Assignment Cm Microeconomics

8/2/2019 Assignment Cm Microeconomics

1/21

MicroeconomicsBy Wilmon Steyn

2011

Student No. 116753

Mancosa CM Year 1

9/12/2011


2/21

Microeconomics Page 2

Table of Content

Introduction ....4

Question 1 ....4

Is cigarette smoking in poorer nations highly sensitive to price?

1.1 Define price elasticity1.2 Cigarettes in Russia and China are researched to have a price elasticity of -0.1q5.

Explain what this means?

1.3 Will an increase in price of cigarettes in Russia and China increase or decrease thequality bought?

1.4 Define income elasticity of Demand?1.5 Explain using a diagram what would happen to the demand for cigarettes if the

consumer in Russia and China increased.

1.6 Are cigarettes a normal or inferior good? Justify your answer.Question 2 ....9

Oligopolists are the most common market form in modern economies. When people talk

about big business and market power, they are usually referring to oligopolists.

Microeconomics Study Guide, Certificate in Management Studies, Page 137

2.1 Explain the main features of an oligolpolist.

2.2 Explain the theory of the kinked demand curve of an oligolpolist.

2.3 Highlight the shortcomings of the kinked demand curve model.

2.4 Research the internet or newspaper and find an organization which operates as an

oligolpolist. Provide an overview of this business and explain why the organization you have

meets the requirements of an operating oligopolists in the economy at present.


3/21


Question 3 ..14

Maize shortage linked to push prices up

Japie Grobler, chairman of the National Maize Producers Organisation says with the

lower area planted a critical shortage of both white and yellow maize can be expected

this season and it will be necessary to import. As a result domestic prices will rise and

remain at the higher levels. Extract from the Sunday Business Times, 25 January 1998

3.1 Using a diagram, explain the difference between a movement along a demand curve

and a shift of the demand curve

3.2 Using a diagram explain the difference between a movement along a supply curve and

a shift of the supply curve.

3.3 Define market equilibrium and explain how it arises.

3.4 Explain how the lower quantity of maize supplied led in the above article, affected

market equilibrium.

Question 4 ..19

With the aid of a diagram, discuss the relationship between government, firms and

households.

Conclusion ..20

Bibliography ..21


4/21


Introduction

The study of Microeconomics is the focus on the individual parts of the economy.Mikros

means small in the Greek language. In this assignment we will provide greater understanding

of the principles that govern the rules of demand and supply and the effect that they have on

an economy in the microenvironment. We will also discuss the role of Oligopolistic firms andthe rules that define how they conduct themselves in the market place. We will then discuss

the cycle of income and the relationship between the various role players in that cycle.

Question 1

Is cigarette smoking in poorer nations highly sensitive to price?

1.1Define price elasticity of demand.The law of demand states that as the price off a good increase the demand for the quantity

of those goods will decrease. The law of demand further states that the price elasticity of

demand will always be greater than zero. Price elasticity is used to measure the sensitivity

of demand for a good when the price changes. The higher the price elasticity is the more

responsive consumers are to price changes.

PEoD > 1 the demand is Price Elastic

PEoD < 1 the demand is Price Inelastic

PEoD=0 the demand is Perfectly Inelastic

A number of factors affect price elasticity of demand;

1.1.1 Number of close substitutes in the market1.1.2 Luxury goods vs. Necessity goods1.1.3 The percentage of income spent on a particular good1.1.4 Considerations over a period of time.1.1.5 Goods that are habit forming

1.2Cigarettes in Russia and China are researched to have a price elasticity of -0.15Explain what this means?

The PEoD is less than one which indicates that the price of cigarettes in China and Russia is

price inelastic. This means that the increase in price is very unlikely to cause a large drop in

the demand for the quantity of cigarettes.


5/21


Price elasticity can best be expressed in the equation

Price Elasticity (Ep) = (% change in Quantity Demand/% change in price).

(Figure 1.2: Illustrates Price Inelasticity)

The inelastic demand of a good is denoted by a much more vertical curve as the quantity

changes little with a movement on the price axel.

1.3Will an increase in price of cigarettes in Russia and China increase or decrease thequality bought?

