ASSIGNMENT COVER SHEET

Surname

Mamathuntsha
Mashudu Valcano

First Name/s

130641
Student Number

Economics
Subject

6
Assignment Number

Shepherd Muzamba
Tutors Name

Pretoria, UNISA Campus

Examination Venue

11.04.2016
Date Submitted

Submission ()

First Submission

.resubmission

1ST Floor AFGRI Building

Postal Address

12 Byls Bridge Boulevard

Highveld
Ext 73
Centurion

0157

Mashudu.mamathuntsha@cmint.co.za
E-Mail
(Work) 011 063 2162
(Home) N/A

Contact Numbers

Course/Intake

(Cell) 076 621 7907

MBA Year One July 2015

Declaration: I hereby declare that the assignment submitted is an original piece of work produced by myself.

Date: 11.04.2016
Signature:

Table of contents

Question 1..3-8
Question 2..9-13
Question 3.14-18
Question 4.19-26
References.27-28

Section A
Question 1:
1.1 Critically discuss the differences between economic growth, economic development and
social development:
Economic growth: According to diffen.com (2016), economic growth is an increase in a country's
real level of national output which can be caused by an increase in the quality of resources
(by education etc.), increase in the quantity of resources & improvements in technology or in
another way an increase in the value of goods and services produced by every sector of the
economy. Economic Growth can be measured by an increase in a country's GDP (gross domestic
product).
Economic development: According to Mohr and Fourie (2008: 520), economic development refers
to the improvement of living conditions in the less developed countries. It is also a normative
concept i.e. it applies in the context of people's sense of morality (right and wrong, good and bad).
The definition of economic development given by Michael Todaro is an increase in living
standards, improvement in self-esteem needs and freedom from oppression as well as a greater
choice (Diffen.com, 2016). It tries to see how well off people are in ways that include more than
just income.
Social development: According to Ask.com, social development is defined as prioritizing human
needs in the growth and progression of society focusing on improving the lives of regular citizens,
especially the poor, to make society a better place for everyone (Ask.com, 2016). Social
development issues determine the citizens access to resources who gets what, where and how.

When comparing economic development and growth within Brazil or Costa Rica itself, it is
extremely important to look at the change in both GDP and HDI over the years because each
indicator is important to show either economic growth (GDP) or development (HDI). Economic
growth in Brazil /Costa Rica is simply an increase in the real output of the countrys economy over
a period of time, while economic development in Brazil /Costa Rica would come from an increase
in peoples freedoms, the reduction of poverty, the bettering of the public provisions of health and

education, the guarantee of civil liberties and the maintenance of law and order. The measuring of
economic growth is quantitative. An increase in real gross domestic product (GDP) will show that
Brazil /Costa Rica have economic growth. A noticeable increase in one of the components of GDP,
which are consumption, government spending, investments, or net exports, will most likely cause
economic growth in Brazil /Costa Rica. On the other hand, the measuring of economic development
is based more on qualitative data. Economic development entails an improvement in the quality of
life of the majority of the population as a result of economic growth, reduction of inequality and
eradication of absolute poverty (Mohr, P. and Fourie, L., 2008:520).This clears shows that
economic growth is one of the components of economic development. Development can be seen
through changes in the human development index (HDI), gender related index (GDI), literacy rate,
infant mortality rate, the human poverty index (HPI), genuine progress indicator (GPI), etc.
Development relates to growth of human capital indexes, a decrease in inequalities figures within
Brazil /Costa Rica and structural changes that lead to an increase standard of living for these
countries.
Comparison chart:
Economic Development versus Economic Growth comparison chart
Economic Development

Economic Growth

Implications

Economic development implies an upward

movement of the entire social system in terms
of income, savings and investment along with
progressive changes in socioeconomic
structure of country (institutional and
technological changes).

Economic growth refers to an

increase over time in a country`s
real output of goods and services
(GNP) or real output per capita
income.

Factors

Development relates to growth of human

capital indexes, a decrease in inequality
figures, and structural changes that improve
the general population's quality of life.

