price remains an open question. It just describes price rigidity but cannot explain it. In addition, the model has not been supported by empirical tests. In reality, rival firms do match price increases as well as price cuts.

Market-sharing Price Leadership :

Oligopolists often collude—jointly restrict supply to raise price and cooperate. This strategy can lead to higher profits. Collusion is, however, illegal. Moreover, one of the main impedi­ments to implicitly collusive pricing is the fact that it is difficult for firms to agree (without talking to each other) on what the price should be.

Coordination becomes particularly problem­atic when cost and demand conditions—and, thus, the ‘correct’ price—are changing. However, benefits of cooperation can be enjoyed without actually colluding. One way of doing this is through price leadership. Price leadership may be provided by a low-cost firm or a dominant firm.

In this context, we may draw a distinction between price signalling and price leadership. Price signalling is a form of implicit collusion that sometimes gets around this problem. For example, a firm might announce that it has raised its price with the expectation that its competi­tors will take this announcement as a signal that they should also raise prices. If competitors follow, all of the firms (at least, in the short run) will earn higher profits.

At times, a pattern is established whereby one firm regularly announces price changes and other firms in the industry follow. This type of strategic behaviour is called price leadership— one firm is implicitly recognised as the ‘leader’. The other firms, the ‘price followers’, match its prices. This behaviour solves the problem of coordinating price: Everyone simply charges what the leader is charging.

Price leadership helps to overcome oligopolistic firms’ reluctance to change prices—for fear of being undercut. With changes in cost and demand conditions, firms may find it increas­ingly necessary to change prices that have remained rigid for some time. In that case, they wait for the leader to signal when and by how much price should change.

Sometimes a large firm will naturally act as a leader; sometimes different firms will act as a leader from time to time. In this context, we may discuss the dominant Firm model of leadership. This is known as market- sharing price leadership.

6. The Dominant Firm Model :

In some oligopolistic markets, one large firm has a major share of total sales while a group of smaller firms meet the residual demand by supplying the remainder of the market. The large firm might then act as a dominant firm, setting a price that maximises its own profits.

The other firms, which individually could exert little, if any, influence over price, would then act as perfect competitors; they all take the price set by the dominant firm as given and produce accordingly. But what price should the dominant firm set? To maximise profit, it must take into account how the output of the other firms depends on the price it sets.

Fig. 5 shows how a dominant firm sets its prices. A dominant firm is one with a large share of total sales that sets price to maximise profits, taking into account the supply response of smaller firms. Here D is the market demand curve and S F is the supply curve (i.e., the aggregate marginal cost curves of the smaller firms, called competitive fringe firms). The dominant firm must determine its demand curve D D .

This curve is just the difference between market demand and the supply of fringe firms. For example, at price P 1 , the supply of fringe firms is just equal to market demand. This means that the dominant firm can sell nothing at this price. At a price P 2 or less, fringe firms will not supply any of the good, in which case, the dominant firm faces the market demand curve. If price lies between P 1 and P 2 , the dominant firm faces the demand curve D D .

The marginal cost curve of the dominant firm corresponding to D D is MR D . The dominant firm’s marginal cost curve is MC D . In order to maximise its profit, the dominant firm produces quantity Q D at the interaction of MR D and MC D . From the demand curve D D , we find P 0 . At this price, fringe firms sell a quantity Q F , thus the total quantity sold is Q T = Q D + Q F .

7. Collusive Oligopoly: The Cartel Model :

Various models have been formulated to explain the strategic behaviour of firms in an oligopolistic market. A price (cut-throat) competition exists among the rivals who try to oust the others from the market. Sometimes there ex­ists a dominant firm that acts as the leader in the market while the others just follow the leader.

As a result, there happens to be a clear possibil­ity of the formation of a cartel by the rival firms in an oligopolistic market in order to eliminate competition among themselves. This is termed as “collusive oligopoly” because the firms some­how manage to combine together in order to be­have collectively as a single monopoly.

Now let us see graphically what incentives the firms get for forming a cartel. In Fig. 6, the market demand curve is given by the D M the total supply curve is the horizontal summation of the marginal cost curves of all existing firms in the industry, which is denoted by MC M .

The market equilibrium is attained at the point of intersection between the D M (demand curve) and the marginal cost curve MC M , if the firms compete with each other. OP M is the equilibrium price at which the total output of the industry is OQ M .

In order to determine its own quantity, each firm equates this price to its marginal cost. The sum of the quantities of the firms is OQ. If the firms form a cartel in order to act as a monopolist, the price rises to OP ‘ M and the quantity is reduced to OQ ‘ M to be in equilibrium. Now, when the quantity is being reduced by Q M Q’ M , then all the firms together save the cost represented by the area below the MC M curve which is Q M E M F M Q ‘ M .

Thus, a rise in price due to a reduction in the quantity is followed by a decrease in the total revenue represented by the area below the MR M curve, i.e., area Q M G M F M Q’ M . This, in turn, shows that the cost saved exceeds the loss in revenue and, so, all the firms taken as a whole can increase their profit represented by the area E M F M G M . The prospect of earning this extra profit actually acts as the incentive to form a cartel in the oligopoly market structure.

Since the cartel is formed, all firms agree together to produce the total quantity OQ’ M . In order to carry this out, each and every firm is allotted a quota or a certain portion of production such that the sum of all quotas is equal to OQ M . For this, the best way of quota allotment would be to treat each firm as a separate entity (plant) under the same monopolist. Thus, all the firms have the same marginal cost (MC) such that MC = MR (marginal revenue).

Finally, the total profit is maximised because the total output is produced at the minimum cost.

Each and every firm can increase its profit by reducing the profits of other firms, simply by increasing its output quantity above the allotted quota. The system of cartel formation must guard against the desire of individual firms to violate the quota and the cartel breaks down when the cost of guarding against quota violation is very high.

The OPEC is an example of collusive oligopoly or cartel in which members (producers) explicitly agree to cooperate in setting prices and output levels. All the producers in an industry need not and often do not join the cartel. But if most producers adhere to the cartel’s agree­ments, and if market demand is sufficiently inelastic, the cartel may drive prices well above competitive levels.

Two conditions for success:

Two conditions must be fulfilled for cartel success. First, a stable cartel organisation must be formed whose members agree on price and production levels and both adhere to that agreement. The second condition is the potential for monopoly power. A cartel cannot raise price much if it faces a highly elastic demand curve. If the potential gains from cooperation are large, cartel members will have more incentive to share their organisa­tional problems.

Analysis of Cartel Pricing:

Cartel pricing can be analysed by using the dominant firm model of oligopoly. It is because a cartel usually accounts for only a portion of total production and must take into account the supply response of competitive (non-cartel) producers when it sets price. Here we illustrate the OPEC oil cartel.

Fig. 7 illustrates the case of OPEC. Total demand TD is the world demand curve for crude oil, and S c is the competitive (non-OPEC) supply curve. The demand for OPEC oil D 0 is the difference between total demand (TD) and competitive supply (SC), and MR 0 is the corresponding marginal revenue curve.

MC 0 is OPEC’s marginal cost curve; OPEC has much lower production costs than do non-OPEC producers. OPEC’s marginal revenue and marginal cost are equal at quantity Q 0 , which is the quantity that OPEC will produce. Here we see from OPEC s demand curve that the price will be P 0 .

Since both total demand and non-OPEC supply are inelastic, the demand for OPEC oil is also fairly inelastic; thus the cartel has substantial monopoly. In the 1970s, it used that power to drive prices well above competitive levels.

In this context, it is important to distinguish between short-run and long-run supply and demand curves. The total demand and non-OPEC supply curves in Fig. 7 apply to short-or intermediate-run analysis. In the long run, both demand and supply will be much more elastic, which means that OPEC’s demand curve will also be much more elastic.

We would thus expect that, in the long run, OPEC would be unable to maintain a price that is so much above the competitors’ level. In truth, during 1982-99, oil prices fell steadily, mainly because of the long- run adjustment of demand and non-OPEC supply.

However, cartel is not an unmixed blessing. No doubt cartel members can talk to one an­other in order to formalize an agreement. But it is not that easy to reach a consensus. Different members may have different costs, different assessments of market demand, and even different objectives, and they may, therefore, want to set prices at different levels.

Furthermore, each member of the cartel will be tempted to “cheat” by lowering its price slightly to capture a larger market share than it was allotted. Most often, only the threat of a long-term return to competi­tive prices deters cheating of this sort. But if the profits from cartelization are large enough, that threat may be sufficient.

Essay # 5. Sales (Revenue) Maximisation :

W.J. Baumol presented an alternative hypothesis to profit maximisation, viz., sales (revenue) maximisation. He has suggested that large oligopolistic firms do not maximise profit, but rather maximise sales revenue, subject to the constraint that profit equals or exceeds some minimum accepted level. Various empirical studies support Baumol’s hypothesis. And it accurately cap­tures some aspects of oligopolistic firms’ behaviour.

Most important, when firms are uncertain about their demand curve they actually face, or, when they cannot accurately estimate the marginal costs of their output (due to uncertainty about factor prices, or when they produce more than one product), the decision to try to maximise sales appears to be consistent with their long-term survival. This is why many oligopolist firms seek to maximise their market share in order to protect themselves from the adverse effects of uncertain market environment.

Graphical Analysis :

A revenue-maximising oligopolist would choose to produce that level of output for which MR = 0. When MR = 0, TR is maximum. That is, the oligopolist should proceed to the point at which selling any extra unit(s) actually leads to a fall in TR. This choice is illustrated in Fig. 8.

For the firm which faces the demand curve D, TR is maximum when output is q s . For q < q s , MR is positive. This means that selling more units increases TR (though not necessarily profit). For q > q s , however, MR is negative. So further sales actually reduce TR because of price cuts that are necessary to induce consumers to buy more. We know that

MR = P(1 – 1/e p ) … (1)

MR = 0 if e p = 1, in which case TR will be maximum. TR is constant in a small neighbourhood of that output quantity at M 1 P = 0, TR is maximum, and when TR is maximum, e p = 1.

We may now compare the revenue-maximisation choice with the profit-maximising level of output, q s . At q p , MR equals marginal cost MC in Fig. 8. Increasing output beyond q p would reduce profits since MR < MC. Even though TR continues to increase up to q s , units of output beyond q p bring in less than they cost to produce. Since marginal revenue is positive at q p , equation (1) shows that demand must be elastic (e p > 1) at this point.

Essay # 6. Constrained Revenue Maximisation :

A firm that chooses to maximise TR is neither taking into account its costs nor the profitabil­ity of the output that it is selling. And it is quite possible that the output level q s in Fig. 8 yields negative profit to the firm. However, it is not possible to any firm to survive for ever with negative profits. So it may be more realistic to assume that firms do meet some mini­mum level (target rate) of profit from their activities.

Thus, even though oligopolists may be prompted to produce more than q p with a view to maximising revenue, they may produce less than q p units in order to ensure an acceptable level of profit. They will, therefore, behave as constrained revenue maximises and will choose to produce an output level which lies between q p and q s .

Mathematical Analysis :

How firms in Oligopoly compete

Oligopoly is a market structure in which a few firms dominate the industry; it is an industry with a five firm concentration ratio of greater than 50%.

In Oligopoly, firms are interdependent; this means their decisions (price and output) depend upon how the other firms behave:

• Barriers to entry are likely to be a feature of Oligopoly
• There are different models to explain how firms may behave

The kinked demand curve model suggests firms will be profit maximisers.

Kinked Demand Curve Diagram

At p1 if firms increased their price, consumers would buy from the other firms. Therefore, they would lose a large share of the market and demand will be elastic. Therefore, firms will lose revenue by increasing the price.

If firms cut price then they would gain a big increase in market share. However, it is unlikely that firms will allow this. Therefore, other firms follow suit and cut-price as well. Therefore demand will only increase by a small amount: Demand is inelastic for a price cut and revenue would fall.

This model suggests price will be rigid because there is no incentive for firms to change the price

If prices are rigid and firms have little incentive to change prices they will concentrate on non-price competition . This occurs when firms seek to increase revenue and sales by various methods other than price.

For example, a firm could spend money on advertising to raise the profile of their product and try and increase brand loyalty, if successful this will increase market sales. Advertising is a big feature of many oligopolies such as soft drinks and cars. Alternatively, they could introduce loyalty cards or improve the quality of their after sales service. When buying a plane ticket price is not the only factor consumers look at, they may prefer airlines with more leg room, air miles e.t.c.

Non-price competition depends upon the nature of the product. For example, advertising is very important for soft drinks but less important for petrol.

However, in reality, this model doesn’t always occur. Often the objectives of firms are not to maximise profit. For example, they may wish to increase the size of their firm and maximise sales. If this is the case, they may be willing to take part in a price war, even if this does lead to lower profits. Price wars involve firms selling goods at very low prices to try and gain market share. For example, newspapers such as the Times and the Sun have recently been sold very cheaply. Price wars are more likely if:

• 1. Large firms are able to cross subsidise one market from profits elsewhere
• 2. In a recession, markets are more competitive as firms seek to retain customers

However, price wars may only be short-term

A firm may engage in predatory pricing ; this occurs when the incumbent firm seeks to force a new firm out of business by selling at a very low price so that it cannot remain profitable.

Using game theory

Game theory looks at different possible outcomes of oligopoly – depending on how firms react to different decisions.

If the firms in oligopoly seek to increase market share the most likely outcome is that they both set low prices and make a low profit (£3m each) However if the firms could come to some agreement either formal or tacit collusion – they could both agree to raise prices. This will require the firms to reduce output and stick to the more limited supply. If they set high prices, then they will both be able to make monopoly profits (£8m each)

However, when prices are high, there is a temptation to undercut your rival and benefit from both high market prices and high output. This enables higher profit – £10m, but if firms start to cheat – then rivals are likely to retaliate by cutting prices too.

Collusion is possible in oligopoly, but it depends on several factors. Collusion is more likely if

1. There are a small number of firms, who are well known to each other – this makes it easier to stick to output quotas 2. A dominant firm, who is able to have a lot of influence in setting the price. 3. Barriers to entry, this is important to stop other firms entering to take advantage of the high profits 4. Effective communication and monitoring of output and costs 5. Similar production costs and therefore will want to raise prices at the same rate 6. Effective punishment strategies for firms who cheat 7. No effective government legislation, e.g. collusion is illegal in the UK.

Conclusion:

There is no certainty in how firms will compete in Oligopoly; it depends upon the objectives of the firms, the contestability of the market and the nature of the product. Some oligopolies compete on price; others compete on the quality of the product.

Examples of Competition in oligopoly

Petrol is a homogenous product and so is likely to be quite stable in prices. Firms often move petrol prices in response to changes in the oil price. However, the introduction of the supermarket own brand petrol has changed the market. Tesco and Sainsbury’s are more willing to sell cheaper petrol to attract customers to shop at their supermarket.

Coffee market

This takeaway coffee at 99p is quite cheap – suggesting a competitive oligopoly. However, for many customers, the price of coffee is secondary to the quality and environment of the coffee shop. Traditional coffee shops like Costa and Starbucks use more non-price competition to attract customers – as much as offering cheap prices.

In fact, there is a danger selling cheap coffee – may indicate to consumers lower quality.

How firms compete in general

See more – How firms compete

• Pricing strategies

Oligopoly Notes & Questions (A-Level, IB)

Relevant Exam Boards: A-Level (Edexcel, OCR, AQA, Eduqas, WJEC), IB, IAL, CIE Edexcel Economics Notes Directory | AQA Economics Notes Directory | IB Economics Notes Directory

Oligopoly Definition: An Oligopoly is a market structure where only a few sellers dominate the market.

Oligopoly Examples & Explanation: Because there are only a few firms (players) in an Oligopoly, they tend to be highly interdependent of one another – meaning they will take in account each others’ actions when trying to compete in the market. Another characteristic is these markets also exhibit high barriers to entry, such that new firms cannot easily enter into the market. This characteristic is shared with Monopolies (one firm dominating) and Duopolies (two-firms dominating), explaining how they can dominate the market with large amounts of market share. If we consider the oil & gas industry, they tend to be an Oligopoly in most countries (think Shell, BP, Exxon) due to the huge capital investment required for oil exploration/mining, making it difficult for new producers to enter into the market. When a large oil/gas producer sells their oil at a lower price to increase their sales volume, other producers are likely to lower their prices as well to protect their share of the market. As a result, Oligopolies tend to keep market prices stable and focus on non-price competition, so that firms can avoid a price war. However, the negative oil prices from the coronavirus pandemic is also caused by other factors, including a lack of storage capacity for oil producers forcing them to sell, and a global lack of demand for oil during the crisis. In general, oil producers in OPEC agree on an amount of output to maintain a relatively high price for oil, meaning higher profits for the industry.

Oligopoly Economics Notes with Diagrams

Oligopoly video explanation – econplusdal.

The left video explains oligopoly and the kinked-demand curve, the right looks at competition and cartels in the oligopoly market structure.

Oligopoly Multiple Choice Questions (A-Level)

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What Is an Oligopoly?

Understanding oligopolies, special considerations.

• Characteristics
• Game Theory
• Pros and Cons

The Bottom Line

• Government & Policy

Oligopoly: Meaning and Characteristics in a Market

An oligopoly is a type of market structure that exists within an economy. In an oligopoly, there is a small number of firms that control the market. A key characteristic of an oligopoly is that none of these firms can keep the other(s) from having significant influence over the market. The concentration ratio measures the market share of the largest firms. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others. An oligopoly is different from a monopoly, which is a market with only one producer.

Key Takeaways

• An oligopoly is a market structure wherein a small number of producers work to restrict output and/or fix prices so they can achieve above-normal market returns.
• Economic, legal, and technological factors can contribute to the formation and maintenance, or dissolution, of oligopolies.
• The major difficulty that oligopolies face is the prisoner's dilemma that each member faces, which encourages each member to cheat.
• Government policy can discourage or encourage oligopolistic behavior, and firms in mixed economies often seek government blessing for ways to limit competition.

Investopedia / Ellen Lindner

Market structures come in different forms and sizes. The term is used to describe the distinctions between industries, which are made up of different companies that sell their products and services. Most market structures aim for perfect competition , which is a theoretical construct that doesn't actually exist, As such, there are other structures that

These market structures are made up of a small number of companies within an industry that controls the market. Firms in an oligopoly set prices , whether collectively—in a cartel —or under the leadership of one firm, rather than taking prices from the market. Profit margins are thus higher than they would be in a more competitive market. 

Some of the barriers to entry (that prevent new players from entering the market) in an oligopoly include economies of scale , regulatory barriers, accessing supply and distribution channels, capital requirements, and brand loyalty.

Oligopolies in history include steel manufacturers, oil companies, railroads, tire manufacturing, grocery store chains, and wireless carriers. The economic and legal concern is that an oligopoly can block new entrants, slow innovation, and increase prices, all of which harm consumers.

Governments sometimes respond to oligopolies with laws against price- fixing and collusion. Yet, a cartel can price fix if they operate beyond the reach or with the blessing of governments. Oligopolies that exist in mixed economies often seek out and lobby for favorable government policy to operate under the regulation or even direct supervision of government agencies.

The main problem that firms in an oligopoly face is that each firm has an incentive to cheat. if all firms in the oligopoly agree to jointly restrict supply and keep prices high, then each firm stands to capture substantial business from the others by breaking the agreement and undercutting the others. Such competition can be waged through prices, or through simply the individual company expanding its own output brought to market. 

Companies in an oligopoly benefit from price-fixing, setting prices collectively, or under the direction of one firm in the bunch, rather than relying on free-market forces to do so.

Oligopoly Characteristics

Oligopolies are considered stable. One of the main reasons why they are is because participating firms need to see the benefits of collaboration over the costs of economic competition, then agree to not compete and instead agree on the benefits of cooperation.

The firms sometimes find creative ways to avoid the appearance of price-fixing , such as using phases of the moon. Price-fixing is the act of setting prices, rather than letting them be determined by the free-market forces. Another approach is for firms to follow a recognized price leader so that when the leader raises prices, the others will follow .

The conditions that enable oligopolies to exist include high entry costs in capital expenditures , legal privilege (license to use wireless spectrum or land for railroads), and a platform that gains value with more customers, such as social media.

The global tech and trade transformation has changed some of these conditions. For instance, offshore production and the rise of mini-mills have affected the steel industry. In the office software application space, Microsoft ( MSFT ) was targeted by Google Docs, which Google funded using cash from its web search business.

Oligopolies and Game Theory

Game theorists have developed models for these scenarios, which form a sort of prisoner's dilemma . When costs and benefits are balanced so that no firm wants to break from the group, it is considered the Nash equilibrium  state for oligopolies. This can be achieved by contractual or market conditions, legal restrictions, or strategic relationships between members of the oligopoly that enable the punishment of cheaters.

Maintaining an oligopoly and coordinating action among buyers and sellers in general on the market involves shaping the payoffs to various prisoner's dilemmas and related coordination games that repeat over time.

As a result, many of the same institutional factors that facilitate the development of market economies by reducing prisoner's dilemma problems among market participants, such as secure enforcement of contracts, cultural conditions of high trust and reciprocity, and laissez-faire economic policy, might also potentially help encourage and sustain oligopolies.

Advantages and Disadvantages of an Oligopoly

One of the main benefits of having an oligopoly is that competition is very limited. That's because there are very few players in the market. Since there are few competitors, an oligopoly allows those who participate to net a higher amount of profits .

Customer demand is often greater in this type of market structure. This is commonly due to the fact that there are better products and services that are on the market. As such, firms don't skimp on quality as they want to retain or increase brand loyalty .

Customers can expect better customer service and better pricing for products and services from the firms in an oligopoly because of the small number of participants.

Disadvantages

Oligopolies come with higher barriers to entry for new participants. This means that it can be difficult to enter the market because of the high costs associated with doing business, the regulatory environment, and the problems that arise when it comes to accessing supply and distribution channels .

Because of the lack of competition, there may be very little incentive to innovate product and service offerings. With no diversity in offerings, consumers remain loyal to what they know best.

Although there may be more quality products on the market, consumers often have little choice available to them. This means they can only rely on a small pool of goods and services on which to spend their money.

Limited competition

Higher profits for companies

Greater consumer demand

Higher quality products and services

Better customer service and pricing

High barriers to entry for new participants

Lack of innovation

Very little choice for consumers

Example of an Oligopoly

There are many examples of oligopolies in the market. But one of the major examples of a global oligopoly is the Organization of the Petroleum Exporting Countries (OPEC) . The organization was founded in Baghdad in 1960 with five countries but expanded to 13 oil-producing countries in 1975.

One of the main reasons why OPEC is considered an oligopoly is because it has no overarching authority. Every member nation within the group also has a substantial portion of the group's market share. These countries also have a great deal of power together (not separately) when it comes to supply and demand issues and pricing. So when the group lowers its supply as demand drops, prices rise. The opposite is true when demand rises.

What Are Some Negative Effects of an Oligopoly?

An oligopoly is when a few companies exert significant control over a given market. Together, these companies may control prices by colluding with each other, ultimately providing uncompetitive prices in the market. Among other detrimental effects of an oligopoly include limiting new entrants in the market and decreased innovation. Oligopolies have been found in the oil industry, railroad companies, wireless carriers, and big tech.

