WAEC SSCE - Economics - 2018 (Essay)

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(a) Maximum price legislation (a price ceiling) is a law that fixes a price above which a commodity may not legally be sold. It is set below the equilibrium price to protect consumers from high prices, for example a rent or a price control on essential foodstuffs.

(b) Three reasons for fixing price floors (minimum prices) on agricultural produce:

• To guarantee farmers a fair, stable income and protect them from ruinously low prices.
• To encourage greater production by assuring farmers that their output will fetch a worthwhile price.
• To cushion farmers against price fluctuations caused by bumper harvests or gluts, which would otherwise push prices very low.

(c) Three effects of a price ceiling:

• Excess demand (shortage): because the fixed price is below equilibrium, quantity demanded exceeds quantity supplied.
• Emergence of a black market: scarce goods are diverted and sold illegally above the controlled price.
• Rationing and hoarding: government may have to ration the scarce goods, and sellers may hoard them, creating queues and favouritism.

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(a) Commodity money is money in the form of a good that has value in itself (intrinsic value) and is also generally accepted as a medium of exchange. Examples include cowries, gold, salt, and cattle used as money in earlier societies.

(b) Three problems of trade by barter:

• Double coincidence of wants: each trader must find someone who has what he wants and also wants what he has, which is difficult.
• Lack of a common measure of value: there is no single unit in which to express and compare the worth of different goods.
• Indivisibility of some goods: valuable items such as a cow cannot be split to pay for a small purchase.
• Difficulty in storing value: many goods (e.g. farm produce) perish and cannot store wealth over time.

(c) Three ways money has solved these problems:

• Medium of exchange: money is generally accepted, so a seller takes money and later spends it, removing the need for a double coincidence of wants.
• Measure/unit of value: the prices of all goods are stated in money, giving a common yardstick for comparing values.
• Store of value: money can be saved and kept without perishing, so wealth can be held and used later; being divisible into small units, it also solves the problem of indivisibility.

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(a) Total revenue \( TR = P \times Q \) at each price.

(b) Price elasticity of demand using \( E_d = \dfrac{\%\,\Delta Q}{\%\,\Delta P} \) (ignoring the sign).

(i) $5 to $10: quantity falls 60 to 50.

\[ E_d = \frac{-10/60}{5/5} = \frac{-16.67\%}{100\%} = 0.17 \]

(ii) $25 to $30: quantity falls 20 to 10.

\[ E_d = \frac{-10/20}{5/25} = \frac{-50\%}{20\%} = 2.5 \]

(c) Classification

• (i) \( E_d = 0.17 < 1 \): demand is inelastic.
• (ii) \( E_d = 2.5 > 1 \): demand is elastic.

(d) Relationship between total revenue and elasticity

• Over \$5 to \$10 demand is inelastic, and as price rises total revenue rises (300 to 500). When demand is inelastic, price and total revenue move in the same direction.
• Over \$25 to \$30 demand is elastic, and as price rises total revenue falls (500 to 300). When demand is elastic, price and total revenue move in opposite directions.

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First we sort each item into visible (physical goods that cross the border) and invisible (services).

(a) Value of visible exports

\[ 120{,}000{,}000 + 40{,}000{,}000 + 80{,}000{,}000 = \$240{,}000{,}000 \]

(b) Balance of trade = visible exports \( - \) visible imports. Visible imports \( = 140m + 80m + 50m = \$270{,}000{,}000 \).

\[ 240{,}000{,}000 - 270{,}000{,}000 = -\$30{,}000{,}000 \]

A balance of trade deficit of \$30,000,000.

(c) Invisible items

• Invisible exports: Tourism and Shipping & Insurance.
• Invisible imports: Banking Services and Freight and Insurance.

(d) Current account balance = (visible + invisible exports) \( - \) (visible + invisible imports).

Total exports \( = 240m + (45m + 60m) = 345{,}000{,}000 \). Total imports \( = 270m + (60m + 40m) = 370{,}000{,}000 \).

\[ 345{,}000{,}000 - 370{,}000{,}000 = -\$25{,}000{,}000 \]

A current account deficit of \$25,000,000.

(e) The country is developing. Its exports are dominated by primary/unprocessed products (crude oil, groundnuts, bauxite) while it imports refined and manufactured goods (petroleum products, vehicles), which is the typical trade pattern of a developing economy.

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(a) Features of the two systems

(i) Capitalist economic system:

• Private individuals own the means of production (property and capital).
• The profit motive and the price mechanism guide production, with freedom of enterprise and consumer choice.

(ii) Socialist economic system:

• The state owns and controls the means of production on behalf of the people.
• Central planning, rather than the free market, decides what, how and for whom to produce, aiming at equality.

(b) Four weaknesses of the capitalist system:

• Wide inequality of income and wealth: the rich grow richer while the poor remain poor.
• Exploitation: the profit motive can lead to underpayment of workers and overcharging of consumers.
• Growth of monopolies: free competition can end in a few large firms dominating and abusing the market.
• Economic instability and unemployment: the system is prone to booms and slumps that cause waste and joblessness.
• Neglect of unprofitable but essential social services because private firms produce only what yields profit.

