Economics

Grade 12
Term 2

Learner Guide

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 TABLE OF CONTENTS
Session TOPIC PAGE
1 Tips to Study Economics and prepare for the 3-6
examination
2 Microeconomics- Perfect Markets- Part 1 7 - 12
3 Microeconomics- Perfect Markets -Part 2 13 - 17
Microeconomics- Perfect Markets Part- 3 17 - 18
4 Perfect Market -Assessment Activities 19 - 32
5 Microeconomics- Imperfect Markets – Part 1 33 - 41
Microeconomics- Imperfect Markets – Part 2 42 - 49
6 Imperfect market – Assessment Activities 50 - 65
7 Microeconomics- Market Failures Part 1 66 - 72
8 Microeconomics- Market Failures Part 2 72 - 77
9 Microeconomics – Cost Benefit Analysis 78 - 79
Market Failure Assessment Activities 66 - 94

This activity book consists of 94 pages

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This activity book should be used together with other Economics
sources
Tips to Study Economics and prepare for the examination
1. Draw up a timetable to study Economics ever day
2. Have all the Economics resources neatly sorted and ready
3. Ensure that your stationery including a calculator is there
4. Have the Main topics as per question paper 1 and 2
5. Use this activity book together with other sources to study towards
the best possible marks in the examination.
Paper 2 assess: Microeconomics and Contemporary Economic
Issues
• Every topic and subtopic are very important if you strive to get the best marks in
Economics.
• Do not select (spot) the content, it will hamper your opportunity to get good
marks.
• The concepts are very important to know and describe in order to understand
the content and get marks.
• Make time to study smart, make notes, refer to you study material, the
examination guideline and other sources to add more information to your
notes.
• Work out the activities and compare with the solution do not give up if first
performance is not what you desire. Keep practicing writing the activities.
Practice makes perfect. Good luck!!
• You have made it so far against all odds, you can!!! Good luck!!!

Use the structure of the question paper below to guide and assist you in preparing
for the examinations

Typical examination How to approach/ respond to

questions What to expect the questions
Section A Section A To cover the full scope, study
Compulsory Questions all the concepts in each main
Question 1 1.1 consist of multiple topics: Microeconomics and
1.1 Multiple choice (8X2) (16) Contemporary Economic
question 1.2 match column A with Issues.
1.2 Match column A column B (8X 1) (8) Knowledge of all concepts
with 1.3 give the most correct and the description thereof will

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 column B term/concept. help you to get full marks in
1.3 Give the term No abbreviation, acronyms Section A 30 marks
and examples will be The Mind the Gap study guide
accepted has the list of concepts for all
subtopics
(6X1) (6)
Section B Questions 2.1.1, 3.1.1 and Only give the required number
Answer ONLY two 4.1.1 of the correct items
questions in this section
Example of action verbs e.g., Answer:
Questions 2.1.1, 3.1.1 are Give, Name, State
and Many buyers
These questions will Many sellers
4.1.1
guide in the total number Note if you listed more than
Assess low cognitive of items you need to two required only the first two
questions provide e.g. answers/items will be awarded
Allocation of 2 mark per marks in your response
List any TWO
question characteristics of the perfect
market 2 marks
Questions 2.1.2, 3.1.2 Questions 2.1.2, 3.1.2 and You should be able to apply the
and 4.1.2 access the general current economic situation to
4.1.2 respond to this question.
economic content
based on middle Action verbs are what, why,
cognitive level how, explain.
Allocation of 2 mark per
question
Questions 2.2 to 2.3, 3.2, Questions 2.2, 2.3, 3.2, You need to know your
3.3, 4,2 and 4.3 3.3, concepts and the description
Based on data responses, 4.2 and 4.3 are based on
focus on middle cognitive to answer the data responses.
level data responses. You must interpret tables,
The data response analyse, draw graphs
can be an extract accurately, calculate using
that you must the guidance from the data
read, a cartoon that you responses.
must interpret, a graph Use the content in sources to
that you must draw and answer these types of
interpret. You must study questions.
the content of the data
response to answer the
questions
Each question assesses 5
questions for 10 marks
e.g., 2.2.1, 2.2.2, 2.2.3,
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 2.2.4 and 2.2.5

Questions 2.4, 3.4 and 4.4 Questions 2.4, 3.4 and To answer these questions
based on middle order 4.4 are 8-marks, middle and get full marks you need to
questions for 8 marks. order questions. study your content
For example, Discuss, thoroughly.
differentiate, compare, The answers to these
distinguish, briefly questions come from your
discuss. notes or the relevant
E.g., Differentiate between economic sources.
the economic profit and You must study and summarise
normal profit it to get the full eight marks per
8 marks question
Questions 2.5, 3.5 and Questions 2.5, 3.5 and 4.5 You are expected to use the
4.5 are questions such as content in your notes to relate
Based on high cognitive analyse, outline, how, it to the current economic
levels for 8 marks. evaluate. activities.
e.g., Evaluate the impact of Write in full sentences, provide or
the of COVID-19 pandemic elaborate with good reasons
on market failure.
8 marks in your answers.
Responses can have positive
or negative answers based on
your observations and
knowledge.
Sustain your argument or
motivation by providing
practical examples to support
your answers.
You need to be confident in
attempting these questions and
answer as if you are an
Economist.
Section C Questions 5 and 6 Cover all the essay topics
Questions 5 and 6 consists of following and do not spot
based on middle and high Introduction is based on the
sub sections:
cognitive levels essay type description of the topic. Know
Introduction: 2 marks,
questions. the concepts to get 2 marks
Main part: 26
Read your questions with
marks, Additional part:
understanding and focus on
10 marks Conclusion:
the key words to give the
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2 marks correct concept description.
Total essay: 40 marks The main part: a minimum of 8
You are only expected to marks will be allocated to
choose ONE question from headings and examples
Section C in examination The discussions of content
The essay topics are from the sources will be
available in the examination awarded 18 marks.
guideline of 2021
The content for the main part
of the essay is in your notes
and in your sources.
You have only to study all
the content with
understanding and recall.
Examples of an action
verbs used: Discuss in
detail the monopoly as a
market
for 26 marks.
The additional part need
application of the content
based on the current
economic situation.
You must substantiate your
responses with practical
examples. You must elaborate
and motivate your answers.
The conclusion is a
summary of the discussed
essay making
recommendation and
suggestions

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SESSION 1: PERFECT MARKET: PART 1

DYNAMICS OF A PERFECT MARKET

Tip: Study the concepts and descriptions to master the content
CONCEPT DESCRIPTION
Perfect market Is a market structure in which no supplier is able to manipulate
the price.
Market An institution or mechanism that brings together buyers and
sellers of goods or services
Homogeneous Products that are identical / same
Price taker A seller in a market who cannot control or influence the price of
the goods he sells. The prices are determined by market forces
Price maker A seller in a market structure who is able to set or influence the
price of a good or service.
Economic profit A profit that exceeds normal profit. Is also called excess or
supernormal profit.
Total revenue exceeds total costs
Normal profit The minimum earnings required to prevent the entrepreneur
from leaving and applying his factors of production somewhere
else.
Economic loss When total costs are greater than total revenue /When average
revenue is lower than average cost the firm makes an economic
loss
Long run The period of production where all factors can change.
The time is long enough for variable and fixed factors to change
Short run The period of production where only the variable factors of
production can change while at least one factor is fixed
Explicit costs Actual expenditure of business, e.g. wages and interest
Implicit costs Value of inputs owned by entrepreneur and used in the
production process (forfeited rental, interest + salary)
Shut- down point The short run shutdown point for a competitive firm is the output
level at the minimum of the average variable cost curve
The Competition Appeal An institution whose main functions is to review orders made by
Court the Competition Tribunal and amend or confirm these orders
The Competition An institute that investigates restrictive business practices,
Commission abuse of dominant positions and mergers in order to achieve
equity in the South African economy

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 The Competition Tribunal An institution whose main function is to approve large mergers,
adjudicate in the case of misconduct and issue orders on
matters presented to it by the Competition Commission

PERFECT MARKET 1 LEARNER NOTES

Perfect competition is the market structure in which there are many firms producing
homogenous products.
CHARACTERISTICS OF A PERFECT MARKET
Nature of products
● Products must be homogenous (i.e., identical)
● There should be no differences in style, design, and quality
● Products compete solely based on price and can be purchased anywhere
● Product differentiation, sellers can persuade buyers to buy their more
expensive products by grading them.
● The markets for maize and coal consist of homogenous products which are
graded.
Number of businesses
● There are a large number of buyers and sellers
● Not possible for one buyer or seller to influence the price when there are many
sellers the share the market.
● Sellers are price takers; they accept the prevailing market price
● Businesses that increase prices above the market price, will lose customers
No preferential treatment/Discrimination
● Buyers and sellers base their actions solely on price.
● Homogenous products fetch the same price and therefore no preference is
shown for buying from or selling to any particular person
Collusion
● No collusion takes place because each seller acts independent of one another/
impossible for sellers to form groups to enforce higher prices.
Free competition
• Buyers must be free to buy whatever they want from any firm and in any
quantity.
• Sellers must be free to sell what, how much and where they wish.
• They should be no state interference and no price control.
Mobility of factors of production
• They can move freely between markets without any restrictions.

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Perfect knowledge of market conditions
● All buyers and sellers must be fully aware of what is happening in any part of
the market.
● Technology has increased competition as information is easily obtained via the
internet.
Entry to markets
● There is complete freedom of entry and exit – a market that is fully accessible.
● Entry is not subject to any restrictions in the form of legal, financial,
technological or other barriers that curtail the freedom of movement of buyers
and sellers.
Profits
● In the short run the firms can make economic profit, economic loss and normal
profit.
● In the long run the firms make normal profit.
Control over prices
● Each seller is a price-taker and regards the market price as given.
● The market price is determined by the interaction of the market supply and
market demand – if a producer tries to change a price above market price,
consumers will get a better price from someone else.
● When an excess demand of supply exists, the price will respond to ensure that
equilibrium is reached again.
Efficiency
• The perfect competitor produces at the lowest cost over the long run.

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Individual business and industry
Determining the market price
● None of the firms could be large enough to influence the market.
● Prices are determined by the market (demand and supply).
● The point where demand and supply meet are called equilibrium point.
● Firms take the price that is determined by the market, they do not have influence
of price.
● An increase in price will force consumers to switch to another business because
products are homogeneous, and consumers have perfect information or
knowledge of producers.
● The demand curve of the firm is horizontal because they cannot change the
price. The horizontal demand curve represents the D=P=AR=MR.
● The demand curve is perfectly elastic, meaning that a slight increase in the
price cause the quantity demanded to drop to zero.

The individual business and the industry

Profit maximisation-Occurs in 2 ways:

It is possible for an individual in the perfect market to make an economic profit in the
short-term. There are two ways of determining economic profit – the total
revenue/total cost approach and the marginal revenue: marginal cost approach

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(a) Total Revenue/Total Cost Approach

● The total revenue curve (TR) is drawn from the origin. Total cost
(TC) starts above the origin because before production takes
place there are fixed costs that are incurred.
● Between the output 0 and Q1, the firm is making a loss. TC runs
above TR meaning the costs are more than revenue.
● However, the firm must continue producing because it can still
make profit by producing more. If it continues to produce it will
reach a breakeven point where TR is equal to TC (breakeven
point B1). At this point the firm is making a zero profit (zero loss).
● The firm is now able to cover its costs. It must continue to
produce in order to realise a profit. Between Q 1 and Q3 it is
making economic profit.
● It will earn the maximum profit where the difference between TR
and TC is the greatest. This will be at Q2.
● The maximum profit is found where the line XY (which is parallel
to the TR curve) is tangent to TC.
● as the firm continues to grow, TC starts to increase until it
reaches breakeven point B2. The firm should not grow more than
point B2 because it will make a loss.

