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SECTION A: MICROECONOMICS

Question 1

(a) The microeconomic issue discussed in the Denel Aeronautics strike

Source: (https://www.fin24.com/Economy/Labour/News/satawu-members-at-denel-
aeronautics-plan-to-down-tools-20180917)

From the article, I have noted that the main microeconomic issue discussed in the article is
related to wage determination (individual labour market). The Denel employees demanded
15% across the board wage increase, while the employers of Denel offered only 4% in pay
hikes and refused to negotiate further (fin24, in the press). The industrial action (strike)
affected the operations, maintenance, repairs and services of military aircraft for the South
African (SA) Airforce. Microeconomics literature and books indicated that deficiencies in the
employment market causes earnings (wages) to vary from an economical (competitive)
equilibrium. One of the diverse deficiencies in the employment market is Trade Unions. This
means that in specific circumstances, Trades unions will bargain for earnings (wages)
higher the economical (competitive) equilibrium. This will be accomplished by limiting the
supply of labor (for example, down tools at Denel aeronautics or threatening to go on strike).
South African Transport and Allied Workers’ Union (SATAWU) bargaining strength is
enriched by the ratio of all employees they represent and leads to a greater union earning
(wage) premium (Freeman and Medoff, 1981; Lewis, 1986; Stewart, 1987; Schumacher,
1999; Forth and Millward, 2002).

Classic microeconomic theory explains how wages can be determined in the perfectly
competitive Labour market: there will be many firms participating, that there is perfect
information out there, which is the same job offered and that worker skill levels are equal.
The underneath diagram describes how wages can be determined in a perfectly competitive
Labour market. The equilibrium wage would be set where the supply and demand curves of
the business meet. In this market, firms are wage takers, as workers would not automatically
accept lower wages. Firms are wage takers so the Labour bend for the supply turns out to
be impeccably flexible (Tejvan, 2017).
(b) Market Structure of Denel Aeronautics
The market structure of the Denel Aeronautics can be a monopoly market.
In a monopoly market, a single firm controls the whole market. Therefore, Denel
Aeronautics is the only business (firm) who manufacturer equipment for the Rooivalk
Combat Support Helicopter, Design Authority for the Oryx Medium Transport Helicopter
and the Cheetah Multirole Fighter aircraft in South Africa (Denel aviation, 2018).
Examples from the article: “Denel Aeronautics maintains and services military aircraft
for the SA Airforce and offers maintenance, repairs and operations for both local and
international defence markets, the union points out in the press”.

Monopoly characteristics are: (1) the monopolist expands earnings, (2) it can set the
value, (3) there are great boundaries to admission and departure, (4) there is just a
single business (firm) that controls the whole market (Quickonomics, 2016). Bryson
(2007, 33-35p) states that regardless of whether SATAWU is effective depends, in vast
part, on their bargaining strong point – that is established on their capacity to limit the
supply of work to the business – and the capacity of employers to surrender above-
market compensation (Freeman and Medoff, 1984).
The South African Transport and Allied Workers’ Union (SATAWU) can be treated as a
supplier in the labour market. The collective unit of workers can be seen as that trade
union as one supplier, as in the instance of the Denel strike. In this instance, workers in
the union (SATAWU) are using their power to stop or considerably disrupt the business
functioning optimally to generate revenue. Thus, workers are now in a position of more
power in their wage determination as they can stop the flow of business with their strike.
Trade Unions use a method of collective bargaining in wage negotiations, which can
result in the Trade Union having too much power as they can halt the industry,
particularly in a Monopoly. The below graph expresses this. SATAWU bargaining can
also be strengthened by the fact that they can force the hand of the Denel (employer)
to a wage higher than the employer (Denel) can afford.
(c) Microeconomic Theory
Microeconomic theory proves that Denel Aeronautics can maximise its earnings, if it
produces that quantity of production where peripheral (marginal) cost equals its
peripheral (marginal) revenue (Keynes, Lionel Charles Robbins, Robbins, and Robbins,
1936:13-14).

Expects frequently think that every economic actor expands something: customers
amplify utility (i.e. joy or fulfilment) and businesses maximise earnings (Keynes, Lionel
Charles Robbins, Robbins, and Robbins, 1936).

