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APPENDIX A: ASSIGNMENT COVER SHEET

ASSIGNMENT COVER SHEET

Smuts
Surname
Renier
First Name/s
152071
Student Number
Economics 1A
Subject

Assignment Number
Kuda
Tutor’s Name

Examination Venue
2 May 2019
Date Submitted
x
Submission (√) First Submission Resubmission
8 Kawana Crescent
Sunningdale
Postal Address

7441
Renier.Smuts@Capetown.gov.za
E-Mail
(Work) 021 400 2363
(Home)
Contact Numbers
(Cell) 0844774683
BACHELOR OF COMMERCE INFORMATION AND TECHNOLOGY
Course/Intake MANAGEMENT

Declaration: I hereby declare that the assignment submitted is an original piece of work produced by
myself.

Date: 9/04/19
Signature:
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Table of Contents
ASSIGNMENT COVER SHEET .............................................................................................. 1
Scenario 1................................................................................................................................... 3
Question 1 .............................................................................................................................. 3
1.1 Construct a production possibility frontier to illustrate Tom’s earnings potential
between the two careers if initially he was not working as a carpenter, then he worked one
week per month, then two, then three and finally four weeks per month .............................. 3
1.2 Discuss the underlying assumption of the shape of the above drawn diagram and
comment on how likely this could be true with respect the above scenario. (6 marks) ........ 4
1.3 Discuss a factor that would lead to an outward shift of the diagram drawn in 1.1 and
illustrate this on the diagram drawn. (5 marks) ..................................................................... 5
1.4 Discuss a factor that could lead to an inward shift of the curve drawn. (4 marks) .......... 6
1.5 In the labour market for carpenters, the current market clearing wage rate is R800 per
day. With the aid of a diagram, discuss the welfare effects of government intervention in
the form of legislation that sets the minimum wage rate for a carpenter at R1000 per day.
(20 marks) .............................................................................................................................. 7
Bibliography ............................................................................................................................ 10
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Scenario 1

Tom is a full-time lecturer at a private higher education institution and is considering a career
in carpentry. He wishes to pursue a career in carpentry (a childhood dream) which he has
studied part-time and is now equipped to take on clients. In his current position he earns a
rate of R1000 per day and if he were to pursue a career in carpentry he would earn R800 per
day. Due to the flexibility of the employment conditions at the higher education institution he
works for, Tom can negotiate the number of days he works at and will receive a rate of
remuneration based on the number of days worked.

Question 1

1.1 Construct a production possibility frontier to illustrate Tom’s earnings potential between
the two careers if initially he was not working as a carpenter, then he worked one week per
month, then two, then three and finally four weeks per month (assuming only four weeks in a
month). (5 marks)

Answer:

Production Possibility Frontier

5
Y - Axis

A=Salary of R20 000

4
Working as a Lecturer (Weekly)

B=Combined Salary of R19 000

F=unattainable
3

C=Combined Salary of R18000

2

G=attainable but inefficient

use of resources D=Combined Salary of R17 000
1

E=Salary of
0 R16 000
0 1 2 3 4 5
Working as a Carpenter (Weekly) X - Axis

Figure 1.1 - Production Possibility frontier indicating Tom’s earnings potential

between both careers.
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1.2 Discuss the underlying assumption of the shape of the above drawn diagram and
comment on how likely this could be true with respect the above scenario. (6 marks)

Answer: The Production possibility curve will illustrate the economic principle of scarcity,
choice and opportunity cost. The PPF will also show the maximum amount of production that
can be produced with a certain amount of resources by an economy.
At point A a maximum amount of R20000 per month can be earned when Tom only works as
a lecturer devoting all his time and available resources to lecturing and working five days per
week. At point B his salary will be reduced to R19000 as he chooses to work 3 weeks as a
lecturer and 1 week as a carpenter. Point C Tom chooses to work 2 weeks as a lecturer and 2
weeks as a carpenter and his wages for the month will decrease to R18000. Combinations on
the PPF represent the maximum amounts which can be produced by efficiently using all
available resources. Point D Tom will be earning R17000 as he chooses to work for 3 weeks
as a carpenter and only 1 week as a lecturer. At Point E he will be earning R16000 as he
chooses to no longer work as a lecturer but to devote all his time and available resources
working as a carpenter. Point F to the right of the curve is unattainable due to scarcity and a
lack of resources in order to achieve that level of production. Point G to the left of the curve
is attainable but this is inefficient due to available resources not being used to their full
potential. The need to choose between the combinations available illustrates the principle of
choice. The PPF demonstrates the principle of opportunity cost where Tom chooses to work
as a carpenter and sacrifices the choice of working as a lecturer. In the above figure 1.1 the
opportunity cost for choosing to work as a carpenter is then the opportunity to work as a
lecturer forgone. Opportunity cost increases as you move along the PPF curve as indicated
by the downward slope of the curve from A to E. This is mainly due to the fact that it is
difficult to move resources from one industry to another and because resources do not adapt
easily due to the skills of the workers not being the same. When moving resources from one
industry to another you get fewer of one good for every other good that is given up (Schiller,
2008: 8).
The PPF in figure 1.1 is true as it shows Tom’s maximum earning potential as he chooses to
work both as a lecturer and a carpenter and eventually only working as a carpenter and then
using all of his resources fully and efficiently.
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1.3 Discuss a factor that would lead to an outward shift of the diagram drawn in 1.1 and
illustrate this on the diagram drawn. (5 marks)

Answer:
An outward shift in the PPF will occur if the amount of available resources like labour and
raw materials increased or the productivity of the available resources increase. Also if the
economy sees improvements in technology which make production more efficient and more
goods can be produced with the same resources. It is now possible to produce more of both
labour working as a lecturer and a carpenter. Therefore, the potential output has increased for
both and the new PPF will shift from AB to EF as indicated in Figure 1.2 below. The outward
shift of the PPF illustrates economic growth.

