WAEC SSCE - Economics - 1992 (Essay)

Bayanin Amsa

A demand curve normally slopes downwards from left to right because of the law of demand: as price falls, quantity demanded rises, and as price rises, quantity demanded falls, other things being equal. This inverse relationship is explained by the income effect (a lower price raises real income, so more can be bought) and the substitution effect (a good becomes cheaper relative to substitutes). However, in certain cases the demand curve can slope upwards (a positive relationship between price and quantity), producing an exception to the law of demand.

The main exceptions are:

• Giffen goods: very inferior staple goods on which poor consumers spend a large share of income (for example a cheap staple like garri). When its price rises, consumers become so much poorer in real terms that they cut back on more expensive foods and buy even more of the cheap staple, so quantity demanded rises with price.
• Goods of ostentation (Veblen or prestige goods): luxury items such as diamonds, expensive cars or designer goods bought to display wealth. A higher price increases their prestige value, so more may be demanded as price rises.
• Expectation of future price changes: if buyers expect the price to keep rising, they may buy more now despite the higher current price, in order to beat the expected further increase.
• Speculative goods: shares, foreign currency and similar assets may be bought in greater quantity as their price rises because buyers expect to resell at a still higher price.
• Fear of scarcity: when a rising price signals that a good may soon become scarce, people may buy more to store, so demand rises with price.
• Quality judged by price: where buyers cannot judge quality directly, they may treat a higher price as a sign of better quality and buy more.

In each of these cases the ordinary income and substitution effects are outweighed by another force, so the curve does not slope downwards as usual. These are recognised exceptions and do not overturn the general law of demand, which holds for the great majority of ordinary goods.

Bayanin Amsa

A component (stacked) bar chart uses one vertical bar for each year, and each bar is divided into segments whose heights represent Savings, Current and Fixed-deposit balances. The total height of a bar equals the sum of the three accounts for that year.

Step 1: find the total height of each bar

Step 2: the cumulative segment boundaries (stack Savings at the bottom, then Current, then Fixed deposit):

Step 3: draw the chart. On the horizontal axis mark the five years (1984 to 1988) with equal spacing; on the vertical axis mark values from 0 to at least 425 using a scale such as 1 cm to 50 units. For each year draw one bar of equal width up to its total height, then partition it at the boundaries above. Shade the three components differently (for example plain for Savings, hatched for Current, dotted for Fixed deposit) and add a key. Title the chart "Types of accounts held in Nigerian banks, 1984 to 1988".

Bayanin Amsa

(a) Price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price. It is the ratio of the percentage change in quantity demanded to the percentage change in price:

\[ E_d = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}} \]

If a small price change causes a large change in quantity, demand is elastic (\(E_d>1\)); if quantity barely responds, demand is inelastic (\(E_d<1\)).

(b) Identify the values. Original price and quantity: \(P_1 = N8.00\), \(Q_1 = 20\) tubers. New price and quantity: \(P_2 = N6.00\), \(Q_2 = 30\) tubers. So \(\Delta Q = 30-20 = 10\) and \(\Delta P = 6-8 = -2\).

Percentage change in quantity demanded:

\[ \frac{\Delta Q}{Q_1}\times 100 = \frac{10}{20}\times 100 = 50\% \]

Percentage change in price:

\[ \frac{\Delta P}{P_1}\times 100 = \frac{-2}{8}\times 100 = -25\% \]

Therefore:

\[ E_d = \left|\frac{50\%}{-25\%}\right| = 2 \]

The elasticity of demand is 2. Since \(E_d = 2 > 1\), demand for the tubers is elastic: quantity demanded responds more than proportionately to the price change. The value is normally reported as a positive number even though price and quantity move in opposite directions, because the negative sign only reflects the downward-sloping demand curve.

Bayanin Amsa

Division of labour means splitting a production process into separate tasks, with each worker specialising in one task rather than doing the whole job. Entrepreneurs adopt it because it raises output and lowers cost, but its use is limited by several practical factors.

(a) Factors that encourage entrepreneurs to adopt division of labour:

• Large market and high demand: when a firm can sell large quantities, it pays to break work into specialised tasks to raise output.
• Large scale of production: big firms have enough work to keep specialised workers and machines fully employed.
• Availability of capital and machinery: specialisation goes hand in hand with the use of machines, so access to capital encourages it.
• Availability of skilled and adequate labour: enough workers must be available to be assigned to separate tasks.
• Nature of the product: goods that can be broken into distinct stages (for example assembling manufactured goods) lend themselves to division of labour.
• Desire to increase efficiency and reduce cost: specialisation raises each worker's speed and skill, lowers unit cost and increases profit.
• Good transport and communication: these allow parts and finished goods to move easily between specialised stages and to a wide market.

