WAEC SSCE - Economics - 1990 (Essay)

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Meaning of inflation. Inflation is a persistent and general rise in the level of prices of goods and services in an economy over a period of time, accompanied by a fall in the purchasing power (value) of money.

Government efforts to combat inflation in Nigeria

• Contractionary monetary policy: the Central Bank of Nigeria raises interest rates, sells securities through open market operations and raises the cash reserve ratio to reduce the money supply and check demand.
• Contractionary fiscal policy: the government reduces its own spending and increases taxes to withdraw excess purchasing power from the public.
• Increased production of goods: agricultural and industrial programmes (for example food-production schemes) raise the supply of goods to match demand.
• Importation of essential commodities: importing scarce goods increases supply and eases pressure on prices.
• Price control: setting maximum (ceiling) prices for essential goods to restrain runaway prices.
• Wage and income control: restraining sharp wage increases that would push up costs and demand.

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Internal economies of scale are the cost advantages a single firm enjoys as it grows larger and expands its own output. As a very large organisation, the Nigerian National Petroleum Corporation (NNPC) can achieve them in the following ways:

• Technical economies: it can install and fully use large, specialised and indivisible plant such as refineries, pipelines and storage depots, spreading their cost over a huge output so that cost per unit of oil falls.
• Managerial economies: being large, it can employ specialist managers, engineers and accountants each handling one department, raising efficiency and lowering cost per unit.
• Financial economies: as a big and reputable corporation it can raise large loans and capital more easily and at lower interest rates than small firms.
• Marketing (commercial) economies: it can buy inputs and equipment in bulk at discounts and sell its products in large quantities, reducing buying and selling costs per unit.
• Risk-bearing economies: by diversifying into exploration, refining, distribution and petrochemicals, it spreads its risks so that a loss in one area is offset by gains in another.
• Research economies: its large size lets it fund research and development into better and cheaper methods of production, whose cost is spread over large output.

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(a) Equilibrium price and quantity. Equilibrium occurs where quantity demanded equals quantity supplied, \(Q_d = Q_s\):

\[ 20 - 2P = 6P - 12 \]

\[ 20 + 12 = 6P + 2P \;\Rightarrow\; 32 = 8P \;\Rightarrow\; P = 4 \]

Substituting \(P = 4\) into either function: \(Q_d = 20 - 2(4) = 12\). So the equilibrium price is N4.00 and the quantity bought and sold is 12 units.

(b) Excess supply at the fixed price. At a price above equilibrium, quantity supplied exceeds quantity demanded, giving excess supply (a surplus). Excess supply \(= Q_s - Q_d\). Taking the fixed price as N6.00 (the sensible value above the equilibrium of N4):

\[ Q_s = 6(6) - 12 = 24, \qquad Q_d = 20 - 2(6) = 8 \]

\[ \text{Excess supply} = 24 - 8 = 16 \text{ units} \]

The magnitude of the excess supply is therefore 16 units. (Note: the figure printed as N60.00 is almost certainly a typographical error for N6.00, since a price of N60 lies far outside the range of these functions.)

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Opportunity cost is the real cost of a choice, measured as the next best alternative that is forgone (given up) when a decision is made. Because resources are scarce, choosing to use them for one purpose means sacrificing another. For example, if a farmer uses his land to grow maize, the opportunity cost is the yam he could have grown instead.

Money cost is the amount of money actually paid out or spent to acquire or produce a commodity, that is the monetary expenditure on the good or service. If a shirt is bought for N2,000, the money cost is N2,000.

The distinction: money cost is measured in naira and shows what is paid; opportunity cost is measured in terms of the alternative goods or satisfaction sacrificed and need not involve any money changing hands. Opportunity cost is the more fundamental economic concept because it captures the true sacrifice behind every choice.

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Scores: 38, 28, 70, 43, 39, 20, 64, 66, 12, 46, 52, 53, 20, 34, 48, 69, 18, 20, 64, 34. Number of students \(n = 20\), pass mark = 40%.

(a) Mean score. The sum of all scores is 838.

\[ \bar{x} = \frac{\sum x}{n} = \frac{838}{20} = 41.9 \]

The mean score is 41.9%.

(b) Number who passed. Scores of 40 and above are: 70, 43, 64, 66, 46, 52, 53, 48, 69, 64. That is 10 students.

(c) Percentage who failed. Failures = \(20 - 10 = 10\) students.

\[ \text{Percentage failed} = \frac{10}{20} \times 100 = 50\% \]

(d) Range of scores. Highest = 70, lowest = 12.

\[ \text{Range} = 70 - 12 = 58 \]

(e) Number scoring below the mean (41.9). Scores below 41.9 are: 38, 28, 39, 20, 12, 20, 34, 18, 20, 34, giving 10 students.

