WAEC SSCE - Economics - 2001 (Essay)

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A perfect (perfectly competitive) market and a monopolistic (imperfectly competitive) market differ on several like features:

In short, perfect competition has many sellers of an identical product who are price takers with free entry, while a monopoly has a single price-making seller of a unique product protected by barriers to entry.

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A free market (or free enterprise) system is one in which the forces of demand and supply, working through the price mechanism, decide what is produced, how it is produced and for whom, with minimal government interference. Many West African countries have moved towards it for the following reasons.

• Greater efficiency: competition forces firms to cut costs and use resources productively, unlike the wasteful, loss-making public enterprises common under state control.
• Failure of central planning: heavy state control produced shortages, inefficiency, corruption and unsustainable budget deficits, so governments sought a market alternative.
• Encouragement of private investment and enterprise: secure property rights and the profit motive attract both domestic and foreign investors, creating jobs and output.
• Conditions of the IMF and World Bank: Structural Adjustment Programmes attached to loans required deregulation, privatisation and reduced subsidies.
• Wider consumer choice and better quality: competition among producers gives consumers more and better goods at competitive prices.
• Reduced burden on government: transferring production to the private sector frees scarce public funds for infrastructure, health and education.
• Faster economic growth: the incentive of profit and rewards for risk-taking stimulate innovation and higher national output.

In short, the free market is adopted mainly to raise efficiency, attract investment and correct the failures experienced under state-dominated economies.

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The size of a firm refers to the scale of its operations, usually measured by output, capital employed, number of workers or turnover. The main factors that determine it are:

• Size of the market: a large demand for the product allows a firm to grow big; a small or local market keeps it small.
• Availability of capital: firms that can raise large funds (through shares, loans or ploughed-back profits) can expand, while shortage of capital limits size.
• Nature of the product: goods needing large-scale, capital-intensive production (for example steel, cement) favour large firms, while personal or perishable services favour small firms.
• Economies and diseconomies of scale: a firm grows while internal economies (lower unit costs) continue, but stops expanding when diseconomies (management difficulties, poor coordination) set in.
• Ability and efficiency of management: skilled, capable management can control a large organisation; weak management limits growth.
• Government policy: laws, taxes, subsidies and anti-monopoly regulation can encourage or restrict expansion.
• Availability of raw materials and infrastructure: steady supplies of inputs, power and transport support large-scale operation.
• Technology used: advanced, indivisible machinery encourages large-scale production; simple technology suits small firms.

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(a) Economic integration is an arrangement in which two or more countries agree to co-operate and merge parts of their economies by reducing or removing trade barriers among themselves, so as to form a larger economic unit and enjoy mutual benefits such as a wider market and freer movement of goods and factors. Examples include ECOWAS and the European Union.

(b) Characteristics of a customs union:

• Member countries abolish tariffs and trade barriers on goods traded among themselves, allowing free internal trade.
• Members adopt a common external tariff against non-member (outside) countries.
• It creates a larger single market among members, encouraging trade and specialisation.
• There is usually a common commercial and trade policy towards the rest of the world.
• It is a deeper stage of integration than a free trade area (which lacks a common external tariff) but shallower than a common market (which also allows free movement of labour and capital).
• It often involves sharing of customs revenue and joint administration of external trade.

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Solution

(a)(i) Per capita income

\[\text{Per capita income}=\frac{\text{GNP (million dollars)}}{\text{Population (million persons)}}\]

Country	GNP (million dollars)	Population (million)	Per capita income (dollars)
R	2,500	120	\(\frac{2500}{120}=20.83\)
S	12,000	180	\(\frac{12000}{180}=66.67\)
T	4,000	60	\(\frac{4000}{60}=66.67\)
U	6,500	100	\(\frac{6500}{100}=65.00\)
V	2,500	25	\(\frac{2500}{25}=100.00\)

(a)(ii) Range of per capita incomes

\[\$100.00-\$20.83=\boxed{\$79.17}\]

(a)(iii) Country V enjoyed the highest standard of living because it has the highest per capita income, \(\$100.00\).