Growth relates to a gradual

increase in one of the
components of Gross Domestic
Product: consumption,
government spending,
investment, net exports.

Measurement

Qualitative. HDI (Human Development Index), Quantitative. Increases in real

gender- related index (GDI), Human poverty
GDP.

index (HPI), infant mortality, literacy rate etc.

Effect

Brings qualitative and quantitative changes in

the economy

Brings quantitative changes in

the economy

Relevance

Economic development is more relevant to

measure progress and quality of life in
developing nations.

Economic growth is a more

relevant metric for progress in
developed countries. But it's
widely used in all countries
because growth is a necessary
condition for development.

Scope

Concerned with structural changes in the

economy

Growth is concerned with

increase in the economy's output
Source: www.diffen.com , 2016.

Economic growth is obtained by an efficient use of the available resources and by increasing the
capacity of production of a country. It facilitates the redistribution of incomes between population
and society.

In conclusion, although social development , economic development and economic growth have
some similarities, but do differs.

1.2. Evaluating factors that have led Costa Rica to economic and social development:
Introduction:
There are many factors contributing to economic and social development. Amongst them are the
ones evaluated below:
Gini coefficient(Income inequality) :
It is a standard economic measure of income inequality, based on Lorenzo curve. Higher the
number over 0 higher the inequality and the score of 1.0 (or 100) indicates inequality where one
person corners all the income (Businessdictionary.com, 2016).Costa Rica has a Gini coefficient of
0.46 and it is close to 0. This means that the issue is not really that bad (i.e. there is some income
equality in Costa Rica). A Gini coefficient close to zero means that more people have income
available to spend. Growth happens when lots of people spend money. The 2000 per capita income
in Costa Rica was about $ 3960.00 (equivalent to R 59 400.00 based on the latest exchange rate of
R15/USD). This contributes to improved standard of living and ultimately, increased economic
development.
Political stability:
According to Martin Paldam (1995), political instability is often associated to low economic
growth. There is no military force interfering in the running of Costa Rica as a country. The
elections are also free and open. A country with political instability is less likely to experience both
economic growth and economic development. Costa Rica is very politically stable and such
conditions permit the economy to experience economic growth and improved social development.
Mandatory Education:
Costa Rica has implemented the policy of mandatory education. Education alone, of course, cannot
transform an economy. According to Alejandro Ramirez, Gustav Ranis and Frances Stewart
(1997:10), the quantity and quality of investment, domestic and foreign, together with the overall
policy environment, form other important determinants of economic performance and the level
human development. Costa Rica also has 95% adult literacy rate. Costa Rica also six years of
school attendance are mandatory and 99% attendance is reported. Mandatory education give poor

countries the human capital boost necessary to bring large segments of the population out of
poverty
Export promotion:
Export promotion has been defined as those public policy measures which actually or potentially
enhance exporting activity at the company, industry, or national level (Chand, S., 2016). This
means that the country put its interests first and ensures that the local producers (exporters) are well
protected against imports. This can be in the form of export subsidies and import quotas. Brazil has
had an export policy stressing incentives for manufacturing exports. Costa Ricas exports have been
more concentrated in agriculture. The more Costa Rica exported its produce, the more foreign
income they earn and more people will be employed. This contributes to increasing the economic
growth as well as improving the workers standard of living (as a result of the income they earned
from rendering the service).
Poverty Reduction and Human Development performance:
According to the case study, Fields concluded that the proportion of Costa Ricans below the
absolute poverty line fell from 20% to 10% from the early sixties to the early seventies. With more
people above the absolute poverty line, their standard of living also improved as they are now able
to afford most of the essential services they couldnt afford before. Costa Rica also has better
human development performance in relation to its Latin American neighbors is due in no small part
to its agrarian system. People of Costa Rica have benefited from its comparatively better agrarian
system, including its better opportunities for rural economic mobility; the agrarian system is an
incomplete explanation for the country's human development performance.
Regressive taxation system:
This includes taxes on cigarettes, alcohol & fuel tax. This discourages the society from consuming
these goods and ultimately, not only improving the health status of the society but also increasing
saving lot of money. This also helps the government to save on social spending on addressing the
social ills that comes with the consumption of these goods. This is good for social development as
it is attempts to redress the social ills facing the society.
Press freedom:

