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 APPENDIX A: ASSIGNMENT/ PROJECT COVER SHEET

ASSIGNMENT/ PROJECT COVER SHEET

VAZI
Surname
BATHANDWA BRIDGETTE
First Name/s
Student Number 149462
Subject MANEGERIAL ECONOMICS
Assignment 1
Number
NOMPUMELELO PRECIOUS XULU
Tutor’s Name
Examination Venue DURBAN
16 AUGUST 2019
Date Submitted

Submission (√) First Submission Resubmission

"
4TH FLOOR CLIFFTON PLACE

Postal Address 19 HURST GROVE

MUSGRAVE
DURBAN
4001
E-Mail bathandwavazi@gmail.com
(Work) 031 817 0000

Contact Numbers (Home)

(Cell) 081 780 4114
Course/Intake MBA JAN2019 Y1S1

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

Date:

16 AUGUST 2019
Signature:"

Page !1 of !34
 INFORMATION AND KNOWLEDGE MANAGEMENT IN THE
DEVELOPMENT, GROWTH AND SUSTAINABILITY OF ORGANISATIONS

BATHANDWA VAZI
STUDENT NO : 149642

16 AUGUST 2019

Contact Details:
bathandwavazi@gmail.com
0817804114

Page !2 of !34
I. Introduction 4

Premises of the Study 5

1. International Trade (Tariffs and Barriers) and the NAFTAS cost implications to Mexico
6

1.1. International trade, Tariffs and Barriers 6

1.1.2. Costs arising from the creation of the North American Free Trade Agreement
(NAFTA) to the Mexican Economy 8

1.2. The NAFTA strengthens or weakens the world trading system(Agree/Disagree) 10

2. State Led Development versus Free trade development : The Case of Mexico 12

2.1. Strategies and Policies used by the Mexican Government to achieve economic
Growth and Development 12

2.2. Advantages and Disadvantages of Openness to direct foreign trade between

Developed and Developing Economies 14

3. Effects of Price Controls, Administered Prices and Wage rates on Economic Growth :
South African Case 14

3.1. Economic Effects of Price Controls 14

3.1.2. Price Controls on Wage Rates 17

3.2. Administered Prices and Price controls 20

4. Competition and Monopoly analysis in an economy 24

4.1. Profit and Loss Analysis for a Firm in a Perfectly Competitive Market 24

4.1.1. Abnormal Economic Profit (profit maximisation) 25

4.1.2. Normal Economic Profit 27

4.1.3. Economic Loss 27

4.2. The Rationale for The Government to create Monopolies 28

4.3. Strategies Employed by Government to Curb Monopolies 29

II BIBLIOGRAPHY 31

Page !3 of !34
I. Introduction

The world consists of 195 countries which all operate different economies with different
currencies. Of these 195, according The World Bank, only 79 of those are classified as
“developed” or high income countries. Developed nations are those which according to
the world bank income classification, hold higher gross national incomes. The
classification includes upper middle incomes and lower middle incomes (Fantom &
Serajuddin, 2016).

Trade between these varied income levelled countries is something that has occurred
since the inception of capitalism. Countries that are now classified as developed were
heavily active during the industrial revolution and employed trade policies that were
protectionist in nature, to safeguard infant industries, capital accumulation, infrastructure
and institutional development. This practise is seen to have been adopted across the
sphere. The Great Britain secured its industrialisation development with the use of trade
policies that protected infant industries in selected products i.e. cotton and iron. This
enabled Britain to compete internationally as its cotton industry grew to account for 40% of
its total exports by the year 1815 (Shafaeddin, 1998).

Countries monitor the growth of their economies within the premises of Macro and Micro-
economics. It is important to understand how domestic economic regulations have an
impact on international economies of scale and how such will impact the economy of a
country. Developing countries such as Mexico or South Africa have had international
interference and influence on their economies without having to fully explore
industrialisation, thus such economies will always remain at the mercy of global changes.

At a microeconomic level, it is also important to note how markets function, what factors
influence market growth or decline, what factors encourage industrial growth or decline
and how markets influence the socio-economic factors in a country. Markets no longer
operate freely or openly without government interference. Governments have interfered
in-order to restore order, enable opportunities for market expansion, reduce barriers to
entry and monitor prices for goods and services.

Page !4 of !34
Premises of the Study
This research will seek to find the role played by trade agreements between countries with
particular focus on the trade between developing and developed countries. A specific
case between the United States of America and Mexico will be delved into to find out how
the NAFTA (North America Free Trade Agreement) Agreement impacted both countries in-
terms of their trade taxes and tariffs. furthermore, the economic impact with regards the
impact on both country’s workforce (Income), socio-economic factors, skills development,
technology and the overall impact on industrialisation for both countries.
The research will focus on the following topics:

• International Trade and Tariffs and the NAFTAS cost implications to Mexico
• State Led Development versus Free trade development
• Effects of Price Controls on Wage rates
• Competition analysis in an economy

This paper will seek to delve into each identified research objective to explain what it
means and its relation to the study topic. The objective it to also show how these variables
together, influence the formation of and the management thereof of economic growth and
development within a country.