Cigarette is a habit forming inelastic good that people find very difficult to do without,

very much unlike an elastic good that will force consumers to buy less of. A price

increase will cause a movement along the demand curve I will substantively show that the

quantity of cigarettes will remain fairly constant and should not result in a lower quantitydemanded for that good.

In an inter-office correspondence from Phillip Morris published in 1982 it depicts the

relationship in the United States of America between price increases and per capita

consumption measured between 1966 and 1981.[ This was prior to the introduction of

strict Anti-Smoking legislation.

We have seen a market decline in The United States over the past 2 decades due to health

concerns and various economic reasons.[

Both China and Russia are developing economies with greater numbers of consumers

entering the middle working class. In a growing economy where income continues to

increase and the lure of brand appeal and disposable income makes for a scenario where

the demand will not be dampened by price increases. There currently is no or little

enforcement of Anti-Smoking Legislation in China and Russia and consumers continue to

smoke in public areas.


6/21


(Figure 1.3.1: Illustrates a shift in the demand curve)

Figure 1.3.1 Illustrate a shift in the demand curve at the point of equilibrium. The low

inelasticity of cigarettes will remain at 40 even should the price increase to $2.80. It must

be noted that with the increase in the disposable income the demand curve will shift to theright as more people have a demand for cigarettes.

1.4Define income elasticity of Demand?This measures the sensitivity of the quality demanded to changes in income as a

proportion of the percentage change in the quality demanded and a percentage change in

the consumers income. The result of Income Elasticity can be both positive and negative.

Positive income elasticity is referred to as normal goods while Negative income elasticity

is called inferior goods.

It is best expressed in the formula;

ey = (% change in Quantity demanded/% change in income)

1.5Explain using a diagram what would happen to the demand for cigarettes if theconsumer in Russia and China increased.

(Figure 1.5.1 illustrates the shift in the demand curve)

Ep


7/21


As Russia and China become more industrialized and more consumers enter the middle class

there will be an increase in disposable income. As a result of new entrants into the market

new demand will be created. The demand curve shifts to the right due to the positive income

shift. At a constant price level (P1), more demand could be created through increases in

disposable income. A new demand curve (D2) will be set based on the market size and need

of the consumers. This is illustrated through a shift in the demand curve from P1Q1 to P2Q2.

Therefore, for the same price level, a greater quantity of the product could be demanded (Q1

to Q2).

1.6Are cigarettes a normal or inferior good? Justify your answer.Normal goods can be defined as a shift either to the left or right in the demand curve as a

result of an increase or decrease in income. The income elasticity of demand is positive

however it is less than one. (www.Businessdictionary.com) An Inferior good is defined as

a decrease in demand for a particular item when their income increases because they can

now afford a higher priced substitute. The income elasticity of demand is less than zero.

(www.Businessdictionary.com)

Cigarettes classification as being a normal or inferior good should first be regionalised based

on the geographic spread of its consumers. Cigarettes are classified as a habit forming good.

In Russia and China which is a developing economy cigarettes can be defined as a normal

good based on the fact that as income has risen demand for this particular good continues to

increase. Chinas State Tobacco Monopoly Administration sets policies and enforces them,

while also overseeing the worlds largest cigarette maker the China National Tobacco

Corporation. Additionally it is culturally entrenched in China that smoking makes you a man.

(Smoking: China's new SARS? By Daniel Mark Carr, 2010/08/19)
http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.iwatchnews.org/2011/06/09/4835/russias-cigarette-king-practices-strategic-givinghttp://www.businessdictionary.com/http://www.businessdictionary.com/


8/21


In the more developed economies of Europe and North America we can classify cigarettes as

inferior goods because as incomes and education continues to rise the demand for this good

continues to decrease. Smoking cigarettes are no longer accepted as socially acceptable

behaviour and the focus over the past decades on the health risks associated with smoking has

seen the quantities demanded decreasing considerably.

Figure 1.6.4 Illustrates the habit forming of smoking in relation to Men & Women in Russia

Figure 1.6.3

Percent of U.S. Adults Who Smoke byEducation, 2009

Source: National Centre for Health Statistics,"Summary Health Statistics for U.S. Adults:National Health Interview Survey, 2009," Vital andHealth Statistics10, no. 249 (2010).

