WAEC SSCE - Economics - 2012

Maelezo ya Majibu

The law of diminishing marginal utility states that as a consumer consumes more and more units of a particular good or service, the additional satisfaction or utility that he derives from each additional unit goes on decreasing. In other words, the consumer will derive less and less satisfaction from each additional unit consumed, up to a point where the satisfaction derived from each additional unit consumed becomes zero or negative. Therefore, the law of diminishing marginal utility applies to a consumer who is trying to maximize his or her satisfaction from consuming a particular good or service.

Maelezo ya Majibu

Bank balance is not a form of money, as it is simply a record of how much money a person or company has in their bank account. It is not a physical object that can be used to make purchases or transactions directly. In contrast, coins, bank notes, and bank deposits can all be used as forms of money in various contexts.

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The problem that arises where there are more than one technically possible methods of production is "how to produce". This is because the decision on how to produce is concerned with the selection of the most efficient and cost-effective method of producing a good or service. When there are multiple technically feasible methods of production, the producer has to decide which method to choose in order to minimize production costs and maximize profits. This problem is important in the field of economics because it determines the efficiency and profitability of a production process.

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The mode is the observation or value that appears most frequently in a dataset. In other words, it is the value that occurs with the highest frequency. For example, in a dataset of {1, 2, 2, 3, 4, 4, 4, 5}, the mode is 4 because it appears three times, which is more than any other value. Unlike the mean and median, the mode can be used with both numerical and categorical data.

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Encouraging early marriage is not a means of reducing the population of a country. Early marriage can actually lead to an increase in population, as individuals who marry at a younger age are likely to have more children. On the other hand, emigration, family planning, and sex education are all commonly used as methods of reducing population growth. Emigration involves individuals leaving a country to live permanently in another country, which can reduce the population of the first country. Family planning involves the use of contraceptives and other methods to control the number of children a family has, which can help to slow population growth. Sex education involves providing individuals with information about reproductive health and family planning, which can also help to reduce population growth by encouraging individuals to have smaller families.

Maelezo ya Majibu

Maelezo ya Majibu

When a country experiences an improvement in its terms of trade, it means that the prices of its exports have increased relative to the prices of its imports. In other words, the country can now purchase more imports with the same quantity of exports or receive a higher income for the same amount of exports. This can be beneficial to the country's economy because it increases the purchasing power of its exports and can lead to increased revenue and economic growth. Therefore, the correct option is that "exports are cheaper relative to imports" is not correct, while "imports are cheaper relative to exports" is not the answer either. The correct option is that "exports are more expensive relative to imports".

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National income refers to the total income earned by a country's citizens and businesses in a given period. It includes all income earned by citizens and companies both domestically and abroad, minus income earned by foreign entities within the country. Therefore, the answer to the question is not listed as an option. However, it is worth noting that Gross National Product at factor cost is often considered as the best measure of national income, as it includes income earned by the country's citizens both domestically and abroad, and it is adjusted for taxes and subsidies.

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The difference between birth rate and death rate is known as the natural growth rate. The natural growth rate is a measure of population change that indicates whether a population is increasing or decreasing over time. If the birth rate is higher than the death rate, the natural growth rate will be positive and the population will be increasing. On the other hand, if the death rate is higher than the birth rate, the natural growth rate will be negative and the population will be decreasing. The natural growth rate is an important factor in population studies and can have significant implications for social and economic development.

Maelezo ya Majibu

Maelezo ya Majibu

The demand for X and Y is said to be a joint demand because they are consumed together. A decrease in the demand for one product (X) leads to a decrease in the demand for the other product (Y) because they are complementary goods. This means that they are usually used together, so a change in the demand for one will affect the demand for the other. Joint demand occurs when two or more goods are demanded together because they satisfy a particular need or want.

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If a 6% decrease in price results in more than a 6% decrease in quantity supplied, then supply can be regarded as elastic. Elasticity of supply refers to the degree of responsiveness of quantity supplied to a change in price. If the percentage change in the quantity supplied is greater than the percentage change in price, then supply is considered elastic, meaning that small changes in price can result in significant changes in the quantity supplied. In this case, if the decrease in price results in more than a 6% decrease in quantity supplied, it indicates that suppliers are sensitive to price changes and will adjust their supply accordingly. Therefore, the supply can be considered elastic.