The microeconomic theory shows that the Denel Aeronautics is the business that
maximising income and consumers reasonably maximise utility subject to their
contentment, fulfilment, an agreement of the design and comfort of the aircraft together
with related systems. For Denel Aeronautics to improve the business performance, they
should consider incorporating the theory of the buyer and the business (how buyers and
business interact), and the supply and demand for inputs into the productive process.
These inputs include labor, capital, land, and managerial talent. Denel Aeronautics to
produce the aircraft that consumers or other business wish to purchase, will require all
this inputs. This will demonstrate how the buyers and Denel Aeronautics interact and
how decisions of buyers and Denel Aeronautics are coordinated through movements in
market price (Keynes, Lionel Charles Robbins, Robbins, and Robbins, 1936).

Economists suggest that the decisions of buyers and Denel (businesses) be consistent
in a manner that demonstrate that the buyers and Denel concur regarding the quantity
and price of the aircraft that will be produced and disbursed. Therefore, Denel
Aeronautics need to improve business performance and should ensure that buyers and
service of the aircraft is not inconvenience due to internal matters, such as strike,
unavailability of aircraft due to not being serviced and maintained, etc. (Keynes, Lionel
Charles Robbins, Robbins, and Robbins, 1936).

Economists say that when there is consistency in decision-making, it implies that the
market is in equilibrium. There is a key association between maximisation and
equilibrium in the microeconomic theory. This implies; characterise the conduct of each
person or groups as maximising something. Maximising the conduct tends to drive these
person’s and groups towards a point of equilibrium. They definitely do not mean for an
equilibrium result; rather, they merely attempt to expand whatever it is that is of interest
to them. Yet, the collaboration of maximising agents usually results in equilibrium
(Keynes, Lionel Charles Robbins, Robbins, and Robbins, 1936).
Question 2

a. Elasticity of demand of a specific good to the government

The idea of elasticity of demand is made pragmatic utilization of by the Minister of
Finance and the monopolist. At the point when the Government imposes a tax on a
commodity, its cost will tend to rise. However, when the demand is very elastic, it will
extensively fall when the cost has increased (Lakhotia, 2011). The outcome will be that
Government will not get bigger income from this tax in light of the fact that the general
population will have significantly abridged their demand for it. In the event that the
Finance Minister needs to be sure of the income from a specific tax, he should require
it on such commodities for which the demand is less elastic. In any case, because such
commodities happen to be necessaries of life, the Finance Minister may like to exempt
them or impose a lower tax on such commodities on humanitarian grounds (Lakhotia,
2011).

The concept of elasticity of demand is also significant for the government in such
substances as governing of business cycles, get rid of inflationary and deflationary gaps
in the economy. Likewise, for price stabilization and the procurements and sale of
stocks, information about elasticity of demand is most useful (Kumar, 2016).

Rate of trade between two monetary standards can be transformed over depreciation
or overvaluation of one currency in connection to different monetary standards. A nation
while choosing for such a strategy will contemplate the elasticity of demand for its
exports and imports. In the event that the government degrades the currency without
thinking about the elasticity of demand for its exports and imports, it will be unable to
adjust unfavourable balance of payments. Under these conditions, the demand both for
its exports and for imports ends up being inelastic (Kumar, 2016).

The South African government has the accountability to stabilise or moderate the tax
load among producers and consumers. This is to enable customers to have entrance to
specific needed products and the producers sustain the capacity to provide products
and service to ensure profitability (Lakhotia, 2011).

For example, the South African government imposed high value added tax on
purchases (14% to 15%) and at present is accumulating more profits. This
demonstrating perfect inelastic demand, because the load of the tax cascades down to
customers, as they have no choice but to purchase (Lakhotia, 2011).
b. Price Elasticity of Demand to the producer of the good
The businessperson takes his prompt from the idea of demand while fixing his price. In
instances, the demand is elastic; he will have the capacity to expand his sales by
bringing down its cost and in this manner gain on the turnover. Then again, if the
demand is inelastic he realizes that the general population must purchase such
commodities. He will be in a position mostly to charge a higher cost, except if; obviously,
he has some thought for human welfare (Lakhotia, 2011).

The idea of elasticity of demand assumes an essential job in deciding the cost of joint
products. If there should be an occurrence of joint products like skin and meat of goat,
separate expenses are unknown. The producer will be directed generally by demand
and its nature while fixing his cost. For example, when we buy a cow, we normally do
not keep in mind the different expenses of skin and meat (Kumar, 2016).

At the point when the dealer sells the skin and meat, the dealer remembers the elasticity
of demand of skin and meat. On the off chance that elasticity of demand for meat is less
elastic, overall the cost of meat will be higher. Then again, if elasticity of demand for
skin is more elastic, overall the cost of the skin will be low and the other way around
(Kumar, 2016).

