WAEC SSCE - Economics - 2018

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A firm should shut down in the long run if its average revenue is less than its average cost. In other words, if the firm is not making enough revenue to cover its costs, it will eventually go out of business. There are different types of costs associated with running a business, including fixed costs (which don't vary with the level of output) and variable costs (which do vary). The minimum average cost refers to the point at which the firm is producing output at the lowest possible average cost. If the firm's average revenue is less than its average variable cost, then it is not even covering the cost of producing each unit of output, let alone covering the fixed costs. In this case, the firm should shut down in the short run, and definitely in the long run if it continues to operate at a loss. If the firm's average revenue is equal to the minimum average cost, it is just breaking even, but not making any profit. In the long run, it might be better for the firm to shut down and invest its resources in a more profitable venture. Therefore, a firm should shut down in the long run if its average revenue is less than its average cost, which means that it is not generating enough revenue to cover all of its costs.

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An industry is a group of firms that produce similar products or provide similar services. These firms may compete with each other for market share, but they also share many common interests and challenges. For example, the automobile industry is made up of many different companies that produce cars and trucks. These firms may have different brands, models, and features, but they all rely on similar production processes, supply chains, and distribution channels. They also face common challenges such as fluctuating demand, changing regulations, and technological innovation. While some industries may provide jobs for many people, and others for few people, the number of jobs is not a defining characteristic of an industry. Rather, the key factor that defines an industry is the similarity of the products or services that are produced or provided by the firms within it. This similarity allows for the grouping of firms into specific industries, which can be useful for analysis and understanding of market trends, competition, and other economic factors.

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A firm's average cost decreases in the long run due to increasing returns to scale. This means that as the firm increases its production and expands its operations, it can benefit from economies of scale such as bulk purchasing, specialized equipment, and division of labor. These efficiencies can lead to lower average costs per unit of output, allowing the firm to be more competitive and potentially increase its profitability. On the other hand, if the firm experienced diminishing average returns or decreasing marginal returns, it would experience higher average costs as it increased its production, making it less competitive and potentially leading to decreased profitability. Decreasing average fixed cost may also contribute to lower average costs, but it is not the primary driver of cost reductions in the long run.

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If the price of commodity X increases and consumers start buying more of commodity Y instead, then commodity X and Y are substitutes. Substitutes are products that can be used in place of each other. When the price of one substitute increases, consumers tend to switch to the other substitute because it becomes relatively cheaper. For example, if the price of beef increases, consumers might switch to chicken instead. On the other hand, complements are products that are typically used together, such as gasoline and cars. If the price of gasoline increases, consumers might reduce their demand for cars as well, since they need gasoline to run their cars. Inferior goods are products that people tend to buy less of as their income increases, such as instant noodles. Finally, bought goods is not a recognized economic term.

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The International Bank for Reconstruction and Development (IBRD) was created in 1944 to assist in the post-World War II reconstruction efforts of member countries. Its primary function is to provide long-term loans and technical assistance to developing countries to help them achieve economic development and reduce poverty. Reducing tariff among members is not a function of IBRD. This function is typically handled by international trade organizations such as the World Trade Organization (WTO). Developing human resources is a key aspect of IBRD's work as it helps to ensure that countries have the necessary skilled workforce to support their economic development efforts.

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Public limited liability companies are not necessarily democratic in nature because of government appointees being members of the board or because they are run by elected public officers. However, they can be considered democratic because of the principle of shareholder democracy. In a public limited liability company, shareholders elect the board of directors, who are responsible for making important decisions for the company. This allows for the voice of the shareholders to be heard and for them to have a say in the direction of the company. This is a democratic aspect of public limited liability companies as it allows for the will of the people (the shareholders) to be reflected in the decisions of the company.

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The total fixed cost is $20.00. Fixed cost is a cost that does not change with the level of production or the quantity of goods produced. In the given table, the total cost increases as the quantity produced increases. However, when the quantity produced is zero (0), the total cost is still $20.00. This means that regardless of the quantity produced, the business incurs a fixed cost of $20.00. Therefore, the correct answer is $20.00.