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(b) The MR/MC approach

● According to the MR/MC rule maximum profit is made at point

where MR=MC. In Fig 7 below, that point is point A.
● At this point the total cost is 0CBQ1.
● Total revenue is 0PAQ1. The difference between TR and TC is
CPAB.
● This is the economic profit that this firm is making.
● If the firm is producing a quantity which is less than Q1, it must
continue to produce because it will still make more profit by doing
so.
● For quantities to the left of Q1 MR runs above MC.
● The firm must continue to produce until it reaches Q 1. The profit
maximisation point is a point where MR = MC (point A in the
graph below)

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SESSION 2: PERFECT MARKET

MARKET STRUCTURES
Note: The table presents a summary of the characteristics of
different markets. You are expected to use full sentences to answer
the essay type questions.
Characteristic Perfect Monopoly Oligopoly Monopolistic
competition competition
Price The price is The price is The price is high A small number
low. It is high as few firms are of firms are
determined by because able to dominate able to charge
the market and the firm has the market with higher prices
the firm has no market little competition but competition
market power. power. between them. keeps prices
relatively low.
Output Output is high. Output is The output is Due to the
The firm has no limited to higher than existence of
choice but to the under monopoly many supplies,
provide individual but is still output is high
whatever firm’s restricted from 3 across most of
quantity the output as to 5 large firms. the market.
market require. the firm is
the market
(single
seller).
Barriers to There are no There are High, but not as Barriers are low
entry barriers to entry high high as or non-existent.
and new firms barriers to monopoly. Start- Some firms are
can enter the entry as the up costs and merely able to
market at will. firm uses advertising market their
marketing prevent new product more
and firms entering efficiently than
technical with ease. others.
knowledge
to restrict
entry.
Availability of Any new firm The Existing firms in Any new firm
information entering the technical the market may entering the
market has knowledge have technical market has
perfect referred to information that perfect
information. above is new entrants are information.
not unable to
available to acquire.
new firms.

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 Size of profits Profits are Economic Economic profits Are small and
normal only. profits are are made in the limited to
made in the long run. normal.
long run.
Nature of the The product is Unique Heterogeneous The product is
product homogeneous product product. homogeneous
and easy to with no with some
reproduce at close suppliers
low cost. substitute. making clever /
fine
differences.

The individual business short term equilibrium positions

NORMAL PROFIT

● Normal profit is the minimum earnings required to prevent the entrepreneur from
leaving the industry.
● Normal profit occurs when total revenue equals total cost/ when average revenue
equals average cost.
● The firm produces at point e where MR=MC.
● At e, Q/100 units are produced at P/R10.
● At point e, AR (P/R10) is equal to AC (P/R10).
● The firm makes normal profit of P x Q – AC x Q / R1000 – R1000 = R0 /
R10 – R10 = R0.

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ECONOMIC LOSSES

● Economic loss occurs when total costs are greater than the total revenue/when
average revenue is lower than the average cost.
● The firm produces at point e where MR=MC.
● At e, Q/100 units are produced at P/R10.
● At point e, AR (P/R10) is less than AC (P1/R12).
● The firm makes an economic loss of PP1ae / TR – TC (R1000 – R1200 = - R200)/
R10 – R12 = - R2).

ECONOMIC PROFIT

● Economic profit is the profit that is made in addition to the normal profit/When
average revenue is greater than average cost the firm makes economic profit.
● The firm produces at point e where MR=MC.
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● At e, Q/100 units are produced at P/R10.
● At point e, AR (P/R10) is greater than AC (P1/R8).
● The firm makes an economic profit of PeaP1 /TR - TC (R1000 – R800= R200)/
R2 x 100 = R200).

The industry
The long-term equilibrium for the industry and the individual firm:
● Production level in the long-run is determined using the long-run
average cost (LAC) curve. LAC is a summation of short-term costs,
SACs. LAC is U-shaped. This shows that long-run costs decrease in
the beginning as the size of the firm increases.
● This happens because when the firm begins to buy in bulk, it gets
discounts and the average input costs decrease.
● In the long-run all factors of production are variable.
● The firm can increase its size or it can acquire more factors of
production. As the business becomes bigger, its costs of production per
unit become lesser. We say in the long-term the firm enjoys the
economies of scale*. This is depicted by the falling part of the LAC
curve in the graph below– the area between A and B.

● The curves SAC1 to SAC4 are the short-term average cost curves of the
same firm.
● The curves SMC1 to SMC3 represent the short-term marginal cost curves
of the same firm. At a price of P1 the firm is producing Q1 and making
economic profit (shaded area).
● As time goes on the firm can increase its size.
● As the size increases, the average costs are decreasing – shown by the
lower SAC2. During this stage the firm is able to buy more inputs at a
lower cost because of bulk-buying. As long as LAC is decreasing, the
firm must continue to increase its size because it will make more profiting
by doing so.
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● The optimum point of production level in the long term is “e” where output
is Q3. Here LAC is at its minimum point.
● LMC cuts LAC at its minimum point. As long as the firm is producing any
quantity to the left of Q3 it can increase its profit by producing more.
● The firm must take advantage of the economies of scale applicable to
this stage.
● However, the firm must not exceed point “e”. At any production level
beyond “e” the firm will suffer the diseconomies of scale* because it
will become too big and cumbersome.

SESSION 3: PERFECT MARKET

The supply curve and the shutdown point

● If the firm is making a loss when should it shut down?

● It should shut down at a point where average variable costs (AVC) are
more than marginal revenue (MR).
● Remember, MR is the same as the price. It does not make sense to
produce at a cost that is more than revenue.
● At that point the firm must shut down.
● That point is represented by A at the figure below. If the price falls below
P, the firm must shut down. Point A is called a shutdown point*.

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 ● However, if the price is anywhere between P and P 1, the firm can
continue to produce because the price is above AVC.
● For the prices above P the firm is prepared to offer Q, Q1 and Q2 for sale.
● In other words, points A, B and C form the supply curve of this firm. The
supply curve is the rising part of the MC curve above the AVC.

Competition policies
Description
● Markets can only operate efficiently if there is healthy competition. The first step
in promoting competition is to open up a country’s economy to imports.
Goals of competition policy
● To prevent monopolies and other powerful businesses from abusing their
power.
● To regulate the formation of mergers and acquisitions who wish to exercise
market power.
● To stop firms from using restrictive practices like fixing prices, dividing markets
etc.
The Competition Act in South Africa
The government introduced the Competition Act 89 of 1998 to promote competition in
South Africa in order to achieve the following aims/objectives:
● promote the efficiency of the economy (its primary aim)
● provide consumers with competitive prices and a variety of products.
● promote employment.
● encourage South Africa to participate in world markets and accept foreign
competition in South Africa
● enable SMMEs to participate in the economy.
● to allow the previously disadvantaged to increase their ownership of
businesses.
Institutions
The Competition Commission
It investigates restrictive business practices, abuse of dominant positions and
mergers in order to achieve equity and efficiency in the South African economy.
The Competition Tribunal
● It has jurisdiction throughout the Republic.
● It is a tribunal of record and independent from the other competition institutions.
● The Tribunal’s main functions are to: grant exemptions, authorise or prohibit
large mergers, adjudicate if any misconduct takes place, issue an order for
costs on matters presented to it by the Competition Commission.

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The Competition Appeal Court
● Its status is similar to the High court.
● It has jurisdiction throughout the Republic and is a court of record.
● Its main functions are to review orders made by the Competition Tribunal and
amend or confirm these orders.
Anti-monopoly policy
● After 1994, a strict anti-monopoly policy was propagated. This meant a further
boost for competition policy in the country.
● A great deal of emphasis was placed on the fact that there should be no
restrictions on entry to any industry because this would be to the detriment of
previously disadvantaged groups.
● A further objective was to curb the economic power of the big conglomerates in
the South African economy to arrive at a more equitable distribution of income
and wealth.
● The fact that South Africa was able to regain access to the world economy also
implied that South African businesses had to become more competitive.
● New trade agreements with other countries made it mandatory for South African
competition law to comply with international requirements.

MICROECONOMICS: PERFECT MARKETS PART 1

HINT: When answering Section, A – short question, it is important not to rush but to read
the questions carefully and to make sure you understand what the question is asking.
Always remember two alternative is completely wrong, one is nearly correct, and one is
totally correct. It is easy to eliminate the completely wrong answers, but if you do not read
the question carefully the nearly correct answer will also appear correct. The answer will
NEVER be two options. Only ONE option is correct. Your answer will immediately be
marked incorrect if you write TWO options
TIP: Know the concepts and descriptions to do well in Section A
Note that concepts are part of each question in the question paper

QUESTION 1: Section A –Low order Questions

1.1 Various options are provided as possible answers to the following questions.
Choose the answer and write only the letter (A–D) next to the question number.

1.1.1 The average revenue of a firm in a perfectly competitive market is equal to its
…………………….

A selling price
B total cost
C marginal cost
D economic profit
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1.1.2 The supply curve for a firm in a perfectly competitive market is the same as…….
cost curve.

A average
B total
C marginal
D convex
1.1.3 The perfect market sell … products

A identical.
B heterogeneous.
C homogeneous.
D unique.

1.1.4 A close example of a perfect market in South Africa is …

A oil companies.
B the Johannesburg Securities Exchange.
C Eskom.
D the retail industry.

1.1.5 Unit cost is also known as … cost.

A. Marginal
B. Total
C. Average
D. Variable

1.1.6 Period of production where all factors can change is….

A. Long run
B. Short run
C. Medium
D. Shut down

1.1.7 Minimum earnings required to prevent a business from leaving the industry is
…
A. Economic loss
B. Normal profit
C. Accounting profit
D. Economic profit

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1.1.8 Extra amount of income gained by selling one more unit is called ….

A. Marginal product
B. Average revenue
C. Total revenue
D. Marginal revenue

1.1.9 The perfect competitor charges price that is equal to the …

A. Average cost
B. Average revenue
C. Marginal cost
D. Total revenue

1.20 In a perfect market normal profit is achieved when total revenue is equal to …

A total variable cost.

B marginal cost.
C average revenue.
D total cost.

1.2. Choose a description from COLUMN B that matches the item in COLUMN A.
Write only the letter (A-I) next to the question numbers (1.2.1. to 1.2.8) in the
ANSWER BOOK.

Column A Column B

1.2.1 Market A The minimum earnings required to

prevent the entrepreneur from leaving
and applying his factors of production
somewhere else.
1.2.2 The Competition Commission B An institution whose main functions is
to review orders made by the
Competition Tribunal and amend or
confirm these orders
1.2.3 Short run C When average revenue is lower than
average cost
1.2.4 Implicit cost D An institution or mechanism that
brings together buyers and sellers of
goods or services
1.2.5 Economic profit E Products that are identical or the
same
1.2.6 Homogeneous F An institution or mechanism that
brings together buyers and sellers of
goods or services

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 1.2.7 Shut- down point G The period of production where only
the variable factors of production can
change while at least one factor is
fixed
1.2.8 Economic loss H Value of inputs owned by
entrepreneur and used in the
production process (forfeited rental,
interest + salary)
I The point for a competitive firm is the
output level at the minimum of the
average variable cost curve

1.3. Give ONE term for EACH of the following descriptions. Write only the term next
to the question numbers (1.3.1 to 1.3.7) in the ANSWER BOOK.
Abbreviations, acronyms and examples WILL NOT be accepted.

