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ECONOMIC PRINCIPLES 1 (ECOP101B)

GUIDELINES
MAY 2019

GENERAL

These guidelines are prepared to assist in the marking process as they indicate
(a) the correct answer and (b) how marks should be allocated.

In evaluating answers, markers must keep in mind that the IMM Graduate School
examinations are set on a higher education level and that the student should
therefore not only illustrate an adequate understanding of theory, but also insight
into the application of knowledge. In addition, the student should illustrate
independent critical thinking.

The marker accepts that the student should be familiar with the contents of the
study guide and the prescribed textbook. If, however, factual and correct
information is included from other valid academic sources besides the study
guide and the prescribed textbook, such knowledge and insights also qualify for
the allocation of marks.

When answering questions the student is required to:

 Read each question carefully and thoroughly before attempting the
answer, in order to determine exactly what is required.
 Allocate sufficient time to answer each question in proportion to the marks
indicated on the examination paper.
 Number answers clearly and correctly.
 Provide answers in a legible handwritten format.
 Set out the answers in a structured format and formulate statements in full
and coherent sentences.

As the guidelines accompany the examination paper and are prepared prior to
the examination session, they are not able to include areas where the students
provided incorrect answers.

The guidelines are also central to the moderating team when performing
moderation of examination scripts.

© IMM Graduate School

May 2019 Guidelines ECOP101B
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SECTION A (40 MARKS)

COMPULSORY

Answers are in accordance with the prescribed textbook: Mohr, P. & associates,
2015. Economics for South African students (5th ed.) Pretoria: Van Schaik.

QUESTION 1 [40]

1.1 (D) 1.11 (E)

Mohr et.al. 2015. pg 61 – Mohr et.al. 2015 pg 170 –
68. 173.
1.2 (C) 1.12 (A)
Mohr et.al. 2015 pg 68 – 75. Mohr et.al. 2015 pg 170 –
173.
1.3 (A) 1.13 (B)
Mohr et.al. 2015 pg 75 – 77. Mohr et.al. 2015 pg 166 –
168.
1.4 (E) 1.14 (B)
Mohr et.al. 2015 pg 91 – 95. Mohr et.al. 2015 pg 170 –
173.
1.5 (D) 1.15 (B)
Mohr et.al. 2015 pg 148 – Mohr et.al. 2015 pg 170 –
149, 157 – 158. 173.
1.6 (C) 1.16 (A)
Mohr et.al. 2015 pg 150 – Mohr et.al. 2015 pg 249 –
153. 252.
1.7 (B) 1.17 (E)
Mohr et.al. 2015 pg 153 – Mohr et.al. 2015 pg 249 –
157. 252.
1.8 (D) 1.18 (C)
Mohr et.al. 2015 pg 153 – Mohr et.al. 2015 pg 259 –
157. 260.
1.9 (A) 1.19 (C)
Mohr et.al. 2015 pg 146 – Mohr et.al. 2015 pg 268 –
149. 272.
1.10 (C) 1.20 (B)
Mohr et.al. 2015 pg 153 – Mohr et.al. 2015 pg 268 –
157. 272.

© IMM Graduate School

May 2019 Guidelines ECOP101B
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SECTION B (60 MARKS)

ANSWER ANY THREE (3) QUESTIONS

QUESTION 2 [20]

Mohr et. al. 2015 pages 5 – 11, 42 – 45.

Learner Guide: Study Unit 1 & 2.
Learning outcomes:
• Use a production possibilities curve to show the effect of an increase in
technology and an increase in the number of resources.
• Distinguish between different types of goods.
• Name and briefly discuss the four sources of production, viz. natural
resources, labour, capital and entrepreneurship.
• List the remuneration for the four factors of production.

2.1 Two separate production possibility curves to show the difference between:

a) an increase in technology in the production of one good only, and (1)

b) an increase in the number of resources available. (1)

Good A
Good A
1100
1000
1000

0
100 120 Good B 0 100 120 Good B

2.2 Distinguish using examples:

a) Capital goods are used in the production of consumer goods, example

machinery 
Consumer goods are purchased by households, example bread. 

b) Durable goods are goods that can be used repeatedly, example

furniture
Semi-durable goods can be used for a limited time, example clothes. 

c) Economic goods are goods that fetch a price, example chocolate. 

Free goods. are goods that do not directly carry a price, example sea
water. 
(3 x 2 marks)

© IMM Graduate School

May 2019 Guidelines ECOP101B
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2.3 The four sources of production and their remuneration:

Natural resources: 
• Sometimes called land which earns rent. 
And one of: 
• Consist of gifts of nature, e.g. minerals, ore, raw materials, animals, water, etc.
• Minerals, e.g. coal, are non-renewable or exhaustible.
• Quality & quantity are important.

Human resources/labour: 
• Labour earns wages. 
And one of: 
• Refers to human mental and physical effort.
• Quantity depends on the size of the population and size of labour force.
• Quality depends on skill, knowledge, health, etc. Sometimes called human
capital.
• Labour intensive firms use mainly labour.

Capital: . 
• Capital earns interest. . 
And one of: 
• All manufactured resources, e.g. machines, buildings, tools, etc. (Accountants
call this fixed capital.)
• Does NOT refer to financial capital, i.e. money. Money is not a resource since
nothing can be made from it.
• Capital depreciates over time.
• Capital can become obsolete and may need to be replaced.
• Capital intensive firms use mostly machines.

Entrepreneurship: 

• They bear the risks and reap the rewards (entrepreneurs earn profit). 
And one of: 
• Refers to those people who start a business.
• They combine all the other factors.
• They are the driving force behind a business, the initiators. (4 x 3 marks)

QUESTION 3 [20]

Mohr et. al. 2015 pages 110 – 112, 115 – 116.