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The stock exchange is an example of the capital market. The capital market is a market for long-term financial instruments such as stocks, bonds, and other securities. It enables companies and governments to raise funds for their long-term investment projects, such as expanding their business, developing new products, or building infrastructure. The stock exchange is a platform where investors can buy and sell shares of publicly listed companies. By buying stocks, investors become part owners of the company and can benefit from its growth and profits. The stock exchange plays a critical role in the capital market by providing liquidity to investors and allowing companies to access funding for their long-term projects. Therefore, the correct answer is the capital market.

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At output level 5, the total variable cost is $35.00. Variable cost is the cost that varies with the level of output produced, and it includes costs such as raw materials, direct labor, and fuel. From the table, we can see that the total cost for producing 5 units is $55.00, and the total cost for producing 4 units is $38.00. Therefore, the variable cost for producing the 5th unit is $55.00 - $38.00 = $17.00. Hence, the total variable cost for producing 5 units is the sum of the variable cost for producing each of the 5 units, which is $17.00 x 5 = $35.00.

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The value added by the baker is $18.00. To understand this, we need to know what value added means. Value added is the difference between the total revenue generated from the sale of a product and the total cost of all the inputs used to produce that product. In this case, the baker spent $250.00 on flour and other ingredients and $52.00 on distribution, for a total cost of $302.00. The baker then sold the bread for $320.00. To calculate the value added, we subtract the total cost from the total revenue: Value added = Total revenue - Total cost Value added = $320.00 - $302.00 Value added = $18.00 Therefore, the value added by the baker is $18.00. This represents the contribution the baker made to the economy by using their skills and resources to transform raw materials into a finished product that consumers were willing to pay for.

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This is an example of seasonal unemployment. Seasonal unemployment refers to unemployment that occurs regularly in certain industries during certain times of the year, such as agriculture or tourism. In this case, workers at the school canteen may only be employed during the school term, and have no work during the holidays, making them examples of seasonal unemployment.

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In the event of bankruptcy, owners of joint-stock companies lose only the capital invested. A joint-stock company is a type of business organization where the ownership is divided into shares of stock, and the liability of the owners is limited to the amount of capital they have invested. This means that if the company goes bankrupt and cannot pay its debts, the owners of the company (the shareholders) will lose only the amount of money they have invested in the company's shares. They will not be personally liable for the company's debts or lose any of their private properties. However, if the company's assets are not sufficient to cover its debts, the shareholders may not receive any dividends, and their shares may become worthless. Therefore, the correct answer is only the capital invested.

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Goods whose demand varies directly with money income are called normal goods. This means that as a person's income increases, their demand for these goods also increases. Normal goods are often considered to be luxury or non-essential items, such as high-end clothing, jewelry, or expensive cars. In contrast, inferior goods are goods whose demand decreases as a person's income increases. For example, if a person's income goes up, they may choose to buy a more expensive brand of bread instead of the cheaper, lower-quality bread they used to buy. Complementary goods are goods that are consumed together, such as peanut butter and jelly. If the price of one complementary good increases, the demand for the other good may also decrease. Substitutes are goods that can be used in place of each other, such as coffee and tea. If the price of one substitute good increases, the demand for the other good may increase. Overall, normal goods are goods whose demand varies directly with money income, meaning that as a person's income increases, their demand for these goods also increases.

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Out of the given options, massive importation of consumer goods will not lead to economic growth. Economic growth is defined as an increase in a country's output of goods and services over time. It is typically measured by the growth rate of Gross Domestic Product (GDP). Economic growth occurs when a country increases the factors of production such as capital, labor, and technology. Massive importation of consumer goods means that a country is importing finished goods such as clothes, electronics, and cars from other countries. While this may provide immediate satisfaction to consumers, it does not contribute to economic growth because it does not increase a country's factors of production. On the other hand, massive importation of capital goods (such as machinery and equipment) can boost economic growth as it helps to increase a country's production capacity. Intensive capital formation locally refers to investing in the production of capital goods locally, which can also increase a country's production capacity. Similarly, the use of modern technology can help a country to produce more efficiently, increase productivity and ultimately boost economic growth. In summary, while the importation of consumer goods may have short-term benefits, it does not contribute to a country's long-term economic growth.