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1. International Trade (Tariffs and Barriers) and the NAFTAS Cost
Implications to Mexico

1.1. International trade, Tariffs and Barriers

Singh (2009) describes international trade as the exchange of goods, services and ideas
between two countries. In an era of globalisation and information explosion, international
trade is fast becoming the central focus for most economies in the world. Trade is not only
through formal and legislated means but it happens on a daily basis through the internet,
were people from various parts of the world exchange information, goods, and ideas.
Abimbola (2017) states that international trade is the commercial transaction or exchanges
between two of more countries. In most countries, the income generated from goods or
services traded accounts for a significant share of the Net National product and the Gross
Domestic Product.

International trade differs from domestic trade due to the costs and regulations attached to
exports and imports from one country to another (Abimbola 2017). The practise of
international trade has economic, political and social implications attached to the countries
involved in the trade. Some of these costs can be avoided or cancelled out depending on
the type of trade i.e. unilateral, bi-lateral or multiracial trade (OECD 2017). Countries
involved in a trade agreement thus provide their own regulations which includes taxes,
tariffs, incentives etc

International trade responds to allocation and efficient use of scarce resources among
countries. This allocation is achieved in world markets under the concept of free trade,
where the best products are produced and sold in a competitive market which provides
better quality and lower prices to all people of the world (Vijayasri 2013). Another view by
Looney (2019) suggests that even though historically a clear link exists between trade
liberalisation, trade expansion and higher GDP growth, there is mounting pressure/
concern over the ability of the international economic/financial system to assure continued
prosperity on a global scale.

The South African Case - In the 1950-70’s South Africas Gross Domestic Product was
largely generated from the export of Gold to the Great Britain and Switzerland. South
Africa was the main supplier of gold globally during those years. South Africa was able to

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take over the control of the gold price from the United States and in doing so, managed to
inflate the price to about R197 USD per ounce, which transcended to the growth of the
South African economy and thus the South African currency as a player globally (Van
Vuuren, 2017)

iii) Types of Trade Agreements

Bautista (2013) alludes to the existence of these trade agreements: the Preferential Trade
Agreement (PTA) (a unilateral trade preference.), Regional Trade Agreement (RTA) (an
agreement between two of more countries); Free Trade Areas (FTA) (is a unilateral trade
agreements or a PTA for which barriers on trade between members are reduced or
eliminated); A Customs Union (a Free Trade Area with a Common External Tariff in which
internal customs controls have been eliminated) and a Common Market (allows free
movement of labour and capital as well as goods and services).

Within the WTO, the General Agreement on Trade in Services (GATS) provides for
economic integration agreements in services. Other provisions within the WTO
agreements allow developing countries to enter into regional or global agreements that
include the reduction or elimination of tariffs and non-tariff barriers on trade among
themselves (Freund & Ornelas, 2010). The WTO’s main functions are to oversee the
implementation of WTO agreements, provide a forum for trade negotiations amongst its
members, oversee the settlement of disputes, monitor trade policies and cooperate with
other organisations with similar objectives (Ayres, 2015)

iv) Trade Tariffs and Trade Barriers

Tariffs are fees that are charged when goods cross the border of a country. There exists
import and export tariffs (The National Board of Trade, 2018). Tariffs are the most
common type of a trade barrier. Tariffs have three primary functions which is to serve as a
source of revenue, protect domestic industries and remedy trade distortions. Tariffs also
act as a policy tool to protect domestic industries by changing the conditions under-which
the goods compete so that the competitive imports are placed at a disadvantage (https://
www.meti.go.jp).

The international community lacks an official body that regulates tax within the
international trade space. Farrell (2011) explains that both international tax law and

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international trade law share a similar underlying economic objective to eliminate or reduce
barriers that impede the free flow of international trade. The international trade law
traditionally in-terms of the GATT and subsequently the WTO agreement, affects the taxes
imposed on goods (such as tariffs and sales taxes) but not the taxes on income. Income
taxes are covered by bilateral tax treaties, which are negotiated by in a sense “tax
practitioners” (Li, 2005).

Regulatory heterogeneity speaks to the costs attached to traders of goods and services
from differences in regulations across jurisdictions. Such costs are generally borne to
producers or exporters and may cause barriers to trade. The report further states that
regulatory heterogeneity may impose “fixed” and “variable” trade costs. Fixed trade costs
are investments which are largely independent of the product volume to be traded. Fixed
costs do not directly affect the marginal costs of traded products, but need to be covered
by sales large enough to amortise the investment. Thus fixed trade costs present a barrier
to market entry, particularly for small and medium-sized enterprises with smaller trade
volumes. Variable trade costs however, increase the marginal costs of traded products
directly impacting the import price, making such products less competitive in the
destination market (OECD, 2017).

Foreign trade barriers are classified by the VEDP (2018) as Import Policies ,Export
Subsidies, Lack of Intellectual Property Protection, Service Barriers, Trade Restrictions
affecting Electronic Commerce and Investment Barriers.