Russian Men

Russian Females

Russian Men

Russian Females


9/21


Question 2

Oligopolists are the most common market form in modern economies. When people talk

about big business and market power, they are usually referring to oligopolists.

Microeconomics Study Guide, Certificate in Management Studies, Page 137

2.1 Explain the main features of an oligolpolist.

Oligopoly is one type of imperfect competition as there are only a few sellers in that market.

There are two types of oligopolistic firms that differentiate themselves on price competition

and non-price competition. Additionally pure oligopoly or perfect oligopoly is the production

of identical products while imperfect or differentiated oligopoly is the production of similar

but not identical products. According to Prof. G.J. Stigler, Oligopoly is the situation in

which a firm bases its market policy in part on the expected behaviour of a few close rivals

There are a number of main features of an Oligopolist.

1 Number of firms: There are only a few sellers in that market with a high marketconcentration. These firms produce branded products and they closely consider

the others actions and reactions.

2 Nature of the products: Perfect/ pure oligopoly produces and sells homogeneousproducts while Imperfect/ differentiated oligopoly produces and sells

heterogeneous products.

3 Barriers to Entry: Barriers to entry does exist and these can range from free torestrictive.

4 Information: Organisations operate under conditions of incomplete information.5 Interdependentness: The actions of one firm will have an effect on others in that

market. The pricing and investment decisions take into account the likely

reactions of other firms in the market. This creates the opportunity for price

collusion.

6 Oligopoly Pricing: They are price makers and price setters and they compete onprice and profits that will be the same as in a competitive market. These firms

could collaborate to charge the monopoly price and hence benefit from the

monopoly profit because of the interdepent modelling of price and output

decisions.


10/21


7 Demand Curve: The price elasticity of their product demand can varysignificantly. The exact behavioural patterns of customers are unknown and hence

the demand curve of an oligopolistic is indeterminable due to the interdependence

of other oligopolistic firms in the market.

2.2 Explain the theory of the kinked demand curve of an oligolpolist.A bend in a standard demand curve that is a result ofcompetitors decreasing their prices to

match each others, but not raising them to achieve the same effect. The thought is that once a

business has reduced their price to a certain level any fluctuation that raises the price will

cause the firm to lose customers.(www.Businessdictionary.com)

It explains price rigidity in an oligopolistic market where once thought to be unresponsive to

changes in costs or demands. The kinked demand curve model which is downward sloping

model of oligopoly pricing illustrates oligopolistic prices as a natural result of non-collusive

behaviour. The reaction of rivals firms in the market to a price change depends on whether

price is raised or lowered. Increases in the price of its product could result in losing

customers to its rivals. As a result of this the upper part of demand curve has greater elasticity

than the part of the curve lying below the kink which is more inelastic. The demand curve

will be kinked, at the currentprice. A decrease in the price of its product will see an increase

in the demand for its product. However it must be noted that it cannot push up its sales very

much because the rival firms will follow suit with a corresponding price cut. The risk in

engaging in a market strategy of price differentiation it that the competing firms could out

price you on that same product which will result in decreased sales. Therefore oligopolistic

firms avoid competing on price but rather try selling their products at the current market

price. These firms compete far more sustainably with one another on the basis of quality,

product design, after-sales services, advertising, discounts, gifts, warrantees and special

offers.

At point a, the price is currently P and Q units of the good that are sold by this firm in this

oligopoly. Demand curveD0 represents a relatively elastic demand should the other firms in

the market chose to ignore these price changes. This will result in a lower demand of the

quantity of product P1 and Q1. If other firms did not follow suit it could lead to its customers

shifting to their competitors products. Demand curve D1 represents a relatively inelastic

demand should the firm lower its price. Unchallenged the sales revenues and quantity

demanded would increase P2 and Q2. Profit is maximized at the existing quantity Q and price

