Micro Essays 2021 Only GR 12 - 220907 - 141106

Compiled by Noel Mashonga
GRADE 12
MICROECONOMICS
AND
CONTEMPORARY ECONOMIC ISSUES
According to Examination Guidelines for 2021
ECONOMICS PAPER 2 ESSAYS 2021
Advise learners NOT TO FOCUS on essays only

since essay consist 27% and section B 53% and
Section A 20 % per paper
Topic Page
NOVEMBER ESSAYS 2-3
ESSAY STRUCTURE 4
MICROECONOMICS
5 PERFECT MARKET 5-8 5
6.2 IMPERFECT MARKET: MONOPOLIES 9-14
6.3 IMPERFECT MARKET: OLIGOPOLIES 15-20
6.5 COMPARE AND CONTRAST MARKET 21-27
STRUCTURES
7 MARKET FAILURES 28-42
pg. 1 of 42
PREPARATORY/NOVEMBER 2021 SCOPE ESSAYS

PAPER 2
QUESTION 5: QUESTION 6
MICROECONOMICS CONTEMPORARY ECONOMIC
ISSUES
• Discuss in detail the various • Discuss in detail the
equilibrium positions with the aid consequences of inflation
of graphs: under the following
- Economic profit headings:
- Economic loss - Debtors/Creditors
- Normal profit (short and - Wage and salary
long run) earners
• Discuss the monopoly in detail - Investors and savers
(with/without the aid of graphs): - Taxpayers
- Concept - Industrial stability
- Characteristics - Unemployment/poverty
- Economic profit, - Balance of payments
- economic loss (short run) problems
- Economic profit (Long-run ) - Psychological
• Examine the oligopoly in detail: influence
- Concept • Discuss in detail the
- Characteristics measures to combat
- Kinked-demand curve demand-pull and/or cost-
• Compare and contrast any TWO push inflation
types of market structures - Monetary policy
(perfect to imperfect/imperfect to - Fiscal policy
imperfect) in detail in terms of - Other measures
the following. • Examine in detail the effects
- Number of businesses of tourism
- Nature of product - GDP
- Entrance - Employment
- Control over prices - Poverty
- Information – - Externalities
- Examples - Environment
- Demand curve - Investment
- Economic profit/loss • Examine in detail the
- Decision-making benefits of tourism
- Collusion - Households
- Productive/Technical - Businesses
efficiency - State
- Allocative efficiency - Infrastructure
• Discuss in detail how the development
following factors lead to the • Discuss in detail how the
misallocation of resources in the government can ensure
market: sustainable development
- Externalities under the following
- Missing markets headings:
- Imperfect competition - Grant property rights
pg. 2 of 42
- Lack of information - Pay for environmental

- Immobility of factors of use
production - Levy environmental tax
- Imperfect distribution of - Pay environmental
income and wealth subsidies
• Discuss in detail state - Issue marketable
intervention as a consequence of permits
market failures, with the aid of - Command and control
relevant graphs - Voluntary agreements
- Direct control - Education
- Imperfect markets • Discuss in detail the
- Minimum wages following problems and the
- Maximum prices international measures
- Minimum prices taken to ensure sustainable
- Taxes and subsidies development under the
- Subsidies on goods and following headings:
services - Biodiversity
- Redistribution of wealth - Chemical waste
- Government involvement in - Hazardous waste
production - Climate change policy
(Nations Framework
Convention on Climate
Change [UNFCC]
- Kyoto Protocol, Paris
agreement on climate
change)
- Indigenous knowledge
pg. 3 of 42
STRUCTURE OF ESSAY MARK

ALLOCATION
Introduction
• A good starting point would be to define a concept or key
word that appears in the question.
• Include other sentences to support the topic.
• Do not include in your introduction any part of the question.
• Do not repeat any part of the introduction in the body.
• Avoid saying in the introduction what you are going to discuss Max. 2
in the body.
Body:
Main part: Discuss in detail / In-depth discussion / Examine /
Critically discuss / Analyse / Compare / Evaluate / Distinguish /
Differentiate / Explain / Assess / Debate
Max. 26
Additional part: Give own opinion / Critically discuss / Evaluate
/ Critically evaluate / Draw a graph and explain / Use the graph
given and explain / Complete the given graph / Calculate /
Deduce / Compare / Explain / Distinguish / Interpret / Briefly
debate Max. 10
Conclusion
• The conclusion is a wrap up of the discussion of the topic in
the body and should be treated as a higher order response.
• The conclusion can take the form of an own opinion,
examples to support your discussion or contradictory
viewpoint from what has been discussed.
• No aspect from either the introduction or body should be Max. 2
included in the body
TOTAL 40
pg. 4 of 42
TOPIC 5: PERFECT MARKETS

QUESTION 1
•Examine, with the aid of THREE separate graphs, the following short-run
equilibrium positions in a perfect market:
- Economic profit (10 marks)
- Economic loss (8 marks)
- Normal profit (8 marks) (26 marks)
• Why would a perfect competitor be forced to shut-down the business at a
certain point? (10 marks) [40]
INTRODUCTION
There are several profit or loss possibilities for a perfect competition in the short run.
✓✓
(Accept other correct and relevant introduction) (2)
BODY: MAIN PART
Short run equilibrium positions of a perfect competitor:
Economic profit✓
• Economic profit refers to profit that is made in addition to normal profit. ✓✓
• It takes place when average revenue (AR) is greater than average cost
(AC) the firm makes an economic profit. ✓✓
• Profit is maximized at point E3, where MR = MC at quantity of Q3 and
market price of P3. ✓✓
• Economic profit attracts other businesses to enter the market. ✓✓
• Economic profit is represented by the shaded area. ✓✓
(Accept other correct relevant response) Max.4
Labelling of the axes = 1 mark

Labelling on the axes = 1 mark
Correct position of AC = 1 mark
Correct position of MC = 1 mark
Correct position of MR/AR = 1
mark
Max.4
(10)
pg. 5 of 42
Normal profit✓
Labelling of the axis = 1 mark

Labelling on the axis = 1 mark
Profit maximisation point = 1 mark
Correct position of MR/AR = 1 mark
Max. 4 marks
• Normal profit occurs when AC = AR✓✓
• It is the amount that the business must make in order to keep its doors open.
✓✓
• It is the minimum earnings required to prevent an entrepreneur from leaving
the industry. ✓✓
• Once all costs such as the running costs and fixed costs are covered the
business can keep its doors open. ✓✓
• Profit is maximized at point e, where MR = MC at quantity of Q1 and market
price of P1. ✓✓
• (Accept other correct relevant response) Max. 4
(8)
Economic loss✓
• Economic loss takes place when total costs are greater than total revenue
(TC > TR)/When average revenue is lower than average cost the firm
makes an economic loss (AR < AC) ✓✓
• Economic loss is a signal to exit/leave the market. ✓✓
• Point E3 represent loss minimization point where MR = MC at quantity of
Q3 and market price of P3. ✓✓
(Accept other correct relevant response)
Max.4
pg. 6 of 42
Labelling of the axis = 1 mark