1.1.2. Costs arising from the creation of the North American Free Trade
Agreement (NAFTA) to the Mexican Economy

The NAFTA is a Free Trade Agreement (FTA) which was entered into by the United States
President George W. Bush on December 1992 and approved by the US congress on
November 20, 1993. Prior to the NAFTA, the United States and Canada had already
entered into a bilateral free trade agreement in 1987 and effected on January 1, 1989
(Villarreal et.al, 2017). When both countries then included Mexico in a Multilateral Free
Trade Agreement, many of the provision in the existing bilateral agreement were
incorporated and expanded in NAFTA. NAFTA thus included Intellectual property rights,
Cultural exemption, transportation services and investment, trade remedies, softwood

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lumber, agricultural supply management. NAFTA was the first Free Trade agreement that
included two developed countries and a developing country, it also set the tone for many
international trade agreements to follow. (Fergussion et.al, 2017)

iii) Mexico’s Economy after NAFTA

President Carlos Salinas de Gortari’s motivations for entering the NAFTA was to increase
export diversification by attracting foreign direct investment, which would ideally help in
creating jobs, to increase wage rates and reduce poverty. As a result, many predictions
around NAFTA’s impact were positive and supported president Carlos’s intentions
(Villarreal, 2010).

The NAFTA can be attributed to formally institutionalising Mexico’s trade liberalisation

strategy. Since then Mexico has joined the Organisation for Economic Co-operation and
Development (OECD) and the World Trading Organisation (WTO); it has also entered into
other free trade agreements with numerous other parties. NAFTA is associated with
Mexico’s insertion into global markets and its rising importance in non-oil exports. From
1985 to 1994, Mexico ranked fifth among countries with the largest increases in their share
of world manufacturers exports and its moved to second place between 1994-2001, just
behind China (Moreno-Brid et.al, 2005).

It is argued that NAFTA helped Mexico reach economic statuses closer to those of the US
and Canada; in that, it helped Mexican manufactures adopt to U.S. technological
innovations more quickly. Since NAFTA, the Mexican GDP volatility and variations have
declined. Some indirect and direct contributions re seen in the aspect of NAFTA being the
key ingredient in the decision taken by Mexico to continue with the course of market-based
economic reforms, which resulted in increased investor confidence in Mexico. The World
Bank estimates that foreign direct investment in Mexico would have been approximately
40% lower, without NAFTA (Morales, 2018).

Towe et.al (2004) argues that NAFTA played an important role in shaping the policy
responses of Mexico and the United Stated to the 1994-95 financial crisis. The
partnership allowed the U.S. to provide a loan to Mexico which dealt with its balance of
payment problems. Inflation peaked at 52 percent in late 1995, well below the rates
observed during the previous financial crises in the region. By 2003, Mexico enjoyed the

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lowest inflation rates in its modern history. As inflation declined, policy credibility
increased, the pass-through of exchange rate changes to domestic prices fell.

By 1996 - 2000, Mexico was enjoying strong growth in real output. The substantial opening
of Mexico’s export sector provided a key engine of growth in the process of recovery from
the tequila crisis. Trade deepening also made Mexico more resilient to shocks to
international capital flows, by redressing the previous imbalance between the large size of
capital flows compared with small trade flows (Kose et. Al 2004).

1.2. The NAFTA strengthens or weakens the world trading system(Agree/

Disagree)
I agree that NAFTA has strengthened the world trading system. The world economy
cannot be viewed from a static determinant point of view as many factors influence its
growth or decline. The reasons that many countries enter into free trade agreements are
often to the benefit of the countries involved. The creation and monitoring of the Free
Trade Agreements by the World Trade Organisation ensures that all those involved “reap
what they sow”. Buva (2012) states that the common motive for all three countries was to
increase trade amongst themselves. Under NAFTA, regional trade did increase.

According to the Case Study:

- NAFTA was the first free trade agreement of significance between developed and
developing countries and thus has played a role in shaping policy debate on trade and
the developing countries
- NAFTA eliminated tariff barriers and most non tariff barriers between the three countries
within ten years. It included free trade in agricultural products, which is often a
stumbling block in most trade accords
- Mexico was able to export textiles to the United States and Canada without the
protectionist restrictions that limits textile exports from other countries
- Foreign investors from the three signing countries investing in other NAFTA countries
would receive legal treatment equal to that of local investors in each country
- NAFTA rules were expected to lead to a diversion of trade in textiles and other
manufactured goods to Mexico and away from other developing countries. As a result,
there was an enormous expansion of border industries known as maquiladora, in the
1990s.

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- Mexico entered NAFTA in-order to boost its direct foreign investment. Most Lower
Developing Countries are driven by the same interest when entering into Free Trade
Agreements. For Mexico, NAFTA would be a means of attracting more U.S. direct
foreign investment. The prospect of increased investment outweighed the prospects of
increased exports. Thus, the NAFTA provided the guarantees for such pitched at an
international level.
- Investments followed after the negotiations of the treaty. Inflows of capital to Mexico
amounted to an 8.5% GDP growth in 1992, even though investments slowed down after
NAFTA took effect.
- Unemployment was sitting at estimates of 18% in 1986-87 and by 1991, the
unemployment figure had dropped to 2.7%. By the year 2000, it had been clear the
positive effects of NAFTA on the Mexican Economy and its job market. The growth of
the Maquiladoras industries had reached over 2000, employing over 500 000 border
state workers in Mexico. It was also instrumental in improving skills and upscaling job
prospects for Mexicans located away from the border.
- NAFTA represents the change in Mexico’s industrialisation tactics more than its
development strategy.
- Mexicos wages rose significantly as opposed to those in the United States even though
the rise represents half in U.S. levels.

