PERFECT MARKET 

DISTINGUISH BETWEEN INDIVIDUAL BUSINESSES AND THE INDUSTRY.  

• An individual business is a single, distinct economic entity engaged in the production  or sale of goods and services.
• An industry is a broader category that encompasses all businesses engaged in similar  or related economic activities. It represents a group of companies that produce similar  products or offer similar services.
• Individual businesses form a small part of the market (industry), therefore, they do not  influence market price. Individual business is a price taker.
• Market price is determined by the interaction of demand and supply.
• DD (demand curve) slopes downwards from top left to bottom right and SS (supply  curve) slopes upwards from bottom left to top right.
• The point where demand and supply intersect, is called the equilibrium.
• Individual business can offer any quantity on the market at the market price.
• Business will not charge a higher price, because buyers will buy elsewhere and they will not charge a lower price, because they can sell all their goods at the current  market price. 

USE GRAPHS TO EXPLAIN THE DERIVATION OF THE DEMAND CURVE FOR THE  INDIVIDUAL BUSINESS.

• Demand curve for individual business is a horizontal line at market price.
• For each unit sold, business receives the same price – the market price, Therefore Po = AR = MR equals individual demand curve.
• The average revenue the business receives is therefore equal to the market price and  the horizontal demand curve represents the average revenue curve (AR).
• The revenue from any additional unit the business sells, that is the marginal revenue,  is equal to market price Po, and the horizontal demand curve therefore also  represents the marginal revenue curve (MR). 

USE GRAPHS TO EXPLAIN PROFIT MAXIMISATION USING: MARGINAL COST AND  MARGINAL REVENUE CURVES 

• Marginal Revenue is the additional revenue that a firm earns from selling one more  unit of a good or service. It is the change in total revenue that results from a change in  the quantity of output sold.
• Marginal Cost is the additional cost incurred by producing one more unit of a good or  service. It is the change in total cost that results from a change in the quantity of  output produced.
• The firm makes the highest profit where MC = MR, therefore this point is known as the  profit maximisation point.
• The firm should produce the quantity 80 and sell at the price 4 in order to make the  maximum profit.
• At any quantity to the left of the profit maximisation point, the firm ‘s cost for producing  any one additional unit is lower than the revenue received from such unit (MC < MR),  The firm can still increase its total profit by increasing production.
• At any quantity to the right of the profit maximisation point, the cost of producing any  additional units of a product is higher than the revenue received from such unit (MC >  MR). Therefore, any of the additional unit produced will reduce the firm‘s total profit  because such units bring no additional profit. 

N.B: 

▪ While the practice of drawing and labelling graphs is essential to learners’  understanding of various concepts and content related to a topic, teachers  should also encourage learners to provide explanations of given graphs on a  regular basis where credit must be given to explanations related to the graph. 

DISCUSS ECONOMIC PROFIT AND ECONOMIC LOSS IN A PERFECT MARKET

ECONOMIC PROFIT 

• Economic profit is the positive difference between a firm's total revenue and its total  economic costs
• Business maximizes profit at point e2 and this is the equilibrium point e2 and at this  point SMC = MR.
• The business produces at market price P2 and the quantity produced is Q2.
• The averages cost for Q2 units is point R on the SAC curve.
• Price P2 (or AR) is greater than SAC. (TR > TC)
• The firm makes economic profit, AR is greater than/ lies above AC 

N.B: 

• While there has been a general improvement in the drawing of graphs over the  years, the technical aspects need to be reinforced.  
• This would include the correct shape, positioning and labelling of cost and  revenue curves in the perfect and imperfect markets.
• Learners still lack the skill of interpreting the graphs they have drawn.

ECONOMIC LOSS 

• Economic Loss occurs when a firm's total revenue is less than its total economic  costs, which include both explicit and implicit costs.
• Business minimise loss at point E and this is the equilibrium point E and at this point  MC = MR.
• The business produces at market price P and the quantity produced is Q.
• The averages cost for Q2 units is point M on the SAC curve.
• Price P (or AR) is less than AC. (TR < TC)
• The firm makes economic loss, AR is less than/ lies below AR 

EVALUATE THE SUCCESSES/FAILURES OF THE COMPETITION POLICY. (RELATE TO  CURRENT EXAMPLES) 

N.B:  

• In teaching Economics, a crucial element is to motivate learners to think  laterally about the topic.
• Where possible, teachers must relate the different topics to real-world issues.
• This will help learners prepare for higher-order questions.
• Learners must gain practice in evaluating, assessing or critiquing issues/topics  whenever possible.
• Teachers are encouraged to set their own higher-order questions, to extend the  engagement and knowledge acquisition of the learners in their respective  classes.
• They should realise that textbooks are not adequate in providing all relevant and  current responses to questions. 

