Wednesday, June 22, 2016

152. Why Africa is poor.

and what to do about it


Monday, June 20, 2016

151. What to do to fix our economy

... a set of recommendations to increase employment in SA before a generation of South Africans grew up with little hope of ever working.

We suggested that all government policies focus on growth and that current efforts at asset redistribution in the mining and agricultural sectors are misguided, that the minimum wage is too high, that employers need more flexibility to hire workers, that state-owned enterprises be fixed (starting with Eskom) and that much more attention be paid to how legislation developed in Pretoria is implemented at the local level.

We also said that it is absolutely necessary to fix SA’s grossly underperforming educational sector.

Nor are business and labour left off the hook. We sense some collusion between big business and big labour around the high-wage economy.

Big business can cope with high wages by employing fewer workers and using more machines and robots, while big labour’s members benefit from high salaries.

The losers are small and medium-sized businesses that cannot change production mixes easily, and the unemployed.


Friday, June 17, 2016

150. is wrong! This is what they say the advantages and benefits of Socialism is. • Great efficiency - Economic efficiency under socialism means that production decisions are controlled and regulated by the central planning authority towards a particular goal. • Greater social welfare - In a socialist economy there is less inequality of income because of the absence of private ownership of means of production. • Absence of monopolistic practices • Absence of business fluctuations - A socialist economy coordinates the action of various producing units, prevents discrimination between saving and investment and makes full use of available resources. Discuss.

149. An Examination paper - Economics 1A

* With the aid of clearly labeled diagrams, explain the difference between a change in the quantity demanded and a change in demand. * Use a fully labeled diagram of the market demand curve and the market supply curve to illustrate each of the situations below. For each case show clearly on the diagram the original market clearing price and quantity (equilibrium) and the shift in the relevant curve. Use arrows on the diagram to indicate the direction of any change in equilibrium price and quantity. a) In the market for Smart LED TV sets, what happens when the cost of a digital colour generator (an input in the manufacturing process increases, ceteris paribus?

b) In the market for Samsung tablets, what will happen if the price of Apple iPads rise considerably, ceteris paribus? SOME PREVIOUS MANCOSA EXAM PAPERS FOR ECONOMICS 1A is available HERE here are 1b & 1a papers

Thursday, June 9, 2016

148 The kinked demand curve.

Why is the kinked demand curve so popular in Economics examinations? I do not know, but the Wikipedia article is a pretty good way of familiarising yourself with the concept.

Wednesday, June 8, 2016

147 Free Market Capitalism - Why do some hate it so much?

Is it because they do not understand what it means? 