Labelling on the axis = 1 mark
Profit maximisation point = 1 mark
Shaded area (economic loss) = 1 mark
Correct position of MR/AR = 1 mark
Max. 4 marks
(8)
ADDITIONAL PART
TYPICAL EXAM QUESTION: THESE HIGHER ORDER

QUESTIONS REQUIRE THE LEARNERS TO USE HER/ HIS
CRITICAL THINIKING SKILLS.
Higher order questions are grounded in the content. These
types of questions test critical thinking, where candidates should be able to
apply their knowledge, through logical reasoning and also have an
awareness of their current economic climate. Content (covered by
discuss/examine/describe/analyse/explain/evaluate/compare/assess/justify/
construct/calculate) can be assessed as higher-order questions. Answers will
not necessarily be found in textbooks.
ADDITIONAL PART CHANGE ON EACH AND EVERY EXAMINATION OR
TEST
Why would a perfect competitor be forced to shut-down the business at a
certain point?
• A perfect competitor will shut down if it cannot meet its average or total
variable costs. ✓✓
• When AR < AVC or P < AVC the business will be forced to shut down. ✓✓
• The shut-down point is the point where MC intersects with AVC at its lowest
point✓✓
• A firm will sell goods if the price is above the shutdown price level. ✓✓
• Below the shut-down point, a firm will not be able to supply and sell its
products. ✓✓
pg. 7 of 42
• Producing a lower output would only add to the financial losses, so a

complete shutdown is required. ✓✓
• If a firm decreased production, it would still acquire variable costs not covered
by revenue as well as fixed costs (costs inevitably incurred). ✓✓
• By stopping production, the firm only loses the fixed costs. ✓✓
(Accept other correct relevant response) (10)
CONCLUSION
Whether a business makes a profit or loss depends on the location of the average
cost curve (AC) in relation to the market price when the business is in equilibrium.
✓✓(Accept the correct relevant conclusion of a higher cognitive level). (2)
[40]
pg. 8 of 42
TOPIC 6: IMPERFECT MARKET

6.2. MONOPOLY
QUESTION 1
• Discuss in detail the characteristics of a monopoly. (26 marks)
• Evaluate the effects of monopolies on an economy.? (10 marks)
INTRODUCTION
A monopoly exists when there is only one seller of a product, when the product has
no close substitutes, and when barriers block entry into the market completely. ✓✓
(Max. 2)
MAIN PART
Number of producers ✓
• The monopolist has full control over the supply of a product, because it is the
only seller ✓✓
• The monopoly also represents the total industry, e.g. De Beers, Eskom ✓✓
Nature of the product ✓

• The product is unique and has no close substitutes ✓✓
• E.g. electricity and rail transport ✓✓
Economic profit ✓
• The monopoly makes a short-term loss or profit ✓✓
Technical superiority ✓
• A monopoly has technical advantage over potential competitors and their
access to resources and technical superiority make it difficult for others to
compete ✓✓
Access to scarce resources ✓

• A single firm owns and controls a specific scarce resources and excludes other
companies from entering the market ✓✓
Demand curve ✓
• Monopolists are also confronted with a demand curve for their product but
because they are the only supplier of the product, they can decide at what point
on the demand curve they wish to be ✓✓
• The monopolist is the only supplier of the product in the market – the demand
curve that confronts the monopolist is that of the market as a whole ✓✓
• The market demand curve which slopes downwards from left to right/graph ✓✓
Production level ✓
• Once the monopolist has decided on a price, the quantity sold is determined by
market demand – by reducing the price, monopolists can sell more units of the
product and vice versa ✓✓
pg. 9 of 42
• Monopolists influence the product-price combination of the product they sell

without any reaction from other market participants ✓✓
• Other participants cannot act because a basic requirement for the existence of
a monopoly is that entry to the market is blocked ✓✓
Market forces ✓
• Although the monopolist is the only supplier of a product, the product is still
influenced by market forces in the economy ✓✓
• Consumers have limited budgets and a monopoly can therefore not demand
excessive prices for the product and the monopolist product has to compete for
consumer's favour with all the other products available in the economy ✓✓
• E.g. Transnet competes with road, air and sea transport ✓✓
Control over the price ✓

• A monopolist has considerable control over the market price – but demand limits
it ✓✓
• A monopoly does not have control over demand, so demand will influence the
final market price ✓✓
• A monopoly can only decide at which point on the demand curve it wants to
produce ✓✓
Substitutes ✓
• There are few products that have no close substitutes whatsoever ✓✓
• For many years there was no competition for telephone services in South Africa,
but consumers could still use alternative forms of communication such as letters
and telegrams ✓✓
Favourable circumstances ✓
• Sometimes entrepreneurs may enjoy favourable circumstances in a certain
geographic area ✓✓
• E.g. there may be only one supplier of milk in a particular town, a hardware store
or hotel ✓✓
• There may even be laws that protect them, e.g. Post Offices in South Africa ✓✓
• Pure monopolies are a rarity in South Africa ✓✓
• Not only are substitutes available, but there is often nothing to prevent other
entrepreneurs from entering the market hence what may be called a quasi-
monopoly ✓✓
Market information ✓
• All buyers and the single seller have no full knowledge of all the current market
conditions ✓✓
Exploitation of consumer ✓
• The monopolist may produce fewer products at a higher price compared to
businesses under perfect competition ✓✓
• E.g. De Beers, because the monopolist is the only producer of the product in
the market, there is always the possibility of consumer exploitation. Most
governments take steps to guard against such practices and new and existing
monopolies are usually well monitored ✓✓
pg. 10 of 42
Market entry ✓
• The barriers prevent other producers from entering the market to supply the
same type of product ✓✓
Natural monopolies ✓
• High development cost are frequently a reason – the provision of electricity is
often used as an example ✓✓
• To build a nuclear power station and transmission lines to distribute electricity,
costs billions of rand ✓✓
• E.g. Eskom as a single business in the country that supplies electricity
✓✓operates as a natural monopoly and is owned and regulated by the
government✓✓
Artificial monopolies ✓
• The barriers to entry are not economic in nature but artificial like patent rights
which are legal and exclusive rights of a patent holder to manufacture a product
using his or her unique invention ✓✓
• Patents are also frequently encountered in the pharmaceutical industry ✓✓
• Licensing is another way in which artificial monopoly is applied, e.g. TV and
radio licenses ✓✓
• Licences protect operators against entry of other competitors ✓✓
Economies of scale ✓
• These give advantages to large existing companies ✓✓
• Occur when the cost per unit decreases when the output increases ✓✓
• Large businesses' production costs per unit are lower than those of small
businesses, e.g. Eskom ✓✓
The geographical area ✓

This can cause a natural barrier as well, e.g. only one holiday resort can fit on the
seafront as an exclusive beach ✓✓
Size of the market ✓

• Sometimes a business enjoys favourable circumstances in a certain small
market ✓✓
• E.g. there may be only one hardware store in a particular small town ✓✓
ADDITIONAL PART

pg. 11 of 42

TEST
Evaluate the effects of monopolies on an economy. (10)