(b) Percentage distribution of population

Total population \(=120+180+60+100+25=485\) million.

Country	Calculation	Percentage of total population
R	\(\frac{120}{485}\times100\)	24.74%
S	\(\frac{180}{485}\times100\)	37.11%
T	\(\frac{60}{485}\times100\)	12.37%
U	\(\frac{100}{485}\times100\)	20.62%
V	\(\frac{25}{485}\times100\)	5.15%
Total		100.00%

(c) Simple bar chart of per capita incomes

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(a) Definition. Labour is the human effort, both physical and mental, applied to the production of goods and services in return for a reward (wages or salary). It is one of the four factors of production, and its reward is wages.

(b) Characteristics of labour:

• Labour is human: it is inseparable from the worker, who has feelings, rights and personal preferences, so it cannot be bought and owned outright like land or capital.
• Labour is perishable: a day's labour not used today cannot be stored and sold tomorrow; unemployed labour time is lost permanently.
• Labour is mobile but imperfectly so: workers can move between occupations and places, but movement is limited by cost, family ties, skills and other barriers.
• Labour has weak bargaining power individually: a single worker is at a disadvantage against an employer, which is why workers form trade unions to bargain collectively.
• Labour is variable in efficiency: its productivity differs from person to person and depends on education, training, health, motivation and working conditions.
• Labour is an active factor: it sets the other factors of production to work, since land and capital are unproductive without human effort.

Any five well-explained characteristics are acceptable.

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(a) Balance of payments (BOP) deficit. The balance of payments is a record of all economic transactions between a country and the rest of the world in a given year. A BOP deficit exists when a country's total payments to other countries (for imports of goods, services and capital outflows) exceed its total receipts from them (from exports and capital inflows). In other words, outflows of foreign exchange are greater than inflows, so the overall balance is unfavourable (negative).

(b) How a deficit is financed. A deficit must be settled by drawing on external means of payment, mainly:

• Running down external (foreign exchange) reserves: using accumulated reserves of gold and foreign currencies to pay the difference.
• Borrowing from abroad: loans from foreign governments, the IMF, the World Bank or the international capital market.
• Drawing on IMF facilities/Special Drawing Rights (SDRs): using the country's reserve position and SDR allocation at the Fund.
• Attracting foreign investment and aid: inflows of foreign private capital or grants help cover the gap.
• Sale of gold and foreign assets held abroad.

These are short-term financing measures; a lasting cure requires correcting the deficit itself, for example by boosting exports, cutting imports or devaluing the currency.

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The Central Bank controls the money supply using two broad groups of instruments: quantitative (general) instruments and qualitative (selective) instruments.

Quantitative instruments (affect the total volume of credit):

• Open market operations (OMO): selling government securities to the public reduces the money supply; buying them back increases it.
• Bank (discount) rate: raising the rate at which the Central Bank lends to commercial banks makes borrowing dearer and contracts credit; lowering it expands credit.
• Cash reserve ratio: raising the proportion of deposits banks must keep with the Central Bank reduces their lendable funds and the money supply; lowering it does the reverse.
• Liquidity ratio: raising the minimum ratio of liquid assets banks must hold reduces the credit they can create.
• Special deposits: requiring banks to place extra deposits with the Central Bank withdraws funds from circulation.

Qualitative instruments (direct credit to particular uses):

• Selective credit control: directing banks to favour priority sectors (for example agriculture) and restrict others.
• Moral suasion: persuading and appealing to banks to follow the Central Bank's desired lending policy.
• Direct/legal directives: issuing binding instructions and setting credit ceilings on lending.

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(a) Under-population is a situation in which a country's population is too small relative to its available resources (land, capital and natural resources) to make the best use of them. At this point the resources are not fully or efficiently exploited, and both per capita income and total output could rise if the population increased towards the optimum.