P, The importance of the kinked demand curve is that Marginal Cost can increase or decrease
http://www.businessdictionary.com/definition/standard.htmlhttp://www.businessdictionary.com/definition/demand-curve.htmlhttp://www.businessdictionary.com/definition/result.htmlhttp://www.businessdictionary.com/definition/competitor.htmlhttp://www.businessdictionary.com/definition/price.htmlhttp://www.investorwords.com/3007/match.htmlhttp://www.businessdictionary.com/definition/achieve.htmlhttp://www.investorwords.com/10993/same.htmlhttp://www.investorwords.com/9552/effect.htmlhttp://www.businessdictionary.com/definition/business.htmlhttp://www.investorwords.com/10843/reduced.htmlhttp://www.investorwords.com/10180/level.htmlhttp://www.businessdictionary.com/definition/fluctuation.htmlhttp://www.investorwords.com/4025/raise.htmlhttp://www.investorwords.com/1967/firm.htmlhttp://www.investorwords.com/10228/lose.htmlhttp://www.businessdictionary.com/definition/customer.htmlhttp://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/definition/customer.htmlhttp://www.investorwords.com/10228/lose.htmlhttp://www.investorwords.com/1967/firm.htmlhttp://www.investorwords.com/4025/raise.htmlhttp://www.businessdictionary.com/definition/fluctuation.htmlhttp://www.investorwords.com/10180/level.htmlhttp://www.investorwords.com/10843/reduced.htmlhttp://www.businessdictionary.com/definition/business.htmlhttp://www.investorwords.com/9552/effect.htmlhttp://www.investorwords.com/10993/same.htmlhttp://www.businessdictionary.com/definition/achieve.htmlhttp://www.investorwords.com/3007/match.htmlhttp://www.businessdictionary.com/definition/price.htmlhttp://www.businessdictionary.com/definition/competitor.htmlhttp://www.businessdictionary.com/definition/result.htmlhttp://www.businessdictionary.com/definition/demand-curve.htmlhttp://www.businessdictionary.com/definition/standard.html


11/21


significantly without affecting the Equilibrium output and price. This is as a result of the

interdependence among oligopolists and the resulting uncertainty about how competitors will

react to price changes. The more fiercely oligopolists compete the closer these firms will

come to a perfectly competitive output and price.

(Figure 2.2.1 Illustrates a Kinked Demand Curve)

2.3 Highlight the shortcomings of the kinked demand curve model.

The Kinked Demand curve is only applicable to an oligopolistic market. It is not predictive in nature. It denies price and also output fluctuations in response to cost changes. The theory offers no explanation for how current price (at which the demand curve is

kinked) arrived at.

The overriding factor for industries operating in this market is price and hence profitwill be the overriding factor.

a

D0

D1


12/21


2.4 Research the internet or newspaper and find an organization which operates as

an oligolpolist. Provide an overview of this business and explain why the organization

you have meets the requirements of an operating oligopolists in the economy at present.

Coffee shops are strewn across the country. This has made drinking coffee an important part

of social gathering. There is a wide variety of coffee offerings in the South African marketthat differentiate on size, flavour, gourmet meals and value added services.

Barriers to entry are a key factor that makes it difficult for new firms to enter an industry

which lead to imperfect competition. The most commonly known barriers of entry are

economies of scale, legal restrictions, high cost of entry, advertising and product

differentiation.

The larger role players in the South African market for coffee consumption are Mugg & Bean

and Wimpy that has the highest market concentration. They offer essentially identical core

products namely coffee. These firms will compete for market share and the demand from

consumers in a number of unique of ways. We have to make a distinction between price

competition and non-price competition.

Price competition can involve discounting the price of coffee.

Non-price competition focuses on other strategies for increasing market share. Herewith are

some market differentiating strategies.

Mass media advertising and marketing Store Loyalty cards Banking and other Financial Services In-store book stores Extension of trading hours Internet or Wi-Fi access

However the price of a basic cup of coffee remains relatively static across both these firms.

Instead they have opted to differentiate on the variety of supplementary goods that they sell

and the hours of trading.


13/21


Wimpy business overview:

The Wimpy brand was created in the 1930s. The name was inspired by the character of J.

Wellington Wimpy from the Popeye cartoons created by E. C. Segar. The company is owned

by Famous Brands South Africa and it operates a franchise model. Wimpy is a casual dining

family restaurant that has become famous over the year for its breakfasts and coffee.

