Lesson 1: The world of economics and its importance

The purpose of studying economics is not to acquire a set of

ready-made answers to economic questions, but to learn
how to avoid being deceived by economists. - Joan Robinson
(1978: 75)

When one thinks of economics, all things ‘money’ come to mind. However, economics is not nearly as exact as
merely counting and trading rands and cents. Ask an economist, and they will tell you that the world of economics
is all about trade-offs.
What do we mean by that? Watch this short video to find out.

Economics is about making trade-offs

 Economics is about making trade-offs

Consider for a moment

Think about your own life. When last did you have to make a substantial trade-off? What was the scarce resource
that forced you to make this trade-off?

Lesson contents

Seeing the bigger picture

Getting our definitions straight

Opportunity cost

The importance of economics

 Lesson 1 Conclusion: The world of economics and its importance

Seeing the bigger picture

Before we delve into the nitty-gritty of economics, we will take a small step back. Do you remember during the
Introduction to Professional Accounting Studies module, in the lesson on understanding change in the context of
compiling a business plan, we introduced you to the different STEEP dimensions when we discussed the levels of
change in the world?

Levels of change in the world (Bishop & Hines, 2012)

We briefly spent some time pondering the economic environment, one of the five STEEP dimensions (the first E).
We also mentioned, in the Introduction to Professional Accounting Studies module, that “professional accountants
play an important role in the world’s economic systems and economic development”.
It is, therefore, vital that you, as a professional accountant, have a good understanding of economics, which is, in
essence, the field of study concerned with the economic environment. (More detailed definitions to follow). It is
equally important to remember how economics fits into the bigger picture.
We said that the five STEEP dimensions are deeply interconnected. If something changes in one of the dimensions,
the ripple effects are felt throughout the whole system and all the other dimensions. This interrelationship is crucial
to keep in mind as we delve deeper and deeper into economics.
Example of the interrelationship of the five STEEP dimensions
 The interrelationship of the five STEEP dimensions using the Futures Wheel

We will cover various aspects of economics during this module and in another module next semester. As our
discussions get more complicated, you might get caught up in all the concepts and calculations.
Just remember, behind every economic system, there are:
real people using
 real technologies, having an impact on

the natural environment,

either for good or for bad,

governed by real policies and laws.

Getting our definitions straight: Economics

Defining economics in levels
Defining ‘economics’ is no easy task. In fact, one could argue that there isn’t only one finite definition of
economics. In a way, economics is like a multiple story building with different levels.
The foundations of economics
Looking carefully, you will see that economics is all around you. Just open a news site or social media, and some
aspect of economics will confront you.
Economics is all around you (Dumisa, 2022; Martin, 2022; Odendaal, 2022; Smit, 2022)
In the financial news, you get articles about ‘The war on inflation’ or all about the latest movements in the stock
exchange. You get plenty of articles on how to invest your money better, and if you turn to the sports pages, you
read about the latest contract for a soccer star running into the millions.
News sites report how ‘Poverty and inequality are a national security risk’ or what is happening in the housing
market. Someone shares their solution for the unemployment crisis on social media, and a columnist on another
site describes how ‘Lower labour productivity is destroying manufacturing’.
These are all things that are part of economics. So, on a foundational level, we can define economics as follows:

Foundational level definition of economics (Fourie & Mohr, 2022: 3)

Glossary
Economics "seeks to describe, explain, analyse, and predict a variety of phenomena such as economic growth,
unemployment, inflation, trade, the prices of different goods and services, money, interest rates and business
cycles" (Fourie and Mohr, 2022: 3).
Economics on the ground floor – the origin story
Another level of describing economics is by looking at its Greek origins.

Greek origins of economics

This brings us to the next definition:

 Ground floor (origins) level definition of economics

Glossary
Therefore, economics is all about the management of households, no matter their size – from each individual to
the management of the whole economy.
Economics – running out of bricks
Now that we have the foundations and the ground floor of our economics building, we need to go up one, two, or
three levels. We can’t go up indefinitely, even if we want to, and at some point, we will run out of money (and
bricks).
Remember that we started the lesson by talking about scarcity and trade-offs. So, while economics is concerned
with the management of households (from small to big), it is also about making choices in the face of scarcity.
But why, you may ask, is there scarcity? Simply put, when you ask people, organisations, or society what
they want, you will find those wants are unlimited. However, to satisfy all these wants, you need means (time,
money, energy, resources), and except for one or two exceptions (like sunlight and love), means are limited.

Except for sunlight

and love,

means are limited,

while wants are unlimited.

Scarcity level definition of economics (Greenlaw & Shapiro, 2017b: 1.1)

Glossary
Therefore, “[e]conomics is the study of how humans make decisions in the face of scarcity” (Greenlaw & Shapiro,
2017b: 1.1).
Economics – the reality
What does ‘economics’ look like for most South Africans?

South African economic reality (BusinessTech, 2022a; Stats SA, 2022)

In South Africa, we use the poverty line to measure how many people live in poverty. Until August 2022, the
poverty line was R1,335 per month. At the time, it was estimated that 30.4 million of South Africa’s population of
60.6 million people had to get by with R 1335 per month or less. Therefore, at the time, more than half of the
population lived in poverty.
We use the food poverty line to measure extreme poverty. Until August 2022, the food poverty line was at R624
per month. At the time, almost 23% (or 13.8 million people) were living on R624 or less per month.
For those living in poverty, economics means a lot of very hard choices and trade-offs on a daily basis. These
conditions are extremely challenging, and many economists believe it is their duty to use their knowledge of the
field to help solve these tough economic challenges. We could say that ethically and socially conscious economists
use the discipline to fly the flag of creating a better life for all.

Ethically and socially conscious level definition of economics (Fourie & Mohr, 2022: 2)

Glossary
With this in mind, we can also describe economics by saying that it is “ultimately about studying the lives of
ordinary people, and how to improve them” (Fourie & Mohr, 2022: 2).
As you can see, there are many levels to economics. We will cover some of those in this module and many more
next semester.

Opportunity cost

Example
You could choose to go for lunch with your friends this afternoon instead of completing this lesson. Because you
have limited time, we would say you are sacrificing your study time for a social life.

In economics, we call this sacrifice when you choose something else, the opportunity cost. Knowing how to think
about and calculate opportunity cost is an important part of understanding economics. You will be looking at it in a
lot more depth when we get to the details of microeconomics.

Case study: E-Bike South Africa

For now, this short video explains opportunity cost as it could apply to our e-bike business.
An E-Bike South Africa example of opportunity cost
 An E-Bike South Africa example of opportunity cost

Economists measure everything in terms of opportunity cost.

Glossary
We can, therefore, define “the opportunity cost of a choice [as] the value to the decision maker of the best
alternative that could have been chosen but was not chosen. In other words, the opportunity cost of a choice is the
value of the best forgone opportunity” (Mohr et al., 2018: 6).
With the first two pertinent definitions out of the way, let’s reflect on the importance of economics.

The importance of economics

You probably realise that, despite what our earlier quote about parrots said, economics is not really about learning
strings of facts by heart. There are plenty more concepts you need to learn about, but once you understand all
these concepts, the fun starts.

Economics is about answering questions and solving puzzles

As a professional accountant, having tools to help you answer questions and solve puzzles can be very useful.
Also, remember we mentioned that all the STEEP domains of the external environment are interconnected.
Suppose you want to consider the changes in the external environment when you put your business strategy
together. In that case, you first need to understand what is happening in those domains. Each of these domains is
complex in its own right, but economics is particularly complex if you are unfamiliar with its principles.

Consider for a moment

Just think of all these situations in which a good understanding of economics will be handy:
 When someone makes a comment about the lack of economic growth, do you have an informed opinion
on the matter?
 When you open a news article, and you see a headline that says, "South Africa's credit rating is
downgraded to 'junk' status", can you use that information meaningfully in your business?
 How will it influence your business decision when you understand the opportunity costs of those decisions
better?
 How can you assess the impact of an interest rate hike on your business, if you are uncertain what an
interest hike means?

Situations when a good understanding of economics is handy

One of the secrets to making good decisions in your personal life and business is knowing what questions to ask.
While economics won’t give you all the answers, it will help you evaluate your questions with circumspection and
common sense and help you understand your different choices better.

Lesson 1 Conclusion: The world of economics and its

importance
Economy is the basis of society. When the
economy is stable, society develops. The
ideal economy combines the spiritual and
the material, and the best commodities to
trade in are sincerity and love. - Morihei
Ueshiba, founder of Aikido (n.d.: para. 32)
Behind all the numbers, rates and graphs, economics is all about tackling difficult questions and puzzles, making
hard choices and trying to ensure a better life for all.
What you’ve learned
Because the key principles of economics play an important role in business strategy development and decision-
making, we first needed to make sure that you are comfortable with some of the fundamental economic terms and
familiar with some aspects of economic thinking.
Despite our efforts, you might still think completing this module that includes economics is not nearly as
interesting as time with your friends or on the sports field. Just don’t forget that when there is scarcity involved
(your time in this case) and when you make trade-offs, there is also an opportunity cost.
If you understand the opportunity costs involved in choices such as studying (or not studying), you are well on your
way to making better decisions.
This lesson included a lot of the things you need to know (for now) about the world of economics and its
importance.
Where you’re going next
In our next lesson, we look at the two main branches of economics: microeconomics and macroeconomics. We
need you to understand the difference and be able to explain it to someone else.

Lesson 2: Micro- versus macroeconomics

Microeconomics is about money you don't

have, and macroeconomics is about money
the government is out of. - P.J. O'Rourke, Eat
The Rich: A Treatise on Economics (2007)

P J O’Rourke’s explanation for the difference between micro- and macroeconomics might be tongue-in-cheek, but it
isn’t completely inaccurate. In the previous lesson, we mentioned that ‘economics is all about the management of
households, no matter their size – from each individual to the management of the whole economy’.
How does one see the whole economy?
No matter what we do, no one can see the whole economy in one glance.
What about the country that is South Africa? Can we see the whole of South Africa all at once?
No, that’s humanly impossible. So, what do we do?

We type https://earth.google.com/ into our browser

And we search for South Africa.

 Google Earth - South Africa

We know we are not really looking at South Africa, but thanks to Google Earth, we can see what South Africa looks
like if you are 3,918 km above the earth’s surface.
As you start to zoom in, more and more things appear, like provincial boundaries, mountains, roads, dams, and
beaches. At about 24 km elevation, the outlines of neighbourhoods and open spaces like parks and fields become
visible.
So far, all we’ve seen of South Africa is what they call a macro view (from the Greek makros translated as ‘large’).
But Google Earth has another feature. Drop a little person icon anywhere on the map; suddenly, you are
transported to the ground.
 Google Street View - South Africa

Also called Google Street View, you can see gravel on a road, tracks, rocks and bossies growing by the roadside. By
dropping to ground level, we now have a micro view (again from Greek, mikros translated as small).
We haven’t left Google Earth in our browser, but we now have a very different view that gives us an alternative
perspective on the same thing.
Micro- and macroeconomics are exactly like that. Both are concerned with the economy, but the perspective we
take when we look at economics at a micro-level is very different from the perspective we take when we look at a
macro-level.
How do these perspectives on economics differ? Let’s find out.
Lesson contents

Micro- and macroeconomics: The difference

Micro- and macroeconomics: Examples

Lesson 2 Conclusion: Micro- versus macroeconomics

Micro- and macroeconomics: The difference

Spot the difference
Because micro- and macroeconomics are different perspectives on economics, the things we look at when we
study either, are also different.
Microeconomics
So, what do we look at when we study microeconomics?
Microeconomics
For future reference, let’s just capture the official definition of microeconomics:

Glossary
“In microeconomics the decisions and functioning of decision makers such as individual consumers, households,
firms or other organisations are considered in isolation from the rest of the economy. The individual elements of
the economy are, figuratively speaking, each put under the microscope and examined in detail” (Mohr et al., 2018:
4).
Macroeconomics
What about macroeconomics? What are the important things to keep in mind?
Let’s investigate.
Macroeconomics

Example of macroeconomic forces in action

In 2022, after years of court cases and debates, SANRAL’s (South Africa National Road Agency) controversial
Gauteng e-toll saga came to an end. There has been resistance to the e-toll scheme since 2012. If only one or two
people decided not to pay their e-tolls, they would probably have been summoned, and the court would have
forced them to pay (BusinessTech, 2022b).
However, in this case, thousands of people and organisations decided not to pay their e-toll bills. In a 2019 survey,
they estimated that only 40% of road users paid their e-toll bills (BusinessTech, 2019).
Those who did not pay their e-toll accounts made individual decisions, but collectively it made a big difference.
Court cases followed, and SANRAL’s debt spiralled. Eventually, the courts cancelled the Gauteng e-toll system, and
the National and Provincial governments had to foot the bill for SANRAL’s debt.
This case is macroeconomics in action. The collective effects of individual economic actors have an impact on a
macro (national) scale.
Consider for a moment
Where do you think the National and Provincial governments got the money to pay off SANRAL’s debt? What else
could they spend their money on?
Just to make sure you have it all stitched up, let’s look at a more official definition of macroeconomics.

Glossary
A definition of macroeconomics is, being “concerned with the economy as a whole… In macroeconomics we focus
on the “big picture”, we develop an overall view of the economic system, and we study total (or aggregate)
economic behaviour” (Mohr et al., 2018: 4).

Micro- and macroeconomics: Examples

Blurred lines
When we were zooming in from the Google Earth View to get to the Street View, there was a time when we could
argue about whether we were looking at a macro or micro view. We no longer felt like we were looking at South
Africa from space; we could see roads, clusters of houses and other details but not individual houses.
The same applies to micro- and macroeconomics. There are some overlaps between the two, especially when
individuals start to affect the macro environment and when the macro environment affects individuals. However,
avoid getting too bogged down by these overlaps; economics is not an exact science.
Another way to improve your understanding of the differences between micro-and macroeconomics is by looking at
some examples.
 Examples of things we study in microeconomics
Just like there are millions of houses, roads and other sights to find if you spend enough time on Google Street
View, the instances of microeconomics in action are endless. Here are some relevant examples of the things we
study in microeconomics in the context of our e-bike business.

Examples of microeconomics (Mohr et al., 2018: 4)

Resource
Download a copy of these Examples of microeconomics Download Examples of microeconomicsfor future
reference.

Consider for a moment

Do you get the idea? We've just used our example of an e-bike business to get your thinking going, but you can
apply these decisions to any industry, business or product.
Can you think of some examples of your own?

Examples of things we study in macroeconomics

When we think of things we study in macroeconomics, we usually make sure that words like 'total', 'combined',
'general' or 'aggregate' is part of the sentence. In macroeconomics, we want to see the big picture, not the detail.
Here are some examples.
 Examples of macroeconomics (Mohr et al., 2018: 4)

Resource
Download a copy of these Examples of macroeconomics Download Examples of macroeconomics for future
reference.
You might notice that these examples are not that different from our microeconomic examples.
 In micro, it was the price of one product; in macro, it is the price of all the products.
 In micro, it was one business's decision to import; in macro, it is total imports, and so forth.
Consider for a moment
Now that you are more familiar with the things we study in macroeconomics, how do you think we know the totals
of all these things?
How are they calculated? How accurate are these calculations? How do economists make sense of all the moving
parts of economics?
We mentioned that governments and their policies play an important role in macroeconomics, but how do these
policies work?
All these questions and more will be addressed. In this module, we'll introduce you to the important concepts and
explore the detail in the following semester.

Lesson 2 Conclusion: Micro- versus macroeconomics

Microeconomics concerns things that
economists are specifically wrong about,
while macroeconomics concerns things
economists are wrong about generally. -
P.J. O'Rourke, Eat the Rich: A Treatise on
Economics (2007)
In this lesson, we mentioned that economics is not an exact science, and this quote from P J O’Rourke taps into
that uncertainty. However, the idea behind studying macro- or microeconomics is not to be 100% sure of what will
happen next. It is to see what could happen in the future by analysing what has happened in the past and trying to
anticipate how trends will play out.
Some things happen on a Google Street View level, and we see these decisions play out daily. Sometimes it is as
simple as whether to order takeaways for the evening or make a sandwich at home. At other times it could be
something as complex as the commission structures at a large insurance company. Either way, when we study the
economic behaviour of specific economic actors, it is microeconomics.
Other things are only visible if you take a step far enough away to get the big picture. Within the big picture, which
is macroeconomics, we are mostly interested in the ‘total’ of something, the ‘aggregate’ or the ‘combined’.
Having the ‘up close and personal’ perspective is very useful when making all sorts of direct decisions about your
business. Equally, it is crucial to have the ‘big picture’ perspective and not lose sight of the impact of
macroeconomic activities on your own business and life. Although different, both these perspectives have a role to
play in business strategy development and decision-making.
What you’ve learned
In a nutshell, micro- versus macroeconomics are two ways to look at the same thing, the economy of a country or a
region. Just in case you want to remind yourself of the difference between the two, here is a summary of each:
Summary of microeconomics
 Summary of macroeconomics
Where you’re going next
In our next lesson, we will turn our attention to macroeconomics. We’ll start by introducing you to what is called
‘the economic problem’.
Now that you know how relevant economics is to your daily life, we hope you keep making good choices and will
spend enough of your valuable time with us in this course.

Lesson 3: The economic problem

 Example: Game day braai
The weekend is approaching, and there is a big game on Saturday evening. You invite a bunch of friends over for a
braai and to watch the game. As you plan the evening, you realise that you have several problems.

Game day braai problems

First, you are not exactly sure how many people are coming. You’ve sent invitations via WhatsApp to ten of your
friends. So far, only eight of them have replied. Also, you know that your best friend and her partner were having
some problems, and you are not sure if she is bringing him along. Your other friend is a doctor on call; she might
come, or she might have to work. So actually, you don’t really know for how many people you need to cater.
Your second conundrum is to decide how much food and drinks to serve. Not only are you not sure of the exact
number of people, but you are also not sure how much food and drink they will consume. You know that not all
your friends drink alcohol, so you need to make sure that plenty of other drinks are available too. It is a braai, and
you will need some meat, but recently a few of your friends decided to go vegetarian, so you also need to cater for
them.
One of your biggest challenges is that your budget is terribly tight. You invited everyone without any expectation
that they should bring anything, so it’s up to you to ensure no one goes thirsty or hungry. On the other hand,
neither do you want to be left with endless half-eaten plates of chips or half-empty cans of beer.
Lastly, you still need to figure out how to have everything ready in time. Will you buy some stuff ready-made, or
will you make everything from scratch? Not only is your budget tight, but you also have a birthday party for a
family member in the afternoon, so you can’t really spend the whole day in the kitchen preparing. Unless, of
course, you decide to blow off your family, but that could come at an emotional cost. Your mother might not talk to
you for a week!
As the weekend approaches, you realise you got yourself into a conundrum. You will not have all the accurate and
detailed facts available in time to plan your braai to precision. The most you can do is make assumptions, make
tough decisions and hope for the best.
This might only be a story about some friends and a braai, but at its core, it is also about scarcity, choices and
opportunity cost. It’s, in essence, a story about what they call ‘the economic problem’.
Of course, since we are talking about macroeconomics, the scale of ‘the economic problem’ is far greater than your
problems with your impending braai. So, let’s see how the economic problem plays out at a societal level.
 Introduction to macroeconomics

An important introduction to how one can and should think about the economy is by describing and defining ‘the
economic problem’. ‘The economic problem’ is, therefore, the starting point for our ‘thinking about the
economy’.
Lesson contents

Defining the economic problem

The economic problem: What?