What Is an Example of a Current Oligopoly?

One measure that shows if an oligopoly is present is the concentration ratio, which calculates the size of companies in comparison to their industry. Instances where a high concentration ratio is present include mass media. In the U.S., for example, the sector is dominated by just five companies: NBC Universal; Walt Disney; Time Warner; Viacom CBS; and News Corporation—even as streaming services like Netflix and Amazon Prime begin to encroach on this market. Meanwhile, within big tech, two companies control smartphone operating systems: Google Android and Apple iOS.

Is the U.S. Airline Industry an Oligopoly?

With just four companies controlling nearly two-thirds of all domestic flights in the U.S. as of 2021, it has been purported that the airline industry is an oligopoly. These four companies are Delta Airlines, United Airlines Holdings, Southwest Airlines, and American Airlines. According to a report compiled by the White House, "reduced competition contributes to increasing fees like baggage and cancellation fees. These fees are often raised in lockstep, demonstrating a lack of meaningful competitive pressure, and are often hidden from consumers at the point of purchase." Interestingly, in 1978, The Airline Deregulation Act was imposed, which stripped away the Civil Aeronautics Board the ability to regulate the industry. Prior to this time, the airline industry operated much like a public utility, while fare prices had declined 20 years before the deregulation was introduced. 

There is no such thing as perfect competition in the market. But there are different market structures, including oligopolies. These types of markets are characterized by a small number of participating firms that work together to set prices. Companies benefit because there is very little competition while consumers are able to choose from better quality products and services.

Organization of Petroleum Exporting Countries. " Brief History ."

The White House. " Fact Sheet for Executive Order on Promoting Competition in the American Economy ."

Congress.gov. " S.2493 - Airline Deregulation Act ."

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• Clayton Antitrust Act of 1914: History, Amendments, Significance 4 of 24
• Sherman Antitrust Act: Definition, History, and What It Does 5 of 24
• Robinson-Patman Act Definition and Criticisms 6 of 24
• How and Why Companies Become Monopolies 7 of 24
• Discriminating Monopoly: Definition, How It Works, and Example 8 of 24
• What Is Price Discrimination, and How Does It Work? 9 of 24
• Predatory Pricing: Definition, Example, and Why It's Used 10 of 24
• Bid Rigging: Examples and FAQs About the Illegal Practice 11 of 24
• Price Maker: Overview, Examples, Laws Governing and FAQ 12 of 24
• What Is a Cartel? Definition, Examples, and Legality 13 of 24
• Monopolistic Markets: Characteristics, History, and Effects 14 of 24
• Monopolistic Competition: Definition, How it Works, Pros and Cons 15 of 24
• What Are the Characteristics of a Monopolistic Market? 16 of 24
• Monopolistic Market vs. Perfect Competition: What's the Difference? 17 of 24
• What are Some Examples of Monopolistic Markets? 18 of 24
• A History of U.S. Monopolies 19 of 24
• What Are the Most Famous Monopolies? 20 of 24
• Monopoly vs. Oligopoly: What's the Difference? 21 of 24
• Oligopoly: Meaning and Characteristics in a Market 22 of 24
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• Oligopolies: Some Current Examples 24 of 24

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An oligopoly is a market in which a few firms dominate, and an oligopolist is one of these dominant firms. While 'a few' is an imprecise number, economists generally look at the market shares of the top three, four or five firms - if these firms control most of the market, then the firms are oligopolists.

How is the degree of oligopoly measured?

Concentration ratios.

Concentration ratios (or CRs) can be used to help identify whether the firm operates under conditions of oligopoly. Concentration refers to the extent to which market power is in the hands of a small number of firms. Concentration ratios show the combined market shares of the top few firms as a ratio of the total market size, expressed as a percentage.

When markets are highly concentrated the conduct of firms and their efficiency is likely to be sub-optimal. [Read more on market structure and conduct .]

For example, the global music shares of the top producers are:

Universal Music, 31% Sony Music, 21% Warner Music, 18% Independents, 27% Artists Direct, 3% Source: MIDIA (2019),

This makes the three-firm CR 70% - indicating oligopoly conditions.

The H-H Index

he Herfindahl–Hirschman Index (HH-Index) is an alternative measure of market concentration in an industry. It is calculated by adding the squared market shares of the top few firms in a market. The higher the number, the greater the degree of concentration.

The maximum figure possible is for a single monopolist, which is 100 (%) x 100 (%) = 10,000 .

For example, let's assume that the market shares of the largest three firms in a hypothetical market are: Firm A = 35%, Firm B = 25%, and Firm C = 20%.

The H-H Index would give 35 2 + 30 2 + 25 2 , which equals:

1,225 + 625 + 400 = 2350 .

Example - UK Supermarkets

The top four UK supermarkets in 2022 by market share were Tesco, with 26.9%, Sainsbury, with 14.6%, ASDA with 14.1%, and Morrisons, with 9.1%. 

The H-H Index for the top four supermarkets in the UK in 2022 was 1222.

Generally, an H-H Index of more than 1200 indicates a high degree of concentration and suggests the market is an oligopoly.

Read more: Changing concentration in the UK electricity market

Key characteristics and features of oligopoly

Firms are interdependent.

As there are only a few other competitors in the market, the profit available to a single oligopolist is constrained by the actions and decisions taken by the other firms in the market.

For example, if one oligopolist - firm A - decides to reduce its price in the hope of gaining market share, and the two other firms in the market - B and C - also reduce their prices in response, firm A's strategy will have been thwarted.  An oligopolist needs to anticipate and respond to the actions and behaviour of rivals. The need to take rivals into account when making decisions is referred to as mutual interdependence .

Uncertainty

Given the importance of interdependence, oligopolists face high levels of uncertainty, perhaps never being able to fully predict the behaviour of close rivals. This explains the temptation to reduce competition and the attempt to co-operate with close rivals to reduce uncertainty.

The importance of strategy

As a result of interdependence, oligopolists must try to anticipate the likely response of rivals to any change in policy concerning price or to non-price decisions. Non-price decisions include decisions about the product itself, how it is distributed, how it is marketed and advertised.

Strategy is especially important for oligopolies that cannot easily differentiate their good or service, such as petrol retailers. If they can differentiate, they become less interdependent and more able to act independently.

Differentiated or undifferentiated?

Oligopolists may operate in markets where differentiation is difficult - such as the market for refined white sugar, or where differentiation is much easier - such as oligopolists in the motor manufacturing industry.

Competition or collusion?

It follows that a key feature of oligopolies is that key decisions must be made about whether firms actively compete with each other, or whether they limit competition. Competition can be reduced when firms collude with each other and act jointly to enable all firms to reduce uncertainty and increase the level of profits (or other benefits) available to the 'group' of firms.

Types of collusion

Oligopolists can engage in overt (open) collusion by establishing an agreement to reduce competition or to collaborate in some way. For example, members of cartels may create agreements to fix output or price, or other aspects of the market. While 'overt' collusion to fix prices is clearly anti-competitive, and therefore unlawful in most countries, other forms of collusion may be hidden and difficult to legislate for, and to police.

Covert collusion arises when oligopolists conspire to 'rig' a market by having agreements which are hidden and secret. In some cases, members may 'whistle-blow' in the hope that they may avoid any punishment if the collusion is discovered by the relevant competition authority. This is more likely if authorities offer incentives to whistle-blow.

Tacit collusion arises when firms appear to adopt a similar policy on price or non-price aspects of their business, but there is no agreement between them. This may not involve any collusion in the legal sense, and need not involve communication between firms. However, the outcomes (such as higher prices or reduced output) may well resemble those that arise from explicit collusion.

Tacit collusion may arise when firms follow rules which are understood rather than written down. For example, in an oligopoly market with three firms, it may be understood that firm A takes the lead in making a change to price, or to a non-price activity, and firms B and C simply follow the lead. This arrangement is not written and there may be no conscious attempt to rig the market. Price leadership is arguably the commonest form of tacit collusion - in this case, there is no conspiracy to act unlawfully.

From a legal perspective, anti-trust law is concerned with the process of collusion, rather than the outcome, and there must be a conscious commitment to achieve an unlawful outcome.

Types of competition

Oligopolists may prefer to compete, rather than collude, especially if the penalties for anti-competitive behaviour are significant (such as fines, being forced to wind-up, or loss of reputation if discovered.)

Competition can either involve competing on price - price competition - or competing in non-price ways - non-price competition .

For the oligopolist, price competition is risky as it can lead to retaliation, and to a price-war which can lead to falling profits for all firms in the industry. This explains the preference for non-price competition . For example, rather than compete on the price of their core product (petrol/'gas'), petrol retailers may compete through special promotions, through advertising, and by developing a respected brand.

Pricing strategies can also be introduced that reduce competition, such as cost-plus pricing . Cost-plus pricing exists when the oligopolist sets a selling price as a fixed mark-up above average production costs.

For example, insurance companies may set a fixed 20% mark-up above all their costs, including all the predicted claims costs. If all insurance companies share similar costs, then any sudden change in costs - such as following a particularly harsh winter, will result in all insurance companies raising their prices (called premiums) by the same or a very similar amount.

Barriers to entry

Oligopolists can maintain their relative dominance by benefitting from barriers to entry. These include expenditure on advertising and the strength of the brand in deterring entry; the benefit of economies of scale ; collusion between oligopolists; and pricing strategies to deter entry, such as limit pricing - setting a low price to limit the entry of new firms.

Read more on barriers to entry

Price-stickiness - the oligopolists kinked-demand curve

Prices in oligopolistic markets tend to 'stick' - often for lengthy periods - even when market conditions change. This can be explained though the kinked-demand curve .

The oligopolist faces two demand scenarios:

Firstly, when demand is elastic following a price rise , and secondly when demand is inelastic in response to a price drop .

In both scenarios, the firm is worse off - at least in terms of revenue. Raising price creates an elastic reaction, and lowering price creates an inelastic reaction. In both case, revenue is less than achieved at the original price.

Profits will also be maximised at the original price

Profit maximisation occurs where marginal cost (MC) cuts marginal revenue (MR). For the oligopolist, this may occur in the vertical section of the MR curve, between A and B. The level of profit depends upon the position of the ATC curve.

Once price is set, the kinked demand curve implies that the price sticks at P.

Even when we factor in the possibility of cost changes, the price will stick at its original level. Changes in costs have no effect at all if MC remains between A and B (the discontinuous portion of the oligopolist's MR curve). Even when MC moves outside of this range, price hardly changes.

Price stickiness and interdependence can also be explained through Game Theory .

Integration

Oligopolists tend to emerge over time through integration with other firms.

Integration can either be horizontal - between firms at the same stage of production (such as two airlines merging) - or vertical, which involves the integration of firms from different stages in production.

Vertical integration can be in one of two directions - backward, where one firm integrates with a firm which is nearer to the source of supply (such as a TV company purchasing a soccer team) or forward, which is where a producer integrates with a firm nearer to the final consumer (such as a farmer acquiring a grocery store.)

Numerical example

Why the oligopolist's demand curve is 'kinked' is a question that can be appreciated by considering a cost-revenue schedule.

Here we can see that the firm's average revenue curve falls with quantity, but because there are two different reactions to price - elastic for a rise, and inelastic for a fall - there is a kink in the demand (AR) curve and the MR curve will have a discontinuous portion (between output 6 and 7, as highlighted in the schedule).

The elastic response to the price rise results from rivals not changing their price in response, whereas the inelastic response to a price drop results in rivals being forced to 'follow suit' given that rivals would experience a considerable fall in market share if they did not reduce price.

If we transfer the figures to a graph we arrive at the classic kinked demand curve. Profits are maximised at output 6 (and price 75), which is where marginal cost (MC) equals marginal revenue (MR).

The area for super-normal profits is also highlighted.

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Characteristics of oligopoly

Few large dominant firms There are a small number of dominant firms within the market and therefore the market is likely to have a high concentration ratio.

High barriers to entry and exit

There are high barriers to entry and exit within oligopolistic industries. This is often due to high startup costs which can be seen in oligopolistic industries such as the airline industry. For example, it costs hundreds of millions of pounds to buy several airplanes and therefore this is a massive barrier to entry for firms trying to enter the market. In addition to this, there is a high level of sunk costs for firms if they were to leave the market, thus acting as a barrier to exit. For example, in the smartphone industry lots of money is spent on advertising, product development and market research. When a phone company exits the market, these cost cannot be recovered. Therefore, phone companies tend to stay in the market for as long as possible which would be in contrast to a company in an industry with lower sunk costs.

High concentration ratio There are several types of concentration ratio depending upon the number of firms included within the calculation. For example. A 4-firm concentration ratio takes the combined market share of the 4 biggest firms within the industry which is then expressed in relation to the overall market share. Therefore it can be concluded that a higher concentration ratio reflects lower levels of competition and a lower concentration ratio reflects higher levels of competition. A 5-firm concentration ratio would a similar calculation but instead would include the top 5 firms and 4-firm concertation ratio would be a similar calculation but would include only the top 4 firms etc etc. Oligopolistic industries such as the airline industry have high concentration ratios as they are dominated by only a small number of firms.

Interdependence of firms Firms changing their prices within an oligopoly market structure need to consider the reaction of competitors. For example, firms within the market often lower their prices as soon as another firm does and therefore the overall revenue gained by firms within the market fall. As a result of this interdependence, prices within the market are often very rigid.

Product differentiation As there is product differentiation within the oligopoly market structure, firms have the ability to set prices. Therefore both average revenue and marginal revenue are downwards sloping on the oligopoly diagram.

Non-price competition Firms operating within an oligopoly market structure tend to compete through non-price mediums such as advertising. This can be seen in the mobile phone industry by big companies such as Samsung and Apple. Although both phones may be more expensive than similar alternatives, the strong brand they’ve created gives them a competitive advantage.

Firm’s profits maximize Firms operate at the point where marginal cost is equal to marginal revenue.

Kinked demand curve

Firm’s within an oligopoly are profit maximizers and therefore produce at the point where marginal cost is equal to marginal revenue. This gives a price level of P1 and a quantity of Q1. The kink in the demand curve shows the price rigidity and interconnectedness of firms within an oligopoly market structure. Above the price level of P1 the demand/average revenue curve turns more elastic. This means that if firms were to increase their prices above P1, the change in quantity demand would be greater than the change in price level. Therefore, the firm’s total revenue and profit would decrease. On the other hand, the demand/average revenue curve becomes slightly inelastic below the price level P1. This is due to the interconnectedness of firms within oligopolistic markets, meaning that if one firm reduces their prices, so will all of the other firms within the market. Therefore, demand is relatively inelastic below P1 as they would gain no price advantage as competitors would also drop their prices (the percentage change in quantity will be less than proportional to the change in price). This means by doing so all firms suffer a decrease in total revenue and profit As a result of this, the market price tends to be very rigid and instead, firms compete through non price means such as advertisement.

Another key characteristic of the kinked demand diagram is the discontinuity that occurs in the marginal revenue curve. As a result of this discontinuity, firms will still keep a price of P1 regardless of a marginal cost increase given that it is within the vertical discontinuity. This is shown on the diagram where marginal cost increases from MC1 to MC2 whilst firms still operate at a price level of P1. Again this shows the price rigidity of oligopolistic markets as well as the disincentive for firms to raise or lower their prices given the elasticity changes before and after the kink in AR.

Calculation of n-firm concentration ratios

4-firm concentration ratio example:

Find the top 4 biggest firms

Firm A – 20%

Firm B – 14%

Firm C – 6%

Firm D – 15%

Firm E – 4%

Firm F – 16%

Firm G – 3%

Add the market share of the four firms together

Firm D -15%

Firm B – 14%

4-firm concentration ratio = 65%

This figure tells us that the top 4 firms within the industry make up 65% of the total market share. A 4-firm concentration ratio of around 60% usually indicates that the industry is oligopolistic. A 4-firm concentration ratio of 0-50% usually indicates a perfectly competitive market. If a single firm has a concentration ratio of 100% then this is considered a pure monopoly. However, in the UK any single firm that has a market share of 25% or more is considered a monopoly.

Simple game theory

Game theory is used to demonstrate the interdependence of firms and price rigidity within an oligopoly market structure. It does this by showing a firm’s decision given the expected reaction of a competitor.

For example, firm A and firm B both have a choice whether to increase their prices, or decrease them. The figures in the box represent the profit that each firm will make given their choice. Firm B’s profit is represented by the value on the right hand side, whereas firm A’s decision is on the left hand side.

If firm B decided to raise its prices and firm A reacts by raising their prices also, then both firms would make £20 million profit.

If firm B decided to raise its price and firm A reacted by lowering their price, firm B would make £10 million, whereas Firm A would make £24 million.

On the other hand, if firm A were to raise their price and Firm B where to lower their price then Firm A would make £10 million and firm B would make £24 million.

Furthermore, if Firm A were to lower their price and Firm B were to also lower their price, both firm’s would make £15 million.

Given the fact that the reaction to either firm increasing their price would be the competitor lowering their price, the best outcome for both of them given their expected reactions would be £15 million each. This is known as the nash equilibrium. Although £15 million is the best outcome for them both given their expected reactions, the most efficient outcome for both firms would be for both of them to raise their prices. By doing so they could both earn £20 million each. However, for this to occur there needs to be collusion from both firms in order to stop the competitor from lowering their prices given the firm’s decision to raise their price. Collusion often results in monopoly outcomes for consumers as they can now charge whatever they want without having to worry about competitors offering lower prices. Therefore, overt collusion is illegal. Although this is the case, tacit collusion is still legal. Both of these forms of collusion are explained below.

Types of collusion

Tacit collusion

This is known as informal collusion and often originates from price leadership. If there is a dominant firm within the market then other firms will follow their prices. This is because the dominant firm benefits from large economies of scale and therefore cannot be beaten price wise by the smaller firms. Therefore, all the smaller firms follow the prices that the price leader sets.

Overt collusion

This occurs when firms within the market get together in order to formally set the market price for a good/service. As a result of this, firms are able to set prices similar to those within a monopoly market structure and therefore make large amounts of profit. Due to the extortionate prices and uncompetitive outcomes (poor quality goods, poor customer service etc) that this leads to, overt collusion is banned within the UK as well as in many other countries.

Reasons for collusive behavior

Small number of firms

If there are only a small number of firms within the market, it is easy for firms to get together with the intention to collude.

Similar costs

If firms within the market have similar costs then it is less likely that one firm will have an advantage over another firm. Therefore, all firms within the market have more incentive to collude than to try and get ahead of competitors through means such as price wars. In addition to this, it is much easier for firms to agree on the fixed price that is to be set. This is because firms within the market have very similar profit margins.

High entry barriers

If there are high barriers to entry within a market then firms do not have to worry about firms entering the market in the long run due to the large amounts of supernormal profit that they make. As potential new entrants in to the market will be put off by the high entry barriers, firms are able to keep making supernormal profits within the long run. Therefore, there is more incentive to collude knowing that they will be able to maintain the supernormal profit made through collusion in the long run.

Ineffective competition policy

If the competition policy is ineffective and less stringent, then firms within the market are more likely to get away with collusion. Therefore, there is more incentive for firms to collude.

Consumer loyalty

Firms are less likely to cheat on a collusive deal if consumer loyalty is high. This is because regardless of the lower price level offered by the competitor that broke the deal, customers will continue to shop at their existing firm. This means that little revenue will be made by the firm through undercutting the fixed price agreed upon. Therefore any collusive deals made are more likely to stay intact.

Reasons for non-collusive behavior

Large number of firms

When there are a large number of firms within the market it can be difficult to organize collusion.

Low barriers to entry

Market structures that have low barriers to entry usually don’t make supernormal profits in the long run due to the fact that other firms see these supernormal profits and enter the market, removing supernormal profit in the long run. This is the same reason why firms that are in markets with low barriers to entry are less likely to collude. The large amounts supernormal profit that would be made by firms through collusion will be removed in the long run as more firms enter the market.

Cost advantage

If one competitor has a large cost advantage then there is no need for them to collude. This is because they… Read more

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Home — Essay Samples — Economics — Oligopoly — A Research Paper On Oligopoly, Its Characteristics And Effects

A Research Paper on Oligopoly, Its Characteristics and Effects

• Categories: Economic System Oligopoly

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Words: 2046 |

11 min read

Published: Nov 22, 2021

Words: 2046 | Pages: 4 | 11 min read

Table of contents

Introduction, theoretical reviews, effects on the market, advantages and disadvantages of oligopoly.

• High profits: Due to the small number of firms in an oligopoly, the firms can have high profits because of the low competition. The products or services under control of oligopolies are usually high in demand.
• Simple and few choices: Consumers have the ability to carefully choose the product they desire because its easier to compare them in this type of market. In other markets with big competitors, the price ranges and product differentiation makes it difficult for the consumer to choose.
• Competitive pricing: Usually the only differentiation between the products is the price, this causes the firms to lower their prices in order to compete with other similar firms. This is great for the consumers as prices will eventually lower.
• Advancement in products: Due to the number of competitors and product similarities in oligopoly, advancement in products is seen very often in this type of market because each firm is trying their best to get gain the loyalty and trust of the customers in the market.
• Difficulty of entry: It is very hard for a new firm to enter an oligopoly market because usually the market is already controlled by other well-known firms who already have the customers’ loyalty and the price control advantage.
• Fixed prices: Pricing strategies are used in an oligopoly market but the difference in the prices of products are rarely far apart. This is because the firms in the market agree upon a fixed price for the products or services. Fixed prices in markets usually mean firms have control over consumers and this causes consumers to pay more.
• Less choices: Consumers have limited options between the products and services they want.
• No fear of competition: Firms in an oligopoly market usually aren’t motivated to come up with new products or ideas because they control the market with other firms.

The Cournot Model

The prisoner’s dilemma, oligopoly markets in uk, cartel theory of oligopoly.

• Oligopoly. (n.d). Retrieved from: https://www.investopedia.com/terms/o/oligopoly.asp [Accessed 11th May 2018]
• N. Gregory Mankiw and Mark P. Taylor (2010) Economics. Special edition. Singapore. Stephen Wellings. Ian G. (2018) What is Oligopoly effects? Available at: https://www.chegg.com/tutors/what-is-Oligopoly-Effects/ [Accessed date 12th May 2018]
• Courtnot Competition (n.d). Available at: https://www.investopedia.com/terms/c/cournot-competition.asp [ Accessed date 12th May 2018]
• Cartel theory of oligopoly (2017). Available at: https://www.cliffsnotes.com/study-guides/economics/monopolistic-competition-and-oligopoly/cartel-theory-of-oligopoly [ Accessed date 13th May 2018]
• Eshna (2016) Market structures. Available at: https://uk.simplilearn.com/market-structures-rar188-article [Accessed date 13th May 2018]
• Vanshika Gho (2016) Kinked demand curve model of Oligopoly. Available at: http://www.economicsdiscussion.net/oligopoly/kinked-demand-curve-model-of-oligopoly-with-diagram/24162 [Accessed date 13th May 2018]
• N. Gregory Mankiw (1991) Principles of microeconomics. 1st edition. United States. Ted Buchholz.