Defining the free market system

The market system has spontaneously developed through the ages in much the same way as language and law. It was not planned or designed (not like the other contrived economic systems) – it is the result of what social scientists call “spontaneous order”.
Looking at the system there seems to be a number of building blocks that keep the system in place – here they are:
1st Building Block: Institutions
The features that make a particular society “free market” as opposed to socialist or “mixed” is the degree to which it upholds the institutions that protect:
•             Private property and private property rights
•             Consent as the basis of agreement between individuals and groups
•             Minimum intervention from the state in the private affairs of people
These institutions typically include a free press, an independent judiciary, an effective and uncorrupted police force and a vibrant civic community.
2nd Building Block: Government upholds rights
In a market economy
•             the government simply allows & protects the private ownership of property
•             the right to the voluntary exchange of labour, goods and services between consenting participants
•             there is no fear of confiscation through taxes and expropriation for the common good
•             willing buyers and sellers meet in an unfettered marketplace
•             the value of goods and services are determined by buyers and sellers that are allowed to trade freely
•             goods are traded without subsidies and price controls, and tariffs are absent
•             no special licenses and controls are forced onto business.
So, the involvement of the state is limited to one of overseer and not a participant and there are various checks and balances in place to limit the actions of the state and to keep the government small.
3rd t Building Block: Free trade
In such a free market economy
•             People own the factors of production and trade with their property and labour in any way they see fit
•             Participants do not act in a way that would infringe on others to behave in a similar way; and if they do there are remedies that they can apply emanating from an easily accessible and unbiased legal system
 4th  Building Block: Honesty
•             Excluded from relationships is the use of force or the threat of force (or acting in a fraudulent way)
•             Individuals take responsibility for their actions and cause no damage to others lives and property (again, if they do, there are remedies available to arbitrate and compensate).
•             There is a free movement of people, goods and services (not like in Apartheid South Africa where free movement was severely restricted)
•             The role of the state is not to promote the interest of any one group (not like the current dispensation in many countries where there are legislation that stipulate certain group rights).
•             The government sees its role as the protector of property rights of all – an ultimate arbitrator
•             The constitution and laws value individual liberty and the rights of groups to promote their groups as long as it does not done in a way that it offends basic human and individual rights.
•             Economic growth is high is because of having low tax and simple and fair tax regimes – this has become evident in countries such as Ireland, Mauritius where taxes have been reduced and the import processing zones instituted in many countries, where tax rebates and other tax incentives have led to increased economic activity
•             People spend more time and effort on creating wealth through productive means than on efforts to protect themselves from the tax authorities
•             Government upholds a policy of protecting the value of the currency and therefore takes no inflationary actions. Less effort is spent on speculative endeavours.
•             Nobody is granted any special privileges on the basis of race or gender
•             No special subsidies, tax concessions, import controls, tariff protections granted to favour some special interest groups
•             Political power and influence is curtailed to the essential services of foreign relations, the army, the judiciary and internal safety and security and perhaps a few others
•             Rules are kept simple and understandable
•             There is no unrealistic building, zoning, and other restrictions on trade
•             No costly processes involved in setting up of businesses, the subdivision of land and the meeting onerous regulatory requirements.
•             You normally have a society where the government allows communities a bigger say in those decisions that affect them directly.      
5th Building Block: Actions driven by self interest and markets
•             The individual is the main actor in Capitalism – the individual is not sacrificed for group interests – all relationships are voluntary with no force or fraud. All transactions are beneficial to both consenting parties. The market and market prices prevail in allocating resources amongst the members of society.

With this overview of the Free Market system, you should be in a better position to judge to what extent a particular arrangement or policy can be regarded as Free Market, “mixed” or Socialist in nature. 
C.M. Heydenrych 2015

Monday, June 6, 2016

146. Sowell, Socialism and the minimum wage

Friday, June 3, 2016

145. Returns to scale.

For all the Economics 1B learners - Returns to scale refers to the rate by which output changes if all inputs are changed by the same factor. Let's first look at the law of diminishing returns:

Now -
Constant returns to scale: a x-fold change in all inputs leads to a x-fold change in output.

If output increases by less than that proportional change in inputs, there are decreasing returns to scale (DRS). If output increases by more than that proportional change in inputs, there are increasing returns to scale (IRS). WIKIPEDIA

In economics, returns to scale and economies of scale are related but different terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable (chosen by the firm). The term returns to scale arises in the context of a firm's production function. It explains the behavior of the rate of increase in output (production) relative to the associated increase in the inputs (the factors of production) in the long run. In the long run all factors of production are variable and subject to change due to a given increase in size (scale). While economies of scale show the effect of an increased output level on unit costs, returns to scale focus only on the relation between input and output quantities.

The laws of returns to scale are a set of three interrelated and sequential laws: Law of Increasing Returns to Scale, Law of Constant Returns to Scale, and Law of Diminishing returns to Scale. If output increases by that same proportional change as all inputs change then there are constant returns to scale (CRS). If output increases by less than that proportional change in inputs, there are decreasing returns to scale (DRS). If output increases by more than that proportional change in inputs, there are increasing returns to scale (IRS). A firm's production function could exhibit different types of returns to scale in different ranges of output. Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high output levels, and constant returns at one output level between those ranges.

The shape of the PPF (concave to the origin) is also an explanation of the law of diminishing returns and it occurs because not all factor inputs are equally suited to producing all items

. A barrel is more suited to the brewing of beer than the production of bread. Therefore applying it for that function will not affect bread production a lot but greatly contribute to the production of bread - the PPF will therefore be almost vertical if bread is depicted on the x-axis and beer on the y-axis and this production factor is moved from producing bread to beer.

Cash Reserve Ratio(CRR): It refers to the minimum percentage of a bank's total deposits required to be kept with the central bank