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The transaction is possible because of the "double coincidence of wants." This refers to a situation where two individuals have goods or services that the other wants, and they are willing to exchange them directly without the need for money or a medium of exchange. In this case, Mr. Akpoti has meat and wants maize, while Mr. Adama has maize and wants meat, and they can exchange these goods without the use of money because there is a mutual need for each other's goods. Therefore, the double coincidence of wants facilitates the barter exchange between Mr. Akpoti and Mr. Adama.

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The question is asking to identify the option that is NOT a reason for the failure of agricultural policies in West Africa. The correct answer is "creation of agro-service stations" because it is not a reason for the failure of agricultural policies in West Africa. Agro-service stations are intended to provide farmers with information, inputs, and services to improve their agricultural productivity, and thus can be a helpful initiative for supporting agriculture in West Africa. On the other hand, the other options are reasons for the failure of agricultural policies in West Africa. Vague policy statements can lead to confusion and misinterpretation of policy objectives, negation of policies can occur when policies are not enforced or not backed by adequate resources, and provision of obsolete implements can hinder farmers' ability to achieve their full potential.

Maelezo ya Majibu

Maelezo ya Majibu

To calculate average utility, we divide total utility by the quantity consumed. Therefore, the average utility in this case would be 22/4 = 5.5 utils. So, the answer is: 5.5 utils.

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The factor of production which takes the initiative in combining resources for production is the entrepreneur. An entrepreneur is a person who identifies a need in the market and uses their creativity, innovation, and risk-taking abilities to combine other factors of production such as land, labor, and capital in a productive manner to produce goods or services. They take the responsibility of organizing, managing, and coordinating the other factors of production to achieve their business goals.

Maelezo ya Majibu

Population control will not retard economic development in West Africa. Population control refers to measures taken to regulate the growth rate of a population, typically by reducing the birth rate. While population growth can be a challenge for economic development if it outpaces the capacity of a country to provide adequate resources and infrastructure, population control can actually be beneficial for economic growth by reducing pressure on resources and increasing the available labor force. On the other hand, dependence on imports, high level of illiteracy, and low level of savings can all hinder economic development in West Africa. Dependence on imports can strain foreign exchange reserves and limit the growth of domestic industries. High levels of illiteracy can limit access to education and skills training, making it difficult for people to participate in the labor force and for businesses to innovate and grow. Low levels of savings can limit investment in infrastructure and human capital, which are critical for long-term economic growth.

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When the estimated government revenue is less than the proposed expenditure for a given year, it creates a situation where the government is expected to spend more money than it can generate. This is known as a deficit budgeting. In this scenario, the government has to borrow money or increase taxes to meet its financial obligations, which can lead to inflation and other economic challenges.

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The correct equation for national income is Y = C + I + (X - M). In this equation, Y represents national income, C represents consumption, I represents investment, X represents exports, and M represents imports. This equation is based on the national income accounting identity, which states that total income in an economy is equal to total expenditure. Therefore, national income (Y) is the sum of consumption (C), investment (I), and net exports (X - M). The net exports component is the difference between exports (X) and imports (M).

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Visible balance is also known as the balance of trade. It refers to the difference between a country's exports and imports of visible goods, such as physical goods like machinery, food, and clothing. If a country's exports of visible goods are higher than its imports, it has a surplus in its balance of trade, while if its imports are higher than its exports, it has a deficit. The balance of trade is one component of the balance of payments, which also includes the balance of services, capital transfers, and financial flows.

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The function of a retailer is to provide sales services. This means that retailers are businesses that sell goods or products directly to consumers for their personal use. Retailers can operate through physical stores or online platforms, and they usually offer a range of products from different brands or manufacturers. Retailers play a crucial role in the supply chain by connecting producers or manufacturers with end consumers. They buy products in bulk from suppliers and then sell them to individual customers at a higher price, adding their profit margin. This allows customers to access a wide range of products conveniently and at a competitive price. While some retailers may offer banking, hoarding, or storage services, these are not their primary functions. Banking services are typically provided by financial institutions such as banks and credit unions. Hoarding services refer to the practice of accumulating and storing goods or commodities, which is not a core function of retailers. Finally, storage services are typically provided by logistics companies or warehousing businesses, which specialize in storing and managing inventory for different industries.