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Economic Analysis of the Cell Phone Oligopoly Essay

Oligopoly competition, oligopoly price determination, demand elasticity in oligopolistic markets, game theory in oligopolistic markets, profit maximization in oligopolistic structures, oligopolistic markets benefits and disadvantages.

An oligopoly is a market type in which an industry is controlled by a small number of sellers / firms and their products are either homogeneous or are differentiated (Riley, 2006). Market participants usually predict the actions of the competitor. Cell phone industry is a good example of an oligopolistic market structures since the number of organizations serving the industry is small.

The industry is dominated by organizations such as Nextel/Sprint and Verizon among others. Existence of oligopolistic markets structures exists in markets where there are large initial capital requirements, scarcity of growth opportunities and due to government regulations.

The paper will focus on the nature of oligopoly market in cell phone industry. Essentially, it brings forth how firms in the industry compete, how prices are determined, effects of demand elasticity on competition, and the application of the game theory. In addition, the essay discusses the equilibrium point of maximizing profits, advantages and disadvantages of the market structure.

Oligopoly market structures are characterized by few large suppliers, the products are differentiated or homogeneous and the firm in the industry is driven by self-interest to set prices and output levels to maximize profits. Cell phone industry is of kind where products offered by the players are homogeneous and the competition is judged by the price determination.

According to Thomas & Charles (2007), the decisions of one company influence the decisions of competitors and also decisions of competitors influence decisions of a company. Generally competition in the industry takes three forms. These are;

• Free competition and one company become a price leader
• Larger firms becomes price setters and /leaders while smaller ones become the price-taker.
• Cartel system exists where firms collude to agree on prices to surpass stiff competition.

Generally, the ability of the firm to dominate the market and have probability of control is determined by the economies of scale. This implies that organizations that take advantage of economies of scale in the oligopolistic markets will set lower prices and produce larger quantities becoming cost and price leaders (Thomas & Charles, 2007).

Conversely, two or more firms in the industry might collude to lessen the level of competition by forming cartels. In this case, small firms will be denied entry and if exist remain as price takers. Typical case in the cell industry is where dominant firm such as Verizon takes lead in making prices and impacts the price decisions on the small firms thus becoming price leader.

If an industry is composed of few cell phone firms each selling identical or homogenous products and having powerful influence on the total market, the price and output program of each is likely to affect the other significantly. This will consequently promote collusion ending to industry cartels.

In case there is product differentiation, an oligopolistic firm can raise or lower prices without any fear of losing customers or immediate reactions from his rivals (Thomas & Charles, 2007). However, intense competition among them may build up a condition of monopolistic competition. For an individual company in oligopolistic competition, prices are determined as illustrated by the following graph.

MC is the marginal costs; MR is the marginal revenues, while AC is the average costs. From the graph, profits are maximized when the marginal cost equals marginal revenues a point noted as equilibrium point (Anon, 2006). The industry faces two demand curves that are normal demand curve and marginal revenue curve that also act as a demand curve. At low prices, the firm faces fairly inelastic market demand.

The two market demand curves produce point p which is the firms’ price and maximum revenue point. Therefore, the market demand curve that the oligopolistic structures actually face is the kinked-demand curve (Anon, 2006) . From the graph the kinked demand curve can be noted by points BCQ. Oligopolistic prices are determined where marginal costs intersect with marginal revenue curve.

Oligopolistic markets demand curve are mostly kinked as indicated by the above graph. If for instance, one company increases its price above the equilibrium price p, it is assumed that the other firms in the industry will change their prices to affect the market price dynamism.

Alternatively, if one firm change prices and it assumes the role of price leadership other companies will be price takers ( Riley, 2006) . Ideally, the effect of price leadership and being price taker is caused by the kinked demand curve . In this case, firms will never change their prices in the short run since a small change may make companies loss customers.

Normally, firms in the industry assume price increases, as a strategy to achieve larger market share with lower prices advantages. Moreover, the elasticity will create small gain of customers if prices are largely decreased. This will consequently result into a price war among firms or industry developing cartels. In such case, in the long run new entrants will often enter the industry.

Shah, nd, indicates that game theory exists in oligopolistic structures and refers to approaches to gain a competitive position in terms of moves and counter interchanges. The strategic approach takes three elements that include firms, strategies and payoffs.

Cell phone industry is common example where game theory exists. Organizations such as Verizon and Sprint acts as players, their decisions on pricing and promotions act as strategies while the payoffs are profits or losses they make from such strategic moves.

Essentially, firms in the cellphone industry which is oligopolistic market will choose strategies with better payoffs which will further contribute to competitive advantage in the market (Shah, nd).

In an oligopoly market, the profit in firm is maximized at a point where marginal revenue curves intersect marginal costs curve. Oligopoly marginal revenue is also a demand curve, and the point where average costs and the demand curve meet determine the maximum profits.

According to Riley (2006), “kinked demand curve model predicts periods of relative price stability under an oligopoly with businesses focusing on non-price competition as a means of reinforcing their market position and increasing their supernormal profits”. Therefore, profits are maximized at an industry level while firms enjoy suboptimal equilibrium.

Oligopolistic structures present a number of benefits and disadvantages to consumers. These are;

• Better quality of products and lower costs.
• Extended services to customers since firms fight to retain customers at all costs.
• High innovativeness and creativity on new products.
• Discounts and promotions are largely utilized by competition thus consumers get all the information regarding certain products.
• The contractual contacts usually exist between customers and producers.

Disadvantages

• Oligopolistic competition in most cases leads to collusion of firms to form cartels which erodes the participation of consumers in [prices determination
• The structure provide a platform of competition where prices a nd production is volatile. Prices are lowered and raised affecting buyer’s rationality.
• Alliance of various firms to form cartels further brings about stabilization of unsteady markets which is a disadvantage to the economy.

Anon. (2006). Oligopoly . Web.

Riley, G. (2006). Oligopoly market structures overview . Eton College. Web.

Shah, A. (nd). Game Theory: Oligopolies. Web.

Thomas, C. R. & Charles, M. S. (2007). Managerial Economics (10th Ed). New York City: McGraw-Hill Higher Education.

• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2024, February 23). Economic Analysis of the Cell Phone Oligopoly. https://ivypanda.com/essays/economic-analysis-of-the-cell-phone-oligopoly-essay/

"Economic Analysis of the Cell Phone Oligopoly." IvyPanda , 23 Feb. 2024, ivypanda.com/essays/economic-analysis-of-the-cell-phone-oligopoly-essay/.

IvyPanda . (2024) 'Economic Analysis of the Cell Phone Oligopoly'. 23 February.

IvyPanda . 2024. "Economic Analysis of the Cell Phone Oligopoly." February 23, 2024. https://ivypanda.com/essays/economic-analysis-of-the-cell-phone-oligopoly-essay/.

1. IvyPanda . "Economic Analysis of the Cell Phone Oligopoly." February 23, 2024. https://ivypanda.com/essays/economic-analysis-of-the-cell-phone-oligopoly-essay/.

Bibliography

IvyPanda . "Economic Analysis of the Cell Phone Oligopoly." February 23, 2024. https://ivypanda.com/essays/economic-analysis-of-the-cell-phone-oligopoly-essay/.

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Economics Model Essay 11

(a)   Explain how the different characteristics of the market structures of monopolistic competition and oligopoly affect pricing and output decisions. [10] (b)   Discuss whether the behaviour of oligopolistic firms is consistent with the objective of profit maximisation. [15]

Introduction

(a)   Market structure refers to the characteristics of a market such as the number of firms, the nature of their products, the availability of knowledge and the extent of barriers to entry which affect the behaviour of the firms in the market. The market structures of monopolistic competition (MPC) and oligopoly differ in terms of the number of firms, the extent of barriers to entry and the presence or absence of strategic interdependence which affect pricing and output decisions.

A firm will maximise profit when it produces the output level where marginal cost (MC) is equal to marginal revenue (MR).

In the above diagram, profit is maximised at Q 0 where MC is equal to MR. If the firm increases output from Q 0 , both total revenue and total cost will rise. However, at an output level higher than Q 0 , such as Q 1 , MC is higher than MR. Therefore, the increase in total cost will be greater than the increase in total revenue and hence the increase in output will lead to a decrease in profit. If the firm decreases output from Q 0 , both total revenue and total cost will fall. However, at an output level lower than Q 0 , such as Q 2 , MR is higher than MC. Therefore, the decrease in total revenue will be greater than the decrease in total cost and hence the decrease in output will lead to a decrease in profit. Since profit cannot be increased by changing output from Q 0 , it must be maximised at Q 0 . The profit is represented by the shaded area, assuming the firm is making supernormal profit.

MPC and oligopoly differ in terms of the number of firms which affects pricing and output decisions. MPC is a market structure where there are a large number of small firms each with a small market share selling differentiated products that are close substitutes. An example of MPC is the restaurant market. Due to the large number of firms in the market and hence the large number of substitutes, the demand for the good of an MPC firm is likely to be price elastic. Therefore, an MPC firm has limited market power as it is able to charge a price only modestly higher than its marginal cost.

In the above diagram, due to the elastic demand which gives rise to the relatively flat demand curve (D), the price (P 0 ) is modestly higher than the marginal cost (MC 0 ). In contrast, oligopoly is a market structure where there are a small number of large firms each with a large market share generally selling differentiated products. An example of oligopoly is the pharmaceutical market. Due to the smaller number of firms in the market and hence the smaller number of substitutes, the demand for the good of an oligopolistc firm is less price elastic. Therefore, an oligopolistic firm has greater market power as the difference between price and marginal cost is greater compared to an MPC firm.

MPC and oligopoly differ in terms of the extent of barriers to entry which affects pricing and output decisions. In MPC, there are low barriers to entry which means that firms can make only normal profit in the long run. In other words, low barriers to entry in MPC preclude an MPC firm from charging a price higher than its average cost. If the firms in an MPC market are making supernormal profit, potential firms will enter the market in the long run due to the low barriers to entry. As the number of firms in the market increases, the market demand will be split among a larger number of firms and hence the demand for the good produced by each firm will decrease which will lead to a fall in the price and the quantity resulting in a fall in the profits of the firms. This process will continue until the firms in the market make only normal profit.

In the above diagram, the supernormal profit represented by the shaded area induces potential firms to enter the market in the long run which leads to a leftward shift in the demand curve of each firm (D) from D 0 to D 1 resulting in a fall in the price (P) from P 0 to P 1 and a fall in the quantity (Q) from Q 0 to Q 1 . At P 1 which is equal to average cost (AC 1 ), as the firms in the market make only normal profit, the incentive for potential firms to enter the market disappears. In contrast, there are high barriers to entry in oligopoly which means that firms can make supernormal profit in the long run. Although the supernormal profit will induce potential firms to enter the market, the high barriers to entry will prevent them from entering. In other words, high barriers to entry in oligopoly allow an oligopolistic firm to charge a price higher than its average cost in the long run.

MPC and oligopoly differ in terms of the presence or absence of strategic interdependence which affects pricing and output decisions. In oligopoly, due to the small number of large firms and hence the large market share of each firm, the actions of one firm affect and are affected by the actions of the other firms in the market, and this is commonly known as strategic interdependence. When an oligopolist changes its price, it will have a significant effect on the other firms in the market. The rival firms will hence react by changing their prices which will affect the first firm. Therefore, when an oligopolist makes pricing and output decisions, it must take into consideration the reactions of the other firms in the market. In this sense, the pricing and output decisions of an oligopolist depend on the behaviour of competitors. In contrast, MPC firms are not strategically interdependent. In MPC, due to the large number of small firms and hence the small market share of each firm, the actions of one firm do not affect and are not affected by the actions of the other firms in the market. Therefore, the pricing and output decisions of an MPC firm do not depend on the behaviour of competitors.

In conclusion, MPC and oligopoly have different characteristics which have implications for pricing and output decisions.

(b)   The question on whether the behaviour of oligopolistic firms is consistent with the objective of profit maximisation can be discussed with reference to the concepts of non-price competition, third-degree price discrimination, research and development, tacit collusion and alternative objectives of firms.

The behaviour of oligopolistic firms may be consistent with the objective of profit maximisation as they typically engage in non-price competition instead of price competition. The theory of the kinked demand curve explains price stability in oligopolistic markets where there is no collusion. The theory of the kinked demand curve is based on two asymmetrical assumptions. First, if a firm in an oligopolistic market increases its price, its rivals will not follow suit because by keeping their prices the same, they can attract consumers from the firm. Accordingly, if a firm in an oligopolistic market increases its price, its quantity demanded will decrease by a larger percentage as consumers will switch from the firm to the rivals which will lead to a fall in revenue for the firm. Second, if a firm in an oligopolistic market reduces its price, its rivals will follow suit to avoid losing consumers to the firm. Accordingly, if a firm in an oligopolistic market reduces its price, its quantity demanded will increase by a smaller percentage as consumers will not switch from the rivals to the firm, which will lead to a fall in revenue for the firm. Therefore, oligopolists do not have the incentive to change their prices, assuming no substantial changes in the cost of production. The theory of the kinked demand curve can be illustrated with a diagram. A firm in an oligopolistic market faces a demand curve that is kinked at the equilibrium and the kink on the demand curve leads to a discontinuity on the marginal revenue curve.

In the above diagram, as the price (P) and the output level (Q) are P 0 and Q 0 , the marginal cost (MC) curve must be cutting the marginal revenue (MR) curve at the discontinuity. A change in the cost of production will lead to a shift in the MC curve. However, as long as the MC curve lies between MC’ and MC”, the price will remain constant and this explains price stability in oligopolistic markets where there is no collusion. As the theory of the kinked demand curve explains price stability in oligopolistic markets where there is no collusion, it suggests that oligopolistic firms should engage in non-price competition instead of price competition. In reality, oligopolistic firms typically engage in non-price competition instead of price competition. For example, telecommunications companies in Singapore do not undercut one another. Instead, they engage in non-price competition through product development and product promotion.

The behaviour of oligopolistic firms may be consistent with the objective of profit maximisation as they practise third-degree price discrimination when the necessary conditions are met. Third-degree price discrimination is the practice of charging different prices for the same good in different markets. For example, cinema operators charge different prices for the same movies to different groups of consumers. To practise third-degree price discrimination, a firm which has price-setting ability must be able to identify at least two distinct markets which differ in terms of their price elasticities of demand. In addition, it must be able to prevent consumers in the lower-priced market from reselling the good to consumers in the higher-priced market which is known as arbitrage prevention. Suppose that a good is sold in two different markets, market A and market B, at two different prices. Under third-degree price discrimination, profit will be maximised when the marginal revenue in market A (MR A ), the marginal revenue in market B (MR B ) and the marginal cost (MC) are equal. If MR A is not equal to MR B , profit can be increased by selling less of the good in the market with the lower MR and more of the good in the market with the higher MR. If MC is not equal to MR A and MR B , profit can be increased by changing the output level. The firm will charge a higher price in the market with the lower price elasticity of demand and a lower price in the market with the higher price elasticity of demand. In reality, oligopolistic firms practise third-degree price discrimination when the necessary conditions are met. For example, the price elasticity of demand for cinema movies is lower for adults due to their higher level of income and hence smaller proportion of income spent on the good compared to students. Therefore, cinema operators in Singapore charge a higher price to adults and a lower price to students for the same movie on weekdays.

The behaviour of oligopolistic firms may be consistent with the objective of profit maximisation as they typically engage in research and development. Firms are likely to experience an increase in profit if they engage in research and development. Research and development will lead to product innovations and process innovations. Product innovations will lead to higher product quality and better product features which will lead to higher demand and lower price elasticity of demand resulting in higher total revenue. Process innovations will lead to a better production technology which will lead to higher labour productivity resulting in lower total variable cost. Although total fixed cost will rise due to the cost of research and development, the increase is likely to be more than offset by the rise in total revenue and the fall in total variable cost resulting in an increase in profit. In reality, oligopolistic firms typically engage in research and development. For example, smartphone producers as such Apple and Samsung constantly engage in research and development to improve the quality and the features of their products.

The behaviour of oligopolistic firms may not be consistent with the objective of profit maximisation due to tacit collusion in the form of dominant firm price leadership. In dominant firm price leadership, the dominant firm which is the firm with the largest market share is the price leader and the rest of the firms are the price followers. The price leader will set the price and the price followers will take the price set by the price leader. The price followers will also follow any price increase or decrease by the price leader. Typically, the price leader will set the price which maximises its profit. However, as the price leader will reap more economies of scale than the followers due to its large scale of production as a result of its larger market share, the price which will maximise the profit of the price leader will not maximise the profits of the price followers. The price followers will take the price set by the price leader due to the fear of a price war rather than to maximise profit.

The behaviour of oligopolistic firms may not be consistent with the objective of profit maximisation as they may be pursuing other objectives such as market share maximisation, sales revenue maximisation and long-run profit maximisation. For example, if a firm is a new entrant, it may want to maximise market share to compete with the incumbent firms. In this case, although profit will not be maximised, the larger market share may ensure the survival of the new entrant. For example, when StarHub entered the telecommunications market in Singapore in 2000, it charged prices lower than those charged by the incumbent firms, namely SingTel and M1. The objective of StarHub was to induce mobile phone users to switch mobile network service providers so that it could capture sufficient market share to compete with SingTel and M1. To maximise market share, a firm should produce the output level where price is equal to average cost, assuming it wants to make at least normal profit.

In the above diagram, market share is maximised at Q MS where price (P) is equal to average cost (AC), assuming the firm wants to make at least normal profit. Beyond this output level, price is lower than average cost and hence a loss will be incurred.

In the final analysis, it is important for an oligopolistic firm to pursue the objective of profit maximisation in the long run, if not in the short run. An oligopolistic firm that pursues the objective of market share maximisation or sales revenue maximisation instead of profit maximisation in the long run is unlikely to have the financial ability to expand its scale of production to reap more economies of scale. This is likely to put its long-term survival in jeopardy as it is likely to constrain its ability to increase its cost-competitiveness and hence price-competitiveness. Furthermore, an unprofitable oligopolistic firm is likely to have difficulty in raising funds at a favourable rate as financial institutions and investors are likely to consider the firm a high default risk. This is likely to further constrain its ability to increase its cost-competitiveness and hence price-competitiveness. However, unlike a private oligopolistic firm, the objective of a state-owned oligopolistic firm need not be profit maximisation. Indeed, for a state-owned oligopolistic firm that produces an essential good or service, such as healthcare, the objective should be to ensure the affordability of the good as high prices of essential goods and services are likely to cause hardship for the people, especially low income households. For a state-owned oligopolistic firm that produces a non-essential good and service, the objective should be to maximise the welfare of society as failure to do so will lead to a loss of social welfare. This can be done by producing the allocatively efficient output level where the marginal social benefit is equal to the marginal social cost.

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• Economic Essays Grade 12

Grade 12 Economic Essays for the Next Three-Year Cycle (2021-2023)

• Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow)

Discuss in detail 'The new economic paradigm'/Explain the 'smoothing of cycles (Business Cycles)

Discuss in detail the features underpinning forecasting (Business Cycles)

Discuss in detail the main objectives of the public sector in the economy (Public Sector)

Discuss in detail the reason(s) for public sector failure (link them to typical problems experienced through public sector provisioning) (Public Sector)

Discuss in detail the reasons for international trade (Foreign Exchange Markets)

• Discuss in detail export promotion (Protectionism and FreeTrade)

Discuss in detail the arguments in favour of protectionism (Protectionism and Free Trade)

Discuss in detail the demand-side approach in promoting growth and development in South Africa (Growth and development)

Discuss in detail the following South African growth and development policies and strategic initiatives (Growth and development)

Discuss in detail South Africa's initiaties (endeavours) in regional development (Industrial Development Policies)

Discuss in detail the following economic indicators (Economic and Social Performance Indicators

Discuss in detail the following social indicators (Economic and Social Performance Indicators)

Discuss in detail the various equilibrium positions with the aid of graphs-PERFECT MARKET (Perfect Market)

• Discuss the monopoly in detail (with/without the aid of graphs) (Imperfect Market)

Examine the oligopoly in detail (Imperfect Market)

• Compare and contrast any TWO types of market structures  

Discuss in detail how the following factors lead to the misallocation of resources in the market (Market Failures)

Discuss in detail state intervention as a consequence of market failures, with the aid of relevant graphs (Market Failures)

Discuss in detail the consequences of inflation (Inflation)

Discuss in detail the measures to combat demand-pull and/or cost-push inflation (Inflation)

Examine in detail the effects of tourism (Tourism)

Examine in detail the benefits of tourism (Tourism)

Discuss in detail how the government can ensure sustainable development (Environmental Sustainability)

• Discuss in detail the following problems and the international measures taken to ensure sustainable development (Environmental Sustainability)

ESSAYS FOR THE NEXT THREE-YEAR CYCLE (2021-2023)

Macroeconomics- paper1.

Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow) INTRODUCTION The economy of a country is regarded as an open economy because of the presence of households, producers, government, foreign sector and financial sector as active participants in the economy. Markets link the participants in the economy 🗸🗸 [Max 2]

BODY: MAIN PART PRODUCT / GOODS/ OUTPUT MARKET🗸

• These are the markets for consumer goods and services🗸🗸
• Goods are defined as tangible items, like food, clothes, cars, etc. that satisfies some human wants or needs🗸🗸
• Buying and selling of goods that are produced in markets e.g. 🗸🗸
• Capital Goods market for trading of buildings and machinery🗸🗸
• Consumer goods market for trading of durable consumer goods, semi-durable consumer goods and non-durable consumer goods. 🗸🗸
• Services are defined as non-tangible actions and include wholesale and retail, transport and financial markets. 🗸🗸

FACTOR / RESOURCE/ INPUT MARKETS🗸

• Households sell factors of production on the markets: rent for natural resources, wages for labour interest for capital and profit for entrepreneurship🗸🗸
• The factor market includes the labour, property and financial markets. 🗸🗸
• The market where services of factors of production are traded e.g. labour is hired and capital is borrowed – these services earn wages, interest, rent and profits🗸🗸

FINANCIAL MARKETS🗸

• They are not directly involved in the production of good and services, but act as a link between households , the business sector and other participants with surplus finds🗸🗸
• E.g. banks, insurance companies and pension funds🗸

MONEY MARKETS🗸

• In the money markets short term loans, and very short term funds are saved and borrowed by consumers and business enterprises 🗸🗸
• Products sold in the market are bank debentures, treasury bills and government bonds 🗸🗸
• The simplest form exists when parties make demand and short-term deposits and borrow on short term 🗸🗸
• The SARB is the key institution in the money market🗸🗸

CAPITAL MARKETS🗸

• In the capital markets long term funds are borrowed and saved by consumers and the business sector🗸🗸
• The Johannesburg Security Exchange (JSE) is a key institution in the capital 🗸🗸
• Products sold in this market are mortgage bonds and shares🗸🗸

FOREIGN EXCHANGE MARKETS🗸

• On the foreign exchange markets businesses buy/ sell foreign currency to pay for imported goods and services🗸🗸
• These transactions occur in banks and consists of electronic money transfers from one account to another🗸🗸
• The leading centres/ most important foreign exchange markets are in London, New York and Tokyo 🗸🗸
• e.g. traveller’s cheques to travel abroad🗸
• Flows of private and public goods and services are real flows and they are accompanied by counter flows of expenditure and taxes on the product market🗸🗸
• Factor services are real flows and they are accompanied by counter flows of income on the factor market🗸🗸
• Imports and exports are real flows and are accompanied by counter flows of expenditure and revenue on the foreign exchange market🗸🗸[Max 26]
• A change in investment of R 10m will result in a change in income of R 20m🗸🗸
• An increase in investment causes the expenditure function to shift upwards from C1 to C2 so that C1 is parallel to C2🗸🗸
• The effect of the increase in investment is that the total expenditure will increase from R 20m to R 30m🗸🗸
• The increase in the value of output (Y) is greater than the increase in the expenditure (E) 🗸🗸 (Explanation must comply with the figures supplied in the graphical presentation) [Max 4] [Max 10]

CONCLUSION The circular flow ensures continued interdependence and coordination of the economic activities in the economy / markets are critically important institutions in our economic system, because they regulate the supply and demand and safeguard price stability and general business confidence. 🗸🗸 [Any other relevant conclusion] [Max 2]

INTRODUCTION The new economic paradigm in terms of the smoothing of business cycles discourages monetary policy makers from using monetary and fiscal policies to fine tune the economy but rather encourages achieving stability through sound long term decisions relating to demand and supply in the economy/smoothing out the painful part of economic down-fall that is part of the market economy🗸🗸 (Accept other relevant definition/description of smoothing/new economic paradigm). [Max 2]

BODY: MAIN PART The new economic paradigm is embedded in the demand and supply side policies. 🗸🗸

Demand-side policies

• It focuses on aggregate demand in the economy🗸🗸
• When households, firms and the government spend more, demand in the economy increases. 🗸🗸
• This makes the economy grow but lead to inflation.🗸🗸
• Aggregate demand increases more quickly than aggregate supply and this causes price increases. 🗸🗸
• If the supply does not react to the increase in demand, prices will increase. 🗸🗸
• This will lead to inflation (a sustained and considerable in the general price level) 🗸🗸

Unemployment:

• Demand-side policies are effective in stimulating economic growth. 🗸🗸
• Economic growth can lead to an increase in demand for labour. 🗸🗸
• As a result more people will be employed and unemployment will increase. 🗸🗸
• As unemployment decreases inflation is likely to increase. 🗸🗸
• This relationship between unemployment and inflation is illustrated in the Phillips curve. 🗸🗸
• The PC curve shows the initial situation. A is the point of intersection of the PC curve with the x- axis. It shows the natural rate of unemployment, for instance 14%🗸🗸
• At point A inflation rate is zero. 🗸🗸
• If unemployment falls to C for instance, 8%, inflation caused by wage increases is at 6%.🗸🗸
• If unemployment increases from C to B to A, inflation falls from 6% to 2% to 0%.🗸🗸

Supply-side policies Reduction of costs 🗸

• Infrastructural services: reasonable charge and efficient transport, communication, water
• services and energy supply. 🗸🗸
• Administrative costs: these costs include inspection, reports on applications
• of various laws, regulations and by-laws, tax returns and returns providing statistical
• information.
• It adds to costs and businesses carry a heavy burden 🗸🗸
• Cash incentives: it includes subsidies for businesses to locate in neglected areas where unemployment is high and compensation to exporters for certain costs they
• incurred in development of export markets. 🗸🗸

Improving the efficiency of inputs 🗸

• Tax rates: low tax rates can serve as an incentive to workers. It will improve the productivity and output. 🗸🗸
• Capital consumption: replacing capital goods regularly creates opportunities for businesses to keep up with technological development and better outputs🗸🗸
• Human resource development: to improve the quality of manpower by improving health care, education and training. 🗸🗸
• Free advisory service: these promote opportunities to export. 🗸🗸

Improving the efficiency of markets 🗸

• Deregulation: removal of laws, regulations and by-laws and other forms of government controls makes the market free. 🗸🗸
• Competition: encourages the establishment of new businesses 🗸🗸
• Levelling the play field: private businesses cannot compete with public enterprises 🗸🗸 Answers must be in full sentences and well described with examples to be able to obtain 2 marks per fact. Learners should be awarded 1 mark per heading or sub-heading to a maximum of 8 marks. (8 x 1) (8) [Max 26]

Explanation: The above graph shows:

• Aggregate demand (AD) and aggregate supply (AS) are in equilibrium at point C. 🗸🗸
• If aggregate demand is stimulated so that it moves to AD1 and aggregate supply responds promptly and relocates at AS1; a larger real output becomes available without any price increases. 🗸🗸
• Supply is often sticky and fixed in the short term. 🗸🗸
• Therefore, if aggregate demand increases to AD1 and aggregate supply does not respond, intersection is at point F. Real production increases but so does the price, in other words, with more inflation. 🗸🗸
• The aggregate demand locates at any position to the left of AS1 inflation prevails. 🗸🗸
• The solution is to create conditions that ensure supply is more flexible. 🗸🗸
• If the cost of increasing production is completely flexible, a great real output can be supplied at any given price level. 🗸🗸 [Max 10]

CONCLUSION It is clear from the discussion above that it is critically important to manage the aggregate supply and demand to ensure stability in the economy. 🗸🗸 [Accept any relevant higher order conclusion] [Max 2]

INTRODUCTION Accurate prediction is not possible in Economics. The best the economists can do is to try and forecast what might happen. There are a number of techniques available to help economists to forecast business cycles, e.g. economic indicators 🗸🗸 OR Successive periods of contraction and expansion of economic activities 🗸🗸 [Accept any other relevant introduction] [Max 2]

BODY: MAIN PART Business cycle indicators Leading economic indicators 🗸

• These are indicators that change before the economy changes / coincide with the reference turning point 🗸🗸
• They give consumers, business leaders and policy makers a glimpse (advance warnings) of where the economy might be heading. 🗸🗸
• Peak before a peak in aggregate economic activity is reached.
• Most important type of indicator in helping economists to predict what the economy will be like in the future 🗸🗸
• When these indicators rise, the level of economic activities will also rise in a few months' time/an upswing 🗸🗸
• E.g. job advertising space/inventory/sales ratio🗸

Coincident economic indicators🗸

• They move at the same time as the economy / if the turning point of a specific time series variable coincides with the reference turning point🗸🗸
• It indicates the actual state of the economy🗸🗸
• E.g. value of retail sales. 🗸
• If the business cycle reaches a peak and then begins to decline, the value of retail sales will reach a peak and then begin to decline at same time🗸🗸

Lagging economic indicators🗸

•  They do not change direction until after the business cycle has changed its direction🗸🗸
• They serve to confirm the behaviour of co-incident indicators🗸🗸
• E.g. the value of wholesalers' sales of machinery🗸
• If the business cycle reaches a peak and begins to decline, we are able to predict the value of new machinery sold🗸🗸

Composite indicator🗸

• It is a summary of the various indicators of the same type into a single value🗸🗸
• Their values are consolidated into a single value , if this is done we find a value of a composite leading , coincident and lagging indicator🗸🗸 Accept ONE example from the table below:
• This is the time that it takes for a business cycle to move through one complete cycle (measured from peak to peak) 🗸🗸
• It is useful to know the length because the length tends to remain relatively constant over time.🗸🗸
• If a business cycle has the length of 10 years it can be predicted that 10 years will pass between successive peaks or troughs in the economy. 🗸🗸
• Longer cycles show strength. 🗸🗸
• Cycles can overshoot. 🗸🗸

Ways to measure lengths:

• Crisis to crisis 🗸🗸
• Historical records 🗸🗸
• Consensus on businesses experience 🗸🗸

Amplitude 🗸

• It is the difference between the total output between a peak and a trough. 🗸🗸
• It measures the distance of the oscillation of a variable from the trend line / It is the intensity (height) of the upswing and downswing (contraction and expansion) in economic activity 🗸🗸
• A large amplitude during an upswing indicates strong underlying forces – which result in longer cycles 🗸🗸
•  The larger the amplitude the more extreme the changes that may occur / extent of change 🗸🗸
• E.g. During the upswing inflation may increase from 5% to 10%. (100% increase) 🗸🗸
•  A trend is the movement of the economy in a general direction. 🗸🗸
• It usually has a positive slope because the production capacity of the economy increases over time 🗸🗸
• Also known as the long term growth potential of the economy. 🗸🗸
• The diagram above illustrates an economy which is growing – thus an upward trend (positive slope) 🗸🗸
• Trends are useful because they indicate the general direction in which the economy is moving – it indicates the rate of increase or decrease in the level of output🗸🗸

Extrapolation 🗸

• Forecasters use past data e.g. trends and by assuming that this trend will continue, they make predictions about the future🗸🗸
• Means to estimate something unknown from facts or information that are known 🗸🗸
• if it becomes clear that the business cycle has passed through a trough and has entered a boom phase, forecasters might predict that the economy will grow in the months that follow 🗸🗸
• It is also used to make economic predictions in other settings e.g. prediction of future share prices🗸🗸

Moving average 🗸

• It is a statistical analytical tool that is used to analyse the changes that occur in a series of data over a certain period of time / repeatedly calculating a series of different average values along a time series to produce a smooth curve 🗸🗸
• The moving average could be calculated for the past three months in order to smooth out any minor fluctuations 🗸🗸
• It is calculated to iron out (minimize) small fluctuations and reveal long-term trends in the business cycle🗸🗸 Answers must be in full sentences and well described with examples to be able to obtain 2 marks per fact. Learners should be awarded 1 mark per 8 headings and examples. [8 x 1=8] [Max 26]

BODY: ADDITIONAL PART

• An expansionary monetary policy is implemented when the economy is in recession in order to stimulate economic activities. 🗸🗸
• Interest rates can be reduced to encourage spending. 🗸🗸
• Households and firms can borrow more and spend more. 🗸🗸
•  The increased spending increases the level of economic activity. 🗸🗸
• Investment will increase and more factors of production will be employed. 🗸🗸
• Higher levels of production, income and expenditure will be achieved. 🗸🗸
• If the supply of goods and services does not increase in line with an increase in demand, inflation will increase. 🗸🗸
• Inflation can be curbed by reducing money supply and availability of credit. 🗸🗸
• To dampen demand at the peak the government will be able to reduce the money supply by increasing interest rates. 🗸🗸
• Selling government bonds and securities (open market transactions) and reduce the supply of money in circulation. 🗸🗸
• Increase the cash reserve requirements to manipulate money creation activities of banks. 🗸🗸
• Persuade banks to decrease lending (moral suasion) 🗸🗸
• To devaluate the exchange rate (exchange rate policy) 🗸🗸 [Max 10]

CONCLUSION It remain clear that business cycles must be clearly monitored through the indicators available, policy makers must act quickly by using monetary and fiscal instruments in order to prevent instability in the economy. 🗸🗸 [Accept any other relevant conclusion] [Max 2]

INTRODUCTION: The government provides goods and services that are under supplied by the market and therefore plays a major role in regulating economic activity and guiding and shaping the economy. 🗸🗸 [Max 2]

BODY: MAIN PART Objectives:

Economic growth 🗸

• Refer to an increase in the production of goods and services 🗸🗸
• Measured in terms of Real GDP 🗸🗸
• For economic growth to occur, the economic growth rate must be higher than Population growth 🗸🗸
• Growth and development in a country benefit its citizens because it often leads to a higher standard of living 🗸🗸

Full employment 🗸

• It is when all the people who want to work, who are looking for a job must be able to get a job 🗸🗸
• High levels of employment is the most important economic objective of the government 🗸🗸
• The unemployment rate increased over the past few years 🗸🗸
• Informal sector activities must be promoted because it is an area where employment increase 🗸🗸

Exchange rate stability 🗸

• The economy must be manage effectively and effective Fiscal and monetary policy must be used to keep the exchange rate relatively stable 🗸🗸
• Depreciation and Appreciation of the currency create uncertainties for producers and traders and should be limited. These uncertainties must be limited 🗸🗸
• The SARB changed the Exchange rate from a Managed floating to a free floating exchange rate 🗸🗸

Price stability 🗸

• Stable price causes better results in terms of job creation and economic growth 🗸🗸
• The SARB inflation target is 3% - 6% and they are successful in keeping inflation within this target 🗸🗸
• Interest Rates, based on the Repo Rate are the main instruments used in the stabilisation policy 🗸🗸
• The stable budget deficit also has a stabilizing effect on the inflation rate 🗸🗸

Economic equity 🗸

• Redistribution of income and wealth is essential 🗸🗸
• South Africa uses a progressive income tax system – taxation on profits, taxation on wealth, capital gains tax and taxation on spending, are used to finance free services 🗸🗸
• Free social services are basic education; primary health and to finance basic economic services 🗸🗸
• E.g. Cash Grant to the poor, e.g. child grants and cash grants to vulnerable people, e.g. disability grants 🗸
• Progressive taxation means that the higher income earners pay higher/more taxation 🗸🗸 [Max 26]
• Learner responses can be positive or negative.
• Follow the argument and see if the learner can produce enough evidence to support his/her answer.

Economic Growth:

• SA targets 4–5% economic growth. Previously SA had a 5% growth rate 🗸🗸
• In recent years the growth rate decreased steadily (presently below 3%) 🗸🗸

Full Employment:

• Compared to foreign countries unemployment is very high. (Expanded – over 30%) 🗸🗸
• Efforts by SA government to reduce these figures includes the GEAR strategy, focus on small business enterprises, Public Works Programme 🗸🗸

Exchange rate stability:

• SA now operates on a free floating exchange rate system in line with international benchmarks 🗸🗸
• Unfortunately our currency has lost its value, with a general trend of depreciation over the last few years 🗸🗸

Price stability:

• For the past few years South Africa has managed to remain within the 3–6% target 🗸🗸
• The current increase in the repo rate has put constraints on the inflation rate 🗸🗸

Economic equity:

• Economic equity has improved (BEE, affirmative action, gender equity) and led to an improvement in economic equity 🗸🗸 [Any 5 x 2] [Max 10]

CONCLUSION: While some successes have been achieved by government, the fulfilling of some of the objectives are compromised by factors like lack of accountability, corruption, budgeting, nepotism and incompetence. 🗸🗸 [Any relevant conclusion] [Max 2]

INTRODUCTION The government responds to market failures by establishing and maintaining state owned enterprises to provide public goods and services 🗸🗸 [Any other relevant introduction] [Max 2]

BODY: MAIN PART

• It is required to give an explanation of one's decisions, actions and expenditures over a period of time 🗸🗸
• There are mechanisms for evaluating government's economic and financial performance 🗸🗸
• That the desired quantities and quality of goods and services for which taxes are raised are delivered 🗸🗸
• That monopolies, corruption, nepotism, incompetence and apathy does not occur 🗸🗸
• Two important elements of accountability is participation and transparency🗸🗸
• Ministerial responsibilities, i.e. the ministers of government departments are responsible for decisions and actions and expenditures 🗸🗸
• Parliamentary questioning arises and members of the government departments have to respond 🗸🗸
• The national treasury is responsible for treasury control 🗸🗸
• The auditor-general reports annually in writing on each government department🗸🗸
• Public goods are efficiently provided if Pareto efficiency is achieved 🗸🗸
• That is if resources are allocated in such a way that no one can be made better off without making someone else worse off 🗸🗸
• Bureaucracy the official rules and procedures. 🗸🗸/insensitivity to the needs of their clients 🗸🗸
• Incompetence- the lack of skill or ability to do a task successfully🗸🗸/May have improper qualifications/or an attitude of apathy 🗸🗸
• Corruption- the exploitation of a person's position for private gain /taking bribes, committing fraud, nepotism 🗸🗸
• State-owned enterprises do not operate according to the forces of supply and demand 🗸🗸
• It becomes thus very difficult for state-owned enterprises to assess needs and they are thus prone to under- or over-supplying public goods and services 🗸🗸
• The census and other household surveys as well as local government structures provide this type of information 🗸🗸
• Since resources are scarce, government must then decide which needs and whose needs are to be satisfied 🗸🗸
• In the private sector houses are built according to the price that people are able and willing to pay 🗸🗸
• In the public sector housing is regarded as a social responsibility and authorities supply them according to the needs of people 🗸🗸
• In a market economy prices are determined by supply and demand 🗸🗸
• The objectives of firms are to maximise their profits and they usually set prices to achieve this objective 🗸🗸
• Government does not pursue the profit maximisation objective 🗸🗸
• Government takes into account certain social, economic, political and environmental conditions as well as public opinion 🗸🗸
• Free-of-charge services- this is met from taxes 🗸🗸 and applies to most community goods and collective goods 🗸🗸 (e.g.) defence, police whereby charges and toll fees are levied 🗸
• User-charges 🗸 option to charge depends on technical reasons 🗸🗸 (e.g.) cost of providing a double lane road could be recovered by toll charges 🗸 Economic reasons 🗸 such as services like water and electricity 🗸 that have a zero price 🗸 political reasons 🗸 where income distribution is significantly unequal, administrative rationing according to need takes place 🗸🗸 (e.g.) public health and education 🗸
• Direct and indirect subsidies direct subsidies are used to cover part of the costs 🗸🗸 (e.g.) urban bus service 🗸 and an indirect subsidy is used to write off accumulated losses or deficits 🗸🗸
• Standing charges -called availability charges 🗸🗸 (e.g.) water and electricity 🗸 standing charges goes to meet fixed costs and the price per unit consumed covers variable costs 🗸🗸
• Price discrimination - different users have different elastic ties of demand for a good 🗸🗸 (e.g.) commercial and manufacturing businesses pay higher rates than households and they pay on a sliding scale🗸🗸
• State-owned enterprises that either render a service or when an existing enterprise is nationalised 🗸🗸
• They focus on making a profit and maximizing cost at the expense of the needs of some groups 🗸🗸 (e.g.) Iscor 🗸 SABC, 🗸SAA, Spoornet 🗸
• refers to the process whereby state-owned enterprises and state-owned assets are handed over or sold to private individuals 🗸🗸
• cost of maintaining and managing state-owned enterprises are high which can lead to higher taxes and larger public debt 🗸🗸
• State-owned enterprises are not run as efficiently as private enterprises 🗸🗸
• Nationalisation is the process whereby the state takes control and ownership of privately owned assets and private enterprises 🗸🗸
• It includes contracting of services, public-private partnerships, increasing competitiveness🗸🗸 [Max 26]

ADDITIONAL PART Possible problems in your community or elsewhere

• Lack of drinking water due to burst pipes 🗸🗸
• Lack of electricity due to lack of infrastructure (load shedding) 🗸🗸
• Lack of schooling – no buildings available – lack of maintenance 🗸🗸
• Lack of health services due to lack of staff, infrastructure, strikes 🗸🗸
• Lack of adequate housing (RDP) 🗸🗸 [Max 10 marks - List of examples max 5 marks] [Accept any other relevant answer] 

CONCLUSION If the above problems are not dealt with timeously by government, government will continue to fail its people in terms of service delivery, seeing many protests occurring regularly 🗸🗸 [Any other relevant higher order conclusion] [Max 2]

INTRODUCTION International trade can be defined as the exchange of goods and services between countries globally. 🗸🗸 These trade agreements are negotiated by protocols and agreement due to the uneven distribution of natural resources globally. 🗸🗸

BODY-MAIN PART The main reasons for international trade.

Demand reasons The size of the population impacts demand.

• If there is an increase in population growth, it causes an increase in demand, as more people’s needs must be satisfied. 🗸🗸
• Local suppliers may not be able to satisfy this demand. 🗸🗸

The population’s income levels effect demand.

• Changes in income cause a change in the demand for goods and services. 🗸🗸 • An increase in the per capita income of people in more disposable income that can be spent on local goods and services, some of which may then have to be imported. 🗸🗸

An increase in the wealth of the population leads to greater demand for goods.

• People have access to loans and can spend more on luxury goods, many of which are produced in other countries. 🗸🗸

Preferences and tastes can play a part in the determining of prices,

•  E.g. customers in Australia have a preference for a specific product which they do not produce and need to import and it will have a higher value than in other countries. 🗸🗸

The difference in consumption patterns is determined

• By the level of economic development in the country, e.g. a poorly developed country will have a high demand for basic goods and services but a lower demand for luxury goods. 🗸🗸

Supply reasons Natural resources are not evenly distributed

• Across all countries of the world. 🗸🗸
• They vary from country to country and can only be exploited in places where these resources exist. 🗸🗸

Climatic conditions

• Make it possible for some countries to produce certain goods at a lower price than other countries, e.g. Brazil is the biggest producer of coffee. 🗸🗸

Labour resources

• Differ in quantity, quality and cost between countries. 🗸🗸
• Some countries have highly skilled, well-paid workers with high productivity levels, e.g. Switzerland. 🗸🗸

Technological resources

•  Are available in some countries that enable them to produce certain goods and services at a low unit cost, e.g. Japan. 🗸🗸

Specialisation in the production

• Certain goods and services allows some countries to produce them at a lower cost than others, e.g. Japan produces electronic goods and sells these at a lower price. 🗸🗸

Capital allows developed countries

• Enjoy an advantage over underdeveloped countries. 🗸🗸
• Due to a lack of capital, some countries cannot produce all the goods they require themselves. 🗸🗸

ADDITIONAL PART

• Buying and selling goods and services from other countries: 🗸🗸
• The purchase of goods and services from abroad that leads to an outflow of currency from SA- Imports (M). 🗸🗸
• The of goods and services to buyers from other countries leading to an inflow of currency to SA – Exports (X) 🗸🗸
• Different factor endowments mean some countries can produce goods and services more efficiently than others- specialisation is therefore possible: 🗸🗸

Absolute Advantage:

• Where one country can produce goods with fewer resources than other. 🗸🗸

Comparative Advantage:

• Where one country can produce goods at a lower opportunity cost it sacrifices less resources in production. 🗸🗸

CONCLUSION International trade is important of countries to survive economically, as barriers to trade would disadvantage all countries, due to their interdependency globally. 🗸🗸 [Any other relevant higher order conclusion] [Max 2]

ECONOMIC PURSUITS-PAPER 1

Discuss in detail export promotion (Protectionism and Free Trade)

INTRODUCTION Export promotion refers to measures taken by governments increase production of goods and services that can be exported. The government provides incentives to encourage production 🗸🗸 [Max 2]

BODY: MAIN PART REASONS:

• Export promotion measures lower cost of production which makes it easier to compete on the international market 🗸🗸
• Achieve significant export-led economic growth🗸🗸
• Export enlarges production capacity of country because more and larger manufacturing industries are established. 🗸🗸
• The first step to export-led economic growth is to implement policies that encourage the establishment of industries to produce goods and services for export markets🗸🗸

METHODS: Exports are promoted through: Incentives🗸

• Export incentives include information on export markets, research with regard to new markets, concessions on transport charges, export credit and export credit guarantees and publicity commending successful exporters🗸🗸
• This will encourage manufacturers to export an increased volume of their production🗸🗸
• Trade missions help to market SA products abroad🗸🗸and supply SA companies with information about potential markets 🗸🗸

Direct Subsidies🗸

• Described as direct because it involves government expenditure. 🗸🗸
• Include cash payments to exporters, refunds on import tariffs and employment subsidies.
• The aim is to increase the competitiveness of exporting company🗸🗸 reduce cost of production🗸🗸and explore and establish overseas markets🗸🗸

Indirect subsidies

• Regarded as indirect because it results in the government receiving less revenue🗸🗸 e.g. general tax rebates,
• Tax concessions on profits earned from exports or on capital invested to produce export goods, refunding
•  Of certain taxes e.g. custom duties on imported goods used in the manufacturing process🗸🗸
• Allows companies to lower their prices and enables them to compete in international markets🗸🗸
• Challenge for governments to design incentives and subsidies in such a way that prices of export goods can't be viewed as dumping prices🗸🗸

Trade neutrality 🗸

• Can be achieved if incentives in favour of export production are introduced
• Up to point that neutralises the impact of protectionist measures in place🗸🗸
• E.g. subsidies equal to magnitude of import duties can be paid🗸

Export processing zones (EPZs) 🗸

• Is free-trade enclave within a protected area –
• Is fenced and controlled industrial park that falls outside
• Domestic customs area, and usually located near harbour or airport 🗸🗸 NOTE : For the response with regard to the effectiveness of export promotion methods, a maximum of 5 marks can be allocated.
• No limitations on size and scale since world market is very large🗸🗸
• Cost and efficiency of production based on this and organised along lines of comparative advantage🗸🗸
• Increased domestic production will expand exports to permit more imports and may result in backward linkage effects that stimulate domestic production in related industries🗸🗸
• Exchange rates are realistic and there is no need for exchange control and quantitative restrictions🗸🗸
• Value can be added to natural resources of the country 🗸🗸
• Creates employment opportunities 🗸🗸
• Increase in exports has positive effect on balance of payments 🗸🗸
• Increase in production leads to lower domestic prices, which benefit local consumers🗸🗸

DISADVANTAGES

• Real cost of production 🗸 subsidies and incentives reduce total cost of production which must be met from sales🗸🗸 real cost is thus concealed by subsidies🗸🗸products cannot compete in open market 🗸🗸
• Lack of competition 🗸 businesses charge prices that are so low that they force competitors out of the market 🗸🗸
• Increased tariffs and quotas 🗸can be against spirit of provisions of WTO🗸🗸overseas competitors retaliate with tariffs and quotas🗸🗸 goods are sold domestically below their real cost of production (export subsidies and dumping) 🗸🗸
• Protection of labour-intensive industries 🗸 developed countries maintain high levels of effective protection for their industries that produce labour-intensive goods in which developing countries already have or can achieve comparative advantage 🗸🗸
• Withdrawal of incentives often leads to closure of effected companies. 🗸🗸
• Incentives often lead to inefficiencies in the production process, since companies don't have to do their best to compete🗸🗸
• Can be seen as dumping 🗸🗸 [Max 26]

BODY: ADDITIONAL PART How successful is South Africa in protecting the local textile industry against foreign competition?