TEACHERS SHOULD AVOID AN OVER-DEPENDENCE ON TEXTBOOKS.

Successes: 

• The Competition Commission’s intervention in the grocery retail sector has promoted  competition among major retailers like Shoprite, Pick n Pay, and Woolworths and  this competition has led to better prices and services for consumers
• The Commission’s investigations into price-fixing and collusion, such as the case  against major cement companies, led to significant fines and corrective measures.  This has helped prevent unfair pricing and protect consumer interests.
• Policies and interventions to reduce barriers for SMEs have fostered a more  competitive environment. For instance, the Commission has scrutinized mergers and  acquisitions to ensure that they do not stifle the growth of smaller businesses.
• The Competition Commission’s actions against large firms engaging in predatory  pricing, such as the case against the telecommunications sector involving MTN and  Vodacom, have helped address practices that undermine fair competition.
• The introduction of the Competition Amendment Act in 2018 brought significant  improvements, including enhanced powers for the Competition Commission and the  introduction of a fast-track process for dealing with anti-competitive practices. 

Failures: 

• Despite rigorous enforcement, some high-profile cases, like the ongoing investigation  into the pharmaceutical sector for excessive pricing of essential medicines, have faced  delays and difficulties in achieving timely resolutions.
• In sectors like energy and telecommunications, where market concentration remains  high, there have been limited improvements in competition.
• The persistent dominance of large firms in key sectors, such as banking and retail,  highlights challenges in effectively curbing monopolistic and oligopolistic behaviours.
• The Competition Commission has sometimes struggled with limited resources and  capacity to effectively monitor and enforce competition laws across all sectors, leading  to concerns about the adequacy of its interventions.
• The Commission’s handling of large mergers, such as the merger between AB InBev  and SABMiller, raised concerns about whether such deals adequately address  potential anti-competitive effects and ensure fair market conditions. 

EXPLAIN THE DOWNWARD SLOPE OF THE DEMAND CURVE (AR) OF A MONOPOLY

• In a monopoly, the downward slope of the demand curve (Average Revenue, AR)  reflects how the price a monopolist can charge decreases as the quantity of goods  sold increases.
• Since the monopolist is the only seller of the product, it faces the entire market  demand curve.
• Since AR is the price received for each unit sold, the downward slope of the demand  curve also represents the decrease in AR as more units are sold.
• In a monopoly, as the monopolist increases the quantity of the goods sold, it must  lower the price to sell additional units.
• The downward slope of the demand curve indicates that higher sales volumes are  associated with lower prices. This is because consumers will only buy more if the price  is reduced. 

EXPLAIN, WITH THE AID OF A GRAPH, ECONOMIC LOSS OF A MONOPOLY. 

• Economic loss in a monopoly occurs when the monopolist's total revenue is  insufficient to cover its total economic costs.
• The monopolist minimises loss where marginal revenue equals marginal cost.
• The area representing economic loss is where the AC curve is above the AR  (demand) curve.
• The cost per unit (P1) is above the price P, indicating that the firm is incurring a loss.

EXPLAIN THE LONG-RUN EQUILIBRIUM POSITION OF A MONOPOLY WITH THE AID  OF A GRAPH 

• When the monopolist makes losses in the short term, they will expand their plant size  so that they can make profits.
• If they do not get it right, they will have to close their business.
• When the monopolist makes profit in the short term, they will try to expand their plant  size to make more profits.
• The long term marginal cost (LMC) and the long term average cost curve (LAC)  appear in the graph.
• Long term profit is maximised where MR = LMC at point A.
• The profit area is represented by P1 C B E 

EXAMINE THE OLIGOPOLY IN DETAIL:  

CONCEPT 

• An oligopoly consists of a small number of large firms that dominate the market. The  exact number of firms can vary, but typically there are just a few key players. 

CHARACTERISTICS 

Number of businesses  

• It exists when only a few firms dominate the market for a particular product.
• There is limited competition. 

Nature of product  

• The product is homogeneous or differentiated.
• In a pure oligopoly products are homogenous whereas in a differentiated oligopoly are  differentiated. 

Entrance  

• Market entry into an oligopolistic market is not easy since there are only a few  businesses in market.
• This is because of brand loyalty and it also requires a large amount of capital outlay.