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The given demand function is Qd = 20 - 1/2P, which represents the relationship between the quantity demanded (Qd) and the price (P) of a product. To find Qd when P is $12, we simply substitute 12 for P in the demand function and solve for Qd as follows: Qd = 20 - 1/2(12) Qd = 20 - 6 Qd = 14 units Therefore, when the price is $12, the quantity demanded is 14 units.

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In open market operations, the Central Bank sells or buys securities. Securities refer to financial instruments that represent ownership in a publicly-traded corporation, a creditor relationship with a governmental body, or a right to ownership as represented by an option. When the Central Bank wants to reduce the money supply in the economy, it can sell securities to commercial banks, which reduces the amount of money the banks have to lend to customers. Conversely, when the Central Bank wants to increase the money supply in the economy, it can buy securities from commercial banks, which injects new money into the economy. Therefore, buying and selling securities is a key tool in implementing monetary policy and managing the money supply in an economy.

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In a free market economy, the allocation of goods and services is performed by the price system. The price system is a mechanism by which prices are determined through the interaction of buyers and sellers in the market. Prices serve as a signal for producers to supply goods and services, and for consumers to demand them. As demand for a product increases, its price increases, which signals to producers to increase their supply. Similarly, as demand for a product decreases, its price decreases, which signals to producers to decrease their supply. This mechanism ensures that goods and services are allocated efficiently based on consumer preferences and market demand, without the need for central planning or government intervention.

Maelezo ya Majibu

The condition for consumer utility maximization is the equality of the ratio of marginal utilities and the ratio of prices. In simpler terms, this means that a consumer can maximize their satisfaction or utility by allocating their budget in such a way that the additional satisfaction gained from consuming an extra unit of a good (marginal utility) is equal to the price of that good divided by the price of another good. In other words, the consumer should spend their money on goods in such a way that the satisfaction gained from the last dollar spent on each good is the same. By following this condition, the consumer can spend their budget in the most efficient way and achieve the highest level of satisfaction or utility possible.

Maelezo ya Majibu

Maelezo ya Majibu

The correct answer is "legal monopoly". A legal monopoly arises from the granting of exclusive rights to a company or individual by the government. In this case, a patent is a legal right granted by the government that gives the owner the exclusive right to produce and sell a particular product or invention for a certain period of time. Therefore, the monopoly that arises from the grant of a patent is referred to as a legal monopoly. This means that no other company can produce or sell the product without permission from the patent owner, and the patent owner can charge a higher price due to their exclusive right to produce and sell the product.

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Small scale businesses are very common in West Africa because their initial capital is easy to raise. Small scale businesses require a small amount of capital to start, which is easily available to entrepreneurs in West Africa. This is in contrast to large businesses that require significant amounts of capital to start and run, which is often difficult to obtain. Additionally, small scale businesses are often managed by the owners themselves or their family members, which means that they can make quick decisions and adapt to changing market conditions more easily than large businesses with complex management structures.

Maelezo ya Majibu

In a situation where the finished product of an industry is fragile, bulky and perishable, such an industry should be located close to its market. This is because transporting such goods over long distances can be difficult and costly, and may result in damage or spoilage of the goods. Additionally, being close to the market allows for quick and efficient delivery of the goods to consumers, which is important in maintaining their freshness and quality.

Maelezo ya Majibu

Maelezo ya Majibu

A public limited company can finance its operations in various ways, including issuing equity shares to the public, which involves selling ownership shares in the company to investors. This provides the company with funds that can be used to finance its operations, such as purchasing new equipment or expanding the business. Additionally, a public limited company may also generate revenue through dividend payments, which are payments made to shareholders based on the company's profits. These payments can be reinvested by shareholders or used for personal expenses. However, government taxes and import duties are not typically used as a means of financing a company's operations, as they are expenses that the company is required to pay. Rather, these expenses are factored into the company's operating costs and are accounted for in its financial statements.

Maelezo ya Majibu

An increase in birth rate is capable of increasing the population of a country. Birth rate refers to the number of live births per thousand of the population per year. If the birth rate of a country increases, it means that more babies are being born per thousand of the population per year. This can lead to an increase in the population of the country over time. Therefore, option A (increase in birth rate) is the correct answer. The other options (increase in death rate, poor medical facilities, and decrease in birth rate) are likely to result in a decrease in population or a slower population growth rate.

