ECS1501 EXAM PACK AND STUDY NOTES

ECS1501 EXAM PACK AND STUDY NOTES MUST READ!! SUCCESS! 2 TABLE OF CONTENTS STUDY UNIT 1: What economics is all about………………………………………………..…….....…p4 May 2011…………………………………………………………………………………….…..….…p9 May 2011 solutions……………………………………………………………………………..….…p12 November 2011………………………………………………………………………………….…...p13 November 2011 solutions………………………………………………………………….…………p15 May 2012………………………………………………………………………………………..…….p16 May 2012 solutions……………………………………………………………………………….…...p20 November 2012……………………………………………………………………………………..…p21 November 2012 solutions …………………………………………………………………………….p23 STUDY UNIT 3: The interpendence between the major sectors, markets and flows in the mixed economy…….............................................................................................................................................p24 May 2012 solutions…………………………….……………………………………………………...p25 November 2012 questions & solutions……………………………………………………………..…p26 STUDY UNIT 4&5: Demand, supply & prices, AND demand & supply in action ………….………..p27 May 2011………………………………………………………………………………………..….…p30 May 2011 solutions…………………………………………………………………………..…….…p34 November 2011 solutions………………………………………………………………………….…p36 May 2012 solutions……………………………………………………………………………….…...p38 November 2012………………………………………………………………………………………..p40 November 2012 solutions …………………………………………………………………………….p47 STUDY UNIT 6: Elasticity……………………………………………………………………………...p48 May 2011………………………………………………………………………………………….…p50 May 2011 solutions……………………………………………………………………………….…p53 November 2011…………………………………………………………………….………………...p55 November 2011 solutions…………………………………………………………………..…………p56 May 2012 solutions……………………………………………………………………………….…...p57 November 2012 solutions …………………………………………………………………………….p58 STUDY UNIT 7: Theory of consumer choice…………………………………………………………p November 2011 solutions…………………………………………………………………….………p61 November 2012……………………………………………………………………………………..…p62 November 2012 solutions …………………………………………………………………….……….p65 May 2013 solutions……………………………………………………………………………………p66 STUDY UNIT 8: Background to supply the theory of production and cost……………………………..p67 May 2011………………………………………………………………………………………..….…p69 May 2011 solutions…………………………………………………………………………..…….…p73 November 2011 solutions………………………………………………………………………….…p74 3 November 2012………………………………………………………………………………………p75 November 2012 solutions …………………………………………………………………………. p78 PERFECT COMPETITION………………………………………………………………………..P79 May 2011……………………………………………………………………………………..….…p83 May 2011 solutions………………………………………………………………………..…….…p86 November 2011 solutions………………………………………………………………..…………p87 May 2012 solutions……………………………………………………………….…………….…...p88 November 2012…………………………………………………………………….……………..…p89 IMPERFECT COMPETITON AND THE LABOUR MARKET…………………………………..P91 May 2011………………………………………………………………………………………………p93 May 2011 solutions…………………………………………………………………..…..…………….p98 November 2012………………………………………………………………….………….………..p100 May/june 2010 solutions………………………………………………………………………………p105 4 Study Unit 1 What Economics is all about Economics is a social science that studies how people use scarce resources to satisfy their unlimited wants. Microeconomics looks at this at an individual, household or firm level while Macroeconomics is a broader look which is an aggregate of all the individuals, households and firms in a given economy. The main aspects in Microeconomic theory are supply, demand, scarcity, choices and opportunity cost. The Economic Problem Every individual has a set of needs and wants that they seek to satisfy. Some are important for day-to-day living, such as food, water, clothing, shelter and health care. In Economics these are termed needs. Some of the things that the human being wishes to accumulate are not really necessary for a living. He/she can do without. Examples include sports cars, jewellery, fancy clothing and luxurious accommodation. These are termed wants. Our needs and want are never ending, yet the means to satisfy them are limited in supply. Hence the economic problem, “how to satisfy these never ending wants and needs, given limited resources”. This is the basis of Economics. Scarcity Almost every resource on this planet comes in limited supply. Money, housing, time, food, labour, machinery, cars all come in limited quantities such that we can`t all get everything that we need to satisfy our needs and wants. This limit in supply and availability brings another important principle in Economics, that of scarcity. 5 Opportunity Cost and Choice Opportunity cost is one of the very important concepts in Economic theory. It`s very important to note that opportunity cost depends on individuals as people value alternatives differently. Opportunity cost is the value of the next (second) best alternative forgone or sacrificed when a certain choice is made. The existence of scarcity brings up the concept of opportunity cost when a choice is made. Because our wants and needs are unlimited/endless, and the resources to satisfy them are limited, this leaves us with no option but to make choices between competing alternatives. For example, consider money, a resource which is available in very limited supply, yet used to satisfy an endless list of unlimited needs and wants. If let’s say you have R1 000 for use and you choose to use R500 on airtime, it automatically leaves you with R500 for use on other competing needs. When determining opportunity cost of any choice made it is very important to rank your alternatives in order of preference, from the most preferred to the least preferred. Take Tebogo for example. On a Saturday morning he has the following options that he ranked in order of preference: 1) Work 2) Study 3) Do Laundry 4) Chat 5) Watch Soccer 6) Do Shopping 7) Sleep Based on the above, Tebogo`s opportunity cost of Work will be Studying. His opportunity cost of Studying will be Laundry, and that of Laundry will be Chatting. The opportunity cost of Chatting will be the Soccer forgone. Note that every time the opportunity cost will be the value of the next best alternative forgone, not the values of all the alternatives forgone. The Economic Problem All authorised decision makers are faced with the questions to do with what to produce amongst the (limited) competing goods and services that satisfy unlimited needs and wants. Should we erect more hospitals or build more schools, use the land to construct factories for production of cars and computers or instead use that land for farming to produce maize, wheat and milk? After the what question has been answered, the how to produce question has to be addressed. Should we employ more labour or more capital? Now that we have decided to use that land for farming, how should we produce that maize, wheat and milk? After we have answered that, we have one more question to answer, for whom to produce? Should we produce the maize, wheat and milk according to the people`s needs. Say a family of 4 gets 100kg of maize, 50kg wheat and 20 litres of milk per month while a family of 6 gets 150kg of maize, 70kg wheat and 8litres of milk or should we produce only for those who can afford?