Factors Contributing To Stuttering Economy In Africa And Nine-Point Development Plan For South Africa’s Economic Growth

Overview of Economic Factors in Africa

Africa is suffering from a sluggish economic growth with growth rate being even less than 1% in recent years. The slow economic growth in Africa is viewed as a combined effect of several economic factors. The factors are discussed below:

Different national indices for capturing consumer behavior have indicated negative sentiments among most of the consumers during the first quarter of 2016. The trend has been continuing from past three four years where the index for consumer confidence stayed below zero in most of the quarters (Marais and Cloete 2015). The evidences point to weaken economic and financial status of economic agents.

Foreign direct investment in Africa has declined almost 30%. Foreign funds are attracted where the government regulation are relatively simple. However, in the past few years in view of changes in legislative structure is creating obstacles in free flow of fund. For example, the attempt to promote and protect investment bill has turned many bilateral investment arrangement redundant. Both domestic and foreign investments are struggling facing challenges in different aspect (Pillay and Wesson 2016). The challenges have resulted from factors like declining credit ratings, sudden changes in the post of finance minister and several political as well social factors.

Under the purview of global financial crisis in 2008, the financial sector has already under severe pressure. The problem is more aggravated with rising deficit in government budget and huge burden of public debt.  Political issues add with this to make the situation even worse. This restricts the power of government to support economic growth (Cant and Wiid 2013).

Weakness in global commodity prices hurts the export revenue of the nation. Global index for commodity price record a 15% decline measured in US dollar in metal goods in the month end of April in 2016 (kpmg.com 2017).In that year currency depreciated by same margin. However, the depreciation failed to generate any real gain to the exporters because of globally declined price.

Lack of managerial efficiency and weaker policies result contribute to a slow growth in the economy. Africa lacks openness to the international market because of its inability to compete with the technically advanced global goods. The economy heavily relied on imported goods because of a slow production growth. Depreciation of currency hurts the economy by raising its import cost. Poor management of goods discourages domestic production in Africa and generates preferences for imported goods.

African countries are generally endowed with a huge reserve of natural resources. The Content possess reserves of resource starting from precious metals like gold, diamond, ivory and coal to goods like timber, share butter, animals, cola and others. However, it failed to explore all the resources and put them in productive use. This along with bad governance reduces the growth potential for the nation.

Factors Contributing to Stuttering Economy

In recent years personal debt in Arica is growing rapidly making it one of the most indebted countries in the world. The global debt figure in 2013-2014 was 40% whereas the figure as recorded in Africa was 86% (Botha and Keeton 2014).  High loan liabilities restrict people’s ability to spend on goods as a major share of their income goes to loan repayment. This in turn affects economic growth.

In 2015 Jacob Zuma, the president of South Africa proposed the ‘Nine point development’ plan to accelerate economic growth and increase employment opportunities in the needed sectors (Chawla 2016). The focus of the plan is to resolve the issues of energy sector improvise the infrastructure in of the economy, increase the efficiency of agricultural sector and agro based product, giving more importance to mineral wealth and increase beneficiation of mineral wealth, design impactful industrial Policy plan, development of small enterprises and encourage private sector investment in various fields.

The present economic status of South Africa needs some major restructuring of its economy. Slow growth prone nature of South Africa increases the investment risk in South Africa. Thus, the economy is not considered as an attractive investment destination. Measures needed for reverse the downgrade in sub investment level. Low investment affects the business or industrial expansion in the economy. State Owned Enterprises (SOEs) here can play a crucial role. Well performing SOEs in the economy help to boost the confidence and build trust by signaling better governance in the economy. Private and public sector together will improve the business environment in the economy. The newly developed nine point plan in South Africa has taken steps to improve the investment and business environment in the economy. The strategies in this regard are discussed below.

