WAEC SSCE - Economics - 2007 (Essay)

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(a) Law of diminishing returns. The law states that as more and more units of a variable factor (for example labour) are added to a fixed factor (for example land), a point is reached beyond which the extra (marginal) output from each additional unit of the variable factor begins to fall, other things being equal. It is also called the law of variable proportions.

(b) Definitions.

• (i) Marginal product. The addition to total output resulting from employing one more unit of the variable factor: \( MP = TP_n - TP_{n-1} \).
• (ii) Average product. Total output divided by the number of units of the variable factor employed: \( AP = \dfrac{TP}{L} \).

(c) Three factors that determine the size of firms.

1. Availability of capital. Firms that can raise large amounts of capital (for example through the sale of shares or bank loans) can expand to a large size, while those with limited finance remain small.
2. Size of the market. A large demand for the firm's product allows large-scale production, whereas a small or localised market keeps the firm small.
3. Nature of the product and technology. Goods that need heavy machinery and mass production (for example cars, cement) favour large firms, while goods requiring personal skill or catering to varied tastes (for example tailoring, catering) favour small firms. (Other valid factors: managerial and organisational ability, and government policy.)

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(a) Labour versus labour force.

• Labour is any human physical or mental effort, whether paid or unpaid, that is directed towards the production of goods and services. As a factor of production it is the human effort used in production.
• Labour force is the total number of people in a country who are of working age (for example 15 to 64 years), who are able and willing to work, and who are actually working or available for work. It excludes children, the aged, the sick, full-time students, and those unwilling to work.

In short, labour is the effort supplied, while the labour force is the number of people available to supply that effort.

(b) Four reasons for differences in earnings among workers.

1. Differences in skill, training, and qualifications. Highly skilled and well-trained workers (for example doctors, engineers) earn more than unskilled workers because their services are scarce and more productive.
2. Nature and risk of the job. Jobs that are dangerous, unpleasant, or require heavy responsibility usually attract higher pay to compensate the workers.
3. Demand for and supply of the particular labour. Where the demand for a type of labour is high relative to its supply, wages rise; where labour is abundant relative to demand, wages are low.
4. Bargaining power (trade unions). Workers in strong trade unions can negotiate higher wages than unorganised workers. (Other valid points: differences in experience, location of work, and government wage legislation.)

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(a) Meaning of an economic system. An economic system is the organised way in which a society uses its scarce resources to decide what goods to produce, how to produce them, and for whom they are produced, that is, how production, distribution, and consumption are arranged in that society.

(b) Three characteristics of a mixed economic system. A mixed economy combines features of capitalism (free market) and socialism (state control).

1. Co-existence of private and public ownership. Individuals own and run private businesses while the government also owns and controls certain key enterprises and utilities.
2. Government intervention in the market. Prices are largely determined by the forces of demand and supply, but the government intervenes through regulation, taxation, subsidies, and price controls to protect the public interest.
3. Pursuit of both profit and social welfare. Private firms produce for profit, while the state provides essential services (such as education, health, and roads) for the welfare of citizens rather than for profit.

(c) Two disadvantages of a mixed economic system.

• Conflict between the two sectors. Excessive government control and regulation can discourage private investment and initiative, while too little control lets private firms exploit consumers, so striking the right balance is difficult.
• Bureaucracy and inefficiency in the public sector. Government-owned enterprises are often poorly managed, slow, and wasteful, leading to inefficiency and losses.

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(a) Elasticity of supply. 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:

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

(b) When supply is:

• (i) Elastic. Supply is elastic when a small change in price causes a more than proportionate change in quantity supplied, so \( E_s > 1 \).
• (ii) Inelastic. Supply is inelastic when a change in price causes a less than proportionate change in quantity supplied, so \( E_s < 1 \).

(c) Two factors that influence elasticity of supply.

1. Time period. The longer the time available, the more producers can adjust output to a price change, so supply is more elastic in the long run than in the short run.
2. Nature of the good and ease of storage. Durable goods that can be stored have a more elastic supply, whereas perishable goods (which cannot be held back) have an inelastic supply. (Other valid factors: availability of spare productive capacity, cost and ease of changing output, and mobility of factors of production.)

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(a)(i) Supply of money. The supply of money is the total stock of money in circulation in an economy at a given point in time. It is made up of currency (notes and coins) held by the public plus demand (current-account) deposits held with the commercial banks that are available for spending.

(a)(ii) Value of money. The value of money is the purchasing power of money, that is, the quantity of goods and services that a unit of money can buy at a given time. It varies inversely with the general price level: when prices rise (inflation), the value of money falls; when prices fall (deflation), the value of money rises.