The economic problem: How?

The economic problem: For whom?

Scarcity: Discussion

Lesson 3 Conclusion: The economic problem

Lesson 3: The economic problem

 Example: Game day braai
The weekend is approaching, and there is a big game on Saturday evening. You invite a bunch of friends over for a
braai and to watch the game. As you plan the evening, you realise that you have several problems.

Game day braai problems

First, you are not exactly sure how many people are coming. You’ve sent invitations via WhatsApp to ten of your
friends. So far, only eight of them have replied. Also, you know that your best friend and her partner were having
some problems, and you are not sure if she is bringing him along. Your other friend is a doctor on call; she might
come, or she might have to work. So actually, you don’t really know for how many people you need to cater.
Your second conundrum is to decide how much food and drinks to serve. Not only are you not sure of the exact
number of people, but you are also not sure how much food and drink they will consume. You know that not all
your friends drink alcohol, so you need to make sure that plenty of other drinks are available too. It is a braai, and
you will need some meat, but recently a few of your friends decided to go vegetarian, so you also need to cater for
them.
One of your biggest challenges is that your budget is terribly tight. You invited everyone without any expectation
that they should bring anything, so it’s up to you to ensure no one goes thirsty or hungry. On the other hand,
neither do you want to be left with endless half-eaten plates of chips or half-empty cans of beer.
Lastly, you still need to figure out how to have everything ready in time. Will you buy some stuff ready-made, or
will you make everything from scratch? Not only is your budget tight, but you also have a birthday party for a
family member in the afternoon, so you can’t really spend the whole day in the kitchen preparing. Unless, of
course, you decide to blow off your family, but that could come at an emotional cost. Your mother might not talk to
you for a week!
As the weekend approaches, you realise you got yourself into a conundrum. You will not have all the accurate and
detailed facts available in time to plan your braai to precision. The most you can do is make assumptions, make
tough decisions and hope for the best.
This might only be a story about some friends and a braai, but at its core, it is also about scarcity, choices and
opportunity cost. It’s, in essence, a story about what they call ‘the economic problem’.
Of course, since we are talking about macroeconomics, the scale of ‘the economic problem’ is far greater than your
problems with your impending braai. So, let’s see how the economic problem plays out at a societal level.
 Introduction to macroeconomics

An important introduction to how one can and should think about the economy is by describing and defining ‘the
economic problem’. ‘The economic problem’ is, therefore, the starting point for our ‘thinking about the
economy’.
Lesson contents

Defining the economic problem

The economic problem: What?

The economic problem: How?

The economic problem: For whom?

Scarcity: Discussion

Lesson 3 Conclusion: The economic problem

The economic problem: What?

 What must be produced?
 What goods and services must be produced?
 In what quantities?
Just like you were unsure what food and drink you needed to serve at your braai, an economy also needs to figure
out what goods and services need to be produced. Also, how does the economy know in what quantities these
goods and services need to be produced?
Unlike in our braai story, where the conundrum was your own, in the case of an economy, the problem of what to
produce and in what quantities, does not necessarily belong to one person or entity. The scale of this question
makes this a complex problem, and the consequences if an economy gets this wrong can be devastating.

Example: The Great Chinese Famine

A controversial historical example where many believe this economic question was not answered correctly is the
Great Chinese Famine (1959 – 1961). It is argued that about 30 million Chinese citizens died because the Chinese
state demanded high levels of grain from the communes, not leaving enough to feed those in the communes
(Kucha & Llewellyn, 2019). Whether they produced the right goods is debatable, but they arguably got the
quantities that had to be produced very wrong.

Consider for a moment

Has there ever been a time when you felt that what is being produced and its quantities seem wrong? Put
differently, was there ever something you genuinely wanted, but it was unavailable in South Africa or out of stock
before you could get hold of it?
Why do you think the economy got the answer to the first economic question wrong in your example?

Optional resource for enrichment

For more on the Great Chinese Famine, you can read the article The Great Chinese Famine by Kucha and Llewellyn
(2019).Links to an external site.

The economic problem: How?

How will it be produced?

 How will the goods and services be produced?
 How many scarce resources will be used?
In our story, you were unsure whether you would prepare all the food and snacks for the braai yourself or buy
some ready-made things. Your scarce resources were both your time and your money.
On a macroeconomic level, economies also need to solve this problem. It is one thing to know what needs to be
produced and how much of it, but it is another to know how it will be produced, especially in light of scarce
resources.
Remember that we said that in economics, we have to solve the economic challenge of unlimited wants and
limited means? Scarce resources are a problem for societies across the globe. Sometimes, humans ignore the
warning signs and completely deplete a scarce resource.

Example: Overfishing in Newfoundland and Labrador

Humans have been fishing for cod along the coasts of Newfoundland and Labrador in Canada for almost five
centuries. In 1992 however, the Canadian government had to shut down the industry indefinitely. At the time,
overfishing had caused the stocks of cod, which was once in abundance, to deplete to near extinction. In the
process, about 30,000 people lost their jobs and livelihoods. In the context of the economic problem, attempts to
satisfy needs (in this case for cod) did not consider the limited means (not enough cod) and again, the
consequences were tragic (Higgins, 2009).

Optional resource for enrichment

We’ve only touched on the overfishing of cod, and the full history makes for interesting reading. Should you be
interested, you can refer to Cod MoratoriumLinks to an external site. (Higgins, 2009) on the Newfoundland and
Labrador Heritage website.

The economic problem: For whom?

For whom will it be produced?

 For whom will the goods and services be produced?

 Who will receive these goods and services?
 How much will they receive?
When you were planning your braai, you were never sure who was going to be there. Your friend could have
brought her partner or not. Your doctor friend could have pitched, or she could have been called to the hospital.
Two friends never answered you. They could arrive or not, and they could have brought someone with them or
come alone.
In macroeconomics, the third question, ‘For whom’, is equally fraught with uncertainty. Sometimes producers think
they are producing for a certain market, but another market (or group of people) starts to buy their goods. Some
goods might be intended for a specific group, but they don’t get access to them for various reasons. Sometimes
the market misjudges, and not everyone that is supposed to get certain quantities get what they need.

Example: Covid-19 vaccine inequality

To find an example of how the right goods don’t always reach the right audiences in the right quantities, we only
have to think back to the recent Covid-19 pandemic. One of the issues that made headlines, especially at the
height of the pandemic, was what they called ‘vaccine inequality’. As with all our examples, this is a complex issue;
much more is involved than we have time for.
Yet, if we look at the essence of the issue, it comes down to how the Covid-19 vaccine was distributed across the
globe. It was reported that millions of people in low-income and lower-middle-income countries were still
unvaccinated, while those in high-income countries were already queuing for their third shot. The target set by the
international community was to ensure that 70% of the global population was vaccinated by the middle of 2022.
However, for various reasons, vaccines intended for some populations were given to others, and the distribution of
the quantities of the vaccine fell far short of the international community's intention (Kelly, Kirk & Ahmed, 2022).

Optional resource for enrichment

For a more comprehensive take on global vaccine inequality, read Covid vaccine figures lay bare global inequality
as global target missedLinks to an external site.(Kelly, Kirk & Ahmed, 2022).

Lesson 3 Conclusion: The economic problem

Consider for a moment

Let’s reflect briefly on the three economic questions. One could say that the three questions are objectively
neutral. No value judgements are hidden in asking what, how and for whom goods and services need to be
produced. However, when humans operating in an economy start to answer these questions, their values take over
and steer how they are being answered.
In our three examples about the economic problem, one can only speculate about the societal values that drove
the choices and answers. However, judging by the outcomes (famine, almost extinction and a health crisis), one
could argue that not all societies have the best interests of all their people and the environment at heart.
What you’ve learned
This lesson covered three short questions forming the core of ‘the economic problem’ in society. We’ve also seen
that even though these questions seem fairly straightforward, how these questions are being answered in society
can be very complex and riddled with pitfalls.
On a macroeconomic level, societies answer the economic problem through economic systems, the same
economic systems which Gloria Steinem describes as “ways of expressing what varying societies believe is
important” (n.d.: para. 10).
Where you’re going next
In our next lesson, we will explore the mechanisms available to societies to answer the economic problem and
how those translate into common economic systems.

Economic systems are not value-free columns of numbers

based on rules of reason, but ways of expressing what
varying societies believe is important. - Gloria Steinem
(n.d.: para. 10)

Lesson 3 Conclusion: The economic problem

Consider for a moment

Let’s reflect briefly on the three economic questions. One could say that the three questions are objectively
neutral. No value judgements are hidden in asking what, how and for whom goods and services need to be
produced. However, when humans operating in an economy start to answer these questions, their values take over
and steer how they are being answered.
In our three examples about the economic problem, one can only speculate about the societal values that drove
the choices and answers. However, judging by the outcomes (famine, almost extinction and a health crisis), one
could argue that not all societies have the best interests of all their people and the environment at heart.
What you’ve learned
This lesson covered three short questions forming the core of ‘the economic problem’ in society. We’ve also seen
that even though these questions seem fairly straightforward, how these questions are being answered in society
can be very complex and riddled with pitfalls.
On a macroeconomic level, societies answer the economic problem through economic systems, the same
economic systems which Gloria Steinem describes as “ways of expressing what varying societies believe is
important” (n.d.: para. 10).
Where you’re going next
In our next lesson, we will explore the mechanisms available to societies to answer the economic problem and
how those translate into common economic systems.

Economic systems are not value-free columns of numbers

based on rules of reason, but ways of expressing what
varying societies believe is important. - Gloria Steinem
(n.d.: para. 10)

Mechanisms to answer the economic problem

It is not from the benevolence of the butcher, the brewer,
or the baker that we expect our dinner, but from their
regard to their own interest. We address ourselves not to
their humanity but to their self-love, and never talk to
them of our own necessities but of their advantages. -
Adam Smith, Wealth of Nations, 1776: 17

In Adam Smith’s famous quote, he refers to the self-interest of the butcher, the brewer and the baker. However,
self-interest is not the only driving force behind economic systems.
Three mechanisms
In short, society applies three mechanisms in various combinations to answer the economic problem.

Three mechanisms to answer the economic problem

In practice, these mechanisms are expressed through economic systems, which we will also touch on. Let’s look at
these three mechanisms in more detail in the following sections.

The traditional mechanism

Tradition
Let's look at how the mechanism of tradition answers the economic problem and how that translates into a
traditional economic system.
Tradition as a mechanism

Tradition as a mechanism
Glossary
A traditional economy can be described as an economy governed by tradition, customs, beliefs and rituals to
determine what goods and services are produced, by whom and how, and for whom in determined quantities. A
traditional economy is typically ecologically sustainable.

Consider for a moment

Imagine you were part of a community that practices traditional economic principles:
 What do you think will be good and beneficial about being part of such a community?
 What do you think you will find difficult?
Share your thoughts with your classmates on this week’s collaborative discussion about academic content.

The command mechanism

Command

Let’s find out what is meant by the command mechanism to answer the economic problem.
Command as a mechanism
 Command as a mechanism

Glossary
A command economy can be described as an economy governed by a central authority to determine what goods
and services are produced, by whom and how, and for whom in determined quantities. A fully command economy
leaves little room for individual choice.
Some things are better when planned and coordinated from a central point.
Consider for a moment
Can you think of an example where it would make sense for a central authority, like a government, to plan what,
how much, by whom and for whom certain goods or services need to be produced?

The market mechanism

Market

Let’s now look at using the market mechanism to answer the economic problem.

Market as a mechanism
Market as a mechanism
Types of abstract markets
 Market prices signal scarcity in the market system

Glossary
A market economy can be described as an economy where the market determines what goods and services are
produced, by whom and how, and for whom in determined quantities. The market is not one thing; it is a
completely decentralised mechanism and reflects the choices of individuals, firms and governments. Inefficiencies
in a market economy result in waste, shortages and pollution.
“A market is any contact or communication between potential buyers and potential sellers of a good or a service”
(Fourie & Mohr, 2022: 6).
Consider for a moment
When last did you have to negotiate a price with someone for something? Were you perhaps negotiating rent? Or
buying something at a second-hand market? Or something off Facebook marketplace?
Were you successful? Were you happy with what you paid in the end? Do you think the seller was happy?
The same principles that applied when you negotiated your small transaction also apply to millions and millions of
transactions every day all over the world. At the core of a market system, are countless willing buyers and willing
sellers just trying to make the most with their limited resources.

Mixed economies
Economic system
If tradition, command and market are the three mechanisms, what makes an economic system?

Glossary
Fourie and Mohr (2022: 4) define an economic system as a “pattern of organisation that is aimed at solving the
three central questions”.

Mixed economies
Most economic systems in the real world are mixed economies. Mixed economies combine elements of the market
and command mechanisms and even, in some cases, incorporate tradition. The different weights of these
mechanisms form a pattern that determines the economic system of a country.
Some countries (like the USA) operate mostly according to the market mechanism, but not completely. Other
countries give stronger weight to the command mechanism and less to the market mechanism.
South Africa has a mixed economy. The market mechanism drives most activities, but we do have central
planning in place with energy, housing and healthcare planning, some of the most visible. Tradition plays an
almost negligible role.
Lesson 4 Conclusion: Solving the economic problem
To conclude this lesson
It is important to understand how the economic problem is solved in the country or region where you want to do
business. While most countries have a version of the mixed economy, some have more elements of central
planning than others.
For example, suppose you want to expand your business to China. In that case, you need to remember that even
though China is a mixed economy, it has a long history of central planning. Depending on the industry you are in
and the goods and services you want to offer, you might run into regulations that could restrict your business.
In South Africa, the energy sector is heavily regulated. While there is lots of potential for expansion in renewables,
you could get bogged down in the regulations if you are not careful.
Like it is useful to understand the rules of the game when you play Monopoly, it is really helpful to understand the
rules of economics if you want to take an active part in the economy – as a professional accountant or an
entrepreneur. You might not win every time, but you will certainly fare better than those who don’t know about or
understand the rules.
What you’ve learned and where you’re going next
Now that we’ve covered the economic problem and the mechanisms of how to solve it, it is time to look
at markets in more detail. After all, to have the ability to start and own a business like our e-bike business is a
clear sign that the market system is alive and well in South Africa.
But what are the implications of a market system? We mentioned that in a market system, we have willing buyers
and willing sellers, and we also have supply and demand. We know there is more to understanding economics than
supply and demand, but before we move on, it is probably time to define supply and demand and look at the basic
flows in the economy.

Lesson 5: Supply and demand

 Example: Game day braai
Despite all the uncertainty, you made some assumptions about who will be coming to your game day braai, and
you’ve made some choices. You had a long chat with your mom and agreed on a trade-off with her. You’ll be
excused from the family birthday party, but you will join the family picnic at the beach next weekend. Sacrifices
had to be made!
That also means you decided to make all the food for the party yourself. Because you are on a tight budget, you
plan the menu very carefully. You leave the shopping for Saturday morning to ensure all ingredients are fresh. You
set off for the shop with a detailed shopping list.
 Game day braai decisions

When you arrive at Checkers, you realise they are out of avocados. Disaster! You’ve planned your whole braai with
a Mexican theme, and your mom’s winning guacamole recipe was going to be the star of the show. But without any
avocados, your plans are ruined. But Checkers is not your only option. You try the local Spar. No luck. You have
one option left. You go to Woolworths. When you see the price of their avocados, you almost have a heart attack!
R72.99 for four. They must be mad. You bought avo’s at Checkers just two weeks ago, and they only cost R49.99
for four (in November 2022).
You don’t have time to replan your menu, and reluctantly you buy the four avocados at Woolworths. On the way
home, you are still seething. Your team better win this evening; otherwise, this will be quite a miserable day.
This might be a story about a braai, friends and avocados, but it is also a story about supply and demand in
a microeconomic context where the prices of products and the quantities exchanged are important. In
microeconomics when demand increases, it is possible for suppliers to increase their prices. Conversely, as
demand decreases, suppliers might be forced to lower their prices to attract more customers.
In macroeconomics, however, we’re not interested in the prices or quantities of avocados. We aim to make sense
of aggregate (a common economic synonym for total) demand and aggregate (total) supply of all the goods and
services within an economy.
 Introduction to macroeconomics

We are still building our toolbox that helps us think about the economy. In this lesson we will cover the terms
‘supply’ and ‘demand’ and look at some of the factors that drive supply and demand.
Lesson contents
Defining supply and demand

What drives demand?

What makes supply shift?

Importance of the laws of supply and demand

Lesson 5 Conclusion: Supply and demand

Defining supply and demand

Getting more definitions straight

Supply and demand

Glossary
Supply in macroeconomics is defined as the total quantities of goods and services that potential sellers
are willing and able to sell within a specific period. It is influenced by demand, and there is no guarantee that
everything offered will be sold.
Demand in macroeconomics is defined as the total quantities of goods and services that potential buyers
are willing and able to buy within a specific period. Not to be confused with wants and needs, demand is the
result of choosing specific wants and needs over others, given the means that are at hand (Based on Fourie &
Mohr, 2022: 8).

Attention
Supply and demand is such a fundamental principle; this lesson covers both the micro- and
macroeconomic perspectives of the topic.

What drives demand?

Example: Game day braai

In our story, you bought avocados to make guacamole for the party. But you don’t buy avocados every day; they
are simply too expensive. And you are not the only one who thinks that. Avocados are not on the average person’s
daily menu.
This relationship between the price of a product and the demand for the product is called the law of demand.
Factors that affect demand
But price is not the only thing that drives demand. Let’s look at some of the other things.
Factors that affect demand

To summarise, note the factors that affect demand, especially those factors that drive aggregate demand (Fourie &
Mohr, 2022: 38 -30):
 Macroeconomic
Microeconomic factors
factors

The income of
1 Price of a product 6
consumers

The price of substitute The size of the

2 7
products market

The price of Income

3 8
complementary products distribution

4 Consumer taste

5 Expectations
 Factors that affect demand (Fourie & Mohr, 2022: 38 -30)

Consider for a moment

What will happen on a macroeconomic level to aggregate (total) demand if the income distribution amongst a
country's citizens changes and becomes more equitable?
So, as you saw, various factors affect the demand for a product. But remember, in an economy, demand is only
half of the story. We also need to look at what happens on the supply side.
What makes supply shift?