• Not successful: 🗸 Many domestic textile manufacturers closed down due to unfair international competition 🗸🗸 Many wholesalers make use of suppliers from abroad 🗸🗸 e.g. Woolworths/Walmart🗸
• Dumping still occurs – European manufacturers still dump clothing in Africa out of season at prices below cost 🗸🗸 Job losses due to a lack of protection in this industry 🗸🗸 [Accept any motivation relating to success indicators] [Max 10]

CONCLUSION South Africa's international trade policy facilitates globalisation thereby impacting positively on the balance of payment. 🗸🗸 [Accept any other relevant conclusion] [Max 2]

INTRODUCTION Protectionism refers to a deliberate policy on the part of the government to erect trade barriers, such as tariffs and quotas, in order to protect domestic industries against international competition. 🗸🗸 [Accept any other relevant definition] [Max 2]

BODY-MAIN PART Raising revenue for the government

• Import tariffs raise revenue for the government. 🗸🗸
• In smaller countries the tax base is often small due to low incomes of individuals and businesses. 🗸🗸
• Low incomes do not provide much in the form of income taxes and therefore custom duties on imports is a significant source of income or revenue. 🗸🗸

Protecting the whole industrial base

• Maintaining domestic employment. 🗸🗸
• Countries with high unemployment are continuously pressured to stimulate employment creation and therefore resort to protectionism in order to stimulate industrialisation. 🗸🗸
• It is thought that using protectionism the country’s citizens would purchase more domestic products and raise domestic employment. 🗸🗸
• These measures on domestic employment creation at the expense of other countries, led to such measures as “beggar-my-neighbour” policies. 🗸🗸
• Applying import policies is likely to reduce other countries ability to buy country’s exports and may provoke retaliation. 🗸🗸

Protecting workers

• It is argued that imports from other countries with relatively low wages represent unfair competition and threaten the standard of living of the more highly paid workers of the local industries. 🗸🗸
• Local industries would therefore be unable to compete because of higher wages pushing up the price levels of goods. 🗸🗸
• Protection is thus necessary to prevent local wage levels from falling or even to prevent local businesses from closing down due to becoming unprofitable. 🗸🗸
• Competition from low-wage countries may also reflect the fact that those countries have a comparative advantage in low-skilled labour-intensive industries. 🗸🗸

Diversifying the industrial base

• Overtime countries need to develop diversified industries to prevent overspecialisation. 🗸🗸
• A country relying too heavily on the export of one or a few products is very vulnerable. 🗸🗸
• If a developing country’s employment and income is dependent on only one or two industries, there is the risk that world fluctuations in prices and demand and supply-side problems could results in significant fluctuations in domestic economic activity. 🗸🗸
• Import restrictions may be imposed on a range of products in order to ensure that a number of domestic industries develop. 🗸🗸

Develop strategic industries

• Some industries such as the iron-ore and steel, agriculture, (basic foodstuffs, such as maize), energy (fuels) and electronics (communication) among others, are regarded as strategic industries. 🗸🗸
• Developing countries may feel that they need to develop these industries in order to become self-sufficient . 🗸🗸

Protecting specific industries Dumping

• Foreign industries may engage in dumping because government subsidies permit them to sell at very low prices or because they are seeking to raise profits through price discrimination. 🗸🗸
• The reason for selling products at lower prices may be to dispose of accumulate stocks Of the goods and as a result consumers in the importing country stand to benefit however,
• Their long term objective may be to drive out domestic producers and gain control of the market and consumers
• Are likely to lose out in the reduction in choice and higher prices that the exporters will be able to charge. 🗸🗸

Infant industries

• Usually newly established and find it difficult to survive due to their average costs being higher than that of their well-established foreign competitors. 🗸🗸
• However, if they are given protection in their early years they may be able to grow and Thereby take advantage lower their average costs and become competitive and at this point protection can be removed. 🗸🗸

Declining industries/sunset industries

• Structural changes in the demand and supply of a good may severely hit an industry such industries should be permitted to go out of business gradually declining industries
• Are likely to be industries that no longer have a comparative advantage and however, if they go out of business quickly there may be a sudden and large increase in unemployment. 🗸🗸
• Protection may enable an industry to decline gradually thereby allowing time for resources including labour to move to other industries. 🗸🗸
• Protecting domestic standards domestic regulations of food safety human rights and environmental standards have been increasingly acting as trade restrictions. 🗸🗸 [Accept any other relevant fact] [Max 26]

ADDITIONAL PART South Africa promotes exports through subsidies

Direct Subsidies

• Strict screening measures should be put in place when companies apply for financial assistance. Government expenditure can provide direct financial support to domestic producers for their exports e.g. 🗸🗸
• Cash grants offered to South African exhibitors to exhibit their products at exhibitions overseas. To explore new markets. 🗸🗸
• Foreign trade missions to explore new markets imposition of tariffs on imports. 🗸🗸
• Funds for the formation of formal export councils. 🗸🗸
• Subsidies for training or employing personnel. 🗸🗸
• Funds for the export market research. 🗸🗸
• Product registration and foreign patent registrations. 🗸🗸
• Government can refund companies certain taxes to promote exports.
• These types of indirect subsidies are:
• General tax rebates (Part of the cost of production can be subtracted from the tax that has been paid) 🗸🗸
• Tax concessions on profits earned from exports or on capital invested to produce export goods. 🗸🗸
• Refunds on import tariffs in the manufacturing process of exported goods companies often use custom duties are paid on these goods and the government refunds them. 🗸🗸 [Max 10]

CONCLUSION Most countries agree that protectionism is harmful to the economy if not well managed. Protectionism is needed especially where industries are young and need expansion or development. 🗸🗸 [Any other relevant higher order conclusion] [Max 2]

INTRODUCTION Economic growth is responsible for the overall growth of the economy, in order to enhance the well being of the economy as a whole. Whereas economic development would focus on the individual well being of the citizens of a country. [Any other relevant higher order conclusion] [Max 2]

BODY-MAIN PART Growth and Development A demand-side approach includes discretionary changes in monetary and fiscal policies with the aim of changing the level of aggregate demand. 🗸🗸

Monetary policy

• Is driven by the South African Reserve Bank (SARB). 🗸🗸
• It aims to stabilise prices by managing inflation. 🗸🗸

Fiscal policy

• Is driven by the Department of Finance. 🗸🗸
• It aims to facilitate government, political and economic objectives. 🗸🗸
• A demand-side approach to economic growth and development does not only depend on fiscal and monetary policy. 🗸🗸
• It is dependent on all components of aggregate demand, that is, C, I, X and G. 🗸🗸

South African approach

• The South African approach uses both monetary and fiscal measures to influence aggregate demand in the economy. 🗸🗸
• The South African Reserve Bank (SARB) as the central bank in South Africa formulates the monetary policy. 🗸🗸
• They use the following instruments:

Interest rate changes

• It is used to influence credit creation by making credit more expensive or cheaper. 🗸🗸
• The exchange rate is stabilised by encouraging inflow or outflows. 🗸🗸

Open market transactions

• To restrict credit the SARB sells securities. When banks buy these securities money flows from banks to the SARB. 🗸🗸
• The banks have less money to lend and cannot extend as much credit as before. 🗸🗸
• To encourage credit creation the SARB buys securities. Money flows into the banking system.🗸🗸

Moral suasion

• The SARB consults with banks to act in a responsible manner based on the prevailing economic conditions. 🗸🗸

Cash Reserve Requirements

• Banks are required to hold a certain minimum cash reserve in the central bank. 🗸🗸
• Banks have a limited amount to give out as credit. 🗸🗸
• South Africa’s fiscal policy is put into practice through the budgetary process. 🗸🗸
• The main purpose of fiscal policy is to stimulate macroeconomic growth and employment, and ensure redistribution of wealth. 🗸🗸
• The following instruments are used:

Progressive personal income tax

• Higher income earners are taxed at higher tax rates. 🗸🗸
• These taxes are used to finance social development. 🗸🗸
• The poor benefit more than those with higher incomes. 🗸🗸

Wealth taxes

• Properties are levied (taxed) according to their market values. 🗸🗸
• Transfer duties are paid when properties are bought. 🗸🗸
• Securities (shares and bonds) are taxed when traded. 🗸🗸
• Capital gains tax is levied on gains on the sale of capital goods (e.g. properties, shares). 🗸🗸
• Estate duties are paid on the estates of the deceased. 🗸🗸
• These taxes are used to finance development expenditures which benefit the poor more  often. 🗸🗸

Cash benefits

• Old age pensions, disability grants, child support and unemployment insurance are cash grants. These are also known as social security payments. 🗸🗸
• Benefits in kind (natura benefits) 🗸🗸
• These include the provision of healthcare, education, school meals, protection etc. 🗸🗸
• When user fees are charged, poor or low income earners pay less or nothing. 🗸🗸
• Limited quantities of free electricity and water are provided. 🗸🗸

Other redistribution

• Public works programmes, e.g. the Strategic Integrated Projects (SIP) provides employment subsidies and other cash and financial benefits such as training, financing and export incentives.🗸🗸

Land restitution and land redistribution

• Land restitution is the return of land to those that have lost it due to discriminatory laws in the  past. 🗸🗸
• Land redistribution focuses on land for residential (town) and production (farm) for previously disadvantaged groups. 🗸🗸
• The money for these programmes is provided in the main budget. 🗸🗸

Subsidies on properties

• It helps people to acquire ownership of fixed residential properties. 🗸🗸
• E.g. government’s housing subsidy scheme provides funding to all people earning less than  R3 500 per month🗸🗸

CONCLUSION The demand-side approach focuses on the expansion of the demand for goods and services produced in the economy. 🗸🗸 OR To ensure economic growth, there should be an adequate and growing demand for goods and services produced in the economy. 🗸🗸

[Any other relevant higher order conclusion] [Max 2]

INTRODUCTION Different growth and development strategies have been implemented in South Africa since 1994, each aimed at addressing particular needs at the time of introduction. 🗸🗸 [Any other relevant introduction] [Max 2]

BODY-MAIN PART The Reconstruction and Development Programme (RDP)

• The RDP was an integrated, coherent socio-economic policy framework that was implemented directly after our first democratic elections in 1994. 🗸🗸
• It seeked to mobilise all our people and our country’s resources toward the final eradication of apartheid and the building of a democratic, non-racial and non-sexist future. 🗸🗸

The RDP was based on six principles.

• an integrated and sustainable programme. 🗸🗸
• a people-driven process focusing on the needs of the population. 🗸🗸
• peace and security for all, aimed at a non-violent society that respects all human rights. 🗸🗸
• nation-building, focusing on the needs of all members of society. 🗸🗸
• linking reconstruction and development. 🗸🗸
• The RDP consisted of many proposals, strategies and policy programmes.
• All of these could, however be grouped into five major policy programmes that were linked to each other.

The five key programmes were:

• meeting basic needs. 🗸🗸
• developing our human resources. 🗸🗸
• building the economy. 🗸🗸
• democratising the state and society. 🗸🗸
• implementing the RDP. 🗸🗸

The Growth, Employment and Redistribution Programme (GEAR)

• The GEAR built upon the strategic vision set out in the RDP, i.e. 🗸🗸
• The importance of all the objectives of the RDP was reaffirmed but it recognized the implementation and macroeconomic problems that the government had been experiencing in implementing the RDP. 🗸🗸
• The RDP placed much more emphasis on disciplined economic policy. 🗸🗸
• While still recognizing that there were very serious needs that had to be addressed. 🗸🗸

The Accelerated and Shared Growth Initiative for South Africa Programme (AsgiSA).

• AsgiSA resulted from government’s commitment to halve unemployment and poverty by 2014. 🗸🗸
• The Joint Initiative on Priority Skills Acquisition (Jipsa) was established to address the scarce and critical skills needed to meet AsgiSA’s objectives. 🗸🗸

AsgiSA identified six important factors that prevented growth:

• the relative volatility of the currency. 🗸🗸
• the cost, efficiency and capacity of the national logistics system. 🗸🗸
• shortages of suitably skilled labour, and the spatial distortions of apartheid affecting low-skilled labour costs. 🗸🗸
• barriers to entry, limits to competition and limited new investment opportunities. 🗸🗸
• the regulatory environment and the burden on small and medium enterprises (SME’s). 🗸🗸
• AsgiSA was not intended to be a government programme. 🗸🗸
• But rather a national initiative supported by all the key groups in the economy. 🗸🗸
• Namely business, labour, entrepreneurs and government and semi-government departments and institutions. 🗸🗸

Joint Initiative on Priority Skills Acquisitions (JIPSA)

• It is the skills development arm of ASGISA. Focus is on skills development, especially through the SETAS. 🗸🗸

Expanded Public Works Programme (EPWP)

• It is a nationwide government intervention to create employment using labour-intensive methods, and to give people skills they can use to find jobs when their work in the EPWP is done. 🗸🗸

The New Growth Path (NGP)

• The New Growth Path (NGP) was released in November 2011. 🗸🗸
• This plan is designed to serve as a framework for economic policy, and to be the driver of the country’s job strategy. 🗸🗸

The New Growth Path therefore proposes certain strategies to ensure adequate demand:

• Deepening the domestic and regional market by growing employment. 🗸🗸
• Increasing incomes and undertaking other measures to equity and income distribution. 🗸🗸
• Widening the market for South African goods and services through a stronger focus on exports to the region and other rapidly growing economies. 🗸🗸
• On a macroeconomic level the NGP entails accommodating or looser monetary policy combined with stricter fiscal policy to limit inflationary pressures and enhance competitiveness. 🗸🗸
• Government spending will be prioritised with the objective of long-term sustainable employment opportunities. 🗸🗸

The microeconomic measures to control inflationary pressures include the following:

• A competition policy to supervise monopoly pricing on products and services. 🗸🗸
• A review of administered prices to ensure that they do not increase above inflation without compelling reasons. 🗸🗸
• Interventions in the case of rapidly rising prices of essential products and services such as private🗸🗸
• Healthcare and basic food items. 🗸🗸
• Active industrial policy. 🗸🗸
• Rural development policy. 🗸🗸
• Competition policy. 🗸🗸
• Stepping up education and skills development. 🗸🗸
• Enterprise development: promoting small business and entrepreneurship; eliminating unnecessary red tape. 🗸🗸
• Broad-based Black Economic Empowerment (BBBEE). 🗸🗸
• Labour practices. 🗸🗸
• Technology policy. 🗸🗸
• Developmental trade policies. 🗸🗸
• Policies for African development. 🗸🗸 
• The different growth and development strategies that have been implemented in South Africa since 1994. 🗸🗸
• Have all contributed to making our country more prosperous and to address problems created by inequalities of the past. 🗸🗸
• However, problems such as a low level of education, unemployment and unequal distribution of income persist. 🗸🗸
• The current NGP is a comprehensive policy that is focused on addressing all of these problems. [Any other relevant higher order conclusion] [Max 2]

INTRODUCTION South Africa’s overall objective of Industrial Development Policy is to ensure international competitiveness in its nine provinces. OR Regional development is aimed at increasing the economic livelihood of specific areas or regions. OR Regional development attempts to limit the negative effects of economic activities in only a few areas. OR It attempts to promote the advantages of a more even regional development by using labour and other natural resources and infrastructure in neglected areas. [Accept any relevant introduction] [Max 2]

BODY-MAIN PART SPATIAL DEVELOPMENT INITIATIVES

• SDI Programme attracts infrastructure and business investments to underdeveloped areas to create employment. 🗸🗸
• Department of Trade and Industry is driving force behind industrial and spatial development. 🗸🗸
• DTI plans together with central, provincial and local government, IDC, parastatals and research institutions. 🗸🗸
• Industrial Development Policy Programme (Spatial Development) has 2 focus points spatial development initiative (SDI) and financial incentives. 🗸🗸
• SDI refers to government’s initiative and economic development potential of certain specific spatial locations in SA. 🗸🗸

Key Objectives:

• Stimulate economic activity in selected strategic locations. 🗸🗸
• Generate economic growth and foster sustainable industrial development. 🗸🗸
• Develop projects of infrastructure in certain areas and finance them through lending and private sector investment. 🗸🗸
• Establish private-public partnerships (PPP’s). 🗸🗸

In areas with high poverty and unemployment, SDI focuses on:

• High level support in areas where socio-economic conditions require concentrated government assistance. 🗸🗸
• Where inherent economic potential exists. 🗸🗸
• The approach is towards international competitiveness, regional cooperation and a more diversified ownership base. 🗸🗸

Some of the main focus points of the SDI Programme are:

• Lubombo Corridor (agro-tourism, education, craft, commercial and agricultural sectors); 🗸🗸
• KwaZulu-Natal (Ports of Durban and Richards Bay); 🗸🗸
• West Coast SDI (fishing and industrial ports); 🗸🗸
• Coast-2-Coast Corridor with agro-tourism. 🗸🗸
• It also makes it possible for private sector businesses to take advantage of the economic potential of underdeveloped areas in private-public partnerships (PPP’s) 🗸🗸
• In PPP a private business may provide the capital to build the factory and to buy raw materials and employ labour, while the government provides the capital for the infrastructure such as roads and water and electricity. 🗸🗸
• The business benefits from profits and the government benefits from taxes, levies and employment opportunities. 🗸🗸

There are TWO types of PPP’s which are compensated differently: Unitary payments:

• Private sector builds and runs a project (it performs the function on behalf of the public sector); the payment provides an acceptable return on the total investment (building cost, maintenance, operational expenses). 🗸🗸
• Private sector constructs the project and then is given the right to change a toll fee (e.g. public road); 🗸🗸
• The toll covers costs of construction, maintenance, operation. 🗸🗸
• The above options can be combined: E.g. hospital (cost of building is an annual payment and a user fee is also charged). 🗸🗸
• A track of land that forms a passageway allowing access from one area to another and particular advantages to mining, manufacturing and other businesses. 🗸🗸
• Domestic Corridor: e.g. Lubombo, West Coast, Fish River. 🗸🗸
• Corridors beyond the South African Borders (SADC) e.g. Maputo Development Corridor Mozambique. 🗸🗸
• Reasons in support of South Africa’s regional integration in Southern Africa: have political and stable neighbours have important export markets and a future source of water and energy supplies integration may be a precondition for support from foreign investors, donors and multilateral institutions. 🗸🗸
• A robust regional transport system and a solid infrastructure base hold the key to attracting investment into the SADC region – improving competitiveness and promoting trade. 🗸🗸

Advantages from Corridor development:

• Greater levels of economic efficiency and productivity compact urban form corridor urban form. 🗸🗸
• Corridor developments will often occur due to private investment. 🗸🗸
• Intergration of land use and transport planning will lead to generally efficient integration. 🗸🗸
• Efficient urbanisation leads to efficient use of land and promotion of an efficient transport system. 🗸🗸

INDUSTRIAL DEVELOPMENT ZONES (IDZ’s)

• Geographically designed, purpose-built industrial sites providing services tailored for export- orientated industries. 🗸🗸
• Physically enclosed and linked to an international port or airport. 🗸🗸
• Specifically designed to attract new investment in export-driven industries. 🗸🗸
• Falls outside domestic customs zones and able to import items free of customs and trade restrictions, add value and then export their goods. 🗸🗸
• Development and management done by private sector. 🗸🗸
• Government IDZ policy designed to boost exports and jobs. 🗸🗸
• IDZ’s aim to encourage economic growth –attract foreign investment in industrial development – facilitate international competitiveness regarding manufacturing. 🗸🗸 [Max 26]

ADDITIONAL PART FINANCIAL INCENTIVES Small and Medium Enterprise Development Programme (SMEDP) • This incentive has provided a tax-free cash grant for investment in industries in

• South Africa. 🗸🗸
• E.g. manufacturing, agricultural, processing, aquaculture and tourism. 🗸🗸

Critical Infrastructure Fund Programme (CIF)

• A tax-free cash grant incentive for projects has improved critical infrastructure in  South Africa. 🗸🗸
• E.g. for installation, construction of infrastructure, payment of employees, materials directly consumed during installation. 🗸🗸

Duty Free Incentives (for businesses operating in the IDZ’s)

• This has encouraged export-orientated manufacturing to increase their competitiveness 🗸🗸
• And helped to promote foreign and local direct investment. 🗸🗸

