The Market
You should be able to:
Explain the free market system
Discuss and illustrate the interaction of demand and supply in price determination.
Identify and discuss the factors that drive economic activity.
Describe the development and significance of markets with particular reference to South Africa.
Illustration by WT Murch in
Men and Machines by
Stuart Chase.
Concepts of the economic system.
Laws of demand and supply
Interaction of demand, supply and price.
Factors that influence the South African economy.
Knowledge
Capitalism and Communism
Market systems
Demand and supply
Inflation, GDP, Consumer Price Index
Balance of Payments, Exchange Rates, Interest Rates
Economic cycle
Growth sectors of RSA
Identifying new venture opportunities.
TEXT
Specific Outcome 1: Explain the free market system (in terms of
perfect and imperfect competitive markets).
Assessment Criteria:
1.1 Characteristics of different economic systems are identified.
Economics and economic thought lies at the heart of most human interactions. Your understanding of the how a modern economy works (or should work) forms the basis of how you behave as part of the economy. The better you understand it the better your decisions will be in your interactions with others. It is therefore of utmost importance that you know how markets function within the broader economy.
The free market system
The market should be seen a process rather than a configuration of prices, qualities and quantities that are consistent with each other (in that they produce a market equilibrium situation). There is no such thing as perfect competition – the market is always in the process of eliminating discrepancies in prices and continuously in the process of solving the problem of satisfying the maximum level of needs with the available resources.
The basic assumption of human nature is that it would seek to maximize value to itself with the minimum of exertion. It is because of this trait that markets come into being. Persons trade or go to a market to exchange that which they value “less” for that which they value “more”.
All normal adults would get to a point where they have to enter some kind of a market in order to make a living. Many persons enter the labour market where a person trades (sells) his skills and competencies for money. There are in reality many “markets” where values are traded.
It is because of the existence of the market that the entrepreneur (who has the critical role of “seeing around the corner”) scans the horizon to anticipates where the need in the marketplace will be tomorrow and take actions to profit from opportunities to trade and satisfy new needs before and as they arise. This action of the entrepreneur helps to stabilise prices and ensures that markets are less volatile and unpredictable than would be the case otherwise.
In the real world markets are by nature imperfect there will be at any point many prices prevailing for a single homogenous article. For example at one shop (shop A) an article may sell at R 10,00 and at the shop next door (shop B) the same article may sell at R 12,00. Economists will argue that if information was freely available, nobody will shop at shop B and the owner will have to reduce his price if he hopes to sell any items.
In situations where the price differential is large – for example in country A, a ton of maize may cost $ 100 and in country B it may cost $ 50 and the transport cost for a ton from B to A is $20; in this case the entrepreneur could initially make $ 30 per ton profit by moving maize from B to A. We say initially because the increase in supply will tend to cause the price to come down from the $ 100 level. Why?
Interaction of demand and supply
Why do prices go up as supply goes down?* The phenomenon that prices tend to be higher when demand is high in relation to supply and low when supply is high in relation to demand is called the Law of Supply and Demand. An example of this phenomenon can be found when looking at the prices of vegetables on the market – at the beginning and end of the season the price tends to be high (supply is restricted). A similar thing happens with the price of meat over the Christmas period (demand is high and supply is smaller because of abattoirs being closed and other reasons).
Who determines prices? As much as we would like to think that it is the owner of a product that sets the price it is simply not true – just as the two blades of a scissors is necessary to cut – it is the interplay between supply (the sellers) and demand (the buyers) that determines the price. If, at a given price there are many buyers, this will be a clear signal for the seller to either place more goods on the market or to increase prices. If the seller is making a good profit and supply is not a problem he will most probably place more of the product on the market and continue to make money. Two things can happen – others also start selling the product at the same price or lower (they can do this because there is a profit to be made and there is a demand) – the second thing that can happen is that the market gets saturated and demand drops – this will also have the effect of sellers lowering prices in order to keep their profits at the same level as before (a smaller profit or margin but more sales).
Now there are many factors that drive economic activity – one is the virtually insatiable need for goods and services by humans and the human ability to devise goods and services to meet the needs of others. It seems that since time immemorial humans have had the tendency to trade with others to fulfil their wants (it seems more efficient than stealing what you want – less dangerous too!). It is in this producing and trading process that value is created in a society. Remember value is a perception in peoples mind based on the reality they are living in and making money is just a shorthand way of saying “producing goods and services that are traded voluntarily to people that place a value on it”
Here is a simple example of how trade produces value.
Leon Louw of the Free Market Foundation of ten uses this story to illustrate how value is created through the market: Two groups of children are playing on adjoining fields – the one group is set up to play cricket – stumps, cricket bats, pads etc … but they only have a soccer ball.
The other group is set up to play soccer – the posts and the soccer field marked out … but they only have – a cricket ball!
They then decide to exchange balls and immediately because of this trade both groups are better of. Value has increased (Economists will say that need satisfaction has taken place and the “society” is better off.)
Simply by trading balls each group will have improved their respective situations – this is how value is also created in the larger society: VOLUTARY TRADE between people where both parties gain. The economic cake can also only get larger through trade and any obstacle in the way of trade only leaves the society poorer. Can you think of some of the obstacles that are placed in the way of trade and who and why would anyone want to do this if it is not in the interest of the people?
Conclusion: For a society to attain maximum need satisfaction by its inhabitants it needs to ensure that trade is not hampered by administrative regulation, trade barriers, unfair tariffs and the whims of politicians.
The other prerequisite for growth is the ability of a society to protect the property rights of its citizens. The economic collapse of Zimbabwe (2004) can be directly attributed to its inability to protect the property rights of its citizens.
“Liberty and freedom are the conditions of man within a contractual society. Social cooperation under a system of private ownership of the means of production means that within the range of the market the individual is not bound to serve an overlord. As far as he gives and serves other people, he does so of his own accord in order to be rewarded and served by the receivers.
What impels every man to the utmost exertion in the service of his fellow men and curbs innate tendencies toward arbitrariness and malice is in the market, not compulsion and coercion on the part of the gendarmes, hangmen and penal courts; it is self-interest. The member of a contractual society is free because he serves others only in serving himself” (Ludwig von Mises – Human Action).
Development and significance of markets (with reference to SA)
Free Market also means deregulated – so one of the factors that have dogged the SA economy has been the heavy hand of the state – first the colonial rules and regulations, then Apartheid and now the inability of the state to relinquish many of the controls that the previous government imposed (…power and control). One of the many issues that need to be addressed if we want accelerated growth and employment in South Africa is the heavy tax burden placed on firms that need that money to reinvest and expand. It is a fallacy to think that by taking the money and spending it on social development programmes one gets the same economic growth and impact.
There are however political reasons for the current high tax scenario – as George Bernard Shaw put it: “A government which robs Peter to pay Paul can always depend on the support of Paul.” In the long term however we pay the price of this through sluggish market condition low economic growth and poverty.
Characterestics of different economic systems.
There are essentially two economic systems: Free Market and Collectivism (Planned Economies) – the one based on individual liberty and people relate to one another through trade and the other where force is used to expropriate resources to meet the needs of the society. Some people may contend that there is a third, the so called “mixed economy”. This is not a “type” but an unhealthy hybrid of the two systems mentioned - it may be reality, but just as oil and water do not mix, free trade and coercion do not really mix. Fascism also is a type of mixed economy where the government tries to act as the entrepreneur – mostly with less than optimal results.
A true market economy has certain features:
• The government allows and protects the private ownership of property.
• The government protects the right of voluntary exchange and trade amongst individuals and other legal entities
• The government creates a framework of peace and stability through an effective policing and accessible legal system as well as maintaining effective foreign relationships and an appropriate military structure for defensive purposes.
• The basis of trade in their property and their labour is that they essentially can do what they like as long as they do not use force or fraud in their dealings. So they are not permitted to endanger others, damage their property or act in ways that are fraudulent. If they have reneged on a deal or agreement or are thought to have done so, the matter is resolved within the framework of an accessible legal system.
• In a society that has a moral political system the government plays an important role as the protector of property rights and individual liberties (a free press, free speech and so on).