Positive effects
Monopolies are effective because:
• Some products are dangerous and need to be handled with caution, e.g.
electricity by Eskom and water by local municipalities. ✓✓
• Critical products and services are handled by one company which should
be held accountable when something goes wrong.
• Quality is maintained in that it is handled by an experienced service
provider.
Negative effects
• Because it is the only producer, products and services tend to be
expensive. ✓✓
• Quantity tends to be limited. ✓✓
• Products are produced at high cost and welfare tends to be reduced. ✓✓
• Lack of competition, which means choice for consumers is limited. ✓✓
(Accept any other correct relevant response)
Conclusion
A monopoly does not always make economic profit in the short run; it can also make
economic loss in the short run if the total cost exceeds total revenue. ✓✓
Accept high order conclusion.
pg. 12 of 42
QUESTION 2
Discuss the monopoly profits and losses in the short run under the following
headings
• Economic profit (13)
• Economic loss (`13) (26 marks)
Explain implications of downward demand curve of a monopoly (10 marks)
INTRODUCTION
• Monopoly it is a market structure with one seller or producer which sells
unique product with no close substitutes
Main: Body
Economic profit
• If the AR exceeds the AC (or TR > TC), the firm will make an economic profit.

• When the AR curve is above the AC curve, an economic profit will be made:

• The economic profit is indicated by the shaded area on the graph. 
Economic loss
• Some people argue that because the monopolist is the only supplier, it will
always make an economic profit.  However, his profitability depends on
the demand for the product as well as the cost of production. 
• The monopolist can produce at a level of output where revenues are too low
or where costs are too high. 
• If the AC exceeds the AR (or TC > TR), the firm will make an economic loss.

• When the AC curve is above the AR curve, an economic loss will be made.

pg. 13 of 42
• The economic loss is indicated by the shaded area on the graph. 
Additional part

TEST
Explain implications of downward demand curve of a monopoly
• The MR curve runs below the demand curve (AR curve), and shows that, with
the exception of the first unit, MR is always lower than ar. 
• the MR curve intersects the horizontal axis at a point that is exactly halfway
between the origin and the point of intersection of the demand (AR) curve. 
• the monopolist will have a pricing policy. the monopoly is the only supplier in
the market, and with the downward-sloping demand curve, where each
quantity supplied is associated with a unique price more units can be sold by
reducing the price. 
• the monopoly can therefore influence the price-quantity combination of its
product. 
• a monopoly will always try not to fix its price below the centre of the demand
curve. 
• the reason for this is that the total revenue will then start to decline because
the price will be in the inelastic part of the demand curve and the point will be
reached where MR becomes negative. 
Conclusion
• The monopoly firm is like an industry, and faces a downward sloping demand
curve for its product; thus, it has to lower its price in order to sell more. for, it is
this nature of demand curve that determines the nature of average and
marginal revenue curves
pg. 14 of 42
6.3. OLIGOPOLIES
Question 1
• Discuss an oligopoly as a market structure (26 marks)
• How do oligopolists compete without using price to increase their
market share? (10 marks)
[40]
INTRODUCTION
• The oligopoly is a type of imperfect market in which only a few large
producers dominate the market. 
(Accept any other relevant and correct response)
MAIN PART
Nature of product
• The product may be homogeneous in a pure oligopoly. 
• If the product is differentiated, it is known as a differentiated oligopoly. 
Market information 
• There is incomplete information on the product and the prices. 
Market entry 
• Market entry is not easy, it is limited in the sense that huge capital outlay
might be necessary. 
Control over price 
• Oligopolists have considerable control over price, it can influence price, but
not as much as the monopolist. 
• Oligopolies can frequently change their prices in order to increase their
market share and this result in price wars. 
Mutual dependence 
• The decision of one firm will influence and be influenced by the decisions of
the other competitors. 
• Mutual dependence (interdependence) exists amongst these businesses.
• A change in the price or change in the market share by one firm is reflected in
the sales of the others. 
Non-price competition 
• Non - price competition can be through advertising, packaging, after-sales
services. 
• Since price competition can result in destructive price wars, oligopolies prefer
to compete on a different basis. 
• Participants observe one another carefully- when one oligopolist launches an
advertising campaign, its competitors soon follow suite. 
• If oligopolies operate as a cartel, firms have an absolute cost advantage over
the rest of the other competitors in the industry. 
Collusion 
• Collusion is a strategy used by firms to eliminate competition amongst each
other. 
• It can be in a form of overt collusion where firms can work together to form a
cartel and tacit collusion where a dominating business controls the price. 
Limited competition 
• There are only a few suppliers manufacturing the same product. 
Economic profit 
pg. 15 of 42
• Oligopolies can make an economic profit over the long term. 

• Abnormal profits may result to joint decision-making in an oligopoly. 
Demand curve 
• Slope from left down to the right. 
• It is known as the kinked demand since it contains the upper relatively elastic
slope and the lower relatively inelastic slope. 
(Accept any other relevant and correct response)
(A maximum of 8 marks for sub-headings and examples)
(Max. 26)
ADDITIONAL PART

TEST
Oligopolist may increase their market share using non-price competition strategies
by:
• branding their product to create an impression that its product is for a
particular age group or income group. 
• aggressive advertising which inform customers about the business or product
it provides. 
• using appealing packaging to bring out important features of their product.
• improving their customer service in order to ensure that they return to their
businesses. 
• providing relevant and precise information which is crucial to the customers,
since there are competitors in the market, customers will patronize the
businesses that provides relevant information. 
• extending shopping hours to the convenience of customers.
• Offering loyalty rewards to customers which will encourage their return to
spend accumulated rewards. 
(Accept any other relevant response)
(Max.10)
CONCLUSION
• In South Africa, oligopolists have been found to be illegally manipulating
prices to their benefit, yet to the detriment of consumers and have been
penalized for such action. 
(Accept any other relevant response)
pg. 16 of 42
QUESTION 2
Examine oligopoly under the following headings

• Nature of product 4 marks
• Entry 6 marks
• Interdependent decision-making 8 marks
• Kinked-demand curve 8 marks
Evaluate the view that only producers and not consumers, benefit when
oligopolistic firms collude to try to reduce the uncertainty they experience. (10
marks)
INTRODUCTION
An oligopoly is a market structure dominated by few producers, each of which has
control over the market. 
Body: Main part
Nature of Products
• the product may be identical or differentiated. 
• If the product is homogeneous, the market is pure oligopoly. 
• If the product is differentiated the market is called a differentiated oligopoly.

Entry
• new producers have free entry to an oligopolistic market, although this is not
easy as illustrated by the fact that there are only few businesses in the
market. 
• Firms under oligopoly advertise extensively. 
• This in itself is a barrier to entry to other firms. Advertising is very expensive
and firms who cannot afford to do so will lag behind the competition. 
Independent decision-making
• firms in an oligopoly are interdependent in their decision-making because
there are so few competitors in the market. 
• Any decision and action of one will have a direct effect on the profits of the
others who will retaliate by changing prices and output. 
• In an oligopoly, a firm not only considers the market demand for its product,
but also the reactions of other firms to its price and output policies. 
Kinked-demand curve
pg. 17 of 42
• The upper segment of the oligopoly graph is more elastic in nature. 