Plan is proposed to build investment houses to take care of issues related to local as well as international investment. The responsibility of investment clearing house is to find the obstacles of investments. They attempts at relaxing the legislative complications in order to smooth the path of investment, improve regulatory efficiency. The investment norms are made simple and speed up the process of investment enquiries. In last financial year, an investment facilitation of more than 43.8 billion rand was made available by the fiancé department. The success of the project is seen from the increasing number of projects related to foreign direct investment. South Africa is currently dealing with nearly 116 foreign investment projects.  The inflow of FDI in South Africa is increasing which now records approximately 43.3 billion rand. Increased investment boosts employment opportunities. 5037 new jobs are created within a span of six months (Clark and Worger 2016).The investments are mostly driven in six major industrial zones of the economy.

Nine-Point Development Plan for South Africa’s Economic Growth

Regulations are redefining for setting up of special economic zones. Special economic zones are areas that provide special benefits to investors and business corporations. They face more relaxed rules in these areas than any other areas within the nation. New boards are formed to take decisions in SEZs (Gov.za 2017). The decision to employment eligible secretariats is already approved to guide the decisions in right direction. The department has already completed analysis of eight newly builds SEZs. Government increase the security of invested funds by making Investment bill aimed at protection and promotion of investment even open for foreign fund. The parliament has sanctioned investment bill in favor of foreign investment. President has assured completion of detailed study regarding business investment and guided the investment in favor of growth and development of nation.

Small business development department is continuing its effort to adapt policies in support of formal sectors. The department has conducted training programs for improving skills of working labor force. To rejuvenate business infrastructure they are attempting to make partnership with local municipalities. A co-branch is set in planning and monitoring department to look after the issues of non-payment or late payment to the suppliers. The report published by the ministry of planning and monitoring indicates that delay in business payment is a major obstacle in business growth (Pollet, Staffell and Adamson 2015).  However, in response to measure taken by the concerned department significant improvement has been shown in this regard. Invoices recorded on an average have been increased in the economy. The provisional department has accounted an improvement in the recorded margin of invoices paid by 5% within just 30 days.

Government is giving importance to strengthen internet connectivity. Considerable progress has already made in this front. To increase broadband roll out better quality fiber optic cables of length 41351 km have been laid. Market has been made open to allow the entry of new service providers. For this purpose Telkom has launched an open server. The improved means of communication in South Africa has connected 623 schools across the country. The Science and technology department will sanction funds for innovation and encourage partner between public and private sector with a aim to commercialize innovation. To face challenges in economic and social respect the science and technology department provides open platform for innovation and strengthen research and development of the nation. Better technology contributes to industrialization process by encouraging the entrepreneur in terms of reduced cost.

Encourage investment in private sector

The department is currently working on developing technologies in sanitation in order to optimize the use of water and development of new types of crops, resistant to drought. This will help in agro based business by mitigating the risk of crop failure in times of less rainfall. In order to continue industrialization without sacrificing environment quality, eco friendly technologies are proposed to be used to generate power. For example, the department encourages the use of hydrogen as a source of fuel energy. Additionally supports are given to the technologies that will help to make industries in South Africa an attractive investment destination and export the technology to strengthen its international relation.

Improvement in transport facilities include repairing of damaged Bay port of the nation. Private sector investments are attracted to make contribution in building a floating dock in Repair Quay or providing facilities of fixed dock at Causarina. Plans are also designed to increase the depth of the existing berths.

Industrial plan in South Africa is re designed. In the new plan government interventions are encouraged to speed up in industrial development. The department of Trade and Industry (DTI) protects 16 sectors, products and sub sectors for local product. This will help local businessmen to expand their business. The local pro0curemkent products include power-line structures and hardware, mining and vehicles for construction, transformers , pipes of steel conveyance and materials related to building and construction. For the ongoing infrastructures projects in the nation government will procure products fall in these categories from local suppliers.

All the discriminatory practices among different industrialists are removed to unlock their business potential. DTI sanctioned a fund of rand 1 billion and rand 23 billion has been confirmed from Industrial Development and Corporation (IDC) (acceleratecapetown.co.za 2017).IDC also takes initiatives for opening new industries and extend s funding to support rising innovative sectors. The manufacturing business of ship and rail has been rejuvenated effectively.

