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ECS 2601

Microeconomics
Boston | UNISA 2015

Unit 1 Overview of the SA macroeconomy

Errol Goetsch
Lorraine

078 573 5046


082 770 4569

errol@xe4.org
lg@xe4.org

www.facebook.com/groups/fec1501

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Lecture Outcomes
Units 01 - 09

1.1 Introduction
1.2 The Basic Economic Problem

1.2.1 Scarcity
1.2.2 Unlimited wants vs. limited means
1.2.3 Factors of Production
1.2.4 Choice and Opportunity Cost

01 Overview of the SA macroeconomy

1.3 The Miracle of the Market Economy

02 The goods market

1.4 Common market failures


1.5 Macro vs. Micro economics
1.6 Macroeconomic objectives
1.7 Measurement of Production

03 Financial Markets
04 The IS-LM model
05 Openness in goods and financial markets

1.3.1 Markets
1.3.2 Prices

1.7.1 The importance of national accounts


1.7.2. Gross domestic product
1.7.3 Double counting and avoiding it
1.7.4 3 ways to calculate GDP

1.8 Real vs. Nominal values


1.9 The composition of GDP
06 The goods market in an open economy
1.9.1 Origin of GDP
1.9.2 Components of Total Expenditure
07 Output, the interest and the exchange rates1.10 Shortcomings of GDP
1.11 Understanding Economic Graphs

08 The labour market


09 The AS-AD model

1.11.1 The Axes of a Graph


1.11.2 Other types of graphs
1.11.2.1 Variables with a + relationship
1.11.2.2 Variables with a relationship
1.11.2.3 Variables that are unrelated
1.11.2.4 The 45 degree line

1.12 Stabilisation policies


1.13 Define and measure unemployment

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1.1 Introduction

The circular flow of goods and services


Make

Firm

Buy

Sell

Factor Market

Goods Market

Sell

Buy
Household
Use

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1.2 The Basic Economic Problem


How, what, for whom

Make

Firm

Buy

Factor Market

How (should goods


and services be
produced)?

Sell

Goods Market

For whom (should


the goods and
services be
produced)?

Sell

Buy
Household
Use

What (should be
produced)?

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1.2.1 Scarcity
Definition of Economics

Make

Firm

Buy

Factor Market

Sell
In Economics we study how people use
their limited resources to gain the
greatest possible satisfaction of their
unlimited needs

Sell

Goods Market

Buy
Household
Use

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1.2.2 Scarcity

Unlimited wants vs. limited means


Make
Means of
Production

Firm

Buy

Factor Market

Factors of
Production

The Economic Problem: Scarcity


We have near-infinite needs
We have fixed supplies in short term
We have finite supplies in long term
If S > D then scarcity of Demand
If D > S then scarcity of Supply

In Economics we study how people use


their limited resources to gain the
greatest possible satisfaction of their
unlimited needs
Limited
means

Sell

Goods Market

Unlimited
wants
(wishes vs.
necessities)

Sell

Buy
Household
Use

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1.2.3 Factors of Production


Natural, human and man-made resources

Make

Firm

Buy
Natural Resources
(mineral, agricultural, marine)
Human Resources
Mental and physical capacity
Man-made resources
Machines, equipment, tools

Factor Market

Sell Labour

Capital goods
Land
Entrepreneurship

Household
Use

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1.2.4 Choice and Opportunity Cost


1.1.2 Choice and Opportunity Cost

Make

Firm

Buy

Factor Market

Scarcity requires choosing between


options
Choice = Opportunity Cost
measures the cost of obtaining
(producing) a certain quantity
of a good in terms of another
good (or goods) that could have
been obtained (produced)
in its place

Sell

Sell

Goods Market

Buy
Household
Use

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1.3 The Miracle of the Market Economy


Definition

Make

Firm

Buy

Factor Market

Sell
A market economy is an elaborate
mechanism for the unconscious
coordination of people, activities and
businesses through a system of prices
and markets

Sell

Goods Market

Buy
Household
Use

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1.3 The Miracle of the Market Economy