(b) Factors capable of limiting the practice of division of labour:

• Size of the market: a small market cannot absorb the large output that specialisation creates, so specialisation is not worthwhile.
• Small scale of production: where output is low, there is not enough work to justify splitting tasks among many workers.
• Nature of the work: some jobs, such as personal or artistic services, cannot be divided into stages.
• Shortage of capital: without money for machines and premises, specialisation is difficult.
• Shortage of skilled labour: too few workers means one person must handle several tasks.
• Risk of monotony and reduced worker morale: repeating one task can bore workers, lower quality and raise labour turnover.
• Interdependence and risk of disruption: if one stage stops (through a fault or strike), the whole chain halts.
• Poor transport and communication: these restrict the market and the movement of parts, limiting specialisation.

Bayanin Amsa

Effective distribution and marketing means getting the right goods to the right consumers, at the right place, time, quantity and price, at the lowest reasonable cost. Certain economic activities help to achieve this in Nigeria.

• Transportation: developing road, rail, water and air transport, and providing suitable vehicles, so that goods move quickly and cheaply from producers to markets.
• Storage and warehousing: building warehouses, silos and cold stores to preserve goods, hold stock and even out supply between seasons.
• Wholesaling and retailing: a good network of middlemen breaks bulk, spreads goods over many locations and brings them close to consumers.
• Advertising and sales promotion: informing and persuading buyers so that goods are known and demanded.
• Market research: studying consumer needs, tastes and locations so that the right goods are produced and supplied.
• Grading, standardisation and packaging: sorting goods by quality and packaging them well to protect them and make them easy to sell.
• Provision of market information and communication: spreading price and supply information so buyers and sellers can make good decisions.
• Provision of finance and credit: banks and trade credit that allow traders to buy, hold and move stock.
• Insurance: covering goods in transit and in store against loss, so trade can go on with less risk.
• Provision of markets and marketing boards: organised market places and, for some commodities, marketing boards that buy, grade and sell farm produce.
• Standardisation of weights and measures: ensuring fair dealing and consumer confidence.

Together these activities reduce the cost and delay of moving goods, widen the market, and ensure that goods reach consumers in good condition and at fair prices.

Bayanin Amsa

Agriculture in West Africa is carried out under several different systems, that is, recognised ways of organising the growing of crops and rearing of animals. The main systems are described below.

• Subsistence farming: the farmer produces mainly to feed the family, using simple tools (hoe and cutlass), family labour and small plots. Little or nothing is left over for sale, and output per person is low.
• Commercial (or plantation) farming: production is on a large scale for sale and profit, often specialising in one cash crop such as cocoa, oil palm or rubber. It uses hired labour, machinery and modern inputs, and is capital intensive.
• Shifting cultivation: a farmer clears and cultivates a piece of land until its fertility falls, then abandons it and moves to fresh land, allowing the old plot to recover naturally. It suits areas of plentiful land and low population.
• Bush fallowing (land rotation): similar to shifting cultivation but the farmer keeps the same homestead, cultivating a plot for a few years, leaving it fallow to regain fertility, and returning to it later.
• Mixed farming: the same farmer grows crops and rears animals together on the same holding, so that each supports the other (animals provide manure and draught power, while crop residues feed the animals).
• Crop rotation: different crops are grown in a planned sequence on the same land in successive seasons to maintain soil fertility and control pests, for example alternating a cereal with a legume.
• Pastoral farming (nomadic herding): the rearing of animals, especially cattle, sheep and goats, in which herders move with their animals in search of pasture and water, common in the drier savanna and Sahel.
• Cooperative farming: farmers pool land, labour or resources and farm together, sharing inputs, produce or proceeds.
• Irrigation farming: water is supplied artificially to the land, allowing cultivation in dry areas or dry seasons.

These systems often overlap in practice; a single region may combine, for example, bush fallowing for food crops with pastoral herding of livestock.

Bayanin Amsa

Industrialisation means expanding the manufacturing and processing sector so that a country produces more finished goods rather than relying on raw materials. Successive Nigerian governments have used a range of policies to encourage it. The main ways are outlined below.

• Provision of infrastructure: building roads, railways, ports, power stations and water supply to lower the cost of setting up and running industries.
• Establishment of industrial estates and free-trade zones: providing serviced land and facilities where industries can locate together.
• Provision of finance: setting up development banks and lending institutions (such as the Bank of Industry) to give industrialists cheap and long-term loans.
• Tax incentives: granting tax holidays, pioneer status, and relief on import duties for machinery and raw materials to reduce the cost of production.
• Protection of infant industries: imposing tariffs, quotas or import bans on foreign goods so that local industries can grow.
• Indigenisation and local participation: policies to transfer ownership and management of enterprises to Nigerians and to encourage local investment.
• Manpower development: establishing technical colleges, polytechnics and industrial training schemes to supply skilled labour.
• Encouragement of foreign investment: creating agencies and incentives to attract foreign capital, technology and partnership.
• Establishment of research institutes and standards bodies: to improve product quality, adapt technology and support raw-material processing.
• Local sourcing of raw materials: encouraging industries to use locally available inputs and backward integration to reduce dependence on imports.
• Direct government investment: setting up public enterprises in key areas such as steel, petrochemicals and fertiliser where private capital is insufficient.
• Stable macro-economic and monetary policies: providing a favourable exchange rate, credit and interest-rate framework to support manufacturing.