• Any price increases in this segment above the market price will have a large
decrease in the quantity demanded (law of demand). 
• An oligopoly competitor will lose many sales for any small increase in price.

• If a firm decreases its price, while other firms do not follow, it will face a more
inelastic demand curve, which will allow it to increase sales. 
• The large price decrease will cause a small increase in the quantity
demanded in this inelastic segment. 
• The profit obtained by any price decrease is actually less than at the original
market price. 
Additional part

TEST
Evaluate the view that only producers and not consumers, benefit when oligopolistic
firms collude to try to reduce the uncertainty they experience.
pg. 18 of 42
• When oligopolistic firms collude, they are effectively acting like a monopolist.

• They are looking at the profit maximising price and output for the whole
industry and setting output quotas accordingly. 
• This will lead to higher prices and higher profits for firms. Because firms
benefit from supernormal profits they can spend more on research and
development. However, it could be argued that consumers may benefit from
this investment. 
• For example, in industries like automobile production and drug research,
expensive investment is required to develop new engines and new drugs. 
• They may simply give it to shareholders in the form of higher dividends.
Alternatively, they may use the supernormal profits to fund predatory pricing in
another market
• Under collusion, consumers face higher prices and a decline in consumer
surplus, but they don’t benefit from any extra economies of scale. In
monopoly, supernormal profit margins are justified because it is argued the
monopoly is able to benefit from economies of scale which lead to lower
average costs and therefore lower prices for consumers. 
• However, in collusion, the consumer doesn’t benefit from economies of scale,
but just faces higher prices
• Collusion is necessary to generate sufficient profits to finance investment.
Although it means higher prices, consumers benefit in the long run because
they get better quality products. 
Conclusion
In South Africa, cartels are illegal and are punishable by law. 
pg. 19 of 42
6.5. COMPARE AND CONTRAST MARKET STRUCTURES

QUESTION 1
• Compare and contrast the structure of a oligopoly and a monopolistic
competitive market.
• How can government assist markets to be more competitive?
Introduction
An oligopoly exists when a small number of large companies are able to influence
the supply of a product or service to a market. Monopolistic competition is a
combination of perfect and imperfect competition. It has to some extent the
characteristics of both.There are various market structures that exist in the economy,
each with its own peculiar set of characteri. (Accept any other correct relevant
introduction) (Max 2)
BODY: MAIN PART

Compare and contrast the structure of an oligopoly and a monopolistic
competitive market .
Number of businesses
• Monopolistic Competitive markets have many sellers with small market share.
• Only a few suppliers manufacture the same product in a oligopoly.
Nature of product
• Monopolistic competing firms' products are differentiated to gain a larger market
share than its competitors.
• In a opligopoly products are homogeneous or diferentiated.
Control over prices
• Prducers in oligopoly have considerable control over the price of their products
although not as much as in a monopoly.
• Businesses in a monopolisctic competitive market have limited control over
prices.
Entrance / Entry 
• Producers in a monopolisctic competitive market have no barriers to entry; new
firms can enter the market .
• Entry is not easy in an oligopolistic market. This is due to brand loyalty and it also
requires a large capital outlay.
Economic profit/loss
• In the short run both market types can make economic profit, economic loss and
normal profi.
• If oligopolies operate as a cartel, firms have an absolute cost advantage over the
rest of the competitors in the industry. Abnormal high profits may be a result of
joint decisions in an oligopoly.
• Only normal profits are possible in the long run for firms in a monopolistic
competitive market.
Information
pg. 20 of 42
• In a oligopoly firms have incompleteand information.

• In ŉ monopolistic competitive market incomplete information is available. 
Collusion
• In a oligopoly producers make formal agreements between firms to collude. 
• This it is called a cartel. A cartel is a group of producers whose goal is to form a
collective monopoly in order to fix prices and limit supply and competition. 
• For a perfect competition, only secret communication between sellers is
impossible.
• In an oligopoly market, a dominant firm will increase the price of a product in the
hope that its rivals will see this as a signal to do the same. 
• This is referred to as price leadership and is an example of a tacit collusion.
• In monopolistic competition collusion is impossible due to many sellers.
Decision making
• An oligopoly is characterised by mutual dependence. The decision of one
company will influence other businesses.
• The decisions of producers in monopolistic competitive market is influenced by
other competitors.
Demand curve
• The demand curve of a monopolistic competitive firm is downward sloping but
relatively elastic.
• The demand curve of an oligpolist is downward sloping but kinked(relatively
inelastic and elastic)
Examples
• An example of an monopolistic competitive firm is fast-food outlets.
• An example of an oligopoly is OPEC.
Technical effifiency
• A monopolisctic competitive market is close to being technically efficient
possible.
• Technical effifiency is possible for an oligopoly.
Allocative efficiency
• A oligopoly is not allocatively efficient.
• A monopolisctic competitive market is close to being allocation efficient.
(Allocate a maximum of 8 marks for mere listing of facts/examples)
(Max 26)
ADDITIONAL PART

pg. 21 of 42

TEST
• The government should use laws on competition to prevent exorbitant prices

charged by firms.
• The government should ensure that entry to the market is free.
• The government should prevent harmful collusion and encourage foreign
competition which helps keep prices of goods low.
• Government should introduce supply-side polices, with the focus on
microeconomic components, e.g., competition and potential output.
• Government intervention should aim to facilitate the smooth operation of markets
to stimulate growth and development.
• Taxes on business should be collected more efficiently, human resources should
be supported to improve, and free advisory services should be made available so
that business efficiency improves.
• Government should focus on lowering the cost of doing business by reducing
transport, communication, and energy costs.
(Accept any other correct relevant higher order answer) (5 x2) (10)
CONCLUSION
Most businesses operate in a monopolistic competitive market. Monopolistic
competitive markets are more efficient than an oligopoly market.
Government should only intervene in imperfect market types like monopolistic
market types with policies that make markets more competitive. 
(Accept any other correct relevant higher order conclusion) (Max 2) (2
pg. 22 of 42
QUESTION 2
• Compare, without graphs, the market structure of a monopolistic
competition with that of a perfect market focussing on the following:
- nature of the product (8)
- market information (8)
- price determination and demand curve (8) (26 marks)
• Evaluate the importance of the south African competition policy in the
operation of marks. (10 marks)
INTRODUCTION
- a market is an institution/mechanism that brings together the buyers and
sellers of a good or service to negotiate about prices and quantities to be
traded. 
- market structure refers to the way markets are organised.
(accept any other correct relevant response) max. (2)
MAIN PART
Nature of the product