• In such a society the government leads by example by not itself having confiscatory levels of taxation (expropriating wealth without the consent of the owner). Indeed in such a society the need for taxation would be small since the role of government is on of protecting the rights of its citizens rather that providing goods and services to the population – that role is left to entrepreneurs that do it because it is in their self interest to do so. People in such a society will also then be spending more time creating wealth and less on hiding it from the taxman.
• If there is a need for social programmes any benefits agreed on should flow directly to the individuals in need and financed as far as possible by local communities. Centralised bureaucratic structures do not work since most of the aid tends to be sucked up by the system itself with few benefits flowing to those who need it.
• The government also has the role to ensure that the monetary system of the country is sound ie that money retains its value (no inflation).
• Corruption is reduced in a society where the government does not grant special privileges in the form of special licenses, subsidies, tax breaks, tariff protection and import control mechanisms. Adminitrative discretion (with the inevitable result of corruption) is minimized.
• In an economically liberalised society there are no unrealistic building regulations, trade restrictions, land use restrictions or restrictions on the subdivision of land.
• Also it seems right that decisions that affect a local community is taken by that community.
Capitalism and Communism
Communism
The theory of the Communists may he summed up in the single sentence: Abolition of private property.
Communism, a theory and system of social and political organization that was a major force in world politics for much of the 20th century. As a political movement, communism sought to overthrow capitalism through a workers’ revolution and establish a system in which property is owned by the community as a whole rather than by individuals. In theory, communism would create a classless society of abundance and freedom, in which all people enjoy equal social and economic status. In practice, communist regimes have taken the form of coercive, authoritarian governments that cared little for the plight of the working class and sought above all else to preserve their own hold on power.
The idea of a society based on common ownership of property and wealth stretches far back in Western thought. In its modern form, communism grew out of the socialist movement of 19th-century Europe. At that time, Europe was undergoing rapid industrialization and social change. As the Industrial Revolution advanced, socialist critics blamed capitalism for creating a new class of poor, urban factory workers who labored under harsh conditions, and for widening the gulf between rich and poor. Foremost among these critics were the German philosopher Karl Marx and his associate Friedrich Engels. Like other socialists, they sought an end to capitalism and the exploitation of workers. But whereas some reformers favored peaceful, longer-term social transformation, Marx and Engels believed that violent revolution was all but inevitable; in fact, they thought it was predicted by the scientific laws of history. They called their theory “scientific socialism,” or communism. In the last half of the 19th century the terms socialism and communism were often used interchangeably. However, Marx and Engels came to see socialism as merely an intermediate stage of society in which most industry and property were owned in common but some class differences remained. They reserved the term communism for a final stage of society in which class differences had disappeared, people lived in harmony, and government was no longer needed.
The meaning of the word communism shifted after 1917, when Vladimir Lenin and his Bolshevik Party seized power in Russia. The Bolsheviks changed their name to the Communist Party and installed a repressive, single-party regime devoted to the implementation of socialist policies. The Communists formed the Union of Soviet Socialist Republics (USSR, or Soviet Union) from the former Russian Empire and tried to spark a worldwide revolution to overthrow capitalism. Lenin’s successor, Joseph Stalin, turned the Soviet Union into a dictatorship based on total state control of the economy and the suppression of any form of opposition. As a result of Lenin’s and Stalin’s policies, many people came to associate the term communism with undemocratic or totalitarian governments that claimed allegiance to Marxist-Leninist ideals. The term Marxism-Leninism refers to Marx’s theories as amended and put into practice by Lenin.
After World War II (1939-1945), regimes calling themselves communist took power in China, Eastern Europe, and other regions. The spread of communism marked the beginning of the Cold War, in which the Soviet Union and the United States, and their respective allies, competed for political and military supremacy. By the early 1980s, almost one-third of the world’s population lived under communist regimes. These regimes shared certain basic features: an embrace of Marxism-Leninism, a rejection of private property and capitalism, state domination of economic activity, and absolute control of the government by one party, the communist party. The party’s influence in society was pervasive and often repressive. It controlled and censored the mass media, restricted religious worship, and silenced political dissent.
Capitalism
Capitalism is a social system based on the principle of individual rights. The term capitalism is used here in the broader philosophical political sense, and not in the narrower economic sense, i.e. a free-market.
Capitalism, economic system in which private individuals and business firms carry on the production and exchange of goods and services through a complex network of prices and markets. Although rooted in antiquity, capitalism is primarily European in its origins; it evolved through a number of stages, reaching its zenith in the 19th century. From Europe, and especially from England, capitalism spread throughout the world, largely unchallenged as the dominant economic and social system until World War I (1914-1918) ushered in modern communism (or Marxism) as a vigorous and hostile competing system.
Free enterprise and the free market system are terms also frequently employed to describe aspects of modern non-Communist economies. Sometimes the term mixed economy is used to designate the kind of economic system most often found in Western nations. They are not so much mixed as having a mixture of policies that one could put on a scale of relatively free to extremely repressive. Those that are free tend to have high economic growth rates and the others tend to lag behind. (SA is number 47 of 150 countries on the Economic freedom of the World Index; 2003)
The individual who comes closest to being the originator of contemporary capitalism is the Scottish philosopher Adam Smith, who first set forth the essential economic principles that underpin this system. In his classic An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith sought to show how it was possible to pursue private gain in ways that would further not just the interests of the individual but those of society as a whole. Society's interests are met by maximum production of the things that people want. In a now famous phrase, Smith said that the combination of self-interest, private property, and competition among sellers in markets will lead producers “as by an invisible hand” to an end that they did not intend, namely, the well-being of society.
Characteristics of Capitalism
Throughout its history, but especially during its ascendency in the 19th century, capitalism has had certain key characteristics. First, basic production facilities—land and capital—are privately owned. Capital in this sense means the buildings, machines, and other equipment used to produce goods and services that are ultimately consumed. Second, economic activity is organized and coordinated through the interaction of buyers and sellers (or producers) in markets. Third, owners of land and capital as well as the workers they employ are free to pursue their own self-interests in seeking maximum gain from the use of their resources and labor in production. Consumers are free to spend their incomes in ways that they believe will yield the greatest satisfaction. This principle, called consumer sovereignty, reflects the idea that under capitalism producers will be forced by competition to use their resources in ways that will best satisfy the wants of consumers. Self-interest and the pursuit of gain lead them to do this. Fourth, under this system a minimum of government supervision is required; if competition is present, economic activity will be self-regulating. Government will be necessary only to protect society from foreign attack, uphold the rights of private property, and guarantee contracts. This 19th-century view of government's role in the capitalist system was significantly modified by ideas and events of the 20th century.
Encyclopedia Article from Encarta
Introduction
Merchants and trade are as old as civilization itself, but capitalism as a coherent economic system had its origins in Europe in the 13th century, toward the close of the feudal era. Human beings, Adam Smith said, have always had a propensity to “truck, barter, and exchange one thing for another.” This inclination toward trade and exchange was rekindled and stimulated by the series of Crusades that absorbed the energies of much of Europe from the 11th through the 13th centuries. The voyages of discovery in the 15th and 16th centuries gave further impetus to business and trade, especially following the vast flood of precious metals that poured into Europe after the discovery and conquest of the New World. The economic order that emerged from these events was essentially commercial or mercantile; that is, its central focus remained on the exchange of goods rather than on their production. Emphasis on production did not come until the rise of industrialism in the 19th century.
Before that time, however, an important figure in the capitalistic system began to emerge: the entrepreneur, or risk taker. A key element in capitalism is the undertaking of activity in the expectation that it will yield gain in the future. Because the future is unknown, both the risk of loss and the possibility of gain always exist. The assumption of risk involves the specialized role of the entrepreneur.
The thrust toward capitalism from the 13th century onward was furthered by the forces of the Renaissance and the Reformation. These momentous developments changed society enormously and paved the way for the emergence of the modern nation-state, which eventually provided the peace, law, and order crucial for the growth of capitalism. This growth is achieved through the accumulation of an economic surplus by the private entrepreneur and the plowing of this surplus back into the system for further expansion. Without some minimum of peace, stability, and continuity this process cannot continue.
