4.1 Answer the following questions - NSC Economics - Question 4 - 2022 - Paper 2

A decrease in the interest rate typically encourages borrowing and spending, as loans become cheaper. This increased liquidity can lead to higher demand for goods and services, resulting in demand-pull inflation. Alternatively, lower interest rates can reduce the benefit of saving, shifting consumer behavior towards immediate consumption rather than saving, further fueling inflation.

The loss minimizing (equilibrium) point in the graph is point C, where marginal cost (MC) equals marginal revenue (MR).

In a monopoly, the product sold is unique, meaning there are no close substitutes available in the market. This uniqueness allows the monopolist to have significant control over price.

A natural monopoly occurs when a single firm can supply the entire market's demand at a lower cost than multiple competing firms. This often happens when the industry has high fixed costs and low marginal costs, creating barriers for new entrants and resulting in economies of scale.

A monopoly can sustain economic profits in the long run due to high barriers to entry that prevent other firms from entering the market. The monopolist sets prices above marginal cost, maximizing profits while facing no competition.

Economic loss can be calculated using the formula:

Economic Loss = (Average Cost - Average Revenue) × Quantity

From the graph:

• Average Cost (AC) at point C is R50.
• Average Revenue (AR) at point C is R40.
• Quantity at point C is 500 units.

Plugging in the values:

Economic Loss = (R50 - R40) × 500 = R10 × 500 = R5,000.

The cause of cost-push inflation in the cartoon is identified as 'Wages', indicating that rising labor costs increase production expenses.

One way to measure inflation is through the Consumer Price Index (CPI), which tracks the prices of a basket of consumer goods and services over time.

Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time, reducing the purchasing power of money.

A decrease in the general price level can lead to lower revenues for producers, as the prices they receive for their goods and services drop. This often results in reduced profits, possible layoffs, and can force producers to adjust their production levels accordingly.

The government can combat demand-pull inflation by:

1. Increasing taxes to reduce disposable income and curb consumer spending.
2. Reducing government spending on public projects, which decreases demand in the economy.

Lack of information leads to market failure as consumers and producers may make irrational decisions due to inadequate knowledge about prices, availability, or quality of products. This can lead to inefficiencies in supply and demand.

Immobility of factors of production also contributes to market failure as labor and capital may not be able to move freely to where they are needed most. For example, skilled workers may not relocate to areas with job opportunities, leading to unemployment and underutilization of resources.

An increase in tourism can lead to environmental degradation through:

1. Overcrowding in natural sites causing destruction of ecosystems.
2. Increased waste production, impacting local wildlife and ecosystems.
3. Strain on local resources such as water and wildlife, ultimately leading to habitat destruction.