Mugg & bean Business overview:

Mugg & Bean is a coffee themed franchise restaurant that is primarily located in busy

shopping centers throughout South Africa that will offer you a welcome reprieve from your

busy shopping. The Mugg & Bean franchise has been very successful in creating a store

identity around the fictional characters of George Bean and Edmund Mugg that grew up in

1874. Mugg & bean is also owned by Famous Brands.

Interesting Coffee facts:

Both restaurants are famous for their coffee and both serve 100% Arabica coffee. The cost of

a small Wimpy coffee is R9.95 and at Mugg & Bean that same size coffee will cost you

R13.50, however it must be noted that this is a bottomless cup. The average South African

according to the Coffee Company consumed 0.6kg of coffee annually that effectively equates

to less than one cup of coffee per day. Mugg & Bean creates the very effective case that you

can have more than one cup. The reality however is that most people will drink only one.

About Famous Brands:

It has already been stated that they own both franchises, however additional facts must be

shared is that Famous Brands also owns and controls the manufacturing of many of the

products that these firms use in their business. Additionally they also control the distribution

network ranging from warehousing to export. The franchises agreements also bind the buyer

of this business to purchase most of their raw goods for production from the franchisor. The

marketing/ brand identity and leasing approval for both firms is also controlled by Famous

Brands.
http://en.wikipedia.org/wiki/J._Wellington_Wimpyhttp://en.wikipedia.org/wiki/J._Wellington_Wimpyhttp://en.wikipedia.org/wiki/Popeyehttp://en.wikipedia.org/wiki/E._C._Segarhttp://www.themugg.com/index.phphttp://en.wikipedia.org/wiki/E._C._Segarhttp://en.wikipedia.org/wiki/Popeyehttp://en.wikipedia.org/wiki/J._Wellington_Wimpyhttp://en.wikipedia.org/wiki/J._Wellington_Wimpy


14/21


Conclusion:

Both Mugg & Bean and Wimpy operates as oligopolists. Famous Brand could also been seen

as an oligopolist should it be stacked up against Pioneer Foods. However in the space of the

franchisee Famous Brand could be construed as a Monopolist.

Question 3

Maize shortage linked to push prices up

Japie Grobler, chairman of the National Maize Producers Organisation says with the

lower area planted a critical shortage of both white and yellow maize can be expected

this season and it will be necessary to import. As a result domestic prices will rise and

remain at the higher levels. Extract from the Sunday Business Times, 25 January 1998

3.1 Using a diagram explain the difference between a movement along a demand curve

and a shift of the demand curve.

The quantity demanded is directly influenced by a change in the price.

The movement along the downward sloping demand curve from P1Q1 to P2Q2 reflects a

change in the quantity of a particular good demanded. There is a single demand curve for the

market (D1), and the quantity demanded is greatly influenced by the price of that good. As

the price decreases point a, (P1 to P2) the demand of that particular good will increases Q1 to

Q2. This is reflected as a movement along the demand curve (D1) to point b reflecting the

new demand.

a

b

Figure 3.1.1 Illustrates a movement along the

Demand Curve


15/21


As a result of changes to a particular market new demand is created. At a constant price level

(P1), more demand could be created through increases in disposable income. A new demand

curve (D2), can be drawn. This is illustrated through a shift in the demand curve from P1Q1

to P2Q2. The equilibrium point shifts from a to the new market balance position of b.

Therefore, a new market price level is set with greater quantity of the good being demanded

on the demand curve D2.

3.2 Using a diagram explain the difference between a movement along a supply

curve and a shift of the supply curve.

The law of supply states that as the price of a good increases, so the quantity supplied will

increase, and as prices fall so will the quantity supplied. Supply refers to the planned

quantities that producers or sellers plan at each price.

A movement along the supply curve is a direct result of a change in price.

Shift in the Demand

Curve

a

b

Figure 3.1.1 Illustrates a Shift in the

Demand Curve

Movement Along Supply Curve

Figure 3.2.1 Illustrates the movement

along the Supply Curve


16/21


A change in supply results in a change in the non-price factors of supply. These are the

factors that we assumed were constant when we used the ceteris paribus assumption in

developing the supply curve. An increase in supply will result in a shift to the right at the

same price; however the quantities supplied will be greater.

3.3 Define market equilibrium and explain how it arises.

Equilibrium in the market occurs when quantities demanded exactly balance the quantities

supplied for those goods and services. This is where the demand and the supply curves

intersect to determine the equilibrium price and equilibrium quantities that are bought andsold in this particular market. When the market price is set above or below the equilibrium

price, the market will be in disequilibrium. This will either result in a market surplus or

market shortage. To overcome a surplus or shortage, buyers and sellers will change their

behaviour and the market will tend towards equilibrium where no further adjustments will be

required. Price acts as an important factor in determining market equilibrium.