Information 

• Market information in an oligopoly market is incomplete.
• Consumers do not have full information about the various products that are available  in the market, prices, quality of the products, etc. 

Examples

• Pure oligopoly, for example, identical goods, such as steel, cement, sugar.
• Differentiated oligopoly, for example, highly differentiated goods: motor cars,  newspapers, airlines 

Mutual dependence

• This market is characterised by mutual dependence
• The decision of one business will influence and will be influenced by the decisions of  the other companies
• Due to the mutual dependence of firms on each other, competitors react to price  changes.
• Oligopolies can frequently change their prices in order to increase their market share,  however this can result in a price war. 

Control over the price

• Producers have little control over the price of their products less control than that of a  monopoly 

Collusion 

• There are few producers of a particular product in an oligopoly market - this makes  collusion possible
• No oligopoly can be sure of the behaviour and policy of their competitors
• Businesses function in an uncertain environment
• To reduce these uncertainties, businesses often collude
• Producers agree on things such as prices and production quantities
• Collusion can take a form of cartel or price leadership  

Cartel/Overt collusion  

• It is when oligopolies collude openly and formally
• It is an organization of oligopolistic businesses that comes into existence in an industry  with the specific aim of forming a collective monopoly. for example, OPEC (oil)  

Price leadership/Tacit collusion  

• One business increases its price in the hope that its rivals will increase their prices - such a firm is known as a price leader
• When the other businesses follow with the increase, they are known as price followers
• Price leaders are usually the strongest and most dominant business whose production  cost is the lowest, for example, steel industry, transport industry 

Profit /loss 

• Oligopolies develop brand loyalty among their customers enabling them economic  profit in the long run. 

Allocative and productive efficiency

Productive efficiencies

• An oligopoly market is productively efficient can be productive efficient – the  businesses produce at the lowest possible cost
• There is no room to lower cost without producing less or poor quality goods 

Allocation efficiencies

• Product mix of an oligopoly market does not reflect the consumer’s tastes
• Resources are not allocated in the right proportions. 

KINKED-DEMAND CURVE

The market price is R10 and the quantity is 9  

The oligopoly firm has three options: 

1. The firm can increase the price.  

• If the firm increases the price above the market price at R10 (from R10 to R12), it is  more likely that other firms will not increase their prices.
• The firm will end up losing customers (market share) to other firms because  consumers will buy where the price is lower.
• An increase in price (from R10 to R12) will cause a greater decrease in quantity  demanded (9 to 2) because consumers will switch to cheaper products of other firms.
• The firm will face a relatively elastic demand curve above the point “K” and this is  indicated by the demand curve “KF”. 

2. The firm can lower the price.  

• If the firm lowers the price below R10 (from R10 to R8), it will start a price war  because other firms will lower their prices as well.
• It is more likely that the competitors will set their prices even lower than the firm.
• There will not be a great increase in quantity demanded even with a relatively large  high price cut.
• That is why a decrease in price (R10 to R8) will cause a smaller increase demand (9  to 10).
• The firm will face relative inelastic demand curve below the point “K” and this is  indicated by the demand curve “KG”. 

3. The firm can keep the price the same.

• The firm should, therefore, not change the price and should continue to sell at price  R10.
• Therefore:  The best strategy is to stick to the existing price level.
• In order to avoid a price war firms will compete on other factors rather than price, this  is known as non-price competition. 

BRIEFLY DISCUSS PRODUCT DIFFERENTIATION IN A MONOPOLISTIC MARKET

• This refers to the process by which a firm distinguishes its product from those of  potential substitutes or competitors
• The goal is to create a perception of uniqueness that appeals to specific consumer  needs or preferences, thereby reducing direct price competition.
• The monopolistic may offer a product that is of superior quality compared to any  potential or perceived substitutes.
• The product may have unique features or design elements that set it apart from other  products that consumers perceive as alternatives.
• Product differentiation creates the opportunity to increase the demand for the product  and to make the demand less price elastic.
• It is done by means of product variations and marketing campaigns.
• Differentiation may even be imaginary – it depends on the perception of the consumer,  e.g. medicine

EXPLAIN NON-PRICE COMPETITION (EMPHASISE, AMONGST OTHERS,  ADVERTISING AND BRANDING AMONG OTHER EXAMPLES OF NON-PRICE  COMPETITION) 

• Non-price competition refers to strategies that firms use to compete with each other  without altering the price of their products or services.
• Instead of competing on price, firms focus on differentiating their offerings through  various methods to attract and retain customers. 