Buva (2012) states that “The United States direct investment in Mexico’s food processing
industry increased by about two-thirds and almost three times in Canada. On the other
side Mexican firms also increased their investment in the United States food industry from
$306 million in 1997 to 1 billion in 1999, but Canadian investment dropped from $6.7 billion
to one billion”

It can thus be deduced that during the period between Mexico and its NAFTA partners, the
free trade agreement was characterised by higher business cycle synchronisation. The
same result has been observed amongst industrialised countries. It has provided the
premises for future trade agreements between developing and developed countries, as it
indicates that even with the significant differences in factor endowment that characterise
Mexico and its NAFTA partners higher synchronisation is likely to follow from closer trade
(Lederman et al, 2003).

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2. State Led Development Versus Free Trade Development : the Case
of Mexico

2.1. Strategies and Policies used by the Mexican Government to achieve

economic Growth and Development
In the 1980s and 1990s, the country’s strategy focused on three things: control on
government spending and fiscal concervativism, removal of barriers to trade in goods and
services and liberalisation of financial flows simultaneously with institutional change.
Between 2012 and 2014, Mexico adopted structural reforms which were introducing
change in five key areas; Labour, economic competition, fiscal reform, financial reform,
telecommunications, energy, education and a focus on transforming the rule of law and
anti-corruption reforms (Valenzuela, 2016).

According to G20 Report (2014), the Mexican government has made commitments based
on the key identified reforms to achieve the following:
- To initiate the inflow of private investment in to the energy sector and a further
government spending commitment of 300 billion USD towards infrastructure
development.
- Appointing a new telecommunications regulator to promote greater competition in the
sector. This reform will also impact on attracting foreign investment in the sector,
- A new economic competition law will grant powers to the new autonomous regulator, the
Federal Antitrust Commission. The regulator will work to enforce the legislation,
promote a culture of healthy competition whilst preventing monopolistic practices,
- The financial reform and the National Infrastructure Program will focus on improving
capital market regulations in-order to Chanel more effective institutional investors and
commercial banks towards infrastructure projects,
- The government has also committed about 45 billion USD towards the expansion of
induced credit towards SME’s and infrastructure.

The government strategies and policies directly influenced the growth of the economy by
increasing productivity (both in business and labour), investment and competition. For
Mexico, its new reforms will in the short and medium term, spur job creation and the
country’s growth potential (G20 Report, 2014)

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The Mexican’s trade policy between the 1930’s - 1980’s was protectionist in an effort to be
independent of any foreign power and as a means to support industrialisation. Mexico
placed high restrictions on foreign investment and controlled the exchange rate to
encourage domestic industrial growth. In the years from 1960-1980, the Mexican economy
grew at an average annual rate of over 6.5% which resulted in improved living conditions
and per Capita GDP (Villarreal, 2010). Post 1980, the country experienced a drop in its
GDP growth rate which resulted into a debt crisis. However, after 1995, the GDP growth
began to decline again by 6.2% in year 2000 to -0.2% in 2001(Meredith et.al , 2004). Due
to the financial crisis in the mid-1980’s, the country bended towards privatising state
industries and moving towards trade liberalisation. In 1986, Mexico acceded to the
General Agreement on Tariffs and Trade (GATT), assuring trade liberalisation measures
and building closer ties with the United States (Kose et.al, 2004).

Mexico’s fiscal reforms implemented in 2014 broadend the tax base and limits special
treatments. The reform promotes job formality with the establishment of a new tax
incorporation regime. In terms of corporate taxation, the repeal of a the Single Rate
Business Tax Law as well as the Cash Deposit Tax Law will simplify the corporate tax
regime. This including the new Income Tax Law will simplify the tax system, consolidating
three types into one while maintaining revenue collection levels. In December 2013,
congress approved a reform on the Federal Budget and Fiscal Responsibility Law which
strengthens macroeconomics stability, grants credibility and transparency to the evolution
of expenditure and public finances in Mexico and establishes fiscal discipline as a state
policy (Valenzuela, 2016)

2.1.1. The Mexican Economy: is it State-Led or Free Market ?

Swanson (2004) states that Mexico has a free market economy with a mixture of modern
and outmoded industry and agriculture. The economy has increasingly gotten dominated
by the private sector with many state owned enterprises becoming privatised. Post
NAFTA, trade with the United States and Canada has tripled. Mexico also implemented
free trade agreements with Guatemala, Honduras, Elsalvador and the European free trade
area in 2001, putting more than 90% of trade under free trade agreements.

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Mexico’s economy is one that has evolved from having strong state intervention to foster
industrialisation through import substitution to one that liberal due to the payment crisis of
the 1980’s. This shifted the economy to one that was export based. Mexico’s economy
developed from a manufacturing sector which produced capital goods and was enabled to
grow through the implementation of tax cuts and trade restriction , between the 1940’s
-1970’s. Due to failed policy on addressing the promotion of the exports, the imported -
processed raw materials - by the booming maquiladora program was later unsuccessful in
growing the Mexican economy. These events eventually pushed Mexico towards an
export orientated economy which officially was set off by the entering into the GATT and
WTO in 1986, and later more regionally though the NAFTA (Lorde, 2011).

