WAEC SSCE - Economics - 2006 (Essay)

(a)(i) Why a producer enters a competitive market. A producer enters when existing firms are earning supernormal (abnormal) profit, that is, when price (average revenue) exceeds average total cost. Because there is freedom of entry in perfect competition and firms have perfect knowledge, the prospect of these profits attracts new firms into the industry.

(a)(ii) Why a producer leaves a competitive market. A producer leaves when it is making losses, that is, when price falls below average total cost (and, in the short run, below average variable cost so that it cannot even cover its variable costs). Freedom of exit allows unprofitable firms to leave until the remaining firms earn only normal profit.

(b) Two ways consumers benefit from perfect competition.

• Lower prices. Intense competition and free entry drive price down to the level of minimum average cost in the long run, so consumers pay the lowest sustainable price.
• Efficient allocation of resources. Production takes place at the lowest cost and price equals marginal cost, so consumers get the goods they want without waste; there is also no wasteful spending on advertising since the product is homogeneous.

(c) Two conditions for profit maximisation of a perfectly competitive firm.

1. Marginal cost equals marginal revenue: \( MC = MR \).
2. The marginal cost curve cuts the marginal revenue curve from below (\( MC \) is rising at that output), which ensures it is a maximum and not a minimum.

Examination reminder: \( MC = MR \) alone is not enough; the second-order condition that \( MC \) is rising is what confirms profit is maximised.

(a) Sources of government revenue. Government raises money from two broad groups of sources:

• Tax revenue: direct taxes (personal income tax, company income tax, capital gains tax, petroleum profit tax) and indirect taxes (import and export duties, excise duties, value added tax, sales tax).
• Non-tax revenue: royalties, rents and mining rights from natural resources such as oil and solid minerals; profits and dividends from government-owned enterprises; fees, licences, fines and court charges; interest on loans granted by government; grants and aid; and internal and external borrowing.

(b) How a government finances a budget deficit. A budget deficit exists when planned government expenditure exceeds expected revenue. It can be financed by:

1. Internal borrowing - selling treasury bills, treasury certificates and development stocks/bonds to the public, banks and the central bank.
2. External borrowing - loans from foreign governments, and from institutions such as the World Bank and IMF.
3. Running down reserves - drawing on accumulated surpluses or foreign-exchange reserves.
4. Deficit financing by creating money - borrowing from the central bank (in effect printing money), though this risks inflation.
5. Grants and aid from foreign or international bodies.

Examination reminder: separate sources of revenue (how normal income is raised) from deficit financing (how the shortfall is covered), and note that money creation is the most inflationary option.

(a) Two strategies of industrialisation.

(i) Import substitution. This is a strategy in which a country builds local industries to produce goods that were formerly imported, so as to satisfy the domestic market from home production. It is usually protected by tariffs, quotas and import bans on the affected goods. Its aims are to save foreign exchange, create local employment and reduce dependence on foreigners; its weakness is that the industries often stay small, high-cost and dependent on imported inputs.

(ii) Export promotion. This is a strategy in which a country deliberately develops industries to produce goods mainly for export to earn foreign exchange. Government supports it with incentives such as export subsidies, tax reliefs, favourable exchange rates and export-processing zones. It exposes firms to world competition, encourages efficiency and earns foreign exchange, though it can be vulnerable to unstable world markets and trade barriers abroad.

(b) Four objectives of industrial development programmes in Nigeria.

1. To create employment and reduce unemployment.
2. To diversify the economy and reduce over-dependence on a single product such as crude oil.
3. To promote local processing of raw materials and add value to primary products.
4. To conserve and earn foreign exchange (by substituting imports and promoting exports).

Other valid objectives include developing local technology and skills, and encouraging even regional development.

Examination reminder: contrast the two strategies directly: import substitution looks inward at the home market, while export promotion looks outward at foreign markets.