perfect market:
• products sold are homogenous or identical 
• there is no difference in the products, they are exactly the same in terms of
quality and appearance 
• it makes no difference to a buyer where or from whom to buy the product in a
perfect market 
Monopolistic competition:
• products sold are differentiated 
• products may be similar but not identical as there may be differences in
packaging and ingredients 
• the differentiation in products creates a scope for brand loyalty 
Market information
Perfect market:
• buyers and sellers have full knowledge of the market conditions 
• all buyers know what the specific characteristics of the good are, how much to
pay, the quality and market opportunities 
• sellers know the preferences of consumers 
Monopolistic competition:
• market information is incomplete for both buyers and sellers 
• many brands, enormous variety of products, multiple outlets, diverse location
and marginal differences in prices cause a lack of complete information for
sellers and buyers 
Price determination and demand curve
Perfect market:
• a perfect competitor cannot determine its prices; it takes the price determined
by the market 
pg. 23 of 42
• the price in the market is determined by the intersection of demand and

supply,  i.e. equilibrium price
• it is therefore a price taker – it takes the price as it is from the market and only
changes when the market changes 
• since it can sell any quantity at the prevailing market price, then the demand
curve is perfectly elastic or horizontal 
• the demand curve is also the price of the products 
monopolistic competition:
• there is considerable control over the prices of goods and services 
• it can produce less and charge a higher price 
• demand curve is downward sloping (negative) moving from left to right 
• demand curve is relatively elastic and represents the average revenue 
(accept any other correct relevant response) max. 10
ADDITIONAL PART

TEST
competition policy is important in:
• providing consumers with competitive prices and product choice 
• regulating markets and monopolies in the country thereby preventing
monopoly growth 
• balancing the act of economic transformation that will benefit all south africans
through ownership, participation of smmes and employment 
• declaring practices such as resale price maintenance and horizontal collusion
to be unlawful 
• forcing firms to compete vigorously in terms of prices and quality 
• fostering restructuring in sectors that have lost competitiveness 
(accept any other correct relevant response) (5 x 2)(10)
Conclusion
• perfect competition and monopolistic competition are relatively comparable as
they have similar characteristics. 
(accept any other correct relevant higher order conclusion)
pg. 24 of 42
QUESTION 3
• Compare the market structure of monopolistic competition with that of a
perfect competitor.
(26 marks)
• Explain why the business will stop producing output at the shut-down
point. (10 marks)
INTRODUCTION
• A market structure is a frame work of how a market is organized ✓✓

• Monopolistic is a market structure with many buyers and sellers where entry is
relatively easy but the product is differentiated ✓✓
• Perfect competition is a market structure with many buyers and seller ✓✓
(Accept any other correct relevant introduction) (Max. 2)
BODY
MAIN PART
Perfect Competitor Monopolistic Competition

The number of seller is so large A large number of sellers are
that individual participants are active in the monopolistic
insignificant in relation to the competitive market ✓✓, e.g.
Number of
market as a whole✓✓, e.g. producers of cleaning materials,
businesses
securities exchange or fresh toothpaste, soap, cold drinks,
produce market. ✓ etc. ✓
The demand curve for the perfect The demand curve is downward
competitor is horizontal. ✓✓ sloping. ✓✓
Output
The firm can realise economic The firm can realise economic
profits in the short-term but only profit in the short-term as well
normal profit in the long term as in the long term in the
Profit
under conditions of perfect monopolistic competitive
market. ✓✓ market. ✓✓
There is no need for marketing Marketing strategy is applied in

strategy due to perfect market the monopolistic competitive
knowledge. ✓✓ market. ✓✓ Deliberate
Marketing advertising campaign is
launched to create brand
loyalty. ✓✓
Homogeneous e.g. maize ✓✓ Products are heterogeneous.

Nature
E.g. they differ slightly in terms
of a
of appearance, shape, size and
product
taste. ✓✓
pg. 25 of 42
Both buyers and sellers have Market information is complete.

complete knowledge about The many brands, variety of
prevailing market conditions. ✓✓ products or marginal
Market It is assumed that buyers and differences cause a lack of
knowledge sellers instinctively know, e.g. information for sellers and
quantities, price at which the buyers. ✓✓
product is sold. ✓✓
Completely free ✓✓ Easy and free. There are no

barriers such as licenses, or
Entry
permits. ✓✓
(Accept any other relevant fact)

(Maximum of 8 marks for mere listing of examples) (Max.
26)
ADDITIONAL PART

TEST
• A firm will shut down if it cannot meet its average or total variable costs ✓✓
• The firm will not produce here because AR < AVC ✓✓
• The firm will not keep on producing from the shut-down point down because the
firm cannot meet its operational cost ✓✓
• Below the shut-down point, the firm will not sell any goods. ✓✓
• A firm will sell goods if the price is above the shutdown price level (supply
curve) ✓✓
Any (2 x 2)
(Max. 10)
CONCLUSION
While perfect does not exist, it serves as a standard that imperfect markets such as
monopolistic competition should strive to achieve. ✓✓
(Accept any other relevant conclusion) (Max. 2)
[40]
pg. 26 of 42
TOPIC 7: MARKET FAILURE

QUESTION 1
• Discuss how the following factors can lead to the misallocation of resources in
the market.
- Missing markets
- Lack of information
- Immobility of production factors (26 Marks)
• Motivate why the government has implemented a national minimum wage in

the labour market. (10 Marks)
NB: Learners should study all the causes/reasons for market failure:
externalities, missing markets, lack of information, immobility of factors of
production, imperfect markets; and imperfect distribution of income and
wealth. The examiner can choose ALL or only THREE or FOUR causes.
INTRODUCTION
Market failure is when the forces of supply and demand fail to allocate resources
efficiently / when markets fail to allocate goods and services efficiently. ✓✓
(accept any other correct introduction) (Max 2)
BODY: MAIN PART
Missing Markets
• Markets are often incomplete in the sense that they cannot meet the
demand for certain goods. ✓✓
Public goods: ✓
• They are not provided by the price mechanism because producers cannot
withhold the goods from non-payment and there is often no way of
measuring how much a person consumes. ✓✓
Public goods have the following features:
• Non-rivalry: ✓ The consumption by one person does not reduce the

consumption of another person✓✓ e.g. a lighthouse. ✓
• Non-excludability: ✓ Consumption cannot be confined to those who have
paid, so there are free riders✓✓ e.g. radio and TV in South Africa. ✓
Merit goods✓
• These are goods/services that are deemed necessary or beneficial to the

society, ✓✓ e.g. education, health care etc. ✓
pg. 27 of 42
• These goods are highly desirable for general welfare but not highly rated
by the market, therefore provide inadequate output/supply. ✓✓
• If people had to pay market prices for them relatively too little would be
consumed – the market will fail. ✓✓
• The reason for undersupply of merit goods is that the market only takes
the private costs and benefits into account and not the social costs and
benefits. ✓✓
Demerit goods✓
• These are goods/services that are regarded as bad or harmful for

consumption hence we should use less of these✓✓e.g. alcohol, cigarettes,
etc. ✓
• Demerit goods lead to a lot of social costs, therefore, the government
charges sin tax / excise duties to discourage the consumption of such
goods. ✓✓
• While the market is willing to supply demerit goods, it tends to oversupply
demerit goods. Some consumers may be unaware of the true cost of
consuming them. ✓✓
Lack of information
• Technical and allocative efficiency require that both producers and