This refers to the right to obtain and publish information or opinions without government
censorship or fear of punishment. This means that Costa Ricans have more access to the
information about whats happening in their country and the information will actually aid them in
their decision-making about the life choices, careers, health etc. Press freedom promotes social
development.
Health performance:
According to the case study, Costa Rica's life expectancy at birth in 2000 was 77 years, the same as
in the United States. This just goes to show that the Costa Rica now has quality health care facilities
and the citizens are able to access these facilities. A healthy population translated to a productive
workforce as well as reduced cases of pre-mature deaths. Majority of the population are able to
make meaningful contribution to the Costa Rican economy.
Ecotourism promotion and preventation of rainforest destruction:
According to Untamedpath.com (2016), ecotourism is a promising means of advancing economic
and environmental objectives in developing countries. Costa Rica experienced the benefits offered
by Ecotourism and such benefits includes: investment for small-enterprises, employment and
increased national stake in protecting biological resources. Ecotourism promotion and the
preventation of rainforest destruction not only protect the environment, but also contribute to
economic development.
Agricultural infrastructure and extension programs:
Costa Rica also had quality agricultural infrastructure and extensive programs. This actually also
allow them the increase their agricultural exports as well as contributing to both economic and
social development.
Democratic system:
Every individual has the right to enjoy and experience, political and social rights and the state is
not allowed to discriminate citizens on the standard of sex, caste, property and religion
(Apecsec.org, 2014). Costa Rican citizens are enjoying economic and social benefits that come with
a democratic system.
In conclusion, the above factors contributed to both social and economic development in Costa
Rica.
8

Question 2:
2.1. Critically evaluate the notion that development is not necessarily the same as growth
although in poor countries is generally a precondition for meeting important development
goals:
Introduction:
Development refers to a general improvement in living standards and enhancement of peoples
well-being and freedom. Growth can be very helpful in achieving development, but this requires
active public policies to ensure that the fruits of economic growth are widely shared, and also
requiresand this is very importantmaking good use of the public revenue generated by fast
economic growth for social services, especially for public healthcare and public education. It is
possible to have economic growth without development. This actually means an increase in GDP
with no actual improvements in living standards and it often a case where only benefits a small %
of the country population.
Growth in many developing countries also requires external capital inflows. Without reasonable
flows, the prospect for any improvements in living standards is bleak. As a result, the poor will be
forced to overuse the environment to ensure their own survival. Economic growth does not
automatically lead to social progress. The Social Progress Index shows that if we are to tackle
problems such as poverty and inequality economic growth alone is not enough. (Michael, Green,
2014). Meaning, it is very important that we address the issues affecting economic and social
development before think about economic growth. According to Mohr and Fourie (2008:521),
economic growth is regarded as one of the components of economic development and development
requires changes in structures, institutions and attitudes, including a specific focus on the conditions
and needs of the deprived majority.

It is very important to note that there are measures of both economic growth and development and
these measures are different.

i.

How economic growth is measured?

According to Mohr and Fourie (2008:510), we measure it by the percentage change in the level of
national income, often over the period of one year.
ii.

How economic development is measured?

According to the case study, the developmental criteria are: the meeting of basic needs (i.e.
reduction of absolute poverty), the creation of modern employment opportunities, and the
achievement of a less unequal distribution of income, human development index, political & market
freedom, enhanced self-esteem and self-actualization.
Development measures are a broader measure than the simple economic growth measures. We get
more information with the development measures than a simple reliance on economic growth. A
mere increase in flows of capital to developing countries will not necessarily contribute to
development. Domestic efforts are of paramount importance. More external funding is also
required, but it must come in ways that are sensitive to the environmental impacts. The point is that
the reduction of poverty itself is a precondition for environmentally sound development. And
resource flows from rich to poor flows improved both qualitatively and quantitatively are a
precondition for the eradication of poverty. Growth in the poor countries often comes at the expense
of the environment or natural resources. An example of this would be Brazils growth without no
changes or improvement in the standard of living.

