WAEC SSCE - Economics - 2011 (Essay)

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(a) Difference between shares and debentures:

(b) Four problems firms encounter in raising capital:

• Poorly developed capital market: A weak or narrow stock exchange makes it hard to float shares and stocks.
• Low level of savings and incomes: Widespread poverty means few people can buy shares or lend to firms.
• Lack of collateral security: Small firms cannot provide the security banks require for loans.
• High interest rates and lender caution: Costly borrowing and the reluctance of banks to lend to risky ventures limit access to funds. (Ignorance of company procedures and lack of confidence in some firms also discourage investors.)

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(a) Competitive (substitute) demand exists where two or more goods satisfy the same want, so that a rise in the demand for one reduces the demand for the other; the goods compete for the consumer's income. Examples: butter and margarine, tea and coffee, or different brands of soap.

Complementary (joint) demand exists where two goods are demanded together to satisfy a single want, so that a rise in the demand for one raises the demand for the other. Examples: cars and petrol, bread and butter, or pens and ink.

(b) Effect of a fall in the import duty on cars on the price and consumption of petrol. Cars and petrol are in complementary (joint) demand. A reduction in the import duty on cars lowers the cost of importing cars, so the supply of cars increases and the price of cars falls. At the lower price, more cars are bought and used.

Because petrol is used jointly with cars, the increased use of cars raises the demand for petrol at every price: the demand curve for petrol shifts to the right, from \(D\) to \(D_1\). Given the supply curve of petrol, this shift raises the equilibrium price of petrol and increases the quantity of petrol consumed. Thus a fall in the import duty on cars leads, through complementarity, to a higher price and higher consumption of petrol.

Two diagrams are used: (i) the car market, where the supply curve shifts right and the car price falls; (ii) the petrol market, where the demand curve shifts right (\(D\) to \(D_1\)) so that both price and quantity of petrol rise.

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(a) Mobility of labour is the ease with which workers can move from one job, occupation or geographical location to another. It has two forms: geographical mobility (movement from one place or region to another to work) and occupational mobility (movement from one occupation or grade of job to another).

(b) Four factors influencing the supply of labour:

• Size of the population: A larger population, other things being equal, provides a larger pool from which the labour force is drawn.
• Age structure of the population: The proportion of people within the working age bracket determines how many are available to work; a young or ageing population reduces the working population.
• Wage rate: Higher wages generally attract more people into the labour market and encourage longer hours, increasing supply (up to the point of a backward-bending supply).
• Hours of work, working conditions and level of education/training: The number of hours per worker, attractiveness of conditions, and the skills available determine the effective quantity and quality of labour supplied. (Social factors such as the participation of women and cultural attitudes to work also count.)

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(a) The demographic transition theory explains the pattern of population change that a country passes through as it develops economically, describing how birth rates and death rates change over time and how this affects the rate of population growth. It states that societies move from a stage of high birth and high death rates, through a stage of falling death rates with still-high birth rates, to a stage of low birth and low death rates.

(b) The three stages:

1. First (high stationary) stage: Both the birth rate and the death rate are high, so they roughly cancel out and the population grows slowly. This is typical of pre-industrial societies with poor medical care, famine and disease.
2. Second (early/late expanding) stage: The death rate falls sharply because of improved medical services, better nutrition, clean water and sanitation, while the birth rate remains high. The wide gap between them causes a rapid increase (population explosion). Many developing countries are in this stage.
3. Third (low stationary) stage: The birth rate also falls, through family planning, urbanisation, education and rising living standards, until it is low and close to the low death rate. Population growth is again slow and the population becomes fairly stable, as in developed countries.

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(a) Three objectives of the African Development Bank (AfDB):

• To promote economic development of member countries by financing investment projects and programmes, individually and collectively.
• To mobilise and provide resources (loans and equity) for the development of agriculture, industry and infrastructure in Africa.
• To provide technical assistance for the preparation, financing and execution of development projects, and to promote regional economic co-operation and integration among African states.

(b) Two achievements of the African Development Bank:

• It has financed numerous development projects across member states, including roads, power, water, agriculture and industry, thereby improving infrastructure and productive capacity.
• It has provided loans, grants and technical assistance that have supported poverty-reduction and regional integration programmes and helped member countries attract further development finance.

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(a) Price elasticity of supply between December 2004 and January 2007

The coefficient is \( E_s = \dfrac{\%\,\Delta Q_s}{\%\,\Delta P} \). Between the two periods price rose from \$30 to \$40 and quantity supplied rose from 100 to 150 bags.

\[ \%\,\Delta Q_s = \frac{150-100}{100}\times 100 = 50\% \]

\[ \%\,\Delta P = \frac{40-30}{30}\times 100 = 33.33\% \]

\[ E_s = \frac{50}{33.33} = 1.5 \]

(b) Yes, the supply of rice is elastic, because \( E_s = 1.5 > 1 \): the percentage change in quantity supplied (50%) is greater than the percentage change in price (33.33%), so quantity supplied is highly responsive to price.

(c) Three reasons that may cause an increase in the supply of rice:

• Improvement in technology (better machinery, high-yield seeds) raising output.
• Favourable weather or good climatic conditions during the growing season.
• A fall in the cost of production or inputs, or a government subsidy to farmers.