1.3.1 Markets and 1.3.2 Prices

Make

Firm

Buy

Factor Market

Supply /
Demand
Labour Market
Capital market
Property market
Stock market

Prices are
the value
of goods
in terms
of money

Supply /
Demand

Sell

Wholesale
Market
Retail Market
Financial Market
Equilibrium
etc

Goods Market

Demand = Supply
Sell

Supply /
Demand

Household
Use

Supply /
Demand

Buy

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1.4 Common Failures of the Market


Socially non-optimal outcomes

Firm

Factor Market

Imperfect competition
(monopolies, oligopolies and
weak property rights)
Asymmetric Information
Buyer (or Seller) knows more
than Seller (or Buyer)
Public goods
Goods or services that
cannot be sold to a person

Goods Market

Household

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1.5 Microeconomics vs Macroeconomics


Distinguishing the 2 main areas of study in Economics

Firm
Micro small

Factor Market

the Prices and


Quantities of specific
goods in individual
markets and
determine changes
price theory and
decisions to buy and
sell

Macro big
study the economy as a
whole, looking at global
economic magnitudes,
such as total production
of a country, total
employment, inflation
rate etc.

Goods Market

Govt. stabilisation
policies of fiscal and
monetary policy

Household

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1.6 Macroeconomic Objectives

The responsibility of Government when faced with aggregates

Firm

ER
BoP

Factor Market

1. Full employment
2. Price Stability
3. External
Equilibrium
4. Economic
growth
5. Equitable
income

Macro big
study the economy as a
whole, looking at global
economic magnitudes,
such as total production
of a country, total
employment, inflation
rate etc.

Goods Market

ER
BoP

Govt. stabilisation
policies of fiscal and
monetary policy

Household
5

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1.7 The Measurement of Production


The parts of the National Accounts

Firm

Macro

ER
BoP

Factor Market

1. Full employment
2. Price Stability
3. External
Equilibrium
4. Economic growth
5. Equitable income

1. Employment Rate
2. Inflation
3. Exchange rate
4. GDP
5. Gross Natl Income
5. Gross Dom
Expenditure
5. Disposable Income
Gross / Net capital
formation

Goods Market

ER
BoP

Household
5

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1.7 The Measurement of Production


1.7.1 The importance of the SARB's National Accounts

Firm

Macro

ER
BoP

Factor Market

1. Full employment
2. Price Stability
3. External
Equilibrium
4. Economic growth
5. Equitable income

PPI

1. Employment Rate
2. Inflation
3. Exchange rate
4. GDP
5. Gross Natl Income
5. Gross Dom
Expenditure
5. Disposable Income
Gross / Net capital
formation

Goods Market

UR

GNI total
income of
households

BoP

4GDP

1
GNI

ER

Household
5 GDE R
GC / LR

expenditure of
the economy

GDP = R final
production of
the economy
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1.7 The Measurement of Production


1.7.2 Gross domestic product defined, and 1.7.3 Double counting

Any commodity or
service bought for
reselling or
processing is an
intermediate and is
not counted in GDP

Firm
The total value of all final goods and services
Buy produced within the boundaries of a country
during a certain period (normally a year)
- using their market prices
- excluding intermediate goods to avoid double
counting
1 Farmer 10 000
Factor Market
2 Miller 12 500
3 Baker 18 000
4 Shop
21 000
5 Total
61 500

Sell

Sell

Goods Market

Buy
Household

Intended
Intermediate
goods

Final goods
Final goods
produced (not
just sold or on
stock exchange)
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1.7 The Measurement of Production


1.7.4 3 methods to calculate gross domestic product

Firm

Buy

Factor Market

Equality of national income accounts


Production method
Value added to basic prices
=
Expenditure method
Market prices of final outputs
=
Income method
Payments for factors in production

Sell

Sell

Intermediate
Goods

Goods Market

Buy

Final goods

Household

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1.7 The Measurement of Production


1.7.4 Expenditure method to calculate GDP

Firm

Intermediate
Goods

Factor Market

1 Farmer 10 000
2 Miller 12 500
3 Baker 18 000
4 Shop 21 000
5 Final 21 000
Expenditure Method

Counting value of
goods and
services at final
stage i.e. when
sold to consumer

Goods Market

Final goods
Household

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1.7 The Measurement of Production


