WAEC SSCE - Economics - 1989 (Essay)
Pregunta 1 Informe
Briefly outline the principles of taxation and give reasons why Nigerians are taxed.
Principles (canons) of taxation are the qualities a good tax system should possess. The classic canons are:
- Equity: taxes should be fair; people should pay according to their ability, so higher incomes bear a heavier burden.
- Certainty: the amount, time and manner of payment should be clear and known in advance to the taxpayer.
- Convenience: tax should be levied at a time and in a manner convenient to the payer, for example deducting income tax when wages are paid.
- Economy: the cost of collecting the tax should be small relative to the revenue raised.
- Productivity: a tax should yield sufficient revenue for the government.
- Flexibility: it should be easy to adjust rates to changing economic conditions.
- Neutrality/simplicity: it should not distort economic choices unduly and should be easy to understand.
Reasons why Nigerians are taxed:
- To raise revenue to finance government spending on defence, roads, schools and hospitals.
- To redistribute income and reduce inequality, using progressive taxes to transfer resources to the poor.
- To control inflation by reducing excess purchasing power in the economy.
- To discourage the consumption of harmful goods (for example heavy duties on tobacco and alcohol).
- To protect local industries through import duties.
- To correct a balance of payments deficit by taxing imports.
- To achieve social and economic objectives such as directing resources to priority sectors.
Detalles de la respuesta
Principles (canons) of taxation are the qualities a good tax system should possess. The classic canons are:
- Equity: taxes should be fair; people should pay according to their ability, so higher incomes bear a heavier burden.
- Certainty: the amount, time and manner of payment should be clear and known in advance to the taxpayer.
- Convenience: tax should be levied at a time and in a manner convenient to the payer, for example deducting income tax when wages are paid.
- Economy: the cost of collecting the tax should be small relative to the revenue raised.
- Productivity: a tax should yield sufficient revenue for the government.
- Flexibility: it should be easy to adjust rates to changing economic conditions.
- Neutrality/simplicity: it should not distort economic choices unduly and should be easy to understand.
Reasons why Nigerians are taxed:
- To raise revenue to finance government spending on defence, roads, schools and hospitals.
- To redistribute income and reduce inequality, using progressive taxes to transfer resources to the poor.
- To control inflation by reducing excess purchasing power in the economy.
- To discourage the consumption of harmful goods (for example heavy duties on tobacco and alcohol).
- To protect local industries through import duties.
- To correct a balance of payments deficit by taxing imports.
- To achieve social and economic objectives such as directing resources to priority sectors.
Pregunta 2 Informe
The wholesaler performs useful economic functions. Discuss.
A wholesaler is a middleman who buys goods in large quantities from producers (manufacturers) and sells them in smaller quantities to retailers. In the chain of distribution the wholesaler stands between the producer and the retailer, and in doing so performs several useful economic functions:
- Breaking bulk. He buys in large quantities and sells in smaller lots to retailers, sparing producers the trouble of dealing with countless small buyers and enabling retailers to buy quantities they can handle.
- Storage (warehousing). He holds stocks of goods in warehouses between production and sale, so producers can produce steadily while goods are released to the market as needed; this also helps stabilise prices between seasons.
- Finance. He pays the producer promptly (often in cash) for large purchases and may grant credit to retailers, thereby financing both ends of the chain and freeing the producer's capital.
- Bearing risk. He carries the risks of price changes, deterioration, damage, theft and changes in fashion while the goods are in his hands, relieving the producer and retailer of these risks.
- Transport and distribution. He often collects goods from producers and delivers them to scattered retailers, and helps distribute goods over a wide area.
- Preparation of goods for sale. He may grade, sort, pack, brand or blend goods and sometimes advertises them, making them ready for the retail market.
- Provision of market information. He advises producers on consumers' tastes and demand and informs retailers about new products, linking the two ends of the market.
Examination reminder: the wholesaler's core justification is that he relieves the producer of holding stocks, granting credit and bearing risk, which is why manufacturers still use him despite direct-selling alternatives.
Detalles de la respuesta
A wholesaler is a middleman who buys goods in large quantities from producers (manufacturers) and sells them in smaller quantities to retailers. In the chain of distribution the wholesaler stands between the producer and the retailer, and in doing so performs several useful economic functions:
- Breaking bulk. He buys in large quantities and sells in smaller lots to retailers, sparing producers the trouble of dealing with countless small buyers and enabling retailers to buy quantities they can handle.