2.2. Advantages and Disadvantages of Openness to direct foreign trade

between Developed and Developing Economies
It has already been established based on the Mexico NAFTA case study that as a
developing country, Mexico has enabled growth of its economy through its trade relations
with two developed countries. The advantages that came with the free trade agreement
for Mexico were not without some losses. However, in a broader sense, there have been
more gains than losses. Also, some of the disadvantages were due to some of the
clauses within the agreement which have been amended and continue to be amended
with each review of the agreement.

Based on the case study, one can deduce that FTA’s between developed and developing
countries will have the following impact

3. Effects of Price Controls, Administered Prices and Wage Rates on

Economic Growth : South African Case

3.1. Economic Effects of Price Controls

The above is referenced from Mlumbi - Peter (2017)

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! of !34
ADVANTAGES DISADVANTAGES
• Free Trade Agreements are a good way to reduce or • FTA’s can also to trade diversions which can impact
remove trade barriers other developing or growing economies who have
• Access to developed markets for the developing been trading with one or more of the countries now
country has been seen to improve its economic involved in the FTA
position • Industries from the developing country can become
• FTA’s are a way for countries to liberalise their stifled and thrown out of business by the entrance
economies of new bigger industries from developed countries
• For developing countries they can significantly • Free trade is seen to have a negative impact
improve their exports towards the industrialisation of developing countries
• For developed countries, their companies are as it can induce them to specialise in goods with
provides new and emerging markets to enter long term growth prospects
providing a larger market for the consumption of • FTA’s can inhibit the development of indigenous
goods industrial capacities
• FTA’s have impacted on improved technology, • issues of environmental and labour laws may be
telecommunications and transportation services weakened or not fully catered by the FTA which my
markets for developing countriesFree trade areas lead to some environmental challenges caused with
provide dynamic creation of new industries, imports, especially for the developing country.
economies of scale, possibilities of coordinated
industrial policy and a static trade creation
• A positive effect on wages for countries in the FTA
• Foreign direct investment for countries in the FTA
agreement

i) impact of Price controls on the Demand and Supply of Labour

In - order to understand the effects of price controls in the elasticity of the labour market,
one has to bring forth the macroeconomic terms that enable that to occur. It is also
important to understand all the factors that influence economic growth or decline other
than labour and how such factors also indirectly impact on labour.

Economics is he study of production, distribution and consumption which is divided broadly

into two areas known as macroeconomics and microeconomics. Macroeconomics is
about aggregate economic quantities looking at the total national output and the national
income (Eastin et.al, 2011). The output can also be understood as production ad the
income as the economic growth. In-order to understand the ratio at which the economy
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grew or shrunk, one needs to understand Demand and Supply based on macroeconomic
variables; such as consumer or household spending/consumption, investment spending by
industry, government spending, exports and imports ratio. The Pricing (price elasticity)
attached to macroeconomic factors creates an environment that promotes or inhibits
growth. Consumer Spending is measured according to the cost of labour within a given
economic period. Labour Cost is knows as wages (Arbogast et.al, 2011).
Demand is the rate at which consumers want to buy a product. It depends on
market price which influences whether it goes up or down. Supply refers to the
willingness and the ability to supply goods/services based also on the market price
(Whelan et.al, 1996)

Market Price, that is, the cost attached to all the macroeconomic factors (wages, interest
rates, ratio of exports to imports, taxes, government spending,) is often controlled by
governments in-order to minimise market monopolies, create a conducive environment for
businesses to compete and most importantly, for consumers to be active within the
economy. Price control manifests in two ways, price ceiling and a price floor. Both these
two circumstances have an impact onto the economy growth and this impact will be
illustrated through diagrams.

i) Monetary Policy and Fiscal Policy on the Economy

Monetary policy is a demand-side economic policy through which the central bank of a
country acts on the amount of money and interest rates in order to influence income levels,
output and unemployment in the economy with the interest rate as the link binding money
and income. The main tools used in monetary policy implementation are open market
operations, loans to commercial banks and the use of reserve requirements (https://
policonomics.com). Inflation rates (increase/decrease) and interest rates (increase/
decrease) impact on either a positive or ripple effect on private spending i.e. consumption
and investment (SARB, 2019). When the interest rate is increased, less economic activity
happens from both consumers and businesses. Interest rate increases the costs of
lending, costs of production, and costs of labour and have a direct effect on inflation and
the fiscal policy unemployment rate (Bhorat and Hirsch, no date).

Fiscal policy is a policy through which the government acts over its income and
expenditure in order to influence the levels of income, output and unemployment in the

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economy. The government uses taxes and unemployment benefits or through applying
taxes on spending and increasing public spending (https://policonomics.com).
Governments change the level and type of taxes, the extent and composition of spending
and the degree and form of borrowing, to influence the economy. The equation of the
national income accounting is depicted as:
GDP = C +I + G + NX
Where C is Private consumption, I is private investment, G is the purchase of goods and
services by the government and NV is the difference in exports minus imports.
Governments therefore effect economic activity by controlling G and influencing C, I and
NX indirectly through changes in taxes, transfers and spending (Horton and El-Ganainy,
2009)

3.1.2. Price Controls on Wage Rates

In a market economy, the compensation of labour is determined by the interaction of the
demand and supply in each labour market. The demand of labour ultimately depends on
the value of the output produced by labour, evaluated at the market prices that consumers
are willing to pay (Flanagan, 1992). The ultimate measure of the value of any possessed
item is the quantity of labour it can be traded for (Kryńska et.al, 2015). When wages are
prevailing, employers hire more workers if doing so adds to profits (if the value of output
exceeds additional costs). At any given moment, higher wage costs reduce profits and
hence employment and vice versa.