(a) Natural resources. Natural resources are the free gifts of nature that can be used to produce goods and services. They include land, mineral deposits, forests, water bodies, wildlife, sunshine, fertile soil and the climate. In economics they are grouped under the factor of production called land, and they command a reward known as rent.

(b) Four roles of natural resources in economic development.

1. Source of raw materials. Minerals, timber, farm land and water supply the inputs that industries process into finished goods, so their availability determines the pattern and scale of industrialisation.
2. Source of government revenue and foreign exchange. Exporting resources such as crude oil, cocoa and solid minerals earns foreign exchange and yields royalties and taxes that finance development.
3. Provision of employment and income. Extracting, processing and marketing resources (mining, farming, fishing, forestry) create jobs and raise the incomes of the people.
4. Attraction of investment and infrastructure. Rich resource endowments attract domestic and foreign investment and encourage the building of roads, railways, power and ports to exploit them, spreading development.

Resources also provide food and a base for the growth of allied and supporting industries.

Examination reminder: stress that resources must be combined with capital, labour and enterprise before they contribute to development; on their own they remain idle potential.

(a) Wants versus demand. A want is simply a desire or wish for a good or service; it is unlimited and need not be backed by anything. Demand in economics is an effective want: a desire for a good that is backed by both the willingness and the ability to pay, and expressed over a given period at a given price. Thus every demand is a want, but a want becomes demand only when purchasing power and willingness support it. A poor person may want a car (a want) but not demand it because he cannot pay.

(b) Effect on demand, with diagrams. Draw a demand curve \( DD \) on axes with price on the vertical axis and quantity on the horizontal axis, and distinguish a shift of the whole curve from a movement along it.

• (i) A reduction in the number of consumers. Fewer buyers reduce demand at every price, so the demand curve shifts leftward (inward) from \( DD \) to \( D_1D_1 \). This is a fall in demand, not a movement along the curve.
• (ii) A rise in the price of substitutes. When substitutes become dearer, consumers switch to this commodity, so its demand rises and the curve shifts rightward (outward) from \( DD \) to \( D_2D_2 \).
• (iii) A fall in the price of the commodity itself. A change in the good's own price does not shift the curve; it causes a downward movement along the same demand curve to a lower price and larger quantity demanded (extension of demand).

Examination reminder: a change caused by the good's own price is a movement along the curve; a change caused by any other factor is a shift of the whole curve.

(a) Elasticity of supply. Price elasticity of supply measures the degree of responsiveness of the quantity supplied of a good to a change in its price. It is calculated as:

\[ E_s = \frac{\%\ \text{change in quantity supplied}}{\%\ \text{change in price}} \]

(b) When supply is elastic. Supply is elastic when \( E_s > 1 \), that is, when a given percentage change in price brings about a more than proportionate percentage change in the quantity supplied. For example, a \( 10\% \) rise in price that causes a \( 25\% \) rise in quantity supplied is elastic.

(c) Four factors influencing elasticity of supply.

1. Time period. The longer the time available, the more producers can adjust output, so supply is more elastic in the long run than in the short run.
2. Ease of storage. Goods that can be stored cheaply and without spoiling have more elastic supply, because stocks can be released quickly when price rises; perishables are inelastic.
3. Availability and mobility of factors of production. If labour, raw materials and capital can be obtained and shifted easily, output can be raised quickly and supply is elastic.
4. Nature of the good and production technique. Manufactured goods whose output can be expanded quickly are elastic in supply, while agricultural goods with long gestation periods are inelastic.

Cost of expanding production and the number of firms in the industry are also acceptable factors.

Examination reminder: distinguish elastic supply (\( E_s>1 \)) clearly from the special cases of unit elastic (\( E_s=1 \)) and inelastic (\( E_s<1 \)) supply.

(a) Types of farming.