- Storage (warehousing). He holds stocks of goods in warehouses between production and sale, so producers can produce steadily while goods are released to the market as needed; this also helps stabilise prices between seasons.
- Finance. He pays the producer promptly (often in cash) for large purchases and may grant credit to retailers, thereby financing both ends of the chain and freeing the producer's capital.
- Bearing risk. He carries the risks of price changes, deterioration, damage, theft and changes in fashion while the goods are in his hands, relieving the producer and retailer of these risks.
- Transport and distribution. He often collects goods from producers and delivers them to scattered retailers, and helps distribute goods over a wide area.
- Preparation of goods for sale. He may grade, sort, pack, brand or blend goods and sometimes advertises them, making them ready for the retail market.
- Provision of market information. He advises producers on consumers' tastes and demand and informs retailers about new products, linking the two ends of the market.
Examination reminder: the wholesaler's core justification is that he relieves the producer of holding stocks, granting credit and bearing risk, which is why manufacturers still use him despite direct-selling alternatives.
Pregunta 3 Informe
Given that quantity demanded per period of time is a function of price and that the relation is expressed as: Q = 60 - 1/3 P, where Q is quantity demanded and P is the price,
(a) Find the quantity demanded when price is :
(i) N30.00;
(ii) N210.00;
(iii) NO.00.
(b) comment on (a) (ii) above.
(c) suppose the relation is now expressed as P = N (180 - 3Q); find P when:
(i) Q = 0;
(ii) Q = 60;
(iii) Q = 59.
The demand relation is \( Q = 60 - \tfrac{1}{3}P \). Substitute each price to find the quantity demanded.
(a)(i) When \( P = 30 \): \( Q = 60 - \tfrac{1}{3}(30) = 60 - 10 = 50 \) units.
(a)(ii) When \( P = 210 \): \( Q = 60 - \tfrac{1}{3}(210) = 60 - 70 = -10 \) units.
(a)(iii) When \( P = 0 \): \( Q = 60 - \tfrac{1}{3}(0) = 60 \) units.
(b) Comment on (a)(ii): A quantity of \( -10 \) is economically meaningless because quantity demanded cannot be negative. It shows that at a price of N210 the price is so high that no quantity is demanded; the demand curve has effectively reached zero before this price. In practice quantity demanded stops at zero, so we take demand as \( 0 \), not \( -10 \).
(c) Now \( P = 180 - 3Q \).
(i) When \( Q = 0 \): \( P = 180 - 3(0) = N180 \).
(ii) When \( Q = 60 \): \( P = 180 - 3(60) = 180 - 180 = N0 \).
(iii) When \( Q = 59 \): \( P = 180 - 3(59) = 180 - 177 = N3 \).
Notice that (c) is simply the first relation rearranged to make \( P \) the subject, so the price and quantity pairs are consistent: high quantity goes with low price and vice versa, confirming the law of demand.
Detalles de la respuesta
The demand relation is \( Q = 60 - \tfrac{1}{3}P \). Substitute each price to find the quantity demanded.
(a)(i) When \( P = 30 \): \( Q = 60 - \tfrac{1}{3}(30) = 60 - 10 = 50 \) units.
(a)(ii) When \( P = 210 \): \( Q = 60 - \tfrac{1}{3}(210) = 60 - 70 = -10 \) units.
(a)(iii) When \( P = 0 \): \( Q = 60 - \tfrac{1}{3}(0) = 60 \) units.
(b) Comment on (a)(ii): A quantity of \( -10 \) is economically meaningless because quantity demanded cannot be negative. It shows that at a price of N210 the price is so high that no quantity is demanded; the demand curve has effectively reached zero before this price. In practice quantity demanded stops at zero, so we take demand as \( 0 \), not \( -10 \).
(c) Now \( P = 180 - 3Q \).
(i) When \( Q = 0 \): \( P = 180 - 3(0) = N180 \).
(ii) When \( Q = 60 \): \( P = 180 - 3(60) = 180 - 180 = N0 \).
(iii) When \( Q = 59 \): \( P = 180 - 3(59) = 180 - 177 = N3 \).
Notice that (c) is simply the first relation rearranged to make \( P \) the subject, so the price and quantity pairs are consistent: high quantity goes with low price and vice versa, confirming the law of demand.
Pregunta 4 Informe
What is devaluation? Under what conditions will devaluation improve a country's balance of payment position ?
