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Page 1

Economics
for South African students

FOURTH EDITION

Van Schaik
PUBLISHERS

Philip Mohr, Louis Fourie
and associates

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Published by Van Schaik Publishers
1064 Arcadia Street, Hatfield, Pretoria
All rights reserved
Copyright © 2008 P. Mohr

No part of this book may be reproduced or transmitted in any form
or by any electronic or mechanical means, including photocopying
and recording, or by any information storage and retrieval system,
without written permission from the publisher.

NOTE TO LECTURERS

Contact the marketing department at [email protected] or on
(012) 342 2765 for a CD-ROM with a test bank and a Microsoft PowerPoint slide
show that accompanies this book.

The title South African workbook for economics is also available as a guide to assist
students to master the material. The book is in a question-and-answer format.

Specifications

Authors: Corné van Walbeek, Waldo Krugell, Nicholas Samouilhan
ISBN: 978 0 627 02720 8

For any further information on this book contact the marketing department at
[email protected] or on (012) 342 2765.

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ISBN 978 0 627 02712 3

Commissioning editor Lydia Reid
Production manager Werner von Gruenewaldt
Editorial manager Daleen Venter
Copy editor & proofreader Yvonne Kemp
Cover design by Gisela van Garderen
Cover image Digital Source Image Library
Illustrations by Jon Inggs
Typeset in 9.3 on 11 pt Century Old Style by Pace-Setting & Graphics
Printed and bound by Interpak Books, Pietermaritzburg, South Africa

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1

3

What economics
is all about

In this chapter we introduce you to economics. We first use a
number of examples to indicate what economics is all about and
we then introduce the important concepts of scarcity, choice
and opportunity cost. We explain these concepts with the aid of
a production possibilities curve. Next we give some important
definitions, including various definitions of economics. We
explain the difference between microeconomics and macro-
economics, as well as the difference between positive and nor-
mative economics. This is followed by a brief discussion of the
major reasons for the apparent tendency for economists to dis-
agree. The chapter concludes with an explanation of some com-
mon mistakes in reasoning about economics.

Economics is a study of
mankind in the
ordinary business of life.

ALFRED MARSHALL

Economics is the art of making
the most out of life.

GEORGE BERNARD SHAW

Economics is the only
profession in which one can
gain great eminence without
ever being right.

GEORGE MEANY

Learning outcomes

Once you have studied this chap-
ter you should be able to

� explain what economics is all
about

� define economics
� explain what the economic

problem is
� define the important concept

of opportunity cost
� describe a production possibil-

ities curve or frontier
� distinguish between microeco-

nomics and macroeconomics
� distinguish between positive

and normative economics
� explain why economics is a

social science
� comment on why economists

disagree on certain issues
� identify some common mis-

takes in reasoning about eco-
nomics

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Fifty years ago economics was not as familiar a term
in South Africa as it is today. The political debate was
dominated by racial issues. There was no television,
and economic journalism was in its infancy. There
were few periodicals that dealt with economic issues,
and economic matters received little coverage in the
newspapers. Students who went to university to study
subjects like accounting, statistics and management
found that they also had to study economics, but they
usually had no idea what the study of economics
would entail.

All this has changed. Nowadays everyone has
heard about economics and everyone knows that it is
important. Economic affairs play an important role in
the political debate, and economic issues are reported
and analysed every day on television. There are a
number of weekly and monthly periodicals, many
websites and even some television channels that deal
almost exclusively with economic issues. Every news-
paper has a large and expanding section which focus-
es on economic and financial matters. Economics is
taught in our schools and many students go to univer-
sity specifically to study economics.

There is thus a much greater awareness of eco-
nomic issues today than at any time in the past. But
this does not mean that people know what economics
is all about. Many people are convinced that eco-
nomics is only concerned with making money. Some
believe that economics is concerned mainly with buy-
ing and selling shares on the JSE Securities Ex-
change. Others think that economics is the study of
balance sheets and profit statements. As we shall
point out in this book, all these views are extremely
narrow and do not capture the essence of what eco-
nomics is all about.

What then is economics? What is it concerned
with? The two definitions of economics quoted on the
previous page indicate that it is a wide-ranging discip-
line. These definitions point to the fact that the subject
is concerned with virtually every aspect of human
existence.

The following example gives some indication of the
wide-ranging nature of economics, and of the types of
question and issue that it is concerned with.

Let us take a fictitious character – we shall call him
Simon Mokgatle – who lives in Diepkloof. And let us
think about some of the decisions that he has to make
once he has finished his secondary education. Should
he continue with his studies at a residential technical
college, university of technology or university, or
should he try to find a full-time job? Or should he try
to find a job while at the same time continuing his
studies through Unisa? If he is going to further his
studies, which field of study should he choose? If he
decides to try and find a job, what type of job should
he apply for? What type of transport should he use to
travel to work or lectures: a taxi, a bus or a train?
What should he wear when he goes to work or when

he attends lectures? If he opts for and finds a job, how
should he spend his first pay cheque? If he cannot
find a job and cannot afford to study further or obtain
a bursary, what should he do? Should he remain in
Diepkloof and continue looking for work or should he
move to another area or town in pursuit of employ-
ment? If he does find a job and also enrols as a stu-
dent at Unisa, what should he do on a Saturday night
– study, watch television or go to the movies?