Mercantilism
From the 15th to the 18th century, when the modern nation-state was being born, capitalism not only took on a commercial flavor but also developed in another special direction known as mercantilism. This peculiar form of capitalism attained its highest level in England.
The mercantilist system rested on private property and the use of markets for the basic organization of economic activity. Unlike the capitalism of Adam Smith, the fundamental focus of mercantilism was on the self-interest of the sovereign (that is, the state), and not the self-interest of the individual owners of economic resources. In the mercantilist era, the basic purpose of economic policy was to strengthen the national state and to further its aims. To this end the government exercised much control over production, exchange, and consumption.
The most distinctive feature of mercantilism was the state's preoccupation with accumulating national wealth in the form of gold and silver. Because most nations did not have a natural abundance of such precious metals, the best way to acquire them was through trade. This meant striving for a favorable trade balance—that is, a surplus of exports over imports. Foreign states would then have to pay for imports in gold or silver. Mercantilist states also favored maintaining low wages, believing that this would discourage imports, contribute to the export surplus, and thus swell the influx of gold.
More sophisticated proponents of the mercantilist doctrine understood that the real wealth of a nation was not its hoard of precious metals, but its ability to produce. They correctly saw that the influx of gold and silver from a favorable trade balance would serve as a stimulus to economic activity generally, thus enabling the state to levy more taxes and gain more revenue. Only a few states that practiced mercantilism, however, understood this principle.
Beginnings of Modern Capitalism
Two developments paved the way for the emergence of modern capitalism; both took place in the latter half of the 18th century. The first was the appearance of the physiocrats in France after 1750; and the second was the devastating impact that the ideas of Adam Smith had on the principles and practice of mercantilism.
The Physiocrats
Physiocracy is the term applied to a school of economic thought that suggested the existence of a natural order in economics, one that does not require direction from the state for people to be prosperous. The leader of the physiocrats, the economist François Quesnay, set forth the basic principles in his Tableau économique (1758), in which he traced the flow of money and goods through the economy. Simply put, this flow was seen to be both circular and self-sustaining. More important, however, was that it rested on the division of society into three main classes: (1) The productive class was made up of those engaged in agriculture, fishing, and mining, representing one-half of the population. (2) The proprietary class consisted of landed proprietors and those supported by them, which amounted to one-quarter of the population. (3) The artisan, or sterile, class, made up the rest of the population.
Quesnay's Tableau is significant because it expressed the belief that only the agricultural classes are capable of producing a surplus or net product, out of which the state either could find the capital to support an expansion of the flow of goods and money or could levy taxes to meet its needs. Other activities, such as manufacturing, were regarded as essentially sterile, because they did not produce new wealth but simply transformed or circulated the output of the productive class. It was this aspect of physiocratic thought that was turned against mercantilism. If industry did not create wealth, then it was futile for the state to try to enhance society's wealth by a detailed regulation and direction of economic activity.
The Doctrine of Adam Smith
The ideas of Adam Smith represented more than just the first systematic treatise on economics; they were a frontal attack on the doctrines of mercantilism. Like the physiocrats, Smith tried to show the existence of a “natural” economic order, one that would function most efficiently if the state played a highly limited role. Unlike the physiocrats, however, Smith did not believe that industry was unproductive or that only the agricultural sector was capable of producing a surplus above the subsistence needs of society. Rather, Smith saw in the division of labor and the extension of markets almost limitless possibilities for society to expand its wealth through manufacture and trade.
Thus, both the physiocrats and Smith contributed to the belief that the economic powers of governments should be limited and that there existed a natural order of liberty applicable to the economy. It was Smith, however, far more than the physiocrats, who opened the way for industrialization and the emergence of modern capitalism in the 19th century.
The Rise of Industrialization
The ideas of Smith and the physiocrats provided the ideological and intellectual background for the Industrial Revolution—the material side of the sweeping transformations in society and the world that characterized the 19th century. No precise date can be given for this “revolution”; it is generally conceded to have begun in the late 18th century.
The fundamental characteristic of the industrialization process was the introduction of mechanical power (originally steam) to replace human and animal power in the production of goods and services. As the mechanization of production gained momentum in England and gradually spread to other parts of the world, several fundamental changes occurred. Production became more specialized and concentrated in larger units, called factories. The artisans and small shops of the 18th century did not disappear, but they were relegated to the periphery of economic activity in the leading nations, especially in England, the United States, and Germany. The modern working class began to emerge; workers no longer owned their tools, they had little property, and generally they had to exchange their labor for a money wage. The application of mechanical power to production brought with it a great increase in worker efficiency, which made goods abundant and cheap. Consequently, the real standard of living rose throughout much of the world during the 19th century.
The development of industrial capitalism had serious human costs. The early days of the Industrial Revolution were marred by appalling conditions for large numbers of workers, especially in England. Abusive child labor, long working hours, and dangerous and unhealthy workplaces were common. These conditions led Karl Marx, who spent most of his adult life in England, to produce his massive indictment of the capitalistic system, Das Kapital (3 volumes, 1867-94). Marx's work, which is the intellectual foundation for the kind of Communist economic systems used in the former Union of Soviet Socialist Republics (USSR), struck at the fundamental principle of capitalism—private ownership of the means of production. Marx believed that land and capital should be owned collectively (that is, by society) and that the products of the system should be distributed according to need.
The economy was also beset by cycles of "boom and bust," periods of expansion and prosperity followed by economic collapse and waves of unemployment. The classical economists who refined the ideas of Adam Smith had no ready explanation for the ups and downs of economic life, being content to view such cycles as the inevitable price that society had to pay for the material progress experienced under capitalism. Marxian criticisms, along with frequent depressions in the major capitalist nations, helped establish vigorous trade-union movements that fought to raise wages, shorten working hours, and improve working conditions.
In the late 19th century, especially in the United States, the modern corporation, with its limited liability and immense financial power, began to emerge as the dominant form of business organization. The tendency toward corporate control of manufacturing led to many attempts to create combines, monopolies, or trusts that could control an entire industry. Eventually, the public outcry against such practices was great enough in the United States to lead Congress to pass antitrust legislation. This legislation attempted to make the pursuit of monopoly by business illegal, using the power of the state to force at least a bare minimum of competition in industry and commerce. The antitrust laws never succeeded in restoring to industry the competition of many small businesses that Adam Smith had envisaged, but it did impede the worst tendencies toward creating monopolies and restraining trade.
Despite such difficulties, capitalism continued to expand and prosper almost without limit throughout the 19th century. It was successful because it demonstrated an enormous ability to create new wealth and to raise the real standard of living for nearly everyone touched by it. As the century closed, capitalism was the dominant economic and social system.
20th-Century Capitalism
For most of the 20th century the world was buffeted by wars, revolution, and depression. World War I brought revolution and a Marxist-based communism to Russia. The 1st world war also spawned the Nazi system in Germany, a malevolent mixture of crony capitalism and state socialism, brought together in a regime whose violence and expansionism eventually pushed the world into another major conflict. In the aftermath of World War II (1939-1945), Communist economic systems took hold in China and Eastern Europe. However, as the Cold War came to an end in the 1980s and the former Soviet-bloc nations turned to free enterprise (though with mixed success at first), China was the only major power to retain a Marxist regime but its policies are increasingly shifting towards a more open and free economy. The superbly successful model created by the free market policies of Hong Kong (where people are of the wealthiest in the world) during the period of British rule, now incorporated into China (one of the poorest countries of the world), may have influenced the shift toward freer economic policies. Many of the developing nations, strongly influenced by Marxist ideas in the early postcolonial period, turned to a modified form of capitalism in their search for answers to economic problems.
In the industrial democracies of Western Europe and North America, the sharpest challenge to capitalism came in the 1930s. The Great Depression was by far the most severe economic upheaval endured by modern capitalism since its beginnings in the 18th century. In meeting the challenge of the Depression, the capitalist systems demonstrated remarkable abilities for survival and adaptability to change. Democratic governments began to intervene in the economy to fix what politicians thought were deficiencies inherent in capitalism but really were the effects of the states intervention in the marketplace in the first place!.