Devaluation. Devaluation is a deliberate official reduction in the external value (exchange rate) of a country's currency in terms of other currencies or gold, carried out by the government or monetary authority under a fixed or managed exchange-rate system. After devaluation the country's exports become cheaper to foreigners and its imports become dearer to residents. (A fall in value caused by market forces under a floating system is called depreciation, not devaluation.)
Its aim is usually to correct a deficit in the balance of payments by encouraging exports and discouraging imports.
Conditions under which devaluation improves the balance of payments.
- Favourable elasticities of demand (the Marshall-Lerner condition). The sum of the elasticity of demand for exports and the elasticity of demand for imports must be greater than one. If demand for exports and imports is sufficiently elastic, the fall in export prices raises export earnings and the rise in import prices cuts import spending, improving the balance.
- Elastic domestic supply of exports. The country must be able to expand production of exportable goods to meet the extra foreign demand; if supply is fixed or inelastic, extra orders cannot be filled.
- Availability of import substitutes. Residents must be able to switch from now-dearer imports to home-produced substitutes, otherwise import spending stays high.
- Other countries do not retaliate. Trading partners must not devalue their own currencies or raise trade barriers in response, which would cancel the advantage.
- Domestic prices (inflation) are controlled. If devaluation sets off internal inflation that raises export costs, the initial price advantage is quickly eroded, so inflation must be checked.
Examination reminder: the central condition is the elasticity (Marshall-Lerner) requirement; if demands are inelastic, devaluation can actually worsen the balance of payments.
Detalles de la respuesta
Devaluation. Devaluation is a deliberate official reduction in the external value (exchange rate) of a country's currency in terms of other currencies or gold, carried out by the government or monetary authority under a fixed or managed exchange-rate system. After devaluation the country's exports become cheaper to foreigners and its imports become dearer to residents. (A fall in value caused by market forces under a floating system is called depreciation, not devaluation.)
Its aim is usually to correct a deficit in the balance of payments by encouraging exports and discouraging imports.
Conditions under which devaluation improves the balance of payments.
- Favourable elasticities of demand (the Marshall-Lerner condition). The sum of the elasticity of demand for exports and the elasticity of demand for imports must be greater than one. If demand for exports and imports is sufficiently elastic, the fall in export prices raises export earnings and the rise in import prices cuts import spending, improving the balance.
- Elastic domestic supply of exports. The country must be able to expand production of exportable goods to meet the extra foreign demand; if supply is fixed or inelastic, extra orders cannot be filled.
- Availability of import substitutes. Residents must be able to switch from now-dearer imports to home-produced substitutes, otherwise import spending stays high.
- Other countries do not retaliate. Trading partners must not devalue their own currencies or raise trade barriers in response, which would cancel the advantage.
- Domestic prices (inflation) are controlled. If devaluation sets off internal inflation that raises export costs, the initial price advantage is quickly eroded, so inflation must be checked.
Examination reminder: the central condition is the elasticity (Marshall-Lerner) requirement; if demands are inelastic, devaluation can actually worsen the balance of payments.
Pregunta 5 Informe
The table below shows the age distribution of hypothetical population.
| Age | No. of people (million) |
| Under 20 | 20.90 |
| 20 - 29 | 13.75 |
| 30 - 59 | 12.10 |
| 60 and above | 8/25 |
| Total | 55.00 |
Present this information in the form of a pie chart. Show your workings clearly.
For a pie chart, the angle for each sector is:
\[\text{Sector angle}=\frac{\text{Number of people in the group}}{\text{Total population}}\times360^\circ\]
The number aged 60 and above is \(8.25\) million, since \(20.90+13.75+12.10+8.25=55.00\) million.
| Age group | Population (million) | Working | Angle for pie chart |
|---|---|---|---|
| Under 20 | 20.90 | \(\frac{20.90}{55.00}\times360^\circ\) | \(136.8^\circ\) |
| 20–29 | 13.75 | \(\frac{13.75}{55.00}\times360^\circ\) | \(90.0^\circ\) |
| 30–59 | 12.10 | \(\frac{12.10}{55.00}\times360^\circ\) | \(79.2^\circ\) |
| 60 and above | 8.25 | \(\frac{8.25}{55.00}\times360^\circ\) | \(54.0^\circ\) |
| Total | 55.00 | \(360.0^\circ\) |
The completed pie chart is shown below.