1.3.1. A Market structure with many sellers and buyers

1.3.2. When average revenue is greater than average cost
1.3.3. The cost that remains the same even if the output changes
1.3.4. A market structure where the individual firms are price-takers
1.3.5. The additional revenue earned when sales increase by one more unit
1.3.6. The period of production in which at least one of the factors of production is
fixed

SECTION B

QUESTION 2: Low order questions (Adapted from various

sources)

HINT: When the question requires you to “State” the answer is a short sentence or
phrase. To “Give or Name”, you need not write one or few words
The answers MUST be done in bullet form. These types of questions are applicable
for 2.1.1, 3.1.1 and 4.1.1
Provide only TWO answers.
Note: Only the first TWO answers will be marked

2.1 Answer the following questions.

2.1.1 State TWO characteristics of a perfect market (2)

2.1.2 Name TWO types of costs that are used to calculate the total costs (2)
of a firm.
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 2.1.3 List TWO kinds of profits associated with businesses (2)

2.1.4 Name any TWO institutions that regulate unfair competition in South
Africa. (2)

2.1.5 State any TWO aims of a competition policy (2)

QUESTION 2: Middle order questions (Adapted from various sources)

HINT: These types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2
The questions are based on recent economic activities.

2.2 Answer the following questions.

2.2.1 Why is the demand curve of a business in prefect competition

perfectly elastic? (2)
2.2.2 Why is it not possible for a single business to adjust its selling price?
(2)
2.2.3 How will an individual producer know that his expansion was
successful? (2)
2.2.4 Why is the demand curve of the individual producer horizontal
(elastic)? (2)
2.2.5 Why will the entrepreneur be happy to make normal profit under
perfect Competition? (2)
2.2.6 When does a business make an economic profit (2)

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DATA RESPONSE: Middle Order questions (Adapted from various sources)

HINT: All section B questions have TWO data response questions in a question paper
– each question total 10 marks.
Section B consist of Questions 2-4 in question papers, not as numbered in this activity
book.

2.3 PERFECT MARKET

Study the graph below and answer the questions that follow
Diagram A Diagram B

2.3.1 Identify the diagram that represents a single firm from the above
diagram (1)

2.3.2 Give another name for curve d in diagram B (1)

2.3.3 Briefly describe the term perfect competition (2)

2.3.4 Explain price determination for the firm in diagram B (2)

2.3.5 How is supply affected if more firms decide to leave the

industry? (2 x 2) (4)

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2.4 Study the graph below and answer the questions that follow.

2.4.1 Identify the profit maximisation quantity (1)

2.4.2 Which curve is used to determine the supply of the firm? (1)

2.4.3 Briefly describe the term marginal revenue. (2)

2.4.4 When will a firm in a perfect market shut down its operations? (2)

2.4.5 Use the graph above to determine the type of profit made by
this firm. (Show ALL correct calculations.)
(2x2) (4)

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2.5 Study the graph below and answer the questions that follow

2.5.1 Which market structure is represented by the graph above? (1)

2.5.2 Name point A in the graph above (1)

2.5.3 Briefly describe the term explicit cost. (2)

2.5.4 Why would firms incur costs even when the output is zero? (2)

2.5.5 Use the graph above to explain how profit maximisation is

achieved by the firm. (2 x 2) (4)
QUESTION 3 Paragraph type questions – Middle Order

3.1.1 Explain with the aid of a graph how to determine the supply curve of an
individual business in the perfect market. (8)

3.1.2 With the aid of a well-labelled graph (cost and revenue curves), explain
the shut-down point for the individual firm in a perfect market. (8)

3.1.3 Broadly outline the objectives of the Competition Act, 1988 (Act of
1998) in South Africa? (8)

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 3.1.4 Briefly discuss aims of South Africa's competition policy. (8)

QUESTION 4: Paragraph type questions – Higher Order

4.1.1 How can an exit of firms in a perfect market affect the economy? (8)

4.1.2 Analyse measures that may be used by the government to promote

competition in the economy. (8)

4.1.3 Outline the challenges that the competition policy in South Africa face in (8)
achieving their goals.

SECTION C: Essay Questions

HINT: In section C, question5 will be based on Microeconomics

Use the grid below to guide in answering the essay type questions

MARK
STRUCTURE OF ESSAY: ALLOCATI
ON:
Introduction Max 2
The introduction is a lower-order response.
● A good starting point would be to define the main concept related
to the
● question topic.
● Do NOT include any part of the question in the introduction.
● Do NOT repeat any part of the introduction in the body.
● Avoid mentioning in the introduction what you are going to discuss
in the body.

Main part:
Discuss in detail/In-depth discussion/Examine/Critically Max 26
discuss/Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Dra
w a graph and explain/Use the graph given and explain/Complete the
given graph/Assess/Debate
A maximum of 8 marks may be allocated for headings/examples.
Additional part: Critically discuss/Evaluate/Critically evaluate/Debate/ Max 10

Deduce/Compare/Distinguish/Interpret/How? /Suggest

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 A maximum of 2 marks may be allocated for mere listing of facts
Conclusion
Any higher-order conclusion should include: Max 2
● A brief summary of what has been discussed without repeating
facts
● already mentioned
● Any opinion or valued judgement on the facts discussed
● Additional support information to strengthen the
discussion/analysis A contradictory viewpoint with motivation, if
required
● A brief summary of what has been discussed without repeating
facts already mentioned in the body
● Any opinion or value judgement on the facts discussed.
● Additional support information to strengthen the
discussion/analysis
● A contradictory viewpoint with motivation, if required
● Recommendations

TOTAL 40

QUESTION 5: MICROECONOMICS 40 MARKS – 40

MINUTES
With the aid of three separate graphs, explain the following short term equilibrium
positions in a perfect market:

● Economic profit
● Economic loss
● Normal profit (26)
● How successful is the competition policy in promoting a more competitive (10)
economy?

[40]

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 PERFECT MARKETS LEARNER HOMEWORK
QU QUESTION 1 20 MARKS – 20 MINUTES+

1.1 FOUR possible options are provided as possible answers to the following questions.
Choose the correct answer and write only the letter (A–D) next to the question number
(1.1.1 – 1.1.5) in the ANSWER BOOK. For example (1.1.6 - C).

1.1.1 The institution that adjudicates on competition matters is called Competition …

A Policy.
B Commission.
C Tribunal.
D Appeal Court.

1.1.2 Actual expenditure of a business on inputs required for production is called …

costs.

A implicit
B explicit
C total
D average

1.1.3 Minimum returns required by the owners of a firm can be referred to as an/a …
profit.

A pure
B economic
C supernormal
D normal

1.1.4 The firm makes … when average revenue is greater than average cost.

A loss
B economic profit
C normal profit
D shut-down

1.1.5 Period of production where all factors can change is….

A long run
B short
C average
D minimum

(5 x 2)

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1.2 Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A-I) next to the question number (1.2.1 – 1.2.6) in
the ANSWER BOOK.

Column A Column B
1.2.1 Long run A a business in a perfect market will consider
closing down if AR = AVC
1.2.2 Competition tribunal B A period of production where all factors of
production become variable
1.2.3 Marginal revenue C Authorises and prohibits large mergers and
takeovers
1.2.4 Short run D Large number of buyers and sellers
1.2.5 Shut-down point E a period of production where at least one
factor can be changed
1.2.6 Perfect market F extra income the seller earns if one more unit
of a product is produced and sold
(6 x 1)
1.3 Provide the economic term/concept for each of the following
descriptions. Write only the term/concept next to the question number.
No abbreviations will be accepted.

1.3.1 Sum of all individual businesses producing a similar kind of product

1.3.2 The cost that remains the same even if the output changes.

1.3.3 A market structure where the individual firms are price-takers.

1.3.4 The point in production below which a firm's revenue is not able to
meet its average variable costs.

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SECTION B

Answer ALL questions from this section in the ANSWER BOOK.

QUESTION 2: MICROECONOMICS 40 MARKS –30 MINUTES

2.1 Answer the following questions.

2.1.1 List TWO types of price takers (2 x1) (2)

2.1.2 Why is the demand curve of a business in perfect competition (2)

horizontal? (1 x 2)
2.2 Study the graph below and answer the questions that follow.

2.2.1 Identify the marginal revenue curve in the graph above (1)

2.2.2 Which curve is also known as the supply curve? (1)

2.2.3 Why will the individual firm not produce more than 60 units? (2)

2.2.4 What is the significance of point A? (2)

2.2.5 How does the market demand curve differ from the individual firm?
(2 x 2) (2)

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2.3 Study the extract and answer the that follow below

2.3.1 In which market structure is collusion found? (1)

2.3.2 Name the institution grants exemptions and authorises or prohibits

large mergers? (1)

2.3.3 Briefly describe the term collusion. (2)

2.3.4 Explain the main objective of the Competition Commission. (2)

2.3.5 Why should collusion be regarded as a criminal offence for

directors of companies? (2 x 2) (4)

2.4 Using TR and TC curves, draw a correctly labelled graph to briefly

explain how a firm in a perfect market maximises profit (8)

2.5 What does the South African government hope to achieve (8)
through competition policies?

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SESSION 4
IMPERFECT MARKETS LEARNER NOTES

Key Concepts

CONCEPT DESCRIPTION
Monopoly A market structure characterised by a single
seller, selling a unique product in the market.
Oligopoly A market structure wherein an industry is
dominated by a small group of large sellers.
Monopolistic Competition A market form which is characterised by
many sellers selling similar but differentiated
products.
Artificial Monopoly Natural monopoly occurs when a large firm
dominates the industry so much that it
becomes difficult for others to enter.
Natural Monopoly A type of monopoly that occurs due to high
start-up costs
Legal Monopoly A type of monopoly that is protected by law
from its competitors.
Patent this is the legal right of a holder to exclusively
manufacture a product.
Cartel A group of producers whose goal is to form a
collective monopoly in order to fix prices and
limit supply and competition
Collusion An illegal arrangement between businesses
rivals with the aim of limiting competition
between them by fixing prices.
Tacit Collusion It occurs where firms make informal
agreement to charge prices established by a
dominant firm.
Overt Collusion Rival firms openly agree on price output and
other decisions aimed at achieving economic
profits.
Hybrid market A market which has aspects of both perfect
market and monopoly.

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 Price Leadership A situation where one firm fixes a price and
the others accept it as the market price
Duopoly a market structure that is dominated by two
businesses
Economies of scale An increase in output with the same factor
inputs

● An imperfect market refers to any economic market that does not meet
all the characteristics of a perfectly competitive market.
● An imperfect market arises whenever individual buyers and sellers can
influence prices and production, or otherwise when perfect information
is not known to all market actors.
Economists group markets in which competition is limited into three broad structures:
1. Monopoly
Description
A monopoly takes place where there is a single firm which supplies the entire
market, the firm has absolute market power and faces zero competition.

Characteristics of monopolies
Market power ● In its pure form, a monopoly means the monopolist is
the only firm in the market.
● There are no other sellers and so the firm has
complete market power.
● This enables the monopolist to exert considerable
influence over the buyers.
Price ● the market power enables the monopolist to set its
maker/control over own price.
price ● 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 must
sell fewer units of goods. Alternatively, a reduction in
price will result in a higher output sold.
Demand curve ● A monopolist is confronted with a normal market
demand curve, which 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

Barriers to entry There are numerous barriers blocking firms from entering or
exiting imperfect markets such as:

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Government licenses/legal restrictions: the state may
regulate an industry to prevent undesirable or incompetent
firms from entering.
● A business may be prevented from producing a
particular product because it does not have a license
to do so.
● This creates a monopoly for the firm in possession of
the license. Some monopolies are created by law.
● The government can pass a law that gives one firm
exclusive rights’ to produce a particular product.
High start-up costs: these include costs such as capital
investment and research and development that could be
difficult for other firms to afford.
Patents: these are legal rights granted to investors of a
production process or service.
● A person who invents a product is given special
protection by government in the form of a patent.
● This protects the inventor against competition for a
certain period of time.
● Whilst the patent is in force, the inventor therefore
enjoys a monopoly.
Sunk costs: these are costs that cannot be retrieved if the
business exits the industry.
● For example, the cost of advertising is very high and
cannot be sold off in the same way that machinery
and equipment can. So sunk costs are a barrier to
exit.
Access to scarce resources: a natural monopoly is created
if a single firm owns and controls a specific scarce resource.
● Other companies and potential competitors are
therefore excluded from entering the market due to
the unavailability of the resource.
Technical Superiority: a monopoly is created if a company
possesses a technical advantage over its potential
competition.
● e.g., Microsoft is the largest producer and supplier of
computer technology and dominates the market with
the Windows Operating Systems.
● Their experience, access to resources and technical
superiority make it difficult for others to complete.

