WAEC SSCE - Economics - 2004 (Essay)

Answer Details

(a) Distinctions.

(i) Firm versus industry. A firm is a single business unit that produces a good or service under one ownership and control. An industry is the group of all firms producing the same or similar products. Thus one bakery is a firm, while all the bakeries together form the baking industry.

(ii) Location versus localization of industry. Location refers to the choice of a particular site or place where a firm or industry is established. Localization is the concentration or clustering of many firms of the same industry in one particular area (for example, several textile mills sited in the same town) to enjoy the advantages of being close together.

(b) Four factors that influence the location of industries in Nigeria.

• Nearness to raw materials: industries using bulky or perishable materials (e.g. cement, food processing) locate close to their sources to reduce transport cost.
• Availability of labour: firms site where suitable skilled or cheap labour is available.
• Nearness to market: firms locate near large populations to cut the cost of distributing finished goods.
• Availability of power and water supply: reliable electricity and water are needed for production.
• Good transport and infrastructure: access to roads, railways and ports.
• Government policy: incentives, tax reliefs or industrial estates that attract firms to particular areas.

Examination reminder: keep location (choosing a single site) distinct from localization (many similar firms clustering in one area).

Answer Details

(a) Gross National Product (GNP). GNP is the total money value of all final goods and services produced by the nationals (citizens and resident-owned factors) of a country in a given year, whether they are located at home or abroad. It equals Gross Domestic Product (GDP) plus net factor income from abroad: \( GNP = GDP + (\text{income earned by nationals abroad} - \text{income earned by foreigners at home}) \).

(b) Three methods of measuring national income.

• The output (product) method: add up the money value of all final goods and services produced by every sector of the economy in the year, taking care to use only value added at each stage to avoid double counting.
• The income method: add up all incomes earned by the factors of production for their part in producing the year's output, i.e. wages and salaries, rent, interest and profits.
• The expenditure method: add up all spending on the final goods and services produced: consumption \( (C) \), investment \( (I) \), government spending \( (G) \) and net exports \( (X - M) \), giving \( \text{National income} = C + I + G + (X - M) \).

In principle all three give the same total, because one person's expenditure is another's income and both equal the value of output.

Examination reminder: guard against double counting in the output method by summing only value added or the value of final goods, not intermediate goods.

Answer Details

(a) A tax. A tax is a compulsory payment levied by the government on individuals, firms and goods, for which the taxpayer receives no direct or specific benefit in return. It is a major source of government revenue used to finance public services.

(b) Four principles (canons) of a good tax system. These are the qualities first stated by Adam Smith.

• Canon of equity (fairness): tax should be based on ability to pay, so that those who earn more pay more.
• Canon of certainty: the amount, time and manner of payment should be clear and known in advance to the taxpayer, not arbitrary.
• Canon of convenience: the tax should be collected at a time and in a manner convenient to the taxpayer (for example, deducting income tax when wages are paid).
• Canon of economy: the cost of collecting the tax should be small relative to the revenue raised.
• Other canons: productivity, flexibility and simplicity are also desirable.

Examination reminder: describe each canon (do not merely name it), and remember the four Adam Smith canons: equity, certainty, convenience and economy.

Answer Details

(a) Four reasons why small-scale farmers dominate agriculture in Nigeria.

• Shortage of capital: most farmers are poor and cannot raise the large funds needed to buy machinery, inputs and large tracts of land, so they farm small plots.
• Land tenure system: communal and inheritance-based land ownership fragments land into small, scattered holdings that cannot support large-scale farming.
• Use of crude/traditional implements: reliance on the hoe and cutlass and family labour limits the area one farmer can cultivate.
• Lack of access to credit and modern inputs: difficulty in obtaining loans, improved seeds, fertiliser and extension services keeps farms small.
• Poor infrastructure and storage: bad roads and lack of storage discourage producing large surpluses.
• Illiteracy and low level of technical knowledge among many farmers.

(b) Two measures to encourage large-scale farming.

• Provision of agricultural credit and subsidies: government and banks should grant cheap loans and subsidise inputs so farmers can expand.
• Land reform: reform the land tenure system to make large blocks of land available and secure for commercial farming.
• Provision of mechanisation and infrastructure: supply tractors, irrigation, good roads and storage, plus extension education and guaranteed prices.

Examination reminder: in (a) explain why farms stay small (capital, land tenure, tools), and in (b) give measures that directly remove those constraints.

Answer Details

(a) Distinctions.

(i) Mortgage bank versus merchant bank. A mortgage bank specialises in providing long-term loans for the purchase, building or development of houses and landed property, using the property as security. A merchant bank provides wholesale banking services to companies and large investors, such as acceptance of bills, equipment leasing, corporate finance, underwriting of shares and advice on mergers; it deals mainly with firms, not small individual depositors.

(ii) Commercial bank versus development bank. A commercial bank accepts deposits from the public and grants mainly short-term loans and overdrafts, operating for profit through many branches. A development bank provides medium- and long-term finance and technical advice for development projects in sectors such as agriculture and industry, often with government backing and a developmental rather than purely profit motive.