1.7.4 Production method to calculate GDP

Firm

Intermediate
Goods

Factor Market

1 Farmer 10 000
2 Miller 2 500
3 Baker 5 500
4 Shop
3 000
5 Total 21 000
Production Method

Counting value
added to goods
and services at
each stage

Goods Market

Final goods
Household

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1.7 The Measurement of Production


1.7.4 Income method to calculate GDP

Firm

Factor Market

Counting
payments to
factors of
production across
all stages

1 Wages 11 000
2 Rent
3 500
3 Interest 3 500
4 Profit 3 000
5 Total 21 000
Income Method

Goods Market

Household

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1.8 Real vs. Nominal Values


Real value = Nominal value - Inflation

Consumer price index (CPI) is a statistical timeseries measure of a weighted average of prices
of a specified set of 1300+ goods and services
purchased by consumers. It tracks the prices of
a specified basket of consumer goods and
services.

Firm

Factor Market

2010 2011 2012


1 Apple R1 1.1 1.2
1 Bottle R5 5.2 5.3
1 Cloth R1 1.1 1.3
1 Duster R3 3
3.1
4 Total 10 10.4 10.9

2013 2010 Base


1.3
30%
5.5
10%
1.3
30%
3.2
6.6%
11.3
11.3%

Goods Market

2013 2010
2010 x 100

Household

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1.9 Composition of the GDP


1.9.1 Origin of the GDP

Firm

Factor Market

Natural Resources
(mineral, agricultural, marine)
Human Resources
Mental and physical capacity
Man-made resources
Machines, equipment, tools

Goods Market

Household

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1.9 Components of total expenditure


Y = C + I + G + (Net Exports)

X
Factor Market
Z

Firm

GDE = C + I + G
GDP = C + I + G + X Z
GDP = GDE + X - Z
If GDP > GDE, X Z > 0, X > Z
i.e. trade surplus
if GDP < GDE, Y > Z > 0, X < Z
i.e. trade deficit

Y = total expenditure =
C (final consumption by Households)
+ I (Gross capital formation)
+ G (final consumption by Government)
= Gross Domestic Expenditure
+ X (exports of goods and services)
- Z (imports of goods and services)
= Expenditure on GDP

Household

Z
Goods Market
X

C
G
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1.9 Components of total expenditure


Y = C + I + G + (Net Exports)

C (consumption)
normally the largest GDP component in the economy
private (household final consumption) expenditure in the economy
Durable goods, non-durable goods, and services.
e.g. food, rent, jewellery, gasoline, and medical expenses
Not include purchase of new housing
I (investment)
business investment in equipment
not include exchanges of existing assets
e.g. construction of a new mine, purchase of software, or purchase of machinery and
equipment households (not government) purchases on new houses
(buying financial products is classed as 'saving', as opposed to investment)
G (government spending)
sum of government expenditures on final goods and services
e.g. salaries of public servants, purchases of weapons, any investment expenditure
not include any transfer payments, such as social security or unemployment benefits.
X (gross exports)
Z gross (imports)
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1.10 Shortcomings with GDP


GDP is not a perfect measure of economic activity

X
Factor Market
Z

Firm

Incomplete and inaccurate


Not count off-market goods / services
Not count unrecorded activities
(informal sector)
Not count leisure time
Counts waste as valuable
Not count externalities
Not recognise sustainability

Household

Z
Goods Market
X

C
G
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1.11 Understanding Economics Graphs


Graphs of Prices and Quantities in the Market Economy
DEMAND

SUPPLY
Negative
Linear

Price

Price

Firm
Quantity

Positive
Linear

Quantity

Buy

Sell

Factor Market

Goods Market

SUPPLY

Price

Positive
Linear

Sell

Negative
Linear

Buy
Household
Price

Quantity

Quantity
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1.11 Understanding Economic Graphs


4 Quadrants of X and Y coordinates

Vertical Axis
Y
Quadrant 2
X=Y=+

(-X, Y)

(X, Y)

Horizontal
line

+ slope

-x

Variable

Origin

Quadrant 1
X=+
Y=+

Horizontal Axis

2 dimensional space
- slope
Quadrant 4
X=+
Y=(X, -Y)

Quadrant 3
X=Y=(-X, -Y)
Vertical
line

-Y
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1.11.1 The axes of a graph