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Profit ● Market power and high prices enables the monopoly
to make economic profit in both short and long-run.
● Apart from high prices and revenues, the monopoly is
also able to use its bargaining power and superior
knowledge of the market to reduce its costs of
production

Economies of ● The mere size of large business gives it a cost

scale advantage over a smaller rival.
● This will make it impossible for smaller business to
complete.
Information ● Monopoly has perfect information about the market,
however new firms that wish to enter the market will
not have the same information available to them.

Types of Monopoly
Natural monopolies Artificial monopolies:
High development costs prevent others Here the barriers to entry are not
from entering the market and therefore economic in nature. An example of a
the government supplies the product. barrier is a patent. A patent is a legal and
E.g., Electricity in South Africa is exclusive right to manufacture a product.
provided by the government enterprise,
Eskom
It costs billions of Rands to build and Market is big enough for competitors to
maintain power stations and therefore do business yet cannot operate due to
there are no other suppliers. legal that may be taken.

The demand curve of the monopolist

● The firm uses its market power to set the price and are called price makers.
● The monopolist faces a normal market demand curve which slopes downwards
from left to right.

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The table below will be used to plot the shape of the average and revenue
curves.

Graphical illustration of MR and AR curves

● The above Figure shows the AR and MR curves for the price setting firm under
imperfect competition.
● The AR and MR curves are separate curves.
● The MR curve falls at double the rate of the AR curve.

Profit maximisation by the Monopolist

● To maximise profit, the monopolist must produce at a point where MR = MC.
● MR and MC move in opposite direction. As output increases, marginal revenue
decreases and marginal cost increases.

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In the above figure, profit maximisation takes place at Q4 on the horizontal axis.
● The profit maximising point is point E1 where MR and MC are equal (MR = MC)
● For quantities lower than Q4, the MR curve runs above the MC curve (MR >
MC)
● This is to illustrate that the monopolist can still increase his profit by increasing
output to Q4.
● He cannot produce more than Q4 because all units after Q4 are produced at a
higher cost.
● Therefore, marginal cost is higher than marginal revenue (MC > MR) and the
monopolist is making less profit than he/she should.

Economic profit in the short term

Step 1
First, draw your TWO axes: Price (vertical) and Quantity (horizontal) – remember, they
meet at the origin (0).

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Step 2
The two revenue curves start on the price axis and move down to meet the quantity
axis. Draw these axes now.

Step 3
The MC curve intersects the AC curve at the minimum point of the AC curve at
point e.

Step 4

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 ● The most important point on the graph is where MC = MR (look for the dot ●)
● At this point: equilibrium/ maximum profit/profit maximisation is reached.
● The business has expanded production to the point where the production costs
of the last unit are precisely equal to the revenue that it earns.

Short-term Profit for Monopoly

Step 5
● The dot(e) is extended upwards to indicate the cost(N) and the price (L) and
downwards to indicate quantity sold (Q1)
● Your cost occurs where it meets the AC curve at point N, and your market
price occurs where it meets the AR curve (demand curve) at point L.
● The price that corresponds with L is indicated by P on the vertical axis.
● Remember, a monopoly company will determine the price.

● The above figure enables us to calculate the monopolist’s short-term profit.

● The monopolist’s total revenue is P x Q1 which equals to 0PLQ1, and the total
cost is 0CN xQ1 which equals to 0CNQ1.
● The difference between these two areas is the monopolist’s total profit, which
is indicated by area 0PLN.
● In the above diagram, the total revenue is greater than short-term total costs,
the monopolist makes an economic profit.

Economic loss in the short term

Does the monopolist always make economic profit?
● It is possible for the monopolist to make a loss as well.
● The monopolist makes a loss if total cost (AC) is more than average revenue
(AR).
● Remember, AR is the price at which the product is selling and if the cost is more
than revenue, the company will make a loss.

Graphical illustration for Economic Loss

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● The monopoly suffers short-term losses when the AC curve lies above the
demand curve (DD).
● Equilibrium is reached where MR = MC (a loss-minimising situation).
● The monopoly will produce a quantity Q and sell at price P.
● The total costs are the area OCLQ; the total revenue is the area OPNQ.
● The loss will be that part that is shaded (the area PCLN).

Long-term equilibrium
● A firm that is making economic profit in the short run will try to sustain it even in
the long-term.
● A firm that is making economic loss in the short term will try to improve its
situation so that it can make economic profit in the long term.Long-run
Equilibrium of The Monopoly

LONG-RUN EQUILIBRIUM POSITION OF A

MONOPOLY
PRICE/C
OST

LMC
C LAC
P2/
ECONOMIC PROFIT
15 B

E D=

LM
R
Quantity
0 100/Q1

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 • The monopolist makes economic profit even in the long term. Equilibrium in the
long term is determined where LMR = LMC at point E.
• The price the monopolist charges is obtained by extending the line to point C
on the demand curve, D=AR.
• Total revenue is 15 x 100 =1500 (0P2CQ1) while total cost is 10 x 100=1000
(0P1BQ1)
• Economic profit is the difference between 1500 (0P2CQ1) and
1000 (P1BQ1) which is 500 (P1P2CB.)

Comparison Between Monopoly and Perfect Competition

Monopoly Perfect competition
Prices Prices are higher because a Prices are lower because there are
monopolist is a price-maker. many buyers and sellers. The
Single seller in the industry and individual is a price-taker. He has no
therefore easy to manipulate a control over price.
price.
Output Output is less under monopoly There is more output because there
than under perfect competition. are many sellers. The output by
They keep output low so that it each firm increases market output.
will not depress the price.
Competition There is no competition since Individual firms use price
monopolist is a single supplier in
competition in order to attract
the industry. customers.
Profit The monopolist makes
It can make economic profit in the
economic profit in the short term
short term but normal profit in the
and the long term because no long-term. The economic profit
new firms can enter the market.made in the short term attracts
competitors to enter the market in
the long run.
Demand In the monopoly, the demand The demand curve for the perfect
curve is downward sloping from market is horizontal
left to right.

SESSION 5: Oligopoly
Description
● An oligopoly consists of a small group of firms that supply the market
differentiated products
● Examples of an oligopoly are cell phone service providers, the banking sector
etc.
● There is limited competition because there are just few suppliers.
● When two large firms compete with each other, the market structure is called
duopoly.

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 Characteristics of an oligopoly
Number of ● There are few but large businesses e.g., Vodacom, MTN, Cell C
businesses in the cell phone industry. The Big-4-Banks of SA also form
oligopoly.
● If there are only two firms it is called the duopoly such as Coca
Cola and Pepsi. If the firms are more than two it is called the pure
oligopoly. Entry is free but not easy.
Nature of the ● The product may be identical or differentiated.
product ● If the product is homogeneous the market is a pure oligopoly,
e.g., the producers of cement and steel.
● If the product is differentiated the market is called differentiated
oligopoly, e.g., manufacturers of toothpaste, banking services,
insurance companies, etc.
Freedom of ● Entry is difficult as there are barriers of high start-up costs.
entry & exit ● However, it is possible for other smaller firms to operate in the
market of an oligopolistic market, but none of them is large enough
to have any significant effect on market prices and output.
Decision ● There is a lot of interdependence between the different firms.
making ● The decisions taken by one firm are influenced by the decisions of
other firms.
● Each firm is aware of the others’ actions.
● If one firm introduces a new marketing strategy all the other
competitors become aware and do the same.
● A new advertising campaign by one firm causes others to follow
suit.
Control over ● The oligopolist has control over the price but not as much as the
price monopoly.
● However, he must consider the reaction of other firms.
● The prices charged by oligopolists are closed related. Example
interest rates charged by banks are very similar.
● The oligopoly is characterised by price rigidity.
● Prices tend to be rigid and sticky. If any firm cuts the price, the rival
firms retaliate by cutting their prices as well.
● A price-cut by one competitor initiates a price-war in the
oligopolistic market.
● Hence under oligopoly no firm resorts to price-cutting without first
consulting other firms in the market.
Non-price Oligopolists do not use the price when they compete with each other.
competition They use non-price competition strategies such as
* aggressive advertising
* branding
* product differentiation
* product loyalty
* good service (e.g., after-sales services)
* extended business hours (including Sundays and holidays)
* door-to-door deliveries

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Collusion ● Oligopolies are characterised by the act of collusion.
● Since there are few firms in the industry, it is easy for them to
collude.
● They come together and form agreements to cooperate with each
other and raise prices or restrict production in order to influence
the price.
● There are two forms of collusion – overt collusion*(explicit
collusion) and tacit collusion* (implicit collusion).
● Overt collusion: This is open collusion which can be seen by
everybody.
● An example of overt collusion is a cartel. A cartel is an open
agreement between firms to fix prices or to limit supply in order to
increase profits.
● The disadvantage is that cartels are unreliable. A firm can decide
to cheat on others and sell at a lower price in order to attract
buyers.
● Examples of cartels are the Organisation of Petroleum Exporting
Countries (OPEC) and De Beers (diamond firm in South Africa).
● Tacit collusion: Since it is illegal to form a cartel, oligopolists may
decide to collude informally.
● A dominant firm in the industry is tacitly (implicitly, secretly) given
a task to set the price. It takes the lead and announces the price
increase.
● All other firms then follow the leader and start increasing their
prices as well.
NOTE: All forms of collusion are illegal. Firms are not allowed to come
together to fix the price.

Demand curve of the oligopolist

● Unlike in the case of perfect competition and monopoly it is impossible to
determine the demand curve facing the oligopolist.

● The quantity of goods the oligopolist produces is not determined by the

consumers’ demand only.

● The oligopolist must also consider the actions of other producers. One theory
that can be used to determine the oligopolist’s demand curve is what is called
the kinked demand curve.

● According to this theory firms in an oligopoly are striving to protect and maintain
their market share.

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Kinked demand curve.

● A kinked demand consists of two sections.

● The top section (D1) is relatively elastic and the bottom part (D2) is highly
inelastic. Suppose the market price is R20:
● At this price 10 units are produced and sold. Total revenue is R20 x 10 = R200.
● If the firm tries to increase its profit by increasing the price by R2 to R22 it faces
the risk that the quantity demanded will fall from 10 units to 4 units.
● Total revenue will fall to R88.
● A small change in price causes a huge change in quantity.
● Other oligopolists in the industry will not follow his lead.
● Therefore, the upper segment of the demand curve (D1) shows that rivals will
ignore price increases but match price cuts.
● The firm that increases the price will lose its customers to those that did not
increase the price.
● The firm can also try to increase its profit by reducing the price and thereby
increase its total sales.
● If the price is reduced by R4 from R20 to R16, demand increases only by 4
units from 10 to 14 units.
● Demand is relatively inelastic however there is a small increase in revenue to
R224.

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 Comparison between the oligopoly and perfect competition
Characteristic Oligopoly Perfect competition
Prices Prices are higher because the Prices are lower because there are
oligopolist is a price-maker. There many buyers and sellers. The
are few firms in the industry. It is individual is a price-taker. He has no
easy for them to come together control over price.
and fix a higher price.
Output Output is less under oligopoly There is more output because there
than under perfect competition. are many sellers. The output by
They keep output low so that it will each firm increases market output.
not depress the price.
Competition It uses non-price competition Individual firms use price
strategies such as advertising and competition in order to attract
product differentiation to increase customers.
profit
Profit The oligopoly makes economic It can make economic profit in the
profit in the short term and the short term but normal profit in the
long term because it is difficult for long-term. The economic profit
new firms to enter the market. made in the short term attracts
competitors to enter the market in
the long run.
Demand The demand in the oligopoly The demand curve is downward
market cannot be ascertained sloping from left to right.
because it is affected by the
reaction of other firms. As a result,
the kinked-demand curve shows
the reaction of other firms when
the price changes.