Foreign Investment Grant (FIG)

• This has assisted foreign investors to invest in new manufacturing businesses in SA. 🗸🗸
• Benefited in terms of the cost of relocating new machinery and equipment from abroad. 🗸🗸

Strategic Investment Projects (SIP)

• This has attracted investment from local and foreign entrepreneurs in manufacturing, computer, research and engineering sectors. 🗸🗸

Skills Support Programme (SIP)

• This cash grant for skills development has encouraged greater investment 🗸🗸
• In training in general and stimulated the development of new advanced skills. 🗸🗸

Black Businesses Supplier Development Programme (BBSDP)

• This 80 % cash grant has provided black-owned enterprises with access to 🗸🗸
• Training which has improved management of their enterprises. 🗸🗸

Special Economic Zones (SEZ)

• It is an extention to the current financial incetives to further promoted regional development. 🗸🗸
• The major incentive is a tax reduction of 15 % for businesses settling in this area. 🗸🗸
• This does not mean that existing businesses in the IDZ can relocate to take advantage of this incentive. 🗸🗸
• If a current business in the IDZ wants to expand they are allowed. 🗸🗸 [Max 10]

CONCLUSION From the above discussion it is clear that different initiatives form part of South Africa’s Regional Industrial Development Programme. [Max 2]

INTRODUCTION Economic indicators are used to evaluate the economic performance of an economic unit. This unit can be a company, an industry, a country or a region. Macro-economic indicators, measures the economic performance of a country as a whole. 🗸🗸

BODY-MAIN PART Such indicators can provide an indication of:

• Changes taking place in a country. 🗸🗸
• How a country compares to other countries. 🗸🗸

Inflation Rate

• This is the general increase in the price level of goods and services in the economy over a certain period in time. E.g. one year. 🗸🗸
• This is therefore an indicator of the health of the economy and it is monitored in two ways that is at the production wholesale level producer price level (PPI) and at the retail or consumer level consumer price index (CPI) 🗸🗸

The Consumer Price Index (CPI)

• Shows the price increases of a representative (weighted) basket of goods and services that consumers buy. 🗸🗸
• It is abbreviated as CPI this cover all the urban areas. 🗸🗸
• It is an overall index and weights are obtained from expenditures of different income categories of households. 🗸🗸
• It is the most comprehensive indicator measuring consumer inflation in the country. 🗸🗸
• It shows changes in the general purchasing power of the rand and it is used for inflation targeting 🗸🗸
• Is compiled by Stats SA and measures the change in the price level of a basket of consumer goods and services. 🗸🗸
• The goods and services included in the basket are chosen to represent the goods and services purchased by an average household. 🗸🗸
• This basket is adjusted from time to time as consumption patterns change. 🗸🗸
• The inflation rate is the percentage change in the CPI from the previous year and can be calculated as follows:
• Change in CPI x 100 🗸🗸        CPI

The Production Price Index (PPI)

• Used to measure the price of goods that are produced domestically when they leave the factory year. 🗸🗸
• The goods that are imported when they enter the country (at a port) and both of these are before consumers become involved. 🗸🗸
• PPI consists of three baskets that are domestically manufactured outputs, e.g. changes in the PPI can be made monthly or quarterly or yearly. 🗸🗸
• While changes in the imported products and exported commodities are given separately in the same report. 🗸🗸
• PPI includes capital and intermediate goods but not services. 🗸🗸
• It is based on a completely different type of a basket of items in the CPI. 🗸🗸
• It measures the cost of production rather than the cost of living. 🗸🗸
• It is used to predict consumer goods inflation (CPI) 🗸🗸
• Which is also estimated and published on a monthly basis by Stats SA, is similar to the CPI, 🗸🗸
• Except that it also includes the prices of raw materials and intermediary goods 🗸🗸 (i.e. goods that will be finished in the production process), excludes VAT and excludes  services. 🗸🗸
• Manufactured goods included in the PPI are priced when they leave the factory, not when they are sold to consumers. 🗸🗸
• Unlike the CPI, the PPI therefore cannot be related directly to consumers’ living standards. 🗸🗸
• The PPI is nevertheless very useful in the analysis of inflation because it measures the cost of production. 🗸🗸
• A significant change in the rate of increase in the PPI is usually an indication that the rate of increase in the CPI will also change a few months later. 🗸🗸

The GDP Deflator Is a ratio that indicates the relationship of the GDP at nominal prices to the GDP at real prices. GDP deflator = Normal GDP x 100 🗸🗸                            Real GDP 

Nominal GDP

• Is the value of total gross domestic product measured at current prices. 🗸🗸
• While the real GDP is the value of total gross domestic product measured at constant prices.🗸🗸
• So, the GDP deflator includes changes in the prices of exports but not of imports. 🗸🗸
• In a small open economy, like that of South Africa where both, imports and exports are significant in relation to the total size of the economy. 🗸🗸
• The exclusion of import prices is an important shortcoming. 🗸🗸

Unemployment rate

• In terms of economic development, employment is a very important indicator. 🗸🗸
• Employment is, however, not very easy to measure as so many people are employed in the informal sector which is not recorded. 🗸🗸
• The concept of underemployment is also important. 🗸🗸
• This is when someone is employed in a position that requires less skill than their ability. 🗸🗸
• For example when a qualified accountant works as a delivery person because he or she cannot find employment as an accountant. 🗸🗸
• Someone may also be employed on a part-time basis but would prefer to work full time. 🗸🗸
• A labour force survey is published quarterly by Stats SA. 🗸🗸
• This publication contains information and statistics concerning a variety of issues related to the labour market, including the official unemployment rate. 🗸🗸
• It is a comprehensive survey and provides information on changes in employment in different provinces and industries. 🗸🗸
• Employment in the informal sector, and even reasons for changes in employment figures. 🗸🗸
• The unemployment rate is a percentage of the total labour force. 🗸🗸
• The total labour force includes all employed people and unemployed people who are looking for work. 🗸🗸
• The unemployment rate is a lagging indicator, which means that it will only change a few periods after the trend in the economy has changed. 🗸🗸
• For example if the economy starts growing at a faster pace. 🗸🗸
• The unemployment rate will only react to the growth after two or three quarters. 🗸🗸

Interest rates

• Interest rates are important indicators of future economic activity, as the interest rate level is usually an important determinant when economic decisions are being taken. 🗸🗸
• Both the general interest rate level and the structure of interest rates are important indicators.🗸🗸
• There are many interest rates in the economy. 🗸🗸
• Some are short term rates, such as the repo rate, which is the interest rates at which South Africa banks borrow from the Reserve Bank to finance their liquidity deficit. 🗸🗸
• The difference between the short term interest rates and long term interest rates: 🗸🗸
• Is called the interest rate spread and the term structure of interest rates provides an indication of the interest rates levels on loans or investments of different maturities. 🗸🗸
• Usually we can expect the interest rates level in a developing country to be higher than the interest rate in a developed economy. 🗸🗸
• This is due to the higher risk attached to the developing economy. 🗸🗸
• Factors such as political and economic uncertainty cause this higher risk. 🗸🗸
• Developing economies also need to attract foreign investment to their country  to finance growth. 🗸🗸
• Investors’ funds will move towards the highest yield and thereof. 🗸🗸
• Developing countries cannot allow interest rates in their countries to become too low. 🗸🗸

Money Supply

• The increase in the M3 money supply is an important economic indicator. 🗸🗸
• If M, the money supply increases, this means that either (P) prices or Y (output) has to respond to the increase in M. 🗸🗸
• Therefore, an increase in the money supply is an important indicator showing that output will increase. 🗸🗸
• Whether this will translate to an increase in real production or the price level will depend on factors like production within the economy. 🗸🗸
• In addition to economic growth the employment of people of working age (15 -64 years) is a majot economic objective. 🗸🗸
• We need to know more than this; we need to know who the people are that need to be employed. 🗸🗸
• The numbers are determined, not only by age, but also by people’s willingness to work. 🗸🗸

The Economically Active Population (EAP)

• The EAP is also known as the labour force. 🗸🗸
• It consists of people between the age of 15 and 64 who are willing to work for income in cash or in kind and includes: 🗸🗸
• Workers in the formal sector- workers in the informal sector. 🗸🗸
• Employers any one 🗸🗸
• Self employed persons. 🗸🗸

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Unemployed Persons

• The 2021 estimate of the South African population was million people. 🗸🗸
• The EAP numbered million ( % of the population). 🗸🗸

The Employment Rate

• The number of employed persons expressed as a percentage of the EAP gives the employment rate. 🗸🗸
• The employment rate can also be converted into an index. 🗸🗸
• The SA employment rate was % in 2011. 🗸🗸
• This is low, compared to rates in developed and even some developing countries such as Argentina and Pakistan. 🗸🗸
•  In SA the growth in the economy is not accompanied by the similar growth in employment numbers. 🗸🗸

Employment indicators are used for:

• To calculate trends in employment in different sectors or industries. 🗸🗸
• This indicates structural changes in the economy. 🗸🗸
• To calculate productivity. 🗸🗸
• To show the success of the economy in utilizing its full potential. 🗸🗸

Unemployment Rate

• Statistics SA (SSA) obtains its labour data each year from Quarterly Labour Surveys  (QLFS). 🗸🗸
• It uses the standard definition of the International Labour Office (ILO) to calculate unemployment. 🗸🗸
• The strict definition of unemployment is used to calculate the unemployment rate. 🗸🗸
• Did not work during the seven days prior to the interview. 🗸🗸
• Want to work and are available to start work within a week of the week of the interview. 🗸🗸
• Have taken active steps to look for work or to start some form of self-employment in four week prior to the interview. 🗸🗸
• In SA the official unemployment rate was % in 2021. 🗸🗸
• In developed countries, change in the unemployment rate trigger responses. 🗸🗸
• From governments to fine-tune the economy. 🗸🗸
• Increases require more funds for unemployment insurance (UIF) drawings. 🗸🗸
• In developing countries, unemployment is the most important cause of poverty. 🗸🗸 [Accept current statistical data] [Max 16]
• To give a policy direction in the country. 🗸🗸
• To develop mechanism to caution the most affected sectors of the economy promptly
• e.g.during the 2019-2020 recession/pandemic some companies required a bail out from the government. 🗸🗸
• Develop some economic stabilisers to defuse the huge impact that may result from the unexpected economic downturn. 🗸🗸
• Open some other alternative markets for their goods and services. 🗸🗸
• To do research and advice the business community before the actual moment hits. 🗸🗸
• It can be used to stimulate thinking and growth in a number of sectors in the Economy. 🗸🗸 [Accept any relevant consideration] [Max 10]

CONCLUSION Countries cannot survive and grow their economies if they do not pay attention to economic indicators for their planning processes. [Accept any relevant consideration] [Max 2]

INTRODUCTION Social indicators also called human development indicators as they promote improvement in the standard of living. 🗸🗸 [Any other relevant definition] [Max 2]

BODY-MAIN PART Demographics

• This is the description of the physical population and its composition.
• To get this a census is done regularly to obtain this information. 🗸🗸

Human development Index (HDI)

•  This is a measure of people’s ability to live long and healthy lives, to communicate, 🗸🗸
•  To participate in the community and to have sufficient income to experience a decent lifestyle. 🗸🗸

Human poverty index (HPI)

•  It measures life expectancy is measured by the percentage of newborns not expected to survive to age 40. 🗸🗸
•  Lack of education is measured by the percentage of adults who are ill- educated. 🗸🗸

Health and nutrition

• Life expectancy birth. 🗸🗸
• Infant mortality rate. 🗸🗸

Nutrition indicators

• Daily calorie intake per person. 🗸🗸
• The number of children who go hungry. 🗸🗸
• These measures are important to government as they are supplying healthcare and sometime have to include legislation such as adding vitamin A to basic foodstuffs such as bread. 🗸🗸
• The standard of living of people is directly connected to their education. 🗸🗸
• Educated people are employable and can earn an income and provide for their own wants and needs. 🗸🗸

Two important measures are:

• Secondary enrolment percemtage-how many children that start Grade 1 get to Grade 8 and finish Grade 12. 🗸🗸
• Adult literacy- People over the age of 15 that can read and write. 🗸🗸
• A large percentage of the annual budget is allocated to education. 🗸🗸
• Because of our constitution certain basic services must be supplied by the government. 🗸🗸
• These services have a direct effect on people’s living standards. 🗸🗸
• Electricity 🗸🗸
• Refuse disposal🗸🗸
• Water supply🗸🗸
• Sanitation🗸🗸

Housing and urbanisation

• Urbanisation the process by which an increasing proportion of a country’s population is concentrated in its urban areas as a result of natural increase and migration from rural areas. 🗸🗸
• This measures is important as more people come to live in urban areas the greater the demand for housing, services, education, health care etc. 🗸🗸
• Housing the percentage of the population living in a permanent dwelling or house. 🗸🗸
• The government issue housing subsidies to help poor people to own a house South African citizens or permanent residents earning R3 500 or less a month could apply for this subsidy. 🗸🗸

International comparisons

• Figures collected by the World Bank, International Monetary Fund (IMF) and United Nations provide the best data for comparison purpose. 🗸🗸

Other measures used:

• Purchasing power parity (PPP) The number of units of one country’s currency that give the holder the same purchasing power as one unit of another country’s currency. 🗸🗸
• The Big Mac Index, The index is based on the price of the Big Mac around the world as compared to its price in the United States. 🗸🗸 [Max 40]

CONCLUSION From the above discussion it is clear that social indicators play a significant role in South Africa. It is, therefore, of the utmost importance that we should study their uses in depth. [Max 2]

MICROECONOMICS-PAPER 2

INTRODUCTION A perfect market is a market structure which has a large number of buyers and sellers.  OR The market price is determined by the industry (demand and supply curves).  OR This means that individual businesses are price takers, i.e. they are not able to influence prices. OR Perfect competition is an imaginary situation, whereas monopolistic competition is a reality. 🗸🗸 [Accept any other relevant introduction] [Max 2] 

BODY-MAIN PART

• The indicating of the equilibrium positions on the perfect market structure is of utmost importance because from this point where MC = MR
• The dotted lines will be drawn to show economic profit or economics loss. 
• Where the dotted lines intersect the AC and AR curves either normal profit or economic profit or economic loss will be indicated and shadowed.

Mark allocation for graph:

• Position / shape of MC curve = 1 mark
• MR curve = 1 mark
• Position / shape of AC curve = 2 marks
• Equilibrium point = 1 mark
• Indication of price / quantity = 1 mark
• Shading of economic loss = 2 marks MAX MARKS = (8)

Allocate marks on the graph according to the rubric provided and if facts are duplicated again in writing, do not allocate marks. Max of 8 marks.

• Equilibrium is at E 1 i.e. where MC = MR 
• At this point Q 1 goods are produced at a price of P 1  
• The averages cost for Q 1 units is point R on the AC curve 
• Price / AR is greater than AC ( TR > TC)
• Therefore economic profit is represented by the area P 1 SRE 1  
• Equilibrium is at E 1 i.e. where MC = MR
• At equilibrium (point E 1 ) average cost is equal to price 
• The AC curve is tangent to the demand curve which means that P/AR = AC (TR = TC) 
• The business makes normal profit which is the minimum earnings required to prevent the entrepreneur from leaving the industry. 
• Equilibrium is at E1, i.e. where MC = MR 
• At this point Q1 goods are produced at a price of P1 
• At equilibrium (point E1) price/AR is less than average cost/the AC curve is lies above the demand curve which means that P/AR < AC (TR < TC) 
• The business makes an economic loss A maximum of 24 marks will be allocated for graph illustration and analysis: 8 marks max per graph illustration - (Max 26 marks)

ADDITIONAL PART CONDITIONS For a market to successfully operate under perfect competition, the following conditions should prevail at the same time:

• No firm can influence the market price (price takers) due to a large number of buyers and sellers 
• Products are identical (homogeneous) 
• There are no barriers of entry, meaning that there is freedom of entry and exit 
• Buyers and sellers act independently - no collusion between sellers 
• No government interference to influence the market – the market is unregulated 
• Free movement between markets - all factors of production are completely mobile 
• Both buyers and sellers have full knowledge of all the prevailing market conditions (perfect information) 
• If any of the above conditions are not met, the market is regarded as an imperfect market Any 5 x 2 = [Max 10 marks]

CONCLUSION Freedom of entry and exit into the perfect market alter the supply of goods on the market. This will result in changes in price which influences the profit or loss of a business.  If price falls to a level where it is equal to the AVC then the firm will shut-down.  [Max 2] Discuss the monopoly in detail (with/without the aid of graphs) (Imperfect Market)

INTRODUCTION A firm is regarded as a monopolist when it owns or controls the total supply of a scarce factor of production. Monopoly is a market structure where only one seller operates. 🗸🗸

BODY: MAIN PART The characteristics of a monopoly

Number of firms

• The monopoly consists out of one single firm. 🗸🗸
• The monopoly is also the industry. 🗸🗸
• Example: Eskom or De Beers – diamond-selling 🗸🗸 [Accept any other relevant example]

Nature of product

• The product is unique with no close substitute. 🗸🗸
• Example: Diamonds are unique. 🗸🗸

Market entry

• Refers to how easy or difficult it is for businesses to enter or to leave the market 🗸🗸
• Is entirely/completely blocked. 🗸🗸
• Economies of scale 🗸🗸
• Limited size of the market 🗸🗸
• Exclusive ownership of raw materials 🗸🗸
• Licensing 🗸🗸
• Sole rights 🗸🗸
• Import restrictions 🗸🗸

They decide on their production level

• The monopolist cannot set the level of output and the price independently of each other. 🗸🗸
• If a monopolist wants to charge a higher price, it has to sell fewer units of goods. 🗸🗸 Alternatively, a reduction in price will result in a higher output sold. 🗸🗸
• A monopolist is confronted with a normal market demand curve 🗸🗸
• The demand curve slopes downwards from left to right 🗸🗸
• Any point on the monopolist’s demand curve (D) is an indication of the quantity of the product that can be sold and the price at which it will trade. 🗸🗸

They are exposed to market forces

• Consumers have limited budgets and a monopoly can therefore not demand excessive prices for its product. 🗸🗸
• The monopolist’s product has to compete for the consumer’s favour and money with all other products available in the economy. 🗸🗸

They face substitutes

• There are few products that have no close substitutes. 🗸🗸
• For example, cell phones can compete with telephone services. 🗸🗸

They may enjoy favourable circumstances

• Sometimes an entrepreneur may enjoy favourable circumstances in a certain geographical area. 🗸🗸
• For example, there may be only one supplier of milk in a particular town. 🗸🗸

They may exploit consumers

• Because a monopolist is the only supplier of a product, there is always the possibility of consumer exploitation. 🗸🗸
• However, most governments continually take steps to guard against such practices. 🗸🗸

Market Information

• All information on market conditions is available to both buyers and sellers. 🗸🗸
• This means that there are no uncertainties. 🗸🗸

Control over price

• In the case of a monopoly there are considerable price control, but limited by market demand and the goal of profit maximisation. 🗸🗸

Long-run economic profit Can be positive

• Because new entries are blocked and short-run economic profit therefore cannot be reduced by new competing firms entering the industry 🗸🗸
• The monopoly can thus continue to earn economic profit as long as the demand for its product remains intact 🗸🗸

Heading = 1 mark AC = 1 mark DD/AR = 1 mark MC = 1 mark Profit maximisation point =1 mark Labelling of the axis = 1 mark Labelling on the axis = 1 mark

Long run equilibrium of a perfect competitor

CONCLUSION A monopoly does not always make economic profit in the short run; it can also make economic loss in the short run if the total cost exceeds total revenue. 🗸🗸

INTRODUCTION

• The oligopoly is a type of imperfect market in which only a few large producers dominate the market. 🗸🗸 [Accept any other relevant and correct response]

MAIN PART Nature of product

• The product may be homogeneous in a pure oligopoly. 🗸🗸
• If the product is differentiated, it is known as a differentiated oligopoly. 🗸🗸

Market information

• There is incomplete information on the product and the prices. 🗸🗸
•  Market entry is not easy, it is limited in the sense that huge capital outlay might be necessary. 🗸🗸
• Oligopolists have considerable control over price, it can influence price, but not as much as the monopolist. 🗸🗸
• Oligopolies can frequently change their prices in order to increase their market share and this result in price wars. 🗸🗸

Mutual dependence

• The decision of one firm will influence and be influenced by the decisions of the other competitors. 🗸🗸
• Mutual dependence (interdependence) exists amongst these businesses.
• A change in the price or change in the market share by one firm is reflected in the sales of the others. 🗸🗸

Non-price competition

• Non - price competition can be through advertising, packaging, after-sales services. 🗸🗸
• Since price competition can result in destructive price wars, oligopolies prefer to compete on a different basis. 🗸🗸
• Participants observe one another carefully- when one oligopolist launches an advertising campaign, its competitors soon follow suite. 🗸🗸
• If oligopolies operate as a cartel, firms have an absolute cost advantage over the rest of the other competitors in the industry. 🗸🗸
• Collusion is a strategy used by firms to eliminate competition amongst each other. 🗸🗸
• It can be in a form of overt collusion where firms can work together to form a cartel and tacit collusion where a dominating business controls the price. 🗸🗸

Limited competition

• There are only a few suppliers manufacturing the same product. 🗸🗸

Economic profit

• Oligopolies can make an economic profit over the long term. 🗸🗸
• Abnormal profits may result to joint decision-making in an oligopoly. 🗸🗸

Demand curve

• Slope from left down to the right. 🗸🗸
• It is known as the kinked demand since it contains the upper relatively elastic slope and the lower relatively inelastic slope. 🗸🗸 [Accept any other relevant and correct response] [Max. 26]

ADDITIONAL PART Oligopolist may increase their market share using non-price competition strategies by:

• branding their product to create an impression that its product is for a particular age group or income group. 🗸🗸
• aggressive advertising which inform customers about the business or product it provides.🗸🗸
• Using appealing packaging to bring out important features of their product.
• improving their customer service in order to ensure that they return to their businesses.🗸🗸
• providing relevant and precise information, which is crucial to the customers, since there are competitors in the market, customers will patronize the businesses that provides relevant information. 🗸🗸
• extending shopping hours to the convenience of customers.
• Offering loyalty rewards to customers which will encourage their return to spend accumulated rewards. 🗸🗸  [Accept any other relevant response] [Max.10]
• In South Africa, oligopolists have been found to be illegally manipulating prices to their benefit, yet to the detriment of consumers and have been penalized for such action. 🗸🗸 [Accept any other relevant response]

Compare and contrast any TWO types of market structures (perfect to imperfect/imperfect to imperfect) in detail in terms of the following. - Number of businesses - Nature of product - Entrance - Control over prices - Information - Examples - Demand curve - Economic profit/loss - Decision-making - Collusion - Productive/Technical efficiency - Allocative efficiency (Perfect Market and Imperfect Market)

‘’Market structures are classified under Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly’’ Compare all FOUR market structures in a tabular form. NB: Learners should write in full sentences even if the comparison is done in a tabular format). (Marks depend on the combination of market structures to be examined)