consumers have complete and accurate information about the costs and
benefits of the goods and services produced and consumed in the market.
Producers and consumers make production and consumption decisions
based on the information they have. ✓✓
• When information is incomplete or inaccurate, it leads to wrong decisions
about what to produce, how to produce and for whom to produce, and a
waste of resources occurs. ✓✓
• Producers might not know all the different technologies and production
techniques that are available and the different resources that can best be
used to produce goods/services more efficiently. ✓✓
• Consumers might not know that the price of a product is lower from some
other suppliers or about the harmful effects of a product since they might
just base their decisions to consume on the information from a misleading
suppliers. ✓✓
Immobility of factors of production
• Markets do not respond to changes in consumer demand if resources

cannot be easily reallocated or due to a lack of information✓✓
• Labour takes time to move to into new occupations and geographically to
meet the changes in consumer demand. ✓✓
pg. 28 of 42
• Physical capital e.g. equipment, buildings, land✓ and raw materials can
only move from one place to another at a high cost, but cannot be moved
to fit a change in demand. ✓✓
• Technological applications change production methods e.g. use of robots
rather than physical labour. It takes time for most industries to adapt. ✓✓
• With greater technological change there is an increasing need for workers
to become flexible, to update skills, change employment, occupations and
work patterns. ✓✓
MAX 8 for headings and examples + 18 for discussion/explanation= Max 26
Body: Additional part

TEST
• Pressure was put on the South African government to introduce labour
laws which require employers to pay minimum wages. ✓✓
• The application of minimum wage laws is needed to improve a
redistribution of income. ✓✓
The main objectives were:
- To redress inequality (Gap between wealthy and poor) ✓✓

- To improve the standard of living. ✓✓
- Government tried to protect domestic workers and farm workers — thus
preventing exploitation. ✓✓ (Max 10)
Conclusion
Governments intervene in the market when market forces cannot achieve the
desired output. ✓✓ (Max 2)
(Accept any other relevant conclusion)
pg. 29 of 42
QUESTION 2
• Discuss in detail how the following factors lead to the misallocation of

resources in the market.
- Externalities (10 marks)
- Imperfect competition (8 marks)
- Imperfect distribution of income and wealth (8 marks)
(26)
How does the government deal with lack of information as a consequence of
market failure? (10)
Introduction
• Market failure means that the market has not achieved its optimal
production outcome – it has not produced the correct quantity of goods
and services. 
Main body:
Externalities
An externality occurs when some of the costs and benefits of a decision or
action are borne or enjoyed by second or third parties who were not part of or
directly involved in the decision making. 
Private cost:
▪ Internal costs are known as private costs.
▪ These are the usual costs that consumers incur when they buy goods, for
example the price they pay for a product. 
▪ The private costs of the business are their fixed and variable costs – their
day-today expenses. 
Private benefits (internal benefits):
❖ These are the benefits gained by those who buy the goods and those who
produce the goods. 
❖ For the consumer it includes the convenience of enjoying the product, and
for the producer it includes the revenue and profit it receives from selling
the product. 
Social costs:
❖ These are the cost of goods or services to those who create them and to
society in general. 
❖ It includes the production cost, but also the additional cost of pollution and
the waste products (external costs – negative externalities). 
❖ No values are given to these extra (external) costs because no market
exists to price them. 
❖ Private costs plus external costs are equal to social costs. 
Social benefits:
❖ Consumers pay for private benefits. 
❖ However, society in general benefits from less diseases, a healthier
workforce can work more productively and is absent from work less
(external benefits – positive externalities). 
❖ When municipalities provide clean water to households, households pay
only for the private benefit. 
❖ Private benefit plus external benefits are equal to social benefits. 
pg. 30 of 42
❖ Because externalities in production and consumption often exist and output is

usually based on private cost and benefits, this is a cause of market failures.

Imperfect competition
• Under certain conditions, a perfectly competitive market will reach a point of
allocative efficiency. Firms produce the right product at the right price and the
right quantity and do it efficiently since only efficient firms will survive. 
• In market economies, competition is impaired by power. Power lies with
producers more than with consumers. 
• Most businesses operate under conditions of imperfect competition – this
allows them to restrict output, raise prices and produce at levels where price
exceeds marginal cost. 
• The result is an inadequate allocation of resources, as only those that can
afford to pay gain access to certain goods and services. 
• Under imperfect competition, market failure occurs because imperfect
markets fail to achieve technical and allocative efficiency. 
• The following factors cause imperfect competition:
- Modern markets do not cater for price negotiations – consumers have
to pay the prices that producers ask. 
- Advertising promotes the superiority of certain producers. o Barriers
prevent new businesses from entering into markets – full adjustments
to changes in demand are prevented. 
The introduction of new, improved products is delayed – for example the
technology to produce cars not powered by fossil fuels is already available. But
the oil-producers and lack of capital delay the process. 
Imperfect distribution of income and wealth
• The market system tends to distribute income and wealth unevenly. 

• Since the market is interested only in producing goods for those who can
afford it, the unequal distribution of income leads to the fact that few people
have too many goods and many have too few goods. 
• Due to a lack of skills, education and imperfect information, certain individuals
are unable to earn incomes that are necessary to achieve a decent living
standard. 
• Low incomes lead to an inability to accumulate wealth. 
• If the initial distribution is unequal, the final distribution will be unequal too.
• The market fails to ensure that everyone in society gets equal access to the
output of the economy. 
• Too many resources are used to produce output for the rich members of
society, and too few for those that are poor. 
Additional part
pg. 31 of 42

TEST
How does the government deal with lack of information as a consequence
of market failure? (10)
• The SABS regulates standards in South Africa. This means that all firms must
produce goods that meet with certain health, safety and quality standards. 
• Information must be included on the packaging of goods. 
• Regulations for advertising standards, exist to prevent false claims and
deceptive advertising. 
• Access to information and regulations must be easily available. 
• E.g. prepared food products must carry details of the contents on the
packaging. 
(Accept any other correct relevant response.)
Conclusion
Where market failures exist, private bargaining between parties involved or public
policies such as a tax (or subsidy) can improve outcomes. When seeking to use
taxes, subsidies, or prohibitions to improve market outcomes governments face
many of the same asymmetric information problems that confront private
economic factors. Governments may fail to address market failures for another
reason: powerful groups may benefit from the status quo
pg. 32 of 42
QUESTION 3
• Draw a clearly labelled graph explaining the consequences of government
intervention in the market for each of the following:
-Maximum prices
-Taxation (26
marks)
• Explain the supply of undesirable goods in South Africa and how the
government can deal with it. (10 Marks)
INTRODUCTION
The purpose of government intervention is to ensure that the right quantity of

resources is allocated to the production of output so that society as a whole
maximizes its benefits. ✓✓ (Max 2)
(Accept any other relevant introduction)
BODY: MAIN PART
• Sometimes government will set the price of a good or service at a maximum