In the United States, for example, the New Deal administration of President Franklin D. Roosevelt restructured the financial system so as to prevent a repeat of the speculative excesses that had led to financial collapse in 1929. Action was taken to encourage collective bargaining and build a strong labor movement in order to offset the concentration of economic power in large industrial corporations. The foundation for the modern welfare state was laid through the introduction of Social Security and unemployment insurance, measures designed to protect people from the economic hazards endemic to a capitalist system.
The most important intellectual event in the development of contemporary capitalism was the publication by the British economist John Maynard Keynes of General Theory of Employment, Interest and Money (1936). Like Adam Smith's ideas from an earlier era, Keynes's thought profoundly affected the way in which capitalism worked in Western democracies.
Keynes demonstrated that it is possible for a modern government to use its powers to spend money, vary taxes, and control the money supply in ways that can dampen down, if not eliminate, the age-old curse of capitalism—cycles of “boom and bust.” According to Keynes, in a depression, government should increase its spending, even at the cost of unbalanced budgets, to offset the decline in private spending. The process should be reversed if a boom threatens to get out of hand, leading to excessive speculation and inflation. The Keynesian viewpoint became incorporated into U.S. law when Congress passed the Employment Act of 1946. This act, which committed the American government to maintaining high levels of employment and production, is a legal landmark representing the formal abandonment of laissez-faire as national policy in the US.
In the late 70’s and 80’s after Thatcher and Reagan there has been a shift back to laissez-faire and free market policies that, together with the advances in communications, led to the globalisation of trade and the spreading of the benefits of improving living standards to all.
Some of the last hurdles to world wide free markets that need to be overcome seem to be government subsidies to farmers in rich countries (which makes products from developing countries relatively expensive), trade barriers (tariffs) on the importation of goods and the freer movement of people and currencies between countries.
1.2 The role of competition in a free market system is explained with examples from state owned/ monopolies and private businesses.
Competition is an integral part of the free market system. It is because of competition that new products are developed, new ways of solving problems are discovered and that result in more and more people that benefit from the wealth creation activities of others – entrepreneurs, businesspersons, inventors researchers, scientists and all the others that contribute their efforts to the free market economic system.
There are however some organisations that need the state to protect them from the competitive services and products from private organisations . Examples in South Africa are the Post Office, SABC, Roads Authorities, State hospitals, Government schools and others. Some organisations like ESKOM are just afraid of what would happen if the energy market was opened up to competition, some say that they need the protection to be able to provide services to the uneconomic regions of the country, however some are being contracted out such as the management of toll roads, private prisons. The main reason for the existence of government controlled monopolies is political power and the influence politicians desire over the lives of persons. Government schools seem to be the best example here – better schooling could be delivered through private schools and a government sponsored voucher system – but ideological control will have to given up…
Varying prices of the same product/service are listed in illustrating competition.
The same product cost different amounts in different places. Take a 1 kg box of branded soap powder. At a large chain store in the city it may cost R 20. At the café around the corner the same pack may cost R 23 while at the 24-hour convenient store it will be R 28; while at the spaza store down the road it may be R 25. Oh yes, and at Makro it may cost R 17 a pack, but then you have to take four! Each of the shops have a unique competitive advantage which ensures that the price asked is the most optimal for that particular market. If the above prices were the actual prevailing prices over a given period, can you think what would happen if any one of them would double their prices?
Yes, people would buy the product at the other outlets. Relatively small (but significant) differences will be tolerated by consumers, but outside a given range they will switch to another shop. Competition ensures that prices stay within a given range.
1.3 Reasons for imperfect competitiveness are described.
There is no such thing as a perfect market. The concept only exists in economists textbooks. The real market is as perfect as it can get if there is no government intervention in the market – why? Because in a free market the entrepreneur will ensure that markets stay in balance. Let us say in one market the price of a commodity is R 30 per kg and the price of exactly the same product is R 20 per kg in another market and the price to transport goods from one market to another is R 4,00. A entrepreneur would immediately spot that money could be made by purchasing on the R 20 market and selling on the R30 market and making a R 6 profit after transport costs. This process is called arbitrage and forms the basis of all entrepreneurial activity. By doing this prices on the R20 market will tend to rise (because demand increases) and prices on the R 30 market will come down (because supply increases) there will thus be a tendency for the markets to move closer together – the closest they will get (all other things being equal) however will be in the region of R 23/27 (because of the R 4 transport costs)
Let us say there was a sales tax of R 2 on the product the closest the markets will get would be R 22/28. So government intervention makes the market more imperfect. The same things happen across borders where one not only have to contend with import duties but also bureaucracy and other imposed impediments.
The advantages and disadvantages of competition.
The advantages are simple – it elicits the best performance from all role players. As said previously it is the mainspring for improved products leading to a higher standard of living for all. The disadvantages I guess is that it is unforgiving – if you don’t improve you lose out.
Specific Outcome 2: Discuss and illustrate the interaction of
demand and supply in price determination
under conditions of perfectly competitive
markets.
Assessment Criteria:
2.1 The laws of demand and supply and the consequence of these laws for new ventures are explained and illustrated.
2.2 Demand and supply curves are illustrated and the relationship between the variables is explained in context of own venture.
2.3 The relationship between demand, supply and price is discussed and illustrated with reference to own products or service.
2.4 Factors that lead to changes in the demand and supply curve are listed in own specific context.
How prices are formed and how profits are made
The price of an item is dependent of the value placed on the item by a buyer at that point when the transaction takes place. A transaction will only take place if it is in the interest of the buyer and the seller to trade. A buyer will never buy something if he thinks that it is too expensive and a seller will not sell if he doesn’t want to.
If a pen is priced at R50,00 but is never sold, the actual price of the pen is not R 50 – it may be the price that the seller wants or needs to cover his expenses, but if no buyer is prepared to buy at that price the seller may just as well asked any price higher that R50 – the end result is the same: NO SALE. If however the seller brings the price down he increases the likelihood that someone will be interested in buying it. Let say he has a half-price sale and sells it at R25. Then R25 is the realized price. The seller may have bought it at R 35 when he thought he would be able to make a profit. That does not matter, the price of an item is only determined when there is a willing buyer and a willing seller.
People often try and guess what the value of an item should be – but it only when the sale is made that the actual price is formed.
Economists have developed some theories around price formation. The most well known (not necessary the most accurate) is that of Marshall. We will use his concepts to describe the formation of prices of consumer goods.
Market Demand Curve
A market is a process which leads to the one price agreed upon between a buyer and seller for a given quantity of goods.
Demand can be defined as the theoretical quantities of a good (or service) which will be bought at different prices on the market for this good (or service). Since only one price can prevail on a market at any one time, let us have a look at how this price is arrived at. From experience it is known that THE HIGHER THE PRICE THE LOWER WILL BE THE QUANTITY DEMANDED.
If this tendency is expressed numerically, a schedule is obtained which is called the demand schedule. Here is an example:
Price Quantity demanded
40 1700
50 1400
60 1080
70 840
80 640
90 480
100 380
110 290
120 200
Expressed graphically the schedule could be represented as follows:
120
Price
40
200 1700
Quantity
So the quantity demanded increases for any decrease in price.
Market Supply Curve
Supply can be defined as the theoretical quantities of a good (or service) which will be supplied at different prices on the market for this good (or service). Since only one price can prevail on a market at any one time, let us have a look at how this price is arrived at. From experience it is known that THE HIGHER THE PRICE THE HIGHER WILL BE THE QUANTITY SUPPLIED.
If this tendency is expressed numerically, a schedule is obtained which is called the Supply schedule. Here is an example:
Price Quantity supplied
40 200
50 290
60 380
70 480
80 640
90 840
100 1080
110 1400
120 1700
Expressed graphically the schedule could be represented as follows:
120
Price
40
200 hlag behind. 1700
Quantity
So the quantity demanded increases for any decrease in price.
Price formation and Market equilibrium
The means by which prices are formed is now available.
If both the supply and demand curve of a good is drawn on one diagram – this is how it will look:
120
A
Price
40
200 1700
The problem now is how a market price is formed. The answer is relatively simple.