• (i) Peasant (subsistence) farming. Small-scale farming carried out by individual families mainly to feed themselves, using simple tools, family labour and traditional methods on small, scattered plots; only any surplus is sold.
• (ii) Commercial farming. Large-scale, market-oriented farming carried out for profit, using modern inputs such as machinery, improved seeds, fertilisers, hired labour and better management, with the produce sold in the market.
• (iii) State farming. Large farms owned, financed and managed by the government (the state), usually to boost food production, demonstrate modern methods and provide employment.

(b) Two ways increased commercial farming aids economic development.

1. Provision of raw materials and food. Large-scale output supplies industries with raw materials and feeds the growing population, supporting industrial growth and lowering food imports.
2. Employment, income and foreign exchange. Commercial farms create jobs, raise farmers' incomes, and, through the export of cash crops, earn valuable foreign exchange for the economy.

Increased commercial farming also widens the tax base and encourages the growth of agro-allied industries.

Examination reminder: the key contrast is scale and purpose: peasant farming is small and for consumption, commercial farming is large and for profit, and state farming is government-owned.

(a) Economic system. An economic system is the organised way in which a society allocates its scarce resources to answer the three basic economic questions: what to produce, how to produce, and for whom to produce. It defines who owns the means of production and how decisions on production, distribution and consumption are made. The main types are capitalism, socialism and the mixed economy.

(b) Four features of a capitalist economy.

1. Private ownership of the means of production. Land, capital and firms are owned and controlled by private individuals, not the state.
2. Freedom of enterprise and choice. Producers are free to produce and sell what they wish, and consumers are free to buy what they can afford.
3. The profit motive. Production is undertaken mainly to earn private profit, which guides what is produced and how.
4. The price mechanism (market forces). The forces of demand and supply, working through prices, allocate resources with little or no government direction; this is the invisible hand.

Other valid features include competition among producers and consumer sovereignty.

Examination reminder: tie each feature to the idea of private decision-making guided by prices, which is the essence of capitalism.

(a) Types of money.

• (i) Commodity money. Money whose material has intrinsic value of its own and can be used as an ordinary commodity as well as a medium of exchange, for example gold, silver, cowries or salt. Its value as money is close to its value as a good.
• (ii) Token money. Money whose face (nominal) value is greater than the value of the material from which it is made, such as coins and notes; it is accepted because of law and public confidence, not the worth of its metal or paper.
• (iii) Fiduciary issue. The part of a country's note issue that is not backed by gold or other reserves but rests only on public confidence and the credit of the government or central bank.
• (iv) Quasi money. Near money: assets that are not money themselves but can be turned into money quickly and easily, such as time (savings) deposits, treasury bills and bills of exchange.

(b) Four functions of money.

1. Medium of exchange - it is generally accepted in payment for goods and services, removing the difficulties of barter.
2. Measure (unit) of value - it provides a common yardstick in which the prices of all goods and services are expressed.
3. Store of value - purchasing power can be kept in the form of money and used later.
4. Standard of deferred payment - it allows debts and future payments to be fixed and settled in money terms.

Examination reminder: keep token money (face value above material value) distinct from fiduciary issue (unbacked notes), as these two are commonly confused.

The supply function \( Q_s = 25 + 0.25P \) tells us the quantity of gasoline supplied at each price. To find quantity supplied at a given price, substitute the price into the equation and evaluate.

(a) Quantity supplied at each price

\( P = 0 \): \( Q_s = 25 + 0.25(0) = 25 \) litres

\( P = 24 \): \( Q_s = 25 + 0.25(24) = 25 + 6 = 31 \) litres

\( P = 40 \): \( Q_s = 25 + 0.25(40) = 25 + 10 = 35 \) litres

\( P = 60 \): \( Q_s = 25 + 0.25(60) = 25 + 15 = 40 \) litres

\( P = 80 \): \( Q_s = 25 + 0.25(80) = 25 + 20 = 45 \) litres

(b)(i) Supply schedule

(b)(ii) Supply curve

Plot price on the vertical axis and quantity supplied on the horizontal axis, then join the points \( (25,0),\ (31,24),\ (35,40),\ (40,60),\ (45,80) \). Because the equation is linear with a positive slope, the points lie on a straight, upward-sloping line running from lower-left to upper-right. The positive coefficient on \( P \) confirms the direct relationship stated by the law of supply: as price rises, quantity supplied rises.