level that is below the market price ✓✓
• The government intervene and passes a law that suppliers may not charge
more than the maximum price ✓✓
• The immediate effect is that quantity supply will drop ✓✓
• The original market equilibrium price and quantity is P and Q respectively ✓✓
• The price set by the government is P1, at this price the demand will increase
to Q1 and the supply will decrease to Q2 ✓✓
• The difference between Q1 and Q2 is the shortfall that will be created on the
market ✓✓
• The shortage caused by the price ceiling creates a problem of how to allocate
the good since the demand has increased ✓✓
pg. 33 of 42
• Black markets start to develop ✓✓
(Mark allocation: Graph 6 and discussion max. 10 marks)
• The appropriate way to intervene in the market by government is by

levying taxes as a method to recover external cost ✓✓
• The original market equilibrium at e, with P as the equilibrium price and Q
as the equilibrium quantity ✓✓
• The tax increase will shift the supply curve to the left ✓✓
• New equilibrium at E1 ✓✓
• A tax would raise the price from P to P1 ✓✓
• The production will decrease from Q to Q1 ✓✓
(Mark allocation: Graph total 6 marks and discussion max 10 marks)
ADDITIONAL PART

pg. 34 of 42

TEST
Explain the supply of undesirable goods in South Africa and how the government
can deal with it.
• Items such as cigarettes, alcohol and non-prescription drugs are examples

of demerit or undesirable goods. ✓✓
• These goods are often over supplied in the market, due to the fact that the
external cost is not added to the market price. ✓✓
• Some consumers may be unaware of the true cost of consuming them,
their negative externalities. ✓✓
• Government can ban their consumption or reduce it by means of taxation.
✓✓
• Taxation on these products will increase the market price and hopefully
the demand for these products will drop. ✓✓ (10 marks)
Conclusion
The intervention of government ensures that inefficiencies is eliminated and that

the market is operating effectively (Max 2)
(Accept any other relevant conclusion) [40]
pg. 35 of 42
QUESTION 4
With the aid of graphs, discuss in detail state intervention as a consequence of
market failures, under the following headings:
- minimum wages (13 marks)
- maximum prices (13 marks) (26 marks)
How successful is the South African government in solving income inequality?
(10 marks)
INTRODUCTION
Market failure occurs when the forces of demand and supply do not ensure the
correct quantity of goods and services are produced to meet demand at the right
time. ✓✓
Accept any relevant introduction
BODY
Minimum wages
• When the government enforces a minimum wage, it means workers have to

be paid a certain wage amount and not anything less than this. ✓✓
• The graph above shows that if the wage rate is set at W, the corresponding
demand and supply of labour will be Q. ✓✓
• If a minimum wage of W1 is set, the demand for labour will decrease from Q
to Q1. ✓✓
• Some people may become unemployed due to the introduction of a minimum
wage. ✓✓
• However, the quantity of labour supplied will increase from Q to Q2 ✓✓
• More people will offer their labour because of the higher wage. ✓✓ (Max 13)
Setting maximum prices/price ceilings
pg. 36 of 42
• The government sets a maximum price ceiling below the market price to
make goods more affordable. ✓✓
• Maximum prices allow the poor greater access to certain goods and services.
✓✓
• A maximum price is set on goods such as basic foods, housing and transport.
✓✓
• In South Africa the price of petrol, diesel fuel and paraffin are controlled at
their maximum prices. ✓✓
• Initially the market equilibrium price is P and equilibrium quantity is Q. ✓✓

• The government intervenes and passes a law that a product cannot be sold
for more than P1. ✓✓
• The effect of this maximum price is that quantity supplied decreases to Q1
and quantity demanded increases to Q2. ✓✓
• There is a shortage equal to the difference between Q1 and Q2. ✓✓
• A shortage creates a problem of how to allocate the product to consumers.
✓✓
• Black markets often develop where people can obtain the product. A black
market is an illegal market in which either illegal goods are bought and sold or
illegal prices are charged. ✓✓
• Maximum prices may cause a shortage of goods but they do improve the
welfare of some consumers since goods can be purchased at lower prices.
✓✓ (Max 13)
(26)
ADDITIONAL PART
pg. 37 of 42