Learner Guide: Study Unit 5.
Learning outcomes:
• Distinguish between and illustrate five categories of price elasticity of
demand.
• Define income elasticity of demand and state what formula is used to
calculate it.
• Discuss the meaning and significance of income elasticity of demand.

© IMM Graduate School

May 2019 Guidelines ECOP101B
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3.1 Five categories of price elasticity of demand and their coefficients.

Elastic goods
 Coefficient is > 1

10%

D
0
20% Q

Inelastic goods
 Coefficient is < 1

20%
D

0
10% Q

Unitary goods
 Coefficient is = 1

10%
D

0 10% Q

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May 2019 Guidelines ECOP101B
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Perfectly elastic goods

 Coefficient is = infinity 

0
Q

Perfectly inelastic goods

 Coefficient is = 0 

P D

0
Q
(5 x 2 marks)

3.2 Income elasticity of demand is a measure of the responsiveness of quantity

demanded to changes in income. 

formula:% change in quantity demanded

% change in income
(3)
3.3 Meaning and significance of each category of income elasticity of demand.
 If the demand for a good increases with an increase in income, (positive
income elasticity) the good is known as a normal good. 

 Goods such as food (an essential good) show very little increase in
quantity demanded when income increases. 
 Income elasticity in this case will be < 1. 

 Goods such as TVs show large increases in quantity demanded with an

increase in income. 
 Income elasticity is thus > 1. 

 If the demand for a good decreases with an increase in income, (negative

income elasticity) the good is known as an inferior good 
 e.g. potatoes could be considered inferior to meat.  (7)
© IMM Graduate School
May 2019 Guidelines ECOP101B
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QUESTION 4 [20]

Mohr et. al. 2015 pages 54, 234 – 242.

Learner Guide: Study Unit 8.
Learning outcomes:
• Discuss the five macroeconomic objectives and show how they are
interrelated.
• Discuss the three methods to calculate gross domestic product (GDP).
• Define gross national income (GNI) and give the equation used to
calculate it.

4.1 Economic growth 

Growth occurs when production expands, either through new firms entering the
market or existing ones expanding. 

Full employment of all resources, but especially labour. 

Economic growth is a precondition for increased employment. 

Price stability 
does not refer to constant prices, but rather to an acceptable level of increase in
prices. 

Balance of payments stability (also called external stability) 

refers to an equal or favourable balance between money entering and money
leaving an economy. 

Equitable distribution of income 

does not mean an equal distribution, but rather a less unequal distribution of
national income among the population.  (5 x 2 marks)

4.2 Three methods to calculate gross domestic product (GDP).

The expenditure method: 

• Equation:
GDP = C + I + G + (X – Z) 
And any one of: 
• If any intermediate good is included in this calculation, a problem of double
counting arises. Intermediate goods are those used in the production of
other goods.
• Inventories carried over from a previous year should be subtracted from
investment or capital formation.
• GDP does include exports but does not include imports, since imports are
subtracted from the equation.

The value added or production method: 

• Equation:
GDP = Value of sales – value of intermediate goods

Measures the difference between total sales and purchase of intermediate

goods,
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at each production stage. 

The income method: 
• Equation:
GDP = wages + interest + rentals + profit. 

Here we measure total remuneration earned by all the factors of production

which relies on information from the Receiver of Revenue. 
(3 x 3 marks)

4.3 Define gross national income (GNI) is the income of all permanent residents of
the country, calculated by GDP = plus foreign factor receipts minus foreign
factor payments. 
(1)

QUESTION 5 [20]

Mohr et. al. 2015 pages 304 – 311, 382 – 387.

Learner Guide: Study Unit 10 & 11.
Learning outcomes:
• Illustrate and explain the effect of a decrease in the supply of US dollars
on the SA rand.
• Define inflation and discuss the elements of the definition.
• Explain what the CPI measures.
• Explain what the PPI measures.
• Briefly discuss the distribution, economic and social and political effects
of inflation.

5.1 The effect of a decrease in the supply of US dollars on the SA Rand.

S$1
Rand per
Dollar
S$2

R15 per $1
R10 per $1

0
D$

Q$1 Q$2 Quantity of Dollars

(Graph = 5 marks)

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May 2019 Guidelines ECOP101B
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Explanation:
 Original equilirbrium exchange rate = R15 per $1 and Q$1. 
 Increase in $ supply shifts S$1 to S$2. 
 New equilibrium exchange rate is R10 per $1 and Q$2. 
(Explanation = 3 marks)

5.2 Inflation is a sustained and considerable increase in the general price level
over a period of time.  (2)

5.3 The CPI measures the cost of a representative basket of consumer goods and
services as an index over a period of time.  (2)

5.4 The PPI measures the cost of a representative basket of producer goods as
an index over a period of time.  (2)

5.5 Effects of inflation.

Distribution effects:
Any 2 of: 
 Inflation benefits debtors (borrowers) at the expense of creditors (lenders).
 Income is thus redistributed from the elderly to the young.
 Income is redistributed from the private sector to the government.

Economic effects:
Any 2 of: 
 Inflation stimulates speculative practices (real wealth effect) as people and
companies anticipate further inflation, they change their spending and
production patterns.
 Inflation can discourage saving.
 If inflation in SA is higher than its international competitors,this could lead
to balance of payments problems.

Social and political effects:

 Inflation gives rise to political and social unrest. 
 It creates a climate of conflict and tension. 
(3 x 2 = marks)

© IMM Graduate School

May 2019 Guidelines ECOP101B