The list is virtually endless. Simon has to make
choices every day of his life. And this is what eco-
nomics is essentially about. It deals with the choices
that people have to make – what to eat, what to wear,
what career to pursue. The word economics is
derived from the Greek words oikos, meaning house
and némein, meaning manage. Economics is thus the
science of household management and as such is in-
deed concerned with the ordinary business of life.

But economics is not only concerned with the
choices that individuals like Simon Mokgatle have to
make. It also studies the decisions of businesses, gov-
ernment and other decision makers in society. Should
Toyota expand its production of motorcars? Should
Benson & Hedges increase the price of its cigarettes?
Or should it rather reduce the price in an attempt to
increase sales? Should government spend more on
education or on housing? Or should health be a
greater priority? And what about safety and security?
Should taxes be raised or lowered? Should the gov-
ernment raise more taxes through the value-added tax
(VAT) and less through personal income tax? Should
more basic necessities carry a zero VAT rate to help
the many poor people in South Africa? Or should the
government rather subsidise the prices of necessities
such as bread and maize, or perhaps even hand out
food parcels to the needy?

Like Simon, businesses and government also have
to make choices every day. But why are these choices
necessary? This brings us to the basic fact of eco-
nomic life – scarcity. Without scarcity it would not be
necessary to make choices. Individuals, businesses
and government all want to do many things, but the
means with which these wants can be met are limited.
Wants are plentiful – we all want a lot of things – but
the means are scarce. We therefore have to make
choices all the time.

The relationship between unlimited wants and
scarce resources is so central to economics that
most definitions of economics focus almost exclus-
ively on this relationship. A few definitions are listed
in Box 1-1.

The definitions in the box are all by authors of well-
known introductory economics textbooks. Apart from
these definitions and that of Marshall given at the
beginning of the chapter, two of the most widely-
quoted ones are those of Jacob Viner and Lionel Rob-
bins. Viner (1892–1970), a well-known 20th century
American economist, simply stated that “economics is

4

PA R T I I N T R O D U C T I O N

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As we proceed we shall provide more examples of the
need to distinguish carefully between levels and rates
of change.

There are many other examples of mistaken reas-
oning. Most of them are not confined to economics.
They are mistakes that people often make in reason-

ing about a wide variety of issues. But they are mis-
takes and we always have to be careful of falling into
one or more of these traps. Economics, like any other
science, calls for disciplined, structured and logically
correct reasoning.

15

WHAT ECONOMICS IS ALL ABOUT 1

BOX 1-3 LEVELS AND RATES OF INCREASE: SOME NUMERICAL EXAMPLES

Rates of increase are usually expressed as percentages. For example, if the consumer price index
increases from 200 to 220, the rate of increase is 10 per cent. This is calculated by expressing the dif-
ference of 20 (ie 220 minus 200) as a fraction of the original level (200) and multiplying the result by
100.

In other words, the percentage increase from 200 to 220

A large percentage of a low number is still a low number. On the other hand, a small percentage of a large
number can be quite large. For example, 50 per cent of 300 is equal to 1 per cent of 15 000:

Thus if John earns R300 per month while Harry earns R15 000 per month, a 50 per cent increase in
John’s monthly earnings will be required to match a 1 per cent increase in Harry’s monthly earnings.

Likewise, 20 per cent of 100 is less than 5 per cent of 500. It is therefore extremely important to dis-
tinguish carefully between levels and percentages or rates.

50 300 50
100

300
1

15 000
100

150

1 1
100

15 000
1

15 000
100

150

%

%

of

of 15 000

= × = =

= × = =

= − ×

= ×

=

=

220 200
200

100
1

20
200

100
1

2 000
200

10



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Social science (versus natural
science)

Ceteris paribus
Microeconomics
Macroeconomics
Positive economics

IMPORTANT CONCEPTS

Wants and needs
Means or resources
Scarcity (unlimited wants and

limited resources)
Choice
Opportunity cost (or trade-off)
Production possibilities curve

16

PA R T I I N T R O D U C T I O N

R EV I EW QU EST IONS

1. Use everyday examples to illustrate the relationship between scarcity, choice and opportunity
cost.

2. Construct your own version of a production possibilities curve (or frontier) and use it to explain
scarcity, choice and opportunity cost.

3. Give two examples of microeconomic problems in South Africa today as well as two examples
of pressing macroeconomic problems.

4. Give three examples of positive statements about the economy, and three examples of norma-
tive ones.

5. Use the principle of opportunity cost to explain:

(a) why students watch more TV the week after the examinations than the week before the
examinations.

(b) why a self-employed person plays more rounds of golf per week while on holiday than dur-
ing the rest of the year.

(c) why Ernie Els does not tend to his own garden (at Herolds Bay, Wentworth or in Florida),
even if he can perhaps do it better and faster than anyone else.

6. “The fact that economists often disagree proves that economics is not a science.” Do you agree
with this statement? Explain your viewpoint.

7. “The fact that the South Korean economy has grown rapidly since the Korean War (in the early
1950s) implies that South Korea is one of the richest countries in the world today.” Do you
agree? Explain your view.

Normative economics
Biased thinking
Fallacy of composition
Post hoc ergo propter hoc
Correlation and causation
Levels versus rates of change

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