Figure 1.2 – Illustrating an outward shift of the PPF due to an increase in quantity of
available resources and their increased productivity.

Production Possibility Frontier

5

E
Y - Axis

4
A

3
Working as a Lecturer

B F
0
0 1 2 3 4 5
Working as a Carpenter X - Axis
Mohr and Fourie, 2015: 10)
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1.4 Discuss a factor that could lead to an inward shift of the curve drawn. (4 marks)

Answer:
A factor that will lead to an inward shift of the PPF curve is when the amount of resources
decreases or if the productivity of the resources decrease, causing a decline in the potential
output. The decline in both available resources and their productivity will negatively affect
the potential output and therefore shift the PPF inwardly as indicated in Figure 1.3 below
where the PPF curve shifts inwardly from AB to CD. The new PPF will now be from C to D.

Figure 1.3 – Production Possibility curve indicating an inward shift of the PPF due to
the amount of resources and their productivity decreasing.

Production Possibility Frontier

5
Y - Axis

4
A

3
Working as a Lecturer

C
2

D B
0
0 1 2 3 4 5
Working as a Carpenter X - Axis
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1.5 In the labour market for carpenters, the current market clearing wage rate is R800 per
day. With the aid of a diagram, discuss the welfare effects of government intervention in the
form of legislation that sets the minimum wage rate for a carpenter at R1000 per day. (20
marks)
Answer:
If government sets a minimum wage rate (price floor) for carpenters below the market
clearing price (equilibrium price) the minimum price will have no impact on the outcome of
the market. However, if the government set the minimum wage price above the equilibrium
price then this will cause a surplus of labour in the market. Due to the excess supply further
intervention from government is required and it may result in one of the following:
 The government can purchase the surplus and then export it
 The surplus can also be bought by the government and then choose to store it
 Government introduces production quotas to limit supply to quantity demanded at
minimum price
 The surplus is purchased and destroyed by government
 The producers destroy the surplus
(Mohr and Fourie, 2015: 94-95)

Figure 1.4 Minimum price floor

D S
Surplus
Carpenter wage (Price)

P1 b
a
E
P0

S D
0 Q
Q1 Q0 Q2 A
Quantity (labour)
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In the above figure 1.4 the minimum price which government sets above the equilibrium
price is illustrated. The market is at equilibrium at a price of R800 per day and at this price
the labour market will supply Q0. The government sets a minimum price (price floor) of
R1000 per day at P1. At this minimum floor price (P1) consumers demand a quantity for
labour at Q1, however the quantity of labour produced is Q2. Therefore, a surplus exists as
indicated between point a and b. The government creates excess supply in the labour market
by setting the minimum price above the equilibrium price (E). Governments wil set minimum
prices in order to stabilize the income for carpenters. This is not an efficient way to assist the
carpenters. Floor prices are inefficient due to the following:
 The consumers in the market will have to pay high prices.
 The larger carpentry firms will receive the bulk of the benefits which are imminent
 Inefficient firms will now survive due to the protection which the minimum floor
price provides.
 Discarding the surplus which is generated from the minimum price usually forces a
further cost to tax payers and results in welfare losses. (Mohr and Fourie, 2015: 95)

Figure 1.5 The welfare costs of minimum price fixing

P
D

Supply curve
Carpenter wage (Price)

R
P1
A B
P0 E
C

Demand curve
Q
0 Q1 Q0
Quantity (labour)

(Mohr and Fourie, 2015:95)

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In the above figure 1.5 the government has set the minimum floor price at P1 (R1000) which
is above the equilibrium price of P0 (R800). Assuming that the producers will respond by
supplying the market with the amount which is demanded at Q1.
The equilibrium price is at P0 and the consumer surplus is represented by the area DP0E and
the producer surplus is represented by the area 0P0E. When the government implement the
minimum price floor then these areas change. The consumer surplus area changes to DRP1
and the producer surplus area changes to 0P1RT. Take note that the consumer surplus area is
below the demand curve and above the price line and within the quantity supplied.
The producer surplus is the area above the supply curve, below the price line and within the
quantity supplied. Due to the minimum price being enforced the consumers have lost the area
indicated by the rectangle A and triangle B. Losing the area B is due to the decrease in the
quantity supplied from Q0 to Q1 and losing the rectangle area A occurs due to the fact that
those who used to obtain the product at a price of P0 now have to pay a price of P1.
The new producer surplus is now indicated by the area 0P1RT as opposed to the area 0P0E.
Therefore, producers have lost the area represented by triangle C as a result of the loss of
production, but have now gained the area rectangle A at the expense of the consumers.
The total welfare loss is represented by both triangles B and C; this is called the deadweight
loss.
Both areas represented by triangles B and C has been lost to society due to the fact that less is
being produced, and society itself is made up of both producers and consumers.
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Bibliography
Mohr, P. & Fourie, L. (2015). Economics for South African Students. (5th edition) Pretoria:
an Schaik Chapter 1 Page 6, 10, 94-95
Schiller, B. R. (2008), The Economy Today (11th Edition), Boston: Mcgraw - Hill, Page 8