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 Monopolistic Competition

Description
● The firm operates in a market structure where there are many buyers and
sellers.
● Some firms are able to make their product slightly different to the competitors
through a process of product differentiation.
● Restaurants are good examples of monopolistic competition.

Characteristics of a Monopolistic Competition

Monopolistic Competition
Prices The firm has little control over price
Output There is more output because there are many sellers. The output by each
firm increases market output.
Competition Differentiated products create opportunities for non-price competition e.g.
advertising.
Profit It can make economic profit in the short term but normal profit in the long-
term. The economic profit made in the short term attracts competitors to
enter the market in the long run.
Demand The demand curve is downward sloping from left to right.
Nature of a The products are differentiated. Products are similar but not identical. They
Product are similar in that they satisfy the same need of the consumer. There may
be differences in packaging, but the product is the same
Entry Entry into the market is easy.
Monopolistic competition displays a hybrid structure. It is a combination
of competition and a monopoly.
Information Information for buyers and sellers is incomplete.
Collusion Collusion is not possible under monopolistic competition

Non-price competition
● Monopolistic market, competition is not based on prices but rather on factors
relating to the product’s uniqueness.
● They make use of non-price measures to attract customers and increase
their market share.
● An important aspect of non-price competition is to build brand loyalty,
product recognition and product differentiation.

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 Types of non-price competition:
Product differentiation • Refers to similar products that
satisfy the same consumer need
and can be used interchangeably,
e.g., beauty products, toothpaste,
shoes, etc.

Advertising ● used by businesses to make

consumers believe that their
products are different and better
than competing products.
● Advertising can help to establish
brand loyalty, e.g., consumers may
be loyal to Adidas sneakers and
make it their personal identity.
Loyalty Schemes • where consumers are encouraged
by businesses to shop at their
stores by signing up for loyalty
cards, e.g., clicks, pick and pay etc.

3.3.1 Determination of prices and output in the short run

● As with the other market structures, profits are maximised at the output
where MC = MR.
● The diagram is the same as for the monopolist, except that the demand
curve (D/AR) and MR curve are very elastic.
● As with perfect competition, it is possible for the monopolistically
competitive firm to make economic profit in the short run. This is
illustrated by fig. below

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Determination of prices and output in the long-run

● The above fig. depicts the equilibrium position of a monopolistic competition in

the long run.
● If a firm earns economic profit in the short-term, it attracts new firms and new
firms will take customers away from established firms.
● New entrants reduce economic profit earned in a short-run and is no further
incentive for new firms to enter.
● The market goes back to earning normal profit and Long-run equilibrium is
reached.

● In the above figure, equilibrium occurs at point a where LAR is tangent to LAC.
● Output will be QL – where LAR = LAC. At any other output, LAC is greater than
LAR and thus less than normal profit would be made.

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MICROECONOMICS: IMPERFECT MARKETS: TYPICAL EXAM
QUESTIONS
HINT: When answering Section, A – short question, it is important not to rush but to read
the questions carefully and to make sure you understand what the question is asking.
Always remember two alternative is completely wrong, one is nearly correct, and one is
totally correct. It is easy to eliminate the completely wrong answers, but if you do not read
the question carefully the nearly correct answer will also appear correct. The answer will
NEVER be two options. Only ONE option is correct. Your answer will immediately be
marked incorrect if you write TWO options
TIP: Know the concepts and descriptions to do well in Section A
Note that concepts are part of each question in the question paper

QUESTION 1: Section A –Low order Questions

1.1 FOUR possible options are provided as possible answers to the following
questions. Choose the correct answer and write only the letter (A–D) next to the
question number (1.1.1 – 1.1.10 in the ANSWER BOOK. For example (1.1.1 1- C).

1.1.1 The goods of a monopolistic competitor are ...

A similar
B differentiated
C unique
D homogenous

1.1.2 The demand curve of a monopoly is ……………… sloped.

A horizontally
B vertically
C negatively
D Positively

1.1.3 A monopolist will get ……………………. in the long term.

A Economic profit
B Economic loss
C Normal profit
D Normal loss

1.1.4 The demand curve of a monopolist is the same as the ………….. curve.

A average revenue
B total cost
C marginal revenue
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 D marginal cost

1.1.5 Product differentiation and ............... play an important role in non-price

competition.

A price
B advertising
C government policy
D discounts

1.1.6 An industry with only two producers controlling the market is known as a/an
……………………..

A duopoly
B monopoly.
C oligopoly
D tripoly

1.1.7 The perfect competitor must be able to cover its ……. costs to prevent a
shut-down.

A average
B variable
C average labour
D fixed

1.1.8 The demand curve that explains oligopolistic behaviour is described by

some theorists as …

A kinked
B vertical
C horizontal
D circular

1.1.9 Unit cost is also known as … cost.

A marginal
B total
C average
D Variable

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 1.1.10 In any market the average revenue is the same as the ….

A price
B total
C supply
D profit
(10 x 2) [20]

1.2 Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A-I) next to the question number (1.2.1 – 1.2.8) in
the ANSWER BOOK.

COLUMN A COLUMN B

1.2.1. Price leadership A. Products that differ, i.e., not similar

1.2.2. Break-even point B. A business in a perfect market will
consider closing down if AR = AVC
1.2.3. Cartel C. Actual expenditure of a business, for
example wages and Interest
1.2.4. Explicit costs D. An arrangement between businesses
with the aim of limiting competition
amongst them
1.2.5. Normal profit E. Duration where at least one factor of
production is fixed

1.2.6. Heterogeneous F. Total revenue is equal to total cost

1.2.7 Shut down point G Occurs where average revenue is
equal to average cost.
1.2.8 Short run H An example of tacit collusion in an
oligopoly market with regard to
pricing
(8 x 1) [8]
1.3 Give ONE term for each of the following descriptions. Write only the term next
to the question numbers (1.3.1 to 1.3.6) in the ANSWER BOOK. Abbreviations,
acronyms and examples will NOT be accepted.

1.3.1 A market structure where only two businesses dominate the market. (1)

1.3.2 A monopoly that exists because of high development costs (1)

1.3.3 A market structure that sells unique products. (1)

1.3.4 The output increases by more than the percentage increase in inputs
which results in a decrease in cost (1)
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 1.3.5 The profit that the producer receives over and above the normal
profit. (1)

1.3.6 These are costs that cannot be retrieved if the business exits the
industry. (1)

SECTION B

QUESTION 2: Low order questions (Adapted from various

sources)

HINT: When the question requires you to “State” the answer is a short sentence or
phrase. To “Give or Name”, you need not write one or few words
The answers MUST be done in bullet form. These types of questions are applicable
for 2.1.1, 3.1.1 and 4.1.1
Provide only TWO answers.
Note: Only the first TWO answers will be marked

2.1 Answer the following questions.

2.1.1 Give any TWO examples of natural monopolies (2)

2.1.2 Give any TWO examples of fixed cost. (2)

2.1.3 Name TWO types of collusion. (2)

2.1.4 List any TWO types of imperfect market. (2)

2.1.5 Name Two types of monopoly. (2)

2.1.6 List TWO characteristics of a imperfect market. (2)

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 QUESTION 2: Middle order questions (Adapted from various
sources)

HINT: These types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2
The questions are based on recent economic activities.

2.2 Answer the following questions.

2.2.1 How will profit differ between the perfect market and the monopoly
over the long term (2)

2.2.2 What would happen if firms in an oligopolistic market compete on

prices? (2)

2.2.3 What favourable conditions may the monopolist enjoy in

comparison to other market structures? (2)

2.2.4 Why does the marginal revenue (MR) curve lie below the demand
curve in a monopoly market. (2)

2.2.5 Why is it difficult for new firms to enter an oligopoly market (2)

2.2.6 Why do businesses in an oligopolistic market collude with one

another? (2)

DATA RESPONSE: Middle Order questions (Adapted from various sources)

HINT: All section B questions have TWO data response questions in a question paper –
each question total 10 marks.
Section B consist of Questions 2-4 in question papers, not as numbered in this activity
book.

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2.3 Study the graph below and answer the questions that follow

2.3.1 Identify the letter in the graph above that represents the loss
minimising point. (1)

2.3.2 What is the selling price of the business above? (1)

2.3.3 Briefly describe the term monopoly. (2)

2.3.4 Why is the equilibrium position above typical of the short run? (2)

2.3.5 Determine the loss for this business. Show ALL calculations (4)

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2.4 Study the graph below and answer the questions that follow

2.4.1 Which imperfect market structure is illustrated above? (1)

2.4.2 Name the downward sloping demand curve above. (1)

2.4.3 Briefly describe the term cartel. (2)

2.4.4 Explain how price leadership works in this type of market. (2)

2.4.5 Assume that the current selling price is R90. Explain why this
business will not lower prices to improve its sales. (2x2) (4)

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2.5 Study the graph below and answer the questions that follow

2.5.1 Identify the institution that is responsible for investigating anti-

competitive behaviour. (1)

2.5.2 Name the type of collusion explained in the extract above. (1)

2.5.3 Briefly describe the term oligopoly. (2)

2.5.4 What is the impact of price fixing on the market? (2)

2.5.5 How does the existence of monopolies influence the supply of goods
and services? (2x2) (4)

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2.6 Study the picture below and answer the questions that follow

2.6.1 Identify the nature of the product sold in this market structure. (1)

2.6.2 What type of profit is made by monopolistic competitors in the long

run? (1)

2.6.3 Briefly describe the term hybrid structure. (2)

2.6.4 Why does a monopoly fail to achieve productive efficiency? (2)

2.6.5 How do oligopolists maintain their market share? (2x2) (4)

QUESTION 3 Paragraph type questions – Middle Order

3.1
3.1.1 With the aid of a graph, explain the relationship between marginal
revenue and the demand curve (AR) of a monopoly. (8)

3.1.2 With the aid of a correctly labelled graph, briefly explain why it is
advisable for oligopolies to sell at market price. (8)

3.1.3 Compare monopolistic competition with perfect competition. (8)

3.1.4 Distinguish between price leadership and a cartel. (8)

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QESTION 4 Paragraph type questions – Higher Order
4.1
4.1.1 How may differentiated products influence consumers and
producers in a monopolistic competitive market? (8)

4.1.2 Evaluate the impact of collusion in the economy. (8)

4.1.3 Evaluate the effects of monopolies on the economy. (8)

4.1.4 How do oligopolists minimize the level of competition and

uncertainty with regard to prices? (8)
.

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SECTION C

HINT: Section C question questions 5 is based on Microeconomics in the question

paper.
In the examination you will need to answer only ONE question from Section C.
Use the grid below as a guide to answer the essay

MARK
STRUCTURE OF ESSAY: ALLOCA
TION:
Introduction Max 2
The introduction is a lower-order response.
● A good starting point would be to define the main concept related
to the
● question topic.
● Do NOT include any part of the question in the introduction.
● Do NOT repeat any part of the introduction in the body.
● Avoid mentioning in the introduction what you are going to discuss
in the body.