Example: Game day braai

What do the avocado farmers of Tzaneen do? How do they know whether they need to plant more avocado trees?
Unsurprisingly, prices also play an important role in the supply of goods or services. If prices of avocados go up, it
will incentivise some avocado farmers to plant more avocado trees because selling avocados will be more
profitable. It might even incentivise the banana farmers to plant avocados instead of bananas.
This is called the law of supply.
Factors that affect supply
But like demand, apart from price, there are other factors. Let’s briefly look at some of them.
Factors that affect supply

To summarise, note the factors that affect supply (Fourie & Mohr, 2022: 41):
Microeconomic factors

1 Price of a product

2 The price of alternative products

3 The price of the factors of production

The productivity of the factors of production

4
(including the influence of technology)

5
The number of suppliers
6 The expected future price of a product

Factors that affect supply (Based on Fourie & Mohr, 2022: 41)
Consider for a moment
One of the factors of production is electricity. What impact do you think the continued load-shedding in South
Africa had on the supply of goods and services?
So, why is it important to consider the laws of supply and demand? Let’s explore.

Importance of the laws of supply and demand

Why do we need to understand the laws of supply and demand?
The basic laws of supply and demand are very useful whether you want to start your own business, like our e-bike
business, or whether you choose to continue working for someone else.
By implication, a business aims to sell goods or services and any goods or services, even e-bikes, are subject to the
laws of supply and demand.

Case study: E-Bike South Africa

So, in the case of e-bikes, understanding demand will help you decide which e-bikes you want to sell for what price
and whether it might be a good idea to sell complimentary products. Keeping track of consumer trends might also
be a good idea. Having an eye on macroeconomic conditions, especially the income of consumers in your region,
the size of the market and the income distribution in your area, will also help you make better decisions when you
put your business strategy together.
And what about supply? Understanding how the price of alternatives affects the supply of e-bikes might help you
decide how many to keep in stock. The size of your premises also influences how many e-bikes you can keep in
stock, and the price of floorspace (one of the factors of production) plays an important role in deciding how big or
small your premises will be. How productive are your ‘factors of production’? Is your staff more effective than the
average in performing a monthly stock count? That could mean you could keep the store open for longer, in
essence increasing supply. And what about other suppliers? If two more e-bike shops suddenly pop up in your area,
how will that affect how many e-bikes you will keep in stock?
 Also, remember even if you are working for someone, you are still
‘selling’ your services to your employer. The laws of supply and
demand apply just as much to you as an individual as they apply to
avocados.

How scarce will your skills be in future? How many alternatives will potential employers have, and at what price?
How productive could you be? Could you be more productive if you have the assistance of technology about which
you are knowledgeable?
Supply and demand sit at the core of economics and understanding how they interact is an essential tool in the
toolbox of any aspiring professional accountant and entrepreneur.

Lesson 5 Conclusion: Supply and demand

To conclude this lesson
Whether you are buying avocadoes to make guacamole or negotiating your next salary, the laws of supply and
demand are relevant to you.

Consider for a moment

 Image sources: Reuters, 2022; Sciberras & Bennett, 2022; Wakefield, 2022; Wasserman, 2022.
The next time you come across a new technology, extreme weather, a price hike or a wage strike as you watch the
news or browse through social media, stop and consider.
Ask yourself, ‘How could these different factors affect the supply and demand of the things I am interested in?’.
You might never look at the news in the same way again.

What you’ve learned

In this lesson, we have covered two of the most important principles of economics, namely supply and demand. We
also looked at the laws of supply and demand and those factors that influence how supply and demand behave.
Where you’re going next
Our next lesson will add more building blocks to your foundational understanding of economics. We will introduce
you to the basic flows in the economy and investigate from where these flows come.

Lesson 6: The basic flows in the economy

 Example: Pandemic lockdown
In 2020, we experienced something that has so far been unique to our lifetime. On the 27th of March 2020, the
South African government imposed a national 21-day lockdown to curb the spread of the coronavirus. As the
pandemic took off, the lockdown was extended, and the rules amended as the government deemed appropriate.

Attention
For a reminder of the key moments during the early days of the pandemic, you can watch this short
video: Timeline - A year of Covid-19 in South Africa (ANA, 2021)Links to an external site.

Globally, the spread of the virus caused great upheaval and uncertainty, and to those who lost loved ones, it was a
traumatic time. While it is an academic exercise to imagine what would have happened if the government did not
impose a lockdown, this period did teach us something about the economy.
 Lockdown alert levels (South African Government, 2020)

At various stages of the Covid-19 pandemic, South Africa was subject to various levels of alert, with the strictest
level, level 5, having the biggest impact on the economy.
It took the National Department of Health and the rest of the government some time to come to terms with the
virus, and it was in this period of extreme uncertainty that the most stringent restrictions were in place. Goods and
services were limited to essentials. Nothing that was not essential was being produced or imported. Those with
goods and services to sell could not sell those to households with needs and wants. Any many needs did go
unfilled.
The basic engine or flow of the economy was in jeopardy, and it is, therefore, unsurprising that in 2020, South
Africa’s economy (as measured by its gross domestic product – GDP) shrunk by 8.2% (Galal, 2021). Standing still is
hugely detrimental to a country’s economy.
So how do these flows in an economy work? What makes sure that the activities support each other and that,
ultimately, the economy keeps moving and fulfils its promise by looking after the wants and needs of the people?
Let’s find out.
 Introduction to macroeconomics

In the last of our lessons in this module that deals with ‘ways of thinking about economics’, we will cover the basic
flows of the economy.
Lesson contents
Basic flows of the economy

Where does production come from?

Where does income come from?

Where does spending come from?

Lesson 6 Conclusion: The basic flows in the economy

Three major flows of an economy

Interactions between the three major flows of an economy
In the last of our lessons in this module that deals with ‘ways of thinking about economics’, we will cover the basic
flows of the economy. By this stage, you must have realised that macroeconomics is incredibly complex and has
many moving parts. Just like it is impossible to see the whole of South Africa in one glance, we know it is equally
impossible to ‘see’ the whole of the economy. To help us think about macroeconomics, we have all sorts of tools.
To ‘see’ South Africa, we have Google Earth, and for macroeconomics, we have diagrams to help us think about
the economy.
Economists devised the basic flows of the economy diagram to help us think about how things flow through an
economy. It shows the interaction between the three major flows of an economy, production, income and
spending.

Three major flows of the economy diagram (Based on Fourie & Mohr, 2022: 17)

At the top, we have production. We’ve spent a lot of time thinking about production when we looked at the
economic problem. The three questions that answer the economic problem all speak to production, how much of
what needs to be produced, how production needs to happen and for whom.
But production is not enough to make an economy. We produce because we want to satisfy human wants. In a
market economy, we produce not only to survive but to generate income, allowing us to spend the income to buy
the goods and services others are producing.
Of course, all three of these things happen simultaneously, with production, income and spending flowing
continuously through the economy.

Where does production come from? Let’s investigate.

Where does production come from?

 When we looked at the factors, other than price, that affect the supply of goods and s
economy, we mentioned that both the price and productivity of the factors of product
play a role.

When we ask the question, ‘where does production come from?’, the textbook answer is that it comes from
the factors of production. It, therefore, seems like a good time to explain what we mean by factors of
production.
Four factors of production
In economics, there are only four factors of production; these four factors combined are like four buckets that
provide everything an economy needs for production: natural resources (land), labour, capital and
entrepreneurship.
 Factors of production

Let’s pick up each of these four factors and investigate what is important about each of them.

Factor 1: Natural resources (land)

The bucket for natural resources (or land) is very large. It includes all the things that we get from nature.
Humans have always tapped into the gifts of nature. It wasn’t so long ago that people ‘lived off the land’. However,
things changed dramatically during the industrial revolution, and the pace and scale at which natural resources are
absorbed in production have grown exponentially. The following graph shows how global resource use by resource
type increased between 1900 and 2009 - from less than 10 billion tonnes per annum in the early 1900s to almost
70 billion tonnes per annum by 2009. The latest figures indicate we reached 96 billion tonnes by 2019
(MaterialFlows.net, n.d.).
 Increased use of global resources from 1900 to 2009 (European Environment Agency, 2016)

Not all natural resources behave the same. When we think of natural resources as factors of production, we must
look at the quantity of natural resources available for use and the quality thereof.
 Behaviour of natural resources

Example: Natural resources in South Africa

For example, we have plenty of land in South Africa. Suppose you drive through the Karoo; all you see is open veld
for kilometres into the distance. However, South Africa is known for being a water-scarce country. Just having the
land is not enough because it is so arid, and vast tracks of land in South Africa are not suitable for agriculture, nor
does it contain mineral resources.
Sadly, the pace at which humans have been using the earth’s biological resources has been faster than the rate at
which they can be regenerated.
Every year an organisation called Earth Overshoot Day measures which day of the year we have used more of our
biological resources than the Earth can renew in a year. In 2022, Earth Overshoot Day was on 28 July.

Optional resources for enrichment

For more about Earth Overshoot Day, watch this short video (it’s from 2018, but the principles still apply) Earth
Overshoot DayLinks to an external site. (Upscaling Earth, 2019).
Or read more about the initiative on their website Earth Overshoot DayLinks to an external site. (Earth Overshoot
Day, 2022a).
For an interesting comparison, refer to How many Earths? How many countries?Links to an external site. (Earth
Overshoot Day, 2022b).

Factor 2: Labour

Labour includes all occupations, from gardeners to police officers, doctors and baristas.

Glossary
“Labour may be defined as the exercise of human mental and physical effort in the production of goods and
services. It includes all human effort exerted with a view to obtaining reward in the form of income” (Fourie &
Mohr, 2022: 10).
As with natural resources, we are interested in both the quantity and the quality of labour.

Quantity and quality of labour

We measure the quantity of labour as those willing and able to work, and we refer to those as the labour force.
We, by definition, exclude those unable or unwilling to work. There could be many reasons for being unable or
unwilling to work. In particular, the labour force excludes children (since child labour is illegal in South Africa) and
the elderly.
When it comes to the quality of labour, we refer to human capital, and this element of labour is even more
important than quantity. Human capital includes all those human things that humans need to be able to fulfil their
occupation: Knowledge, experience and skills. Developing human capital is one of a nation's most important
priorities, and the mechanisms available for human capital development are education, training and experience.
Nature of unpaid care work
As you can see from the definition of labour, in economics, labour must be “to obtain reward in the form of
income”, but what about all those caring for others and looking after households? In economic terms, care and
domestic work have no space in the basic flow of the economy. However, some argue that just because no income
is earned does not mean it has no value.
“The International Labor Organization found that if care work was valued the same as other work, it would
represent a tenth of the world’s economic output” (Rodriguez, 2021).
There is an ongoing debate about the unpaid nature of care work because many believe it needs to be considered
in how rewards are distributed. It is also worth noting that, by far, women from across the globe are the most
affected by this phenomenon.

Optional resources for enrichment

For more about the topic, read Unpaid Care Work: Everything You Need to Know Links to an external
site. (Rodriguez, 2021).
Or watch the short video Unpaid care and domestic work by womenLinks to an external site. (Shaping Fair Cities,
2019).

Factor 3: Capital

Remember, we are talking about capital in the context of the factors of production.
Glossary
Capital, in the context of the factors of production, is anything tangible, other than labour or natural resources,
needed to produce goods or services, except consumables.
Consumables are things that are used up immediately, like washing powder or shoe polish.

Attention
Economists and accounting professionals use the term ‘capital’ differently. Don’t get confused. In the field of
finance ‘capital’ has a very specific monetary or financial connotation, while in economics it is about more than
finance.
Value, size and lifespan
Capital varies in value, size and life span.
 Value, size and life span of capital

An inexpensive piece of software can contribute greatly to production, but so can an R1 million machine. Capital
can be as big as an Airbus or bridge or as small as a cell phone or a camera. An office desk is regarded as capital,
but it does not last nearly as long as a road, which is also capital.
Eventually, all capital needs to be replaced or maintained, whether it lasts long or short. Professional accounting
deals with this aspect of capital through provisions and depreciation.
 Factor 4: Entrepreneurship

An entrepreneur is like the magic ingredient without which the other factors of production remain dormant.
Only once an entrepreneur has an idea and applies the idea by combining and organising the other factors of
production does one end up with goods or services.
In a free market economy, where there is huge uncertainty about the demand for your goods or services, being an
entrepreneur means taking a risk. Entrepreneurs take these chances and take a risk because if they succeed, they
are rewarded with profits.
But sometimes, entrepreneurs do not succeed and end in financial ruin. Luckily there are enough entrepreneurs in
the world for whom the lure of reward outweighs the risk of ruin.
 The entrepreneur activating the other factors

We’ve looked at the four factors of production. Next, let's consider where income comes from.

Where does income come from?

 The second part of the basic flow of the economy is income. For economists, income is
by the production process.

Without production, there is no income. Equally, in an economy, income has no other source than production. That
makes the maths in macroeconomics fairly straightforward. The total value of the income in an economy
is equal to the total value of the production.

Sources of income in macroeconomics

In terms of the principles of economics, the income derived from natural resources is rent. The income from labour
is salaries and wages, while interest is the income from capital. Entrepreneurs are rewarded for their ideas,
organisation and risk-taking by earning profits.
We’ve looked at income. Next, let's consider where spending comes from.

Where does spending come from?

The last leg of the basic flow of the economy is spending.

When we described the difference between microeconomics and macroeconomics in our second lesson this week,
we mentioned the different economic actors whose ‘decisions in the face of scarcity’ are integral to economics.
These economic actors are also the same sectors of the economy that are responsible for most of the spending in
the economy. Let’s refresh your memory.
Four economic actors in spending
Consumers, firms and government are the three economic actors in spending. From the visual,
you might also notice that we have added another economic actor, the foreign sector.
Economic actors in spending
esson 6 Conclusion: The basic flows in the economy
As you can see, an open market economy is characterised by the free flow of goods and services that are produced
by firms (and the government) to raise income (profits and taxes) to meet the needs of households (consumers)
and firms (the need for capital goods), with some goods and services either bought from the foreign sector
(imports) or sold to the foreign sector (exports).
This lesson is deliberately called the basic flows of the economy. Things just get more complicated from here
onwards, but more about that in the next semester.
What you’ve learned
The basic flow of the economy includes production, income and spending.
 Production comes from four factors: natural resources, labour, capital and entrepreneurship.
 Income comes from the sales of the goods and services produced during production.
 Households, firms, the government and the foreign sector, contribute to the economy's spending.
 Three major flows of the economy diagram (Based on Fourie & Mohr, 2022: 17)

These flows happen all over a mixed economy and usually continue indefinitely. Without these flows, an economy
will stagnate, and ultimately, the people's wants and needs will not be met, and in the long term, it will become a
failed economy. During the Covid-19 pandemic, these basic flows were disrupted for a short time, and
consequences for economic growth rates were dire.
Where you’re going next
However, long before an economy fails, there are warning signs. The best way to keep track of these warning signs
is to measure what is happening in an economy. Next week we will introduce you to some of these key measures.
We have now come to the end of the lessons for this week, well done. All that is left for this week is to do
the knowledge test.
Remember, if you have any questions, please reach out to us.

Connection hub
Bring your academic content-related queries and thoughts to the Week 2 Collaborative discussion forum.
Email your programme-related queries to Programme Support at [email protected]
Connect with your fellow students on the YammerLinks to an external site. community, our social networking
platform.

Week 2 Conclusion
You’ve completed this week’s lessons
Well done - you’ve completed the lessons for Week 2 of the Economics and Foresight for Business Strategy
module.
What you’ve learned this week
This week we opened the book on economics. We first made sure that we agreed on some key definitions and
discussed the importance of economics in the context of the journey of a professional accountant.
We made the distinction between microeconomics and macroeconomics and looked at some examples. The rest of
the week, we continued exploring key macroeconomic principles

Introduction to macroeconomics
Our lessons this week covered important concepts and principles that help economists (and us) think about the
economy. Those key principles include the economic problem and how it is solved through various mechanisms.
We concluded that South Africa has a mixed economy with a market system that also includes elements of central
planning.
We spent some time with the concepts of supply and demand, essential economic points of departure, as we
delved deeper into the abstract world of economics.

Consider for a moment

What is the relevance of all these economic principles to our goals for this module, specifically business strategy
development?
In week one, we spent quite a bit of time describing the business strategy development process, its components
and role players. We also looked at leadership in the context of business strategy development. Business leaders
are not only visionaries, but they are ultimately responsible and accountable for the development of a business
strategy.
Part of the business strategy development process is to consider and make sense of the external environment. By
introducing you to economics and its principles we are equipping you as future business leaders with the tools
necessary to consider and incorporate economic principles in your strategy development process.
Throughout the next three weeks, we will continue adding to this toolbox, and we will conclude this module by
looking more closely at how these tools are applied in a business strategy development process.
 Your tools for business strategy development
What to expect next
Next week, specifically, we will conclude our exploration of macroeconomics for this semester by looking at
measuring and making the economy through key measures and policies, as well as investigating the things one
needs to look out for when thinking about, measuring or making the economy.
Once we conclude our lessons on macroeconomics, we’ll move to microeconomics.
If you have any questions, remember to reach out to us - your online community.

Connection hub
 Week 2 Collaborative discussion about academic content
Reach out and post on the discussion forum for academic content-related queries.

Programme support matters

Reach out and email [email protected] for programme-related queries.

Yammer community
Connect with your online community on our social networking platform.

Additional resources

Week 2 Glossary
The glossary provides a list of the glossary terms we covered this week.

Week 2 Reference list

The reference list provides the sources cited and resources used in the content we covered this week.

Week 2 Glossary
Capital, in the context of the factors of production, is anything tangible, other than labour
Capital
or natural resources, needed to produce goods or services, except consumables.

Command
economy A command economy can be described as an economy governed by a central authority to
determine what goods and services are produced, by whom and how, and for whom in
 determined quantities. A fully command economy leaves little room for individual choice.

Consumables are things that are used up immediately, like washing powder or shoe
Consumables
polish.

Demand in macroeconomics is defined as the total quantities of goods and services that
potential buyers are willing and able to buy within a specific period.
Demand Not to be confused with wants and needs, demand is the result of choosing specific wants
and needs over others, given the means that are at hand (Based on Fourie and Mohr,
2022).

Economics "seeks to describe, explain, analyse, and predict a variety of phenomena such
as economic growth, unemployment, inflation, trade, the prices of different goods and
services, money, interest rates and business cycles" (Fourie and Mohr, 2022).
Economics is all about the management of households, no matter their size – from each
Economics individual to the management of the whole economy.
"Economics is the study of how humans make decisions in the face of scarcity” (Greenlaw
and Shapiro, 2017).
We can also describe economics by saying that it is “ultimately about studying the lives
of ordinary people, and how to improve them” (Fourie and Mohr, 2022).