In conclusion, growth and development are not necessarily same thing.

10

2.2 Critically discuss some of the main features and problems facing Brazil and Costa Rica:
Brazil is a beautiful country; rich in cultures, colours, flavours, languages and customs. But, as with
any country in the world, Brazil and Costa Rica have their fair share of social issues, which their
people and government no doubt work hard to resolve. Both countries are developing countries
with no massive economic powers. Below are the features and problems facing Brazil and Costa
Rica:
Government failures:
This occurs when the government intervention in the economy causes an inefficient allocation of
resources and a decline in economic welfare (Economicshelp.org, 2016). According to the case
study, the Brazilian government has been characterized by the problem of government failures. This
is evidenced when President Fernando Collorde Mello ordered a price freeze and the temporary
seizure of 80 percent of private savings savingsover $110 billionin an attempt to squeeze out
liquidity, which he assumed would cause hyperinflation (Case study). This, however, backfired as
the savings seizure destroyed confidence in financial assets and in the government itself.
High debt levels:
Brazils massive debt level also means that instead of diverting funds to economic & social
development projects, it now faces a challenge of serving debt. According to debtbombshell.com
(2016), the more a country borrows, the bigger the interest payments get. This clears means that the
country, just like Brazil, will have fewer funds available for future investment. Brazil labors under
one of the developing world's highest debt levels. High levels, as explained in the case study, also
increases the countrys poverty (9% of Brazils population struggle to make ends meets).
Child Labour:
Both Brazil and Costa Rica are experiencing problem of child labour. Children are supposed to be
in school receiving quality education to ensure that they become useful to the economies of both
countries and not the other way around working to provide for their families. Children are the
future of any country and if, any, country fails to look after them; the chances are the country will
struggle to eradicate the poverty issue. Therefore, both Brazil and Costa Rica must put in place the

11

systems and programme that will ensure that kids are only protected against abuse, but also ensure
that they are receiving quality education.
Environmental Issues:
Between Brazil and Costa Rica, the latter ensured that it had adequate policies & regulations to
protect its environment. Not looking after the environment can have devastating consequences to
the economy of any country including Brazil. Brazil also exported commodity in high volumes as a
way to get rid of their debt level. However, doing so left the country with high environmental costs.
Instead of the country directly funds to projects or initiatives that will improve the countrys
citizens lives and the economy, Brazil has to deal with the damages that had been caused to the
environments ecosystem.
Race and racial discrimination:
African or Mulatto in origin, are being treated unfairly in Brazil and are not considered in poverty
discussions. The Brazilian government is failing to practice what they preach as they have already
classified racism as a crime, but has never incarcerated anyone being a racist.
Though there is widespread racism and discrimination against blacks, they have achieved
a great deal of upward mobility compared with most countries in Latin America(Case study).This
shows that although both countries suffer same social ills , Costa Rica citizens are more
economically empowered compared to the Brazilians (Africans).
Poverty:
It is quite interesting to note that the poverty line (10%) in Costa Rica is way much better than the
situation in Brazil, where it is 35.5%.This means that majority of the population are unable to meet
their basic needs, access to quality education , quality health care , access proper shelter etc..
Poverty in both Costa Rica is caused by many factors, such as lack of education and immigration
and leads to many diseases. The biggest issue is probably the lack of education as it leads to a

chain of consequences.
Inequality:
Brazils Gini coefficient (0.59) is close to 1.00, meaning that the income Inequality in Brazil worse
in comparison to Costa Rica (0.46). This does not mean that Costa Rica does not income inequality,
it only means that its better than it is in Costa Rica. The land Gini coefficient, a standard measure
12

of inequality, was a staggering .86, exceeded elsewhere in Latin America but perhaps nowhere else.
Therefore, both countries have income and land inequality.
High population growth:
Brazils population growth has been higher than the regional average, somewhat reducing the per
capita growth gap with its neighbors. This is also putting pressure on the countrys fiscal budget.
Land reforms:
In Brazil, unequal land distribution produces political incentives to encourage poor farmers to
establish inefficient rain forest settlements. Brazil and Costa Rica are still faced with the problem of
land redistribution.
Poor health system:
Child mortality rate in Brazil is quite poor by the standards of comparable countries.