4 Quadrants of X and Y coordinates

Vertical Axis
Y
Quadrant 1
X=+
Y=+

Spend

Origin

Time

Horizontal Axis

2 dimensional space

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1.11.2 Other Types of Graphs


Directions

Positive (or Direct) Relationship


Effect changes in same direction as cause
Negative (or Inverse) Relationship
Effect changes in opposite direction as cause
No Relationship
Effect causes no change at all
Examples
1 If rainfall goes up, then maize production goes up
2 If rainfall becomes flood, then production goes down
3 If price goes up, then supply goes up
4 If income goes up, then demand goes up
5 If resources go up, project performance goes up
6 If TV is watched more often, no change to rainfall

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1.11.2 Other Types of Graphs


Directions

Positive (or Direct) Relationship


Effect changes in same direction as cause
Negative (or Inverse) Relationship
Effect changes in opposite direction as cause
No Relationship
Effect causes no change at all
Examples
1 If rainfall goes up, then maize production goes up
2 If rainfall becomes flood, then production goes down
3 If price goes up, then supply goes up
4 If income goes up, then demand goes up
5 If resources go up, project performance goes up
6 If TV is watched more often, no change to rainfall

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1.11.2.1 and 1.11.2.2 Shapes of the Curve


Changes in Direction and Slope

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1.11.2.3 Shapes of the Curve


Unrelated variables (horizontal curve)

Variable Y
Price of
Oranges

Variable X
Marks in Test

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1.11.2.3 Shapes of the Curve


Unrelated variables (vertical curve)

Variable Y
Rainfall in
SA

Variable X
Coal produced
in Wales

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1.11.2.4 The 45 Line


When Y = X

At 45 degrees,
if scales are equal,
if line through
origin
then y = x
i.e. values are equal
i.e. points on line
are equidistant
from axes

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1.12 Stabilisation policies

Inflation, interest rates, monetary policy, fiscal policy

Bond Stock
Market Market

Finance
Market

Firm

Tax
Buy

Factor Market

Fiscal Policy

Ministry of
Finance
National
Treasury

Tax
Sell

SARB
Repo Rate

Goods Market

Banks | Insurers | Mutual companies |


Finance companies | Investment banks
Tax
Finance
Market

Buy
Household

Tax
Finance
Market
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1.13 Unemployment
Narrow vs Broad Definition

Firm
Broad definition = willing and able to work for pay but
unable to find employment
Narrow definition = Employed: All those of working
age (1565) who worked for pay, profit or family gain
for at least one hour in the seven days prior to census
night. Includes employers, employees, self-employed
Factor Market and working family members. Unemployed: Those who Goods Market
(a) did not work in the 7 days prior to census night, (b)
wanted to work and were available to start work within
a week of census night, and (c) took active steps to look
for work or self-employment in the 4 weeks prior to
census night.

Household

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Lecture Outcomes
Units 01 - 09

1.1 Introduction
1.2 The Basic Economic Problem

1.2.1 Scarcity
1.2.2 Unlimited wants vs. limited means
1.2.3 Factors of Production
1.2.4 Choice and Opportunity Cost

01 Overview of the SA macroeconomy

1.3 The Miracle of the Market Economy

02 The goods market

1.4 Common market failures


1.5 Macro vs. Micro economics
1.6 Macroeconomic objectives
1.7 Measurement of Production

03 Financial Markets
04 The IS-LM model
05 Openness in goods and financial markets

1.3.1 Markets
1.3.2 Prices

1.7.1 The importance of national accounts


1.7.2. Gross domestic product
1.7.3 Double counting and avoiding it
1.7.4 3 ways to calculate GDP

1.8 Real vs. Nominal values


1.9 The composition of GDP
06 The goods market in an open economy
1.9.1 Origin of GDP
1.9.2 Components of Total Expenditure
07 Output, the interest and the exchange rates1.10 Shortcomings of GDP
1.11 Understanding Economic Graphs

08 The labour market


09 The AS-AD model

1.11.1 The Axes of a Graph


1.11.2 Other types of graphs
1.11.2.1 Variables with a + relationship
1.11.2.2 Variables with a relationship
1.11.2.3 Variables that are unrelated
1.11.2.4 The 45 degree line

1.12 Stabilisation policies


1.13 Define and measure unemployment

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