Maelezo ya Majibu

Maelezo ya Majibu

One of the main problems facing industrial development in West African countries is inadequate infrastructure. This includes things like poor transportation networks, unreliable energy supply, and a lack of access to basic services like water and sanitation. Without sufficient infrastructure, it can be difficult for businesses to operate efficiently, transport goods, and connect with markets. This can limit economic growth and make it challenging for countries to attract investment and create jobs. Additionally, inadequate infrastructure can exacerbate poverty and inequality by limiting access to essential services for marginalized communities.

Maelezo ya Majibu

The difference between the number of immigrants (people who move into a country) and emigrants (people who move out of a country) is known as net migration. It is a measure of the total number of people who have migrated to a country or left a country over a specific period of time. Net migration can be positive (more people are entering the country than leaving) or negative (more people are leaving the country than entering). It is an important factor in understanding population growth and demographic changes in a country.

Maelezo ya Majibu

The feature that best describes peasant agriculture in West Africa is the use of small farm holdings. Peasant agriculture in West Africa typically involves small-scale farmers who cultivate small plots of land for subsistence and sometimes for sale in local markets. They often use traditional methods of farming, such as manual labor and hand-held tools, and rely on family labor. This type of farming is generally not capital-intensive and does not specialize in the production of a single crop. While tree crops are important in some areas, peasant agriculture in West Africa is generally characterized by a diverse range of crops grown on small plots of land.

Maelezo ya Majibu

Import substitution is a strategy used by countries to reduce their dependence on imports by producing goods domestically that were previously imported. The strategy aims to boost domestic production, create employment opportunities and increase self-sufficiency. Therefore, option C is correct - import substitution enables a country to curtail importation. It does not necessarily improve on importation or increase exportation, but it may lead to an increase in exports if domestic industries become more competitive and can produce goods for export.

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A price index as a statistic measures how the value of money changes over time. It tracks the average price level of a selected basket of goods and services over time, comparing it to a base year or period. The price index allows economists and policymakers to monitor and analyze inflation, deflation, and changes in purchasing power. By tracking the prices of goods and services, a price index can provide insights into the state of the economy and the effectiveness of economic policies.

Maelezo ya Majibu

If the price of a good or service is below the equilibrium price, there will be excess demand in the market. This means that buyers will want to purchase more of the good or service than sellers are willing to supply at that price. As a result, there will be a shortage of the good or service, and some potential buyers will be unable to find what they want. In this situation, suppliers may choose to increase their production in order to take advantage of the higher demand, and as a result, the supply of the good or service will eventually increase. At the same time, the excess demand will put upward pressure on prices, which will eventually move towards the equilibrium price, where the quantity demanded equals the quantity supplied. Therefore, in summary, any price below the equilibrium price will lead to excess demand, which will eventually result in an increase in supply and a rise in prices towards the equilibrium level.

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The features of an optimum population are characteristics that describe an ideal population level for a country or region. The features of an optimum population include full employment of available resources, maximum per capita production and income, and a high standard of living. However, one of the options listed, "unlimited amount of unexploited resources," is not a feature of an optimum population. In fact, the concept of an unlimited amount of unexploited resources is not realistic, as all resources are finite and will eventually become depleted if not managed sustainably. Therefore, the answer is "unlimited amount of unexploited resources."

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The arrangement described in the question implies "limited liability". Limited liability is a legal concept that limits the amount of money a shareholder or owner can lose in case of a company's failure. In other words, the debts of a company can only be paid from its own assets, and the personal assets of shareholders or owners are protected. This means that the liability of the shareholders or owners is limited to the amount they have invested in the company. Therefore, if a company fails, the shareholders or owners will not lose more than the value of their investment.

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When depreciation is deducted from Gross National Product (GNP), the result is Net National Product (NNP). Depreciation is the amount of capital goods that have worn out or been used up during the production process, and it represents a decrease in the value of the economy's stock of physical capital. Deducting depreciation from GNP gives us NNP, which is the value of the nation's final output of goods and services minus the amount of capital that has been used up or worn out during the production process. In other words, NNP is a measure of the economy's net output or income after accounting for the depreciation of its physical capital.