(b) It will be advantageous for such a country to promote population growth under the following conditions:

• Abundant unexploited resources: where large areas of fertile land and untapped natural resources remain idle for lack of labour to work them.
• Shortage of labour: where there are more jobs and productive opportunities than available workers, limiting output.
• Small domestic market: where the population is too small to support mass production, so a larger population widens demand and allows economies of scale.
• Underutilised capital and infrastructure: where factories, roads and social facilities are working below capacity for want of people to use them.
• Need for defence and security: where a larger population strengthens the labour force available for national defence.
• To reach the optimum population: where extra people would raise output per head, that is, where the country is below its optimum size.

Growth is advantageous only up to the optimum; beyond that point additional people cause over-population and falling output per head.

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(a) Diminishing marginal utility. Utility is the satisfaction a consumer gets from consuming a good. Marginal utility is the extra satisfaction from consuming one more unit. The law of diminishing marginal utility states that as a consumer takes in successive units of a good within a given period, the extra (marginal) satisfaction from each additional unit falls, other things being equal. For example, the first cup of water to a thirsty person gives high satisfaction, the second less, and later cups very little or even negative satisfaction. Total utility still rises while marginal utility is positive, reaches a maximum when marginal utility is zero, and falls when marginal utility becomes negative.

(b) How utility is maximised. A rational consumer with a fixed income and given prices maximises satisfaction by allocating spending so that the last naira spent on each good yields the same marginal utility. This is the equi-marginal principle: consumption is adjusted until

\[ \frac{MU_x}{P_x} = \frac{MU_y}{P_y} = \frac{MU_z}{P_z} \]

where \( MU \) is marginal utility and \( P \) is price of each good. If the ratio for one good is higher, the consumer gains by buying more of it (its marginal utility falls) and less of another, until the ratios are equal and total utility can no longer be increased by any reshuffle of spending.

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(a) Fixed Cost vs Variable Cost. Fixed cost is a cost that does not change with the level of output in the short run; it must be paid even when output is zero (for example rent, insurance, salaries of permanent staff). Variable cost changes directly with output; it rises as more is produced and is zero when output is zero (for example raw materials, wages of casual labour, fuel).

(b) Marginal Cost vs Marginal Revenue. Marginal cost is the addition to total cost from producing one more unit of output, \( MC = \dfrac{\Delta TC}{\Delta Q} \). Marginal revenue is the addition to total revenue from selling one more unit, \( MR = \dfrac{\Delta TR}{\Delta Q} \). A profit-maximising firm produces where \( MC = MR \).

(c) Total Cost vs Total Revenue. Total cost is the entire cost of producing a given output, the sum of total fixed cost and total variable cost \( (TC = TFC + TVC) \). Total revenue is the total receipts from selling that output, price multiplied by quantity \( (TR = P \times Q) \). Profit is the excess of total revenue over total cost.

(d) Average Cost vs Average Revenue. Average cost is cost per unit of output, \( AC = \dfrac{TC}{Q} \). Average revenue is revenue per unit sold, \( AR = \dfrac{TR}{Q} \), which equals the price of the good. The gap between AR and AC per unit measures profit or loss per unit.

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(a) Production Possibility Curve (PPC)

Plot the given combinations of military and civilian goods and join them to form the PPC.

Military goods (tonnes)	Civilian goods (tonnes)
0	200
20	160
40	120
60	80
80	40
100	0

(b) Points S and K lie outside the PPC. They are therefore unattainable or not feasible with the available resources and technology.

(c) Points M and N lie inside the PPC. At these points, resources are underutilised and production is inefficient.

(d) The downward slope of the PPC shows that producing more of one type of good requires producing less of the other type. This is the opportunity cost arising from limited resources and technology.

(e) Production at points S and K is not feasible because the country does not have sufficient resources and technological capacity to produce those combinations of military and civilian goods.