In conclusion, the above-mentioned are the features and problems are facing both Brazil and Costa
Rica. These issues are detrimental to not only the development of both countries, but also to their
economic growth prospects.

13

Section B:
Question 3:
3.1
I will use the simultaneous equation solving method (Substituting one equation into another) to find
the equilibrium price. The equilibrium in the market is where the quantity demanded (Qd) equals to
the quantity supplied (Qs) for goods and services in any given market. This is where the demand
and supply curves interact, and determines the equilibrium price and equilibrium quantities that are
bought and sold in a particular market.
Demand: Qd =100 000 4p.Equation 1.
Supply: Qs = 75 000 + PEquation 2.
Substitute equation 2 into equation 1:
Qd = Qs.Market equilibrium.
100 000 4P = 75 000 + P
100 000-4p-100 000
-4P
-4P-P
-5P
P

= 75 000 + P -100 000..Subtract 100 000 on both sides.

= P - 25 000
= P-25 000-PSubtract P both sides on both sides
= -25000 Divide both sides by minus 5.
= 5000 US Dollars.

Therefore, the equilibrium price is 5000 US Dollars.

3.2 Equilibrium Quantity (Qe) at 5000 Dollars (equilibrium price):
Qd = 100 000 4p
= 100 000 4(5000)
= 100 000 20 000
Qd = 80 000 rental accommodation units.
Qs = 75 000 + P
= 75 000 + (5000)
Qs = 80 000 rental accommodation units.
14

Graphical Presentation:

The above market demand curve indicates the relationship between quantities of rental accommodations
that the consumers are willing and able to buy at different price levels, ceteris paribus (Mohr and Fourie,
2008: 114). As the price of rental accommodation goes up, the quantity of rental accommodation
demanded goes up down (Ceteris paribus holding all things else constant)-vice versa. In other words, the
price of the rental accommodation directly influences the quantity of rental accommodation demanded.
On the other hand, The law of supply states that the quantity of a good or service supplied increases as its
price increases, ceteris paribus (Mohr and Fourie, 2008: 117).
In reference to the above graph, at a rental price of 5000 US Dollars, the quantity demanded (Qd) equals to
the quantity supplied (Qs) for the rental accommodation. This therefore means that the market is in
equilibrium and the equilibrium quantity is 80 000 units.

3.3 Price Controls:

What is meant by rent control or price ceiling?
A price ceiling occurs when the government puts a legal limit on how high the price of a product
can be. In order for a price ceiling to be effective, it must be set below the natural market
equilibrium (Mohr and Fourie, 2008:143). This can also be referred to as Maximum pricein
other words, the maximum allowable price. The main reason for the government to have this type
15

of price control in place to make sure that the product or service can accessed by everyone in the
market and not just the those of who are well-off. Another reason is to protects tenants from being
exploited by the owners of rented accommodation (Mohr and Fourie, 2008:146).
Graphical Presentation:

As a result of the passed rent control law, the rental (price) must not exceed 2000 US Dollars.
Quantity Demanded (Qd) = 100 000 4P
= 100 000 4(2000)
= 100 000 8000
Qd

Quantity Supplied (Qs)

= 92 000 rental accommodation units.

= 75 000 + P
= 75 000 + (2000)
16

Qs

= 77000 rental accommodation units.