When taxes imposed on production, this displays perfect elastic demand and the tax
load falls on the producers, as they cannot pass it on to the customers (Lakhotia, 2011).
Fixation of wages assist the producers to fix wages for labourers. They fix high or low
wages according to the elastic or inelastic demand for the labour (Kumar, 2016).

The impact of equipment on work opportunities relies upon elasticity of demand for the
products created by such equipment. In the underlying stage, utilization of such
equipment cause joblessness and costs will likewise fall. Nevertheless, when demand
for such commodities is more elastic, at that point fall in costs will create more increment
in its demand (Kumar, 2016).

Accordingly, demand will invigorate more production and consequently greater work. In
the event that demand for commodities delivered by these equipment is inelastic, at that
point even fall in cost won't expand request and additionally business (Kumar, 2016).

As product manufacturers influenced by price elasticity, it means that the product

demand is inversely proportional to the cost, as the cost rises, the demand for the item
goes down and when the cost drops, the demand for the product will rise (Lakhotia,
2011).
c. Cross Elasticity of Demand to Business

The Economics books defined the Cross elasticity of demand as a measure of degree
of change in demand commodity due to change in price of another commodity (Anon,
2018). Cross Price Elasticity of Demand and other related items enables a firm to outline
the market. The firm would then be able to ascertain what quantity of contenders it has,
and how firmly related they are. Similarly enables a firm to quantify how imperative its
corresponding items are to its very own items. Pricing policy helps vast firms that deliver
distinctive related merchandise. It encourages firms to choose whether to expand the
cost of related items or not. To decrease exposure to risk, firms can create procedures
related to price fluctuations by diverse firms, for instance, a scaling in the cost of a
supplement or a fall in the cost of a substitute (Anon, 2018).

Using knowledge of the cross elasticity of demand to help businesses

 Substitutes? When setting cost businesses should look at what choices the
purchaser has, where there are no close substitutes, the purchaser will have the
ability to expand the expense. Therefore, businesses spend a considerable measure
of cash on publicizing to separate their items and diminish cross-elasticity of demand
(Tejvan, 2017).
 Loss leaders: Firms can use information of matching products to maximise the
whole revenue. For instance, numerous businesses sell copiers as reasonably as
possible because if they sell a copier, they know the demand for their replacement
ink cartridges will rise (Tejvan, 2017).
 When a business makes a small growth in price and finds individuals are, very eager
to change to substitutes, they may make countless determinations to pursue product
diversity and trademark reliability to lessen cross-elasticity of demand (Tejvan, 2017).
Cross elasticity of demand can be measured between any two goods at a time, and the
outcome is the representation of the relationship shared by those two goods. The
following are examples of such two goods (Businesstopia, 2017):
 Cross elasticity is bigger than nil when rise in price of commodity A causes
increase in demand of commodity B. Such type of response observed in
substitute goods such as Stone and Ginger.
 Cross elasticity is equivalent to nil when increase in price of commodity A does
not cause any effect on the demand of commodity B. This type of response can
be seen in goods that are not related to each other such as Carrot and Table.
 Cross elasticity is smaller than nil when increase in price of the commodity A
causes fall in demand of commodity B. Such type of response can be seen in
complementary goods such as Milk and Tea.
SECTION B: MACROECONOMICS

Question 3

South African Reserve Bank (SARB) will use expansionary monetary policy to increase
money supply. This can be achieved with open market procurements of government bonds,
with a reduction in the backup (reserve) requirement, or with an announced decline in the
discount rate. In most growing economies, the money supply is expanded frequently to
retain up with the expansion of the gross domestic product (GDP). In this vibrant context,
expansionary monetary policy can mean an increase in the rate of growth of the money
supply, rather than a mere increase in money (Krugman, 1986).

If the SARB increase, money supply and people anticipate a greater price level, then
aggregate-demand curve will shifts to the right and short-run aggregate-supply curve will
shifts to the left. The quantity demanded at the original interest rate, because of the
increases supply of money, there is now more money in the hands of the public, so public
(people) are able to hold a greater quantity of money (Ecomaa, 2012:17). The economy
moves from point A to point B, with no adjustment in output and an increase in the price
level (to P2). If people do not change their expectation of the price level, the short-run
aggregate-supply curve does not shift, the economy ends up at point C, and output
increases along with the price level (to P3) (BlogSpot, 2013). The diagram below explain
more:

When SARB expand money supply, public will have money surplus to use and two things
can happen (Ecomaa, 2012:17):