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Five reasons why small-scale firms are common in West Africa:

• Shortage of capital: Most entrepreneurs lack the large funds needed to set up big firms, and access to bank credit is limited, so they start small.
• Small size of the market: Low per-capita incomes and poor purchasing power limit demand, making large-scale production unprofitable.
• Nature of the product or service: Many activities (tailoring, hairdressing, petty trading, local crafts, personal services) are best carried out on a small scale close to the customer.
• Limited managerial and technical skills: A scarcity of trained managers and skilled labour makes it difficult to run large, complex organisations.
• Desire for independence and ease of formation: Individuals prefer to be their own bosses, and small firms are easy and cheap to establish with few legal formalities. (Poor infrastructure and limited access to modern technology also discourage large-scale operation.)

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(a) Types of co-operative societies:

• Consumers' co-operatives: Associations formed by consumers who pool funds to buy goods in bulk and sell them to members (and the public) at fair prices, cutting out the middleman. Any surplus is shared among members as dividend according to their purchases.
• Producers' co-operatives: Associations of producers, such as farmers or craftsmen, who combine to buy inputs cheaply, process, store and market their output jointly, and obtain better prices and services than they could individually.
• Thrift and credit co-operatives: Associations whose members save regularly to form a common fund from which members can borrow at low interest for productive or personal needs; they encourage saving and provide affordable credit.

(b) Two problems faced by co-operative societies in West Africa:

• Shortage of capital: Members are often poor, so contributions are small and the societies lack funds to expand.
• Poor/dishonest management and lack of trained personnel: Weak record-keeping, mismanagement and sometimes embezzlement by officials weaken the societies. (Illiteracy of members and inadequate government support are further problems.)

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(a) Grouping of borrowers by sector of production. The primary sector extracts raw materials from nature; the secondary sector processes them into finished goods; the tertiary sector renders services.

(b) Loan to each sector as a ratio of the total loan (total = \(\$45,000\)):

• Primary : \( \dfrac{18000}{45000} = \dfrac{2}{5} \)
• Secondary : \( \dfrac{4000}{45000} = \dfrac{4}{45} \)
• Tertiary : \( \dfrac{23000}{45000} = \dfrac{23}{45} \)

Combined, the ratio Primary : Secondary : Tertiary \(= 18 : 4 : 23\).

(c) Bar chart. On a graph sheet, place the three sectors on the horizontal axis and the loan amount (in $) on the vertical axis, choosing a scale such as \(2\text{ cm} = \$5,000\). Draw three separate bars of equal width but unequal height: Primary up to 18,000, Secondary up to 4,000 and Tertiary up to 23,000. Title the chart and label both axes clearly.

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(a) Economic development is the process of sustained increase in a country's real output (real national income and per-capita income) accompanied by improvements in the structure of the economy and in the welfare of the people, such as better education, health, employment, income distribution and standard of living. It is growth plus qualitative and structural change, not merely a rise in output.

(b) Five features of a development bank:

• Provision of long- and medium-term finance: It lends capital for long periods to industry, agriculture and commerce, unlike commercial banks which lend mainly short-term.
• Development-oriented lending: It finances priority projects that promote economic development rather than aiming purely at profit.
• Provision of technical and managerial advice: It gives advisory and feasibility services to the projects it finances.
• Equity participation: It may buy shares in the enterprises it assists, sharing in ownership and risk.
• It does not accept ordinary demand deposits from the public and does not run current accounts like commercial banks; it is capitalised mainly by government and other institutions. (It also helps mobilise domestic and foreign capital for development.)

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(a) International trade is the exchange of goods and services across national boundaries, that is, trade between two or more countries. It comprises imports (goods and services bought from abroad), exports (goods and services sold abroad) and entrepot trade (re-export of imported goods).

(b) Four advantages of international trade:

• Enables consumption beyond domestic production: Countries obtain goods they cannot produce at all or cannot produce efficiently, widening the range of goods available to consumers.
• Promotes specialisation and efficient use of resources: Each country specialises in goods in which it has a comparative advantage, raising world output and lowering costs.
• Source of foreign exchange and revenue: Exports earn foreign exchange used to import capital goods, and import/export duties yield government revenue.
• Widens the market and transfers technology: A larger market allows economies of scale, and contact with other countries spreads skills, ideas and modern technology, fostering development and international understanding.

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(a) A centrally planned economy (also called a command or socialist economy) is an economic system in which the means of production are owned and controlled by the state, and a central planning authority takes the major economic decisions of what to produce, how to produce and for whom to produce. Prices, output and the allocation of resources are directed by the government rather than by the free interplay of demand and supply.

(b) Four features of a capitalist economy:

• Private ownership of property: Individuals and firms own and control the means of production such as land and capital.
• Profit motive: Production and investment are driven by the desire of private owners to make maximum profit.
• Freedom of enterprise and choice: Producers are free to produce any lawful good, and consumers are free to buy what they can afford; consumer sovereignty guides production.
• Price mechanism (market forces): Prices are determined by the free interplay of demand and supply, and they allocate resources with minimal government interference. (Competition among many buyers and sellers is a further feature.)