Detalles de la respuesta
For a pie chart, the angle for each sector is:
\[\text{Sector angle}=\frac{\text{Number of people in the group}}{\text{Total population}}\times360^\circ\]
The number aged 60 and above is \(8.25\) million, since \(20.90+13.75+12.10+8.25=55.00\) million.
| Age group | Population (million) | Working | Angle for pie chart |
|---|---|---|---|
| Under 20 | 20.90 | \(\frac{20.90}{55.00}\times360^\circ\) | \(136.8^\circ\) |
| 20–29 | 13.75 | \(\frac{13.75}{55.00}\times360^\circ\) | \(90.0^\circ\) |
| 30–59 | 12.10 | \(\frac{12.10}{55.00}\times360^\circ\) | \(79.2^\circ\) |
| 60 and above | 8.25 | \(\frac{8.25}{55.00}\times360^\circ\) | \(54.0^\circ\) |
| Total | 55.00 | \(360.0^\circ\) |
The completed pie chart is shown below.
Pregunta 6 Informe
(a) What is a development plan ?
(b) Discuss the various ways of financing economic development in Nigeria.
(a) A development plan is a deliberate, coordinated government programme that sets out the economic and social targets a country intends to achieve over a specified period (usually three to five years), together with the projects, policies and resources required to reach those targets. It states objectives such as raising national output, reducing unemployment and improving welfare, and it allocates funds across sectors to achieve them.
(b) Ways of financing economic development in Nigeria:
- Taxation: revenue from direct taxes (personal income tax, company income tax) and indirect taxes (VAT, customs and excise duties) funds public investment.
- Oil and mineral revenue: royalties, rents and profits from crude oil and gas provide a large share of government finance.
- Internal (domestic) borrowing: the government raises money from citizens and institutions through treasury bills, treasury certificates and development stocks or bonds.
- External borrowing: loans from foreign governments and multilateral bodies such as the World Bank, IMF and African Development Bank.
- Foreign aid and grants: bilateral and multilateral assistance that need not be repaid.
- Foreign direct investment: capital brought in by multinational companies to establish or expand production.
- Surpluses of public enterprises: profits from state corporations reinvested in development.
- Deficit financing: the central bank creating money or the government spending beyond current revenue to stimulate activity, used cautiously to avoid inflation.
A sound plan combines several of these sources so that the country is not over-dependent on volatile oil earnings or on debt that raises future repayment burdens.
Detalles de la respuesta
(a) A development plan is a deliberate, coordinated government programme that sets out the economic and social targets a country intends to achieve over a specified period (usually three to five years), together with the projects, policies and resources required to reach those targets. It states objectives such as raising national output, reducing unemployment and improving welfare, and it allocates funds across sectors to achieve them.
(b) Ways of financing economic development in Nigeria:
- Taxation: revenue from direct taxes (personal income tax, company income tax) and indirect taxes (VAT, customs and excise duties) funds public investment.
- Oil and mineral revenue: royalties, rents and profits from crude oil and gas provide a large share of government finance.
- Internal (domestic) borrowing: the government raises money from citizens and institutions through treasury bills, treasury certificates and development stocks or bonds.
- External borrowing: loans from foreign governments and multilateral bodies such as the World Bank, IMF and African Development Bank.
- Foreign aid and grants: bilateral and multilateral assistance that need not be repaid.
- Foreign direct investment: capital brought in by multinational companies to establish or expand production.
- Surpluses of public enterprises: profits from state corporations reinvested in development.
- Deficit financing: the central bank creating money or the government spending beyond current revenue to stimulate activity, used cautiously to avoid inflation.
A sound plan combines several of these sources so that the country is not over-dependent on volatile oil earnings or on debt that raises future repayment burdens.
Pregunta 7 Informe
Why do countries impose restrictions on international trade?
Countries impose restrictions on international trade (through tariffs, quotas, embargoes, exchange control and outright bans) for several economic and non-economic reasons:
- To protect infant industries: young domestic industries need shelter from established foreign competitors until they grow strong enough to compete.
- To reduce unemployment: restricting imports shifts demand to home-produced goods, raising domestic output and jobs.
- To correct a balance of payments deficit: cutting imports reduces foreign-exchange outflows and improves the external accounts.
- To raise government revenue: import and export duties are an important source of income, especially in developing economies.
- To prevent dumping: to stop foreign firms selling below cost and destroying local producers.
- To improve the terms of trade: a large country can use restrictions to force down import prices in its favour.