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The financial institution that specializes in risk spreading is an insurance company. An insurance company offers various insurance products to individuals or businesses to protect them against financial losses due to unexpected events, such as accidents, theft, natural disasters, or illnesses. In exchange for a premium payment, the insurance company assumes the risk of financial loss and promises to compensate the policyholder for any covered losses. By spreading the risk among many policyholders, the insurance company can ensure that no single individual or business suffers a devastating financial loss.

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Maelezo ya Majibu

Maelezo ya Majibu

A shift in the demand curve refers to a change in the entire demand schedule, caused by a factor other than the price of the commodity. This means that at every price, the quantity demanded has changed. For instance, a change in consumer preferences, income, or the prices of substitute or complementary goods can shift the demand curve to the right or left. A shift to the right indicates an increase in demand while a shift to the left indicates a decrease in demand. Therefore, a shift in the demand curve represents a change in demand, which is different from a change in quantity demanded, which is caused by a change in the price of the commodity, leading to a movement along the same demand curve.

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One of the reasons why the government may erect a trade barrier is to protect infant industries. A trade barrier is a government-imposed restriction on international trade, and it can take many forms, including tariffs, quotas, and embargoes. The purpose of trade barriers is to protect domestic industries from foreign competition. One of the arguments in favor of trade barriers is that they can protect infant industries, which are new or emerging industries that may not be able to compete with more established foreign industries. By erecting trade barriers, the government can protect these industries until they are strong enough to compete on their own.

Maelezo ya Majibu

Maelezo ya Majibu

(a) A market in economics is any arrangement or system through which buyers and sellers of a commodity are brought into contact with one another to exchange goods and services at an agreed price. It need not be a particular physical place; contact may be by telephone, internet or agents.

(b) Three features of a monopoly

• Single seller: there is only one producer or seller of the commodity, who is the industry.
• No close substitutes: the product has no near alternatives, so buyers cannot easily switch away.
• Price maker with barriers to entry: the monopolist can influence price by controlling output, and new firms are prevented from entering the industry.

(c) Three sources of monopoly power

• Legal grants: patents, copyrights, licences or a government franchise that give one firm exclusive rights.
• Control of a raw material or key resource: ownership of an essential input or the sole source of supply shuts out rivals.
• Economies of scale (natural monopoly): where a single large firm can supply the whole market at lower cost than several firms, discouraging entry.

(Mergers and takeovers, and ownership of special technical knowledge, are other valid sources.)

Maelezo ya Majibu

(a) The law of comparative cost (comparative advantage), associated with David Ricardo, states that a country should specialise in producing and exporting those goods in which it has the greatest comparative advantage (lowest opportunity cost) and import those goods in which it has a comparative disadvantage, even where it holds an absolute advantage in producing both goods. Trade will still benefit both countries because each concentrates where its opportunity cost is lowest.

The key idea is opportunity cost. Suppose two countries can each produce cloth and wine. Even if one country is more efficient at both, its advantage will be relatively greater in one good than the other. By specialising where its advantage is comparatively greatest and trading for the other good, total world output of both goods rises, and each country obtains more of both than it could by producing both itself. Thus specialisation according to comparative cost leads to mutual gains from trade.

(b) Two limitations of the law as a theory of international trade

• It ignores transport costs. The theory assumes goods move freely between countries; in reality high transport and handling costs can wipe out the comparative-cost gain.
• It assumes free trade with no barriers. In practice tariffs, quotas and other trade restrictions prevent countries from specialising and trading fully along comparative-cost lines. (Other valid limitations: it assumes constant costs and full employment, perfect factor mobility within a country but immobility between countries, and only two countries and two commodities.)

Maelezo ya Majibu

(a) Money is anything that is generally accepted as a medium of exchange and in the final settlement of debts.

(b) The three motives for holding money (as identified by J. M. Keynes):

• The transactionary (transactions) motive: holding money to meet day-to-day purchases and expenses.
• The precautionary motive: holding money to meet unforeseen or emergency expenses.
• The speculative motive: holding money to take advantage of expected changes in the price of bonds or other assets, that is, to speculate.