“Labour may be defined as the exercise of human mental and physical effort in the
Labour production of goods and services. It includes all human effort exerted with a view to
obtaining reward in the form of income” (Fourie and Mohr, 2022).

Macroeconomics
A definition of macroeconomics is, being “concerned with the economy as a whole… In
 macroeconomics we focus on the “big picture”, we develop an overall view of the
economic system, and we study total (or aggregate) economic behaviour” (Mohr,
Seymore and Yu, 2018).

“A market is any contact or communication between potential buyers and potential

Market
sellers of a good or a service” (Fourie and Mohr, 2022).

A market economy can be described as an economy where the market determines what
goods and services are produced, by whom and how, and for whom in determined
Market economy quantities. The market is not one thing; it is a completely decentralised mechanism and
reflects the choices of individuals, firms and governments. Inefficiencies in a market
economy result in waste, shortages and pollution.

“In microeconomics the decisions and functioning of decision makers such as individual
consumers, households, firms or other organisations are considered in isolation from the
Microeconomics
rest of the economy. The individual elements of the economy are, figuratively speaking,
each put under the microscope and examined in detail” (Mohr, Seymore and Yu, 2018).

We can define “the opportunity cost of a choice [as] the value to the decision maker of
the best alternative that could have been chosen but was not chosen. In other words, the
Opportunity cost
opportunity cost of a choice is the value of the best forgone opportunity” (Mohr, Seymore
and Yu, 2018).

Supply in macroeconomics is defined as the total quantities of goods and services that
Supply potential sellers are willing and able to sell within a specific period. It is influenced by
demand, and there is no guarantee that everything offered will be sold.

Traditional
economy A traditional economy can be described as an economy governed by tradition, customs,
 beliefs and rituals to determine what goods and services are produced, by whom and
how, and for whom in determined quantities. A traditional economy is typically
ecologically sustainable.

Week 3 Overview
When Grammy Award-winning soul singer, Billy Paul, sang Let the dollar circulate, he described the basic flow of
the economy, which we discussed last week. But if you listen to the rest of his song, you realise how well he
understood the interconnectedness of the various parts of the economy.
He sings about inflation, unemployment, poverty and much more, demonstrating that economics is not confined to
textbooks and the minds of economists. Economics is the concern of everyone in the economy, including you!
You can listen to Let the dollar circulateLinks to an external site. (Billy Paul, 2020) or read the full of lyrics of the
songLinks to an external site. (AZLyrics, n.d.).Links to an external site.
Objectives for this week
Our lessons for this week continue with our process of building your business strategy development and decision-
making toolbox, particularly the key principles of macro- and microeconomics. Last week we introduced you to the
field of economics, its importance, and definitions. We also distinguished between micro- and macroeconomics,
and we spent the rest of our time looking at macroeconomics to answer the question: ‘how can one think about the
economy?’ (Thinking).
This week we continue with macroeconomics. In our first two lessons, we address the other two crucial
macroeconomic questions:
1. How can one measure the economy? (Measuring).
2. How is the macroeconomy made? (Making).

We will also spend some time discussing things one should look out for in macroeconomics. In particular, we will
cover a few assumptions and shortcomings behind thinking about, measuring and making the economy.
To remind you:
 Introduction to macroeconomics - overview of this module

Once we have completed macroeconomics, we move over to microeconomics. We’ll start with some key principles
and basic concepts to ensure that the foundations of your microeconomic thinking are solid. We’ll then move on to
microeconomic theories, the pillars of the discipline, which we’ll carry over and conclude during next week’s
lessons. We’ll close our study of microeconomics by adding some structure, market structures to be specific and
introducing the idea of externalities, which can be both positive and negative.
In the process, we might not be building a multistorey skyrise of microeconomic knowledge (the discipline is far too
complicated to attempt something that ambitious in barely a week). Still, we can build a sentinel or guardhouse
that will give you enough of an overview to tackle the detail of next term with ease.
 Introduction to microeconomics - overview of this module

It is always a good idea to check whether you have gained the relevant knowledge from our lessons and to help
you be sure you will be given a chance, at the end of the week, to complete a compulsory knowledge test. The
knowledge test will be graded, and the results will be included in your final mark for this module but don’t let that
intimidate you. Tests like these are an opportunity for reflection and for you to grow in confidence, knowing that
you understand the material. And should you realise that there are still some gaps in your knowledge, you still
have the time to catch up quickly before we move on to other things.
By the middle of the workload for this week, you will be given an opportunity to contribute towards a discussion on
the discussion forum, for which you will get a mark for participation. We encourage you to use the opportunity to
enrich your learning by engaging with your classmates.

Contents
Introduction to macroeconomics (continued)

Lesson 1: Measuring the economy with key metrics

Lesson 2: Making the economy with policies

Lesson 3: Macroeconomic assumptions and shortcomings

Introduction to microeconomics

Lesson 4: Key principles and basic concepts

Lesson 5: Demand and supply

Week 3 In conclusion

Introduction to macroeconomics (continued) and microeconomics: Knowledge test

Week 3 Conclusion
 Week 3 Collaborative discussion about academic content

Week 3 Glossary

Week 3 Reference list

Declaration: Module Assessment Test 1

Module Assessment Test 1

Lesson 1: Measuring the economy with key metrics

If you have a car or spend a lot of time in a car, you will know that all cars come with a dashboard (some are still
physical gauges while others are now completely electronic). The speedometer tells you how fast you are going,
the odometer tells you how far you’ve travelled, and the fuel gauge helps you figure out whether there is still
enough fuel in the tank. Other gauges, like the engine’s water temperature, oil pressure and the revolutions (rev
counter), are there, but you only need them preventatively or when things go wrong.
 Car dashboard (Fotorech n.d.)

These gauges are vitally important to keep you travelling safely. If you go too fast, you not only run the risk of
getting a speeding fine but your chances of making an accident increase. Knowing how far you’ve travelled is
useful and an important indicator of whether you need to take your car for a service. If it wasn’t for the fuel gauge,
you could run out of fuel in a dangerous spot putting yourselves and your passengers at risk.
Just like a driver needs a dashboard with gauges that measures what the car is up to, the economic actors need a
way of knowing what’s happening in an economy. In the case of a car, we need to know if the speed is dangerous
and whether we have enough fuel. In an economy, we need to know if it is growing or standing still, how quickly
prices are changing and what is happening with the factors of production, amongst others.
In a physical car, we know we need to keep the speed within the speed limit. Similarly, in an economy, there are
targets or goals that help the economy function optimally.
In this lesson, we will introduce you to the key metrics that help us understand how a country's economy is doing,
often in comparison to another period or another country.
Therefore, this lesson answers our second macroeconomic question, ‘How can one measure the economy?’
 Introduction to macroeconomics - overview of the module

Lesson contents

Overview of metrics

Gross domestic product (GDP)

Economic growth

Inflation

Balance of payments

Unemployment

Poverty

Economic inequality

Lesson 1 Conclusion: Measuring the economy with key metrics

Overview of metrics
The standard dashboard of a passenger car has between five and six gauges, all mentioned above. The dashboard
of a Formula 1 car has a lot more information – from the current gear in which the car is driving to tyre
temperatures and lap times. The dashboard of a fully-fledged economist is as complicated as that of an F1 car, if
not more.
However, our mission is to introduce you to macroeconomics in the context of business strategy development and
decision-making. We’re not economists; therefore, we don’t need an F1-level set of metrics. The dashboard which
we will use for the economy only includes key metrics.
Six key macroeconomic metrics
The six key metrics that we will cover in this lesson are:
 Gross domestic product (GDP) (including economic growth)
 Inflation
 Balance of payments
 Unemployment
 Poverty
 Economic inequality
Let’s explore.

Gross domestic product (GDP)

In a car, we use a speedometer to measure the speed at which the car moves. In an economy, we use GDP to
measure the level of activity in the economy, particularly economic growth.

Definition of GDP

Glossary
The gross domestic product (GDP) “is the total value of all final goods and services produced within the
boundaries of the country in a particular period (usually one year)” (Fourie and Mohr, 2022: 21).
Let's unpack the key words in our GDP definition a bit further by illustrating them below:
 Gross domestic product (GDP)

Although the definition of GDP is only one sentence, almost every word has some significance. Let’s look at these
significant words individually:

Value
Remember, we are busy with macroeconomics and, therefore, the world of totals. But how does one get the
total value of all the goods and services? The best way is to look at the price of everything and add it together.
Let’s pretend the only goods and services produced in an economy of a specific period were:
20 avocados @R20 each + 100 mielies @R10 each + 10 haircuts @ R200 each + 1 e-bike @ R5,000 + 2 paintings
@ R10,000 each + 5 chairs @ R250 each.
(20 x 20 + 100 x 10 + 10 x 200 + 1 x 5,000 + 2 x 10,000 + 5 x 250) = R29,650
We say, ‘the total value of production is R29,650’.

How to get to total value

Final
We have to be very careful that we don’t count things twice. To make a sandwich, you need bread, butter, tomato,
cheese, lettuce and ham. Let’s say we have enough ingredients to make and sell ten sandwiches.
We can’t add the value (price) of the bread, butter, tomato, cheese, lettuce and ham AND the price of the ten
sandwiches. That will be double counting. In economics, we need to make sure that we only add the value of
the final products, in this case the sandwiches, in the economy and not the ones that are used to make the final
product (we call those the intermediary goods – like bread, tomatoes, cheese, lettuce and cold meat in our
example).
 What is included in final (and what is not)

Within the boundaries of a country

The term GDP refers to domestic in the geographic sense of the word. In other words, the economic activity in a
specific country or economy. That also includes the net exports (put differently, total exports minus total imports).
We, therefore, include the exports because they were produced within the boundaries of our economy, and
we exclude imports because they were produced outside the boundaries of our economy.

Within the boundaries of a country (total exports minus imports)

During a particular period

We count GDP from period to period. So, every time a new period starts, we start at zero. Because we only include
things produced during a particular period, we only count new things, like new Ford Rangers produced in
South Africa, and we exclude the sale of second-hand items, like vintage VW buses.
Produced during a particular period (new things)
Gross
Usually, ‘gross’ is used as an opposite to ‘net’ and in GDP, it's no exception. It means we look at the value (or
price) without taking the 'usage cost' of the machinery or other capital goods into account. In accounting, we call
the usage cost ‘depreciation’.
(In case you need a refresher – we covered depreciation in Lesson 2 of Week 2 in Financial Reporting Principles:
The Elements of Financial Statements.)
Although the definition of GDP reads seemingly straightforward, it is actually a highly complex calculation with
many different things that need to be considered. Also, imagine all the work that needs to go in to collect all the
data you need to calculate GDP.

Gross (as opposed to net)

In summary
Now that we've unpacked the individual elements of the GDP definition, read over it again and see whether your
understanding of it is different. Remember, in an economy, we use GDP to measure the level of production activity
in the economy in a particular period.
One aspect of GDP which is not made explicit in our definition above has to do with the value that we are
measuring. Values of things do not stay constant, they change over time, and it is, therefore, important to take
that change into account when we measure economic activity. This is particularly important when we want to
compare economic activity over time. The terminology we use to distinguish between different types of values are
‘real’ and ‘nominal’. Let’s explain.
Real versus nominal
Have you ever heard your grandfather say something like ‘in my day…’ and then he would mention the price of
petrol or Wilson toffees. He has a point because, in 1972, you could buy a lot more with R100 than you can today.
For example, in 1972, with R100, you could buy 400 cans of shaving cream (Die Burger, 2022: 11). In 2022, with
R100, (Dischem, 2022) you could only buy one can (with a bit of change). We refer to the purchasing power of
money, which gets less over time.
Usually, if we want to compare a country's GDP for 2022 with another period, we need to consider the shift in the
purchasing power of money, and we call that GDP at real prices.
If we don’t consider the change in purchasing power, we talk about nominal GDP.
We will look into the concepts of ‘real’ and ‘nominal’ in more detail later in this course.

Real versus nominal

So, now that we have explored the definition of GDP in detail you might wonder what GDP looks like when it gets
reported.

What does GDP look like?

In South Africa, Statistics South Africa (StatsSA) is responsible for collecting the data and calculating GDP. Let’s
look at how they report GDP.
 Quarter 2 of 2022 Gross domestic product (Stats SA, 2022b: 6)

The graph above is what Stats SA reported for South Africa’s GDP for Quarter 2 of 2022. Sometimes they report
annual numbers (as with our numerical example above), but other times, like in this graph, they report quarterly
numbers.
Now that we've covered GDP, it is time to time to look at how we can use GDP to calculate economic growth.
Economic growth
No conversation about GDP is complete unless it also includes ‘economic growth’. So, what is economic growth and
how does one calculate it?

What about economic growth?

Glossary
Economic growth “is an increase of the total production or income of a country” (Fourie and Mohr, 2022: 97).

How to calculate economic growth

Let’s look at how we use GDP to calculate economic growth.
While GDP measures the total value of economic activity in a period, the growth rate measures the increase (or
decrease) between two periods (at real prices).
One of the most commonly used methods to calculate economic growth is to calculate the percentage increase (or
decrease) in the GDP of a country between two periods.
Let’s practise calculating economic growth.

Example
Based on the numbers provided, can you calculate the economic growth rate from 2018 to 2019?

2018 2019 Economic 2020 2021 Economic

(R million) (R million) growth rate (R million) (R million) growth rate
from 2018 to from 2020 to
 2019 2021
Annual GDP at 4,570,232 4,584,101 4,293,356 4,504,292 4.91%
market prices
(constant 2015
prices)

(Source: The World Bank, n.d.)

In Lesson 2 of Week 2 of Introduction to Mathematical Principles for Financial Analysis, we used percentages to
measure and communicate the magnitude of change.
Like with GDP, there are several complexities with economic growth, including the need to calculate economic
growth on GDP per capita (per person in the country), but more on those complexities later in this course.

What does economic growth look like?

Since Stats SA report on GDP it makes sense for them to also report on South Africa’s growth rate. Again, these are
quarterly growth rates.
 Quarter-on-quarter percentage change in GDP production (Stats SA, 2022b: 7)

Having covered both GDP and economic growth it is a good time to remind ourselves why these numbers are
important from a business perspective. Let’s discuss.
The relevance of GDP and economic growth
From a business perspective, it is really important to keep abreast of what is happening with a country’s GDP and
economic growth rate. No wonder every time these numbers are released it makes the headlines in the business
section of the newspaper or news site.
Business leaders know that if GDP growth is positive, they will most likely have more sales of goods and services in
the medium term. That means they are more like to invest in plans, like hiring new people or investing in capital
projects. The inverse is also true. If GDP growth is not doing well, business leaders and consumers lose their
confidence in the economy, and they withhold investment and spending. As a future professional accountant
and/or entrepreneur, you will also need to know whether you have confidence in the economy when you need to
assist with or make investment and spending decisions.
Now that we’ve explained GDP and economic growth, our economy dashboard has acquired some metrics.
GDP and economic growth (Stats SA, 2022b)
 Optional resources for enrichment
For more about GDP and how it is measured and reported, visit the Stats SA websiteLinks to an external site..
When you incorporate macroeconomic metrics in your business strategy development and decision-making, it is
always good to use the latest economic information. It will, therefore, be good to familiarise yourself at some point
with the information on the Stats SA website.
You can start by following this link to P0441 - Gross Domestic Product (GDP), 2nd Quarter 2022Links to an external
site. (Stats SA, 2022c). This is where Stats SA reported South Africa’s GDP for the 2nd quarter of 2022 from our
earlier example. The page contains several links, including links to a presentation, data and fact sheets.

Inflation
The engine’s water temperature gauge in a car is incredibly useful because if the water temperature in the engine
rises above normal, it warns us that something is wrong. A country's inflation rate is similar because if it rises
above a certain percentage, it is usually a warning sign of an economy in trouble.
Inflation as an economic measure is sometimes like the scapegoat, and it is blamed for all sorts of ills. Whether one
is a professional accountant or an entrepreneur selling e-bikes, it is vital to understand what inflation is and what it
isn’t and how it can impact your clients or business. This lesson introduces the topic, with lots more to follow later
in the course.

Definition of inflation

Glossary
Inflation “is defined as a continuous and considerable rise in prices in general” (Mohr, Van Zyl and Pretorius,
2018: 205).
This graphic is an illustration of the definition of inflation with some visual cues on what each component
represents. As with GDP, the devil is in the detail, and to fully understand the concept, we have to break up the
definition into its pieces. We'll start with neutrality and then move through ‘continuous’, considerable' and 'in
general'.

Breaking the definition of inflation into its pieces

Neutrality
When thinking through how to understand 'neutrality' in the context of the inflation definition, consider
Switzerland's political position, the perfect alkaline/acid pH balance, or someone balancing on a rope that doesn't
tilt too far left or right. Before we get to the specific words of the inflation definition, it's important to note that the
definition does not aim to make any judgements about where inflation comes from (i.e., there is no 'because' in the
definition). We can, therefore, say that the definition is characterised by neutrality.

The definition is neutrality

Continuous
Have you ever walked into a shop and realised that your favourite chocolate bar has gone up in price? Have you
ever told yourself price has gone up because of inflation? However, not all price increases should be blamed
on inflation and in this example, you might be wrong. Don’t worry; you are not alone. Most people think that just
because something is more expensive today than it was yesterday, it is because of inflation.
That, however, is a misconception. For movements in prices to be considered inflation, the process of price
increases needs to be continuous.

Continual price increases

Considerable
Price increases also have to be significant to meet the definition of inflation. If the price of a product increases by
about 1% or 2% a year, it is not necessarily a sign of inflation. Often, especially when it comes to electronic goods,
the technology of a product improves year-on-year, and what you are buying this year might be slightly more
expensive, but the product is an improvement from the one from last year.
When we think of the scale of price increases in the context of inflation, they are hardly noticeable mouse, fish or
kitten-sized but more in-your-face elephant, whale or lion-sized increases.

Considerable price increase

In general
Lastly, it is worth noting that inflation implies that the prices of most products and services are on the increase
most of the time. Just observing continuous and considerable price increases in one product category alone does
not mean we are talking about inflation. If the price increases only occur in avocados or bananas, it does not mean
it is inflation!

Prices in general
Alternative definition
When we discussed GDP above, we mentioned that the value of money decreases over time, and what you could
buy with R100 in 1972 is considerably less than what could be bought in 2022. We called that the purchasing
power of money that gets less over time. When prices go up all the time for everything, and by a lot, the
purchasing power of money takes a knock. The alternative definition for inflation is, therefore, “a sustained
decline in the purchasing power of money” (Fourie and Mohr, 2022: 131).
Where does the consumer price index (CPI) fit in?
To know whether prices are on the increase, you need to measure prices. In South Africa, we use the consumer
price index (CPI) to measure prices, and like GDP, the data is collected and reported by Stats SA.

