WAEC SSCE - Economics - 2017 (Essay)

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(a) Inflation is a persistent and general rise in the average level of prices of goods and services in an economy over a period of time, which reduces the purchasing power of money.

(b)(i) Three causes of demand-pull inflation. This occurs when aggregate demand grows faster than the economy's ability to supply goods, so "too much money chases too few goods." Causes include:

• Increased government spending not matched by higher output, which injects more money into the economy.
• Excessive money supply / easy credit, for example low interest rates that raise borrowing and spending.
• Rise in consumer incomes or export demand, which raises total spending on available goods.

(b)(ii) Three causes of cost-push inflation. This occurs when rising costs of production force producers to raise prices even without extra demand. Causes include:

• Higher wages won by workers that are not matched by higher productivity, raising labour costs.
• Rising cost of raw materials or imported inputs, for example a rise in fuel prices or a fall in the value of the currency that makes imports dearer.
• Higher indirect taxes (such as increased VAT or import duties) that add to production and selling costs.

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(a) Economic development is the process by which a country improves the economic, social and political well-being of its people. It goes beyond a mere rise in national output (economic growth) to include a rising standard of living, better income distribution, and improvements in education, health, employment and institutions.

(b) Three features of a developing country:

• Low per capita income and widespread poverty.
• Heavy dependence on agriculture and primary products for output, employment and exports.
• High population growth rate with a high dependency ratio, and low levels of literacy, health and infrastructure.

(c) Four factors that can speed up economic development:

1. Capital formation (investment): raising savings and investment in machinery, factories and infrastructure increases productive capacity and output.
2. Development of human capital: investing in education, training and health produces a skilled, healthy and more productive labour force.
3. Provision of infrastructure: good roads, electricity, water and communication lower the cost of production and attract investment.
4. Political stability and good governance: peace, security and sound economic policies create the confidence needed for local and foreign investment. (Also acceptable: adoption of modern technology and diversification of the economy.)

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(a) Two features each.

Perfect competition:

• There are very many buyers and sellers, so no single one can influence the market price.
• The product is homogeneous (identical), and there is freedom of entry and exit with perfect knowledge of the market.

Monopolistic competition:

• There are many sellers, but each sells a slightly differentiated product (through brand, packaging or quality).
• Product differentiation gives each firm some limited control over its price, and there is freedom of entry and exit in the long run.

(b) Price taker and price maker.

• A firm is a price taker when it must accept the price set by the market and cannot influence it, because its output is too small a part of total supply. This describes a firm in perfect competition.
• A firm is a price maker when it has power to set or influence its own price by varying its output, as with a monopolist or a firm selling a differentiated product.

(c) Sources of monopoly power.

1. Acts of parliament: the government may pass a law granting a firm the sole right to supply a good or service (for example a state utility), legally shutting out competitors.
2. Copyright (and patents): legal protection gives the creator or inventor the exclusive right to produce and sell a work or invention for a period, preventing others from copying it.
3. Natural monopoly: where a single large firm can supply the whole market at lower average cost than several firms (for example water or electricity distribution) because of very high fixed costs, so competition is wasteful.
4. Cartel: an agreement among separate producers to act as one by fixing price or output (for example OPEC), giving the group combined monopoly power over the market.

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(a)(i) Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price. Using the initial values as the base:

\[ PED = \frac{\% \Delta Q}{\% \Delta P} = \frac{\Delta Q / Q_1}{\Delta P / P_1} \]

Here \( \Delta Q = 600 - 800 = -200 \), \( Q_1 = 800 \), \( \Delta P = 500 - 450 = 50 \), \( P_1 = 450 \).

\[ PED = \frac{-200/800}{50/450} = \frac{-0.25}{0.1111} = -2.25 \]

The value is 2.25 (ignoring the negative sign, which merely shows the inverse relationship between price and quantity).

(a)(ii) Type of elasticity. Because \( |PED| = 2.25 > 1 \), demand is elastic: the percentage fall in quantity demanded (25%) is greater than the percentage rise in price (about 11%), so buyers are very responsive to the price change.

(b)(i) Total revenue. \( TR = P \times Q \).

• Before: \( 450 \times 800 = \$360{,}000 \).
• After: \( 500 \times 600 = \$300{,}000 \).

(b)(ii) Change in total revenue. \( 300{,}000 - 360{,}000 = -\$60{,}000 \), a fall of \$60,000.

(c) Effect on total revenue. The price increase caused total revenue to fall by \$60,000. This is exactly what theory predicts: when demand is elastic, a rise in price reduces total revenue because the proportionate loss of sales outweighs the higher price per unit.