At a relatively high price – say 110: at this price the quantity supplied will be 1400 units, but the quantity demanded will only be 290 – at this price there will be unsold inventory (excess supply). This implies that suppliers would rather reduce the price and sell more that return from the market with unsold goods. This excess supply will continue up to a price of 80 at which 640 will be sold. Why? To answer this question one needs to see what happens at very low prices – at very low prices - say 50, the quantity demanded will be 1400 units but the quantity supplied will only be 290 – at this price there will be unsatisfied buyers and they will be offering more for the product. This situation will continue again to the level of 80 at which 640 will be sold. At any higher price there will be a stronger tendency for prices to come down and at any lower price there will be a stronger tendency for prices to go up. This level is called the equilibrium price.
Specific Outcome 3: Identify and discuss the factors that drive
economic activity.
Assessment Criteria:
3.1 The effects of cyclical movements in a market system are evaluated in
context of a new venture.
Business Cycle, term used by economists to designate a periodic increase and decrease in an economy’s production and employment.
The Small Businessperson should also be aware of cyclical movements in the market that he/she is operating within. For example if you are in the business of purchasing property for rental to others, then you should time your purchases of your properties when there are many sellers and few buyers. This means that prices will be relatively low; as opposed to buying when everybody is buying and there is less stock available.
These cyclical trends happen in any market especially when there is some state intervention in that market that prevents the market to operate freely. You should know where in the cycle the market is when trading in that market.
Price
Time
Typical trends in the market
These cycles are referred to as “boom” and “bust” in the literature – the downward parts are also referred to as recessions.
Also read the section on Recessions on page 84 of the textbook (Business and Economic Principles)
3.2 The concept of inflation and its impact on own specific business is described.
The concept of inflation is discussed in detail in chapter 3 of the book titled “Business and Economic Principles” (page 63) by Marc Swanepoel.
3.3 The reasons for the decline in the value of money are identified.
What money is and how inflation occurs
There was a time that people bartered the goods that they produced. In other words they exchanged goods and services directly. One can see the problem with this – Let us say I make shirts and you make shoes. I want a pair of shoes, but your shirts are all still OK, then I have to wait until you want a shirt before I can get shoes!
Then there is also the question of parity – six shirts may have the same value than one pair of shoes. What are you going to do with six shirts?
These problems led some groups to find products that were desirable by everyone. Allthough shells and beads were used – gold and silver tended to be used more and more. Later the physical coins of gold and silver were replaced by promissory notes that were issued by people that kept other peoples’ gold in safekeeping. These became the banks of today. Today most transactions are concluded using financial instruments (cheques, internet transfers and so on). Do remember that the underlying value of the money are determined by the specific amounts goods and services that can be purchased with a given amount of money.
Governments have noticed that if they create more money people don’t notice it over the short term – they think that a given amount of money still represents a given amount of goods, and because they may think that something is relatively cheap (because they now have more of the created money in their pockets) they are prepared to pay more; and also because there is more money in circulation people compete for the available goods and services and so too drive up the price of the goods and services. Governments do this to “stimulate the economy”, but in the process they do a lot of damage – the prudent people that save for their old age or “for a rainy day” find that their saved money is worthless when they need it most. So in a sense a country that inflates its currency is robbing from the savings and pension funds of the people.
So, inflation occurs when money loses its value. Money loses its value when there is more money in circulation in relation to the available goods and services. Since most money systems are controlled by governments on can say that inflation is the result of bad monetary policies. Governments often believe that they can get something for nothing – that increasing the money supply actually is the same as producing wealth. Wealth however is dependent on the amount of goods and services available – productivity; and while it may have short term benefits for the government it has a bad effect on the economy over the long term.
3.4 The role of foreign currency and exchange rates in the general economy is identified.
3.5 The role of the interest/ BA rate, Gross Domestic Product and Balance of Payments in the operations of own venture is identified and explained.
Gross Domestic Product (GDP) is one measure of economic activity, the total
amount of goods and services produced in a country in a year. ...
In economics, the gross domestic product (GDP) is a measure of the size of the economy of a particular territory.
It is defined as the total value of all goods and services produced within that territory during a specified period (most commonly, per year). GDP differs from gross national product in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it.
A common equation for GDP is:
GDP = consumption + investment + government expenditures + exports – imports
GDP= $ 432 billion $10,000 pop 42,769,000
Specific Outcome 4: Describe the development and significance of
markets with particular reference to SA.
Assessment Criteria:
4.1 International trade as a result of uneven distribution of resources is
investigated in terms of opportunities for new ventures.
Economy of South Africa
South Africa is a middle-income, developing country with an abundant supply of resources, well-developed financial, legal, communications, energy, and transport sectors, a stock exchange that ranks among the 10 largest in the world, and a modern infrastructure supporting an efficient distribution of goods to major urban centers throughout the region. However, although growth has been positive for ten consecutive years, it has not cut into the 30% unemployment, and daunting economic problems remain from the apartheid era, especially the problems of poverty and lack of economic empowerment among the disadvantaged groups. Other problems are crime, corruption, and HIV/AIDS. At the start of 2000, President Mbeki vowed to promote economic growth and foreign investment by relaxing restrictive labour laws, stepping up the pace of privatization, and cutting unneeded governmental spending. His policies face strong opposition from organized labour.
South Africa has an estimated 4.79 million HIV infections. The government has recently, after much delay, devoted substantial resources to fighting the epidemic. A recent study (from the African Journal of Aids Research, Thomas Rehle and Olive Shisana) showed the infection rate starting to level off, (from 4.2% to 1.7% infection rate for 15-49 year olds), and AIDS deaths peaking at 487 320 in 2008.
Since South Africa opened its borders after the demise of apartheid, international crime syndicates have penetrated the country, and much of the worlds drug trade flows through its borders. South Africa is also the fourth-largest producer of marijuana in the world.
The volatility of the rand has affected economic activity, with the rand plummeting partly because of the consistent increase in money supply up to and during 2001 (hitting an historic low of 13.85 to the dollar and causing the reserve bank to increase interest rates), but since dramatically recovering, trading at under 7 in October 2003, leading to a recovery in inflation, and the reserve bank to drop rates, but exporters threatening to cut jobs.
4.2 The socio-economic factors in South Africa that underline the importance of new ventures, are identified.
South Africa needs jobs. Poverty needs to be eradicated. It is therefore imperative that all legal and other obstacles preventing people to start new businesses be removed.
Trade restrictions, restrictive laws, licensing laws, restrictive zoning laws, arbitrary police action against traders – all should be reviewed in terms of the economic necessities that confront us. The Pacific rim countries should be an example for us – they have been able to achieve phenomenal economic growth largely because of the economic freedoms that have been introduced there in the post war period.
The Economy and the Market
Describe what we mean by “the economy” and “economics”
Economics is the study of how values are created by people and how these are traded to ensure the optimum distribution of this wealth. The values that are created are the goods and services produced by individuals and groups (producers) for others that need them (consumers). The goods and services produced by an individual or group is traded for other goods and services that they need. Money is usually used to make these transactions easier.
Describe how the economy works
Van den Bogaerde, a well known South African economics academic, introduced the study of economics simplistically as follows: Consumption and production are the two poles between which the economy runs its course. Consumption, that is the use of goods and services with a view to the satisfaction of wants, takes place within the household or consumption unit; production, that is the process of providing anything that can be used, directly or indirectly, in the satisfaction of wants, takes place in the firm or production unit. For production the firm needs the factors of production – labour, land, and capital, which are co-ordinated in the productive process by the fourth factor of production: enterprise or entrepreneurship. He then says:”…on the one hand firms will have a demand for factors of production… and pay a price for them; households supply these to firms at a price…and use this income for the purchase of consumer’s goods.
This way there arises a money goods flow between households and firms.
Here is a slightly more complex graphic representation of how the economy works:
The Economic Cycle – the flow of Goods and Services in an Economy
PRIVATE SECTOR Money (taxes)
Money Money
Labour
Money
Goods &
Services
Social services &
PUBLIC SECTOR
TAXES
In this representation the economy is divided into Consumers (Consumption) and Suppliers (production). You will notice that both households and firms play a dual role in the money-goods flow.