(www.Businessdictionary.com)

Quantity Demanded = Quantity Supplied

Shift in Supply: Decrease Shift in Supply: Increase

Fig 3.2.2 Illustrates a Decrease shift in Supply Figure 3.2.3 Illustrates an Increase shift in Supply
http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.businessdictionary.com/


17/21


4 Forces of disequilibrium

Consumer surplus: This is the difference between what consumers pay and the valuethat they receive.

Producer surplus: This is idea that producers will be willing to supply goods at lessthan the market price.

Excess supply: This is when the quantities of good supplied are greater than thequantity demanded.

Excess demand: This is when the quantities of goods demanded are greater than thequantity supplied.

3.4 Explain how the lower quantity of maize supplied led in the above article,

affected market equilibrium.

The lower quantity of both white and yellow maize has resulted in a severe drop in the

supply. This drop in supply is represented by a shift from S1 to S2. S1 represents the supply

of maize at normal planting levels. D1 represents the countrys demand for maize. As can

been seen, the supply and demand for maize in the country is equal prior to the lower planting

levels. This is represented by the fact that Q1, the quantity of maize being supplied, is located

along in the intersection of both S1 andD1. This is called equilibrium, or the point at which

both the supply and demand are satisfied.

Demand, supply and

market equilibrium

Figure 3.3.1 Illustrates Demand,

supply and market equilibrium


18/21


However, due to the lower yield as a result of lower planting in the country the maximum

quantity of maize supply the farmers are able to supply has decreases. This decrease is

represented by a shift from S1 to S2. This has affected the quantity supplied. The result is a

shift from Q1 to Q2 along the supply axis. Throughout the shift the price is initially

maintained at P1. Q2 however represents a point along the supply curve that does not create

equilibrium as it does not fall along the D1 line as well. Instead the new quantity falls below

the demand curve, resulting in a shortage. A shortage is when the quantity of an item supplied

is less than the quantity that the item is demanded. On a diagram this is represented by having

a point falling below the point of equilibrium. The market will try to find equilibrium in order

to satisfy the needs of both the consumers and producers. In this situation, it can be expected

that the price of maize will rise in order to create a movement along the supply curve to meet

the demand of the market. Q2 falls below its point of equilibrium. Assuming the market is

functioning normally the price of maize will increase until it reaches a new equilibrium.

There are yet no discussions of introducing a price ceiling resulting in the maximum price

maize can be sold for. The situation is not ideal as it will cause inflationary pressures.

Price

Shift in Supply of Maize

Quantity of Maize

Shortage

Figure 3.4.1 Illustrates the shift in

Supply of Maize as result of shortage
http://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.pnghttp://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.pnghttp://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.pnghttp://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.pnghttp://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.pnghttp://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.pnghttp://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.pnghttp://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.pnghttp://12congwi.files.wordpress.com/2010/10/screen-shot-2010-10-04-at-22-09-43.png


19/21


Question 4

With the aid of a diagram, discuss the relationship between government, firms and

households.

The circular-flow diagram presents a visual model of the different groups that participate in

the economy. These major markets coordinate macroeconomic activities.

Imports

GovernmentBorrowing

Financial Institutions

Product Market

Resource market

Government

HouseholdsBusinesses

The circular flow of Money

Exports

Foreign

Economies

The governments, firms, households and financial institutions actively engage in the

marketplace by offering to buy or sell goods and services or resources of production.

Participation in this market is primarily motivated by the desire to maximise the utility

(consumers), profits (business firms) and the general welfare (government) from each

participants general resources. All these engagements involve the exchange of either

resources of production or finished products. These exchanges can occur anywhere and take

place in product markets or resource markets, depending on the goods being exchanged.

The marketplace is made up of primarily two basic markets; the Resource market and the

Product market. The resource market is where the factors of production are exchanged.