(d) Two factors influencing PED: availability of close substitutes (more substitutes make demand more elastic), and the proportion of income spent on the good (goods taking a large share of income tend to have more elastic demand). Other acceptable factors: whether the good is a necessity or a luxury, and the time period allowed for adjustment.

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(a) Subsistence farming is a type of farming in which the farmer produces crops and rears animals mainly to feed himself and his family, with little or nothing left over for sale. It is usually small in scale, uses simple tools and family labour, and depends on natural rainfall.

(b) Crop farming versus livestock farming. Crop farming is the cultivation of plants for food, cash or raw materials, for example growing maize, yam, cassava, cocoa and rice. Livestock farming is the rearing of domestic animals for meat, milk, eggs, hides or work, for example keeping cattle, goats, sheep, poultry and pigs. Thus crop farming deals with plants while livestock farming deals with animals, though a mixed farm may combine both.

(c) Four measures government can adopt to boost agricultural production:

1. Provide agricultural credit: make loans available to farmers at low interest through agricultural banks so they can buy inputs and expand output.
2. Supply improved inputs and extension services: provide improved seeds, fertilisers, pesticides and trained extension officers to raise yields.
3. Guarantee prices and provide markets: set minimum guaranteed prices and buy surplus produce to give farmers a stable income and encourage production.
4. Provide infrastructure: build feeder roads, irrigation, storage and processing facilities to reduce waste and ease the movement of produce to markets.

(Other acceptable measures: land reform to give farmers secure access to land, and subsidies on farm inputs.)

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(a) Land as a factor of production means all the free gifts of nature used in production. It includes the surface soil and everything on, above and below it, such as forests, rivers, mineral deposits, sunlight and climate, provided free by nature and not by human effort.

(b) Three features of land:

• It is a free gift of nature: it is not produced by human labour, so it originally has no cost of production.
• It is fixed in supply: the total quantity of land is limited and cannot be increased overall, so its supply is perfectly inelastic.
• It is immobile geographically: land cannot be moved from one location to another; only its use can be changed.

(Other acceptable features: its quality varies from place to place; its reward is rent.)

(c) Four ways land contributes to economic development:

1. Provision of raw materials: land supplies agricultural produce and industrial raw materials (crops, timber, minerals) that feed the manufacturing sector and create employment.
2. Source of food: farmland produces the food needed to feed the population and support a healthy, productive labour force.
3. Source of mineral wealth and foreign exchange: mineral resources such as crude oil, tin and gold are exported to earn foreign exchange and government revenue for development.
4. Site for economic activity: land provides the physical space on which factories, farms, roads, houses and markets are built, making all other production possible.

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(a) Demand and supply schedule using \( Q_d = 30 - p \) and \( Q_s = 15 + 2p \).

(b)(i) Equilibrium. Equilibrium is where \( Q_d = Q_s \):

\[ 30 - p = 15 + 2p \Rightarrow 15 = 3p \Rightarrow p = 5 \]

Equilibrium quantity: \( Q = 30 - 5 = 25 \). So equilibrium price = \$5.00 and equilibrium quantity = 25 units.

(b)(ii) At a fixed price of \$3.00: \( Q_d = 30 - 3 = 27 \); \( Q_s = 15 + 2(3) = 21 \). Since quantity demanded exceeds quantity supplied, there is excess demand of \( 27 - 21 = 6 \) units (a shortage), which is expected because \$3.00 is below the equilibrium price.

(c)(i) New demand schedule with \( Q_d = 40 - p \):

(c)(ii) It represents an increase in demand.

(c)(iii) Explanation. At every price the quantity demanded is now higher than before (for example at \$2.00 it rises from 28 to 38). This means the whole demand curve has shifted to the right, which is the definition of an increase in demand. It is caused by a change in a non-price determinant such as a rise in consumers' income, a change in taste in favour of apples, or a rise in the price of a substitute.

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(a) Two features each.

Free trade area:

• Member countries abolish tariffs and other trade barriers on goods traded among themselves.
• Each member retains its own separate tariff and trade policy towards non-member (outside) countries.

Common market:

• Members remove internal trade barriers and adopt a common external tariff against non-members (so it also forms a customs union).
• There is free movement of the factors of production (labour and capital) as well as goods and services among member states.

(b) Advantages of a common market (any two):

• Larger market: producers sell to a wide combined market, enjoying economies of scale and lower average costs.
• Free movement of factors: labour and capital move to where they are best rewarded, improving efficient use of resources and reducing unemployment.

Disadvantages of a common market (any two):

• Loss of revenue and sovereignty: members give up some tariff revenue and control over their own trade policy to the common external tariff.
• Harm to infant industries: weaker local industries may be driven out of business by stronger competitors from other member states.