Main part:
Discuss in detail/In-depth discussion/Examine/Critically Max 26
discuss/Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Dra
w a graph and explain/Use the graph given and explain/Complete the
given graph/Assess/Debate
A maximum of 8 marks may be allocated for headings/examples.
Additional part: Critically discuss/Evaluate/Critically evaluate/Debate/ Max 10

Deduce/Compare/Distinguish/Interpret/How? /Suggest
A maximum of 2 marks may be allocated for mere listing of facts
Conclusion
Any higher-order conclusion should include: Max 2
● A brief summary of what has been discussed without repeating
facts
● already mentioned
● Any opinion or valued judgement on the facts discussed
● Additional support information to strengthen the
discussion/analysis A contradictory viewpoint with motivation, if
required

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 ● A brief summary of what has been discussed without repeating
facts already mentioned in the body
● Any opinion or value judgement on the facts discussed.
● Additional support information to strengthen the
discussion/analysis
● A contradictory viewpoint with motivation, if required
● Recommendations

TOTAL 40

QUESTION 5: MICROECONOMICS 40 MARKS – 40

MINUTES

● Examine in detail the characteristics of the oligopoly as a market structure. (26)

● How can the government discourage firms from engaging in anti-competitive (10)
behaviour?
[40]

IMPERFECT MARKETS LEARNER HOMEWORK

QU QUESTION 1 20 MARKS – 20 MINUTES
1.1 FOUR possible options are provided as possible answers to the following questions.
Choose the correct answer and write only the letter (A–D) next to the question number
(1.1.1 – 1.1.5) in the ANSWER BOOK. For example (1.1.6 - C).

1.1.1 An industry with only two producers controlling the market is known as a/ an
……………

A Duopoly.
B Monopoly.
C Oligopoly.
D Tripoly

1.1.2 The demand curve of s monopoly is the same as …revenue curve

A Marginal
B Average
C Total
D Average variable

1.1.3 The demand curve that explains oligopolistic behaviour is described by some
theorists as …

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 A kinked.
B vertical.
C horizontal
D circular

1.1.4 A group of producers forming a collective monopoly is called…

A Price leadership
B Perfect market
C Cartel
D Tacit

1.1.5 Barriers to entry are not economic in nature but are caused by other barriers.

A Artificial monopoly
B Legal monopoly
C Natural monopoly
D Cartel
(5 x 2) [10]

1.2 Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A-I) next to the question number (1.2.1 – 1.2.5) in
the ANSWER BOOK.

COLUMN A COLUMN B
1.2.1. Natural monopoly A. Arrangement between businesses
with the aim of limiting competition
between them.
1.2.2. Price leadership B. High development costs prevent
others from entering the market.
1.2.3. Heterogenous C. Market structure where few sellers
operate.
1.2.4. Oligopoly D. An example of tacit collusion in an
oligopoly market regarding pricing.
1.2.5. Collusion E. Market structure where only one seller
operates.
F. Products that differ, in other words
which are not similar.
(5x1) [5]

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1.3 Give ONE term for each of the following descriptions. Write only the term next
to the question numbers (1.3.1 to 1.3.5) in the ANSWER BOOK. Abbreviations,
acronyms and examples will NOT be accepted.

1.3.1 The minimum profit required to prevent the entrepreneur from

leaving the industry (1)

1.3.2 A market structure dominated by a large number of firms producing

differentiated products (1)

1.3.3 The amount by which total costs increase when an extra unit is
produced (1)

1.3.4 An exclusive right to manufacture a product. (1)

1.3.5 A market structure where there is only one manufacture of a

product (1)

SECTION B

Answer ALL questions from this section in the ANSWER BOOK.

QUESTION 2: MICROECONOMICS 40 MARKS – 30

MINUTES

2.1 Answer the following questions.

2.1.1 Give TWO examples of non-price competition by oligopolies (2 x1) (2)

2.1.2 Why is a monopolistic competitive market regarded as a hybrid

market structure? (1 x 2) (2)

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2.2 Study the picture below and answer the questions that follow.

2.2.1 Identify a barrier to entry used by a monopolistic competitor to

increase its market share from the above picture. (1)

2.2.2 Name the type of monopoly that is characterised by the use of

patents. (1)

2.2.3 Briefly describe the term economies of scale. (2)

2.2.4 How would barriers to entry influence profits in the market? (2)

2.2.5 Why is it a challenge for monopolies to charge excessively

high prices? (2 x 2) (4)

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2.3 Study the picture below and answer the questions that follow.

[Source:googleimages.com]

2.3.1 Identify ONE example of a monopolistic competitor from the picture

above. (1)

2.3.2 What is a number of firms expected in the market shown on the

picture above? (1)

2.3.3 Briefly describe the term hybrid structure. (2)

2.3.4 Explain why product differentiation is an important aspect of

competition between businesses. (2)

2.3.5 How does free entry affect the demand curve of the monopolistic
competition?
(2 x 2) (4)

2.4 Compare between the perfect market and the monopoly regarding prices
and profit. (8)

2.5 Analyse measures that may be used by government to promote (8)

competition in the economy.

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 MARK
STRUCTURE OF ESSAY
ALLOCATION
Introduction
The introduction is a lower-order response. Max. 2
• A good starting point would be to define the main concept related to
the question topic.
• Do not include any part of the question in your introduction.
• Do not repeat any part of the introduction in the body.
• Avoid mentioning in the introduction what you are going to discuss in
the body.
Body
Main part: Discuss in detail/In-depth discussion/Examine/Critically Max. 26
discuss/ Analyse/Compare/Evaluate/Distinguish/Differentiate/Explain/Draw
a graph and explain/Use the graph given and explain/Complete the given
graph/Assess/Debate
A maximum of 8 marks may be allocated for headings/examples Max. 10
Additional part: Critically discuss/Evaluate/Critically evaluate/Debate/
Deduce/Compare/Distinguish/Interpret/How? /Suggest
A maximum of 2 marks may be allocated for mere listing facts.
Conclusion
Any higher-order conclusion should include: Max. 2
• A brief summary of what has been discussed without repeating facts
already mentioned
• Any opinion or value judgement on the facts discussed
• Additional support information to strengthen the discussion/analysis
• A contradictory viewpoint with motivation, if required
• Recommendations
TOTAL 40

QUESTION 3: MICROECONOMICS 40 MARKS – 40 MINUTES

● Examine in detail the characteristics of Monopoly as a market structure. (26)

● How can South Africa benefit from increased competition in global markets? (10)

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SESSION 6
MARKET FAILURE LEARNER NOTES
Hint: Ensure that you learn the different graphs in order to answer
Section B data responses and Middle order questions
Have a good knowledge of all the concepts

Key Concepts
Concept Description
Allocative Where resources in the economy are not distributed optimally
Inefficiency and therefore consumers cannot purchase the quantity of
goods that they desire.
Allocative/Pareto Occurs when resources cannot be readjusted to make one
Efficiency consumer better off without making another consumer worse
off
Black market An illegal market in which illegal goods are bought and sold
or illegal prices are charged
Cost-Benefit An analysis done by government which weighs the costs and
Analysis benefits of a project to determine whether it should be carried
out
Demerit Goods Goods that are seen to be socially harmful e.g., cigarettes,
gambling
Externalities Costs or benefits to third parties which are not included in the
market price of a good
Market Failure When the forces of demand and supply fail to allocate
resources efficiently
Maximum Price/ A price set below the equilibrium price/market price to make
Price Ceiling goods affordable
Merit Goods Goods that are so beneficial to society that every individual
should consume them irrespective of their income e.g., health
care, education.
Minimum Price/ Price A price set above the equilibrium price/market price to allow
Floor producers to make a fair profit
Minimum Wage A wage rate set by the government, below which no employer
can pay their workers. It is set above the equilibrium wage
rate
Negative A cost to a third party which is not included in a market price
Externalities of a good. It is a difference between social cost and private
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 cost. E.g., the harmful effect of a product e.g., pollution
Non-Excludable Goods whereby individuals can benefit even if they do not pay
Good for it e.g., the television or the police force
Non-Rival Goods Goods when consumed by one person will not reduce the
consumption by another individual e.g., street lights.
Positive Externalities The benefit gained by a third party which is not included in the
market price
Private Benefit The gain a consumer gets from the use of a goods or the gain
a producer gets from the sale of a product. E.g., The joy
gained by a consumer from driving a car
Private Cost The actual cost paid by a consumer when a good is
purchased.
Producer Subsidies A cash allowance given to a producer to lower the cost of
production and allow more goods to be supplied at a lower
price
Productive/Technical When resources are not used appropriately to produce the
Inefficiency maximum number of goods at the lowest cost and best quality
Social Benefit The benefit gained by society from the use of a good or
service. E.g., taxpayers pay for the maintenance of roads,
society will benefit from fewer accidents. It is calculated by
adding the private benefit and external benefit
Social Cost The cost of a good or service which is paid by society. It is
calculated by adding the private cost and external cost. E.g.
the air pollution caused by cars, will affect people’s health bills

The causes of market failures

EXTERNALITIES
● Sometimes ideal market conditions prevail and the mechanisms of the market
work perfectly, however, the market does not produce optimally.
● With negative externalities, goods are over-produced (because the cost of
production is not included in the market price) and
● with positive externalities goods are under-produced (because the benefit is not
included in the market price).
● Both result in a misallocation of resources.
● Side effects of production and consumption activities that impact on people who
are not involved in the activity.
● In certain instances, people gain while other people losses out. This is because
externalities prevail.
● Externalities are the cost and benefits (spill-over effects or third-party effects)
that convert private cost and benefits into social cost and benefits.

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Concepts:

- Private costs (internal costs) costs consumers incur when buying goods e.g.
price of bicycle of R990.
- Private (internal) benefits - benefits of those who buy and produce goods like
joy to the consumer or profit for the producers.
Social costs -cost to producers and society at large – includes additional costs
like disposing waste products, decreasing appeal of area.
- Social benefits-positive externalities like clean water leading to few illnesses,
healthier workforce, and higher productivity.
● Private costs and benefits have price – externalities do not have a price – is
cost or benefit to third parties.

Externalities are difference between social costs and benefits and private costs and
benefits.
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 leads to a lot of social costs, therefore, the government charges
sin tax / excise duties to discourage the consumption of such goods.

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● 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.
Imperfect competition

● Monopolies and oligopolies restrict supply in order to maximise profits.

Resources are therefore under allocated to the production of goods and
services produced under conditions of imperfect competition.
● One option is for government to do nothing about this and trust that large profits
will attract competitors to the market.
● Can regulate through competition policy.

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 another
supplier or about the harmful effects of a product since they might just base
their decisions to consume based on the information from misleading suppliers.

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 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
quick 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.

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Unequal distribution of income

● Is caused by the fact that some people are born to wealthy parents and have
access to a good education and others not.
● Therefore, people vary in their skill levels and their ability to produce output.
Unequal distribution of income is viewed as a market failure.
● The market fails to ensure that everyone gets equal access to the output of the
economy.
● Too many of the resources are used to produce output for the rich and too few
for the poor. In the South African economy, few people are very well off while
50% of the population lives in poverty.
The South African government imposes progressive taxation, i.e., the more you
earn the more tax you pay. Also, minimum wages.

Consequences of market failures

Two kinds of inefficiencies are possible:

● Productive inefficiency/Technical inefficiency - When resources are not
used appropriately to produce the maximum number of goods at the lowest
cost and best quality.
● Allocative inefficiency - Allocative inefficiency means that the
types/quantities of goods or services produced are not what is best for
consumers.

● The Production possibility curve (AA), above, shows a combination of goods

that can be produced using all the available resources.
● Any point on the curve shows a combination of goods where resources will be
used efficiently.
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● Therefore, any point on the curve indicates Productive/Technical efficiency.
● The indifference curve (I1) shows a combination of two goods which gives the
consumer the same level of satisfaction. However, if production takes place at
point B on the curve, but the demand for goods is actually represented by point
C, Allocative inefficiency will occur where the tastes of consumers are not
met.
● Any point to the left of the curve such as D, indicates that some resources are
unused. If this occurs some customers may be deprived of goods. This depicts
Allocative and Productive inefficiency.

EXTERNALITIES

Negative externalities

Negative externalities bear a private cost, the cost of producing the actual product
and a social cost, a cost suffered by society.
If the social cost of a good were added to the private cost of a good, the final price
would be pushed up and fewer goods would be supplied. This is depicted in Figure
below.
NEGATIVE EXTERNALITIES

From the graph above it can be seen:

● The demand for the cigarettes is represented by DD.