(b) Three motives for holding money (Keynes's liquidity preference).

1. Transactions motive. Money is held to meet day-to-day spending on goods and services between the receipt of one income and the next.
2. Precautionary motive. Money is held as a reserve to meet unforeseen or emergency expenses such as illness, accidents, or sudden needs.
3. Speculative motive. Money is held to take advantage of future changes in the prices of bonds and other assets, that is, to buy assets when their prices are expected to fall (interest rates to rise) and profit from the movement.

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These four terms describe different arrangements of business ownership and control.

• (a) Nationalization. This is the transfer of ownership and control of a privately owned business or industry to the government (the state). The enterprise, formerly in private hands, becomes public property and is run in the interest of the whole nation.
• (b) Commercialization. This is the reorganisation of a government-owned enterprise so that it is run on business (profit-making) principles, without being sold to private owners. The enterprise remains state-owned but must cover its costs and operate efficiently like a private firm, with reduced government subsidy.
• (c) Privatization. This is the transfer of ownership and control of a public (government-owned) enterprise wholly or partly to private individuals or firms, usually through the sale of its shares. It is the opposite of nationalization.
• (d) Joint ventures. This is a form of business in which two or more parties (for example the government and private investors, or a local firm and a foreign firm) come together to own, finance, and manage a business enterprise, sharing the capital, risks, control, and profits according to agreement.

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(a) Marginal utility \( MU_n = TU_n - TU_{n-1} \) for each good.

Unit	Oranges TU	Oranges MU	Mangoes TU	Mangoes MU
1	100	100	50	50
2	190	90	95	45
3	270	80	135	40
4	340	70	170	35
5	400	60	200	30
6	450	50	225	25
7	490	40	245	20
8	520	30	260	15

(b) Equilibrium. With both prices equal to \$1.00, the equi-marginal condition \( \dfrac{MU_o}{P_o} = \dfrac{MU_m}{P_m} \) reduces to \( MU_o = MU_m \), and the consumer must spend the whole \$10 (so \( Q_o + Q_m = 10 \) units at \$1 each).

The marginal utilities are equal at \( MU = 40 \): the 7th orange gives 40 and the 3rd mango gives 40. This uses \( 7 + 3 = 10 \) units, exactly the \$10 budget.

• (i) Oranges bought: 7.
• (ii) Mangoes bought: 3.

(c)(i) Law of diminishing marginal utility: as a consumer consumes more units of a good, the additional (marginal) utility derived from each successive unit falls, other things being equal. Both columns above show MU declining.

(c)(ii) Marginal condition for utility maximisation: the consumer maximises satisfaction when the marginal utility per naira (or dollar) spent is the same for every good, \( \dfrac{MU_o}{P_o} = \dfrac{MU_m}{P_m} \), while the entire income is spent. This is the equi-marginal principle.

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The diagram shows a firm in perfect competition. The marginal revenue line MR is horizontal at \(\$10\), so price \(P = MR = \$10\). The average total cost curve ATC is U-shaped with its minimum of \(\$6\) at an output of \(600\) units, and it reads \(\$8\) at \(400\) units. The rising marginal cost curve MC cuts the MR line at \(900\) units. These read-off values drive the working below.

(a)(i) Profit-maximising output

A firm maximises profit where marginal cost equals marginal revenue while MC is rising. On the diagram MC cuts MR at:

\[MC = MR = \$10 \ \Rightarrow\ Q = \mathbf{900\ \text{units}}\]

(a)(ii) Profit if the firm produces 600 units

At \(600\) units, \(ATC = \$6\) (the lowest point of the ATC curve) and \(P = \$10\).

\[TR = P \times Q = 10 \times 600 = \$6{,}000\]\[TC = ATC \times Q = 6 \times 600 = \$3{,}600\]\[\text{Profit} = 6{,}000 - 3{,}600 = \mathbf{\$2{,}400}\]

(a)(iii) Total cost if the firm produces 400 units

At \(400\) units the ATC curve reads \(\$8\):

\[TC = ATC \times Q = 8 \times 400 = \mathbf{\$3{,}200}\]

(b)(i) Total revenue at 900 units

\[TR = P \times Q = 10 \times 900 = \mathbf{\$9{,}000}\]

(b)(ii) Profit at 900 units

Reading the ATC curve at the profit-maximising output of \(900\) units gives approximately \(ATC \approx \$8\):

\[TC = ATC \times Q = 8 \times 900 = \$7{,}200\]\[\text{Profit} = TR - TC = 9{,}000 - 7{,}200 = \mathbf{\$1{,}800}\]

(c) What happens if market price falls below average variable cost

If price falls below average variable cost, the firm cannot even cover the running (variable) costs of producing. Every unit sold would then add to its losses on top of the fixed costs it must pay anyway. The sensible decision is to shut down (cease production) in the short run: by producing nothing the firm loses only its fixed cost, which is smaller than the loss it would make by continuing. The point where \(P = \text{minimum } AVC\) is therefore called the shut-down point.