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The largest component of national income in developing countries consists of wages and salaries. National income is the total income earned by a country's citizens, including income earned from work, investments, and other sources. Wages and salaries are the income earned by individuals from their employment. In developing countries, the majority of the population is employed in the agricultural and service sectors, which are labor-intensive. Therefore, wages and salaries form the largest component of national income in developing countries. On the other hand, profits are the income earned by businesses, and rent is the income earned by owners of land and property. While these components also contribute to national income, they are typically smaller in developing countries compared to wages and salaries.

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The concept described is "double coincidence of wants." Double coincidence of wants is a situation where two parties have goods or services that the other desires and are willing to exchange. In the given example, the housewife has meat, and she desires tomatoes, and another person has tomatoes and desires meat. They must find each other and agree on the terms of the exchange. This can be a challenging task since the two parties may not meet each other, or their wants may not coincide. However, if they do find each other, they can benefit from trading with each other and satisfy their needs. The concept of double coincidence of wants is essential in understanding the origins and functions of money, which eliminates the need for a double coincidence of wants in trade. Therefore, the correct answer is the double coincidence of wants.

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A price floor is a minimum price that is set by a government or authority for a particular good or service. It is usually set above the equilibrium price, which is the market price where the quantity demanded and the quantity supplied of a good are equal. When a price floor is set above the equilibrium price, it causes a surplus of the good, as the quantity supplied exceeds the quantity demanded. In other words, producers are willing to supply more of the good than consumers are willing to buy at the higher price. Therefore, the correct option is "above the equilibrium and causes surplus."

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The statement suggests that in poorer countries, a larger percentage of the labor force is engaged in agriculture. This is because agriculture is often the main source of livelihood for people in low-income countries. Agriculture provides food and raw materials, as well as employment opportunities for a significant portion of the population. In many cases, the lack of economic development and infrastructure in poorer countries also limits opportunities for other types of employment, such as manufacturing or trading. As countries develop economically and become more industrialized, there is typically a shift away from agriculture and towards other industries such as manufacturing and services. Therefore, the statement implies that the level of economic development is closely related to the type of employment opportunities available to the labor force.

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Nations engage in international trade because of the differences in the comparative cost of producing goods and services. Comparative cost refers to the ability of a nation to produce goods and services at a lower opportunity cost compared to other nations. Opportunity cost is the cost of foregone production of one good or service when producing another. For example, suppose country A can produce 100 units of wheat or 50 units of cloth with the same resources. In contrast, country B can produce 100 units of wheat or 40 units of cloth with the same resources. In this case, country A has a comparative advantage in producing cloth because it can produce more cloth (50 units) than country B (40 units) when given the same resources. As a result of this difference in comparative cost, country A can specialize in producing cloth and trade with country B, which can specialize in producing wheat. This allows both countries to benefit from the trade, as they can obtain more of both goods than they could produce on their own. Absolute cost, fixed cost, and variable cost are not directly related to the reasons for international trade. Instead, comparative cost is the key factor that explains why countries trade with each other.

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Producers operating in a free market economy are more efficient as a result of the existence of competition. In a free market economy, producers are free to produce and sell goods and services as they see fit, without interference from the government. This means that they are also free to compete with each other. When there are many producers competing for the same customers, they are motivated to be more efficient in order to lower their costs and offer lower prices than their competitors. This competition also incentivizes them to innovate and improve their products and services to stand out from the competition. For example, if there are two bakeries in a town, and they both produce and sell bread, they will need to be efficient in order to offer lower prices than their competitor. This could mean investing in better equipment, sourcing cheaper ingredients, or streamlining their production process to reduce waste and increase productivity. These actions will help them keep their costs down, and as a result, offer lower prices to their customers. On the other hand, if there were only one bakery in the town and no competition, they may not feel the same pressure to be efficient or innovative, as there are no competitors to undercut their prices or offer a better product. Therefore, the existence of competition in a free market economy motivates producers to be more efficient, innovative, and cost-effective, which benefits both the producers and the consumers.