(b) Four functions of commercial banks.

• Accepting deposits: they receive savings, current and fixed (time) deposits from the public for safe keeping.
• Lending (granting credit): they give loans and overdrafts to customers, thereby creating credit.
• Agency and payment services: they honour cheques, make and collect payments, standing orders and remittances for customers.
• Safe custody of valuables: they keep documents and valuables in safe deposits.
• Provision of other services such as foreign-exchange dealing and financial advice.

Examination reminder: commercial banks are best remembered for the two core functions of accepting deposits and lending, from which credit creation flows.

Answer Details

(a) Public corporations. A public corporation is a business organisation wholly owned and controlled by the government, established by a special Act of Parliament (or decree) to provide essential goods and services to the public, usually in strategic sectors. It has a legal personality separate from the government, is managed by a board appointed by the government, and its capital is provided by the state. Examples include the national electricity, railway and broadcasting corporations.

(b) Four merits of public corporations.

• Provision of essential services: they supply vital utilities (electricity, water, transport) that private firms may find unprofitable, ensuring the public is served.
• Avoids private monopoly exploitation: by running natural monopolies, the state prevents private owners from charging exploitative prices.
• Large capital and economies of scale: government backing gives them ample capital to operate on a large scale and lower unit costs.
• Serves the public interest, not just profit: services can be provided even in remote or unprofitable areas for social benefit.
• Generates revenue and employment: profitable corporations add to government revenue and create many jobs.

Examination reminder: stress that a public corporation is set up by law and pursues public welfare, which distinguishes it from a private joint-stock company.

Answer Details

(a) Two causes of a declining population. A declining population occurs when deaths and emigration exceed births and immigration.

• High death rate (mortality): widespread disease, famine, war or poor medical care raises deaths above births, shrinking the population.
• Falling birth rate: late marriage, widespread family planning and the high cost of raising children reduce the number of births below the number of deaths.
• Net emigration: when more people leave the country than enter it, the population falls.

(b) Three factors that determine the size of the working population. (The working population is the number of people within the working-age bracket who are able and willing to work.)

• The total size of the population: a larger population generally yields a larger working population.
• Age distribution: a population with a high proportion in the working-age range (about 15 to 60/65 years) has a larger working population than one dominated by children and the aged.
• The official working-age limits: the legal age of entry into work and the retirement age set the size of the working-age group.
• Social and cultural factors: the extent to which women and certain groups are allowed or willing to work.
• Rate of migration: immigration of workers enlarges, and emigration reduces, the working population.

Examination reminder: the working population is not the whole population; it excludes children, full-time students, the aged and those unable or unwilling to work.

Answer Details

(a) Two objectives of a price control policy. Price control is government intervention to fix the price of a good above or below the equilibrium market price.

• To protect consumers from exploitation by fixing a low maximum price for essential goods so that the poor can afford them.
• To check inflation by holding down the prices of key commodities.
• To ensure fair distribution of scarce essential goods and to protect producers/farmers (through a minimum price) from ruinously low prices.

(b) Three effects of a maximum price control policy. A maximum (ceiling) price is a legal price set below the equilibrium price.

• Excess demand (shortage): at the low fixed price, quantity demanded exceeds quantity supplied, so goods become scarce.
• Emergence of a black market: some sellers divert goods and sell secretly above the controlled price.
• Hoarding and rationing: traders hoard goods hoping to sell dearly, and government may have to introduce rationing to share the scarce supply.
• Fall in quality and reduced supply: producers may cut quality or output because the fixed price is unprofitable.

Examination reminder: a maximum price is only effective when set below equilibrium, and its typical outcome is shortage plus a black market.

Answer Details

(a) Descriptions.

(i) Abnormal demand. This is a situation in which the quantity demanded of a good behaves contrary to the ordinary law of demand: quantity demanded rises as price rises, or falls as price falls. The demand curve therefore slopes upward from left to right instead of downward. It applies to exceptional goods such as Giffen goods and goods of ostentation (Veblen goods).

(ii) Effective demand. This is demand that is backed by the ability and willingness to pay. A mere desire for a good is not effective demand; the consumer must both want the good and have the purchasing power (money) to buy it at the ruling price.

(b) Three reasons for the occurrence of abnormal demand.

• Giffen goods: for very inferior staple goods consumed by the poor, a fall in price can lead people to buy less (and buy more of superior foods), while a price rise makes them buy more of the staple.
• Goods of ostentation (prestige/Veblen goods): luxury items such as designer goods or jewellery are bought more as their price rises, because a high price is taken as a sign of quality or status.
• Expectation of future price changes: if buyers expect prices to rise further, they buy more now even though price has already risen (speculative demand); if they expect a fall, they buy less even as price falls.
• Fear of scarcity: anticipated shortage makes consumers rush to buy more despite rising prices.

Examination reminder: abnormal demand is the exception that produces an upward-sloping demand curve; effective demand stresses ability plus willingness to pay, not mere desire.