(c) Two determinants of each motive

• Transactionary motive: the level of the individual's or nation's income, and the interval or frequency of receiving income and making payments (also the general price level).
• Precautionary motive: the level of income, and the degree of uncertainty about the future together with the person's temperament or foresight.
• Speculative motive: the current rate of interest (bond prices), and people's expectations about future interest rates and bond prices.

In general, the transactionary and precautionary balances depend mainly on income, while the speculative balance depends chiefly on the rate of interest.

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The demand for a good changes when the conditions of demand change. Judge each factor by whether it raises or lowers consumers' ability or willingness to buy commodity X, and whether the related good is a complement or a substitute.

(a) A decrease in the price of an implement Y (a complement used together with X). Because Y is used jointly with X, a fall in the price of Y makes the combined use cheaper, so consumers buy more of Y and therefore more of X. The demand for X rises (the demand curve for X shifts to the right).

(b) An increase in consumers' disposable income. For a normal good, higher disposable income raises purchasing power, so the demand for X increases (rightward shift). (If X were an inferior good, demand would instead fall.)

(c) A decrease in the supply of a substitute P. A fall in the supply of the substitute P pushes up P's price. As P becomes dearer, consumers switch away from P towards X, so the demand for X increases.

(d) An increase in income tax. Higher income tax reduces consumers' disposable income and therefore their purchasing power, so the demand for the normal good X falls (leftward shift).

Note that these are changes in the conditions of demand, so they shift the whole demand curve, unlike a change in the price of X itself, which would cause only a movement along the curve.

Maelezo ya Majibu

(a) The output (product) method of measuring GDP. Under this method the gross domestic product is found by adding up the money value of all final goods and services produced by all sectors of the economy (agriculture, industry, services and so on) within the country during a year. To avoid double counting, only the value of final goods is counted, or equivalently the value added at each stage of production is summed. Value added is the difference between the value of a firm's output and the cost of the inputs it bought from other firms.

(b) Obtaining net national product at factor cost from GDP. Proceed step by step:

1. Add net income from abroad to GDP to obtain gross national product: \( GNP = GDP + \text{net income from abroad} \).
2. Subtract depreciation (capital consumption) to obtain net national product at market prices: \( NNP_{mp} = GNP - \text{depreciation} \).
3. Subtract indirect taxes and add subsidies to obtain net national product at factor cost: \( NNP_{fc} = NNP_{mp} - \text{indirect taxes} + \text{subsidies} \).

(c) Two problems associated with the output method

• The danger of double counting: if intermediate goods are added in as well as final goods, output is overstated; care is needed to count only final goods or value added.
• Valuation of non-marketed and subsistence output: goods produced and consumed at home (for example subsistence farming and unpaid household services) have no market price and are hard to value or may be left out, understating true output.

Maelezo ya Majibu

(a) A supply schedule is a table showing the different quantities of a commodity that producers are willing and able to supply at various prices over a given period.

(b) Obtaining a market supply schedule from individual schedules. The market supply schedule is found by horizontal summation: at each price, add together the quantities that all the individual producers are willing to supply. Suppose there are two producers, A and B:

At each price the market quantity is simply the sum of A's and B's quantities (for example at $2, \( 20 + 25 = 45 \) units). Extending this addition to every producer in the market gives the whole market supply schedule.

(c) Three examples of exceptional (abnormal) demand, where more is bought as price rises or less as price falls, contrary to the ordinary law of demand:

• Giffen goods (basic inferior staples), for which a rise in price can raise quantity demanded.
• Goods of ostentation or prestige (Veblen goods), bought precisely because they are expensive.
• Goods bought under the expectation of future price changes, where a rising price today makes buyers rush to buy more, fearing further rises.

Maelezo ya Majibu

(a) Minimum price

A minimum price, also called a price floor, is the lowest price fixed by government below which a commodity must not be bought or sold. For it to have an effect, it must be fixed above the equilibrium price.

In the diagram, the demand curve is DD and the supply curve is SS. They intersect at E, giving the equilibrium price P_e and equilibrium quantity Q_e. Government fixes the minimum price at P_min, which is above P_e. At this price, quantity demanded falls to Q_d, while quantity supplied rises to Q_s. The difference, Q_s − Q_d, is excess supply or surplus. Government must therefore take measures to dispose of, buy up, or prevent the production of the surplus if the minimum price is to be maintained.