Glossary
Index “is a system by which changes in the value of something and the rate at which it changes can be recorded,
measured, or interpreted” (Collins, n.d.-c).
As its name indicates, CPI is an index. In an index, you choose a point in time and assign a value of 100 to it; we
call that the baseline. Then you measure all the other points in time relative to your baseline.
How do we measure the prices of goods and services?
Stats SA has created a ‘shopping basket of goods and services’ that (in theory) represents more or less what South
Africans spend their money on each month. Each item in the basket is weighted, with the total basket adding up to
100. The higher the weighting of a goods or services group, the more important to the average South African.
 The relative weight of goods and services in the CPI basket (Stats SA, 2022f)

You might look at this basket and wonder how Stats SA came up with this.
It’s not an easy task (and we don’t have the time to go into the detail in this course), but just remember that this
basket is an average basket and, therefore, also a best guess. Stats SA monitors consumer behaviour and adjusts
the weightings every couple of years, as well as the individual items in the basket. In their detailed publications,
Stats SA also mentions that they have different baskets for different income groups and provinces. In the detail,
they also distinguish between urban and rural.
In January 2022, Stats SA announced changes to the basket, increasing the total items from 404 to 415. Here is a
slide from Stats SA showing how they have adjusted the basket.
When they made the adjustments, they decided that DVD players and satellite dishes no longer belonged in the
CPI basket. They have, however, added several new items, jam, gin, samp and wipes, to name but a few.
 The new consumer inflation basket with reference to 2019 (Stats SA, 2022a)

Optional resources for enrichment

For more detail on the basket and weights, you can read Gin is in and DVD players are ejected as Stats SA updates
the inflation basketLinks to an external site. (Stats SA, 2022a).

Example: Calculating an index

So, we know that CPI is an index that measures prices relative to a baseline, and we know from where the prices
come. How is CPI calculated? Here is a short video to explain the basic calculation. Just remember that in reality,
the basket contains 415 items and prices are collected across South Africa, so the data that goes into the real
calculations are a lot more involved.
Calculating an index

As a reminder, here are our calculations again:

Get the values for each item in the basket for each period
 Use the baseline to calculate the index values and inflation

Attention
Remember, an index needs a baseline, and all other values are calculated relative to the baseline. Current annual
CPI inflation is calculated by expressing the increase in the index from one year to the next as a percentage of the
earlier index (wikiHow, 2022).
What does inflation in South Africa look like?
Now that you understand how a price changes, an index and inflation fit together, let’s see what South Africa’s CPI
is up to.
 Monthly CPI from January 2021 to June 2022 (Stats SA, 2022f)

Keeping one’s eye on the inflation rate is very important if you are running a business or advising someone with a
business. The moment the inflation rate is climbing it is a sign that prices are going up faster than before. In the
longer term, if prices are rising, consumers will have less money to spend, which could impact your sales or that of
your customers. In times of high inflation, the money you have in your business will also lose its value quicker than
in times of lower inflation.
Based on this data, we can update our dashboard.
 CPI and inflation from 2018-2022 added to our dashboard (Stats SA, 2022f)

Balance of payments
We’ve now looked at two economic metrics which are commonly discussed, GDP growth and inflation. There are
four more to go. The first is the balance of payments, not necessarily a term we use every day, but once we get
into the detail you will see why it is as important as the previous two metrics.
A fuel gauge has been one of the instruments on the dashboard of a car for almost as long as there have been cars
around. Knowing how much fuel is in the tank has prevented many a traveller from being stuck on the side of the
road. However, not all drivers take heed, and there are still those who run out of fuel.

Definition of balance of payments

Broadly speaking, the balance of payments of a country helps those in charge to know what is happening with the
in- and outflow of money in an economy. If a fuel gauge dips below zero, one either has to refuel or the car will
eventually just stop. The balance of payments, however, can fluctuate between a negative number (called a trade
deficit) and a positive number (called a trade surplus) without the economy stopping. In fact, it is sometimes good
to have a trade deficit, and sometimes it is good to have a surplus. Both can have benefits for economic growth.
Let’s define what we mean by ‘balance of payments’.

Glossary
The balance of payments is the accounting record of the transactions between a country and the rest of the
world. “The South African balance of payments summarises the transactions between South African households,
firms and government, and foreign households, firms and governments during a particular period (usually a year)”
(Mohr, Van Zyl, and Pretorius, 2018: 98).
 The transactions that the balance of payments summarises

These transactions include the export of physical items such as avocados, mielies, gold or coal and in return, we
are rewarded with financial assets. Imports are also included in the transactions that are summarised in the
balance of payments, from machinery and electronics to components and in return, we see an outflow of financial
assets.
From the official records of the South African Reserve Bank (SARB), the balance of payments for 2019 and 2020
looks like this:
 South Africa's balance of payments for 2019 and 2020 (SARB, 2021: 3)

You can see how the flow of goods and services (the current account) can be both positive and negative, just like
the flow of financial assets (the financial account) can be both positive and negative. We also have unrecorded
transactions, but in total, the balance of payment is always net zero.
Unlike GDP or inflation, which business leaders follow closely, the balance of payments is not always top of mind.
Yet, it is an equally important measure to understand the health of the economy and knowing whether the
country’s current account is positive or negative and for how long, will also contribute to your level of confidence in
the country’s economy.
We’ve now explained the balance of payments using the actual data from the SARB. The only thing left is updating
our South African economy dashboard.

Balance of payments added to our dashboard (SARB, 2022)

Sources for this page: Amadeo, 2022; Fourie and Mohr, 2022; Mohr, Van Zyl and Pretorius, 2018.
Unemployment
We are now halfway through our list of key economic metrics. The first three dealt with the big numbers – total
production, prices of products and money and things flowing in and out of the country. The next three are more
related to the experience of people on the ground. Of these we’ll start with unemployment. What people do (or not
do) every day, has a significant impact on overall economic activity.
The rev counter on a car moves higher and lower as the driver tries to accelerate by stepping down on the
accelerator and changing gears. In the case of the economy, there is also a relationship between economic growth
and unemployment. A highly simplified version of the relationship between unemployment and economic growth is
that it is inverse, meaning higher unemployment causes lower growth and vice versa.
A more complex explanation of the relationship was described in the 1960s by Arthur Okun, a Yale professor and
economist. Known as Okun’s law, you can learn more about the relationship between economic growth and
unemployment by watching the short video How does Okun's law describe unemployment? Links to an external
site. (Furhmann, 2022). (Just scroll down to find the video).
Unemployment: who’s in and who’s out
Unemployment is one of the more difficult measures to define; it is also a measure that can be controversial and
often politicised. Because of these controversies and difficulties, we have two definitions, the strict definition and
the expanded definition.
Before we get to the actual definitions, we need to explain some concepts.
You might recall that in Week 2 of this module, when we discussed labour as a factor of production, we spoke
about how important the quantity of people willing and able to work is to an economy. We described those able
and willing to work as the labour force.
 The labour force are those willing and able to work

Another term for the labour force is the economically active population (EAP).
Besides those able and willing to work, we have those whose ages exclude them from the EAP. South
Africa's working-age population is between 15 and 64 years old. Those 14 years and younger (children) and 65
years and older (elderly) are not generally considered part of the EAP.
Those who are unable or unwilling to work include those who are choosing to study full-time, those who cannot
work due to disabilities, those who choose not to work for any other reason and those who have given up in their
search for work (also referred to as the discouraged work seekers). These are collectively known as those who
are not economically active but still part of the working-age population.
 Who is employed and who is not?

So, you might wonder, what criteria define someone as economically active (or willing and able to work)? Included
in the EAP are four categories: those employed by the formal section, those employed by informal sector,
employers and self-employed people, and unemployed people.
 The economically active population (EAP)

It is important to know that the unemployment rate (for either definition) is determined at a specific point in time.
In reality, people move continuously in and out of the 'unemployment pool'.

Defining unemployment
As mentioned, we have two definitions for unemployment.
Like GDP, StatsSA is also responsible for determining who is employed and who is not, and they do so with what
they call the Quarterly Labour Force Survey (QLFS). To get the data, they interview people from all over South
Africa within a specific period.

Glossary
The strict definition of unemployment
“Unemployed persons are those people within the economically active population (i.e., aged 15 to 64) who:
a) did not work during the seven days prior to the interview,
b) want to work and are available to start work within two weeks of the interview, and
c) have taken active steps to look for work or start some form of self-employment in the four weeks prior to the
interview.” (Fourie and Mohr, 2022: 156)
In our graphic above, those indicated as ‘Unemployed (but actively seeking)’ meet the criteria of the strict
definition of unemployment.

Glossary
The expanded definition of unemployment
Unemployed persons in this definition “excludes criterion (c) above. In other words, whereas a person had,
according to the strict definition, to have taken steps recently to find a job, the expanded definition only requires a
desire to find employment” (Fourie and Mohr, 2022: 156).
To get to the unemployed persons according to the expanded definition in our graphic above, one will have
to separate those who have the desire to be employed (and are able to) despite being discouraged, from
the students and others.
Knowing who falls into which category and how the definitions work allows us to report on the metric that allows us
to measure unemployment.

Measuring unemployment
Let’s look again at how the population can be sliced and diced. Let’s say the total population is ‘A’. Once we
exclude children and the elderly, we get the working-age population; let’s call that ‘B’. We know from our definition
above that the EAP (or the labour force) is the working age population without those classified as not economically
active (the discouraged, full-time students and others). If we call the labour force ‘C’, we can calculate those that
are not economically active as B minus C.
The whole labour force is not employed, though. The difference between the labour force and the employed is the
unemployed. If we assign ‘D’ to the employed, we can calculate the number of unemployed people as C minus D.

Calculating the official unemployment rate and the labour force participation rate
Now that we’ve covered who is in and who is out of unemployment, including the definitions, you should be able to
calculate two key metrics, the official unemployment rate and the labour force participation rate (LFPR).
 The unemployment rate (UR) is the number of unemployed persons as a percentage of the EAP. In our
graphic above, that means (C-D = the unemployed) as a percentage of C (the EAP) gives us UR.
 The labour force participation rate (LFPR) is the labour force as a percentage of the working-age
population. Therefore, LFPR = C/B x 100%, based on the graphic above.
Here are two short exercises for you to practise with.

Exercise: Calculate the LFPR

We sourced the following data from the Quarterly Labour Force Survey – Quarter 2: 2022 (Stats SA, 2022g: 2):
Apr-Jun 2022
Thousand

Employed 15,562

Unemployed 7,994

Not economically active 16,621

Provide your answer to the following question as a % up to two decimals:

 What was the LFPR for Quarter 2 of 2022?

Suggested solution (click to reveal)

Exercise: Calculate the unemployment rate

Here is another exercise for you. Please provide your answer to the following question as a % up to two decimals.
  What was South Africa’s official unemployment rate for Quarter 2 of 2022?

Suggested solution (click to reveal)

In addition to these numbers and rates, StatsSA provides the expanded unemployment rate (EUR) for each quarter.
For Quarter 2 of 2022, the EUR for South Africa was 44.1%. However, we will leave the detailed calculation of the
EUR for later in this course.

Optional resources for enrichment

If you are interested, you can review Quarterly Labour Force Survey (QLFS) Q2:2022 Links to an external site.(Stats
SA, 2022g) or the presentation by the Statistician-General of Stats SA Links to an external site. when they
announced the QLFS for Q2 2022 (Stats SA, 2022d).
These numbers are released every quarter. Check the StatsSA website to see what the latest numbers look like.
Knowing what is happening with the unemployment rate helps us to get an idea of the health of the economy and
what the socio-political mood might be, which in turn is important for strategy development and decision-making.
Now that we have a better understanding of how the numbers related to unemployment in South Africa fit
together, it is time to update our dashboard.
 Unemployment–related data added to our dashboard (Stats SA, 2022g)

As mentioned above, there is an inverse relationship between economic growth and unemployment. As the owner
of an e-bike store that relies on a growing economy to grow their business, it is worth keeping an eye on the
quarterly unemployment numbers. If the unemployment numbers continue to stay high or even increase, one must
be cautious about expecting economic growth.
Poverty
The second of the economic metrics that deals with the experiences of the people within the economy is poverty.
There is a strong link between poverty and unemployment and given South Africa’s high levels on unemployment,
it is natural to expect high levels of poverty. Let’s look in more detail how poverty is measured.
Like the engine’s water temperature gauge, the oil pressure gauge is an important indicator of the health of an
engine. It serves as a warning sign, and if you notice it climbing early enough, you could do something before the
engine is damaged.
Poverty levels, like inflation, are also a warning signal – in the context of economics, they serve as warning signals
for the health of an economy. Rising poverty levels are not only signs of an economy that is potentially in trouble,
but they can also signal imminent escalations in social tensions and rising crime levels. As a business owner
developing their strategy for the business, monitoring poverty levels are important from a risk management
perspective and also, as a socially responsible business it serves as a motivation to participate in poverty
alleviation activities and initiatives.
If you ask most South Africans, they will be able to confirm that poverty is a very real phenomenon. However,
putting down an exact definition of poverty is more difficult. Generally, there are three ways that poverty can be
measured, absolute (objective), relative and subjective.
However, no matter which of these measures we deploy, millions of South Africans are living in some form of
poverty.

Absolute poverty
We’ve touched on absolute poverty in Lesson 1 of Week 2 of this module when we mentioned using the food
poverty line (FPL) to measure extreme poverty.
Until August 2022, the food poverty line was at R624 per month. At the time, almost 23% (or 13.8 million people)
were living on R624 or less per month.
The food poverty line refers to “the amount of money that an individual will need to afford the minimum required
daily energy intake” (Stats SA, 2022h: 3). The most commonly used minimum required daily energy intake is 2100
calories per day (Oosthuizen, 2014).
We also mentioned that in Aug 2022, more than 30, 4 million South Africans were living below the poverty line of R
1 335 per month (BusinessTech, 2022a). The official name for this poverty line is the upper-bound poverty line
(UBPL), and it is based on the FPL plus the cost of other non-food items.
The following infographic indicates the ratio of South Africans who are not living in poverty (the grey hands, versus
those who are living below the poverty line (blue hands). Those living in poverty are made up of those above the
food poverty line (dark blue hands) and those living in absolute poverty (light blue hands). It is a sobering thought
to realise that half of the country’s citizens are classified as living in poverty.
South African poverty ratio (Business Tech, 2022a; Stats SA, 2022e)
Using absolute poverty lines is seen as objective since it relies strictly on external measures. However, it also has
its shortcomings since it does not take the circumstances of people into account.

Consider for a moment

The national poverty lines are updated regularly. Can you find the latest poverty lines as published by Stats SA? Do
you think these benchmarks are realistic? How much do you think is the bare minimum that one can get by with
per month?

Other measures
The other ways of measuring poverty fall outside this module's scope, but we will mention each briefly and provide
links for you to explore further, should you wish.

Optional resources for enrichment

You can download a PDF version of Types of poverty with linksLinks to an external site.

What do things look like globally?

Poverty is not only a local concern. On the United Nations’ Sustainable Development Goals (SDGs) list, ‘No Poverty’
is number one!

SDG 1: No poverty (National Ethical Service, 2021)

In short, it is the UN’s goal to “eradicate extreme poverty for all people everywhere, currently measured as people
living on less than $1.25 a day” (UN, n.d.: Goal Targets 1.1).
In 1990, when the data for the graphic below starts, 36% of the world’s population (or 1.9 billion people) lived in
extreme poverty. Although the world has not reached the objective of SDG 1 yet, it has made substantial progress,
as seen in the graph, which is based on estimations by the World Bank. Since this graph was created, the world has
been in a pandemic, and one of the consequences was an unexpected increase in extreme poverty above the line
which the World Bank forecasted in this image (Yonzan et al., 2022). However, global poverty levels remain
significantly less than 40 years ago and, given current conditions, it is unlikely to reach the same levels as the
1990s again soon.
 The number of people in extreme poverty – including projections to 2030 (Hasell et al., 2022)

From a South African perspective, our updated macroeconomic dashboard now looks like this:

The poverty ratio added to our dashboard (BusinessTech, 2022a; Stats SA, 2022e)
The last metric that we will explore for our macroeconomic dashboard is economic inequality.

Economic inequality
Economic inequality is the last metric on our dashboard. Like poverty and unemployment, economic inequality
speaks to the experience of the people in the economy. Economic inequality is a relative term. That means that
economic inequality can be low, even if a country is still a developing country, and economic inequality can be
high, even if a country is already a developed country. Let’s find out more about South Africa’s economic
inequality.
A car's odometer is not a warning sign per se, but it is still an important instrument. Without an odometer, it could
be difficult to navigate in uncertain terrain, and you might forget to book your car in for its service. Measuring
economic inequality, which is, in essence, measuring how income (and wealth) is distributed (spread) amongst a
population, is also important.
If the distribution of income and wealth is highly unequal, it often leads to social and political conflict. From an
economic perspective, high levels of economic inequality impact the principles of supply and demand. Those with
relatively high incomes have a disproportionate impact on demand. Those with the money have the means to
enforce their wishes on demand in an economic context more so than those who only have enough to make ends
meet.
There is another dimension to high levels of economic inequality – it has been found that there is an indirect
correlation between levels of happiness in a society and inequality. Societies with low levels of inequality are
generally happier than those with high levels of inequality. And according to the research, this applies to about
80% of a society, even if you are not one of the worst off in that society.
Types of economic inequality
There are two types of economic inequality that are often measured (Macquarie, 2017).
 Income and wealth inequality

Income inequality
Firstly, income inequality looks at the difference between what people earn, and it is often measured by how they
spend their money. If you earn a high income, you can eat sushi regularly and drive a sports car. If you barely earn
the minimum wage, you might often have to survive on toast and jam and use public transport.
In a market economy, income inequality will never be completely eradicated. Remember when we spoke about the
factors of production in Lesson 6 of Week 2? We recognised that labour needs to be compensated through salaries
and wages but that the entrepreneurs who take on the risk of failure are rewarded with profits.
Economists agree that there will always be a gap between the top and bottom earners in a market economy, but
they do not agree on how wide the gap needs to be. In 1980, Peter Drucker shared that he believed the pay ratio
between top executives and workers should not be more than 20:1. (Pizzigat and Anderson,
2022). Forbes magazine reported in May 2022 that the US ratio of the average CEO to median worker pay was
235:1 (Field, 2022).