Impact of setting the price at 2000 USD:

In reference to the above market demand and supply curves, the quantity demanded in the rental
accommodation market (92000 units, Qd) exceeds the rental accommodations available (77000
units, Qs) and thus, the result is excess demand and the market for rental accommodation is now in
disequilibrium. This is due to the quantity demanded for rental accommodation now exceeds the
quantity supplied for rental accommodation by 15000 units i.e. shortage of rental accommodation.
Therefore, there is no equilibrium quantity (Qe) since the market is in disequilibrium because of the
introduced price controls by the US government. Due to demand exceeding the supply by 15000
rental accommodation units, there will be potential or actual tenants or customers who will be
willing to pay the rental at a higher price. This will lead to existence of black market. Black market
is often defined as an illegal market in which goods are sold above maximum price set by the
government (Mohr and Fourie,2008:146).

Government intervention to introduce maximum rental in this case did more harm than its intended
objectives.
3.4. Whether price control is beneficial or detrimental to a market?
Price controls are invariably implemented in the sincere belief that they are in the best interests of
society- They are motivated by an honest concern for the well-being of poor consumers or low
income citizens (Mohr and Fourie, 2008:146). Price control is both beneficial and detrimental to a
market. They are very unsustainable, sooner or later they are often abolished.
Benefits of price controls are as follows:
Protects consumers (in this case, tenants) against exploitations by the landlords.
Combats inflation.
Keeps the price of basic goods or services low as a way to assist the poor.
Disadvantages of price controls:
17

According to Mohr and Fourie (2008:146), when rent control is in force, the following occurs in the
market:
Shortages are created (or excess demand).
The market mechanism gets prevented from allocating the available quantity among
consumers.
Price control stimulates black market by providing an incentive for people to obtain the
good and resell it at a higher price those tenants who are willing to pay higher prices to
obtain it.
When rent control is in force, prospective tenants are at the mercy of agents and landlords and often
resort to bribery to get their names moved up on the long waiting list, corruption and favouritism
are rife. Prospective tenants often have to pay black market prices in the form of key deposits or
finders fees. The longer the controls are maintained, the greater the difference between controlled
rentals and market price rentals will become and the more difficult it becomes to lift the controls ,
since rentals will soar when the controls are abolished. The poor, who were supposed to be assisted,
are the ones who suffer the most.
In conclusion, the disadvantages of having price controls in place outweigh its benefits. The
consumers are actually better without the price controls in place.

18

Question 4.
4.1 Vodacom, MTN, 8.ta and virgin mobile.
Introduction:
When first introduced in South Africa in the early 1990s, mobile telecommunications was seen as
a premium service that offered mobility of voice calls. Since then, its rapid penetration has
challenged the voice monopoly traditionally held by Telkom to the extent that South Africa now
has far more mobile than fixed line telephones(Theron, N.M. and Boshoff,W.H.,2005:10). It is still
a very young industry born out of the fixed line telecommunication sector.
The market structure is based mainly on the number of firms in the industry. The market structure
consists of four basic market structure models are: perfect competition, monopoly, Monopolistic
competition and oligopoly (Mohr,P. and Fourie,L.,2008:241) . The primary distinguishing factor
between these models is the number of firms on the supply side of a market. The key distinguishing
features of any market are: The number of firms in the industry, the nature of the product produced,
the degree of monopoly power each firm has, the degree to which a firm can influence price, profit
levels, a firms behaviour: Pricing strategies, non-price competition, output levels ; and the extent
of barriers to entry. Here, we are concentrated on the South African mobile communication
industry. Vodacom, MTN, Cell C, 8ta and virgin mobile are the service providers. I will determine
each of the key distinguishing market structure features and should come to a conclusion as to
which model (s) of a market structure the SA mobile communication industry is operating/ falls
under.

The key distinguishing features for the South African mobile communication industry:
The number firms in the industry:
According to Mohr and Fourie (2008:242), the actual number of firm is not critically important
what matters is the behaviour of the firms, in particular whether or not an individual firm can
influence the price at which its product is sold and the production costs. According to
mybroadband.co.za (2015), the operators are able to influence the price at which their product are
sold and this includes, but not limited to the data bundles packages. It is quite evident that these
19

operators are price makers or price setters. The number of firms in the South African mobile
communication industry is very few and includes Vodacom, MTN, Cell C, 8ta and virgin mobile.
This is one of the criteria for Oligopoly.
The nature of the product produced/Service rendered:
The product can be homogeneous (identical, standard) or it can be heterogeneous (differentiated,
non-standardized) (Mohr,P. and Fourie,L.,2008:242).