(b) Measures for making a minimum price of an agricultural produce effective

1. Government purchase and buffer stock: Government may buy the excess output at the guaranteed minimum price and store it as buffer stock.
2. Promotion of exports: Export markets may be developed to increase demand for the produce and reduce the surplus.
3. Advertisement and publicity: Extensive advertising can increase consumers' awareness and demand for the agricultural produce.
4. Tax on substitutes: Taxes may be imposed on close substitutes, raising their prices and shifting demand towards the protected produce.
5. Restriction of output: Government may introduce quotas, acreage restrictions, or production licences to reduce supply.
6. Withdrawal or reduction of production subsidies: Reducing subsidies to producers raises production costs and discourages excessive output.
7. Higher taxes on producers: Appropriate taxes may discourage overproduction and reduce the quantity supplied.
8. Encouragement of alternative products: Resources may be diverted to the production of other commodities by granting incentives or reducing taxes on those commodities.

Maelezo ya Majibu

(a) Wants versus effective demand. A want is simply a desire for a commodity, whether or not the person can pay for it. Effective demand is a want that is backed by both the willingness and the ability to pay (purchasing power). A want becomes effective demand only when the consumer is able and ready to buy at the ruling price.

(b) Demand schedule versus demand curve. A demand schedule is a table showing the quantities of a commodity that consumers will buy at various prices. A demand curve is the graphical representation of that schedule, a line (usually sloping downward from left to right) plotting price against quantity demanded. The curve is drawn from the figures in the schedule.

(c) Individual demand versus market demand. Individual demand is the quantity of a commodity a single consumer is willing and able to buy at each price. Market demand is the total demand for the commodity by all consumers in the market, obtained by adding up the individual demands at each price.

(d) Change in demand versus change in quantity demanded. A change in quantity demanded is a movement along the same demand curve caused by a change in the good's own price. A change in demand is a shift of the whole demand curve (to the right or left) caused by changes in factors other than the good's own price, such as income, tastes, or the prices of related goods.

Maelezo ya Majibu

(a) Economic activities versus an economic system

Economic activities are the human efforts and actions directed at the production, distribution, exchange and consumption of goods and services in order to satisfy human wants (for example farming, trading, banking and manufacturing). An economic system, on the other hand, is the organised framework or method a society adopts to allocate its scarce resources and to decide what to produce, how to produce and for whom to produce (for example capitalism, socialism or a mixed economy). In short, economic activities are the individual actions people carry out, while an economic system is the overall arrangement within which those activities take place.

(b) Explanation of the terms

• (i) Production: the creation of goods and services to satisfy human wants. It adds utility (value) to resources and includes not only making goods but also providing services and moving goods closer to the consumer.
• (ii) Distribution: the process of moving and sharing produced goods and services from producers to final consumers through the chain of trade. (In another sense it also means the sharing of the national income among the factors of production as rent, wages, interest and profit.)
• (iii) Consumption: the using up of goods and services to satisfy human wants. It is the final aim of all economic activity, since goods are produced and distributed ultimately in order to be consumed.

Maelezo ya Majibu

(a) Revenue by source

• (i) Direct taxes = Company income tax + Personal income tax \(= 150.00 + 80.00 = \$230.00\) million.
• (ii) Indirect taxes = Customs and excise duties + Value added tax \(= 300.20 + 100.00 = \$400.20\) million.
• (iii) Non-tax sources = Rents, royalties and profits + Fees and specific charges \(= 75.00 + 60.80 = \$135.80\) million.

(b) Expenditure by type

• (i) Capital expenditure = Building of schools and hospitals + Road construction \(= 200.00 + 180.90 = \$380.90\) million.
• (ii) Recurrent expenditure = General administration + Maintenance of foreign missions + Transfer payments \(= 220.10 + 50.00 + 65.00 = \$335.10\) million.

(c) Surplus or deficit

Total revenue \(= 75 + 150 + 300.20 + 80 + 60.80 + 100 = \$766.00\) million.

Total expenditure \(= 380.90 + 335.10 = \$716.00\) million.

\[766.00 - 716.00 = +\$50.00\ \text{million}\]

Revenue exceeds expenditure, so the budget is a surplus of \$50 million.