TEST
How successful is the South African government in solving income inequality?
The South African government has been successful in the following:
- Transferring income directly to the poor✓✓ e.g. child support grants,
unemployment benefits etc. ✓
- Implementing a progressive system of taxation, which reduces the gap
between high and low income earners ✓✓
- Providing free primary health care in provincials hospitals and clinics✓✓
- Offering free basic education to those who cannot afford to pay-✓✓ no fee
schools. ✓✓
- Excluding VAT in basic items that the poor often consumes✓✓e.g. maize✓✓
Accept any relevant correct argument. (10)
CONCLUSION
It is important for the government to intervene, when markets fail, for the benefit of
the society. ✓✓
Accept any relevant conclusion. (2) [40]
pg. 38 of 42
QUESTION 5
Discuss in detail the following state intervention as a consequence of market
failures, without the aid of relevant graphs –
- Direct control
- Imperfect markets
- Subsidies on goods and services
- Redistribution of wealth
- Government involvement in production
Why is an increase in the minimum wage during an economic recession not an
effective state intervention?
INTRODUCTION
Market failure occurs when the forces of demand and supply do not ensure the
correct quantity of goods and services are produced to meet demand at the right
time. ✓✓
Accept any relevant introduction
Main part: Body
Direct controls:
• Government can choose to pass laws or use the existing legislative
framework in an attempt to control and constrain the behaviour of businesses
and industries, and individuals who generate negative externalities. ✓✓
• The emissions of potentially dangerous chemicals, air and scenic pollution,
environmental preservation etc. are controlled by various laws and
regulations. ✓✓
• Advertising in the tobacco industry is prohibited and alcohol may not be sold
on Sundays. ✓✓
• The government can also use regulations to prohibit the production and
consumption of demerit goods such as addictive drugs and child pornography.
✓✓
• The government usually also deals with the problems of imperfect information
by means of regulations designed to ensure greater access to information:
✓✓
• The government can require firms to disclose information about their
operations so that shareholders have better information. ✓✓
• Government also require firms to disclose information about their products –
e.g. goods and pharmaceutical companies must provide details about their
products on their packaging. ✓✓
• Sometimes government provides the information themselves – e.g. cigarettes
carry a government health warning. ✓✓
• In other instances government require firms’ products to meet certain
standards – e.g. cars must satisfy certain safety standards set by the
government. ✓✓
pg. 39 of 42
• The SABS regulates standards in South Africa – all firms must produce goods
that meet with certain health, safety and quality standards. ✓✓
• Regulations for advertising exist to prevent false claims and deceptive
advertising. ✓✓
Imperfect markets:
• Businesses operating in non-competitive markets maximise their profits by
supplying less than the optimal quantity of the good or service at too high a
price. ✓✓
• Governments have various instruments they can use to correct or limit the
allocative distortions resulting from non-competitive markets. ✓✓
The main instruments the South African government uses are:
• Competition from abroad – in some instances only foreign competition has the
capacity to restrain the harmful practices of local monopolies. ✓✓
• Removal or reduction of tariffs - in some instances has rendered local markets
more competitive, as in the case of agriculture. ✓✓
• Promoting competition through introduction of Competition Policy –
government established Competition Commission, Competition Tribunal and
Competition Appeals Court to ensure the level of competition is enhanced.
✓✓
• Imposing price controls (maximum prices), thus reducing the firms’ economic
profits and ensuring that more people are able to consume the product. ✓✓
Taxes and subsidies
Levying of taxes:
• The appropriate way for government to intervene in the markets is by levying
a tax as a method to recover the external cost. ✓✓
• It does this because society feels that demerit goods are over-produced and
overconsumed. ✓✓
• The effect of the tax is to raise the cost of production of the firm, which will
cause the supply curve to shift to the left (decrease). ✓✓
• A tax would raise the price and production would decrease. Less demerit
goods are now produced and consumed. ✓✓
• Sin taxes or excise duties are levied on demerit goods such as cigarettes and
alcohol. ✓✓
Subsidies on goods:
• A subsidy is normally in the form of a financial grant to support the production
of goods. ✓✓
• It can be direct (such as cash grants and interest-free loans) or indirect
(depreciation write-offs, rent rebates and meeting expenses on behalf of
producers). ✓✓
• They can be used for a variety of purposes, including production, income,
employment and exports. ✓✓
pg. 40 of 42
• Provision of merit goods by the private sector is one such purpose – in the
case of education the government normally pay a subsidy to promote such
education. ✓✓
Redistribution of income and wealth:
• The market system is neutral with regard to redistribution of income and
wealth. ✓✓
• Therefore the government is forced to use combinations of taxes, transfer
payments and subsidies to create a redistribution effect. ✓✓
Two methods can be used:
Traditional methods:
• Usually a progressive system of taxation is used – the more people earn, the
more tax they pay. ✓✓
• The government uses this tax money to:
- Subsidise goods and services to the poor; ✓
- Transferring income directly to the poor households (pensions, child support
grants, disability grants); ✓
- Providing certain goods and services free of charge; o Job-creation
programmes; ✓
- The government also uses tax money to finance the provision of merit goods.
✓✓
Government’s production involvement
• Governments are involved in producing goods and services themselves.
Public goods:
• Government’s approach to incomplete markets is to intervene and supply the
desired goods directly. ✓✓
• They raise taxes and provide the goods themselves. o Income taxes, indirect
taxes and wealth taxes are used to pay for these goods and services. ✓✓
• Community goods are provided free of charge (defence, police and
correctional services and street lightning. ✓✓
• Some collective goods are provided for a user fee, such as refuse removal,
waste disposal and sewerage drainage. ✓✓
• The provision of some other collective goods is subsidised, for example clean
water and electricity. ✓✓
• The government can also provide merit goods directly, for example healthcare
and education ✓✓
ADDITIONAL PART
pg. 41 of 42

TEST
Why is an increase in the minimum wage during an economic recession not an
effective state intervention?
• A minimum wage will cause the quantity of labour demanded to decrease and
cause the oversupply(unemployment) of labour to increase.
• At a higher minimum wage more people are wiiling to offer their labour, the
increase in quantity of labour supplied results in the oversupply of
labour(unemployment) to increase.
• Only the labour that remained employed will benefit from the higher minimum
wage. 
• All the workers who the lost employment due to the increased minimum wage
will endure hardship of no income.
• During a recession there is an increase in unemployment, a increase in the
minimum wage will cause unemployment to increase even more.
• The negative effects the unemployment caused by the minimum wage wil be
much more than the benefit to of higher wages for some of the employed
workers.
Conclusion
It is important for the government to intervene, when markets fail, for the benefit of
the society.
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Micro Essays 2021 Only GR 12 - 220907 - 141106

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Compiled by Noel Mashonga

According to Examination Guidelines for 2021

ECONOMICS PAPER 2 ESSAYS 2021

Advise learners NOT TO FOCUS on essays only

PREPARATORY/NOVEMBER 2021 SCOPE ESSAYS

- Lack of information - Pay for environmental

STRUCTURE OF ESSAY MARK

TOPIC 5: PERFECT MARKETS

Labelling of the axes = 1 mark

Labelling of the axis = 1 mark

Labelling of the axis = 1 mark

TYPICAL EXAM QUESTION: THESE HIGHER ORDER

• Producing a lower output would only add to the financial losses, so a

TOPIC 6: IMPERFECT MARKET

Nature of the product ✓

Access to scarce resources ✓

• Monopolists influence the product-price combination of the product they sell

Control over the price ✓

The geographical area ✓

Size of the market ✓

TYPICAL EXAM QUESTION: THESE HIGHER ORDER

ADDITIONAL PART CHANGE ON EACH AND EVERY EXAMINATION OR

Evaluate the effects of monopolies on an economy. (10)

Accept high order conclusion.

• The economic loss is indicated by the shaded area on the graph. 

TYPICAL EXAM QUESTION: THESE HIGHER ORDER

• Oligopolies can make an economic profit over the long term. 

TYPICAL EXAM QUESTION: THESE HIGHER ORDER

Examine oligopoly under the following headings

• The upper segment of the oligopoly graph is more elastic in nature. 

TYPICAL EXAM QUESTION: THESE HIGHER ORDER

6.5. COMPARE AND CONTRAST MARKET STRUCTURES

BODY: MAIN PART

• In a oligopoly firms have incompleteand information.

TYPICAL EXAM QUESTION: THESE HIGHER ORDER

ADDITIONAL PART CHANGE ON EACH AND EVERY EXAMINATION OR

• The government should use laws on competition to prevent exorbitant prices

Nature of the product

Price determination and demand curve

• the price in the market is determined by the intersection of demand and

TYPICAL EXAM QUESTION: THESE HIGHER ORDER

• A market structure is a frame work of how a market is organized ✓✓

Perfect Competitor Monopolistic Competition

There is no need for marketing Marketing strategy is applied in

Homogeneous e.g. maize ✓✓ Products are heterogeneous.

Both buyers and sellers have Market information is complete.

Completely free ✓✓ Easy and free. There are no

(Accept any other relevant fact)

TYPICAL EXAM QUESTION: THESE HIGHER ORDER

TOPIC 7: MARKET FAILURE

- Immobility of production factors (26 Marks)

• Motivate why the government has implemented a national minimum wage in

BODY: MAIN PART

Public goods have the following features:

• Non-rivalry: ✓ The consumption by one person does not reduce the

• These are goods/services that are deemed necessary or beneficial to the

• These are goods/services that are regarded as bad or harmful for

• Technical and allocative efficiency require that both producers and

Immobility of factors of production

• Markets do not respond to changes in consumer demand if resources

MAX 8 for headings and examples + 18 for discussion/explanation= Max 26

Body: Additional part

TYPICAL EXAM QUESTION: THESE HIGHER ORDER