Strategies to resolve the power related issues through enhancement of energy sector make a positive contribution in expanding business. Uninterrupted power supply is one of the essential needs for any industry or business house.

At present South Africa is facing problems in different aspect of economy. Growth and development prospects of South Africa are in serious trouble. In 2016 the growth rate accounted in South Africa is only 0.6% as projected by International Monetary Fund (Pillay and Wesson 2016). The declining growth rate causes the per capita income to fall at a rapid rate. The situation further worsens due to combined effect of financial shock coming from China, volatility in finance market and significant downgrade in debit credit ratings of government. Thus the economy of South Africa needs some major boost to accelerate economic growth. Government and reserve bank in South Africa have come forward to take proper steps in order to mitigate existing crisis.

Boosting the potential of SMMEs, rural and township enterprises and cooperatives

Rising debt results in persistent fiscal deficit and restricts government ability to support the economy in crisis time. Thus, government debt needs to be reduced.  In order to counter rising steps following steps are taken by the government:

The status and performance of State Owned Enterprises (SOEs) is an important determinant of government debt. SOEs often lack operational efficiency (Marino 2014).This results in inefficient management of resources and hence a poorly performed SOEs running with losses. The government then needs to provide financial support to these organizations more than what is expected and thus put additional debt burden on government. Considering this government designs reform program to increase the efficiency of state run enterprises. In order to increase the efficiency of SOEs the governance of this enterprises are strengthen. Private investors are invited to make partnership with government.

State run enterprises are encouraged to adapt cost efficient production technique and focus has been given to make intervention for a better delivery of services and performance. Once the government is free from debt burden and able to make profit from these sectors the additional money can be invested to overcome bottlenecks in infrastructure (Ncube and Brixiová 2015).This will also boost confidence to private investors by reducing uncertainty in policy decision.

Increase in government’s expenditure along with reduced government’s revenue government revenue raises debt burden. Revenue collection in South Africa is underperformed because of its slow growth rate. Finance ministry has taken measures to increase revenue. To raise revenue direct and indirect taxes are increased. With an aim to reduce cost in public sector wage settlement is made to push wages down (Bhorat et al. 2014).What South Africa needs today is economic leaders who are politically independent and trustworthy to make the nation globally competent.

Maintain a stable price level is always a major policy targeting of South African government. South African Reserve bank has used inflation targeting to maintain stability in price level. Targeted inflation rate is achieved through devising tight monetary policy. Following are some steps taken for inflation controlling

The reserve bank reduces money supply in the economy. When less money prints in the economy people have less money for consumption demand. Less demand reduces pressure on price and hence controls the inflation rate.

Reserve Bank control money supply through open market operation. In times of inflation money supply in the economy needs to be reduced. Hence, Reserve bank in South Africa reduces bond prices. In response to lower price people quickly purchases the bonds and these reduces money available in people’s hand.

The reserve bank controls the price level using the tools of repurchase rate or repo rate which central bank charges on the cash lends to other banks in the economy. Recently the reserve bank has made a hike in its repo rate. The repurchase repo rate in South Africa has increased almost 50 basis points. It turns to 6.75% from the earlier 6.25% (Smith 2017).

The prevailing inflation rate in the economy exceeds the target rate set by the government. In order to put a ceiling on price level reserve bank focuses on raising the bank rate. To control inflation banks raises both its deposit and lending rate. A higher lending rate discourages people to purchase goods through borrowing from banks. When people use less credit the shopkeepers end up with less money and this prevents inflation resulting from demand side

The steps taken by government and reserve bank are expected to control the price hike in the economy and put a hold on inflation.

In South Africa the condition of labor market is worsening day by day. In 2013, overall unemployment rate was 24.1. With this, continuous downturn in the economy posses additional challenges in front of the labor market and aggravates the problem of unemployment. Unemployment rate is gradually rising with the rate being 25.4%, 26.4%, 27.1% and 27.7% respectively from 2014 to 2017 (Tradingeconomics.com 2017). 