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

(b) Rates of taxation:

• Progressive tax: the rate rises as income rises, so higher-income earners pay a larger percentage of income than lower-income earners.
• Proportional tax: the same percentage rate is charged on all incomes, so tax paid rises in exact proportion to income while the rate stays constant.
• Regressive tax: the rate falls as income rises, so lower-income earners pay a larger percentage of income than higher-income earners.

(c) Principles of a good tax system:

• Equity (fairness): the burden of tax should be shared fairly according to the taxpayer's ability to pay; those who earn more should pay more.
• Convenience: the tax should be collected at a time and in a manner most convenient to the taxpayer, for example deducting income tax when wages are paid.
• Economy: the cost of assessing and collecting the tax should be small relative to the revenue it yields, so that most of what is collected reaches the treasury.

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(a) Marginal revenue \( MR = \dfrac{\Delta TR}{\Delta Q} \), the change in total revenue when output rises by one bag.

Marginal revenue is constant at \$6 per bag.

(b) The price of a bag of maize is \$6. Average revenue \( = \dfrac{TR}{Q} = \dfrac{6}{1} = \dfrac{12}{2} = \$6 \) at every level, and price equals average revenue. Because MR equals AR equals price, the firm sells every bag at the same fixed price of \$6.

(c) The farmer operates under perfect competition. The price is constant regardless of the quantity sold (MR = AR = price), so the farmer is a price taker who cannot influence the market price.

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(a) Optimum population is the population size that, given a country's available resources and level of technology, yields the highest output per head (maximum per capita income). At this point the country is neither under-populated nor over-populated.

(b) Three ways rapid population growth can slow economic development:

• Reduced per capita income: national output must be shared among more people, so the average standard of living falls.
• Lower savings and investment: a large dependent population forces high spending on immediate needs, leaving little for saving and capital formation.
• Strain on social amenities and infrastructure: schools, hospitals, housing and utilities are overstretched, and much investment goes merely to maintain existing standards rather than to raise them.

(c) Three measures to control rapid population growth:

• Family-planning programmes and free access to contraceptives to help couples space and limit births.
• Public enlightenment and education, especially of women (education tends to lower birth rates).
• Government policy and incentives, such as limiting tax or housing benefits to a set number of children, or discouraging early marriage by law.

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(a) Net migration is the difference between the number of people entering an area (immigrants or in-migrants) and the number leaving it (emigrants or out-migrants) over a given period. \(\text{Net migration} = \text{in-migration} - \text{out-migration}\). It is positive when more people come in than leave, and negative when more leave than come in.

(b) Four economic consequences of rural-urban migration:

• Shortage of farm labour in rural areas: the departure of young, able-bodied people lowers agricultural output.
• Urban unemployment and underemployment: the cities receive more workers than the available jobs, raising unemployment.
• Pressure on urban amenities: housing, water, transport, schools and hospitals in the cities become overstretched, breeding slums.
• Rise in urban social problems: congestion, crime and poor sanitation increase, while rural areas suffer neglect and falling incomes.

(c) Two measures government can adopt to reduce it:

• Develop rural areas by providing roads, electricity, water, schools and health facilities so that people are willing to stay.
• Create rural employment, for example by siting industries and improving farming incentives (credit, guaranteed prices) in the rural areas.

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(a) State-owned enterprises (public corporations) are business organisations established, owned, financed and controlled by the government to provide goods or services to the public, for example a national electricity or water company.

(b) Three reasons for establishing them:

• To provide essential services (water, electricity, transport) that the public needs but which private firms may not supply adequately.
• To prevent private monopoly and exploitation in strategic industries by keeping them under public control.
• To provide services that require very large capital which private investors may be unable or unwilling to raise, and to promote development and employment.

(c) Four problems associated with them:

• Inefficiency and mismanagement arising from the absence of a strong profit motive.
• Political interference in appointments and decisions, which lowers performance.
• Losses and heavy reliance on government subsidies, which burden public finances.
• Corruption, bureaucracy and red tape, which cause waste and slow decision-making.

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(a) Economies of scale are the advantages (falling average cost of production) that a firm enjoys as it expands its scale of output. As output grows, the cost of producing each unit falls.

(b) Types:

• Managerial economies: a large firm can employ specialist managers, each concentrating on one function (production, sales, finance), which raises efficiency and spreads the cost of skilled management over a large output.
• Technical economies: a large firm can install and fully use large, specialised, cost-saving machinery and take advantage of the division of labour, so cost per unit falls.

(c) Four disadvantages of large-scale production:

• Difficulty of management and control: the firm may become too big to coordinate efficiently (diseconomies of scale).
• Poor labour relations: the distance between management and a large workforce weakens personal contact and morale.
• Risk of overproduction: mass output may exceed demand, leading to gluts and losses.
• Tendency towards monopoly: large firms may dominate and exploit consumers, and heavy capital is tied up and hard to withdraw quickly.