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Holding money to take care of contingencies is a precautionary motive. It means keeping a portion of money for unexpected events or emergencies like medical bills, job loss, or car repairs. The precautionary motive is a rational way to manage uncertainty and risk in personal finance. By keeping some money aside, individuals can avoid the need to borrow or sell assets at a loss during unexpected financial difficulties. The other motives for holding money are speculative, transactional, and expansionary, which involve different reasons for holding money.

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(a) Total revenue \( TR = P \times Q \) at each price.

(b) Price elasticity of demand using \( E_d = \dfrac{\%\,\Delta Q}{\%\,\Delta P} \) (ignoring the sign).

(i) $5 to $10: quantity falls 60 to 50.

\[ E_d = \frac{-10/60}{5/5} = \frac{-16.67\%}{100\%} = 0.17 \]

(ii) $25 to $30: quantity falls 20 to 10.

\[ E_d = \frac{-10/20}{5/25} = \frac{-50\%}{20\%} = 2.5 \]

(c) Classification

• (i) \( E_d = 0.17 < 1 \): demand is inelastic.
• (ii) \( E_d = 2.5 > 1 \): demand is elastic.

(d) Relationship between total revenue and elasticity

• Over \$5 to \$10 demand is inelastic, and as price rises total revenue rises (300 to 500). When demand is inelastic, price and total revenue move in the same direction.
• Over \$25 to \$30 demand is elastic, and as price rises total revenue falls (500 to 300). When demand is elastic, price and total revenue move in opposite directions.

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(a) A tax is a compulsory payment imposed by government on individuals, firms or goods, for which the payer receives no direct return, used to finance public spending.

(b) Tax evasion versus tax avoidance:

• Tax evasion is the illegal refusal or failure to pay tax that is lawfully due, for example by understating income or falsifying records. It is an offence punishable by law.
• Tax avoidance is the use of legal means to reduce one's tax liability, for example by claiming all allowances and reliefs or arranging affairs to fall in a lower tax band. It is lawful, though sometimes considered unethical.

(c) Four benefits of tariffs (taxes on imports):

• Revenue: tariffs are a source of income for the government.
• Protection of infant industries: they make imports dearer, allowing young domestic industries to grow.
• Correcting balance-of-payments deficit: by discouraging imports they help improve the trade balance.
• Protecting local employment and guarding against dumping of cheap foreign goods.

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(a) Net migration is the difference between the number of people entering an area (immigrants or in-migrants) and the number leaving it (emigrants or out-migrants) over a given period. \(\text{Net migration} = \text{in-migration} - \text{out-migration}\). It is positive when more people come in than leave, and negative when more leave than come in.

(b) Four economic consequences of rural-urban migration:

• Shortage of farm labour in rural areas: the departure of young, able-bodied people lowers agricultural output.
• Urban unemployment and underemployment: the cities receive more workers than the available jobs, raising unemployment.
• Pressure on urban amenities: housing, water, transport, schools and hospitals in the cities become overstretched, breeding slums.
• Rise in urban social problems: congestion, crime and poor sanitation increase, while rural areas suffer neglect and falling incomes.

(c) Two measures government can adopt to reduce it:

• Develop rural areas by providing roads, electricity, water, schools and health facilities so that people are willing to stay.
• Create rural employment, for example by siting industries and improving farming incentives (credit, guaranteed prices) in the rural areas.

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(a) Economies of scale are the advantages (falling average cost of production) that a firm enjoys as it expands its scale of output. As output grows, the cost of producing each unit falls.