In an economy unemployment exists when there is an excess supply of labor in the economy. There is no exception in case of South Africa. Number of people looking for jobs greater than the rate of jobs created in the economy. With a lower overall growth rate there are depressed demand for goods and services. This restricts expansion of existing business in the nation and at the same time opening of new industries. Thus, prevents the creation of new jobs in the economy. At times of crisis firms in South Africa tried to cut their production cost. Wage cost constitutes a significant portion of production cost. Firms in South Africa are now bringing a technical change that is biased towards skills (Roberts 2016) Mining sectors mechanization is an example of this kind of move in South Africa. Hence, this type of technical change contributes to rising unemployment especially among the unskilled workers.

Problem of unemployment is more prevalent among the youth members of the society. The ratio of youth employment in South Africa is 12.5% (Yu 2013). That is for every 8 people in the age bracket 15-24 years only one is managed to get job. This is in sharp contrasts to the rate of 36% in the contemporary emerging markets. Also, fluctuations in aggregate demand of the economy have a more severe impact on young population than that on adult members in the labor force. This is because in the workplace there is more demand for experienced workers than for young new comers. In times of recession the typical firms stop their recruitments. However, there is a much bigger impact of this decision on youth population (Posel, Casale and Vermaak 2014). Also, when firms think of contracting business and reduce wage cost then young workers are more likely to be first victim of this decision. In South Africa youth unemployment rises because of these dual impacts on youth labor force.

Government and Reserve bank in South Africa have taken policies to counteract rising debt and inflation. To reduce public debt focus is given on raising government revenues. This goal is met through increasing direct and indirect taxes.  The effect of direct taxes is on disposable income of common people in the economy. Increase in tax rate reduces disposable income and hurts consumption demand. When consumption demand reduces then business firms contracts and this increases incidence of unemployment in the economy. Increase in indirect taxes affects unemployment with a different channel. Indirect tax like sales tax reduces profit margins of sellers as a considerable portion of revenue now has to be given to government for the payment of tax. On the other hand, Consumers reduce their demand because they face a high price.

In South Africa reserve bank is employing a strict monetary policy to achieve a low and stable inflation rate. There is a traditional trade of between inflation and unemployment (De Grauwe 2016).  Low inflation tends to higher unemployment rate. South African Reserve Bank targets to maintain the inflation rate within a range of 3-6%. In order to achieve inflation targets SAAB usually sets a very high repo rate. This restricts production growth by making investment more costly.  As a result potential growth in the economy is undermined and this further stifles creation of new jobs in the economy.

The economy in South Africa is undergoing with a challenging economic environment. In addition to reducing debt and stable inflation targeting focus should be also given on the issues of unemployment and especially on youth unemployment.

In the South African grocery market four large retailers capture the major market share. The four retailers are Shoprite, Woolworths, PicknPay and Spar. They together acquire more than 90% of the revenue earned in the grocery market in a year. The leasing agreement in the grocery market restricts the entry or expansion of other firms.  The leasing agreement in South Africa actually works in favor large business giant and helps them to retain their market share (Peyton, Moseley and Battersby 2015)

In the lease agreement there is an exclusivity clause. The clause gives right the existing retailers in the shopping mall to prevent their rivals from starting their business in the same mall. The agreement is valid for 20 years. The grocery market in South Africa is running with comparatively lesser competition. The exclusivity clause is one crucial factor that prevents competition in the grocery market. In the absence of intensive competition there are distortions in the market (fin24.com 2017). A few sellers in the retail market control the price and are in a position to charge a high price because of barriers to entry of new retailers.

There is a potential threat of rising price in the grocery market in case of single retailer in the market. The rising price hurts the interests of the consumers. Grocery items are mostly having an inelastic demand. Even there is high price the consumer cannot reduce their consumption demand much. This actually benefits the large retailers by raising their surplus. In the grocery market there is also informal grocery shops that are foreign owned. There are significant competitions among these informal sellers. The local grocery stores are known as “Spazas”. Owners of the foreign shops are mostly belonging to nations like Pakistan, Somalia and Bangladesh.