According to Kopycińska et.al (2015), wages are a cost to employers thus they try to
reduce them at all times, whilst wages are a source of income for employees hence the
need to always increase them. The conflicting interests of employers (demand) and
workers (supply) produce a market wage. Deviations from the market wage rapidly
become apparent. Employers offering wage rates below the market rate experience low
employee turnover and recruiting difficulties and vice versa. These forces thus move
toward a market equilibrium wage that balances the amount of labour demand and supply
(Flanagan, 1992).

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 Labour Demand Slope

Figure 1

The above diagram depicts the rate at which wages impact on the quantity of labour
demanded by employers. At Wage Rate 2 (W2), the cost of labour is conducive for more
employment quantities to be absorbed in the market. When the wage rate (W2) increases,
there quantity of labour demanded decreases. The demand for labour other than labour
Prices, is influenced by a rise in consumer demand for more products. This means a need
for increased productivity and thus the need for more labour. An increase in productivity
means the costs to produce will be less than labour costs. When a government increases
spending towards labour in the market by providing a subsidy or capital investment.
(Whelan and Msefer, 1996)

Figure 2

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The Demand curve shifts to the right whenever there are labour demand changes. At W2
the wage rate including all other factors enable for maximum demand of labour in the
market. At W3, wage rates have gone up, which means wage costs will supersede other
production costs and therefore a reduction in the labour demanded occurs. This situation
propels unemployment.

Labour Supply Slope

Figure 3

The labour supply curve, unlike the demand curve, is upward. This is because as wages
rise, more workers will be attracted into the market due to higher wage rates. According to
Taylor et.al (2019), the higher the price of labour, the greater the quantity supplier and vice
versa. The supply curve shifts due to other factors influencing the supply of labour other
than wages.
Labour Market Equilibrium

Figure 4

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Labour Market equilibrium is reached when the conflicting desires of workers and
employers are balanced out. The supply curve provides for the total number of employee
hours that agents in the economy allocate to the market at any given wage level, whilst the
demand curve provides the total number of working hours that firms in the market demand
at that wage. Equilibrium occurs when supply equals demand generating the competitive
wage (W2) and the employment (E2). This wage level becomes the market-clearing wage
because any other wage level would create either an upward or downward pressure on the
wage (Gasset, no date)

Figure5 : Labour Market Equilibrium Source: Tutor2U From Https://Www.Slideshare.Net

3.2. Administered Prices and Price controls

i) Administered Prices
The reasoning around administered pricing has its basis on the market structure and firms
pricing behaviour, due to the differences which are seen in the pricing structures of
different firms across market structures. Kenton (2017) defines an Administered price as
the price of a good or service that is dictated by government as opposed to market forces.
Further more, administered price examples include price controls and rent controls. Price
controls (Kamerschen, 1999).

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Economic regulation is generally introduced when market failures prevent effective
competition and it is aimed at mimicking the competitive conditions to steer prices towards
efficient levels. Efficient prices are defined as prices that approach marginal cost, which is
the level achieved under “perfectly” competitive conditions. It is not necessarily
synonymous with price reduction, although most price control approaches will provide
incentives for productive efficiency, that “other things” being equal, should result in lover
prices (Storer, et.al, no date). The need for and effectiveness of price regulation depends
to a large extent on factors indirectly related to the price setting process, such as; the
sector structure and market designs and the extent to which competition is encouraged
where this is economically feasible, secondly; the ability of government to adequately
control the behaviour of state-owned enterprises without regulation and thirdly;
government policy objectives regarding the transport sectors including social imperatives
(Teljeur et.al, no date).

The reasons why administered prices may be employed is that the government (central,
regional, local or national regulators) may directly set prices for some broad reasons which
may include: the price administration directly produces goods and services, it provides
goods and services as a social transfer in kind or it tries to achieve policy goals such as
social and environmental protection (Gattini, 2006)

iI) Price Controls (Price floor vs PriceCeiling)

Price controls are defined as a market-oriented law and policy whose main aim is to
surpass the main machination of the market. It is often done in tow way, firstly by reducing
prices of commodities in order to open access of such markets to buyers with a lower
reservation price. Secondly, it can be done through increasing the buying price of other
commodities in-order to increase the return on investments or yield for sellers. The
purpose for this is to supersede the market rule of supply and demand mostly for political
or socio-economic reasons (Karuiki, 2015)

Aylor (2003) explains that government price controls are often implemented to provide
basic rights to citizens whilst also keeping the economy productive. A government sets a
minimum acceptable level of wages that will allow workers to survive at the standard of
living.