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Tax collectors in Nigeria face several difficulties that reduce the amount of revenue actually collected:

• Tax evasion and avoidance: many taxpayers deliberately refuse to pay (evasion) or exploit loopholes to reduce their liability (avoidance).
• Widespread illiteracy: many people do not understand tax laws or how to complete tax returns, making assessment difficult.
• Poor record keeping: individuals and small businesses keep no proper accounts, so their true incomes cannot be assessed.
• Large informal sector: the many self-employed traders, artisans and farmers have irregular, unrecorded incomes that are hard to assess and reach.
• Corruption and dishonesty: some tax officials collude with taxpayers, or collected money is embezzled.
• Inadequate and incompetent staff: shortage of well-trained tax personnel and equipment.
• Lack of reliable data: absence of an accurate register of taxpayers and their incomes.
• Poor infrastructure and communication: bad roads and poor addressing make it hard to reach and identify taxpayers.
• Political interference and weak penalties: influence from powerful persons and light penalties encourage default.

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Although about 75% of the labour force in West African countries works in agriculture, food output remains too low to meet domestic needs. The reasons are:

• Use of crude and primitive tools: reliance on the hoe and cutlass instead of machinery keeps output per worker very low.
• Subsistence nature of farming: most farmers produce mainly for family consumption on small scattered plots, so little surplus reaches the market.
• Poor storage and preservation: lack of silos and processing facilities causes heavy post-harvest losses.
• Inadequate finance and credit: farmers cannot afford improved seeds, fertilizers and equipment.
• Land tenure problems: fragmented holdings and communal ownership discourage large-scale, mechanised farming.
• Rural-urban migration: the young and able-bodied leave the farms for the towns, leaving mostly aged and weak workers.
• Poor transport and infrastructure: bad rural roads make it costly to move produce, so much rots before reaching markets.
• Pests, diseases and unfavourable weather: drought, flooding and crop pests reduce yields.
• Illiteracy of farmers and low use of modern techniques: little access to extension services and improved methods.
• Rapid population growth: food demand rises faster than the slow growth in food production.

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Development planning is the deliberate government effort to direct the economy over a period towards defined goals. The reasons for development planning in Nigeria include:

• Efficient allocation of scarce resources: to channel limited resources into the most productive and priority uses.
• To accelerate economic growth and development: planning sets targets that speed up growth in output and income.
• To reduce unemployment: planned projects and industries create jobs for the growing labour force.
• To achieve balanced development: to spread projects across regions and sectors and reduce regional inequality.
• To diversify the economy: to reduce over-dependence on oil by developing agriculture and industry.
• To provide social and economic infrastructure: roads, schools, hospitals, power and water are planned and provided.
• To reduce inequality in income distribution: planning aims to share the benefits of growth more fairly.
• To attract and coordinate foreign aid and investment: a clear plan guides donors and investors.
• To set priorities and coordinate government activities: so that different projects work together rather than in conflict.

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Supply is the quantity of a commodity that producers are willing and able to offer for sale at a given price over a period. The main factors that motivate a producer to supply more are:

• A rise in the price of the commodity: by the law of supply, a higher price raises the producer's profit and encourages him to supply more.
• A fall in the cost of production: cheaper inputs (labour, raw materials) lower cost and widen the profit margin, so more is supplied.
• Improvement in technology: better machines and methods raise output and productivity at lower cost, increasing supply.
• Favourable weather (for agricultural goods): good rainfall and climate raise yields, so more can be supplied.
• Government subsidy: financial assistance to producers reduces their effective costs and encourages greater output.
• A fall in the prices of other commodities: when substitutes in production become less profitable, resources are switched to produce more of this commodity.
• Expectation of a future price fall: producers may release more now to sell before prices drop.
• Availability of factors of production and good infrastructure: ready supply of labour, capital and good transport enable larger output.

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National income is the total money value of all final goods and services produced by the nationals of a country within a given period, usually one year. It is also the sum of all incomes (wages, rent, interest and profit) earned by the factors of production in that period.

Importance of national income

• Measures the standard of living: national income per head (per capita income) gives an indication of the average welfare of the people.
• Shows economic growth: comparing national income over the years reveals whether the economy is growing or declining.
• Reveals the structure of the economy: it shows the contribution of each sector (agriculture, industry, services) to total output.
• Aids economic planning: government uses the figures to plan, allocate resources and set realistic targets.
• Enables international comparison: it allows a country's economic performance to be compared with that of other countries.
• Shows income distribution: it indicates how income is shared among the people and guides policy on inequality.
• Guides government policy: it is a basis for fiscal, monetary and taxation decisions.