Notes:
1. This chart indicates the flow of goods and services in an economy.
2. In a free market system the main relationship is between private consumers (individuals and businesses) of goods and services and the independent producers (individuals and businesses) of those goods and services (goods are physical goods such as cars, computers, telephones and so on; and services such as internet providers, courier services, private schools and colleges, transport and health services etc.)
3. In a socialist system the Government attempts to control the lives of people by getting involved in the economy by also providing services such as healthcare, sports facilities, water, electricity, roads, schools and so on. They do that by expropriating the wealth of private citizens through taxes. Because of bureaucracy there is a lot of wastage in the system and the economy falters. This is particularly true in Africa, but even in countries like the UK and America the politicians have gained a large foothold in the economy with disastrous results.
The Economy – Business sectors in an Economy.
Often it is useful to look at an economy from a sectoral point of view. Here is one such a representation:
CONSUMERS
SERVICES
GOODS
Services tend to have a shorter delivery chain than goods since services tend to be delivered personally and can normally not be stored. There could however be some economies of scale that could lead to service companies to become large and diverse.
The Economy – Private/Public Sectors in the SA Economy.
It is also useful to differentiate between the Private and Public sectors in an economy. Countries with a large public sector usually have low growth economies since the public sector is not very efficient in producing good – it therefore consumes a lot of resources that could have been employed more productively elsewhere in the economy.
PUBLIC SECTOR = The public sector in South Africa is very large because of our Apartheid legacy. During the Apartheid years the Government tried to control everything, not only who you have sex with and where you were allowed to stay, but also the economy. They made it difficult for people to trade freely and introduced all sorts of rules and regulations that hampered the economy a lot. To implement their policies they also needed money – that is why our tax rates are so high. Even our Sales tax, which is essentially a tax on the poor is 14%.
PRIVATE SECTOR = The private sector in South Africa is not really private because of all the laws and Government regulations that control even the smallest of activities (such as organising a raffle at your church – you need permission to do it otherwise you may go to jail). So the private sector is being strangled by regulation which causes our economy to stagnate and not create jobs for the people.
How businesses are formed
Businesses are formed when entrepreneurs see an opportunity in the marketplace to “make money”. Making money simply means that you are able to produce goods and services that other people want at price which is higher than what it costs you to produce.
The one factor that drives the economy is the Entrepreneur. He is the one who assumes the responsibility and the risk for a business operation with the expectation of making a profit. The entrepreneur generally decides on the product, acquires the facilities, and brings together the labor force, capital, and production materials. If the business succeeds, the entrepreneur reaps the reward of profits; if it fails, he or she takes the loss.
In his writings, the Austrian-American economist Joseph A. Schumpeter stressed the role of the entrepreneur as an innovator, the person who develops a new product, a new market, or a new means of production. One important example was Henry Ford, Thomas Edison, Bill Gates – can you imagine a world without mass produced cars, no electric lighting and no user friendly computer software? In the industrialized economies of the mid 20th century, giant corporations and conglomerates may have largely replaced the individual owner-operator. There is however a swing back and definitely still a place for the entrepreneur in smaller businesses as well as in the developing economies of the Third World nations.
The term entrepreneur seems to have been introduced into economic theory by Cantillon (1, 1931) in a publication of 1755 and was first accorded prominence by Say (2, 1803). It was variously translated into English as merchant, adventurer or employer, though the precise meaning is the undertaker of a project. John Stuart Mill (3, 1848) popularized the term in Britain.
Earlier understanding of entrepreneurship placed less emphasis on the role of the entrepreneur and trivialized management and decision making and put more emphasis on the market to do all the co-ordination that is necessary and really leaving nothing for the entrepreneur other than to initiate the idea.
According to Schumpeter (1934) however, entrepreneurs are the prime movers in economic development, and their function is to innovate or carry out new combinations. Five types of innovation are distinguished: the introduction of a new good (or an improvement in the quality of an existing good); the introduction of a new method of production; the opening of a new market in particular an export market in new territory; the 'conquest of a new source of supply of raw materials or half-manufactured goods'; and the creating of a new type of industrial organization.
Schumpeter is also very clear about what entrepreneurs are not: they are not inventors, but people who decide to allocate resources to the exploitation of an invention; they are not risk-bearers: risk-bearing is the function of the capitalist who lends funds to the entrepreneur. Essentially, therefore, Schumpeter's entrepreneur has a managerial or decision-making role.
This view receives qualified support from Hayek (1937) and Kirzner (1973), who emphasize the role of entrepreneurs lies in acquiring and using information. Entrepreneurs' alertness to profit-opportunities, and their readiness to exploit these through arbitrage-type operations, makes them the key element in the market process. Hayek and Kirzner regard entrepreneurs as responding to change as reflected in the information they receive while Schumpeter emphasizes the role of entrepreneurs as a source of change. These two views are not incompatible: a change effected by one entrepreneur may cause spill-over effects, which alter the environment of other entrepreneurs. Hayek and Kirzner do not insist on the novelty of entrepreneurial activity, however, and it is certainly true that a correct decision is not always a decision to innovate; premature innovation may be commercially disastrous. [Schumpeter futher begs the question of whether someone who is the first to evaluate an innovation, but decides (correctly) not to innovate, qualifies as an entrepreneur].
Knight (1921) insists that decision making involves uncertainty. Each business situation is unique, and the relative frequencies of past events cannot be used to evaluate the probabilities of future outcomes. According to Knight, measurable risks can be diversified (or laid off) through insurance markets, but uncertainties cannot. Those who take decisions in highly uncertain environments must bear the full consequences of those decisions themselves. These people are entrepreneurs: they are the owners of businesses and not the salaried managers that make the day-to-day decisions.
Leibenstein (1968) regards the entrepreneur as someone who achieves success by avoiding the inefficiencies to which other people or the organizations to which they belong are prone. Leibenstein's approach has the virtue of emphasizing that, in the real world, success is exceptional and failure is the norm.
Casson (1982) defines the entrepreneur as someone who specializes in taking decisions where, because of unequal access to information, different people would opt for different strategies.
Perhaps the aspect of entrepreneurship that has attracted most attention is the motivation of the entrepreneur. Hayek and Kirzner take the Austrian view that the entrepreneur typifies purposeful human action directed towards individualistic ends. Schumpeter, however, refers to the dream and will to found a private dynasty, the will to conquer and the joy of creating, while Weber (1930) emphasizes the Protestant Ethic and the concept of calling, and Redlich (1956) the role of militaristic values in the culture of the entrepreneur. Writers of business biographies have ascribed a whole range of different motives to people whom they describe as entrepreneurs. For many students of business behaviour, it seems that the entrepreneur is simply someone who finds adventure and personal fulfilment in the world of business. The persistence of this heroic concept suggests that many people do not want a scientific account of the role of the entrepreneur.
Successful entrepreneurship provides an avenue of social advancement that is particularly attractive to people who are denied opportunities elsewhere. This may explain why it is claimed that immigrants, religious minorities and people denied higher education are over-represented among entrepreneurs. Hypotheses of this kind are difficult to test without carefully controlled sampling procedures. The limited evidence available suggests that, in absolute terms, the most common type of entrepreneur is the son of an entrepreneur (4, 1982)
How wages are determined
Some people say that if one is able to produce goods and services that other people want at price which is higher than what it costs you to produce – it is labour that being exploited and that labour should share in the profit.
Labour is one of the most important services being provided in the marketplace. It doesn’t matter how many machines we have or how many processes are automated, the economy will always need the skills and competencies that individuals have. The price that the entrepreneur or business owner is prepared to pay for these skills and abilities is however not unlimited. Just like you as a consumer when confronted with the high price of a product, say tomato sauce – you may decide not to buy it, or not to buy it now, or you may decide to take a smaller bottle or a cheaper brand - in the same way the employer will make another plan when confronted with a high salary bill.
Identify the factors that lead to unemployment
Oversupply of unskilled workers undersupply of entrepreneurs. Price of labour too high for the need. Like old stock on the shelf – overpriced.
Now, in a free market there is no such thing as unemployment, since there will always be a price level at which the market will be cleared. This is a difficult concept for economists to understand; but ordinary people know how vegetable markets operate - they know the principle that the price comes down until all the stock is sold! Unfettered labour markets operate in the same way.
