WAEC SSCE - Economics - 1993 (Essay)

Akọwa Nkọwa

A joint stock company is a business incorporated as a separate legal person, owned by shareholders whose ownership is divided into shares. Its main merits are:

• Limited liability: a shareholder can lose only the amount invested in shares; personal assets are protected.
• Large capital: by selling shares to many people (and, for a public company, to the general public) the firm can raise very large amounts of capital.
• Separate legal entity: the company can own property, sue and be sued in its own name, independent of its members.
• Continuity of existence (perpetual succession): the death, bankruptcy or withdrawal of a shareholder does not end the company.
• Transferability of shares: shares of a public company can be freely bought and sold, giving investors liquidity.
• Employment of experts: its large size allows it to hire specialists in management, finance and production, improving efficiency.
• Economies of scale: large-scale operation lowers average cost of production.
• Spreading of risk: business risk is shared among many shareholders rather than borne by one person.

Akọwa Nkọwa

Measures of central tendency are single values that summarise a whole set of data by locating its centre. The three common measures are the mean, the median and the mode.

(a) Explanations

• Mean (arithmetic mean): the sum of all the values divided by the number of values. For values \(x_1, x_2, \dots, x_n\), \(\bar{x} = \dfrac{\sum x}{n}\). It uses every observation, so it is affected by extreme values.
• Median: the middle value when the data are arranged in order of size. With an even number of items it is the average of the two middle values. It is not distorted by extreme values.
• Mode: the value that occurs most frequently in the data. A set may have one mode, more than one mode, or none.

(b) Calculations for 21, 22, 23, 24, 25, 26, 23, 28, 29, 30, 24, 31, 34, 23 (there are \(n = 14\) numbers).

Mean: the sum of the values is 363.

\[\bar{x} = \frac{363}{14} = 25.93\ \text{(2 d.p.)}\]

Median: arrange in ascending order: 21, 22, 23, 23, 23, 24, 24, 25, 26, 28, 29, 30, 31, 34. With 14 items the median is the average of the 7th and 8th values (24 and 25).

\[\text{Median} = \frac{24 + 25}{2} = 24.5\]

Mode: the value 23 occurs three times, more often than any other value, so the mode is 23.

Akọwa Nkọwa

Price elasticity of demand measures how responsive the quantity demanded of a commodity is to a change in its own price, \(E_d = \dfrac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}\). The size of this responsiveness is determined by the following factors:

• Availability of close substitutes: the more numerous and closer the substitutes, the more elastic the demand, because buyers switch easily when price rises.
• Proportion of income spent on the good: goods that take a large share of income tend to have elastic demand; goods on which very little is spent (salt, matches) tend to be inelastic.
• Nature of the commodity: necessities such as food and medicine have inelastic demand, while luxuries have more elastic demand.
• Number of possible uses: a commodity with many alternative uses tends to have more elastic demand.
• Time period: demand is usually more elastic in the long run than in the short run, since consumers need time to adjust habits and find substitutes.
• Habit or addiction: habit-forming goods such as cigarettes have inelastic demand.
• Durability and possibility of postponement: goods whose purchase can be postponed or that can be repaired tend to have more elastic demand.
• Price level of the good: demand for very cheap items is often inelastic, while demand for costly items tends to be more elastic.

Akọwa Nkọwa

A wholesaler is a middleman who buys goods in large quantities from manufacturers and sells them in smaller quantities to retailers. In doing so, the wholesaler performs the following functions for the manufacturer:

• Provides a ready market: by buying in bulk the wholesaler relieves the manufacturer of the burden of searching for many small buyers.
• Bulk purchase and storage: the wholesaler takes large output off the factory, holds stock in warehouses, and so frees the manufacturer's storage space.
• Finances the manufacturer: prompt cash payment on collection gives the manufacturer working capital to continue production.
• Bears risks: once goods are bought, the wholesaler carries the risks of price fall, damage, deterioration and theft.
• Distribution: the wholesaler breaks bulk and spreads the goods to scattered retailers, sparing the manufacturer the cost of wide distribution.
• Provides market information: the wholesaler advises the manufacturer on consumer taste, quality and demand, guiding production decisions.
• Advertising and promotion: the wholesaler helps publicise and promote the manufacturer's products.
• Stabilises prices: by holding stock and releasing it steadily, the wholesaler helps even out supply and price fluctuations.

Akọwa Nkọwa

Agriculture remains vital to Nigeria yet is held back by several problems:

• Inadequate finance/credit: most farmers are poor and cannot obtain loans to expand or modernise.
• Land tenure system: customary ownership causes fragmentation and makes large-scale, mechanised farming difficult.
• Crude implements and low technology: reliance on the hoe and cutlass keeps productivity low.
• Poor storage and processing facilities: large quantities of produce are lost after harvest.
• Inadequate transport and rural infrastructure: bad roads make it costly to move produce to markets.
• Pests and diseases that destroy crops and livestock.
• Unfavourable weather: drought, erratic rainfall and flooding damage output.
• Rural-urban migration: the young and able-bodied leave the farms for the cities, causing labour shortage.
• Unstable prices and poor marketing for farm products, discouraging farmers.
• Illiteracy and inadequate extension services: many farmers lack access to modern methods and advice.

Akọwa Nkọwa

These terms describe how the rate of tax changes as a taxpayer's income (the tax base) rises.