Market participants buy or sell land, labour, or capital that can be used in the productionprocess. When someone is looking for a job they are contributing a resource of production


20/21


(labour) available to the producers. The producers will hire the workers and pay them at a

rate that they will be willing to work for. In the product markets, consumers continuously

interact with business firms where they purchase goods and services. Businesses sell goods

and households buy from them. The product market coordinates the demand (consumption,

investment, government purchases, and net exports) for and supply of domestic production

(real GDP). Foreigners also actively participate in this product market by bringing purchases

(imports) from foreigners into balance with sales (exports plus net inflow of capital). The

South African market place can be considered an open economy as it allows foreigners to

participate in our market. A closed economy does not consider international trade while an

open economy takes imports and exports into consideration.

The firms place a demand on the resources market in order to produce goods. The demand

curve slopes downward due to the fact as resource prices like labour increase the firm will

demand less. The supply curve will be sloped upward because of higher wages meaning an

increase in the supply of labour. Businesses pay taxes to government who again make

payments for goods received.

The households supply the labour to the resource markets that allow for the production of

resources that will again enable firms to produce goods. The households will again acquire

these goods and services through the product market for consumption. Households pay taxes

to government and also supplies labour. Households supply the loanable funds to the

financial institutions in the form of investments.

Government interacts with all the market participants and set the macroeconomic policies that

will influence the overall efficiency of the circular flow of income in a market.

Conclusion

By having a greater understanding of the factors that define the micro economy and how they

interact with each other and their impact on the market we now understand the inner

workings of the macro economy. We have provided greater insight into the mikros parts of

the economy through our explanations of demand and supply and the relationship they have

in ensuring that the market continues to function at equilibrium.


21/21


Bibliography

1 Philip Mohr, Louis Fourie and associates (2008) Economics for South Africanstudents Fourth Edition.

2 Cecilia van Zyl, Ziets Botha, Peter Skerritt (2006) Understanding South AfricanFinancial Markets Second Edition.

3 Jain, T.R and Khanna, O.P. (2009) Business Economics First Edition4 Richard G Lipsey, Colin Harbury (1992) First Principles of Economics Second

Edition

5 N Gregory Mankiw, Mark P. Taylor (2006) Microeconomics First Edition6 www.BusinessDictionary.com7 www.investorpedia.com8

www.ernestmorgan.com9 www.flatworldknowledge.com10 www.economicsonline.co.uk11 www.edu.uoh.edu.cn12 www.population.reference.burea.com13 www.choices_health_concerns_or_price.html 14 www.tobaccodocument.org/pm/2043565313-5328.htm 15 www.shangaiist.com/2010/08/19/smoking_-_the_new_sars_php 16 www.wimpy.co.za17 www.themugg.com18 www.famousbrands.co.za
http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.investorpedia.com/http://www.investorpedia.com/http://www.ernestmorgan.com/http://www.ernestmorgan.com/http://www.flatworldknowledge.com/http://www.flatworldknowledge.com/http://www.economicsonline.co.uk/http://www.economicsonline.co.uk/http://www.edu.uoh.edu.cn/http://www.edu.uoh.edu.cn/http://www.population.reference.burea.com/http://www.population.reference.burea.com/http://www.choices_health_concerns_or_price.html/http://www.choices_health_concerns_or_price.html/http://www.tobaccodocument.org/pm/2043565313-5328.htmhttp://www.tobaccodocument.org/pm/2043565313-5328.htmhttp://www.shangaiist.com/2010/08/19/smoking_-_the_new_sars_phphttp://www.shangaiist.com/2010/08/19/smoking_-_the_new_sars_phphttp://www.wimpy.co.za/http://www.wimpy.co.za/http://www.themugg.com/http://www.themugg.com/http://www.famousbrands.co.za/http://www.famousbrands.co.za/http://www.famousbrands.co.za/http://www.themugg.com/http://www.wimpy.co.za/http://www.shangaiist.com/2010/08/19/smoking_-_the_new_sars_phphttp://www.tobaccodocument.org/pm/2043565313-5328.htmhttp://www.choices_health_concerns_or_price.html/http://www.population.reference.burea.com/http://www.edu.uoh.edu.cn/http://www.economicsonline.co.uk/http://www.flatworldknowledge.com/http://www.ernestmorgan.com/http://www.investorpedia.com/http://www.businessdictionary.com/

Documents

Assignment Cm Microeconomics