(b) Types:

• Managerial economies: a large firm can employ specialist managers, each concentrating on one function (production, sales, finance), which raises efficiency and spreads the cost of skilled management over a large output.
• Technical economies: a large firm can install and fully use large, specialised, cost-saving machinery and take advantage of the division of labour, so cost per unit falls.

(c) Four disadvantages of large-scale production:

• Difficulty of management and control: the firm may become too big to coordinate efficiently (diseconomies of scale).
• Poor labour relations: the distance between management and a large workforce weakens personal contact and morale.
• Risk of overproduction: mass output may exceed demand, leading to gluts and losses.
• Tendency towards monopoly: large firms may dominate and exploit consumers, and heavy capital is tied up and hard to withdraw quickly.

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(a) A tax is a compulsory payment levied by government on individuals, firms or goods, for which the taxpayer receives no direct or specific benefit in return, and which is used to finance public expenditure.

(b) Rates of taxation:

• Progressive tax: the rate rises as income rises, so higher-income earners pay a larger percentage of income than lower-income earners.
• Proportional tax: the same percentage rate is charged on all incomes, so tax paid rises in exact proportion to income while the rate stays constant.
• Regressive tax: the rate falls as income rises, so lower-income earners pay a larger percentage of income than higher-income earners.

(c) Principles of a good tax system:

• Equity (fairness): the burden of tax should be shared fairly according to the taxpayer's ability to pay; those who earn more should pay more.
• Convenience: the tax should be collected at a time and in a manner most convenient to the taxpayer, for example deducting income tax when wages are paid.
• Economy: the cost of assessing and collecting the tax should be small relative to the revenue it yields, so that most of what is collected reaches the treasury.

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(a) Difference: Unemployment is a situation in which people who are willing and able to work at the going wage rate cannot find any work at all. Underemployment is a situation in which people are working, but below their full capacity, that is, they work fewer hours than they could, or in jobs that do not fully use their skills or that yield very low output.

(b) Types of unemployment (with examples):

• Seasonal unemployment: caused by the seasonal nature of some work, so labour is idle in the off-season. Example: farm labourers out of work between planting and harvest.
• Structural unemployment: caused by a change in the structure of the economy or in demand, so certain skills are no longer needed. Example: typists thrown out of work when offices switched to computers.
• Frictional unemployment: the short-term unemployment of workers who are between jobs or searching for a first job. Example: a graduate looking for work after leaving school.
• Cyclical unemployment: caused by a general fall in demand during a slump or depression in the business cycle. Example: factory workers laid off when sales collapse in a recession.

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(a) Optimum population is the population size that, given a country's available resources and level of technology, yields the highest output per head (maximum per capita income). At this point the country is neither under-populated nor over-populated.

(b) Three ways rapid population growth can slow economic development:

• Reduced per capita income: national output must be shared among more people, so the average standard of living falls.
• Lower savings and investment: a large dependent population forces high spending on immediate needs, leaving little for saving and capital formation.
• Strain on social amenities and infrastructure: schools, hospitals, housing and utilities are overstretched, and much investment goes merely to maintain existing standards rather than to raise them.

(c) Three measures to control rapid population growth:

• Family-planning programmes and free access to contraceptives to help couples space and limit births.
• Public enlightenment and education, especially of women (education tends to lower birth rates).
• Government policy and incentives, such as limiting tax or housing benefits to a set number of children, or discouraging early marriage by law.

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(a) Commodity money is money in the form of a good that has value in itself (intrinsic value) and is also generally accepted as a medium of exchange. Examples include cowries, gold, salt, and cattle used as money in earlier societies.

(b) Three problems of trade by barter:

• Double coincidence of wants: each trader must find someone who has what he wants and also wants what he has, which is difficult.
• Lack of a common measure of value: there is no single unit in which to express and compare the worth of different goods.
• Indivisibility of some goods: valuable items such as a cow cannot be split to pay for a small purchase.
• Difficulty in storing value: many goods (e.g. farm produce) perish and cannot store wealth over time.