● The supply of the product, which is also the marginal private cost (MPC) of the
industry, is represented by SS.
● As a result of the pollution, the marginal social cost (MSC) is greater than MPC.
● If the market is left to its own devices, a quantity Q will be produced at price P.
● This is a socially inefficient solution.
● Social efficiency requires that MSC be equal to the price of the product.
● This occurs at price P1 and quantity Q1.
● Fewer goods should be produced at a higher price.
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● The shaded angle represents the negative externality (welfare loss) to society.
● The government has used three methods to reduce negative externalities:
● The government has carried out campaigns in order to change/ persuade
people from causing negative externalities.
● Levying taxes on goods that cause negative externalities. E.g., Taxes are levied
on cigarettes and alcohol.
● Passing laws and regulations to prevent activities that cause negative
externalities. E.g., Tobacco companies are not allowed to advertise. There are
laws that regulate the amount of air pollution and waste.

Positive externalities

If people acknowledged the social benefit of a good, they would demand more
of that good. The price of such a good would therefore increase. This is depicted
in the Figure below.
POSITIVE EXTERNALITIES

From the graph above it can be seen:

● The supply of education, which is also the marginal social cost, is represented
by SS.
● The demand for school education, which is also the marginal private benefit
(MPB) of the industry, is represented by DD. The cost of school fees is P and
the quantity demanded and supplied is Q.
● If the cost of school fees is P, most learners will not be able to afford it.
● The demand curve D1D1 also represents the marginal social benefit. (MSB),
that is, the level of education that should be demanded.
● As a result of the benefits of education, MSB is greater than MPB.
● If the market is left to its own devices, a quantity Q will be produced at price P.
● There would be social inefficiency in the market since not enough education is
being demanded.

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 ● However, if social benefits are acknowledged, a quantity Q1 will be produced
at price P1.
● More education would be demanded, this will lead to social efficiency.
● The shaded angle represents the positive externality (the welfare gain) to
society.

● The government encourages positive externalities by:

▪ Advertising on the radio or television.

▪ Providing education, health care and other services at a low cost or free.
▪ Providing consumer subsidies.
▪ Consumer subsidies lower the cost of a good and encourage its usage.

SESSION 7

STATE INTERVENTION AS A CONSEQUENCE OF MARKET

FAILURE
(a) Direct controls
● The government can pass laws or use existing legislative framework to
control businesses that generate negative externalities.

(b) Imperfect markets

● Firms in an imperfect market supply a limited quantity of goods and services
at a very high price.
● The government uses its laws on competition to prevent exorbitant prices
charged by firms, to ensure entry to the market is free, prevent harmful
collusion and encourage foreign competition which helps keep prices of
goods low.

(c) Establishing minimum wages

● When the government enforces a minimum wage, it means workers have to
be paid a certain wage amount and not anything less than this.
● The Figure below shows that if the wage rate is set at W, the corresponding
demand and supply of labour will be Q.
● If a minimum wage of W1 is set, the demand for labour will decrease from
Q to Q1. Some people may become unemployed due to the introduction of
a minimum wage.
● However, the quantity of labour supplied will increase from Q to Q2.
● More people will offer their labour because of the higher wage.

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 MINIMUM WAGES

(d) Setting maximum prices/price ceilings

● The government sets a maximum price ceiling below the market price to
make goods more affordable.
● Maximum prices allow the poor greater access to certain goods and
services.
● A maximum price is set on goods such as basic foods, housing and
transport.
● In South Africa the price of petrol, diesel fuel and paraffin are controlled
at their maximum prices.

MAXIMUM PRICES

● Initially the market equilibrium price is P and equilibrium quantity is Q.

● The government intervenes and passes a law that milk cannot be sold
for more than P1.

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 ● The effect of this maximum price is that quantity supplied decreases to
Q1 and quantity demanded increases to Q2.
● There is a shortage of milk equal to the difference between Q1 and Q2.
● A shortage creates a problem of how to allocate milk to consumers.
● Black markets often develop where people can obtain milk. A black
market is an illegal market in which either illegal goods are bought and
sold or illegal prices are charged.
● Maximum prices may cause a shortage of goods but they do improve
the welfare of some consumers since goods can be purchased at lower
prices.

(e) Setting minimum prices/price floors

● The government sets a minimum price at some point above the market
price.
● This is done to enable producers to make a comfortable profit and thus
encourages them to supply important essential goods.

MINIMUM PRICES

● Consider the market for wheat.

● The market equilibrium price is P and the equilibrium quantity is Q.
● If the government sets a minimum price at P1, farmers will be earning
greater profits and supply more wheat. Quantity supplied will therefore
increase to Q2.
● However, quantity demanded will decrease to Q1.
● There would be a surplus of wheat equal to the difference between Q2
and Q1.
● A surplus means the government will have to buy the extra wheat and
dump it locally or abroad.
● Although minimum prices may cause a surplus, they do encourage the
supply of important food stuffs.

(f) Taxes and subsidies

Levying of taxes
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 ● Governments intervene in the market by levying taxes to recover the
external cost. These taxes will increase the price and will result in a
decrease in production. This could help to reduce a negative externality
such as pollution.

Providing Producer Subsidies

● The government provides subsidies to producers in order to encourage
them to increase the production of goods. Supply increases.
● Producer subsidies are often given to suppliers of agricultural products
such as milk, wheat and maize.
● Subsidies lower the cost of producing goods and thus the market price
of these goods is lowered.

TAXES AND SUBSIDIES

● The market price of rice is P and the corresponding quantity is Q.

● If the government subsidises the production of rice, the market price will
decrease to P1 with corresponding quantity Q1.
● The lower price, P1, allows the poor to purchase more rice.

(g) Redistribution of wealth

● Traditional methods e.g., the levying of various taxes and the provision
of free services, services in kind and cash benefits to the poor.
● Implementing Redress methods e.g., the use of law to enforce
redistribution. It includes BEE, affirmative action, empowerment, land
restitution, land redistribution and property subsidies (for RDP houses).

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 The government can use other ways to improve income distribution and
overcome market failure:
● Transfers income directly to the poor e.g., child support grants,
unemployment benefits etc.
● Provides goods free of charge e.g., community goods, education etc.
● Implements employment creation programmes e.g., public works
programme.
● Subsidising merit goods e.g., subsidising arts and cultural events.
● Imposes taxes and laws on demerit goods to discourage consumption.
● Uses fiscal and monetary policy to achieve macroeconomic stability.
● Makes sure that consumers are informed about products through
legislation. The South African Bureau of Standards (SABS) checks
consumer goods in South Africa.
● Tries to prevent misleading advertising. (Advertising Standards
Authority)

(h) Government involvement in production

Governments are involved in producing goods and services themselves.
Public goods

● In incomplete markets government will intervene and supply the desired

goods directly.
● They raise taxes to provide these goods.
● Community goods are provided free of charge, examples police, defence
force etc.
● Collective goods are provided for user fee examples refuse removal,
waste disposal etc.

Macroeconomic stability

● If the Macroeconomic aims of government (economic growth,

employment, price stability, exchange rate stability and income equality)
are not achieved government will see this as market failure and
intervene.
● The focus will be on either the demand-side or the supply-side of the
economy.
● The demand-side- they will use monetary and fiscal policies to stimulate
or cool down demand.
● The supply-side focuses on the capability of the economy and on policies
to expand the stock of factors of production, infrastructure and the
flexibility of markets.

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SESSION 8
COST-BENEFIT ANALYSIS

(a) The concept of cost-benefit analysis

● Cost-benefit analysis (CBA) is a standard method used to compare the

social cost and benefits of alternative projects or investments.
● Cost and benefits are measured and then weighed up against each other
in order to generate criteria for decision-making.
● We use one of 3 decision criteria:

Net present value (NPV) Internal rate of Benefit-cost ratio (BCR)

return (IRR)
The present value of an The interest rate at The BCR for a project is
investment project, found by which the net the ratio between the
discounting all present and present value of a sum of expected
future receipts and outgoings at project is zero (0); benefits and its cost.
an appropriate rate of interest; if a project is worth
the net present value calculated investing in if its
is positive, it is worthwhile IRR is greater than
investing in a project. the rate of interest.
● CBA is, in essence, an accounting procedure for investment whereby
the total cost of the particular project is weighted against its total benefits.
Government usually uses CBA to see whether they should undertake a
certain project.

(b) The reason for cost-benefit analysis

This includes understanding the rate of return on a project and the idea that
future costs and benefits can be discounted in reverse to give its present value.
This determines the rate of return on a project and allows informed decisions
to be made that are in the best interests of society.

Price mechanisms

● The procedure involves estimating the money equivalent of the benefits

of a project and comparing these benefits estimates with the cost of
providing the good or service.
● It is relatively easy to measure private costs and benefits as they go
through the price mechanism.
● But in practice, it is more difficult to attach monetary values to external
costs and benefits.
● One way is by using shadow prices, based on opportunity costs.
● Def. of shadow prices: Relative prices of goods, services and resources
that are proportional to their true opportunity cost for the economy, taking
account of any external economies and diseconomies.

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 ● E.g., to place a value on the benefits drivers would receive on completion
of a new freeway, we could estimate the driving time that would be
saved, and then multiply this by the average wage rate.
● Money now is worth more than money later.
● The relative levels of costs and benefits as well as the distribution of
these must be considered. E.g., a project should go ahead if the
investors (those who gain) can compensate those who lose, and still
experience a net gain.

(c) Cost-benefit analysis in practice

● The calculation of a CBR is often the end result of the study.

● The numerator of this ratio is defined as the present value of all of the
expected economic benefits attributable to a proposed undertaking.
● E.g., to calculate the monetary value for a public park or an art museum,
shadow prices (benefits) may be used to calculate the value of the
enjoyment of these facilities.
● The denominator of the CBR is defined as the present value of the cost
of undertaking and operating the project. If it is a large capital investment
project there are 2 types of costs: capital cost and operation,
maintenance and repair cost.
● Capital costs occur before the project begins to produce outputs; the
remaining costs are future expenses.

● On the basis of these definitions, the CBR is defined as the value of

benefits of a programme to the value of the programme’s cost:

CBR = Present value of economic benefits

Present value of economic costs

● If the ratio is greater than 1, the project is judged economically

worthwhile.
● If the ratio is equal to1, public expenditure adds nothing.
● If the ratio is below 1, it detracts from economic well-being.

In practice, a CBA tries to answer the question: ‘Do the gains to the people
exceed the sacrifices required of them?’

● If the answer is yes – CBA >1

● If no – CBA <

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 SESSION 9: MICROECONOMICS: MARKET FAILURES PART 1

HINT: When answering Section, A – short question, it is important not to rush but to read
the questions carefully and to make sure you understand what the question is asking.
Always remember two alternative is completely wrong, one is nearly correct, and one is
totally correct. It is easy to eliminate the completely wrong answers, but if you do not read
the question carefully the nearly correct answer will also appear correct. The answer will
NEVER be two options. Only ONE option is correct. Your answer will immediately be
marked incorrect if you write TWO options
TIP: Know the concepts and descriptions to do well in Section A
Note that concepts are part of each question in the question paper

QUESTION 1: Section A –Low order Questions

1.1 FOUR possible options are provided as possible answers to the following questions.
Choose the correct answer and write only the letter (A–D) next to the question
number (1.1.1 – 1.1.5 in the ANSWER BOOK. For example (1.1.6 - C).

1.1.1 The effect of a minimum price will increase the … goods.

A demand
B supply
C consumption
D spending

1.1.2 Income enjoyed by producers of goods is known as … benefit.

A private
B external
C social
D public

1.1.3 A situation where it is impossible to increase the welfare of one individual

without making another worse off is called … efficiency.

A allocative
B technical
C pareto
D Market

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 1.1.4 Goods which are non-excludable and non-rival are known as … goods
A consumer
B capital
C community
D scarce

1.1.5 The government can introduce … to increase the mobility of labour

A taxes
B poverty
C inflation
D training

1.2 Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A-I) next to the question number (1.2.1 – 1.2.5) in
the ANSWER BOOK.