For a full explanation how the price of labour increases in a free economy you are referred to the book “Business and Economic Principles”.
How tools and improved productivity help us to live better lives
I use my hands and catch one fish a day. I invent a fishing rod and catch 10 a day. I have improved the wealth of my community 10 fold. Twenty fisherman catch 10 fish a day. One fisherman invents a net and catches 200 fish a day on his own – he has saved the community the labour of 19 fishermen (that are now temporarily jobless!) but actually he has released them into the economy - they can now make chairs, toothpaste or whatever – because his costs are low (only the labour of one person instead of twenty to produce the same amount of fish) it now becomes worthwhile to produce other items – more fish can be exchanged for the same amount of other products. Let us say I produced potatoes an previously exchanged one potato for one fish – if the fishing productivity increases and there are more fish around people will be prepared to exchange more fish for the same amount of potatoes. A productivity increase in one industry benefits all other industries.
How a good political system can assist the economy
The free enterprise sysytem
At the core of the free enterprise system lies the principle that individuals may own property, and may employ that property at their own risk in the production of goods and the provision of services., which is then distributed (sold to) consumers at a profit.
In South Africa society’s needs for goods and services are catered for almost entirely by private initiative, comprising a wide variety of business enterprises. All these enterprises, which vary greatly in size and structure, from the spaza shop to industrial giants, nevertheless share one distinguishing feature: that of striving towards profit.
Though there are some services that are provided by government agencies, the tendency is to get privately owned organisations to deliver these because they tend to be more effective in doing so. In these cases too, the profit motive is the driving force.
It is human nature to be goal directed. This is also reflected n the social organisations that people form. In business enterprises these goals are often expressed in financial terms .
The actions that people take to achieve their objectives are based on the decisions that they make given their particular circumstances.
These decisions of making a choice between all the possible alternatives that face the business person cannot be made on a hit-or-miss basis. Good decisions often depend on the quality of information that is available to the person.
Each person then with financial objectives has a need for information concerning the financial consequences of his/her economic activities. Information provides a sound framework for decision making. It is the task of accounting to fulfil these needs in an organised way through the provision of accurate financial information.
This need for accurate financial information is further highlighted in cases where the funds being employed in a business is from a source other than that of the entrepreneur. If someone else’s funds are employed the entrepreneur is obliged to render an account to the funder as to how the money has been used. The existence of well kept accounts also gives the lender some control over the use of the funds.
With the launching of an enterprise the investor will need to know to what use the money has been put and what the benefits (to him) are, of being used in that way.
Though not always the case, businesses are often reliant on outside capital – this investment is either through an investment on a risk bearing basis, or in the form of a loan to the business. The providers of funds therefore are either (part) owners or creditors. Owners want to see profits coming from the business and creditors want to know that their money is safe in a business and that it is strong enough in financial terms not to endanger the repayment of the loan (the capital portion) and that the earnings will be sufficient to cover the interest on the loan.
4.3 The conditions for the existence of perfect and imperfect markets are explained.
The concept of a perfect market is really only found in economics textebooks. In real life there are only imperfect markets in which entrepreneurs operate to make profits within a real world of imperfection – and it works!
The following is an extract from an aticle titled “Israel M. Kirzner and the Austrian Theory of Competition and Entrepreneurship by Richard M. Ebeling, August 2001” (5, 2001) that describes the role of the entrepreneur in the market:
“Mises, as Kirzner explained, viewed the market as a “process.” But what kind of a process is it? Kirzner has emphasized that it is a process of entrepreneurial alertness. The satisfaction of consumer demand may be the purpose behind production, but there must be some who, in the social system of division of labor, have the specialized role of anticipating what it is that consumers will desire in the future and then hiring, directing, and coordinating the use of the means of production towards that end.
What guides entrepreneurs in this task is the anticipation of profits — revenues in excess of the expenses to bring goods to market — and the avoidance of losses. But one of the insights that Kirzner has highlighted is that while entrepreneurship is crucial to the workings of the market, it cannot be bought and sold like other goods or resources for a certain price. The reason is that the essence of entrepreneurial activity is “alertness,” an attention to scanning the market horizon for opportunities and innovations that can result in making better goods, or new goods, or bringing less-expensively manufactured goods to the market place.
But to be “alert” is to notice something that others have neither seen nor thought of before. Alertness means thinking and seeing “outside the box” of the known set of opportunities and routine ways of doing things. It is the process of discovering new knowledge and possibilities that no one has either previously imagined or noticed.”
One may even say that entrepreneurs create the imperfect market by introducing instability and change!
4.4 Growth sectors that exist in South Africa are identified for possible new ventures.
There are myriads of growth sectors in SA. Currently tourism seems to be in vogue but opportunities abound in manufacturing, information technology, call centres, in financial services as well as retailing, mining, farming, fishing, the services industry – really too many to mention.
The following article that is American in origin also has many pointers to entrepreneurs in SA:
What exactly is an entrepreneur? More importantly, what is entrepreneurship? The definition of entrepreneurship has been debated among scholars, educators, researchers, and policy makers since the concept was first established in the early 1700s. According to Kautz, “The definition itself is evolving as the field itself comes into the mainstream of American business” (1999, ¶1). Despite the complex and dynamic nature of entrepreneurship, an operational definition can be identified to help explain the characteristics of entrepreneurial activity and its positive effects on the economy.
Definition of Entrepreneurship
The term “entrepreneurship” comes from the French verb “entreprendre” and the German word “unternehmen,” both which mean to “undertake.” Scholars Bygrave and Hofer in 1891 defined the entrepreneurial process as involving all the functions, activities, and actions associated with the perceiving of opportunities and the creation of organizations to pursue them (as cited in Carton, Hofer & Meeks, 1998). The modern definition of entrepreneurship was introduced by Joseph Schumpeter in 1934. According to Schumpeter, “the carrying out of new combinations we call ‘enterprise’” and “the individuals whose function it is to carry them out we call ‘entrepreneurs’” (as cited in Carton, Hofer & Meeks, 1998, ¶9).
Carton, Hofer, and Meeks (1998) provide an operational definition of entrepreneurship that attempts to encompass definitions from scholars like Schumpeter into a comprehensive and adequate concept: “Entrepreneurship is the pursuit of a discontinuous opportunity involving the creation of an organization (or sub-organization) with the expectation of value creation to the participants. The entrepreneur is the individual (or team) that identifies the opportunity, gathers the necessary resources, creates and is ultimately responsible for the performance of the organization. Therefore, entrepreneurship is the means by which new organizations are formed with their resultant job and wealth creation” (¶1). An important criterion of the Carton, Hofer, and Meeks definition is that the organizations must provide goods or services to society. Though this definition will not satisfy everyone, it does capture the important aspects of entrepreneurship.
A Profile of Entrepreneurs
Marvilla (2000) offers a profile of America’s entrepreneurs based on analysis of the Consumer Population Survey by the U.S. Census Bureau. According to these data, there were approximately 12.8 million self-employed people in nation in 2000. The self-employed are typically married (about 74 percent of the sample) and white (about 90 percent of the sample). Males dominate the entrepreneurial landscape, making up 65.6 percent of the total number of self-employed people. Entrepreneurs overwhelmingly belong to the broad age group of 25-59 years old; about 82 percent of the sample fell between those ages. Almost a third (30 percent) of the self-employed are in their 40s, while people in their 30s and 50s each represent slightly under a quarter the self-employed. The majority of entrepreneurs work for their business on a full time basis. About 70 percent of the self-employed have family incomes of $25,000 or higher, and about 28 percent have incomes of over $75,000. Most of those who started their own businesses are well educated. About 60 percent have received at least some college education (Maravilla, 2000) and, according to the National Association for the Self-Employed (NASE), about 24 percent of their members hold a bachelor’s degree, versus only 16.5 percent of all Americans over the age of 25 (NASE, no date).
Entrepreneurs often have a number of important characteristics in common. Daile Tucker, an entrepreneur herself, says that entrepreneurs have a capacity for “developing a unique business idea, working as a member of a team, and the ability to do multi-level marketing” (as cited Kautz, 1999, ¶3). Indeed, entrepreneurs have to be self-confident, independent, flexible, creative, knowledgeable, versatile, and diligent in order to create a successful business. While these qualities are especially important for starting up a business, it should be noted that they do not guarantee business success.