Source: www.markitects.co.za,2016.

Products in the South African mobile communication industry are very similar, and sold by a few
companies. MTN and Vodacom may offer the two brands (e.g. Samsung and Huawei smartphone)
of the same product that may be technically identical but different in the eyes of the customers; in
this case the product they offered is classified as heterogeneous or differentiated. These are both
smartphones, but may be different in processing capabilities, added features, etc. etc. According to
Ian Rheeder (2016), the products are branded due to extreme competition, and because there are
20

huge long-term entry-barriers, the companies make exorbitant profits. The competing companies
have an unusual interdependence, to the point that they almost operate in unison. They have
incredible difficulty making output/price decisions because of the competitors obvious response.
This criterion has also been met for this market to be classified as an oligopoly.
The degree of monopoly power each firm has:
Monopoly power is much more widespread, and can exist even when there is more than one
supplier such in markets with only two firms, called a duopoly, and a few firms, an oligopoly.
These

mobile

operators

have

exclusive

ownership

or

use

of

scarce

resource

(Economicsonline.com, 2016).

Source: South Africa ICT Report, 2011:38.

With a combined market share of 77%, Vodacom and MTN are the strongest contenders in the

mobile market. While in essence the market is characterized by an oligopoly, the force of duopoly
between Vodacom and MTN is most dominant. The collective market power of the two completely
undermines the potential of competition since the remaining actors barely feature (Dr.Chiumbu,S.
and Akinsanni,T., 2011:38). Although Cell C has made a noticeable dent in the market shares of
the industry, the shift has unfortunately not been strong enough to compete with giants Vodacom
and MTN.

21

The degree to which a firm can influence price:

According to Mohr and Fourie (2008:242), the perfectly competitive firm has no control over
the price of its product (i.e. its a price taker) and the imperfectly competitive firms have a
varying degree of control over prices of their products (i.e. they are price setters/price makers).
Profit levels:
According to Mohr and Fourie (2008:242), perfectly competitive firms do not earn any economic
profits in the long-run (only make normal profits); however, monopolistic competition and
oligopoly may earn economic (abnormal) profits in the long-run.
Firms behaviour: Pricing strategies, non-price competition, output levels:
When competing, these mobile operators prefer non-price competition in order to avoid price wars.
A price reduction may achieve strategic benefits, such as gaining market share, or deterring entry,
but the danger is that rivals will simply reduce their prices in response.
The extent of barriers to entry:
Entry (or mobility) refers to the ease or difficulty with which firms can enter and exit the market
(Mohr, P. and Fourie, L., 2008:242). This has an effect on the number of firms participating in any
industry. According to a report issued by First Avenue Investment (Pty) Ltd(2012), the barrier of
entry range from economies of scale, brand strength and availability of capital (but not limited to
this) .
i.

Economies of scale:

A firm experiences economies of scale if cost per output falls as the scale of production increases.
This may or may not be the result of increasing returns to scale (Mohr and Fourie, 2008: 215).
ii.

Brand strength:

The quality of a substitute generic product is generally unknown and requires one to experience it.
It, therefore, becomes difficult for the users to switch to a new entrant on the market and the users
often remain loyal to the more experienced and established mobile operator.
22

iii.

High initial fixed cost and availability of capital:

We estimate that Vodacom has spent substantially more than R20 billion on network capital
expenditure since inception. As a result, smaller operators have no choice but to roam on the
network of bigger operators due to the prohibitive cost of rolling out their own network, thereby
increasing operational costs (Mohamed,N. and Magoro, B., 2012:7). It is clearly evident this is a
very tough industry to operate in and can only accommodate those who have greater financial
muscles. Spending money on Research and Development (R & D) is often a signal to potential
entrants that the firm has large financial reserves and this industry, all these mobile operators send a
lot in terms of R & D.
In conclusion, it is clearly evident that the S.A mobile communication market meets the entire
criterion for a market structure to be considered as an oligopoly.