Consider for a moment

What do you think? You are currently a student, but you might be the CEO one day. What should be the ratio
between executive and worker pay?
Wealth inequality
Wealth inequality speaks to the difference between what people own. Some people own lots of wealth – houses,
investments, cars, bounds and other properties – and some will own very little over their entire life.
Here is an infographic created by VisualCapitalist explaining global wealth distribution at the end of 2021.
 Global wealth distribution (Deshmukh, 2021)

Those in the bottom 55% of wealth owned less than $10 000 (In November 2022, that equated to about R172,000).
That means, if you have no debt and own your car, let's say a 2017 Ford Fiesta with 95,318 km on the odometer
worth R199,950 (Autotrader, 2022), you could consider yourself part of the world's wealthiest 45% of people.
If you know someone with a house worth R2 million and no debt, that person is among the wealthiest 12.2%. With
over 8 billion people on this planet, being in the top 12.2% makes them wealthier than at least 7 billion other
people.

Optional resource for enrichment

In 2022, the World Bank published a report, Inequality in Southern AfricaLinks to an external site., which
investigated various aspects of inequality for all the countries in the Southern African Customs Union which you
can have a look at if you are interested.
Measuring income inequality
Measuring inequality is regarded as one of the most difficult metrics, particularly because of the level of detail of
the information needed to calculate it. The three most widely used measures of income inequality are:
 The Lorenze curve
 The quintile ratio
 The Gini coefficient

With a Gini coefficient of 0.67, South Africa is regarded as the most unequal country in the world. We will cover
these in more detail later in this course (World Population Review, 2023)
With the last of our measures complete, let’s take one more look at our economic dashboard:
 Inequality added to our dashboard (World Population Review, 2023)

This dashboard is only a snapshot in time; many of these numbers would have changed since we put this together.
The overall picture is not rosy and reflects the realities of doing business in South Africa
Consider for a moment
As a finance professional and entrepreneur, what can you do to move the needle of economic growth or the levels
of poverty and inequality? You might not think that on your own, you can make a blimp on this radar, but what if
you and all your classmates are committed to a positive economic future for South Africa? What if all South Africa’s
accounting professionals put their substantial influence, economic weight and commitment towards moving our
economic needle?

Lesson 1 Conclusion: Measuring the economy with key metrics

When you drive a car, you will notice that when you drive faster, your fuel consumption goes up, and the mileage
on your odometer also increases. If you ignore the rev counter or the engine water temperature, you might see the
oil pressure climb.
In this lesson, we spent quite a bit of time exploring the different macroeconomic metrics that economists use to
make sense of the economy. Although we have dealt with them separately, they are all deeply interconnected, like
the gauges in a car. Economic growth affects poverty and unemployment and vice versa. Inflation also affects
poverty and economic inequality, and the balance of payments. Moreover, all these metrics have an impact, either
directly or indirectly, on the business environment in which we operate.
Remember when we discussed change in the Introduction to Professional Accounting Studies module in the lesson
on understanding change, we spoke about the inbound and outbound change. Economic growth rates, inflation and
unemployment rates are examples of inbound changes coming to you and your business from the external
environment. Sometimes the impacts of these changes feel very indirect (the current account deficit), and other
times their feel more direct (like the inflation rate).
We also said that starting a business and putting a business strategy together creates outbound change, our
intention to change the world.

Sources of change (Based on Bishop and Hines, 2012)

In our quest to affect outbound change and to influence the world around us, we need to get better at anticipating
inbound changes. Knowing how the key metrics in economics work and keeping our eye on the economic
dashboard is one way of making sure that we consider the impact of inbound change on our plans and decisions.

What you’ve learned

In this lesson, we have continued exploring macroeconomics, particularly in answer to the second macroeconomic
question, ‘How can one measure the macroeconomy?’. We have examined six key metrics to measure and monitor
the macroeconomic environment – GDP, inflation, the balance of payments, unemployment, poverty and economic
inequality.
In Week 2, we mentioned that the government plays a crucial role in macroeconomics. One of the roles the
government plays is to steer the economy and its metrics towards certain ideal levels – ideal growth rates, ideal
inflation targets, sustainable unemployment levels and more. The mechanism with which government steer these
targets is policies.
That takes us to the last macroeconomic question, ‘How is the macroeconomy made?’, represented by the third of
the three topics in our illustration below - making.
Where you’re going next
 Introduction to macroeconomics - an overview of the module

We will look at some policy options available to a national government. Remember, when the government
announces any change to their economic policies, chances are that you will feel the impact of those policy changes
directly or indirectly somewhere along the way. We provide you with an overview of the different types of policies
and look a little closer at the two main policy types.

Lesson 2: Making the economy with policies

Whether you are in the driver's seat or just a passenger, even if you are mostly just a pedestrian, you are aware
that there are sets of rules and guidelines that govern how road users are supposed to behave. These rules and
guidelines serve multiple purposes:
 Purposes of rules and guidelines for road users

Economic policies are very similar. They help keep the economy on track and keep funds and goods flowing. They
provide economic guidance and certainty to the country’s citizens and the international community. Good
economic policies don’t interfere with the daily activities of the economy; rather, they create an enabling
environment within which everyone can flourish.
Unfortunately, making good policies is far more difficult and complex than putting traffic laws together.
In this lesson, we will introduce you to the various economic policies at the government's disposal and look at two
types of policies, namely fiscal and monetary policies, in a little more detail.
Lesson contents

Getting our definitions straight: Economic policies

Characteristics of policies

Types of economic policies

Easier said than done

Lesson 2 Conclusion: Making the economy with policies

Getting our definitions straight: Economic policies

Economic policy

Glossary
“Economic policy may be defined as government actions designed to influence economic behaviour in the pursuit
of certain outcomes” (Fourie and Mohr, 2022: 173).
There are four important things to remember when reading this definition and discussing economic policies.

1. Policies are the domain of the government

 Policies might be in the domain of government, but within
government, politicians and bureaucrats (public employees) are
involved with policymaking.

Both politicians and bureaucrats are human and, therefore, susceptible to their personal biases, prejudices, values and
agendas, which could affect how they make choices when putting policies together. (Remember how we spoke about lenses
and biases in the Introduction to Professional Accounting Studies module in the lesson on Smart skills to get ready for the
world of work?)

2. Policies are meant to influence economic behaviour

 The intention is for policies to influence the economy. In a free
market economy, the intention is not for policies and
policymakers to control the economy. There are some
circumstances whereby certain aspects of the economy are
subject to specific types of control, but never the whole
economy.

3. Policies are the topic of many public debates

 Policies are the topic of many public debates, but proposed
solutions are often clouded by self-interest and ignorance.

Economics and economic policies affect all aspects of our lives. Even those policies that don’t seem to have an
obvious economic element have some economic effect – from allocation to education via policies to minerals and
energy policies and much more. That also means that there are as many opinions about economic policies to be
found. Some of these opinions find their way to public debates, but not all opinions, especially those that promise
quick fixes, are viable.

4. Policies are made in the pursuit of specific outcomes and objectives

 Lastly, the outcomes which various economic
policies hope to achieve link back to the key
metrics we spoke about in the previous lesson.

Economic growth needs to be stimulated, inflation and prices need some stability, and ideally, one would wish
for full employment. Both poverty and inequality would take a turn for the better if income distribution was
more acceptable than is currently the case. Lastly, it remains important for the balance of payments to remain
within acceptable boundaries and relatively stable.

Characteristics of policies
There are a few things policymakers need to remember about making policies.
 Policies can be active - taking specific decisions and actions to do something. For example: raise taxes,
lower interest rates, cut fuel levies, or
  Policies can be passive – deciding not to do something. For example, to leave interest rates unchanged,
keep tax rates or maintain subsidies.
Policy is not only about what the government is doing but also what they decide not to do.
 Policies are about making important decisions, but
 Policies cannot remain with decisions; they need to be implemented.
Even the best policies are meaningless or ineffectual unless they are properly implemented.

Policy characteristics
Consider for a moment
In the South African context, we have policies where what is supposed to happen is not happening. We also have
cases where the intention of the policies and the real-life implication of the policies are not the same. Can you
think of any government policies that suffer from ineffectual implementation?
Lastly, we know that economic policies are part of macroeconomics, and we also know that in economics, trade-
offs, scarcity, opportunity cost and making choices apply. Trade-offs between using government money for
social grants or healthcare, having to choose between stimulating the economy by lowering interest rates but
running the risk of increased inflation, all of these and more make policymaking challenging.

ypes of economic policies

There are a few different types of policies. For now, we will concentrate on fiscal policy and monetary policy.

Fiscal policy
Fiscal policy is one of the main mechanisms for government to play a role in the economy.
Let’s look at how fiscal policy works.
Fiscal Policy

Let’s just check a more official definition that supports and summarises what we have said in the video.

Glossary
“Every government purchases goods and services, raises taxes and borrows funds to finance its expenditure. Every
government must therefore regularly decide how much to spend, what to spend it on and how to finance its
expenditure. It must therefore have a policy in respect of the level and composition of government spending,
taxation and borrowing. This is called fiscal policy…The main instrument of fiscal policy is the budget and the
main policy variables are government spending and taxation” (Mohr, Van Zyl and Pretorius, 2018: 52)
In the image below (from the video), the water jug represents the country’s national budget for the fiscal period.
The taps show us the sources of funds with which the government can fill up the jug, and the glasses of water
show us the various needs within a country which the national budget needs to meet.
Fiscal Policy
 Optional resources for enrichment
If you want to know more about fiscal policy, why we pay taxes and the different types of taxes, you can watch this
video Why do we pay taxesLinks to an external site. by Civics Academy SA (2016).
You might also find it interesting to see what the national budget looks like in practice. The National Treasury’s
Budget 2022Links to an external site. (National Treasury, 2022) provides a nice summary on pages 4, 5 and 6.
You could, of course, see if you can get hold of the latest budget, but we’ll leave that up to you.
Monetary policy
But the national government don’t only have to ‘make the economy’ with the fiscal policy that we’ve just
discussed. The way that most economies work means that they also have control over another aspect of the
economy -the amount of money that is circulating. Have you ever wondered how much money is in the economy?
Not only all the coins and notes but also all the bank balances in all the accounts of every household and firm in
the entire country.
Usually, thinking about the amount of money in the economy (the notes and coins in circulation and all the bank
deposits) is the concern of the monetary policymakers, and in South Africa, the monetary policymakers are the
SARB and National Treasury. We can, furthermore, summarise the rest of their activities in the following
infographic.
 Monetary policy

More about these relationships and other intricacies and complexities of monetary policymaking later in this
course.
Please note that measures to influence exchange rates are also technically within the wider definition of monetary
policy, but we’ve covered those above.
Easier said than done
You can see from above how complex these monetary policies are and how interconnected to various spheres and
domains in the economy. It is very easy to critique economic policies, and often those who understand the
complexities the least are frequently the most vocal in their criticism.
We have just scratched the surface, but we hope that we have given you a glimpse into the workings of
macroeconomics, from understanding the core principles to the measurements now and, finally, the policies.
In the case of economic policies, just think of all the moving parts. It is, therefore, no surprise that during
macroeconomic policymaking, things don’t always pan out as planned. Sometimes this is the case merely because
of the time it takes for the macroeconomic policymaking process to run its course.

 Recognition lag
At a very high level, we know that there are constant shifts or changes in the economy, but it takes time to gather
the data and recognise what kind of change is happening.
⇒We call that the recognition lag.
 Decision lag
Once policymakers have recognised a change, it takes time to analyse it and formulate what is believed to be the
appropriate policy response, whether it’s time to intervene or not.
⇒We call that the decision lag
 Implementation lag
The time between when the policy decision is made and the actual implementation thereof can be substantial.
⇒Hence the implementation lag.
 Impact lag
Lastly, depending on the policy, it could take anything from 12 to 18 or even 24 months for the implementation to
result in real changes in the economy
⇒Also referred to as the impact lag.
Jamaican-born author and economist Peter Blair Henry describes what it takes to make good economic policy as
“not so much the bravado to implement drastic change as the strength and wisdom to make reasonable trade-offs
over the many years it takes to transform a country’s standard of living” (2013: 2).

Lesson 2 Conclusion: Making the economy with policies

Like the rules of the road, policies guide and direct the economy and ensure the country does not disappear off the
fiscal cliff. There are many different policies at the government's disposal, and many different parties within the
government are responsible for each of the different policy instruments.
When we discussed the characteristics of policies, we mentioned the different outcomes for which policies aim.
These outcomes are also referred to as the “five objectives of macroeconomic policy” (Mohr, Van Zyl and Pretorius,
2018: 13) and just in case you have missed it; we have summarised it here again:
 Economic growth
 Full employment
 Price stability
 Balance of payments stability
 Equitable distribution of income
Can you remember how we measure each of these? If you are unsure, have another look at Week 3, Lesson 1.
Students, professional accountants, entrepreneurs, and lecturers have at least one thing in common – they will all
feel the impact of fiscal and monetary policy on their back pockets. Whether it is new import tariffs on the coolest
gadgets, duties on e-bike parts, interest on short-term loans or VAT on the latest economics textbook, we are all
affected by the decisions of policymakers.

Consider for a moment

Which macroeconomic policy do you feel has affected you most and why?
Consider sharing your reflections with your classmates in the weekly discussion forum.

What you’ve learned

We have finally completed each of the questions we posed about macroeconomics, represented by the three topics
of thinking, measuring and making. Not only do you have a better idea of how to think about macroeconomics,
but you are also more familiar with the metrics that measure the economy and the policies that make the
economy.
Where you are going next
 Introduction to macroeconomics

Before we cross over to microeconomics, we have one last lesson in macroeconomics ahead. Macroeconomics is
not an exact science, and if you are not careful, you could think you know what is going on, but there might be an
error in your thinking.
Being aware of potential errors in thinking about economics will also make you more cautious and help you think
twice the next time someone makes a sweeping statement about economic growth, unemployment or inflation.

Lesson 3: Macroeconomic assumptions and shortcomings

Have you ever been to an open-air music concert? It’s a Sunday afternoon, and you and your friends are relaxing
on the grass. Maybe you’re having a picnic, chatting away while the opening act is doing its thing on stage.
Everyone is ultimately there for the headline act, right?
Finally, once the bigger speakers get connected, and the lights begin to flash, the superstars make their way onto
the stage. Before you know it, one or two people in the crowd jump to their feet. You get annoyed because you
can’t see the stage any longer, so you jump up too. It’s not long, or the whole audience is dancing away, and a few
(super irritating) people even have their friends on their shoulders.
Everyone wants to see the stage, and the first person who stands up will have the best view, but only for a
moment. Once everyone else is on their feet, their view is pretty much the same as what it was when they were
seated (except, of course, for the very tall people).
The first person who stood up thought they would have the best view, but they were mistaken. If they thought
about it logically (especially if they were fairly short), they would have realised that they would have been better
off if they had stayed seated. When we make logical errors in our thinking, we call them fallacies.
In economics, there are numerous fallacies or ways to make errors in your thinking. Now that you have a better
idea of what macroeconomics is about, it is a good time to make you aware that it is possible to make errors in
your thinking about economics. It is always good to test your arguments to make sure the logic holds. And it’s even
better to bounce your logic off a friend or classmate to help you check for fallacies in your reasoning.
It might also be a good idea to watch out for errors in arguments of others, especially those who make public
statements about economics like policymakers. Listen to their economic arguments with circumspection and test
the logic of their arguments rather than believing them without question.

Glossary
A fallacy is an idea which many people believe to be true, but which is in fact false because it is based on
incorrect information or reasoning (Collins, n.d.-b).Links to an external site.
Circumspection is cautious behaviour and a refusal to take risks (Collins, n.d.-a).Links to an external site.
When Terry Pratchett wrote, “Money makes people rich; it is a fallacy to think it makes them better, or even that it
makes them worse. People are what they do, and what they leave behind”, he not only gave us a good example of
a fallacy, he also reminds us that even though we are currently mainly talking about money, it is ultimately what
we do with our scarce resources what counts (Goodreads, n.d.).
As mentioned, there are numerous ways to make errors in economic thinking. In this lesson, we will only cover two:
the fallacy of composition and correlation versus causation.
We will conclude the lesson with a reminder of the difference between levels and rates of change. While
these are not fallacies, they are often shortcomings in people understanding when they need to interpret economic
data.
Lesson contents

Fallacy of composition

Correction versus causation

Level of change versus rates of change

Fallacy: Discussion

Lesson 3 Conclusion: Macroeconomic assumptions and shortcomings

Fallacy of composition

Example: Fallacy of composition

The examples in this image are a bit ridiculous, and very few people will argue like that. However, these examples
help us understand what it means when someone is guilty of the fallacy of composition.

Glossary
The fallacy of composition “occurs when one argues that something must be true of the whole because it is true
of some parts of the whole” (Elsher, n.d.: para. 1).
In the first ridiculous example, the person guilty of the fallacy of composition argues that what is true for atoms
(namely, that they are not visible to the naked eye) must be true for the whole (something made of atoms like an
avocado).
You might wonder what all of this has to do with economics. We’ve just covered several lessons on
macroeconomics, and next up, we will tackle microeconomics. When we think of macroeconomics, we should be
careful to apply what we see as true on a microeconomic level as also valid on a macroeconomic level. Remember,
microeconomics only gives us the parts, and what is true for the parts might not be true for the whole
(macroeconomics).

Attention
The fallacy is not categorical and while one cannot say ‘what is true for the parts is always true for the whole’,
there are exceptions. Sometimes what is true for the parts is true for the whole. So, before you cry ‘fallacy of
composition!’ make sure that you have tested your logic properly. For example, it is perfectly valid to say, ‘All the
parts of my chair are wood, therefore, my chair is made of wood.’ In this case, the logic holds.

Example: Paradox of saving

Select each information point in the following interactive illustration to learn about the impact of collective savings
versus individual savings:
This example is often referred to as the paradox of savings (or the paradox of thrift).
 The paradox of savings - an example of the fallacy of composition

Consider for a moment

Consider the following example:
Your apartment block has decided to buy security cameras to increase the block's safety. The body corporate gets
a quote for 12 cameras, including wiring, for R16,000 (November 2022 prices). There are 80 apartments in the
block, which means everyone has to pay R200 for the new system.
You meet your neighbour in the lift and chat about the new cameras. She admits she is a bit low on cash and
hasn’t paid her share of the cameras yet. ‘In any case’, she says, ‘it’s only R200, I’m sure it won’t make much of a
difference’.
In economics, we call this kind of reasoning the ‘freerider problem’, and it is another version of the fallacy of
composition. Your neighbour is correct that it might not make a difference if she does not pay, and they will
probably still install the security cameras.
But what if everyone reasons like her? What will happen then?
Sources: Logical Fallacy, 2020; Mohr, Van Zyl and Pretorius, 2018; Pettinger, 2021.