• (a) Proportional tax: the same percentage rate is charged on every income, so the tax paid rises in exact proportion to income. If the rate is 10%, a person earning \(N100{,}000\) pays \(N10{,}000\) and a person earning \(N200{,}000\) pays \(N20{,}000\); the burden as a fraction of income stays constant.
• (b) Progressive tax: the rate rises as income rises, so higher-income earners pay a larger percentage of their income than lower-income earners. For example, the first band may be taxed at 7%, a higher band at 15%, and so on. It is used to redistribute income and reduce inequality.
• (c) Regressive tax: the rate falls as income rises, so lower-income earners pay a larger percentage of their income than higher-income earners. A flat sum, such as a poll tax or an indirect tax on a necessity, takes a bigger fraction of a poor person's income than of a rich person's income.

The key contrast is what happens to the average rate of tax as income grows: it stays the same (proportional), rises (progressive), or falls (regressive).

Akọwa Nkọwa

Left to private investors alone, industries tend to cluster in a few favoured commercial centres. Government therefore participates in deciding where industries are located in Nigeria for the following reasons:

• To reduce regional inequality: spreading industries across states promotes balanced and even development instead of concentrating wealth in a few cities.
• To create employment in rural and less-developed areas, thereby raising incomes there.
• To reduce rural-urban migration: siting industries near rural areas keeps people employed at home and eases pressure on big cities.
• To develop backward or neglected areas by providing infrastructure such as roads, electricity and water alongside the industries.
• For strategic and security reasons: certain sensitive industries are sited away from borders or vulnerable locations.
• To exploit and add value to local raw materials by locating processing industries close to their sources, e.g. agricultural or mineral zones.
• To decongest existing industrial centres and reduce pollution and pressure on facilities in overcrowded cities.
• To promote national unity by distributing the benefits of industrialisation evenly among the regions.

Akọwa Nkọwa

The Central Bank (the Central Bank of Nigeria) supervises the banking system and controls the amount of credit that commercial banks create. It does this using the following instruments:

• Open market operations (OMO): the Central Bank sells government securities to reduce banks' cash and cut lending, or buys them to increase banks' cash and expand lending.
• Bank (discount) rate: by raising the rate at which it lends to banks as lender of last resort, it makes borrowing costly and discourages excessive lending; lowering it does the opposite.
• Cash reserve ratio: it fixes the minimum fraction of deposits banks must keep with it; raising the ratio reduces the funds banks can lend.
• Liquidity ratio: it stipulates the minimum proportion of liquid assets a bank must hold, limiting how much it can advance.
• Special deposits: it can require banks to lodge extra deposits with it, freezing part of their lendable funds.
• Selective credit control: it directs banks to lend more to priority sectors (e.g. agriculture) and less to others.
• Moral suasion: it appeals to and persuades banks to follow desired lending policies.
• Direct directives and regulation: it issues rules and guidelines and can penalise banks that breach them.

Akọwa Nkọwa

We use three formulae. Average Variable Cost \( AVC = \dfrac{TVC}{Q} \), Average Total Cost \( ATC = \dfrac{TC}{Q} \), and Marginal Cost \( MC = \dfrac{\Delta TC}{\Delta Q} \) (the change in total cost when output rises by one unit).

Working

AVC = TVC \( \div \) Output:

• Q = 1: \( 40 \div 1 = 40 \)
• Q = 2: \( 64 \div 2 = 32 \)
• Q = 3: \( 80 \div 3 = 26.67 \)
• Q = 4: \( 88 \div 4 = 22 \)
• Q = 5: \( 96 \div 5 = 19.2 \)

ATC = TC \( \div \) Output:

• Q = 1: \( 140 \div 1 = 140 \)
• Q = 2: \( 164 \div 2 = 82 \)
• Q = 3: \( 180 \div 3 = 60 \)
• Q = 4: \( 188 \div 4 = 47 \)
• Q = 5: \( 196 \div 5 = 39.2 \)

MC = change in TC as output rises by 1 unit:

• Q = 1: \( 140 - 100 = 40 \)
• Q = 2: \( 164 - 140 = 24 \)
• Q = 3: \( 180 - 164 = 16 \)
• Q = 4: \( 188 - 180 = 8 \)
• Q = 5: \( 196 - 188 = 8 \)

Completed schedule

Output	TFC (N)	TVC (N)	TC (N)	AVC (N)	ATC (N)	MC (N)
0	100	0	100	-	-	-
1	100	40	140	40.00	140.00	40
2	100	64	164	32.00	82.00	24
3	100	80	180	26.67	60.00	16
4	100	88	188	22.00	47.00	8
5	100	96	196	19.20	39.20	8

Notice that AVC and ATC both fall as output rises, showing the firm is spreading its fixed cost of N100 over more units and enjoying increasing returns over this range.

Akọwa Nkọwa

Population density is the number of people living per unit area of land, \(\text{density} = \dfrac{\text{total population}}{\text{land area}}\). Where density is very high, as in parts of Nigeria, the following economic effects arise. Some are harmful and some can be beneficial.

Adverse effects

• Pressure on land: intense demand for farmland leads to fragmentation, over-cultivation and falling soil fertility.
• Unemployment and underemployment where the labour force grows faster than available jobs.
• Strain on social amenities: housing, water, electricity, schools and hospitals become overstretched, encouraging slums.
• Low per capita income if output does not keep pace with the number of people to be shared among.
• Environmental problems: congestion, pollution and poor sanitation.
• Food shortages and rising food prices when local production cannot feed the dense population.

Possible favourable effects

• Large labour supply for farms, factories and services.
• Large domestic market that encourages mass production and investment.
• Easier and cheaper provision of infrastructure per person because people are concentrated together.