23

4.2
Marginal Cost (MC) can be defined as the cost of producing additional (marginal) units of output
(Mohr,P., Fourie,L. and Associates, 2008:201) . It falls at first due to the law of diminishing returns,
but then rises as the costs rises.
Average Cost (AC) can be defined as the total cost (TC) divided by the number of units (or
quantity) of product produced (Mohr,P., Fourie,L. and Associates, 2008:201). The difference
between the average cost and sales price does determine the profits per unit once the profit
maximizing quantity is determined, but the profit maximizing quantity generally does not maximize
profits per unit. It is therefore to note that firms maximize profits by considering the marginal cost,
not the average cost.
Marginal Revenue (MR): According to economicsonline.co.uk (2016), MR is the revenue
generated from selling one extra unit of a good or service. It can be found by finding the change in
total revenue following an increase in output of one of unit. The perfectively competitive firm seeks
to maximize profits by producing the quantity of output at which MR =MC and because for the firm
P= MR, It automatically achieves allocative efficiency (P=MC) when it maximizes profit
(MR=MC).
Abnormal profits are earned when the price exceeds the average cost curve at profit-maximizing
output. According to economicsonline.co.uk (2016), the level of abnormal profits available to a
firm is largely determined by the level of competition in a market (i.e. the more competition the less
the chance there is to earn abnormal profits).

24

Graphical presentation:

Source: http://www.economicsonline.co.uk/

On the two diagrams above, Quantity Q1 and price P1 shows both the firms and industrys position
where both are earning abnormal profits in the short run.
Short run equilibrium: Short equilibrium is one where the graph shows the short run equilibrium
with abnormal profits being earned. The price P1 allows them to earn abnormal profits.
Average and marginal costs could be expected to be lower, but price, in the short run, remains the
same. The lower AC and MC would imply that the firm is now earning an abnormal profit
(AR>AC).
Long-run Equilibrium:
According to Mohr and Fourie (2008:234), two things changes in the long run and they are:
1. New firms can enter the industry and existing firms can leave.
Because the model assumes perfect knowledge, the firm gains the advantage for only a short period
of time before others copy the idea or are attracted to the industry by the existence of abnormal
profits. As new firms enter the industry, market supply increases from S1 to S2, market price falls
from P1 to P2 (this means that profits have also been reduced), ceteris paribus and the firm will
be left making a normal profit once again. At this point there is no inducement for the new firms to
25

enter the industry (Mohr P and Fourie, L., 2008:234). In a case where the firms are making
economic losses, these firms will exit the industry in the long run until all firms in the industry are
making normal profits. At this point there is no inducement for the new firms to enter the industry
(Mohr P and Fourie, L., 2008:234). Where the perfectly competitive firms are supposed to operate,
no firm can earn abnormal profits in the long run. These profits will always be competed away
because of the entry of new firms. This therefore means that the industry will only be in equilibrium
in the long run if all firms are making normal profits and this is represented the new market
equilibrium price P2 and new market quantity Q2. Now P=MC=AC. There is equilibrium at the
price where normal profits are earned
2. All factors of production become variable and existing firms earning profit in the short
run may decide to expand their plant sizes to realize economies of scale.
If an existing firm is earning an economic profit and it can realize economies of scale (i.e. if
average cost can be reduced), it will expand its scale of production (Mohr, P. and Fourie, L.,
2008:236). In the long-run, existing firms will continue to expand as long as there are economies of
scale to be realized (i.e. as long as average costs can be reduced) and new firms will continue to
enter the industry as long as positive economic profits are earned. In the long-run, the firm is in
equilibrium where P= SRMC =SRAC=LRAC, as at Price P2 and quantity Q2 in the diagram below.
No other price can represent equilibrium.

In conclusion, abnormal profits are not possible in a perfectly competitive market in the long run
due to the factors discussed above.
26

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