Correlation versus causation

While the fallacy of composition is all about making an error in logic, the next type of error in economic thinking
(referred to as correlation versus causation) commonly occurs when data sets are analysed.
Consider the following graph:
 Correlation versus causation explained (1)

We have two sets of data in this graph. The green line, you might recognise, is South Africa’s CPI, one of the
measures we included on our economic dashboard.
The other set of data, drawn from the same period, follows a very similar trend to CPI.
In statistics, when two sets of data follow the same trend, we often talk about correlation.
 Glossary
Correlation is a statistical measure that expresses the extent to which two variables are linearly related (meaning
they change together at a constant rate). It’s a common tool for describing simple relationships without making a
statement about cause and effect (Statistics Knowledge Portal, n.d.: para. 1).
If we add a trend line for the data in the bar graph, you can see that the two data sets are highly correlated – they
appear to be changing together at a constant rate.

Correlation versus causation explained (2) - with a trend line

Based on the correlation between these two data sets, we could decide that there is also a causal relationship
between them. What we mean by a ‘causal relationship’ is that we believe that one causes the other.
So, in our example, we could say that what is happening in our blue graph is also the reason (the cause) for an
increase in CPI, which might seem like a rational idea.
Maybe it's time to reveal what the blue bar graph represents.
 Correlation vs causation explained (3) (Iqbal, 2023; Stats SA. 2022f)

Correlation does not imply causation

As it turns out, the blue bar graph is the annual number of Twitter users in millions between 2018 and 2022.
It does not take an economist or a statistician to know that there could not possibly be any causal relationship
between South Africa’s CPI and the annual number of Twitter users. Yet, error in thinking often happens when
people see two graphs that look like they follow the same trend.
When you decide that because there is a correlation between two sets of data, there must also be a causal
relationship, you make yourself guilty of an error in thinking. This type of error in thinking could happen in a
macroeconomic context. Here is an extract from an actual speech by Lord McCarthy made in the House of Lords in
the UK on 5 December 1979.
“We are now seeing a whole series of extremely well-researched criticisms of the whole concept of the relationship
between the rate of increase in money, however defined, and the level of inflation. Some of these are mildly
humorous. Messrs. Llewellyn and Witcombe claim that there is a closer fit between inflation and dysentery in
Scotland—dysentery in Scotland 12 months ago, I should say—than there is between inflation and M3 [total money
in the economy]” (McCarthy, 1979, Column 700).
His point? If correlation is causation, then it was more likely that a stomach bug in Scotland caused inflation at the
time than an increase in money.

Reasons for assuming mistaken causation

There are at least three reasons why people assume causation when confronted with two data sets that are highly
correlated. Be on the lookout for all of these.
1. Coincidence
Firstly, it could be a mere coincidence. In our example about the correlation between CPI and the number of
Twitter users, the correlation is pure coincidence, and we know there is no shred of causality. These kinds of
correlations are also termed spurious correlations.
2. Reversed causation
Another example would be if someone should say an increase in ice cream sales causes higher temperatures. We
could most likely draw a nicely correlated graph between rising temperatures and ice cream sales, but the
causation is reversed. It is not ice cream sales that drive temperatures; it is the other way around. Higher
temperatures drive ice cream sales.
3. Omitting other factors
Lastly, sometimes people make claims like ‘it is because of Covid-19 that our sales dropped last year’. While it is
feasible that the pandemic impacted sales, it is unlikely to be the only reason (or cause). They forget to mention
that they had issues with the quality of their product or that they were embroiled in a wage dispute. In other
words, they omit the other factors that caused their sales to drop. That was also what Lord McCarthy was
referring to. While there might be some relationship between the supply of money in an economy and inflation,
many other factors also affect inflation. To blame only the supply of money is an error in economic thinking.
So, the next time a politician or economist wants to convince you that A is the cause of B just because they happen
to follow the same trend, you can remind them ‘correlation is not causation!’.

Optional resources for enrichment

For a more in-depth discussion on the confusion between correlation and causation, read Cleaning up confusion
between correlation and causationLinks to an external site. (Borwein and Rose, 2014).
Sources: Masterclass, 2022; Mohr, Van Zyl and Pretorius, 2018.

Level of change versus rates of change

One way of misinterpreting economic data is to confuse correlation with causation. Another way to misinterpret
data is to confuse rates of change with levels of change.
We, as citizens, measure the economy because we want to know what could be happening to our money and
policymakers measure to make policy. However, during measuring, it is very easy to confuse two closely related
concepts: level of change and rate of change. We’ll conclude this lesson by looking at the two concepts to ensure
you are comfortable with the difference.
The best is to go back to the discussion that we had on CPI and inflation in last week’s lesson on inflation.
Monthly CPI from January 2021 to June 2022 ( Stats SA, 2022f)
 Example: Level of change versus rates of change
Remember how we said CPI is an index? Between March 2021 and March 2022, we say CPI increased by 5.70. That
is a change in the level of CPI.
We know that we measure annual inflation as the percentage difference between CPI in the present and CPI a year
ago. So, inflation is a rate of change.
If we want to know what the rate of change was between March 2021 and March 2022, we calculate the
percentage increase. In other words:
5.70 divided by 96.10 x 100 = 5.9%, which is equal to the inflation rate for March 2022 in the table above.
Let’s look at another example.
Levels of change and rates of change (BusinessTech, 2022b; Stats SA, 2022f: 6)

Example: CPI
What about another example?
Let’s look at interest rates. The following graph shows the repo rate throughout 2022, with the latest date on 31
October 2022.
 The repo rate [01-01-2022 to 31-10-2022] (SARB, 2023)
On the 22nd of September 2022, the repo rate was 5.5%, and on the 23rd of September, it was 6.25%. This is how
the increase was reported:

A news article announcing the increase in the repo rate (eNCA, 2022).

The 75-basis point is the level of change. But what was the rate of change?
 Calculating the actual rate of change

While the level of change was ’75 basis points’, the actual rate of change was 13.64%. Given what we know about
inflation from our previous example, such an increase in the cost of debt must have had some severe
consequences for consumers.
Exercise
Now it’s your turn.
Answer the following questions based on this CPI information (Stats SA, 2022f: 6)
 1. What was the level of change in the Consumer Price Index between September 2022 and January 2022?
2. What was the rate of change in CPI between August 2022 and Aug 2020?

Suggested Solution (click to reveal)

There you have it. Measuring change in economics is essential for understanding macroeconomics, but make sure
you compare apples with apples.

Lesson 3 Conclusion: Macroeconomic assumptions and

shortcomings
Logical, structured and disciplined thinking is not only necessary when thinking about economics. Ensuring our
reasoning is sound is equally important when we are busy with business strategy development or making day-to-
day business decisions.

What you’ve learned

We’ve now reached the end of our lessons about macroeconomics.

Introduction to Macroeconomics - What we covered in this module

To recap
In Week 2 of this module, we covered the first of our three economic questions in four lessons.
1. How can one think about the macroeconomy?
 The economic problem & solving the economic problem
 Supply and demand
 The basic flows of the economy.

This week we addressed the second and third economic questions and devoted one lesson to each.
2. How can one measure the macroeconomy?
3. How is the macroeconomy managed?
We concluded our lessons about macroeconomics by looking at some assumptions and shortcomings in our
thinking about economics.
This also means we have added more tools to our toolbox for business strategy development.
 Tools for business strategy development

Where you’re going next

Our toolbox still has some space, and in our next lesson, we will dig deeper into microeconomics.
No longer focussed on the big picture, we also need to know how the economy works on a Google Street View
level, the level of individuals, households and for firms, or as we explained the level of microeconomics.
You might recall the following image and our definition of microeconomics which we shared in the lesson on micro
versus macroeconomics in Week 2

The definition of microeconomics

Lesson 4: Key principles and basic concepts of microeconomics

 Introduction to microeconomics

As the owner of E-Bike South Africa, you have a lot on your plate. You are still getting to grips with all the tools you
need to make progress with your business strategy development. You also have to deal with so many day-to-day
decisions.
On the one hand, you have to deal with your suppliers, the producers of e-bikes. You have to negotiate pricing with
them and decide on your stock levels. On the other hand, you have your customers to contend with. How much are
they willing to pay for your products? What else can you offer to make your products more attractive? And your
personnel, of course. They also need to be appointed, managed, rewarded and paid.
These decisions must align with your business strategy, and we will get to that in the coming weeks. In the
meantime, it will help to understand some of the economic principles that drive the relationships we’ve described,
and for that, we need to lift the lid on microeconomics. Let's just first remind ourselves of the definition of
microeconomics, which we shared in Lesson 2 of Week 2.
“In microeconomics the decisions and functioning of decision makers such as individual consumers, households,
firms or other organisations are considered in isolation from the rest of the economy. The individual elements of
the economy are, figuratively speaking, each put under the microscope and examined in detail” (Mohr, Seymore
and Yu, 2018: 4).
Before we examine anything under a microscope (that’s what next semester is for), we first need to bed down
some key microeconomic principles and basic concepts.
We also have to remember that microeconomics is a social science and that we use models and tools to help us
make sense of all its complexities. One set of tools that economists use often is what they call theoretical models
or microeconomic theories, and we will cover four of those in this module.

Glossary
“Microeconomic theory is a subfield of economics that seeks to examine the interactions between individual
buyers and sellers through the decision-making processes of consumers and businesses” (Linden, 2022: para. 1).
Later in this lesson, we will touch on the theory of elasticity and in our next lesson (Lesson 5), we will take some
time to explore demand and supply in a microeconomic context. Next week (EFBS01-5 Week 4), we will look at
the theory of demand, which translates as the study of consumer choices and the theory of supply, which deals
mostly with production.
We will conclude our time on microeconomics next week by giving you an overview of market structures and
introducing the idea of positive and negative externalities.

To summarise
 Introduction to microeconomics - an overview

Lesson contents
Back to basics
 Factors of production and more

Scarcity, choice and opportunity cost and the production possibility curve

Households and firms are interdependent

Microeconomic theories – an overview

Lesson 4 Conclusion: Key principles and basic concepts of microeconomics

Back to basics
Our definition of microeconomics reminds us that we are dealing with decisions and decision-makers, specifically
individuals, households and firms.
We also know that these decisions are not easy because they need to be made in conditions of scarcity. Scarcity
forces microeconomic decision-makers to make tough choices, and invariably there will be trade-offs. And if
there are trade-offs involved, there will also be opportunity costs.

We know that our e-bike business only has limited resources. Deciding how to spend
our capital is forcing us to make tough choices. Do we pay our employees more or
invest in more stock? Do we expand the store, or do we spend more on marketing?
How do we get our pricing right?
 Our customers also face scarcity and tough choices. What would be the opportunity
cost if they decided to buy an e-bike? What else do they need to spend their money
on? If they are unsure about investing in an e-bike, is there a price point that might
sway their decision to buy one?

We can say the same about our suppliers. Scarcity and choices are very much a part
of their lives as well. What is the opportunity cost if they delay their parts order from
abroad and the rand weakens against the dollar? How do they get their pricing
right? Have they factored in all the production costs when they put their pricing
together?

The basic flow of the economy

The space where these decision-makers meet is the basic flow of the economy, the flow from production to
income to spending and back:
 The basic flow of the economy

The first of these flows, production, is generated by the factors of production. Let’s revisit these in the context
of microeconomics.

Factors of production and more

The factors of production are just as important from a microeconomic perspective as they were in
macroeconomics. To recap, there are four factors of production that we covered in Lesson 6 of Week 2.
It is sometimes also necessary to categorise or classify these factors. The following table shows how each factor is
categorised.
 Factors of production

The same considerations we covered in macroeconomics are also relevant here, but from a different angle:
 Concerns about the quantity and quality of natural resources, especially non-renewables and slow
renewable. How does one ensure that the natural resources in your product’s life cycle are responsibly
sourced?
 Challenges with the quantity and quality of labour, particularly the development of human capital. Can
one find or develop the right people with the right knowledge, skills and experience for your business?
 How to get the most value over a reasonable lifespan from their capital is one of the things business
owners need to manage. Other factors include building up reserves to replace capital at the end of their
lifecycle and managing risk by taking out insurance.
  Entrepreneurs are at the heart of microeconomics. They are the ones that take the risk, make things
happen and either reap the rewards or face ruin.
These factors of production work together to produce goods and services. It is worth remembering that not all
goods and services are the same; therefore, we have some handy classifications to ensure we are clear when we
talk about things.

Resource
Check out (and download) the infographic Goods and Service Download Goods and Servicethat outlines this in
more detail.
In addition to the factors of production, you might also be wondering where technology and money fit in. It’s time
to find out.

Technology

Isn’t technology another factor of production, a fifth bucket of resources? Let’s find out.
We often think of technology as electronics, but technology is much more than that. Ever
since the first human decided to make a process more efficient by using a tool, technology
was at work. However, since the First Industrial Revolution, the role of technology in
society has increased exponentially.
 At E-Bike South Africa, we use technology to manage our bookkeeping and payroll. We use
technology to market and communicate to the outside world, source our products and
recruit our employees. Running a business without technology seems impossible.

Our producers use technology to make their production processes more efficient, monitor
their waste, and track distribution, to name a few.

Our customers use technology to compare products, find stores and travel from home to
the retailer.

Economies need technology to progress. In the context of production, technology often makes it possible to
be more efficient with scarce resources, resulting in higher levels of production for the same inputs.
You might remember from our lesson about innovation in the Introduction to Professional Accounting Studies
module that for innovation to occur, we need someone to identify the opportunity, invent the solution and
implement the outcome (Three I’s). That someone is the entrepreneur, and it’s the entrepreneur’s role to
So, should technology be classified as a factor of production? Some sources say it is the fifth factor of production,
but we chose not to. We prefer to describe technology as a facilitator of the factors of production.
While technology is not another factor of production in our definition, it is an important resource, necessary for
facilitating the factors of production.

Money
 The importance of money is often exaggerated relative to everything else. In the context of
the factors of production, money is not another factor but is also seen as a facilitator of
the factors of production.
Can you produce goods and services with money alone? No, clearly not! You do need the
factors of production.
Can you produce goods and services without money? Probably, but money as a mechanism
for exchanging value is extremely useful. You need your customers to pay you in money so
you can pay your employees in money. It is unlikely that your employees will be satisfied to
be paid in haircuts and avocados.

Now that we've looked at the factors of production from the perspective of microeconomics, it is time to put the
microeconomics lens over some other economic concepts, like scarcity, choice and opportunity cost. We will also
introduce a handy economics tool, called the production productivity curve.

Scarcity, choice and opportunity cost and the production

possibility curve
We’ve already mentioned that scarcity, choice, trade-offs and opportunity cost play a crucial role in economics.
Economics offers a handy model to help us understand how these concepts work together. This tool is called
the production possibility curve (some call it the production possibility frontier). Let’s look at a simplified
example of the curve to familiarise you with the model. You will return to this model and its applications later in
this course.
Scarcity, choice and opportunity cost and the production possibility curve
Here are the table and the production possibility curve again if you want to remind yourself how the model works.

Data for the production possibility curve

 The production possibility curve

Another aspect of economics which we covered last week was the basic flows of the economy. From a
microeconomic perspective, when we look at these flows, we pay particular attention to the relationship between
households (who spend their salaries and wages) and firms (that earn income from the sales of their goods). Let's
take a closer look.

Households and firms are interdependent

When we discussed the basic flows of the economy in our lesson last week (Lesson 6, Week 2), we also noted that
the income we refer to in the basic flow is rent, salaries and wages, interest and profit, which each link back
to a specific factor of production. Here is a brief reminder:

The basic flow of the economy in detail

We also discussed where spending comes from, namely households, firms, the government and the foreign
sector. As a result of the spending by households, there is a special relationship between them and firms. This
relationship is also captured in a circular flow diagram. Let's have a look.

The circular flow of income and spending

 Circular flow of income and spending (Fourie and Mohr, 2022: 18)

Note how households are the ones that make the factors of production available in the factor market. In return,
they earn rent, salaries and wages, interest and profit.
Households ultimately own the natural resources and the capital – either directly or indirectly. Indirectly their
ownership is in the form of shares in companies or through institutions like pension funds. Labour is, in essence,
people, and all people are part of households. Entrepreneurs are also people and, therefore, again, part of
households. Firms have to spend to get hold of the factors of production.
On the other side of the circular flow, firms make their goods and services available in the goods market. In
return, they earn income. Households spend the money they make in the factor market to purchase goods and
services in the goods market.
Firms need households, and households need firms, and so the economy keeps flowing.
Note: We have not forgotten that spending also comes from the government and the foreign sector. But adding
them to the model takes it to another level of complexity which we will tackle later in this course.
Now that we've revisited some core economic concepts from a microeconomic perspective, let's take a look at the
microeconomic theories that we will introduce in this module.

Microeconomic theories – an overview

We’ve now covered some key principles and basic concepts in microeconomics, and it is time to get into more
detail. Economists have come up with a series of microeconomic theory and models to help themselves (and us) to
understand the complexities involved in all the millions of economic activities that exist on the level of
microeconomic level.
While there are several microeconomic theories, for now, we’ll introduce you to four of them. They are:
 Microeconomic theories

Our next lesson will look at demand and supply in more detail, while consumer choices (also referred to as the
theory of demand) and production (also referred to as the theory of supply) will be covered next week. For the
moment, we will broadly explain what we mean by elasticity, but the detail of this theory of microeconomics is for
later in this course.
Elasticity – in theory

Glossary
“Elasticity is a measure of responsiveness or sensitivity. When two variables are related, one often wants to know
how sensitive or responsive the first is to changes in the second” (Mohr, Seymore and Yu, 2018: 113)
In our previous lesson, we spoke about an error in economic thinking that says that just because two things are
correlated, it does not mean that there is necessarily a causal relationship between them (correlation is not
causation - Lesson 3, Week 3).
As much as it is important to look out for this error in thinking, we should not forget that in economics, many things
have a causal relationship. Just think of people’s eagerness to save and interest rates. Interest rates going down
causes people to save less. Or what about the relationship between exchange rates and imports of luxury goods? If
the rand weakens, it is likely to cause a drop in the volume of imports of luxury goods. The same can be said for
the relationship between the price of Jacobs coffee and its sales figures. If Jacobs coffee is on special, it is most
likely going to cause a spike in sales.
The definition of elasticity tells us that when we look at the relationship between two variables, we can measure
how responsive one is to changes in the other. In microeconomics, there are four types of elasticity. To illustrate
elasticity with an example, we will use the type called price elasticity of demand.
The price elasticity of demand refers to how sensitive the demand for a product is to changes in its price. Products
that are not very sensitive to changes in their prices are referred to as price inelastic; those are usually essential
products. Products that are very sensitive to changes in their prices are called price elastic; those are usually
non-essential or luxury goods or products for which there are many alternatives.
To illustrate:

Price elasticity of demand

A sportscar is a luxury item. When the price of sportscars increases (maybe because of import duties, possibly
because of exchange rates), the demand for sportscars decreases substantially.
We say sportscars are price elastic because the demand for sportscars is sensitive to changes in price.
Milk is an essential good. When the price of milk increases (maybe because of a shortage or a new tax), the effect
on the demand for milk will be scarcely noticeable.
We say milk is price inelastic because the demand for milk is not sensitive to changes in its price.