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The effects caused by price controls in an economy can be viewed from the consumer and
sellers point view in two ways. Overproduction or Scarcity. Overproduction occurs when
there is a price floor (artificially high price). This is due in a sense because consumers
tend to spend more, leading to an increase in the demand of such a product. The seller
may produce more in-order to circumvent the presumed demand. An opposite of this
occurs when there is a price ceiling. Less spending which leads to a reduced demand and
supply and thus the item becomes scarce in the market (Petkanchin,2006).

Figure6 : Source, Economic Note, 2006

ii) The Effects of Minimum Wage Rates on the Economy

A minimum wage is a form of a price floor which makes the payment of low wages illegal.
Such a floor does tend to reduce unskilled job opportunities, it is one of other floors that
regulate conditions of employment such as protection against unfair dismissal or
discrimination, and the provision of employee benefits. A wage floor aims to achieve
equity in the labour economy . The main adverse effect with wage floors is that it
decreases the demand for labour (by companies) whilst increases its supply (from willing
unemployed candidates). It also reduces the supply of certain job levels i.e. unskilled /
general labour in the market (Coyne and Coyne, 2015)

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 Effects of an Increasing Minimum Wage

Figure 7: Source, Https://Saylordotorg.Github.Io/Text_Microeconomics-Theory-Through-Applications/

S14-03-Minimum-Wage-Changes.Html

The diagrams above represent the different demand and supply ratios based on an
increasing wage floor and its effect on the labour market. An increasing wage floor
reduces the quantity of labour demanded and and an increase in the supply of labour,
thus results into unemployment. Unemployment impacts other macroeconomic factors in
the economy. Reduced employment results in a shrunk consumer market, reduced
spending and a decrease in overall demand of outputs in the economy (good, services,
long term finance, investment etc).

Case : South African Wage Floors and impact on Unemployment

The South African economy has been characterised by rising unemployment levels since
the 2008 global recession. Von Fintel (2016) attributes this situation to a general
assumption ranging from rising labour supply, structural economic changes (and
accompanying skills shortages) and high labour costs. It has already been established
that rising labour costs are a direct contributor to rising unemployment levels in an
economy. Dadam et.al (2015) mentions that in the debate on unemployment causal
effects for South Africa, the missing ingredient has been an analysis of the consequences
of these structural characteristics of the labour market at business cycle frequencies.
During the recession, South Africa’s economy sustained. This means the external global
economic factors such as for example, decreased exports, rising interest rates and higher

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inflation did not have any significant impact on the labour market economy. The glaring
cause for a spike in unemployment was the rising labour costs.

4. Competition and Monopoly Analysis in an Economy

Competition in an industry is determined by the number of producers, the conditions to

entry, the degree or absence f collusion between market participants and the degree to
which their products are identical or differentiated. Therefore, a purely competitive industry
is one in-which there are many sellers and buyers (enough that the price is not influenced),
commodities are homogenous - perfect substitute, exit and entry in the long run is easy
(Tisdell and Hartley, 2008). Other Market Structures include Monopolistic competition,
monopoly, and Oligopoly.

4.1. Profit and Loss Analysis for a Firm in a Perfectly Competitive Market
Profit is the difference between Total Revenue (TR) and Total Cost (TC). Average
Revenue is the total revenue divided by the quantity of the product sold. A firm can
maximise its profit by producing the level of output where the difference between revenue
and cost is greatest This is the same level where Marginal Revenue is equal to Marginal
Cost. Marginal Revenue (MR) is the change in total revenue from selling an additional unit
(Mishra, no date).

Demand Curve for Perfectly Competitive Markets

Figure 8: Source, Mishra (no Date)

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 TR = P X Q
The demand curve in a perfectly competitive market is equal to Marginal revenue with is
equal to the price. This is because the price remains the same for all suppliers. Market
players are Price Takers and cannot determine the price. That means Total Revenue is
equal to Price multiplied by quantity.

4.1.1. Abnormal Economic Profit (profit maximisation)

In economic terms, profit can be calculated in two ways, by looking at the total approach
and the marginal approach. The total approach measures profit in-terms of production and
the marginal approach looks at how price affects profit margins.

i) Total Approach
For the Total approach Alwosabi (no date) explains as follows:
TP = TR - TC. Where TP is the total profit, TR is total revenue and TC is total Cost.
TR = P x Q. Where P is price and Q is Quantity

In-order to maximise profit, a firm must consider how an increase in production will affect
TR and TC. In a perfectly competitive market, a firm can sell all of its output at one price,
the total revenue curve of a perfectly competitive firm is an upward sloping straight line,
with the slope equal to market price (equilibrium). MR (Marginal Revenue) is qual to P.
TC is the opportunity cost of production, which includes normal profit. Thus
TC = TFC + TVC

Figure 9: Source, Alwosabi (no Date)

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Total costs increase as output expands. They first rise slowly due to the increasing
marginal returns and then increase rapidly due to the diminishing marginal returns.

Profit depends on the difference between TR and TC, profit is maximised when TR
exceeds TC by the largest amount. Thus when total cost and total revenue costs curves
are places together, one can identify the rate of production at which profits are maximised.
This means that profits are maximised when the vertical line/distance between the TR
curve and TC curve is the largest

At point B, P = MC > ATC, this means the Marginal Cost (MC) is above Average Total Cost
(ATC). This is the point where the company will make maximum economic profit. The
Space between the ATC curve and MR/P is the total amount of profit the firm can make.
The difference between Price A and Price B is multiplied by the quantity and thus provides
the amount.