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(a) Two major views of Rev. Thomas Malthus.

1. Different rates of growth. Malthus held that population, if unchecked, grows in a geometric progression (1, 2, 4, 8, 16...) while the means of subsistence (food) grows only in an arithmetic progression (1, 2, 3, 4, 5...). Population therefore tends to outstrip the food supply.
2. Checks on population. Because food cannot keep pace, population is brought back into line by two kinds of checks: positive checks (famine, disease, war, and other causes of high death rates) and preventive checks (moral restraint such as late marriage and celibacy that lower the birth rate).

(b) Relevance to West African economic realities.

• Points that support Malthus. Many West African countries have high birth rates and rapidly growing populations that press food supply, land, housing, and social services, so rapid population growth outrunning output is a real concern.
• Points that weaken Malthus. Malthus did not foresee modern advances that have raised food output faster than he predicted, so the theory overstates the danger: improved farming methods, high-yielding seeds, irrigation, and fertilizers have expanded food supply; family-planning and birth-control programmes now curb births without famine or war; food can be imported from surplus countries; and industrialisation and technology create output he ignored.

Balanced conclusion: Malthus's warning about population pressure on resources is partly relevant to West Africa, but his gloomy prediction is not fully realised because science, trade, and deliberate population policy have loosened the food constraint he assumed to be fixed.

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(a) Economic integration. Economic integration is an arrangement in which two or more countries in a region come together and agree to reduce or remove trade barriers (such as tariffs and quotas) among themselves and to co-operate in economic matters, in order to form a larger single market and promote their joint economic development. Examples of its forms include free-trade areas, customs unions, common markets, and economic communities such as ECOWAS.

(b) Three problems of economic integration in West Africa.

1. Differences in currencies. Member states use different currencies with different values, and the absence of a single convertible currency makes trade and payments among them difficult.
2. Loss of revenue from import duties. Removing tariffs on goods from member countries reduces the customs revenue that governments depend on, so some states are reluctant to comply fully.
3. Production of similar goods. Many West African countries produce and export similar primary products (for example cocoa, groundnuts, crude oil), so they compete with rather than complement one another, which limits intra-regional trade.

(Other valid problems: language and colonial-heritage differences, poor transport and communication links, political instability, and smuggling.)

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(a) Economic integration. Economic integration is an arrangement in which two or more countries in a region agree to remove or reduce trade barriers (such as tariffs and quotas) among themselves and to co-operate economically, so as to create a larger combined market and promote their joint economic growth and development. Its common forms are the free-trade area, customs union, common market, and economic community such as ECOWAS.

(b) Three problems of economic integration in West Africa.

1. Different currencies and payment difficulties. Member states use different, often non-convertible currencies, which complicates trade and settlement of payments among them.
2. Loss of customs (tariff) revenue. Governments that depend heavily on import duties are reluctant to abolish tariffs on goods from member states because doing so reduces their revenue.
3. Similarity of products. West African countries mostly produce and export similar primary commodities, so they compete for the same foreign markets instead of trading with one another, which keeps intra-regional trade low.

(Other acceptable problems: differences in official language, poor transport and communication networks, political instability, and widespread smuggling.)

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(a) Three disadvantages of monopoly. A monopoly is a market in which a single seller controls the entire supply of a product that has no close substitutes.

1. Higher prices and consumer exploitation. Being the only seller, the monopolist can restrict output and charge a price higher than would prevail under competition, so consumers pay more.
2. Inefficiency and poor quality. With no competitors to challenge it, the monopolist has little incentive to cut costs, improve quality, or innovate, so resources may be used inefficiently.
3. Restriction of output and consumer choice. The monopolist may deliberately produce less than the market needs to keep prices high, and consumers are denied variety since there is only one supplier. (Other valid points: it may earn abnormal (excess) profits at the public's expense and can lead to unequal distribution of income.)

(b) Two ways monopoly can be controlled.

• Government price control (regulation). The government can fix a maximum price for the monopolist's product so that it cannot exploit consumers.
• Anti-monopoly legislation and encouragement of competition. The government can pass laws that break up monopolies, prevent restrictive practices, or remove import restrictions so that competing goods enter the market. (Nationalization of the monopoly and taxation of its excess profits are also acceptable.)