Answer Details

Reading the diagram. The vertical axis is Price and the horizontal axis is Quantity. Four curves are shown: MC (marginal cost, rising), AC (average cost, U-shaped), AR (average revenue, the downward-sloping curve ending at the right), and MR (marginal revenue, the steeper dashed line that lies below AR). Point a sits on the AR curve at the price level \(P_1\); point b sits on the AC curve at the cost level \(C\); point d is where MC cuts MR. The output \(q_1\) is marked on the quantity axis directly below points a and b.

(b)(i) The monopoly demand curve. The curve labelled AR (average revenue) is the monopoly's demand curve. For any firm, price equals average revenue \(\left(AR=\dfrac{TR}{Q}=\dfrac{P\times Q}{Q}=P\right)\), so the AR curve shows the price buyers will pay at each quantity, which is exactly the demand curve. It slopes downward because a monopolist must lower price to sell more.

(b)(ii) The point on the diagram (equilibrium point). The firm maximises profit where marginal cost equals marginal revenue, that is at point d, where the MC curve cuts the MR curve. This fixes the profit-maximising output at \(q_1\). Rising vertically from \(q_1\) to the demand (AR) curve gives point a, from which the price \(P_1\) is read off.

(b)(iii) Equilibrium price and quantity.

• Equilibrium quantity \(= q_1\) (read below points a and b, where \(MC=MR\)).
• Equilibrium price \(= P_1\) (read on the AR curve at point a, vertically above \(q_1\)).

(b)(iv) Area of monopoly (abnormal) profit. Profit per unit is price minus average cost, \((P_1-C)\), and this is earned on \(q_1\) units. On the diagram this is the shaded rectangle \(P_1\,a\,b\,C\), bounded above by the price line \(P_1\) through a, below by the cost line \(C\) through b, on the right by the output \(q_1\), and on the left by the price axis.

(c) Numerical value of the monopoly profit. Using the given data, price \(P_1=5\) Naira, quantity \(q_1=50\) units and average cost \(C=2\) Naira:

\[ \text{Monopoly profit}=(P_1-C)\times q_1=(5-2)\times 50 \] \[ =3\times 50 = \mathbf{150\ \text{Naira}} \]

The monopolist therefore earns a supernormal (abnormal) profit of 150 Naira, represented by the rectangle \(P_1\,a\,b\,C\).

Answer Details

(a) Export promotion. This is a deliberate government policy and set of measures aimed at increasing the volume and value of a country's exports, so as to earn more foreign exchange and improve the balance of payments. Measures include export subsidies, tax reliefs, favourable exchange rates, provision of export credit, and setting up export-processing zones.

(b) Depreciation. The term has two common senses. In production/accounting it is the fall in the value of a fixed asset (such as machinery) due to wear and tear, age or obsolescence over time. In international finance it is a fall in the external value of a country's currency relative to other currencies under a floating exchange-rate system (for example, the naira exchanging for fewer dollars than before).

(c) Terms of trade. This is the rate at which a country's exports exchange for its imports, usually expressed as an index: \( \text{Terms of trade} = \dfrac{\text{index of export prices}}{\text{index of import prices}} \times 100 \). A rise in the index (export prices rising relative to import prices) means the terms of trade are favourable, since a given quantity of exports now buys more imports.

(d) Balance of trade. This is the difference in value between a country's visible exports and visible imports of goods over a period. If visible exports exceed visible imports the balance of trade is favourable (surplus); if visible imports exceed visible exports it is unfavourable (deficit).

Examination reminder: when the context is exchange rates, "depreciation" means a fall in the currency's value; when the context is capital/assets, it means loss in an asset's value. Read the surrounding wording to choose the right sense.

Answer Details

Given the cost equation \(C = 20 + 2q\) (in Naira), where \(C\) is total cost and \(q\) is output.

(a) Total cost

• (i) 12 units: \(C = 20 + 2(12) = 20 + 24 = \text{N}44\)
• (ii) 36 units: \(C = 20 + 2(36) = 20 + 72 = \text{N}92\)

(b) Average cost \(\left(AC = \dfrac{C}{q}\right)\)

• (i) 48 units: \(C = 20 + 2(48) = 116\); \(AC = \dfrac{116}{48} = \text{N}2.42\)
• (ii) 58 units: \(C = 20 + 2(58) = 136\); \(AC = \dfrac{136}{58} = \text{N}2.34\)

(c) Marginal cost

Marginal cost is the rate of change of total cost, \(MC = \dfrac{dC}{dq} = 2\). Because the coefficient of \(q\) is constant, \(MC = \text{N}2\) at every output.

• (i) 23 units: \(MC = \text{N}2\)
• (ii) 36 units: \(MC = \text{N}2\)

(d) Profit in perfect competition, price = N5

\(\text{Profit} = TR - TC = 5q - (20 + 2q) = 3q - 20\).

• (i) 23 units: \(TR = 5\times 23 = 115\), \(TC = 20 + 46 = 66\), Profit \(= 115 - 66 = \text{N}49\)
• (ii) 48 units: \(TR = 5\times 48 = 240\), \(TC = 20 + 96 = 116\), Profit \(= 240 - 116 = \text{N}124\)