ECONOMICS
2 JUNE 2025
SAMUEL RAMDIN
TOPIC: RELATIONSHIP BETWEEN
MARKETS,EFFECTS OF COSTS AMD REVENUE
AND PRICE ELASTICITY
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TABLE OF CONTENTS
Contents
HOW OLIGOPOLIES IN SOUTH AFRICA USE THE DIFFERENT NON-PRICE MEASURES TO
INCREASE THEIR MARKET SHARE............................................................................... 3
THE TYPES OF COLLUSION THAT EXIST IN SOUTH AFRICA...........................................6
THE LOSS-MAKING MODEL AND THE PROFIT-MAKING MODEL FOR A PERFECTLY
COMPETITIVE BUSINESS IN THE SHORT RUN..............................................................9
THE REASONS FOR ESKOM NOT ACHIEVING ECONOMIC PROFIT IN THE LONG RUN AS
EXPECTED OF A TYPICAL MONOPOLY.......................................................................13
................................................................................................................................ 13
HOW INCOME CHANGES AFFECT THE DEMAND FOR VARIOUS GOODS.....................16
CONCLUSION........................................................................................................... 18
BIBLIOGRAPHY......................................................................................................... 19
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HOW OLIGOPOLIES IN SOUTH AFRICA
USE THE DIFFERENT NON-PRICE
MEASURES TO INCREASE THEIR
MARKET SHARE
In South Africa, oligopolies—markets dominated by a few large firms—often utilize
various non-price competition strategies to increase their market share. These
strategies focus on factors other than price to attract and retain customers. Below
are some key non-price measures employed by firms in South Africa.
1. Product Differentiation
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Firms distinguish their products through unique features, branding, and quality to
make them stand out in the market. For example, in the retail sector, supermarkets
like Woolworths and Pick n Pay offer exclusive product lines and premium quality
items to appeal to specific consumer preferences.
2. Branding and Advertising
Strong branding and advertising campaigns help create a loyal customer base and
increase brand recognition. Companies invest heavily in marketing to build a positive
image and differentiate themselves from competitors.
3. Customer Service and After-Sales Support
Providing excellent customer service and after-sales support can enhance customer
satisfaction and loyalty. Businesses that offer warranties, easy returns, and
responsive customer support are more likely to retain customers.
4. Loyalty Programs
Implementing loyalty programs encourages repeat business by rewarding customers
for their continued patronage. For instance, retailers may offer points, discounts, or
exclusive deals to members of their loyalty programs.
5. Convenience and Accessibility
Making products and services more accessible through multiple channels, such as
online platforms and physical stores, can attract a broader customer base.
Companies may also extend operating hours or offer home delivery services to
enhance convenience.
6. Technological Innovation
Investing in technology to improve product offerings or customer experience can
provide a competitive edge. For example, implementing user-friendly mobile apps or
adopting modern technologies in product development can appeal to tech-savvy
consumers.
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By employing these non-price competition strategies, firms in South Africa's
oligopolistic markets aim to increase their market share and build a strong, loyal
customer base.
5
THE TYPES OF COLLUSION THAT
EXIST IN SOUTH AFRICA
In South Africa, collusion refers to anti-competitive behavior where firms in the same
industry cooperate to manipulate market conditions, often to the detriment of
consumers. The Competition Act, No. 89 of 1998, prohibits such conduct to promote
fair competition and protect consumer interests.
Types of Collusion
1. Price Fixing
o Definition: Competitors agree to set prices at a certain level, eliminating
price competition.
o Example: In the bread industry, major companies like Tiger Brands,
Premier Foods, and Pioneer Foods were found to have coordinated price
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increases between 1994 and 2006, leading to higher bread prices for
consumers.
2. Market Division
o Definition: Firms agree to divide markets among themselves, allocating
specific customers or geographic areas to avoid competition.
o Example: Unilever and Sime Darby Hudson Knight participated in a
market division agreement from 2004 to 2013, allocating specific types
of goods and customers, which contravened the Competition Act.
3. Collusive Tendering (Bid Rigging)
o Definition: Companies agree in advance who will win a tender, often by
submitting fake bids or rotating winning bids.
o Example: In the construction industry, firms have been found to collude
in tender processes, leading to inflated project costs and reduced
quality.