COLUMN A COLUMN B
1.2.1. externality A. Market price to make goods affordable
1.2.2. Minimum wages B. Spill over effects of an economic
activity on the third party.
1.2.3. Pareto efficiency C. Creates excess supply for labour.
1.2.4. Maximum price D. When it is impossible to increase the
welfare of one person without
decreasing the welfare of another.
1.2.5. Allocative inefficiency E. Goods that are so beneficial to the
society.
F. When resources are not allocated in
the right proportions
1.3 Give ONE term for each of the following descriptions. Write only the term next
to the question numbers (1.3.1 to 1.3.5) in the ANSWER BOOK. Abbreviations,
acronyms and examples will NOT be accepted.
1.3.1 The combined cost of goods or services to producers and
consumers and society as a whole (1)

1.3.2 The wage rate set by government, below which no employer can
pay his/ her workers. (1)

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 1.3.3 A financial grant from the government to support the production of
a particular product. (1)

1.3.4 Goods that are seen to be socially harmful to society (1)

1.3.5 An illegal market in which illegal goods are bought and sold. (1)

SECTION B

QUESTION 2: Low order questions (Adapted from various

sources)

HINT: When the question requires you to “State” the answer is a short sentence or
phrase. To “Give or Name”, you need not write one or few words
The answers MUST be done in bullet form. These types of questions are applicable
for 2.1.1, 3.1.1 and 4.1.1
Provide only TWO answers.
Note: Only the first TWO answers will be marked

2.1 Answer the following questions.

2.1.1 Name TWO types of externalities (2)

2.1.2 Give any TWO examples of community goods (2)

2.1.3 Give TWO examples of merit goods. (2)

2.1.4 List any TWO types of subsidies on goods. (2)

2.1.5 Give any TWO examples of positive externalities (2)

2.1.6 Give TWO characteristics of public goods. (2)

QUESTION 2: Middle order questions (Adapted from various

sources)

HINT: These types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2
The focus is based on recent economic activities.

2.2 Answer the following questions.

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 2.2.1 Why does the government sometimes set minimum prices (price
floors) for certain products (2)

2.2.2 Why are merit goods normally undersupplied by the market? (2)

2.2.3 Why are allocative and technical efficiencies important for the (2)
economy?
2.2.4 How does a national minimum wage influence the supply of
labour? (2)

2.2.5 How do producers benefit from minimum prices that are

implemented by the government? (2)

2.2.6 Why is the demand for skilled labour difficult to adjust in South
Africa? (2)

DATA RESPONSE: Middle Order questions (Adapted from various

sources)

HINT: All section B questions have TWO data interpretation questions in the question
paper – each total 10 marks.
Section B consist of Questions 2-4 in the question paper, not as numbered in this
activity book

2.2 Study the picture below and answer the questions that follow.

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 2.2.1 What is the equilibrium price in the graph above? (1)

2.2.2 Identify the quantity of goods above which will be supplied if a

maximum price of R70 is implemented. (1)

2.2.3 Briefly describe the term market failure. (2)

2.2.4 Why will a government implement maximum prices of certain

goods? (2)

2.2.5 Use the graph to explain the impact of maximum prices on the
market. (2 x 2) (4)
2.3 Study the picture below and answer the questions that follow.

2.3.1 Identify the curve that relates to allocative efficiency. (1)

2.3.2 What quantity of rice will be supplied if 800 units of maize are
produced? (1)

2.3.3 Briefly describe the term cost-benefit analysis. (2)

2.3.4 How can the government discourage the consumption of demerit

goods? (2)

2.3.5 Why will production at point E be regarded as inefficient? (2 x 2) (4)

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2.4 Study the picture below and answer the questions that follow.

2.4.1 Identify the graph that represents negative externality from the
above figures. (1)

2.4.2 Give any ONE example of positive externalities. (1)

2.4.3 Briefly describe the term externality. (2)

2.4.4 Which demand curve in GRAPH B represents the social benefit? (2)

2.4.5 How do positive externalities affect costs and the quantity of goods
and services. (2 x 2) (4)

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2.5 Study the information below and answer the questions that follow.

2.5.1 Identify ONE example of an external benefit in the table above. (1)

2.5.2 Name the sector in which a cost benefit analysis is applied. (1)

2.5.3 Briefly describe the term social costs. (2)

2.5.4 How can a lack of information among entrepreneurs lead to market

failure? (2)

2.5.5 Determine whether the project is viable or not by calculating the

cost benefit ratio. Show ALL calculations. (2x2) (4)

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QUESTION 3 Paragraph type questions – Middle Order

3.1 Use the graph below to explain the effect of positive externalities in the market.

3.1.2 Briefly discuss merit and demerit goods as a cause of market

failure. (8)

3.1.3 Discuss the uses for a Cost Benefit Analysis (CBA) (8)

3.1.4 Differentiate between allocative and productive inefficiency. (8)

3.1.5 Discuss externalities as a cause of market failures. (8)

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QUESTION 4 Paragraph type questions – Higher
Order

4.1
4.1.1 How would the implementation of maximum prices impact
negatively on the economy? (8)

4.1.2 Why does the government produce certain goods and services? (8)
4.1.3 How can inefficiencies cause market failures? (8)

4.1.4 How does the government discourage externalities? (8)

HINT: In section C, Microeconomics is assessed in question 5 in the question paper
In the examination you will need to answer only ONE.

MARK
STRUCTURE OF ESSAY: ALLOCATION
:
Introduction Max 2
The introduction is a lower-order response.
● A good starting point would be to the main concept related to the
question topic
● Do not include any part of the question in your introduction.
● Do not repeat any part of the introduction in the body
● Avoid saying in the introduction what you are going to discuss in the
body
Body:
Main part: Discuss in detail/ In-depth discussion/ Examine/ Critically Max 26
discuss/ Analyse / Compare/ Distinguish/ Differentiate/ Explain/ Evaluate
Additional part: Give own opinion/ Critically discuss/ Evaluate/ Critically
evaluate/ Calculate/ Deduce/ Compare/ Explain Distinguish / Interpret/
Briefly debate/ How/ Suggest Max 10
Conclusion
Any Higher or conclusion include: Max 2
● A brief summary of what has been discussed without repeating facts
already mentioned in the body
● Any opinion or value judgement on the facts discussed
● Additional support information to strengthen the discussion/analysis
● A contradictory viewpoint with motivation, if required
Recommendations
TOTAL 40

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 QUESTION 5: MICROECONOMICS 40 MARKS – 40 MINUTES

● Discuss the consequences of market failure with the aid of graphs under the
following headings:

- Producer Subsidies
- Maximum prices (26)
- Minimum wages
● How has the implementation of minimum wages benefited the workers in South (10)
Africa?
[40]

MARKET FAILURES LEARNER HOMEWORK

QU QUESTION 1 20 MARKS – 20 MINUTES

1.1 FOUR possible options are provided as possible answers to the following questions.
Choose the correct answer and write only the letter (A–D) next to the question number
(1.1.1 – 1.1.5 in the ANSWER BOOK. For example (1.1.6 - C).

1.1.1 Public goods are provided and funded by …

A markets
B factories.
C governments
D companies

1.1.2 When businesses fail to deliver goods and services at the lowest possible cost is
known as … inefficiency.

A productive
B allocative
C demand
D summative

1.1.3 When two identical products are sold at different prices to different consumers it
is known as price …

A differentiation
B stability
C discrimination
D comparison

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 1.1.4 Prices set by government to ensure affordability to the poor is called … prices.

A limited
B normal
C minimum
D maximum

1.1.5 Goods such as parks, beach facilities and streets are known as … goods.

A private
B collective
C consumer
D producer

1.2 Choose a description from COLUMN B that matches the item in COLUMN A.
Write only the letter (A-I) next to the question number (1.2.1 – 1.2.5) in the
ANSWER BOOK.

COLUMN A COLUMN B
1.2.1. Market failure A. When identical goods and services are
sold at various prices to different
consumers
1.2.2. Cost-benefit analysis B. Spill over effects of an economic
activity on the third party
1.2.3. Price discrimination C. Implemented to subsidise producers
and mostly agricultural products
1.2.4. Minimum price D. Method used by the government to
determine viability of a project

1.2.5. Black market E. When the resources of the community

are allocated inefficiently
F. illegal goods are bought and sold or
illegal prices are charged

1.1 Give ONE term for each of the following descriptions. Write only the term next to
the question numbers (1.3.1 to 1.3.5) in the ANSWER BOOK. Abbreviations,
acronyms and examples will NOT be accepted.
1.3.1 The actual cost paid by a consumer when a good is purchased. (1)

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 1.3.2 The consumption of a product by one person will not prevent other
from enjoying it too. (1)
1.3.3 A cost to a third party which is not included in a market price of a (1)
good.
1.3.4 Goods that are seen to be socially harmful to society (1)
1.3.5 Goods that the free market does not provide because they have non- (1)
rivalry and non-excludability of public goods.

SECTION B

Answer ALL questions from this section in the ANSWER BOOK.

QUESTION 2: MICROECONOMICS 40 MARKS – 30

MINUTES

2.1 Answer the following questions.

2.1.1 Give TWO characteristics of public goods (2 x1) (2)

2.1.2 How will a national minimum wage influence the supply of

labour? (1 x 2) (2)

2.2 Study the extract below and answer the questions that follow.

2.2.1 In which sector is the cost benefit analysis generally used? (1)

2.2.2 Give any ONE redress method used by government to enforce the
redistribution of income. (1)

2.2.3 Briefly describe the term cost-benefit analysis. (2)

2.2.4 Explain the importance of doing cost benefit analysis for large
projects? (2)

2.2.5 Why are some projects undertaken although the financial cost
is very high? (2 x 2) (4)
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2.3 Study the graph below and answer the questions that follow.

2.3.1 Identify the number of houses the market will provide if all
resources were spent on houses (1)

2.3.2 How many schools should the government provide to reach the
social optimum allocation? (1)

2.3.3 Briefly describe the term market failure. (2)

2.3.4 Why are markets reluctant to produce public goods such as roads? (2)

2.3.5 How can the government ensure macroeconomic stability

through their involvement in production? (2 x 2) (4)

2.4 Explain with the aid of a well-labelled graph, the effect of providing subsides
to producers as a form of government intervention during market failure. (8)

2.5 How can inefficiencies cause market failures? (8)

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 SECTION C
MARK
STRUCTURE OF ESSAY: ALLOCATION
:
Introduction Max 2
The introduction is a lower-order response.
● A good starting point would be to the main concept related to the
question topic
● Do not include any part of the question in your introduction.
● Do not repeat any part of the introduction in the body
● Avoid saying in the introduction what you are going to discuss in the
body
Body:
Main part: Discuss in detail/ In-depth discussion/ Examine/ Critically Max 26
discuss/ Analyse / Compare/ Distinguish/ Differentiate/ Explain/ Evaluate
Additional part: Give own opinion/ Critically discuss/ Evaluate/ Critically
evaluate/ Calculate/ Deduce/ Compare/ Explain Distinguish / Interpret/
Briefly debate/ How/ Suggest Max 10
Conclusion
Any Higher or conclusion include: Max 2
● A brief summary of what has been discussed without repeating facts
already mentioned in the body
● Any opinion or value judgement on the facts discussed
● Additional support information to strengthen the discussion/analysis
● A contradictory viewpoint with motivation, if required
Recommendations
TOTAL 40

QUESTION 3: MICROECONOMICS 40 MARKS – 40 MINUTES

Discuss the following causes of market failure without using any graphs.
● Externalities (13)
● Missing markets (13)

How can market inefficiency be reduced by global markets (globalisation)? (10)

Credits: The Department of Basic Education, National Senior Certificate

Economics Question Papers 2021 – 2024, Pretoria
Economics sources and internet for notes with 2021 Examination guideline

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