The influx of new enterprises has created a division between entrepreneurship and amateurism, which Tom Richman in “Creators of the New Economy” has referred to it as the rise of the “professional entrepreneur” (2002, p. 2). Richman theorizes that the amateur entrepreneur is local, independent, secretive, self-reliant, and organizationally orthodox, among other things. On the other hand, the professional entrepreneur is global, innovative, inquisitive, virtual, and more career-oriented and prepared. Richman sees a rise in professional entrepreneurship because professional individuals are raising the bar for business management, knowledge, and skills.
Entrepreneurial Businesses
The two most important categories of businesses to consider when discussing entrepreneurship are small businesses and microenterprises. Though these two categories do not capture all entrepreneurial enterprises, they comprise the lion’s share of businesses that fit within the definition discussed above.
Small Businesses
The U.S. Small Business Administration (SBA) has various definitions for small businesses, depending on the type of industry. Manufacturing and mining businesses with fewer than 500 employees are considered small businesses, while businesses in wholesale trade industries must have fewer than 100 employees. For other industries, such as retail and construction, businesses are classified based on annual revenues (SBA, 2002). There are approximately 25 million small businesses in the country, which currently employ more than half of the country’s workforce and account for more than half of the private sector economic output. Small businesses provide approximately 75 percent of the new jobs added to the economy (NASE, no date).
Though small businesses are not necessarily entrepreneurial enterprises, the flexible nature of small businesses allows them to more quickly develop and adapt new products, services, and technologies, and to create and enter new market niches and business models. “As larger, more established firms are generally less likely to reward innovation or to experiment with risky, new ventures than smaller, entrepreneurially-oriented enterprises, they are less likely to experiment to promote the new ideas, technologies and business methods that will lead economic growth in the twenty-first century” (JETRO New York, 1999, ¶7). The health of the small business market is an most important part of the economy because small businesses lead to new innovations and create new job opportunities and growth (JETRO New York, 1999).
Microenterprises
A microenterprise is a business with fewer than five employees and requires less than $35,000 in start up money. There are nearly 2 million micro-entrepreneurs in the United States today and the microenterprise sector is growing daily. Microenterprises range from cleaning services and childcare programs to designer textiles and specialty foods. These businesses often employ members of the same family and sometimes grow into larger businesses that employ others in the community (Association for Enterprise Opportunity, 2002).
According to author Betsy Brill: “One of the most promising economic development strategies for low-income communities in the United States that has emerged in the past decade is microenterprise. Microenterprise is entrepreneurship on the small scale that offers the most disadvantaged an escape from the trap of minimum wage jobs or welfare” (2000, ¶1). Though research on microenterprises is relatively new, existing research suggests that microenteprise is an important emergent component of entrepreneurship. One study, the Self-Employment Learning Project, revealed the following:
• Microentrepreneurs are relatively well-educated – 83% are high school graduates, 58% have some education past high-school, 19% have 4-year college degrees, 8% have graduate degrees;
• A typical microenterprise is a sole proprietorship that has been in operation for two or more years, with sales of less than $12,000 per year. Most microbusinesses are in wholesale or retail trade or services, with some manufacturing and construction firms;
• Over time, microbusinesses show high survival rates (78%), gains in net worth, and employment generation. Profitability over time fluctuates;
• The majority of low-income microentrepreneurs show income gains over time (55%), and 25% had income gains large enough to move out of poverty (as cited in Dumas, 1999).
Conclusions
Entrepreneurship is a dynamic, developing part of the economy at this time in history and many experts predict substantial growth in entrepreneurial businesses in the twenty-first century. Though consensus on a precise definition of entrepreneurship may be impossible, what cannot be denied is the economic power of entrepreneurship and its way of inspiring creative individuals to pursue opportunities and take risks. (Defining Entrepreneurship - By Kabria Anderson
Workbook
Explain the free market system in terms of perfect and imperfect competitive markets.
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Identify the characteristics of the different economic systems:
Free Market Capitalism
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Socialism
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Explain the role of competition in a free market system. (give examples of state owned/ monopolies and private businesses).
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Explain the varying prices of the same product/service to illustrate how competition works in the marketplace.
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Described the reasons for imperfect competitiveness.
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The advantages and disadvantages of competition are explained.
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Discuss and illustrate the interaction of demand and supply in price determination under conditions of perfectly competitive markets.
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Explain and illustrate the laws of demand and supply and what the consequence of these laws for new ventures are. ………………………………………………………………………………………………………………………………………………………………………………………………
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Illustrate demand and supply curves and explained the relationship between the variables in the context of own venture. ………………………………………………………………………………………………………………………………………………………………………………………………
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Discuss and illustrate the relationship between demand, supply and price with reference to own products or service. ………………………………………………………………………………………………………………………………………………………………………………………………
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List the factors that lead to changes in the demand and supply curve in own specific context.
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Identify and discuss the factors that drive economic activity.
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Describe what is meant by cyclical movements in a market
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Describe the concept of inflation and its impact on businesses
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Identify the reasons for the decline in the value of money
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Identify the role of foreign currency and exchange rates in the general economy.
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Explain the following concepts: the interest/ BA rate, Gross Domestic Product and Balance of Payments
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Describe the development and significance of markets with particular reference to South Africa.
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Discuss international trade in terms of opportunities for new ventures. ………………………………………………………………………………………………………………………………………………………………………………………………
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The socio-economic factors in South Africa that underline the importance of new ventures, are identified. ………………………………………………………………………………………………………………………………………………………………………………………………
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The conditions for the existence of perfect and imperfect markets are explained. ………………………………………………………………………………………………………………………………………………………………………………………………
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Identify growth sectors that exist in South Africa for possible new ventures.
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C:\WINDOWS\Desktop\CMH\DIDTETA\Students stuff\THE MARKET.doc
SPECIFIC OUTCOMES AND ASSESSMENT CRITERIA:
Specific Outcome 1: Explain the free market system in terms of
perfect and imperfect competitive markets.
Assessment Criteria:
1.1 Characteristics of different economic systems are identified.
1.2 The role of competition in a free market system is explained with examples from state owned/ monopolies and private businesses.
1.3 Varying prices of the same product/service are listed in illustrating competition.
1.4 Reasons for imperfect competitiveness are described.
1.5 The advantages and disadvantages of competition are explained.
Specific Outcome 2: Discuss and illustrate the interaction of
demand and supply in price determination
under conditions of perfectly competitive
markets.
Assessment Criteria:
2.1 The laws of demand and supply and the consequence of these laws for new ventures are explained and illustrated.
2.2 Demand and supply curves are illustrated and the relationship between the variables is explained in context of own venture.
2.3 The relationship between demand, supply and price is discussed and illustrated with reference to own products or service.
2.4 Factors that lead to changes in the demand and supply curve are listed in own specific context.
Specific Outcome 3: Identify and discuss the factors that drive economic activity
Assessment Criteria:3.1 The effects of cyclical movements in a market system are evaluated in context of a new venture.3.2 The concept of inflation and its impact on own specific business is described.3.3 The reasons for the decline in the value of money are identified.3.4 The role of foreign currency and exchange rates in the general economy is identified.3.5 The role of the interest/ BA rate, Gross Domestic Product and Balance of Payments in the operations of own venture is identified and explained.
Specific Outcome 4: Describe the development and significance of
markets with particular reference to SA.
Assessment Criteria:
4.1 International trade as a result of uneven distribution of resources is
investigated in terms of opportunities for new ventures.
4.2 The socio-economic factors in South Africa that underline the importance of new ventures, are identified.
4.3 The conditions for the existence of perfect and imperfect markets are explained.
Growth sectors that exist in South Africa are identified for possible new ventures.
• The reason that prices go up when supply is less has to do with marginal utility of the item – the marginal utility for the persons will be higher because less items are available to reduce the value so they will be prepared to forego higher values to obtain need satisfaction – they need that one potato instead of the egg! How much would you pay for a glass of water after a day in the desert and you have five million Rand in your suitcase?
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