Examination reminder: the constant \( 25 \) is the quantity supplied even at zero price (the intercept), while the slope \( 0.25 \) shows that each one-Naira rise in price raises quantity supplied by \( 0.25 \) of a litre.

(a) Number of persons in each age group

A pie chart is a full circle of \(360^\circ\), so each age group's share of the total population of 245,000 equals its sector angle divided by \(360^\circ\). The angles read from the chart are \(0\text{-}16 = 220^\circ\), \(17\text{-}45 = 75^\circ\), \(46\text{-}60 = 43^\circ\) and \(61+ = 22^\circ\); these correctly add up to \(220+75+43+22 = 360^\circ\).

Applying \(\text{Group} = \dfrac{\text{sector angle}}{360^\circ}\times 245{,}000:\)

• 0-16 years: \(\dfrac{220}{360}\times 245{,}000 = 149{,}722\) persons
• 17-45 years: \(\dfrac{75}{360}\times 245{,}000 = 51{,}042\) persons
• 46-60 years: \(\dfrac{43}{360}\times 245{,}000 = 29{,}264\) persons
• 61+ years: \(\dfrac{22}{360}\times 245{,}000 = 14{,}972\) persons

Check: \(149{,}722 + 51{,}042 + 29{,}264 + 14{,}972 = 245{,}000\) (to the nearest person).

(b) Dependency ratio

The dependants are the young (0-16 years) plus the aged (61+ years); the working, productive group is 17-60 years.

Dependants \(= 149{,}722 + 14{,}972 = 164{,}694\).
Working population \(= 51{,}042 + 29{,}264 = 80{,}306\).

\[\text{Dependency ratio} = \dfrac{\text{dependants}}{\text{working population}}\times 100 = \dfrac{164{,}694}{80{,}306}\times 100 \approx 205\%\]

Using the angles directly gives the same result: \(\dfrac{220+22}{75+43} = \dfrac{242}{118} \approx 2.05\). So the ratio is about \(2:1\) - roughly two dependants rely on every one person of working age.

(c) Three implications of this population structure

1. Heavy dependency burden. With about 61% of the people aged 0-16, the relatively small working group must feed, clothe, house and educate a very large number of non-workers, keeping living standards low.
2. Low savings and capital formation. Most income is spent at once on consumption for dependants, leaving little for saving and investment, which slows economic growth.
3. Pressure on social services. The huge child population forces heavy government spending on schools, clinics and other amenities, straining public finances - though it does promise a large labour force in the future.

(a) Population census. A population census is the official, periodic head-count of all the people living in a country at a particular time, together with the collection of data on their characteristics such as age, sex, occupation and location. It is usually conducted by government at fixed intervals (commonly every ten years).

(b) Problems of conducting a census in a developing country such as Nigeria.

• Illiteracy. Many respondents cannot read or fill forms, so enumerators must interpret questions, causing errors.
• Poor transport and communication. Bad roads and inaccessible rural or riverine areas make it hard to reach everyone.
• Inadequate finance and trained personnel. A census is costly, and shortage of funds and well-trained enumerators lowers accuracy.
• Cultural and religious objections. Some people refuse to disclose the number, sex or age of household members, or object to being counted.
• Political manipulation. Because revenue allocation and political representation often depend on population, figures may be deliberately inflated, and fear of this undermines accuracy.
• Ignorance and suspicion. Some believe the count is for taxation or conscription and give false information or hide.
• Mobility of the population. Nomads, migrant workers and travellers may be double-counted or missed.

Examination reminder: group your points into practical difficulties (transport, funds, illiteracy) and attitudinal ones (suspicion, political bias) to show a balanced answer.