PLEASE NOTE: THE ABOVE TABLE SHOULD BE VERBALLY WRITTEN AS PER ESSAY INSTRUCTION

INTRODUCTION Market failure is when the forces of supply and demand fail to allocate resources efficiently / when markets fail to allocate goods and services efficiently. 🗸🗸 [Accept any other correct introduction] [Max 2]

BODY: MAIN PART                           

1. Missing Markets

• Markets are often incomplete in the sense that they cannot meet the demand for certain goods. 🗸🗸
• Public goods:
• They are not provided by the price mechanism because producers cannot withhold the goods from non-payment and there is often no way of measuring how much a person consumes. 🗸🗸

Public goods have the following features: Non-rivalry:

• The consumption by one person does not reduce the consumption of another person e.g. a lighthouse. 🗸🗸

Non-excludability:

• Consumption cannot be confined to those who have paid, so there are free riders e.g. radio and TV in South Africa. 🗸🗸

Merit goods

• These are goods/services that are deemed necessary or beneficial to the society, e.g. education, health care etc. 🗸🗸
• These goods are highly desirable for general welfare but not highly rated by the market, therefore provide inadequate output/supply. 🗸🗸
• If people had to pay market prices for them relatively too little would be consumed – the market will fail. 🗸🗸
• The reason for undersupply of merit goods is that the market only takes the private costs and benefits into account and not the social costs and benefits. 🗸🗸

Demerit goods

• These are goods/services that are regarded as bad or harmful for consumption hence we should use less of these e.g. alcohol, cigarettes, etc. 🗸🗸
• Demerit goods lead to a lot of social costs, therefore, the government charges sin tax / excise duties to discourage the consumption of such goods. 🗸🗸
• While the market is willing to supply demerit goods, it tends to oversupply demerit goods. 🗸🗸
• Some consumers may be unaware of the true cost of consuming them. 🗸🗸

2 Lack of information

• Technical and allocative efficiency require that both producers and consumers have complete and accurate information about the costs and benefits of the goods and services produced and consumed in the market. Producers and consumers make production and consumption decisions based on the information they have. 🗸🗸
• When information is incomplete or inaccurate, it leads to wrong decisions about what to produce, how to produce and for whom to produce, and a waste of resources occurs. 🗸🗸
• Producers might not know all the different technologies and production techniques that are available and the different resources that can best be used to produce goods/services more efficiently. 🗸🗸
• Consumers might not know that the price of a product is lower from some other suppliers or about the harmful effects of a product since they might just base their decisions to consume on the information from a misleading suppliers. 🗸🗸

3. Immobility of factors of production

• Markets do not respond to changes in consumer demand if resources cannot be easily reallocated or due to a lack of information🗸🗸
• Labour takes time to move to into new occupations and geographically to meet the changes in consumer demand. 🗸🗸
• Physical capital e.g. equipment, buildings, land and raw materials can only move from one place to another at a high cost, but cannot be moved to fit a change in demand. 🗸🗸
• Technological applications change production methods e.g. use of robots rather than physical labour. It takes time for most industries to adapt. 🗸🗸
• With greater technological change there is an increasing need for workers to become flexible, to update skills, change employment, occupations and work patterns. 🗸🗸 [Max 26]
• Motivate why government has implemented a national minimum wage in the labour market. 🗸🗸
• Pressure was put on the South African government to introduce labour laws which require employers to pay minimum wages. 🗸🗸
• The application of minimum wage laws is needed to improve a redistribution of income. 🗸🗸

The main objectives were:

• To redress inequality (Gap between wealthy and poor) 🗸🗸
• To improve the standard of living. 🗸🗸
•  Government tried to protect domestic workers and farm workers — thus preventing exploitation. 🗸🗸  [Max 10] [Accept any other correct relevant response]

CONCLUSION Governments intervene in the market when market forces cannot achieve the desired output. [Max 2] [Accept any other relevant conclusion]

INTRODUCTION The purpose of government intervention is to ensure that the right quantity of resources is allocated to the production of output so that society as a whole [Accept any other relevant introduction] [Max 2] maximizes its benefits. 🗸🗸

• Sometimes government will set the price of a good or service at a maximum level that is  below the market price 🗸🗸
• The government intervene and passes a law that suppliers may not charge more than the maximum price 🗸🗸
• The immediate effect is that quantity supply will drop 🗸🗸
• The original market equilibrium price and quantity is P and Q respectively 🗸🗸
• The price set by the government is P1, at this price the demand will increase to Q1 and the supply will decrease to Q2 🗸🗸
• The difference between Q1 and Q2 is the shortfall that will be created on the market 🗸🗸
• The shortage caused by the price ceiling creates a problem of how to allocate the good since the demand has increased 🗸🗸
• Black markets start to develop [Mark allocation: Graph 6 and discussion max. 10 marks]
• The appropriate way to intervene in the market by government is by levying taxes as a method to recover external cost 🗸🗸
• The original market equilibrium at e, with P as the equilibrium price and Q as the equilibrium quantity 🗸🗸
• The tax increase will shift the supply curve to the left 🗸🗸
• New equilibrium at E1 🗸🗸
• A tax would raise the price from P to P1 🗸🗸
• The production will decrease from Q to Q1 🗸🗸 [Mark allocation: Graph total 6 marks and discussion max 10 marks]
• Explain the supply of undesirable goods in South Africa and how the government can deal with it. 🗸🗸
• Items such as cigarettes, alcohol and non-prescription drugs are examples of demerit or undesirable goods. 🗸🗸
• These goods are often over supplied in the market, due to the fact that the external cost is not added to the market price. 🗸🗸
• Some consumers may be unaware of the true cost of consuming them, their negative externalities. 🗸🗸
• Government can ban their consumption or reduce it by means of taxation. 🗸🗸
• Taxation on these products will increase the market price and hopefully the demand for these products will drop. 🗸🗸 [10 marks] [Accept any other correct relevant response]

CONCLUSION The intervention of government ensures that inefficiencies is eliminated and that the market is operating effectively 🗸🗸 [Accept any other relevant conclusion] [Max 2]

CONTEMPORARY ECONOMIC ISSUES-PAPER 2

• This is a constant and significant increase in the general price level of goods and services in the country over a certain period of time, e.g. a year. 🗸🗸 [Max 2] [Accept any relevant introduction]

BODY-MAIN PART Creditors and Debtors

• Whereas borrowers (debtors) benefit from price increases, lenders (creditors) suffer due to price increases. 🗸🗸
• This is because borrowers receive money with a relatively high purchasing power and they repay their loans with money with low purchasing power, unless interest rates are sufficient to prevent this occurrence. 🗸🗸

Salary and Wage Earners

• Price increases affect people whose incomes are relatively fixed (in other words, people whose incomes remains constant or do not increase at the same rate as prices do. 🗸🗸
• This group includes retired people, pensioners and the poor. 🗸🗸
• As prices increase, their almost fixed incomes purchase less and less. 🗸🗸
• However there are individuals and entrepreneurs whose incomes often increase at a rate that is higher than the inflation rate and they do not suffer but gain from inflation. 🗸🗸
• Globalization results in increased employment opportunities in the economy due to increased productivity, the need to produce more goods both for local and international markets rises in globalised economies. 🗸🗸
• The demand for increased skilled labour becomes a need as a result, this demand for labour benefits the local labour market in increased employment opportunities and growth. 🗸🗸

Investors and Savers

• Different types of investments are affected by inflation: Assets with fixed nominal values. 🗸🗸
• These assets have a fixed nominal value and give a return if they are held until maturity. 🗸🗸
• When they are paid, because their nominal values remain constant, the purchasing power of the nominal values decreases as prices increase (that is, their real value decreases). 🗸🗸

Assets with Flexible Market Values

• The holders of shares and fixed property usually gain by price increases because the nominal values of these assets tend to increase at least proportionately to the rate of inflation (that is, their market values are flexible). 🗸🗸
• Often the prices of these assets increase more rapidly than increases in the general price level.🗸🗸
• In this case, inflation creates wealth to the advantage of those holding such assets. 🗸🗸
• South Africa has a progressive personal income tax system. 🗸🗸
• This means that marginal and average tax rates increase in harmony with the income level. 🗸🗸
• The higher level an individual’s income, the greater the percentage of income he or she has to pay tax. 🗸🗸
• With inflation, taxpayers’ nominal income (wages and salaries) rise even when their real income remain unchanged. 🗸🗸

Taxes are levied on nominal income and not on real income.

• Therefore if the income tax schedule remains unchanged inflation increases the average rate of personal income tax. 🗸🗸
• Individuals will have to pay higher taxes even if they are actually no better off than before. 🗸🗸
• This phenomenon known as bracket creep, lads to a redistribution of income from taxpayers to the government. 🗸🗸
• Bracket deep results from a combination of inflation and progressive income tax. 🗸🗸
• It has the same effect as an increase in the tax rate. 🗸🗸

Industrial Peace

• Wage bargaining is often accompanied by strikes and mass action. 🗸🗸
• These actions can sometimes spill over into violence, which affects society at large. 🗸🗸
• In extreme situations in the presence of exceptionally high inflation together with a government that is determined not to yield to wage increase demands (which can push inflation to even higher levels), widespread civil unrest follows. 🗸🗸

Inflation has a negative effect on economic growth

• Inflation leads to increased uncertainty in the economy. 🗸🗸
• This uncertainty discourages savings and investments especially in the long term. 🗸🗸
• Which are necessary for economic growth –result reduced economic growth. 🗸🗸

Inflation affects the real money value and savings

• Because inflation reduces the real value of money, it affects the real value of money saved in particular. 🗸🗸
• This means that inflation, the rand buys fewer goods and services than before. 🗸🗸
• It also means that the real money value saved is worth less at the end of the savings period than when the money was saved. 🗸🗸
• e.g. if a consumer receives 5 % interest on his/her savings account while the inflation rate is 8%, then the real rate of interest on the consumer’s savings is -3%.🗸🗸

Inflation has an adverse effect on a country’s balance of payments (BOP).

• If a country’s rate of inflation is higher than that of its trading partners the prices of exported goods increase while the prices of imported goods decrease. 🗸🗸
• This leads to loss of competitiveness in the export market, which in turn leads to decreased exports. 🗸🗸

This has a negative effect on the country’s balance of payments (BOP).

• The loss of export competiveness can also increase unemployment inflation affects the redistribution of income in a country. 🗸🗸

The effects of inflation are uneven.

• While it does not clearly benefit anyone and certainly harms most, it also harms some less than others. 🗸🗸
• Inflation also tends to redistribute income from low-income groups to higher income groups. 🗸🗸
• This is because people in the low income groups do not have assets than can rise in value faster than the rate of inflation to help them overcome the effects of inflation. 🗸🗸
• Powerful groups such as trade unions large companies and the wealthy people, are able to increase their share of national income at the expense of disadvantaged people such as pensioners the unemployed and the welfare recipients. 🗸🗸

Inflation has social and political costs

• When inflation continually causes rising prices it makes people unhappy and can disturb relations between employers and the employees and between customers and traders or service providers. 🗸🗸
• People in lower-income brackets feel severe effects of increases in the price of essential items such as bread, maize meal rental and transport costs. 🗸🗸
• This can lead to social unrest and political unrest. 🗸🗸

Inflation feeds on itself and causes further inflation

• This is called the inflation spiral. 🗸🗸 e.g. higher wage demands cause producers to increase their prices to maintain their profits.
• This happens again and again pushing prices further every time. 🗸🗸
• If the government does not keep this wage price spiral in check, inflation may get out of control and become hyperinflation. 🗸🗸 [Max 26]

ADDITIONAL PART Debate the merits (benefits) of administered prices by the government

• These are prices regulated by the government e.g. home owner’s costs on water/household fuel (paraffin and electricity) medical care (public hospitals) communication (telephone calls, telephone rentals and installations/postage cell communications /transport (petrol). 🗸🗸
• Most of the administered prices are adjusted once a year which brings price stability. 🗸🗸
• Regulated prices are restricted as to the extent to which prices may vary, depending on the government’s objectives. 🗸🗸
• Administered prices provide additional revenue to national treasury. 🗸🗸
• It appears that some of these prices remain extremely robust over the short term. 🗸🗸 [Accept any other relevant response] [Max 10]
• If inflation is not controlled by the proper and effective instruments, it can have challenging problems to the economy in general. 🗸🗸

INTRODUCTION COST PUSH Inflation is a sustained and significant increase in general price level over a period of time and a simultaneous decrease in the purchasing power of money. Accept any other relevant introduction. 🗸🗸 [Max 2] 

BODY: MAIN PART Causes of cost-push inflation

Increase in Wages:

• In South Africa, increase in wages constitute more than 50% of Gross Value Added at basic prices 🗸🗸
• If the increase in wages is not accompanied by an increase in production, the cost of production will rise 🗸🗸
• Producers will increase the prices of their products to offset the high cost of production strikes and stay-aways / labour union activities 🗸🗸

Key inputs/ increase in prices of imported capital goods

• When the prices of key inputs that are imported increase, domestic cost of production 🗸🗸
• increases especially in the manufacturing sector 🗸🗸
• Supply shocks e.g. sudden increase of oil causes a knock-off effect 🗸🗸

Exchange rate depreciation

• A decrease in the value of the rand will result in an increase in prices of imports 🗸🗸

Profit margins

• When firms increase profit margins, the prices that consumers pay also increase 🗸🗸
• Sometimes firms use their market power to push up prices 🗸🗸

Productivity

• Less productive factors of production will lead to increased cost per unit 🗸🗸
• Strikes and stay-aways often reduce production output and can result in price increases 🗸🗸

Natural disasters

• Natural disasters such as drought, flood and global warming can impact on the cost of production 🗸🗸
• This is often the case in relation to food prices 🗸🗸
• An increase in interest rates results businesses paying more money for capital loaned firms recover these costs by increasing the prices of their products 🗸🗸

Increase in taxation

• Increase in direct tax like company income tax may lead to businesses increasing their prices to offset the extra burden 🗸🗸
• Increase in indirect tax such as custom duty will lead to increase in costs of supplying a particular product, therefore the price will increase 🗸🗸
• Administered prices increase e.g. fuel prices
• Shoplifting and losses caused by employees are added to the prices of products 🗸🗸 [Accept any other relevant fact. Maximum 8 marks for headings] [Max. 26]

DEMAND PULL INFLATION Total spending on domestic goods and services in the economy consists of the spending by households, firms, the government and the foreign sector.

• Total spending = C + I + G + (X-M). 🗸🗸

Causes of demand inflation Increase in consumption [C] – consumers expenditure will increase mainly for three reasons:

• a. If consumers save less & spend more🗸🗸
• b. Decrease in personal income tax. 🗸🗸
• c. A greater availability of consumer credit, because of decrease in interest rate. 🗸🗸

Investment [I] –When business invest this increase demand for labour, cement, sand and bricks. 🗸🗸

• Supply cannot keep up with the increase in demand and this will increase prices. 🗸🗸
• Lower interest rates may result in an improvement in the sentiment and profit expectations of businesses. 🗸🗸
• Businesses invest more and this may lead to an increase in the demand of goods and services that are part of the investment (for example, a new building requires cement bricks and labour).🗸🗸
• If aggregate demand increases at a faster rate than aggregate supply, price increases will follow.🗸🗸

Government Spending [G] – Three main reasons.

• a. New capital projects🗸🗸
• b. Consumption expenditure on education, health, and protection. 🗸🗸
• c. Social expenditure on public work programme to create jobs and increase in social allowances. 🗸🗸

Export earnings [X]

• a. When economy of trading country improve. 🗸🗸
• b. When global economy expands. 🗸🗸

Access to credit

• There is greater availability of consumer credit (by means of credit cards) of the availability of cheaper credit as a result of decreases in lending rates. As new credit is extended the credit multiplier kicks in and more credit is created. 🗸🗸

Consumption spending

• Most governments will at times increase expenditures on education, health, protection and safety (for example, military equipment such as bomber jets and submarines). 🗸🗸

Social spending

• Governments sometimes feel they have to do something substantive about unemployment and poverty. 🗸🗸
• They borrow money and spend it on public works programmes or raise the level of social grants year after year at a higher rate than the inflation rate. 🗸🗸
• Such expenditures invariably lead to inflation because they add to aggregate demand without adding anything to aggregate supply. 🗸🗸

Commodities demand

• The world’s demand for commodities expands and contracts like business cycles do. During an expansionary period, foreign demand increases and this leads to greater volumes of exports. The income earned from these exports adds to aggregate demand and prices increase. 🗸🗸

BODY: ADDITIONAL PART YES / NO

• Inflation targeting is when a particular percentage is set as an acceptable level for an increase in general price levels 🗸🗸
• The SARB's inflation target is a range of 3% and 6% 🗸🗸
• The aim of inflation targeting policy is to achieve and maintain price stability 🗸🗸
• The implementation of the inflation target is easy to understand – expressed in numbers which makes it very clear and transparent 🗸🗸
• It reduces uncertainty and promotes sound planning in the public and private sectors 🗸🗸
• It provides an explicit yardstick that serves to discipline monetary policy and improves the accountability of the central banks 🗸🗸
• The SARB make use of monetary policy, specifically the repo rate to keep the inflation within the target range 🗸🗸
• The government make use of fiscal policy regarding public sector revenue and expenditure 🗸🗸

Positive effects

• Where demand is higher than supply an increase in interest rates help to bring the demand down 🗸🗸
• The policy can helps businesses to make economic plans without worrying about the effects of high inflation 🗸🗸
• South Africa's price level has been fairly stable since the introduction of the inflation targeting policy in 2000 🗸🗸

Negative effects

• Inflation targeting can cause a reduction in economic growth 🗸🗸
• This is because the raising of interest rates, result in a decrease in total spending which is needed for production to increase 🗸🗸
• Decreased economic growth can increase unemployment 🗸🗸
• South Africa has been experiencing an increase in unemployment since the implementation of the policy in 2000 🗸🗸
• Inflation targeting is difficult to implement when the cause of inflation is supply shocks 🗸🗸 [Max. 10]
• A summary of what has been discussed without repeating facts already mentioned in the body. 🗸🗸
• An opinion or valued judgement on the facts discussed. 🗸🗸
• Additional support information to strengthen the discussion. 🗸🗸
• A contradictory viewpoint with motivation. 🗸🗸
• Recommendations. 🗸🗸
• E.g. Inflation can be a threat to the normal functioning of the economy; therefore, measures like monetary and fiscal are vital to keep the phenomenon under control. 🗸🗸 
• This is the activities of people travelling to and staying in places outside their usual environment for a period not longer than one consecutive year for leisure, business and other purposes and not related to a remunerative activity from within the place visited 🗸🗸 [Max 2]

BODY - MAIN PART Gross domestic product (GDP)

• Tourism impacts mostly on the services industry than on agriculture or manufacturing although there are upstream effects when agriculture provides foodstuffs to restaurants and manufacturing provides vehicles for transport 🗸🗸

Direct contribution on GDP

• Statistics South Africa (SSA) shows that in 2020 inbound tourists contributed R69 billion and domestic tourists R billion, amounting to R billion - about % of South Africa's GDP 🗸🗸

Indirect contribution on GDP

• If the indirect contribution is added, tourism add about % to GDP 🗸🗸
• The WTTC estimated that tourism contributed % to the GDP of the world economy in 2020🗸🗸
• In developing economies the service sector is responsible for around % of GDP, while it is responsible for more than % of GDP in developed economies 🗸🗸
• South Africa is similar to that of developed economies and services contributed more than % of GDP in 2020. 🗸🗸
• Tourism has a major effect on employment and this amounted to million workers in 2020🗸🗸
• Tourism is the world’s largest generator of jobs 🗸🗸
• Tourism is labour intensive 🗸🗸
• More jobs can be created with every unit of capital invested in tourism than elsewhere
• Tourism employs many skills 🗸🗸
• It ranges from accountants and hairdressers to tour guides and trackers, 🗸🗸
• the tourism industry draws upon numerous skills 🗸🗸
• Tourism can provide immediate employment 🗸🗸
• If one quarter of tourists’ accommodation establishment in South Africa starts to offer live entertainment to quests, thousands of entertainers could be employed within days 🗸🗸
• Tourism provides entrepreneurship opportunities 🗸🗸
• The tourism industry accommodates informal sector enterprises, from craft and fruit vendors to pavement vendors, chair rentals 🗸🗸
• Tourism is widely recognized as one of the fastest and more effective redistribution mechanisms in development 🗸🗸
• It brings development to the poor in rural areas 🗸🗸
• Tourism provides an alternative to urbanisation, permitting women and youth to continue a rural family lifestyle while giving them business opportunities 🗸🗸
• E.g. to start and operate small-scale tourism businesses around community asserts (forests, parks and rivers) 🗸🗸

Externalities

• The rapidly expanding tourism industry could have both positive and negative impacts that extend well into the future 🗸🗸
• While tourism attracts large amount of revenue, it can also cause undue environmental damage that can harm the very foundation on which it depends 🗸🗸
• All other economic resources, tourism uses resources and produces wastes and also creates environmental costs (pollution) and benefits in the process 🗸🗸
• Rapid growth in tourism aiming at short-term benefits usually results in more negative effects and these includes the degeneration of traditions and cultural values and environmental damage to sites and setting 🗸🗸

Environment Tourism activities create environmental stress:

• Permanent environmental restructuring which includes major infrastructure 🗸🗸
• Waste product generation such as biological and non-biological waste that damages fish production 🗸🗸
• Direct environmental stress caused by tourist activities, e.g. the destruction of vegetation and dunes 🗸🗸
• Effects on population dynamics such as migration and increased urban densities 🗸🗸
• Transport infrastructure, e.g. roads, airports 🗸🗸
• Communication and infrastructure including telephone lines, electronic signal stations and radio, TVs’ 🗸🗸
• Energy infrastructure such electricity and liquid fuel 🗸🗸
• Basic service infrastructure such as clean water and sewerage systems 🗸🗸 [Max. 26]

ADDITIONAL PART How can Indigenous Knowledge Systems be used to promote tourism in South Africa?