Consider for a moment

Why do you think it important for the owner of E-Bike South Africa to be aware of price elasticity?

Optional resource for enrichment

If you want to know more about elasticity, you should watch this video Elasticity: The Economic Concept Behind
How Companies Price ProductsLinks to an external site. by the Wall Street Journal (2022). The video might be very
American, but it does illustrate quite nicely how price elasticity is a topic that pops up during boardroom
discussions.
Sources: Fourie and Mohr, 2022; Mohr, Seymore and Yu, 2018.

Lesson 4 Conclusion: Key principles and basic concepts of

microeconomics
Microeconomics is all around us. When we decide to go shopping, we are confronted by choices, prices and trade-
offs. When we travel, we are affected by fuel prices and, if we choose to fly, the availability of flights. Decisions
such as whether it is better to study first and then start working or whether to start working and then study are
influenced by how we see the opportunity cost of one versus the other.
When we work, we participate in the economy as a factor of production in the factor market, and when we buy
goods or services, we spend our hard-earned money in the goods market.
Sometimes we buy more things when prices drop or fewer things when prices go up. Other times, whether prices
go up or come down has no real impact on our purchases.
Microeconomics is equally all over businesses like E-Bike South Africa. Trade-offs are inevitable if you only have
limited resources, and what business does not have some resource ceiling? Opportunity cost considerations are
frequently on the table, and choices must be made. Capital, labour, entrepreneurship and components made from
natural resources come together in a business such as E-bike South Africa, not forgetting technologies and money.
If your business’s profitability is in trouble and you consider pushing up your prices, price elasticity is no longer just
some theory taught in an economic class. It gets very real very quickly!

What you’ve learned

This was our first lesson dedicated to microeconomics. We’ve seen how relevant microeconomics is to businesses
like our e-bike business, to us individually as consumers and to producers and manufacturers.
We revisit some key concepts that we touched on in previous lessons:
 Scarcity, choice, opportunity costs and trade-offs
 Factors of production
 The basic flows of the economy
And we’ve expanded your knowledge of each:
 The production possibly curve
 Technology and money in the context of the factors of production
 The relationship between households and firms
We’ve also introduced the idea of microeconomic theories and explained what we mean by elasticity.

Where you’re going next

Our next lesson will address another microeconomic theory, demand and supply. We’ll revisit the microeconomic
factors that drive demand and supply, talk about the willing-buyer/willing-seller concept and introduce the concept
of market equilibrium.
Keep your seatbelts fastened; the microeconomic ride is not over yet!

Lesson 5: Demand and supply

Have you ever bought something online? Maybe you’ve ordered books from Loot or an air fryerLinks to an external
site. from Takealot. Facebook Marketplace is arguably the place to go if you are looking for second-hand furniture,
and don’t forget Bob Shop if you are looking for real bargains.
However, if you are a little braver, you have bought earrings from the online shopping platform Etsy. Ordering from
abroad feels risky, and you sometimes have to wait months for your package to arrive. When you finally collect
that little packet from the post office, it still seems like a miracle.
Somewhere in the world, someone (let’s call them Abracadabra) made a pair of earrings they wanted to sell. They
took a few photos and loaded their product, a gorgeous pair of earrings, on an online shopping portal (let’s call it
TopHat). You spotted the perfect pair all the way from here in South Africa. You quickly converted their sales price
from dollars to rands, and you’ve added a bit of extra for the duties. You are happy, even with the weak rand;
finding that perfect pair of earrings makes it worth it! You add the earrings to your basket and checkout
using PayPal. Now you wait. Months later, you get a notification from the post office to collect your parcel. By the
time you finally have the earrings in your hands, it almost feels like Christmas. And what if the parcel never
arrives? With safeguards built into TopHat and PayPal, you at least have the option of getting your money back if
Abracadabra should default.
BI (Before Internet), our experience of ‘the market’ was limited to our weekly shopping and the farmer’s market on
a Sunday. Thanks to technology, we now have ‘the market’ at our fingertips.
We defined a market last week in Lesson 4 as “any contact or communication between potential buyers and
potential sellers of a good or a service” (Fourie and Mohr, 2022: 6).
Does that mean our online exchange took place in a market? Absolutely. Just look at how it checks the boxes.
 Conditions for a market to exist

So why are we talking about markets if the topic of this lesson is ‘demand and supply’?

Demand and supply

Because without a market, demand is meaningless. Sitting by your desk thinking about those perfect earrings will
not conjure them up from thin air. Equally, without a market, supply is pointless. Abracadabra can only use one
pair of earrings at a time, and even if Abracadabra employs ten people, without a market to sell their goods, they
will not be able to pay any of those employees for long.
A market is, therefore, where demand and supply meet. Let’s explore this further.

Lesson contents

An overview of demand, supply and prices

Drivers of demand revisited

Drivers of supply revisited

Market equilibrium and excess

Government intervention

Lesson 5 Conclusion: Demand and supply

An overview of demand, supply and prices

Marshall (2018: 31) uses the analogy of a pair of scissors and argues that just like we cannot say which of the two
blades is responsible for the cutting, we cannot scientifically separate demand from supply when we talk about
markets and prices. In its simplest form, a demand, supply and price graph looks a little bit like a pair of scissors
(see below), and it is clear that without both ‘blades’ (demand and supply), there will be no price point and no
economic exchange.
 Demand and supply curve

As we explained previously, in economics, we use tools like models and graphs to help us think through economic
principles. This graph is another example, and we’ll use the demand, supply and price graph again later in this
course. It is, therefore, useful to explain a few things you can see on the graph.
The line D-D is called the demand curve, and it slopes downwards. The line tells us that there is an inverse
relationship between demand and price: the higher the price, the lower the demand. We refer to that as the law of
demand.
The line S-S is called the supply curve, and it slopes upwards. As demonstrated by this curve, the law of supply
says there is a positive relationship between price and supply. The higher the price, the higher the supply.
We say equilibrium is where the two lines meet (E on the graph), and in our example, that is when the price is
R7.50 and the quantity is 75.
At a price of R10.00 supply is 100 items, but demand is only 50 items. That is called excess supply, and sellers
will have to drop their prices to increase the demand.
At a price of R5.00, supply is 50 items, and demand is 100 items (excess demand). Suppliers can increase their
prices because they know buyers compete for their products. However, they can only increase their prices to R7.50
(the equilibrium price) before demand drops below supply.
Of course, these laws operate in perfect conditions in a free market without interference.
Now it’s time to look at each of the blades of the scissors on their own again.

Drivers of demand revisited

When we discussed supply and demand in the context of macroeconomics last week in Lesson 4, we also covered
the microeconomics drivers of demand, but it is worthwhile recapping them here.
 Drivers of demand

1. Price – we’ve seen how prices affect demand. The law of demand says the higher the price, the lower the
demand. If you were not prepared to pay more than R250 for earrings, and Abracadabra priced the
earrings at $12 (R256.32), you would not have bought those specific earrings.
2. Price of substitutes – if you can find another pair of equally pretty earrings at a lower price, you might
not want to buy the original pair (so demand will suffer).
3. Price of complementary products – If there happens to be a sale on necklaces that match the
earrings, it might make them more attractive and increase demand.
4. Consumer taste – Funky earrings might be in fashion now, but minimalist earrings could be the
accessory du jour next year. Once consumer taste changes and things go out of fashion, demand drops.
 5. Expectations –Marketing messages such as ‘This price for today only!’ often influence people’s emotions
and create an expectation that prices will go up, increasing demand.
Don’t forget the other three drivers of supply; they might be more macroeconomic in nature, but they are still valid
and important to remember.
[6. Income of consumers - More income, more demand; 7. Size of the market - Bigger market; more demand;
8. Income distribution - A shift in product demand as income distribution shifts.]
Drivers of supply revisited
Just as demand is not only influenced by price, there are also other drivers of supply, which we will also be
recapping, this time from a purely microeconomic perspective.
See Lesson 5 of Week 2 for more details.
 Drivers of supply

1. Price – The law of supply clearly shows a positive relationship between supply and price; if prices go up,
supply goes up.
2. Prices of alternatives – If prices for alternatives start to increase, sunglasses might be seen as an
alternative accessory to earrings. If it suddenly becomes lucrative to sell sunglasses, Abracadabra might
decide to dial back on its earring sales and focus on sunglasses instead.
 3. Prices of factors of production – The material that Abracadabra uses to make their earrings might
become more expensive, or a very expensive machine needs to be replaced. These events affect the
price of the factors of production, and Abracadabra might have to scale down on its supply.
4. Productivity of factors of production (incl. technology) – If Abracadabra could invest in a 3D printer, it
might make their employees more efficient at producing earrings, and they could push up supply at a
marginal cost.
5. Number of suppliers – What if three more online shopping platforms suddenly see the light of day?
Abracadabra will have no choice but to temper its supply because it would not want to sit with stock it
can’t sell.
6. Expected future price of products –Abracadabra suspects that the price of costume jewellery will be
under pressure in the future. Rather than sitting with excess stock, which they cannot sell at higher
prices, they decide to reduce their supply in anticipation of a price crunch.
Now that we have covered the drivers of supply, let us move on to market equilibrium and excess.

Market equilibrium and excess

Now that we’ve revisited demand and supply separately, let's put them back together. If we take the basic demand
and supply graph which we introduced above, we can add a few more elements to aid in our understanding of the
market.
 Market equilibrium

The enhanced demand and supply graph above reminds us that when we put demand and supply together, we get
an equilibrium price for our product where the demand and supply curves meet.
Any price above the equilibrium price will result in an excess supply (market surplus), and the market will force
the price downwards.
Any price below the equilibrium price will result in an excess demand (market shortage), and the market will
force the price upwards.
Once the price reaches equilibrium, the market forces stop working, and things will stabilise.
The textbook definition of market equilibrium is, therefore:
“Market equilibrium occurs at the intersection of the demand and supply curves. This is the point at which both
buyers and sellers agree upon the quantity of goods to be exchanged and the price at which they will be
exchanged” (Mohr, Seymore and Yu, 2018: 77).

Ceteris paribus - All other things being equal

Of course, we know that these are all economics theories and that the real world doesn’t always work out exactly
according to these rules. However, to be able to make sense of economics, these theories rest on assumptions.
One of the most important assumptions, when we are working with these models, has a Latin name (ceteris
paribus), and it means we can assume the model works as long as all the other forces remain unchanged or
constant (all other things being equal). This assumption also applies to our demand and supply model. The market
reaches a price equilibrium and would stay there if it was not for other forces.

Government intervention
So, what other forces are we talking about? One force that is known to play a role in the market is the government.
Let’s briefly look at why governments would do that, how they would go about intervening and what the
consequences could be.

Why would a government intervene?

There are main reasons why governments intervene in the market. Let's look at a few.
Price protection
Price protection measures include efforts to prevent consumers from being exploited by producers who charge
unfair prices, as well as measures to assist the poor by keeping the prices of certain types of food low.
For example
During the Covid-19 pandemic, the South African government issued price control measures for a list of goods. The
main reason for the price control was to “prevent sellers from taking advantage of the ongoing coronavirus
pandemic” (BusinessTech, 2020: para 1).
For the list, you can refer to New regulations bring coronavirus price controls for certain high-demand products –
here’s what is on the listLinks to an external site. (BusinessTech, 2020).
These price controls have since expired, but the idea of making use of price controls to help the poor is still on the
table, as illustrated by this article: South Africa needs better food price controls to shield poor people from COVID-
19 falloutLinks to an external site. (Bassier, Joala and Vilakazi, 2020).

Inflation control
In some instances, governments intervene through wage or price controls to curb inflation.
For example
Argentina has been struggling with their inflation rate for years, and in July 2022, Argentina’s annual inflation rate
exceeded 70% (Rathi, 2022). In October 2022, the Argentine Ministry of Production announced that it would extend
the price control that is in place on over 1 300 consumer products until at least January 2023. Since 2014
Argentina has been using price controls “as a public policy intending to counter inflation” (International Trade
Administration, 2022: para. 3). However, not everyone agrees that it is working, and some have even been
criticising the policy as “fruitless measures” (De Marcos, 2022: para. 3).

Scarcity
In times of scarcity, such as wars, governments have been known to limit production quantities of certain goods or
services.
For example
Banning sliced bread to save wax paper and metal? You’ve heard correctly. Read all about the World War II ban on
sliced bread and other wartime oddities in the article 8 Unusual Wartime Conservation MeasuresLinks to an
external site. (Andrews, 2019).
How do governments intervene in the market?
In our descriptions above of the reasons for government interventions in the market, we also touched on some
types of interventions.
For completeness’s sake, we will also list them here and add examples of each.
 Examples of government interventions in the market

What are the possible consequences of government intervention?

While the intentions of these interventions are mostly noble and good, the debate is still out there if government
intervention in the free market achieves what it sets out to do. Despite numerous control mechanisms, Argentina’s
failure to make headway with its inflation has made economists wonder about the usefulness of these
interventions.
Here are some of the consequences of price control – both ceiling and floor.

Consequences of government interventions in the market

Consider for a moment

What do you think about the other types of government interventions? What unintended consequences can one
expect from subsidies, specific taxes and import quotas?
To paraphrase Milton Friedman (n.d.), the market mechanism works best in free market conditions, where willing
buyers meet willing sellers. Despite their good intentions, government interventions break the willing buyer/willing
seller principle, and someone loses in the process. Ironically, the losses are sometimes bigger than the gains and
enforcing the limits is often so burdensome that all their potential benefits are wiped out by efforts to administrate
them.

Lesson 5 Conclusion: Demand and supply

Microeconomics proves the old idiom, ‘there’s no such thing as a free lunch’. Having spent some time with
microeconomics, specifically demand, supply and prices, we know that there is a price to everything, even if it is
just opportunity cost.
Microeconomics itself has somewhat of a double-edged sword.

The two sides of microeconomics

What you’ve learned this week

We’ve covered quite a lot during this lesson. Firstly, we spent some time refreshing our memories with the
complexities of demand and supply, and more specifically, how they interact scissor-like to create price and
market equilibrium.
We’ve also recapped the drivers of both supply and demand, and you should be able to explain several factors that
drive each. We’ve concluded by looking at governmental intervention in the market - why it happens, how it
happens and how it sometimes goes wrong.

Microeconomics in this module

What to expect next

But we are not done with microeconomics yet, and we’ll start next week’s lesson by looking at the remaining two
microeconomic theories for this module. We conclude microeconomics with market structures and externalities,
after which it is time to shift gear to another discipline altogether, strategic foresight.
Remember, if you have any questions, please reach out to us.

Connection hub
Bring your academic content-related queries and thoughts to the Week 3 Collaborative discussion forum.
Email your programme-related queries to Programme Support at [email protected].
Connect with your fellow students on the YammerLinks to an external site. community, our social networking
platform.

Week 3 Glossary
Balance of The balance of payments is the accounting record of the transactions between a country
payments and the rest of the world. “The South African balance of payments summarises the
 transactions between South African households, firms and government, and foreign
households, firms and governments during a particular period (usually a year)” (Mohr, Van
Zyl, and Pretorius, 2018: 98).
Circumspection Circumspection is cautious behaviour and a refusal to take risks (Collins, n.d.-a).
Consumer price The consumer price index (CPI) is an index that measures prices relative to a baseline.
index (CPI)
Correlation Correlation is a statistical measure that expresses the extent to which two variables are
linearly related (meaning they change together at a constant rate). It’s a common tool for
describing simple relationships without making a statement about cause and effect
(Statistics Knowledge Portal, n.d.: para. 1).
Economic growth Economic growth “is an increase of the total production or income of a country” (Fourie
and Mohr, 2022: 97).
Economic policy “Economic policy may be defined as government actions designed to influence economic
behaviour in the pursuit of certain outcomes” (Fourie and Mohr, 2022: 173).
Elasticity “Elasticity is a measure of responsiveness or sensitivity. When two variables are related,
one often wants to know how sensitive or responsive the first is to changes in the second”
(Mohr, Seymore and Yu, 2018: 113)
Fiscal policy “Every government purchases goods and services, raises taxes and borrows funds to
finance its expenditure. Every government must therefore regularly decide how much to
spend, what to spend it on and how to finance its expenditure. It must therefore have a
policy in respect of the level and composition of government spending, taxation and
borrowing. This is called fiscal policy…The main instrument of fiscal policy is the budget
and the main policy variables are government spending and taxation” (Mohr, Van Zyl and
Pretorius, 2018: 52)
Food poverty line The food poverty line refers to “the amount of money that an individual will need to
(FPL) afford the minimum required daily energy intake” (Stats SA, 2022g: 3). The most commonly
used minimum required daily energy intake is 2100 calories per day (Oosthuizen, 2014).
Gross domestic The gross domestic product (GDP) “is the total value of all final goods and services
product produced within the boundaries of the country in a particular period (usually one year)”
(Fourie and Mohr, 2022: 21).
Index An index “is a system by which changes in the value of something and the rate at which it
changes can be recorded, measured, or interpreted” (Collins, n.d.-c).
Inflation Inflation “is defined as a continuous and considerable rise in prices in general” (Mohr, Van
Zyl and Pretorius, 2018: 205).
The alternative definition for inflation is, “a sustained decline in the purchasing power of
money” (Fourie and Mohr, 2022: 131).
Market equilibrium “Market equilibrium occurs at the intersection of the demand and supply curves. This is
the point at which both buyers and sellers agree upon the quantity of goods to be
exchanged and the price at which they will be exchanged” (Mohr, Seymore, and Yu, 2018:
77).
Microeconomics “In microeconomics the decisions and functioning of decision makers such as individual
consumers, households, firms or other organisations are considered in isolation from the
rest of the economy. The individual elements of the economy are, figuratively speaking,
each put under the microscope and examined in detail” (Mohr, Seymore and Yu, 2018: 4).
Microeconomic “Microeconomic theory is a subfield of economics that seeks to examine the interactions
theory between individual buyers and sellers through the decision-making processes of consumers
and businesses” (Linden, 2022: para. 1).
Unemployment "Unemployed persons in this definition “excludes criterion (c) above. In other words,
(expanded whereas a person had, according to the strict definition, to have taken steps recently to find
definition) a job, the expanded definition only requires a desire to find employment” (Fourie and Mohr,
2022: 156).
Unemployment “Unemployed persons are those people within the economically active population (i.e.,
(strict definition) aged 15 to 64) who:
a) did not work during the seven days prior to the interview,
b) want to work and are available to start work within two weeks of the interview, and
c) have taken active steps to look for work or start some form of self-employment in the
four weeks prior to the interview” (Fourie and Mohr, 2022: 156).