There is increasing resilience against the retailers whose operations are in hand of foreigners. These retail shops are blamed for not having authorized registrations. Allegation is made on the ground that they practice tax evasion in the nation. The foreign retailers are suspected to enjoy some advantages from wholesalers because of their religious belief.

The local sellers highly faced racial segregation. They were allowed to set their business only in semi urban areas (kcbcpartners.com 2017). Here they sold staples like maize meal. The shopping centers are located in urban areas and thus are mostly out of reach of the suburbs people. The local stores are named as “Spazas”. The literal meaning of the word is ‘hidden in Zulu’. The name indicates the fact that these shops secretly carry their business during the phase of apartheid.

Foreign retailers and local grocery shops are also threatened from the increasing power of large retailers. These retailers are designing strategies to expand their business among black retailers. In the grocery market speculative growth has been experienced by two other retailers. One is food and other is Veg city. There are more than 100 stores for these brands. In the retail industry they are expected to give effective competition in the retail markets.

Some other independent retailers are attempting to enter in the retail grocery market. However, given the four large retailers they fail to capture much of the market share. The independent retailers are considered as small players in the national grocery market. Their access in the grocery market is hampered from the power of the large retailers. Statistics reveal the share of these small independent retailers as only 30%.

South Africa needs policy prescription to break the stringent nature of grocery markets and encourage competition in the grocery business.

Theory of kinked demand curve is an important theory for oligopoly market. This is a feature of the market where a few sellers captures majority of the market share. In case of kinked demand curve the market demand curve faced by the sellers has two distinct parts- one is flatter and one is relatively steeper. The flatter part indicates elastic nature of demand whereas the steeper part implies relatively inelastic demand. The kinked occur at the joining point of two curves (Choi 2016) This is explained in the following diagram.

abc is the kinked demand curve of the market. Equilibrium in the market occurs at the point where marginal revenue (MR) equals marginal cost (MC). Correspondingly P₁ is the equilibrium price and Q₁ is the equilibrium quantity. Above P1 market demand is elastic. That is if price goes above equilibrium then demand will respond significantly. Thus it is better for the producers not to raise price above equilibrium level. ab is elastic part of the demand curve. On the other hand when one seller reduces price below equilibrium then others adapt the same strategy. However, sellers cannot be benefitted much because of the inelastic nature of demand below the equilibrium price. bc in the demand curve is steeper as compared to ab. In the inelastic part price reduction fails to increase revenue or profit because consumers increase their demand to only a small proportion.

In South Africa there are four major players in the grocery markets. Now, if one of them reduces its price below the market equilibrium level to increase its share in the market then other three will also do the same to retain their shares (Sushko 2013). This will trigger a price war among the retailers. Normally in times of price war some firms leave the market because of disadvantages in cost. This reduces competition in the market. As, each of the four firms is large enough to afford a low price the price war will continue long. In the meantime, many new consumers will enter the market even with low affordability. Grocery products have already low elasticity. In response to falling price demand will not increase much. Since, each retailer will attempt to offer a lower price than other the consumers will have a tendency to switch their demand from one retailer to other. If this continues long, then price will reduced so much that profit will fall. Also, drastic price reduction will increase uncertainty among the shareholder. The investors will lose confidence in phase of declining profits. Thus, price war is not a good strategic move for the four retailers (Ateba 2014)

Price war among the large retailers initially benefits the existing consumers. They enjoy the benefit of having quality product at a low price. This raises their surplus. Consumers who are now unable to buy product of large business giants because of high price can easily purchase those in phase of reduced price. Consumers in turn enjoy a greater variety of product. However, the benefits are short term. If price war continues for a significant long time then quality of the product can be compromised to supply the product at a cheap price. In the long run, there is possibility that some retailers leave the market because of their inability to compete at a very low price. If this happens, then only one or two sellers will enjoy the entire control of the market (Hamilton and Chernev 2013). These retailers can then reverse their pricing policy. Consumers are then left with fewer choice of product.