(c) Three ways money has solved these problems:

• Medium of exchange: money is generally accepted, so a seller takes money and later spends it, removing the need for a double coincidence of wants.
• Measure/unit of value: the prices of all goods are stated in money, giving a common yardstick for comparing values.
• Store of value: money can be saved and kept without perishing, so wealth can be held and used later; being divisible into small units, it also solves the problem of indivisibility.

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(a) Marginal revenue \( MR = \dfrac{\Delta TR}{\Delta Q} \), the change in total revenue when output rises by one bag.

Marginal revenue is constant at \$6 per bag.

(b) The price of a bag of maize is \$6. Average revenue \( = \dfrac{TR}{Q} = \dfrac{6}{1} = \dfrac{12}{2} = \$6 \) at every level, and price equals average revenue. Because MR equals AR equals price, the firm sells every bag at the same fixed price of \$6.

(c) The farmer operates under perfect competition. The price is constant regardless of the quantity sold (MR = AR = price), so the farmer is a price taker who cannot influence the market price.

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Marginal revenue \( MR = \dfrac{\Delta TR}{\Delta Q} \) and marginal cost \( MC = \dfrac{\Delta TC}{\Delta Q} \), where \( \Delta Q \) is the increase in output between successive levels.

(a) Working

(b) Profit \( = TR - TC \) at each level:

• (i) Break even at output 35 kg, where \( TR = TC = 70 \) so profit is zero.
• (ii) Highest profit at output 85 kg, where profit \( = 170 - 105 = \$65 \).
• (iii) Equilibrium at output 85 kg. Because MR (\$2) stays above MC at every stage beyond the first, each extra kilogram adds more to revenue than to cost, so the firm keeps expanding to the largest output shown, where profit is maximised.

(c) The firm operates under perfect competition. Marginal revenue is constant at \$2 per kg, which means price is fixed and the firm is a price taker.

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(a) Features of the two systems

(i) Capitalist economic system:

• Private individuals own the means of production (property and capital).
• The profit motive and the price mechanism guide production, with freedom of enterprise and consumer choice.

(ii) Socialist economic system:

• The state owns and controls the means of production on behalf of the people.
• Central planning, rather than the free market, decides what, how and for whom to produce, aiming at equality.

(b) Four weaknesses of the capitalist system:

• Wide inequality of income and wealth: the rich grow richer while the poor remain poor.
• Exploitation: the profit motive can lead to underpayment of workers and overcharging of consumers.
• Growth of monopolies: free competition can end in a few large firms dominating and abusing the market.
• Economic instability and unemployment: the system is prone to booms and slumps that cause waste and joblessness.
• Neglect of unprofitable but essential social services because private firms produce only what yields profit.

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First we sort each item into visible (physical goods that cross the border) and invisible (services).

(a) Value of visible exports

\[ 120{,}000{,}000 + 40{,}000{,}000 + 80{,}000{,}000 = \$240{,}000{,}000 \]

(b) Balance of trade = visible exports \( - \) visible imports. Visible imports \( = 140m + 80m + 50m = \$270{,}000{,}000 \).

\[ 240{,}000{,}000 - 270{,}000{,}000 = -\$30{,}000{,}000 \]

A balance of trade deficit of \$30,000,000.

(c) Invisible items

• Invisible exports: Tourism and Shipping & Insurance.
• Invisible imports: Banking Services and Freight and Insurance.

(d) Current account balance = (visible + invisible exports) \( - \) (visible + invisible imports).

Total exports \( = 240m + (45m + 60m) = 345{,}000{,}000 \). Total imports \( = 270m + (60m + 40m) = 370{,}000{,}000 \).

\[ 345{,}000{,}000 - 370{,}000{,}000 = -\$25{,}000{,}000 \]

A current account deficit of \$25,000,000.

(e) The country is developing. Its exports are dominated by primary/unprocessed products (crude oil, groundnuts, bauxite) while it imports refined and manufactured goods (petroleum products, vehicles), which is the typical trade pattern of a developing economy.