For Example (using the above diagram) :

Total Profit =. TR - TC

TR =PxQ
= 5 x 20
= 100

TC = ATC x Q
= 3 x 20
=. 60

BC (difference between Price A and Price B)

5-3=2
Thus:

TP = TR - TC
= 100 - 60
= 40

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ii) Marginal Approach
The marginal approach to profit-maximisation looks at the change in revenue when an
additional unit is produced. Marginal Revenue is equal to Total Revenue divided by
Quantity. In a perfect competition, any additional unit sold will generate additional revenue
equal to the price. Since P=MR in a perfectly competitive market, to determine profit in the
marginal approach, the decision is based on P and MC. Profit is attained only if P remains
greater than MC even if additional units are produced. Therefore profit is maximised when
MR=MC (Alwosabi, no date)

4.1.2. Normal Economic Profit

According to Zahidul Islam (2017), normal profits occur when the total revenue equals
total cost. This is an equilibrium situation where the Price is equal to the Average Cost.
Interms of the diagram below, Where the ATC curve intersects with the MR curve, the firm
will breakeven and earn Normal Economic Profits.

Figure 10: Source, Zahidul Islam (2017)

4.1.3. Economic Loss

A company is said to be making an economic loss when the Average Total Cost is greater
than the Average Revenue. This simply means that the company spends more and gains
less or that the total costs exceed total revenue. In this situation, a company may continue
to operate until reaches a shut down point where. A shut-down point occurs when the
average variable cost curve is above the marginal cost curve (Pearson Education, 2010).

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Figure 10: Source, Zahidul Islam (2017)

4.2. The Rationale for The Government to create Monopolies

A pure monopoly occurs when there is only one manufacture of a product of a provider of
a service wherein there are no close substitutes. A firm that has monopoly in the market
can decide its own price and quantity of the product supplied. typical examples of
monopolists in South Africa would be De Beers, Eskom and Water Boards. New entrants
find it difficult to produce the same product as obstacles such as an economic (Viljoen no
date)

The economic concept of a monopoly focuses on the number and size of firms in an
industry. The smaller the number of firms and the larger those firms are, the more
monopoly power that exists in that industry. There governments are involved with
monopoly, it is when they impose restrictions of competition in order for the monopolists to
retain their market power (Simpson, 2005). Government granted monopolies and
government monopolies a re different in that the decision making structure. For a a
government granted monopoly, the government gives a private individual or company the
right to be a sole provider of a good or service (https://courses.lumenlearning.com/
boundless-economics/chapter/barriers-to-entry-reasons-for-monopolies-to-exist/)

In South Africa, ESKOM became a government monopoly, being a state- owned

enterprise, in 1923 when it was established as the Electricity Supply Commission
(ESCOM) by the government of South Africa in terms of the electricity Act of 1922 (Nel,
2008). This establishment was mainly based on the country being able to have an energy
utility which would be responsible for the generation, transmission, distribution and

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retailing of electricity. Thus the government was involved in setting prices for electricity
and creating this monopoly within the energy sector in the country.

Through ESKOM, as a government owned enterprise, the government was able to deliver
key social and economic domain. For example, the RDP goals of electrifying 2.5 million
homes were met and exceeded. The energy utility had generally delivered low prices for
electricity due to having been heavily supported through government investments,
exemption from taxes and subsidies received from the Reserve bank. Additionally, the
energy utility enabled for the achievement of universal access to energy, industrial
development through competitive electricity pricing, reducing government debt by
unlocking value in state assets, attracting foreign investment and ensuring security of
energy supply (Eberhard, 2001)

4.3. Strategies Employed by Government to Curb Monopolies

Governments regulate monopolies in-order to protect the interests of consumers. In
intervening, government will prevent excess prices. Prices above the competitive
equilibrium would lead to allocative inefficiencies and a decline in consumer welfare. To
ensure quality of service, promote competition and regulate natural monopolies (Pettinger,
2017). Governments thus curb or control monopolies through legislation. Legislation that
will regulate prices in a monopolised industry, regulate taxes as well as barriers to entry,
i.e. “minimising red tape”.

According to Roberts (2004) South Africa enacted the competition policy in 1999 and
forms an important part of reforms designed to address both the historical economic
structure and encourage broad-based economic growth. The Government later developed
a Macro-economic Strategy in which the role of competition policy is seen as important in
increasing competitive market pressure, which will lead firms to becoming more efficient
and internationally competitive.

South Africa then established the competition commission as per the Competition Act of
1998, which makes up one of the three independent regulatory authorities established in-
terms of the act. The other two include the Competition Tribunal and the Competition
Appeal Court. The objectives of these three authoritative bodies is to promote efficiency,
adaptability and development of the economy, provide consumers with competitive prices

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and product choices, promote employment and advance social and economic welfare of
South Africans, expand the inclusion of Small and medium sized enterprises into the
economy as well as promote greater spread of ownership with particular focus on
previously disadvantaged individuals (Competition Commission of South Africa, 2019)

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