Small grocery shops in South Africa are already in a disadvantaged position and have only a small share in the grocery market. With this, if the large retailers engage in price war by cutting their prices then consumers who previously buy grocery items from the small shops now switch to large stores. With a reduced customer base these small grocery face a loss. Because of a small scale of production they cannot reduce the price to the extent large retailers can and hence suffer from a sudden downturn in the business (Sotgiu and Gielens 2015)

Lease agreement is a contract signed between the owners of property and its tenant regarding use of the property. Exclusivity clause in the lease agreement is a clause that put restrictions either in terms of number of users or in terms of its uses. In the lease agreement there are generally two or more parties involved. In context of South African grocery market, presence of exclusivity clause in the lease agreement is limiting the number of retailers in the shopping mall. Following lease agreement shopping mall in South Africa cannot rent space retailers other than its anchor tenants (Blumenthal 2015). In South Africa big markets are considered as anchor tenants who not only attract buyers to make their purchase from big grocery shops but also to visit other shops as well. In lease agreement the involved parties are original owners of the property, property developers, and managers of that property and tenants who are taking lease of the property.

Landlords in the South Africa deny the entry of other supermarkets or a store that sells foodstuffs. Before renting out to other retailers the landlords need to have prior approval from the existing tenants. The big retailers do not give approval for the establishments of small retail grocery shops in the shopping mall. This reduces competition in grocery market. The tenure period is usually as long as 20 years (Das Nair and Dube 2015). The exclusivity clause thus gives rise to a monopoly power in the market. A monopoly market in defined as one where there is a single seller serving a large number buyers. Being a single seller, it has the exclusive power of influencing price. For this, monopoly seller is known as a price marker in the market. Price in the monopoly market is usually higher than that with the extent of full competition and equilibrium quantity is lower. As a lower quantity is supplied at a high price there is always distortion in the market (Kirzner 2015)

In a competitive market firms are able to enjoy only normal profit which is a part of production cost. There is no distortion in the market as optimal quantity is supplied at an optimal price (Nair 2015). Neither buyers nor sellers have the ability to influence price. Both are price takers there. However, in monopoly market there is a room for the sellers to make economic profit and sustain it for a long time. This is explained in the following diagram.

From the profit maximizing condition in the monopoly market, equilibrium price and quantity is determined at the point where marginal revenue matches with marginal cost. Two downward sloping curves in the diagram represent average revenue and marginal curve. Average total Cost and Marginal Cost curves are represented by the U shaped curves. Marginal revenue equals marginal cost at point E. Point E is the equilibrium point in the monopoly market. Correspondingly, P* is the monopoly price and Q* is the market quantity.  Total revenue is the area obtained from multiplying average revenue and price. Total Cost is quantity times average total cost. Now economic profit is what left after subtracting total cost from total revenue.  Economic profit in the monopoly market is shown by the shaded region.

This is what is expected for South African grocery market. With exclusivity clause in lease agreement the entire control of the grocery market is going in hand of few large retailers (Baumol and Blinder 2015). With passes of time there is possibility that entire competition will be eliminated and there will be only a single national grocery market. In the shopping center this single grocery retailer can devise a monopoly power and enjoy economic profit as described in the above diagram.

Elasticity of the demand determines change in demand with respect to change in demand influencing factor. There are several factors that affect the demand of ac product. Among them three crucial factors are price of the product, income of the consumers and price of related products that can either be substitute or complementary. Each of the factors is important in taking business decision and planning demand (Varian  2014).

Here, demand elasticity with respect to these three important factors (price, income and related product) is evaluated to make policy suggestion for four main grocery retailers in South Africa.