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(a) State-owned enterprises (public corporations) are business organisations established, owned, financed and controlled by the government to provide goods or services to the public, for example a national electricity or water company.

(b) Three reasons for establishing them:

• To provide essential services (water, electricity, transport) that the public needs but which private firms may not supply adequately.
• To prevent private monopoly and exploitation in strategic industries by keeping them under public control.
• To provide services that require very large capital which private investors may be unable or unwilling to raise, and to promote development and employment.

(c) Four problems associated with them:

• Inefficiency and mismanagement arising from the absence of a strong profit motive.
• Political interference in appointments and decisions, which lowers performance.
• Losses and heavy reliance on government subsidies, which burden public finances.
• Corruption, bureaucracy and red tape, which cause waste and slow decision-making.

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(a) Natural resources are the free gifts of nature that are useful to man and can be exploited for the production of goods and services. They exist without human effort and include land, mineral deposits, forests, rivers, sunshine, wildlife and the fertility of the soil. In economics they form part of the factor of production called land, and they are valued only when the knowledge, capital and labour needed to exploit them are available.

(b) Three contributions of forest resources to economic development:

• Source of raw materials and revenue: Timber, rubber, wood pulp and gum are exported or fed into local industries, earning foreign exchange and government revenue that finance development projects.
• Employment and income: Logging, saw-milling, furniture-making and the gathering of forest products provide jobs and incomes, reducing unemployment and raising standards of living.
• Environmental and agricultural support: Forests check soil erosion, conserve water and preserve soil fertility, which sustains farming; they also supply firewood, herbs and grazing that support rural livelihoods.

(c) Three negative effects of the exploitation of mineral resources:

• Environmental degradation: Mining destroys vegetation, pollutes water bodies and farmland (for example oil spillage and gas flaring), and leaves derelict land unfit for farming.
• Displacement and health hazards: Communities are displaced from their land, and dust, chemicals and unsafe pits cause diseases and accidents among workers and residents.
• Distortion of the economy: Heavy dependence on one mineral makes the economy vulnerable to price falls, encourages neglect of agriculture and other sectors, and can breed conflict over the sharing of mineral revenue.

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(a) Maximum price legislation (a price ceiling) is a law that fixes a price above which a commodity may not legally be sold. It is set below the equilibrium price to protect consumers from high prices, for example a rent or a price control on essential foodstuffs.

(b) Three reasons for fixing price floors (minimum prices) on agricultural produce:

• To guarantee farmers a fair, stable income and protect them from ruinously low prices.
• To encourage greater production by assuring farmers that their output will fetch a worthwhile price.
• To cushion farmers against price fluctuations caused by bumper harvests or gluts, which would otherwise push prices very low.

(c) Three effects of a price ceiling:

• Excess demand (shortage): because the fixed price is below equilibrium, quantity demanded exceeds quantity supplied.
• Emergence of a black market: scarce goods are diverted and sold illegally above the controlled price.
• Rationing and hoarding: government may have to ration the scarce goods, and sellers may hoard them, creating queues and favouritism.

Akọwa Nkọwa

(a) A demand schedule is a table showing the different quantities of a commodity that consumers are willing and able to buy at various prices over a given period, other things remaining equal.

(b) The law of demand states that, other things being equal, the higher the price of a commodity the lower the quantity demanded, and the lower the price the higher the quantity demanded. Price and quantity demanded move in opposite directions.

(c) Types of demand:

• Competitive demand: demand for goods that are substitutes, so that buying more of one means buying less of the other. Example: butter and margarine.
• Derived demand: demand for a good that arises not for its own sake but because it is needed to produce or enjoy another good. Example: demand for bricklayers is derived from the demand for houses.
• Joint (complementary) demand: demand for goods that are used together, so that a rise in demand for one raises demand for the other. Example: cars and petrol; pen and ink.
• Composite demand: demand for a good that has several different uses, the total demand being the sum of the demands for each use. Example: demand for water for drinking, washing, irrigation and industry.