4. Information Exchange
o Definition: Firms share sensitive information, such as pricing strategies
or production costs, to coordinate actions without direct agreements.
o Example: The Competition Appeal Court ruled that passive participation
in industry meetings where anti-competitive discussions occur can
constitute collusion if firms do not distance themselves from such
discussions.
Legal Framework and Enforcement
The Competition Commission of South Africa is tasked with investigating and
prosecuting cartel conduct. The Competition Act prohibits agreements between firms
that prevent or lessen competition. Amendments to the Act, effective from 1 May
2016, introduced criminal liability for directors and individuals with management
authority who are responsible for or knowingly acquiesce in cartel conduct.
Conclusion
Collusion undermines the principles of fair competition and harms consumers
through higher prices and reduced choices. The South African legal framework
actively seeks to detect, prevent, and penalize such practices to ensure a competitive
market environment.
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8
THE LOSS-MAKING MODEL AND THE
PROFIT-MAKING MODEL FOR A
PERFECTLY COMPETITIVE BUSINESS
IN THE SHORT RUN
Loss-Making and
Profit-Making Models in Perfect Competition (Short Run)
In perfect competition, firms are price takers, meaning they accept the market price
determined by supply and demand. In the short run, firms can experience either
profits or losses, depending on their cost structures and the prevailing market price.
📈 Profit-Making Model
Conditions:
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Price (P) > Average Total Cost (ATC)
Firms produce where Marginal Cost (MC) = Marginal Revenue (MR) = Price (P)
Graph Explanation:
Price Line (P): Represents the market price, which is constant for the firm.
MC Curve: Upward sloping, indicating increasing marginal costs.
ATC Curve: U-shaped, showing average total costs at different output levels.
Profit Area: The vertical distance between the price line and the ATC curve,
multiplied by the quantity produced, represents the firm's economic profit.
Diagram:
Price
|
| MC
| /
| /
| /
| /
| /
| /
| /
|/
|/__________________________
Quantity
Note: The area between the price line and the ATC curve above the price line
represents economic profit.
📉 Loss-Making Model
Conditions:
Price (P) < Average Total Cost (ATC)
Firms produce where Marginal Cost (MC) = Marginal Revenue (MR) = Price (P)
Graph Explanation:
Price Line (P): Represents the market price, which is constant for the firm.
MC Curve: Upward sloping, indicating increasing marginal costs.
ATC Curve: U-shaped, showing average total costs at different output levels.
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Loss Area: The vertical distance between the ATC curve and the price line,
multiplied by the quantity produced, represents the firm's economic loss.
Diagram:
Price
|
| MC
| /
| /
| /
| /
| /
| /
| /
|/
|/__________________________
Quantity
Note: The area between the ATC curve and the price line below the price line
represents economic loss.
🔄 Short-Run Adjustments
Profit-Making Firms: Attract new firms into the industry due to the absence of
barriers to entry, increasing market supply and potentially lowering prices.
Loss-Making Firms: May continue operating if they can cover variable costs in
the short run, or they might exit the market if losses are unsustainable.
Conclusion:
In the short run, perfectly competitive firms can experience profits or losses based on
their cost structures and the prevailing market price. Over time, these economic
conditions lead to adjustments in the market, such as the entry or exit of firms,
which drive the industry toward long-run equilibrium where firms earn normal
profits.
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THE REASONS FOR ESKOM NOT
ACHIEVING ECONOMIC PROFIT IN THE
LONG RUN AS EXPECTED OF A
TYPICAL MONOPOLY
Why Eskom Doesn't Achieve Economic Profit in the Long Run
Eskom, South Africa's state-owned electricity supplier, operates as a monopoly in the
energy sector. While monopolies typically earn economic profits in the long run,
Eskom faces several challenges that prevent it from achieving such profits.
1. High Operating Costs
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Eskom's operational expenses are significantly high, primarily due to its aging coal-
fired power plants. Maintaining and upgrading these plants incurs substantial costs,
which are reflected in electricity tariffs. Despite tariff increases, these costs often
exceed revenues, leading to financial losses.