 Direct impact of an expansion in the money supply: That is a few people will request
more merchandise and services (Ecomaa, 2012:17).
 Indirect impact of an expansion in the money supply: that is a few individuals will
store a portion of their cash in banks. In this way, overabundance stores will
increment and banks will need to loan more. Banks will bring down interest rate to
inspire borrowing. This will expand investment and consumption and therefore
aggregate demand will expand (Ecomaa, 2012:17).
Price level- when economists denote to price level, it is in reference to the purchasing
influence (power) of cash or expansion (inflation). As it were, economists are portraying the
condition of the economy by looking at how many individuals can purchase with a similar
rand of money. The most widely recognized price level index is the Consumer Price Index
(CPI) (Heakal, 2018).

Price levels are one of the best-examined economic indicators in the world. It is broadly
assumed that prices should remain comparatively constant from year to year; so as not to
cause unjustified rising prices (inflation). If price levels begin to increase too swiftly, SARB
or governments look for ways to decrease the money supply or the aggregate demand for
goods and service (Heakal, 2018). The aggregate supply curve describes the price-output
reply of business (firms). It defines how business (firms) will desire to change the entire
volume of output as prices change (Washington, 2014).

The short-run in economics is a circumstance in which the information (inputs) markets have
not yet had an opportunity to completely, alter their costs (prices) to the changed price level.
Specifically, I will contend that the short-run is a phase in which the labour market has not
yet figured out how to, completely alter wages to coordinate adjustments in costs (prices)
(Washington, 2014). In the short-run, I contend that as price (P) increases, aggregate supply
(AS) increases. Why could businesses desire to expand the entire volume of output they
supply if prices expand (Washington, 2014)? The clarification relies on two thoughts:

1. At low levels of yield (output) and costs (prices), the economy has a great deal of
underutilized or unutilized assets. Here, any outward shift of AD (an expansion in
aggregate demand) can consider forward an expanded supply of yield (output) without
requiring a lot of an expansion in costs, since firms do not need to bring about many extra
expenses to increase supply (Washington, 2014). Nevertheless, as the economy nears
full asset use at large amounts of yield, firms do not be able to build yield as much as
total interest increments. On the off chance that the economy has drawn every single
unused asset into creation, it has achieved full work level of yield or most extreme
potential GDP (Washington, 2014).
2. If compensation fall behind costs, at that point as costs rise, firm benefits increment. As
general productivity builds, firms will need to offer increasingly in the event that they can
figure out how to draw assets into creation. Note that as P increments, if wage builds
coordinate P, there is no adjustment in productivity, and consequently want to extend
yield. In this way, the longing to extend yield as costs rise can just work if compensation
slack costs. Whenever input costs (particularly work costs) do not fall behind cost builds,
at that point the AS bend is vertical, since cost increments do not change gainfulness and
henceforth do not create any craving to grow generation with respect to firms.
(Washington, 2014).
Question 4

a) Aggregate Demand/Aggregate Supply- short-run

The short-run in macroeconomic investigation is a period in which wages and some different
costs do not react to changes in economic conditions. In specific markets, as economic
conditions change, costs (including compensation) may not modify rapidly enough to keep
up harmony in these business sectors. A sticky cost is a value that is slow to adjust to its
equilibrium level, making maintained times of shortage or excess. Wage and value
stickiness keep the economy from accomplishing its normal level of work and its potential
output (Benise, 2011).

When firms come to be optimistic about future business situations and increase investment,
the diagram below depict the result. The economy begins at point A with aggregate-demand
curve (AD1) and short-run aggregate-supply curve (AS1). The equilibrium has price level
(P1) and output level (Y1). Increased optimism leads to greater investment, so the
aggregate-demand curve shifts to (AD2). Now the economy is at point B, with price level
(P2) and output level (Y2). The aggregate quantity of output supplied rises because the
price level has risen and people have misperceptions about the price level, wages are sticky,
or prices are sticky, all of which cause output supplied to increase (Wofford, 2004).

b) The investment flourishing influence the increase in the long-run aggregate-supply

curve, since bigger investment nowadays implies a higher wealth stock in the future,
consequently larger productivity and output (Wofford, 2004).
The long-run aggregate supply curve is vertical in light of the fact that over the long-run,
an economy's supply of goods and services relies upon its supplies of capital, labor,
and characteristic assets and on the accessible production technology used to
transform these assets into products (goods) and services. The price level does not
influence these long-run determinants of genuine GDP (Wofford, 2004).
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