WAEC SSCE - Economics - 2021 (Essay)

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(a) Three characteristics of perfect competition.

• There are many buyers and many sellers, so no single firm can influence the market price; each is a price taker.
• The product is homogeneous (identical), so buyers have no reason to prefer one seller.
• There is free entry into and exit from the industry in the long run.
• There is perfect knowledge of prices and conditions by buyers and sellers, and free/perfect factor mobility.

(b) Equilibrium of a perfectly competitive firm. In every case the firm maximises profit where marginal cost equals marginal revenue, \( MC = MR \), with MC cutting MR from below. Because the firm is a price taker, \( P = AR = MR \) and the demand curve is a horizontal line at the market price.

(i) Short run. The firm produces where \( MC = MR = P \). At this output the firm may earn supernormal profit (if \( P > AC \)), normal profit (if \( P = AC \)), or a loss (if \( P < AC \)). It continues in the short run so long as price at least covers average variable cost. Diagram: a horizontal demand line \( P = AR = MR \) cutting a U-shaped MC curve; the gap between price and AC at the equilibrium output shows profit or loss.

(ii) Long run. Supernormal profits attract new firms (free entry), which raises supply and lowers price, while losses drive firms out until price rises. Adjustment stops when each firm earns only normal profit, so long-run equilibrium is where \( P = AR = MR = MC = AC \) at the minimum point of the average cost curve. Diagram: the horizontal demand line is tangent to the lowest point of the AC curve, with MC passing through that point.

Examination reminder: stress that only normal profit survives in the long run because free entry and exit compete away any supernormal profit.

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(a) Price elasticity of demand (PED). It is the degree of responsiveness of the quantity demanded of a good to a change in its price. It is measured as \( PED = \dfrac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}} \).

(b) Elastic versus inelastic demand.

(c) Effect on a trader's total revenue. Recall \( TR = P \times Q \).

(i) When demand is elastic: a fall in price causes a more than proportionate rise in quantity demanded, so total revenue rises; a rise in price causes a more than proportionate fall in quantity, so total revenue falls. Price and total revenue move in opposite directions. On a diagram, plot a gently sloping (flat) demand curve; cutting price from \( P_1 \) to \( P_2 \) enlarges the revenue rectangle \( P \times Q \).

(ii) When demand is inelastic: a rise in price causes only a less than proportionate fall in quantity, so total revenue rises; a fall in price causes total revenue to fall. Price and total revenue move in the same direction. On a diagram, draw a steep demand curve; raising price from \( P_1 \) to \( P_2 \) enlarges the revenue rectangle.

Examination reminder: to raise revenue, cut price when demand is elastic but raise price when demand is inelastic.

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(a) Product retailing. Retailing is the final stage in the chain of distribution in which goods are sold in small quantities directly to the final consumer for personal use. The retailer buys from the wholesaler (or producer) and breaks bulk to serve individual buyers.

(b) Three roles of the wholesaler to the manufacturer.

• Provides a ready market and buys in bulk: the wholesaler purchases large quantities, enabling the manufacturer to sell output quickly and continue production.
• Warehousing (storage): the wholesaler stores goods, relieving the manufacturer of the cost and risk of holding large stocks.
• Provides finance: by paying for goods (often in advance or promptly), the wholesaler supplies the manufacturer with working capital.
• Bears risk and gives market information: the wholesaler bears storage and price risks and feeds back consumers' tastes and preferences to the manufacturer.

(c) Three problems associated with distribution of products.

• Poor transport and infrastructure: bad roads and inadequate storage raise cost and cause delay and spoilage.
• High cost of distribution: transport, storage and middlemen charges raise the final price to consumers.
• Hoarding and adulteration by middlemen: some intermediaries hoard goods to create artificial scarcity or tamper with products.
• Perishability of goods: without cold storage many products spoil before reaching consumers.

Examination reminder: address the roles specifically to the manufacturer (not the consumer), since the question fixes the audience.

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Sector classification of the occupations

(a) Size of the entire labour force

Add every occupation: \(30 + 37 + 19 + 12.2 + 16.1 + 10.8 + 15.6 + 19 + 10.3 = 170\) million.

The labour force = 170 million workers.

(b) Percentage in each sector (each sector total divided by 170, times 100)

• (i) Primary: \(\dfrac{42.5}{170}\times 100 = 25\%\)
• (ii) Secondary: \(\dfrac{68.0}{170}\times 100 = 40\%\)
• (iii) Tertiary: \(\dfrac{59.5}{170}\times 100 = 35\%\)

(c) Ratio of mining workers to shoe-production workers

\(16.1 : 30 = 161 : 300\) (multiplying both by 10). Since 161 and 300 share no common factor, the ratio is 161 : 300.

(d) Percentage engaged in warehousing

\(\dfrac{12.2}{170}\times 100 = 7.18\%\) (approximately).

(e) Type of economy

(i) It is an industrialised (developed) mixed economy.

(ii) Reason: only 25% of the labour force is in primary (extractive/agricultural) production, while 75% is engaged in secondary and tertiary activities. A small primary share with large manufacturing and service sectors is the mark of an industrialised economy rather than a subsistence agrarian one.

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(a) Control of money supply by the Central Bank.