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(a) A demand schedule is a table showing the different quantities of a commodity that consumers are willing and able to buy at various prices over a given period, other things remaining equal.

(b) The law of demand states that, other things being equal, the higher the price of a commodity the lower the quantity demanded, and the lower the price the higher the quantity demanded. Price and quantity demanded move in opposite directions.

(c) Types of demand:

• Competitive demand: demand for goods that are substitutes, so that buying more of one means buying less of the other. Example: butter and margarine.
• Derived demand: demand for a good that arises not for its own sake but because it is needed to produce or enjoy another good. Example: demand for bricklayers is derived from the demand for houses.
• Joint (complementary) demand: demand for goods that are used together, so that a rise in demand for one raises demand for the other. Example: cars and petrol; pen and ink.
• Composite demand: demand for a good that has several different uses, the total demand being the sum of the demands for each use. Example: demand for water for drinking, washing, irrigation and industry.

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Marginal revenue \( MR = \dfrac{\Delta TR}{\Delta Q} \) and marginal cost \( MC = \dfrac{\Delta TC}{\Delta Q} \), where \( \Delta Q \) is the increase in output between successive levels.

(a) Working

(b) Profit \( = TR - TC \) at each level:

• (i) Break even at output 35 kg, where \( TR = TC = 70 \) so profit is zero.
• (ii) Highest profit at output 85 kg, where profit \( = 170 - 105 = \$65 \).
• (iii) Equilibrium at output 85 kg. Because MR (\$2) stays above MC at every stage beyond the first, each extra kilogram adds more to revenue than to cost, so the firm keeps expanding to the largest output shown, where profit is maximised.

(c) The firm operates under perfect competition. Marginal revenue is constant at \$2 per kg, which means price is fixed and the firm is a price taker.

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(a) A tax is a compulsory payment imposed by government on individuals, firms or goods, for which the payer receives no direct return, used to finance public spending.

(b) Tax evasion versus tax avoidance:

• Tax evasion is the illegal refusal or failure to pay tax that is lawfully due, for example by understating income or falsifying records. It is an offence punishable by law.
• Tax avoidance is the use of legal means to reduce one's tax liability, for example by claiming all allowances and reliefs or arranging affairs to fall in a lower tax band. It is lawful, though sometimes considered unethical.

(c) Four benefits of tariffs (taxes on imports):

• Revenue: tariffs are a source of income for the government.
• Protection of infant industries: they make imports dearer, allowing young domestic industries to grow.
• Correcting balance-of-payments deficit: by discouraging imports they help improve the trade balance.
• Protecting local employment and guarding against dumping of cheap foreign goods.

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(a) Natural resources are the free gifts of nature that are useful to man and can be exploited for the production of goods and services. They exist without human effort and include land, mineral deposits, forests, rivers, sunshine, wildlife and the fertility of the soil. In economics they form part of the factor of production called land, and they are valued only when the knowledge, capital and labour needed to exploit them are available.

(b) Three contributions of forest resources to economic development:

• Source of raw materials and revenue: Timber, rubber, wood pulp and gum are exported or fed into local industries, earning foreign exchange and government revenue that finance development projects.
• Employment and income: Logging, saw-milling, furniture-making and the gathering of forest products provide jobs and incomes, reducing unemployment and raising standards of living.
• Environmental and agricultural support: Forests check soil erosion, conserve water and preserve soil fertility, which sustains farming; they also supply firewood, herbs and grazing that support rural livelihoods.

(c) Three negative effects of the exploitation of mineral resources:

• Environmental degradation: Mining destroys vegetation, pollutes water bodies and farmland (for example oil spillage and gas flaring), and leaves derelict land unfit for farming.
• Displacement and health hazards: Communities are displaced from their land, and dust, chemicals and unsafe pits cause diseases and accidents among workers and residents.
• Distortion of the economy: Heavy dependence on one mineral makes the economy vulnerable to price falls, encourages neglect of agriculture and other sectors, and can breed conflict over the sharing of mineral revenue.

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(a) Difference: Unemployment is a situation in which people who are willing and able to work at the going wage rate cannot find any work at all. Underemployment is a situation in which people are working, but below their full capacity, that is, they work fewer hours than they could, or in jobs that do not fully use their skills or that yield very low output.

(b) Types of unemployment (with examples):

• Seasonal unemployment: caused by the seasonal nature of some work, so labour is idle in the off-season. Example: farm labourers out of work between planting and harvest.
• Structural unemployment: caused by a change in the structure of the economy or in demand, so certain skills are no longer needed. Example: typists thrown out of work when offices switched to computers.
• Frictional unemployment: the short-term unemployment of workers who are between jobs or searching for a first job. Example: a graduate looking for work after leaving school.
• Cyclical unemployment: caused by a general fall in demand during a slump or depression in the business cycle. Example: factory workers laid off when sales collapse in a recession.