Together these measures aim to raise output, create employment, diversify the economy away from primary production and reduce dependence on imported manufactured goods.

Bayanin Amsa

Middlemen are the traders (wholesalers, retailers, agents and brokers) who stand between the producer and the final consumer and help to move goods through the channel of distribution. In carrying out this work they face a number of problems.

• Shortage of capital: many middlemen, especially small retailers, lack enough funds to buy stock in large quantities or to extend credit to customers.
• Poor transport and high transport costs: bad roads and inadequate transport make it costly and slow to move goods, and raise the risk of damage in transit.
• Inadequate storage facilities: lack of good warehouses and cold stores leads to spoilage, especially of perishable goods.
• Price fluctuations: sudden changes in prices can leave a middleman with stock bought high and sold low, causing losses.
• Bad debts: goods sold on credit may not be paid for, tying up capital and causing losses.
• Competition: keen competition among many traders reduces profit margins.
• High and multiple taxes and levies: numerous charges from local and other authorities raise costs and reduce profit.
• Perishability of goods: foodstuffs and other perishables deteriorate quickly, so unsold stock is lost.
• Government regulation and price control: restrictions, licensing and controlled prices limit the trader's freedom and margins.
• Insecurity: theft, armed robbery, fire and other hazards threaten goods and money.
• Difficulty in obtaining supplies: irregular or insufficient supply from producers disrupts business.
• Inflation and rising costs: a general rise in prices raises the cost of restocking and squeezes profit.

These problems raise the cost of distribution, reduce the middleman's profit and can ultimately raise prices to the final consumer.

Bayanin Amsa

Rural-urban migration is the movement of people from villages and rural areas to towns and cities, usually in search of jobs, higher incomes and better facilities. It leaves farms short of labour and overcrowds the towns. The problem can be reduced by making rural life more attractive and by spreading development, as follows.

• Provision of social amenities in rural areas: supplying good roads, electricity, pipe-borne water, schools, hospitals and recreation so that villages become more attractive to live in.
• Creation of employment in rural areas: siting industries, agro-processing plants and public works in rural areas to provide jobs and income locally.
• Modernisation and support for agriculture: providing credit, improved seeds, fertiliser, mechanisation, extension services and good prices so that farming becomes profitable and can retain young people.
• Rural industrialisation and cottage industries: encouraging small-scale industries and crafts to create non-farm rural employment.
• Even development and decentralisation: spreading government offices, projects and development evenly rather than concentrating them in a few big cities.
• Guaranteed and stable prices for farm produce: so that farmers earn a reliable income and are not forced to leave the land.
• Provision of rural infrastructure and communication: good transport and communication to link villages to markets.
• Land reform and access to farmland: making land available to young farmers to keep them in agriculture.
• Community and cooperative development: supporting cooperatives and community projects to raise rural incomes.
• Population and education policies: educating people about opportunities in rural areas and discouraging the belief that only towns offer a good life.

The central idea is to close the gap in income and living standards between rural and urban areas, so that people no longer feel compelled to move to the towns.

Bayanin Amsa

A balance of payments deficit occurs when a country's total payments to the rest of the world (mainly for imports and other outflows) exceed its total receipts from the rest of the world (mainly from exports and other inflows) over a period. To correct it, a country must either reduce outflows or increase inflows. The main measures are grouped below.

1. Expenditure-reducing (deflationary) measures to cut demand for imports:

• Deflationary fiscal policy: raising taxes and cutting government spending to reduce total demand, which lowers spending on imports.
• Tight monetary policy: raising interest rates and reducing the money supply to curb spending and imports.

2. Expenditure-switching measures to move spending away from foreign goods towards home goods:

• Devaluation of the currency: lowering the external value of the currency makes exports cheaper to foreigners and imports dearer at home, so exports rise and imports fall (provided demand is sufficiently elastic).
• Import tariffs and quotas: taxes and quantity limits on imports to reduce them directly.
• Exchange control: restricting the amount of foreign currency available for imports and other outflows.

3. Measures to increase exports and inflows:

• Export promotion: subsidies, incentives and support to raise the volume and value of exports.
• Diversification of production and exports: to widen the sources of foreign exchange.
• Encouraging import substitution: producing at home goods that were formerly imported.
• Attracting foreign investment, aid and tourism: to bring in foreign exchange on the capital and services accounts.

4. External and financing measures:

• Borrowing from abroad or from the IMF to finance the deficit temporarily.
• Rescheduling of external debt to reduce immediate outflows.

The most suitable mix depends on the cause of the deficit and on how responsive (elastic) the country's exports and imports are to price changes. Some measures, such as tariffs and exchange control, provide short-term relief, while diversification and export promotion address the deficit in the longer term.