- To protect strategic and health interests: to safeguard defence-related industries and to keep out harmful, substandard or dangerous goods.
- To discourage the consumption of harmful or luxury goods and conserve scarce foreign exchange.
- For retaliation: to respond to restrictions imposed by trading partners.
The underlying reasoning is that free trade, though efficient overall, can expose a developing economy to job losses, external deficits and loss of control over strategic sectors, so governments intervene to protect national economic interests.
Detalles de la respuesta
Countries impose restrictions on international trade (through tariffs, quotas, embargoes, exchange control and outright bans) for several economic and non-economic reasons:
- To protect infant industries: young domestic industries need shelter from established foreign competitors until they grow strong enough to compete.
- To reduce unemployment: restricting imports shifts demand to home-produced goods, raising domestic output and jobs.
- To correct a balance of payments deficit: cutting imports reduces foreign-exchange outflows and improves the external accounts.
- To raise government revenue: import and export duties are an important source of income, especially in developing economies.
- To prevent dumping: to stop foreign firms selling below cost and destroying local producers.
- To improve the terms of trade: a large country can use restrictions to force down import prices in its favour.
- To protect strategic and health interests: to safeguard defence-related industries and to keep out harmful, substandard or dangerous goods.
- To discourage the consumption of harmful or luxury goods and conserve scarce foreign exchange.
- For retaliation: to respond to restrictions imposed by trading partners.
The underlying reasoning is that free trade, though efficient overall, can expose a developing economy to job losses, external deficits and loss of control over strategic sectors, so governments intervene to protect national economic interests.
Pregunta 8 Informe
Briefly outline the measures which Nigeria has taken to improve the marketing of her agricultural produce.
To improve the marketing of her agricultural produce, both locally and for export, Nigeria has taken several measures over the years:
- Establishment of marketing boards / commodity boards. Government set up boards to buy, grade, store and sell major export crops (cocoa, groundnut, palm produce, cotton), guarantee minimum prices to farmers and stabilise their incomes against world-price swings.
- Construction of storage and processing facilities. Building of silos, warehouses, cold stores and processing plants to reduce post-harvest losses of perishable and bulky produce and to add value before sale.
- Improvement of transport and feeder roads. Building and repairing rural feeder roads, railways and haulage links to move produce cheaply from farms to markets and ports.
- Provision of price support and guaranteed minimum prices. Government price-support schemes and buffer stocks to protect farmers from ruinous price falls and to encourage production.
- Grading and standardisation of produce. Enforcing uniform grades, quality standards and inspection so that Nigerian produce meets export requirements and commands better prices.
- Provision of credit and cooperatives. Encouraging marketing cooperatives and providing agricultural credit (for example through the Nigerian Agricultural and Cooperative Bank) so farmers can market jointly and bargain better.
- Market information and research. Supplying farmers with price and market information and supporting research bodies (such as the Nigerian Stored Products Research Institute) to reduce losses and guide selling.
- Development programmes. Programmes such as Operation Feed the Nation, the Green Revolution and Agricultural Development Projects (ADPs) that included marketing and distribution components.
Examination reminder: group the measures into three themes - institutions (boards, cooperatives), infrastructure (storage, transport) and price and quality support (guaranteed prices, grading) - to present a well-organised answer.
Detalles de la respuesta
To improve the marketing of her agricultural produce, both locally and for export, Nigeria has taken several measures over the years:
- Establishment of marketing boards / commodity boards. Government set up boards to buy, grade, store and sell major export crops (cocoa, groundnut, palm produce, cotton), guarantee minimum prices to farmers and stabilise their incomes against world-price swings.
- Construction of storage and processing facilities. Building of silos, warehouses, cold stores and processing plants to reduce post-harvest losses of perishable and bulky produce and to add value before sale.
- Improvement of transport and feeder roads. Building and repairing rural feeder roads, railways and haulage links to move produce cheaply from farms to markets and ports.
- Provision of price support and guaranteed minimum prices. Government price-support schemes and buffer stocks to protect farmers from ruinous price falls and to encourage production.
- Grading and standardisation of produce. Enforcing uniform grades, quality standards and inspection so that Nigerian produce meets export requirements and commands better prices.
- Provision of credit and cooperatives. Encouraging marketing cooperatives and providing agricultural credit (for example through the Nigerian Agricultural and Cooperative Bank) so farmers can market jointly and bargain better.