Price elasticity of demand expresses the proportionate change in demand with a proportionate change in price. Price elasticity of demand is important in taking business decision regarding price or demand designing. Before increasing or decreasing price business firms should consider the relevant elasticity of their product. Change in price has a direct impact on the quantity demanded of the product. If demand is very much elastic then even a small change in price will affect it demand to a great extent making a significant difference in their revenues (Rios et al. 2013). For the products having an elastic demand firms should not increase product price while the policy of price reduction proves beneficial for them. A slight reduction in price increases their revenue by increasing demand. On the other hand in times of inelastic demand reducing price does not benefit them much as buyers do not increase their demand. During this time there is a room for the producers to increase price as they know buyers cannot cut down their demand. Here, the decision to raise price benefits firms by raising revenues. Thus, while setting a price that maximizes profit firm should take into consideration the coefficient of price elasticity.

In the grocery market in South Africa the four main retailers-Shoprite, PicknPay, Spar and Woolworths have already acquire the major share. The four giant firms should well aware of the elasticity of grocery products before designing strategy.  Different studies on grocery market in South Africa reveals the elasticity of grocery items of different category. In the food group there are two categories one is necessary and one is luxury. Vegetables, fruits, grains are considered as necessary food item and thus having an inelastic demand. Meat, fish and dairy products fall under luxury category with a price elastic demand. Beverage items generally have high elasticity (Beneke et al. 2015) Therefore, the retailers while deciding on price revision increase the price of the items in necessary group like vegetables, fruit, grains and others. These will increase their revenues as demand is not much flexible for this category. To raise the demand for items fall under luxury category such as meat, fish, dry fruits, beverages and dairy production price reduction is best strategy. A small reduction in price makes a huge difference in quantity demanded and raises revenues by raising demand to a great extent. Among the four retailers who can better adjust their price will have an edge over their competitors and able to increase their market share.

Income elasticity of demand stands to capture the responsiveness of demand with respect to change in people’s income. Goods for which people increase demand when their income raises are classified as normal goods. There are also goods for which demand decreases with an increase in income. When price decreases people enjoy a rise in their real income. In response to increase in real income people change their demand according to categories. For goods having high income elasticity the policy of decrease in price increase revenues by raising demand. People usually have relatively income elastic demand for luxury items. For necessary items demand is generally income inelastic (Angula and Thomas 2014). In case of income inelastic demand change in prices though affect real income but cannot affect demand. Thus, price revision should be taken after considering the affects of the decision on people’s demand.

In South Africa overall income elasticity for grocery items is less than 1. Measured elasticity is 0.6 (Herforth and Ahmed 2015). As in case of price elasticity there are some products for which income respond more as compared to others when income changes. Survey on South African grocery market shows that expenditure on fish, meat, grains increases when real income raises expenditure decreases in case of dairy products, vegetables, fruits and other necessary items. The retailers should reduce the price of fish, meat or beverage items. In response to increase in real income people increase their spending and this is what the objective of retailers. For items that commonly use like fruits, vegetables and dairy products price change is not recommended. For these items people will not increase their demand much even in response to a fall in price.

Cross price elasticity expresses the demand responsiveness of a product when price of a related product changes. The related product can be either substitutes or complementary. In case of substitute product price hike of one product leas to decrease in the demand of that good while increase the demand of is substitute. Thus, cross price elasticity is positive. Opposite is the case in times of complementary product. Here, price rise of a product not only reduces the demand of that product but also negatively impacted its complementary product.

In times of determining price or designing demand cross price elasticity should be taken into consideration. For business firms cross price elasticity plays an important role. When a firm raises its price, the rival firms selling close substitute takes the advantage. Buyers of that firm shift their purchase to the rival firms. Thus, price rise can be proved very harmful (Powell et al. 2013). On the one hand it decreases demand because of its own price elasticity and indirectly helps its rival firm by boosting their demand because of cross price elasticity.

The grocery market in South Africa is mainly concentrated among the four major retailers (Cabral 2017).There is close competition among these firms. They sell more or less same product. Thus, the products are close substitutes. In this situation if any of them raise price of their products then buyers have a tendency to stop buying from that firm and distribute their demand among the three others. Thus firm should not raise price. Instead they can decrease their price. This will help o attract more consumers as other company’s product appears to be relatively cheaper.

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