• More cultural villages can be improved to facilitate and promote tourism e.g. Shangana in Mpumalanga, Basotho in the Free State and Simunye Zulu Lodge in Kwazulu-Natal. 🗸🗸
• Where guides explain and demonstrate storytelling and indigenous knowledge practices. 🗸🗸
• Advertising campaigns domestically and internationally by travel agencies, hotels and B & B, lodges and SA Tourism can focus on promoting these heritage sites in brochures and fliers, social media. 🗸🗸
• These actions will make tourists more aware of these attractions 🗸🗸
• Encourage tourists to experience different cultures and townships - experience life at home with a household and eat at a shebeen or township restaurant 🗸🗸
• World Heritage Sites of South Africa can be promoted for their cultural significance e.g. the Fossil Hominid Sites of Sterkfontein, Mapungubwe Cultural Landscape, Richtersveld Cultural and Botanical Landscape, Vredefort Dome and Robben Island 🗸🗸
• Environmental World Heritage Sites of South Africa selected for their natural importance namely the Cape Floral Region Protected Areas, Isimangaliso Wetlands Park as well as uKhahlamba/Drakensberg Park which has been selected for its mixed significance 🗸🗸
• Arts and culture festivals e.g. the National Arts Festival, the Hermanus Festival, Awesome Africa Music Festival and Macufe African Cultural Festival should more widely be advertised to encourage tourists to attend 🗸🗸
• According to the World Health Organisation, a large majority of the African population make use of traditional medicines for health, social-cultural and economic reasons and forms part of the unique experience tourists experience when visiting local villages 🗸🗸
• In South Africa tourists are made more aware of the important role traditional medicine plays in poverty reduction and employment creation 🗸🗸
• Relaxation of restrictive tourist visa laws to facilitate easier entry into South Africa 🗸🗸 [Accept any other relevant answers] [Max. 10]
• South Africa attracted over million tourists in 2020 /For every 8.1 additional tourist to South Africa, one new job is created/one per cent increase in tourism adds R million annually to the SA economy. 🗸🗸 [Accept any other relevant higher order conclusion] [Max. 2]
• Tourism is the activities of people travelling to and staying in places outside their usual environment for no more than one consecutive year for leisure, business or other purposes PP 🗸🗸  [Accept any other correct relevant response] [Max 2]

MAIN PART Business sector

• Tourism stimulates business in areas such as accommodation and entertainment 🗸🗸
• The construction industry, in private-public partnership with the government to provide the infrastructure, manufacturing sector and recreation sector all benefits from increased demand due to tourism 🗸🗸
• The previously disadvantaged communities get entrepreneurial opportunities through the black economic empowerment schemes 🗸🗸
• A large number of people get business opportunities in the informal sector e.g. selling of artefacts 🗸🗸
• Local retailers may have an increase in sales (and profits) because of increased demand from tourists 🗸🗸
• Private businesses and government work in partnership to provide the infrastructure needed for tourism 🗸🗸
• This increases the market share of and income of the these businesses 🗸🗸
• Allow existing businesses to improve the quality and variety of their products PP 🗸🗸
• Allow natural monopolies e.g. Table Mountain Cableway to achieve abnormal profits PP 🗸🗸
• The public sector also provides a range of financial incentives for private sector tourism investment (grants, subsidies, loans, tax rebates) PP 🗸🗸 [Max 10]

Infrastructure development

• Adequate and well-maintained infrastructure is essential for tourist destinations PP. 🗸🗸
• Locals share this infrastructure with tourists 🗸🗸
• Government often prioritises economic infrastructure such as ports and beaches 🗸🗸
• In addition to physical and basic infrastructure, social infrastructure is also important for the growth of tourism🗸🗸
• Most of the SDIs and development corridors also have tourism as an important focus PP 🗸🗸 [Max 8]
• Members of households earn income from the tourism sector as tour operators, travel agents etc. 🗸🗸
• Many households are indirectly involved in tourism as employees e.g. in hotels, transport sector. 🗸🗸
• Entrepreneurs from households that operate as curio producers or musicians can earn income from tourism . 🗸🗸
• A large number of households acquire skills in the tourism industry. 🗸🗸
• School curriculum and learnership offer opportunities to acquire these skills . 🗸🗸
• Encourages rural development because many tourist attractions are located in rural areas PP 🗸🗸 [Accept any other correct relevant response] [Max. 26]

ADDITIONAL PART Tourism can be successfully marketed in less popular destinations by:

• advertising the firms' attractions in a variety of media including social media and internet which may reach both local and international potential tourists. 🗸🗸
• focusing on a clear message that concentrates on the strength of the attraction/ uniqueness of the destination. 🗸🗸
• using the indigenous knowledge systems of that particular area where possible PP. 🗸🗸
• describing the service offered in the best possible way to catch the interest of the likely tourist PP E.g. the use of slogans. 🗸🗸
• charging a price that is competitive and money well spent for the service offered. 🗸🗸
• helping the tourist to view the entire service as value for money – deliver a worldclass visitor experience 🗸🗸
• highlighting other places of interest in the vicinity of the attraction as part of a package 🗸🗸
• focusing on proudly South African products/services / Sho’t Left campaign PP 🗸🗸
• help disadvantaged South Africans to benefit from tourist attractions in the less popular destinations PP 🗸🗸 [Accept any other correct relevant response] [Max. 10]

CONCLUSION A weaker exchange rate has been a major contributing factor to South Africa's tourism industry growth over many years. 🗸🗸 [Accept any correct relevant response] [Max 2]

INTRODUCTION Environmental sustainability can be defined as development that meets the need of the present without compromising the ability of future generations to meet their own needs. 🗸🗸

BODY: MAIN PART Public sector intervention Because it is difficult to enforce measures to ensure sustainability the government has to intervene. 🗸🗸

Environmental taxes Environmental taxes (green taxes) can be added to the cost of goods and services for the negative impact they have on the environment. 🗸🗸 The government uses the income generated through these taxes to protect the environment. 🗸🗸 Taxes can be imposed on petrol, paper, emission gases etc. 🗸🗸 In 2003 the government has legislated the use of biodegradable plastic bags which consumers had to pay for🗸🗸 The hope is that they will use fewer bags and ensure a litter free environment. 🗸🗸

Charging for dumping of waste A monthly fee as part of municipal accounts is charged for collection of waste, sewage and garbage. 🗸🗸 Households already pay for the collection of rubbish. 🗸🗸 The factory owner might clean up his waste if it cost him to dump it. 🗸🗸 Industries might also pay for emitting gases that can be harmful to people and the environment. 🗸🗸 Subsidies Subsidies can be awarded to businesses that are willing to reduce pollution and waste. 🗸🗸 Waste can also be reduced by using new techniques or equipment such as solar energy. 🗸🗸 Emission gases from factories can be reduced using new technology. 🗸🗸

Granting property rights Normally owners of properties tend to be more protective over their resources than users who are only interested in the profits the resources offer. 🗸🗸 For this reason the government might grant property rights over a specific area. 🗸🗸 Property rights empowers owners to negotiate contracts with businesses who wish to exploit the area’s resources. 🗸🗸

Marketable permits A government can decide on the maximum desired level of pollution in an area. 🗸🗸 It then distribute pollution rights (marketable permits) to factories within that area. 🗸🗸 This means that each factory can pollute to a certain limit. 🗸🗸 It means that marketable permits are licenses that polluters can buy or sell to meet the control levels set by government. 🗸🗸

Education Incorporating topics into the curriculum of school fosters awareness. 🗸🗸 The public is gradually been made aware of this rising problem. 🗸🗸 Plastic, bottles and cartons can be recycled or made biodegradable. 🗸🗸

Public sector control If the government’s intervention does not attain the desired results, then it has to intervene more directly by setting and enforcing limits. 🗸🗸

Environmental Impact Assessment In SA every projected construction, mining or similar development has to undergo an assessment by qualified environmental professionals. 🗸🗸 To prove that it will not cause unwarranted environmental damage and that the damage can be repaired after construction. 🗸🗸 The cost if built into the project. 🗸🗸

Command and Control Regulations that are set and enforce environmental limits or standards. 🗸🗸 Quantity: e.g. set the limit to the amount of fish to catch, or limit the season catching certain species of fish. 🗸🗸 Quality: e.g. drinking water quality is carefully monitored and controlled. 🗸🗸 Air quality in workplace is subject to minimum standards. 🗸🗸 Social effect: e.g. noxious fumes from factories, dumping of medical waste near settlements, and noise pollution. 🗸🗸

Voluntary agreements Agreements between government and businesses voluntarily to address negative environmental impacts of industries. 🗸🗸 Businesses voluntary agree to decrease the emissions of pollutants. 🗸🗸 Most prefer negotiations so that they can tailor their specific needs and include it into their planning🗸🗸 Agreements can be formal, which is legally binding contract or informal. 🗸🗸 [Max 26]

ADDITIONAL PART Government does not exercise effective control over the continuous dumping of waste because of a lack of coordination between departments. 🗸🗸 The fines imposed on industries that dump waste are too lenient and they continue polluting the environment. 🗸🗸

The minimum standards set for hazardous gas and fuel emissions are not enforced or adjusted. 🗸🗸 The recycling of waste materials are not widely encouraged and promoted and landfill sites are overflowing. 🗸🗸 Government has various laws that is not really effectively implemented. 🗸🗸 Poor service delivery also adds to the problem in certain areas. 🗸🗸 [Accept any other relevant answer] [Max 10]

CONCLUSION Each and every individual, business and government needs to stand together to save our planet. [Accept any other relevant conclusion] [Max 2] Discuss in detail the following problems and the international measures taken to ensure sustainable development (Environmental Sustainability)

INTRODUCTION Environment refers to the physical surroundings and physical conditions that affect people’s lives. 🗸🗸 The ever-increasing pressure on our environment originates from increasing population numbers and excessive consumption🗸🗸 Our air, land, and water are under constant assault from the ever-growing ravages of man-made pollution generated chiefly by industrialized societies. 🗸🗸 [Accept any appropriate introduction] [Max 2]

BODY-MAIN PART Conservation

• Conservation is necessary because human actions cause pollution and over-utilisation of  resources. 🗸🗸
• Conservation is a strategy aimed at achieving the sustainable use and management of natural resources. 🗸🗸
• Conservation seeks a creative continuity of the environment while ensuring that change is sympathetic to the quality of life for both present and future generations. 🗸🗸
• Certain aspects of conservation need to be taken into account.
• Firstly, there is an opportunity cost. 🗸🗸
• Secondly, externalities are often present. 🗸🗸
• Lastly, self-interest has a short term horizon – meaning that decisions cannot be left entirely to market forces. 🗸🗸
• Over utilization of resources causes a reduction in supply, increase in prices, contradiction of demand and a search for substitutes. 🗸🗸
• This necessitates conservation of both renewable and non-renewable resources. 🗸🗸
• Conservation has to be concerned with limiting what is harvested in order to maintain a stable stock at least at the minimum level. 🗸🗸
• Government can use permits and quotas as two possible direct control methods in order to maintain the stock of resources at the minimum level. 🗸🗸

Preservation

• Preservation involves any strategy undertaken to safeguard the environment, maintain its current condition and keep it as habitable as possible for people and animals. 🗸🗸
• Heritage sites, indigenous forests, specifies of animals etc. that have special cultural or environmental significance, are often targeted preservation. 🗸🗸
• Preservation is not likely to work as a private enterprise because the benefit to society is much bigger than the income of the producer. 🗸🗸
• It may be possible to use cost-benefit analysis to calculate the social benefits of preservation of the environment.
• The weaknesses in market solutions require the government to intervene in order to preserve environment assets. 🗸🗸
• Government could do any of the following:
• Buy or expropriate – Environmental assets are simply closed for human use. 🗸🗸
• Subsidise-A subsidy would increase net benefits to the owner and raise the property’s present value. 🗸🗸
• Controls – The government can compel the owner to apply control measures like restricting the quantities exploited or number of visitors allowed per day. 🗸🗸 [26 Max]

ADDITIONAL PART Stockholm Conference (1972)

• The Stockholm Conference was the first major large scale international meeting on the environment convened with the support of the United Nations. 🗸🗸
• The meeting agreed upon a declaration containing 26 principles concerning the environment and development, an action plan with 109 recommendations and a resolution. 🗸🗸
• The meeting directly impacted on the environmental policies of many countries. 🗸🗸

Rio de Janeiro Earth Summit (1992)

• This meeting acknowledged the importance of cooperation in addressing environmental concerns that threaten sustainability. 🗸🗸
• The conference helped to make countries around the world aware of the dangers of unsustainable development. 🗸🗸
• Unfortunately the principles outlined and accepted at the summit were not binding and subsequently many countries did not confirm to them. 🗸🗸

Rio + 5 (1997)

• This conference noted that globalization made some countries poorer – 🗸🗸
• In particular African countries and the least developed countries showed a low level of growth or even declined. 🗸🗸

Kyoto Protocol for Climate Change (1997)

• Countries committed themselves to reducing their total emissions of greenhouse by 5 %.🗸🗸
• Unfortunately, China was excluded from this agreement and the USA withdrew. 🗸🗸

World Summit on Sustainable Development (2002)

• The objective of this summit held in Johannesburg was to conserve natural resources in a world that is growing in population. 🗸🗸
• The meeting focused on issues like poverty eradication, water and sanitation, energy, health agriculture and biodiversity. 🗸🗸

COP 17 (2011)

• The main goal of the conference held in Durban was to establish a treaty to limit carbon emissions and plan strategies to keep global temperature rise to less than 2 degree Celsius in the 21st Century. 🗸🗸
• Although the framework for this treaty was established it was not finalised. 🗸🗸
• The solution to our environmental problems will depend on our ability to make sound economic decisions that take account of the natural environment and to change our individual behaviour and attitudes. 🗸🗸 [Accept any other relevant conclusion] [Max 2]

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Dynamics Unveiled: Unraveling the Tapestry of Oligopoly Formation

The essay delves into the multifaceted factors contributing to the formation of oligopolies within markets. It highlights barriers to entry, strategic interactions among firms, mergers and acquisitions, and the role of government policies as key elements shaping oligopolistic structures. Through vivid metaphors and analogies, it portrays the intricate dance of economic forces, emphasizing the delicate balance between competition and stability. The narrative underscores the significance of understanding these dynamics for policymakers and stakeholders, advocating for thoughtful interventions to promote a vibrant and inclusive economic landscape.

How it works

In the intricate dance of economic forces, the emergence of an oligopoly within a market reveals a mosaic of influences, each thread contributing to the fabric of market structure. Oligopoly, characterized by the dominance of a select few corporations, draws its existence from a nuanced interplay of factors that beckon exploration. Delving into the realms of economics, we decipher the peculiarities that render oligopoly a captivating spectacle for analysts, policymakers, and market enthusiasts alike.

At the heart of oligopolistic evolution lies the enigma of barriers to entry, a labyrinth that aspiring businesses navigate with trepidation.

Whether it be the towering entrance fees, the maze of technological prowess, or the elusive control over vital resources, these barriers construct a fortress around established entities. Industries demanding substantial investments, like the cryptic world of telecommunications or the intricate machinery of automobile manufacturing, grant a privileged position to behemoth corporations, warding off the audacious attempts of newcomers. This exclusivity becomes the cornerstone, laying the foundation for the oligopoly to take root and flourish.

The ballet of strategic maneuvers among these corporate giants further elevates the spectacle. Unlike the laissez-faire dance of perfect competition, oligopolies engage in a choreography of calculated interactions. Picture a clandestine tango of tacit collusion, where firms, like skilled partners, synchronize their pricing and production maneuvers to optimize collective profits. Through the artistry of strategies like price leadership or the subtleties of non-price competition, such as the elegant pirouette of product differentiation and the dazzling spins of advertising campaigns, oligopolies not only survive but also orchestrate a harmonious stability, minimizing the cacophony of competitive pressures.

In the theater of market dynamics, mergers and acquisitions command a spotlight, casting a shadow that shapes the contours of oligopolistic landscapes. Firms, driven by a quest for economies of scale, market expansion, or strategic supremacy, engage in corporate courtships that redefine the power dynamics. The fusion of resources and capabilities, however, carries its own narrative risks. Regulatory watchmen scrutinize these unions, ensuring they are not tainted with monopolistic intentions or anti-competitive designs. The delicate choreography of market efficiency and competitive resilience hangs in the balance, as the drama unfolds.

Adding to the narrative, the role of government policies emerges as a protagonist with a dual personality. Regulations, wielding both the sword of competition and the shield of stability, can either sculpt a market utopia or pave the way for oligopolistic dystopias. Antitrust laws, akin to vigilant guardians, aim to curb the abuse of market power and safeguard the interests of consumers. Yet, the tale takes a twist when regulations, unintentionally captured or enforcement half-hearted, unwittingly lay out a red carpet for incumbents, stifling innovation and impeding the entrance of new contenders. Policymakers, the weavers of this intricate tale, must carefully thread the needle of regulation to strike a balance between nurturing competition and maintaining order.

In conclusion, the formation of an oligopoly unveils a captivating narrative, where barriers to entry, strategic ballets among firms, mergers and acquisitions, and the regulatory script intertwine. Oligopolies, akin to a captivating play, offer glimpses of both brilliance and concerns regarding market dynamics, consumer choices, and the crucible of innovation. This narrative, ever-evolving and complex, invites observers to appreciate the delicate ballet that shapes our economic landscape, urging for a nuanced understanding and thoughtful interventions to ensure a stage where all players can thrive.

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Oligopoly Economics: Coca-Cola & Pepsi Competition

Strategic behavior of pepsi and coca-cola, fair elasticity of prices, non-price ways of competition, conclusions.

The soft drinks sector is considered one of the most competitive markets in the food industry. It has a relatively low barrier of entry, wide availability of technologies that enable local producers to compete with international brands, and low requirements for research. Due to relative parity in taste and quality, many companies are forced to compete using non-economic methods. Yet, at the same time, this market has two leaders that establish the rules of competition.

The cola market is considered the largest in the soft drinks sector due to cola being the most favored and widely-recognized carbonated beverage in the world. This market is dominated by two competing giants: Pepsi and Coca-Cola. Together, these companies have a market share of roughly 70-75%, with Coca-Cola’s share being around 45% versus Pepsi’s 30% (Cotterill, Putsis, Rabinowitz, & Druckute, 2015). The presence of two large competitors that shape the industry is known as an oligopoly market. The purpose of this paper is to provide an economic analysis of these two giants through the prism of oligopoly with the perspective for the 21st century.

An oligopolistic system of competition is defined by the mutual interdependence of all large companies engaged in the vigorous competition (Krishnendu, 2017). The amount of profits and market share of both companies depends not only on prices but also on the immediate reactions of one’s direct competitors. Coca-Cola and Pepsi produce roughly the same product of the same color and the same taste. They are widely popularized in the market.

An oligopoly operates on two assumptions. The first assumption is that if a company increases the price of their product, the competition will not do the same, because they are expecting an increase in sales and market share, which would bolster their profits in the short and long-term perspectives (Krishnendu, 2017). However, if a company chooses to drop its prices, the competition would follow to prevent their customers from switching to the opposing brand. The relationship between prices in an oligopoly is demonstrated in the following graph:

As shown in Figure 1, the price loses its elasticity beyond P0. If both Coca-Cola and Pepsi decrease their prices together, the demand remains static. The appearance of the demand curve unique to oligopolistic markets and cannot be applied to a perfect competition model. The price of the product is always higher than the marginal costs, which makes the profit maximization rule used in perfect competition models inapplicable as well.

Since Coca-Cola and Pepsi are the main powers that control the industry, they can set the price higher than the marginal costs without losing any market share. In addition, this system is not productively efficient when compared to the perfect competition, where P is calculated using the following formula: P=min ATC (Yanagihara & Kunizaki, 2016). It enables both Coca-Cola and Pepsi to receive supernormal profits in the long run by restraining output and matching the competitor’s price. Thus, the concept of mutual interdependence revolves around Coca-Cola and Pepsi reacting to each other’s price changes. Since each company is capable of matching another, the strategy of beating the competition with lower prices ends up in a stalemate.

Even though Coca-Cola and Pepsi products are nearly identical in terms of quality and taste, the price for these products is not perfectly elastic. The concept of perfect elasticity states that customers are highly sensitive to prices and will not hesitate to switch brands should one company increase prices even by a tiny margin (Krishnendu, 2017). However, there is a possibility to effect this elasticity and reduce it by affecting the customers’ perceptions of the product and growing customer loyalty.

For example, the current situation shows that although in the event of a price increase for Coca-Cola products most customers would switch to Pepsi over Coke, a portion of customers would remain loyal to the brand. Thus, although the number of sales would decrease, it would never reach Zero, resulting in fair, but not perfect elasticity (Krishnendu, 2017). Both companies experience cross-elasticity due to similarities in products, as the majority of customers would switch between Coca-Cola and Pepsi products based on the price tag alone.

Since it was proven that both companies could match each other in price, quantity, and quality of the product, Coca-Cola and Pepsi engage one another in non-price competition. To gain an advantage, both companies use extensive advertising campaigns to promote their brands, generate customer loyalty, and highlight the small differences between their products. The expenditures made by both companies to advertise their product are the reason the demand curve is shifting to the right, which results in the gradual growth of price and output for both products (Otuki, 2013).

Coca-Cola and Pepsi have different strategies of competition. Pepsi focuses on promoting its products by hiring celebrities to endorse their products. Some of the celebrities enrolled in Pepsi’s advertising campaign were Madonna, Beyoncé, and Britney Spears (Otuki, 2013).

Coca-Cola, on the other hand, makes its bid on careful studying of the market and generating greater exposure by coming closer to the people. Some of the more innovative moves included the introduction of “Happiness Machines,” where customers received random gifts ranging from flowers to pizza, along with their cola (Allen, 2015). In addition, Coca-Cola is looking to differentiate its products based on the lower amounts of calories and sugar in their products.

In 2010, they launched a new product called “Diet Coke,” which managed to grab a large portion of the diet soft drink market (Koschmann & Sheth, 2016). Pepsi did try promoting a similar product in 1993, but improper timing resulted in a marginal failure. In 2010, however, Coca-Cola’s move enabled it to triple the number of sales on Pepsi, the total sales being in 2.5 billion bottles for both products vs. 0.9 billion for Pepsi alone (Koschmann & Sheth, 2016). This helped secure a greater market share for Coca-Cola over Pepsi. However, since the soft-drink industry is relatively slow on innovation, Pepsi entrenched itself in its current market share positions and is content with holding its market share and prepare for the next Cola Wars.

Competition between Coca-Cola and Pepsi in the 21st century serves as a perfect example of oligopoly economics. Although nearly any soda company is capable of producing cola of similar quality and at a similar price, Coca-Cola and Pepsi are the most recognizable companies in the market and control most of their shares. While the competition results in frequent promotional efforts, price drops, and other venues that benefit the customer, the existence of these companies set a high entry barrier for newcomers, as it is very hard to claim any significant market share. Thus, while an oligopoly offers a greater choice when compared to a monopoly, it is still far from instilling fair competition.

Allen, F. (2015). Secret formula: The inside story of how Coca-Cola became the best-known brand in the world. New York, NY: Open Road Media.

Cotterill, R. W., Putsis, W., Rabinowitz, A. N., & Druckute, I. (2015). Soft drinks: The carbonated drink industry in the United States. In V. J. Tremblay & C. H. Tremblay (Eds.), Industry and firm studies (pp. 204-244). New York, NY: Routledge.

Koschmann, A., & Sheth, J. N. (2016). Do brands compete or coexist? Evidence from the Cola Wars . Web.

Krishnendu, G. D. (2017). Oligopoly, auctions and market quality. Tokyo, Japan: Springer.

Otuki, N. (2013). Coca-Cola mulls price cut in market battle with Pepsi. Business Daily. Web.

Yanagihara, M., & Kunizaki, M. (Eds.). (2016). The theory of mixed oligopoly: Privatization, transboundary activities, and their applications. Tokyo, Japan: Springer.

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BusinessEssay . "Oligopoly Economics: Coca-Cola & Pepsi Competition." December 16, 2022. https://business-essay.com/oligopoly-economics-coca-cola-and-amp-pepsi-competition/.

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