(i) Open Market Operation (OMO). This is the deliberate buying and selling of government securities (treasury bills and bonds) in the open market by the Central Bank to alter the amount of money in circulation. To reduce the money supply, the Bank sells securities; the public and commercial banks pay for them, so cash is withdrawn from the banking system and banks' ability to create credit falls. To increase the money supply, the Bank buys back securities, injecting cash into the system and expanding credit.

(ii) Bank rate (discount rate). This is the rate of interest at which the Central Bank lends to commercial banks as lender of last resort. To contract the money supply, the Bank raises the bank rate; commercial banks then raise their own lending rates, borrowing becomes dearer, loans fall and the money supply contracts. To expand the money supply, the Bank lowers the bank rate, making credit cheaper and encouraging borrowing.

(b) Four functions of the Central Bank of Nigeria.

• Issue of currency: it is the sole issuer of legal-tender notes and coins.
• Banker to the government: it keeps government accounts, receives revenue and makes payments on its behalf.
• Banker to and supervisor of commercial banks: it holds their reserves, acts as lender of last resort and regulates them.
• Control of money supply and credit: it conducts monetary policy through OMO, bank rate, reserve requirements, etc.
• Custodian of external reserves and management of the exchange rate.

Examination reminder: link each instrument to its direction: selling securities and raising the bank rate both reduce money supply; buying securities and cutting the rate both increase it.

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(a) The missing values (using \(AR = \dfrac{TR}{Q}\), \(TR = P\times Q\), \(MR = \dfrac{\Delta TR}{\Delta Q}\))

• X = AR at Q = 20 = \(\dfrac{3000}{20} = \$150\)
• U = Unit price at Q = 30 = AR = \(\dfrac{3600}{30} = \$120\)
• V = TR at Q = 40 = \(100\times 40 = \$4000\)
• W = MR at Q = 40 = \(\dfrac{4000-3600}{40-30} = \dfrac{400}{10} = \$40\)
• Y = AR at Q = 40 = \(\dfrac{4000}{40} = \$100\)

(b) Type of market

The firm operates in an imperfect market (monopoly). The unit price (average revenue) falls as output rises, and marginal revenue is below average revenue at every level. A firm facing a downward-sloping demand/AR curve with MR < AR is a price-searcher, not a perfectly competitive price-taker.

(c) Equilibrium output

A firm is in equilibrium where \(MR = MC\). Since \(MC = \$60\) at all outputs, equilibrium is where \(MR = \$60\), which occurs at Q = 30 units. Producing beyond this, MR falls below MC, so additional units subtract from profit.

(d) Margin of profit or loss at 50 units

At 50 units, \(TR = \$4000\). Taking the stated total cost as \$6,000:

\[\text{Profit} = TR - TC = 4000 - 6000 = -\$2000\]

The firm makes a loss of \$2,000.

(e) Another name for marginal cost

Incremental cost (the extra/additional cost of producing one more unit).

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(a) Economies of scale. These are the cost advantages, seen as a fall in the long-run average (unit) cost of production, that a firm enjoys as it expands its scale of output. As output rises, total cost is spread over more units and specialised resources are used more efficiently, so cost per unit falls.

(b) Three internal economies of scale. (These arise from the growth of the individual firm itself.)

• Technical economies: a large firm can install big, specialised, more efficient machinery and use methods of mass production that lower unit cost.
• Managerial economies: a large firm can employ specialist managers and divide administrative work, raising efficiency without a proportionate rise in cost.
• Financial economies: large firms borrow more easily and at lower interest rates and can raise capital from many sources.
• Marketing (commercial) economies: bulk buying of inputs at discounts and bulk selling reduce cost per unit.

(c) Three factors that influence where a firm is sited (location factors).

• Nearness to raw materials: especially where materials are bulky or perishable, to cut transport cost.
• Availability of labour: supply of suitable skilled or cheap labour.
• Access to market: nearness to consumers reduces distribution cost.
• Transport and infrastructure: good roads, power and water supply.

Examination reminder: keep internal economies (from the firm's own growth) distinct from external economies (from growth of the whole industry).

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(a) Domestic trade versus external trade. Domestic (internal) trade is the buying and selling of goods and services within the boundaries of a single country, using one common currency and one set of laws. External (international/foreign) trade is trade between different countries, involving different currencies, customs duties, exchange-rate problems and different commercial laws. External trade is further divided into import, export and entrepot trade.

(b) Terms of trade versus balance of trade. Terms of trade measure the rate at which a country's exports exchange for its imports, expressed as an index: \( \text{Terms of trade} = \dfrac{\text{index of export prices}}{\text{index of import prices}} \times 100 \). It shows whether export earning power is improving. Balance of trade is the difference in value between a country's visible exports and visible imports of goods over a period; a surplus (favourable) means visible exports exceed visible imports, a deficit means the reverse.

(c) Four causes of a balance of payments deficit.

• Excess of imports over exports: spending more on foreign goods and services than is earned from selling abroad.
• Fall in world prices of a country's exports (unfavourable terms of trade), reducing export earnings.
• Heavy external debt servicing: large outflows of interest and principal to foreign creditors.
• Capital flight and large invisible payments such as freight, insurance and profit repatriation by foreign firms.
• Over-dependence on a single export commodity, so a fall in its demand or price causes a deficit.

Examination reminder: do not confuse balance of trade (visibles only) with balance of payments (all transactions, visible and invisible, plus capital).