- Market information and research. Supplying farmers with price and market information and supporting research bodies (such as the Nigerian Stored Products Research Institute) to reduce losses and guide selling.
- Development programmes. Programmes such as Operation Feed the Nation, the Green Revolution and Agricultural Development Projects (ADPs) that included marketing and distribution components.
Examination reminder: group the measures into three themes - institutions (boards, cooperatives), infrastructure (storage, transport) and price and quality support (guaranteed prices, grading) - to present a well-organised answer.
Pregunta 9 Informe
What is the mode and when is it a suitable average to use? State its disadvantages.
The mode is the value that occurs most frequently in a set of data. In a grouped frequency distribution it is the value corresponding to the class with the highest frequency (the modal class). Unlike the mean, it is not calculated from every value but identified as the most common observation.
When the mode is a suitable average to use:
- When the most typical or most popular item is needed, for example the most common shoe size a trader should stock or the most frequently demanded commodity.
- When the data are qualitative or in categories that cannot be added, such as the most popular brand.
- When a quick, simple measure of the typical value is required.
- When the distribution has extreme values that would distort the mean, since the mode is unaffected by them.
Disadvantages of the mode:
- It ignores all values except the most frequent one, so it does not use all the data.
- A distribution may have no mode, or two or more modes (bimodal or multimodal), making interpretation difficult.
- It is not suitable for further mathematical or statistical treatment.
- It can be unrepresentative when the most frequent value lies far from the centre of the data.
- For grouped data its value depends on how the classes are formed.
Detalles de la respuesta
The mode is the value that occurs most frequently in a set of data. In a grouped frequency distribution it is the value corresponding to the class with the highest frequency (the modal class). Unlike the mean, it is not calculated from every value but identified as the most common observation.
When the mode is a suitable average to use:
- When the most typical or most popular item is needed, for example the most common shoe size a trader should stock or the most frequently demanded commodity.
- When the data are qualitative or in categories that cannot be added, such as the most popular brand.
- When a quick, simple measure of the typical value is required.
- When the distribution has extreme values that would distort the mean, since the mode is unaffected by them.
Disadvantages of the mode:
- It ignores all values except the most frequent one, so it does not use all the data.
- A distribution may have no mode, or two or more modes (bimodal or multimodal), making interpretation difficult.
- It is not suitable for further mathematical or statistical treatment.
- It can be unrepresentative when the most frequent value lies far from the centre of the data.
- For grouped data its value depends on how the classes are formed.
Pregunta 10 Informe
Economics problems arise because a country's resources are limited in relation to her unlimited wants. Identify and explain these economic problems.
Because resources are scarce relative to unlimited wants, every society must make choices. These choices give rise to three basic (fundamental) economic problems:
- What to produce and in what quantities: since resources cannot satisfy all wants, society must decide which goods and services to produce (for example food versus military hardware) and how much of each. Choosing to produce one good means giving up another, which is the opportunity cost.
- How to produce: society must decide the method and combination of resources to use, for example labour-intensive versus capital-intensive techniques, so that output is obtained at the least cost.
- For whom to produce: society must decide how the goods produced are shared among the people, that is, the distribution of output, which depends on incomes and the pricing of factors.
Two further problems are often added:
- Efficiency in the use of resources: ensuring that resources are fully and efficiently employed so that no output is wasted.
- Growth of resources over time: deciding how much to save and invest now in order to expand future productive capacity.
The root of all these problems is scarcity, which forces choice, and every choice carries an opportunity cost, the value of the next best alternative forgone.
Detalles de la respuesta
Because resources are scarce relative to unlimited wants, every society must make choices. These choices give rise to three basic (fundamental) economic problems:
- What to produce and in what quantities: since resources cannot satisfy all wants, society must decide which goods and services to produce (for example food versus military hardware) and how much of each. Choosing to produce one good means giving up another, which is the opportunity cost.
- How to produce: society must decide the method and combination of resources to use, for example labour-intensive versus capital-intensive techniques, so that output is obtained at the least cost.
- For whom to produce: society must decide how the goods produced are shared among the people, that is, the distribution of output, which depends on incomes and the pricing of factors.
Two further problems are often added:
- Efficiency in the use of resources: ensuring that resources are fully and efficiently employed so that no output is wasted.
- Growth of resources over time: deciding how much to save and invest now in order to expand future productive capacity.
The root of all these problems is scarcity, which forces choice, and every choice carries an opportunity cost, the value of the next best alternative forgone.