Maelezo ya Majibu

Reading the diagram. The vertical axis is Cost/Revenue and the horizontal axis is Output/Sales. The MC curve (dashed) is U-shaped and rises steeply; the AC curve is U-shaped, cut by MC at its lowest point. Three horizontal revenue lines are drawn: \(AR_1=MR_1\) at price \(P_1\) (lowest), \(AR_2=MR_2\) at \(P_2\) (middle) and \(AR_3=MR_3\) at \(P_3\) (highest). The horizontal (flat) AR = MR lines tell us the firm is a price taker. Point A sits at output \(Q_1\) where the \(P_1\) line just touches the bottom of the AC curve; point E sits at \(Q_2\) on the \(P_2\) line where MC cuts \(MR_2\); output \(Q_3\) is further to the right where MC has risen to the \(P_3\) level (point H).

(a) Why the firm would not produce at:

(i) \(Q_1\). At \(Q_1\) the marginal cost (point A, at the level of \(P_1\)) is below the marginal revenue the firm receives at the ruling price \(P_2\); that is \(MC < MR\). Each extra unit beyond \(Q_1\) adds more to revenue than to cost, so profit is still rising. The firm would therefore expand output past \(Q_1\) rather than stop there.

(ii) \(Q_3\). At \(Q_3\) the marginal cost has risen to the \(P_3\) level, which is above the marginal revenue \(P_2\); that is \(MC > MR\). The last units cost more to make than they earn, so they reduce total profit. The firm would cut back from \(Q_3\). Profit is largest only where \(MC = MR\), at \(Q_2\) (point E).

(b) How much profit the firm makes at \(P_1\). The \(AR_1=MR_1\) line at \(P_1\) is exactly tangent to the AC curve at its minimum point A. There average revenue equals average cost:

So at \(P_1\) the firm makes only normal profit (zero supernormal/abnormal profit). Total revenue just covers total cost, including the normal return to the entrepreneur; there is no excess profit.

(c) If price falls to \(P_1\):

(i) Quantity produced. The firm equates \(MC = MR_1\) at price \(P_1\), which occurs at point A. Output \(= \mathbf{Q_1}\).

(ii) Type of profit. The firm makes normal profit only.

(iii) Explanation. At \(Q_1\) the price line \(P_1\) touches the AC curve at its lowest point, so \(AR = AC\) and total revenue equals total cost. The firm therefore just covers all its costs, including the normal profit that is counted as part of cost (the minimum reward needed to keep the entrepreneur in business). Since there is no gap between AR and AC, there is no supernormal profit and no loss. This point A is the firm's break-even point, and in the long run under perfect competition it is the equilibrium position.

(d) Type of market. The firm is operating under perfect competition. The clue is that average revenue equals marginal revenue and both are drawn as horizontal (perfectly elastic) lines (\(AR=MR\)), which means the firm is a price taker that can sell any quantity at the ruling market price.

Maelezo ya Majibu

(a)

(i) Elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in any of the factors that influence demand, such as price, income and the prices of related goods.

(ii) Price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in its own price.

(b) Determinants of price elasticity of demand

1. Availability of substitutes: Demand is more elastic where close substitutes are available, but inelastic where there are no close substitutes.
2. Nature of the commodity: Necessities generally have inelastic demand, whereas luxuries tend to have elastic demand.
3. Proportion of income spent: Demand tends to be elastic where a large proportion of income is spent on the commodity, and inelastic where only a small proportion is spent.
4. Number of uses: A commodity with many alternative uses tends to have elastic demand, while one with few uses tends to have inelastic demand.
5. Habit or addiction: Goods which consumers are accustomed or addicted to using tend to have inelastic demand.
6. Time period: Demand becomes more elastic over a longer period because consumers have more time to find substitutes or adjust their consumption.
7. Level of price: Demand for very cheap goods tends to be inelastic, while demand for relatively expensive goods tends to be more elastic.
8. Breadth of definition: Broadly defined commodities tend to have inelastic demand, while narrowly defined brands or varieties tend to have elastic demand.

(c)

(i) Fairly elastic demand curve: The demand curve slopes downward from left to right and is relatively flat.

(ii) Perfectly inelastic demand curve: Quantity demanded remains constant at all prices. The demand curve is vertical and parallel to the price axis.