Advertising 

• Advertising involves promoting a product or service through various media channels  (television, radio, online, print, etc.) to enhance visibility and appeal.
• Effective advertising aims to inform, persuade, and remind customers about the  product’s features, benefits, and availability. 

Branding 

• Branding is the process of creating a distinct identity for a product or company through  names, logos, symbols, and overall image.
• Strong branding helps build customer loyalty and trust, making consumers more likely  to choose a branded product over others, even if prices are similar.
• E.g. Iconic logos (e.g., Nike’s Swoosh) and memorable slogans (e.g., McDonald’s “I’m  Lovin’ It”) reinforce brand identity. 

BROAD OUTLINE OF PRICES AND PRODUCTION LEVELS OF MONOPOLISTIC 

• Demand curve slopes from top left to bottom right.
• Entry into the industry is unrestricted.
• Economic profit in the short term eventually attracts new businesses with competitive  products.
• In the long term, this will eliminate economic profit.
• Short term equilibrium of the monopolistic competitor corresponds with that of the  monopolist.
• In other words, the equilibrium quantity he/she is going to produce in the short term  and at which price it will be sold will yield an economic profit for the firm. 

DESCRIBE POSITIVE EXTERNALITIES WITH THE AID OF WELL-LABELLED GRAPH 

If people acknowledged the social benefit of a good, they would demand more of that good.  The price of such a good would therefore increase.

• The supply of education, which is also the marginal social cost, is represented by SS.
• The demand for school education, which is also the marginal private benefit (MPB) of  the industry, is represented by DD. The cost of school fees is P and the quantity  demanded and supplied is Q.
• If the cost of school fees is P, most learners will not be able to afford it. ▪ The demand curve D1D1 also represents the marginal social benefit. (MSB), that is,  the level of education that should be demanded.
• As a result of the benefits of education, MSB is greater than MPB. • If the market is left  to its own devices, a quantity Q will be produced at price P.
• There would be social inefficiency in the market since not enough education is being  demanded.
• However, if social benefits are acknowledged, a quantity Q will be produced at price P.
• More education would be demanded; this will lead to social efficiency.
• The shaded angle represents the positive externality (the welfare gain) to society.
• The government encourages positive externalities by:
  • Advertising on the radio or television.
  • Providing education, health care and other services at a low cost or free.
  • Providing consumer subsidies.
  • Consumer subsidies lower the cost of a good and encourage its usage. 

DISCUSS MINIMUM PRICES AND TAXES WITH THE AID OF GRAPHS AS  GOVERNMENT INTERVENTION ON MARKET FAILURE 

Minimum Prices 

• A minimum price is the lowest legal price that can be charged for a good or service.
• It is important for all countries that their agricultural sector produces enough food to  feed the population.
• Some foodstuff is more important than others because it is a staple food.
• Poor people will suffer if there is no staple food available and it could lead to famine.
• Governments intervene in the market to ensure that enough quantities of food are  produced.
• Sometimes they introduce a minimum price on staple food. They want to make it  worthwhile for farmers to produce enough food.
• It is often set by government regulation or market agreements to protect certain  interests, typically those of producers or workers.
• In S.A. maize and wheat are staple food.
• Before 1994 farmers were guaranteed a minimum price on these foodstuffs.
• Setting of minimum prices has side-effects.
• When government is not involved in the market quantity Q will be produced and sold  at Price P
• Government intervenes, and a minimum price is established above the market price at  P1. Price increases from P to P1. The quantity demanded decreases from Q to Q1. The quantity supplied increases from Q to Q2.
• surplus (excess supply) exists on the market.
• Quantity supplied is more than the quantity demanded.
• Farmers have a surplus = a problem which they will have to solve.
• They can dump it on other markets. (Dumping = selling of goods on foreign markets at  a price that is less than the country of origin.)
• The WTO prohibits this.
• The only manner to get rid of this surplus is to destroy it or feed it to animals.

Taxes 

• Taxes can serve as a tool for government intervention to address market failures,  which occur when the allocation of goods and services by a free market is not efficient
• Taxes internalise external costs (negative externalities).
• The appropriate way for governments to intervene in markets is by levying a tax to  recover external costs.
• Taxation causes that prices of products increase form (P to P1) and that causes  production to decrease from (Q to Q1).
• In S.A such taxes are levied on cigarettes and alcohol.
• These taxes are called excise duties.