2. Massive Debt Burden
Eskom is burdened with over R400 billion in debt. This substantial liability hampers
its ability to invest in infrastructure improvements and renewable energy projects.
The debt servicing costs consume a significant portion of its revenue, leaving little
room for profit generation.
3. Declining Electricity Sales
There has been a consistent decline in electricity demand, with sales decreasing by
approximately 1% annually. Factors contributing to this decline include increased
energy efficiency, the adoption of alternative energy sources, and economic
challenges faced by consumers. This reduction in sales further strains Eskom's
revenue streams.
4. Corruption and Mismanagement
Eskom has been plagued by corruption and mismanagement, leading to inefficiencies
and financial losses. The "state capture" era saw significant exploitation of resources,
resulting in overstaffing, procurement irregularities, and neglect of maintenance.
These issues have eroded public trust and increased operational costs.
5. Electricity Theft and Non-Payment
Eskom faces significant revenue losses due to electricity theft and non-payment by
municipalities and consumers. With arrears reaching over R30 billion, these financial
shortfalls exacerbate Eskom's challenges in achieving profitability.
6. Delayed Infrastructure Projects
The construction of new power plants, such as Medupi and Kusile, has been marred
by delays and cost overruns. These projects, intended to alleviate energy shortages,
have instead increased Eskom's financial burdens without delivering the expected
returns.
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Conclusion
Despite its monopolistic position in the South African energy sector, Eskom's ability
to achieve economic profit in the long run is hindered by high operational costs,
substantial debt, declining sales, corruption, revenue losses from theft and non-
payment, and delayed infrastructure projects. Addressing these issues is crucial for
Eskom to stabilize its financial position and ensure a reliable electricity supply for the
nation.
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HOW INCOME CHANGES AFFECT THE
DEMAND FOR VARIOUS GOODS
In economics, the relationship between income changes and the demand for goods is
quantified through Income Elasticity of Demand (YED). This concept helps us
understand how sensitive the demand for a product is to changes in consumer
income.
📊 Types of Goods Based on Income Elasticity
1. Normal Goods
o Definition: Goods for which demand increases as consumer income rises.
o YED: Positive (greater than 0).
o Examples: Clothing, household appliances, and food.
o Subcategories:
Necessities: YED between 0 and 1.
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Example: Basic food items like bread and milk.
Luxuries: YED greater than one.
Example: High-end electronics and luxury cars.
2. Inferior Goods
o Definition: Goods for which demand decreases as consumer income
rises.
o YED: Negative.
o Examples: Instant noodles, second-hand clothing, and public
transportation.
🔍 Real-World Examples
Luxury Cars: As incomes increase, more consumers opt for luxury vehicles,
leading to a significant rise in demand.
Public Transportation: With higher incomes, individuals may prefer personal
vehicles over public transport, decreasing the demand for the latter.
Basic Groceries: Even with income increases, the demand for essential food
items rises modestly, as they are necessities.
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CONCLUSION
The South African economy presents a dynamic interplay between market structures,
consumer behaviour, and regulatory oversight. Oligopolies in the country leverage a
range of non-price competition strategies—such as branding, innovation, customer
service, and loyalty programs—to maintain and grow their market share without
engaging in direct price wars. However, not all firm behaviour is competitive or
ethical. Instances of collusion, including price fixing, market division, and bid rigging,
highlight the need for strong enforcement by the Competition Commission to ensure
fair market practices.
Consumer demand, influenced by income changes, also plays a critical role in shaping
the market. As income levels shift, demand for normal and inferior goods adjusts
accordingly, reflecting broader economic conditions and living standards. In perfectly
competitive markets, businesses may experience either profits or losses in the short
run, but the long-run tendency toward normal profits highlights the self-correcting
nature of such markets.
Lastly, Eskom’s struggles, despite its monopoly status, underscore that market power
alone does not guarantee economic profit. Operational inefficiencies, corruption, and
mismanagement can severely undermine financial performance, emphasizing the
importance of accountability, innovation, and sound governance.
Together, these insights demonstrate the complexity of economic systems and the
importance of balancing firm strategy, regulatory policy, and consumer welfare in
driving sustainable development in South Africa.
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BIBLIOGRAPHY
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