WAEC SSCE - Economics - 2019 (Essay)

Maelezo ya Majibu

Demand-pull inflation is a persistent rise in the general price level caused by aggregate demand growing faster than the economy's ability to supply goods and services (too much money chasing too few goods).

(a) Four causes of demand-pull inflation:

1. Increase in the money supply. When more money is put into circulation (for example by excessive borrowing or printing), spending rises faster than output and prices are pushed up.
2. Increase in government spending. Heavy public spending, especially deficit financing, raises total demand in the economy.
3. Rise in consumers' incomes and spending. Higher wages or salaries increase purchasing power and demand for goods.
4. Increase in export demand / injection of foreign exchange. Strong demand for a country's exports raises incomes and domestic spending, adding to demand pressure.

(Other valid causes: easy availability of bank credit and a fall in the desire to save.)

(b) Four undesirable effects of inflation:

1. Fall in the value of money (reduced purchasing power), so incomes buy less.
2. It hurts fixed-income earners such as pensioners and salaried workers, whose real income falls.
3. It discourages saving because money kept loses value, which reduces funds available for investment.
4. It worsens the balance of payments, since exports become expensive and less competitive while imports become more attractive.

(Other valid effects: it redistributes income unfairly from lenders to borrowers, and it creates uncertainty that discourages long-term planning.)

Maelezo ya Majibu

Visible (merchandise) trade covers physical goods; invisible trade covers services and other transfers. All figures are in $ million.

(a) Balance of trade (visible exports minus visible imports): visible exports \(=200+300=500\); visible imports \(=250+400=650\). \[\text{Balance of trade}=500-650=-150.\] This is a trade deficit of $150 million.

(b) Invisible trade balance (invisible receipts minus invisible payments): receipts \(=25+30+25+60=140\); payments \(=50+75+85+150=360\). \[\text{Invisible balance}=140-360=-220.\] This is an invisible deficit of $220 million.

(c) Balance on current account (balance of trade plus invisible balance): \[-150+(-220)=-370.\] The current account has a deficit of $370 million.

Maelezo ya Majibu

(a) Industry. An industry is a group of firms engaged in the production of the same or similar kinds of goods or services (for example, the textile industry or the banking industry).

(b) Concepts:

• (i) Division of labour is the splitting of a production process into separate tasks so that each worker specialises in one particular task rather than doing the whole job. It raises output through greater skill and speed.
• (ii) Economies of scale are the cost advantages (falling average cost per unit) that a firm enjoys as it expands its scale of production and produces on a larger scale.

(c) Four internal economies of scale:

1. Technical economies: a large firm can use large, specialised and more efficient machines, lowering unit cost.
2. Managerial economies: a big firm can employ specialist managers for each department, improving efficiency.
3. Marketing (commercial) economies: it can buy raw materials in bulk at discounts and spread selling and advertising costs over more units.
4. Financial economies: a large firm can borrow more easily and at lower interest rates because it is seen as more creditworthy.

(Other valid internal economies: risk-bearing economies through diversification and research economies.)

Maelezo ya Majibu

(a)(i) Elastic vs inelastic demand.

(a)(ii) Income elasticity vs cross elasticity of demand.

• Income elasticity of demand measures the responsiveness of quantity demanded of a good to a change in consumers' income: \[ e_y = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}} \]
• Cross elasticity of demand measures the responsiveness of quantity demanded of one good (X) to a change in the price of another good (Y): \[ e_{xy} = \frac{\% \text{ change in quantity demanded of X}}{\% \text{ change in price of Y}} \] It is positive for substitutes and negative for complements.

(b) Effect of a price increase on total revenue. Total revenue is \( TR = P \times Q \).

• (i) If demand is price elastic: a rise in price causes a larger proportionate fall in quantity demanded, so total revenue falls. On a diagram, the demand curve is fairly flat (gentle slope); the revenue lost from selling far fewer units outweighs the revenue gained from the higher price.
• (ii) If demand is price inelastic: a rise in price causes only a small proportionate fall in quantity demanded, so total revenue rises. On a diagram, the demand curve is fairly steep; the higher price more than makes up for the small drop in sales.

Examination reminder: the second part of (b) reads "price elastic" twice in the paper, but the intended contrast is elastic versus inelastic, which is answered above.

Maelezo ya Majibu

(a)(i) Distribution of goods is the process of moving goods from the producer to the final consumer through a chain of middlemen. It bridges the gap between production and consumption in place and time.

(a)(ii) Normal chain of distribution:

The producer manufactures the goods, the wholesaler buys in bulk and breaks them into smaller lots, the retailer sells in small quantities near the consumer, and the consumer finally uses the goods.

(b) Consumers' co-operative society. This is a voluntary association of consumers who pool their funds to buy goods in bulk and sell them to members (and the public) at fair prices, sharing any surplus (profit) among members as a dividend usually in proportion to their purchases (patronage). It is owned and democratically controlled by its members on the principle of one member, one vote.

(c) Four roles of a consumers' co-operative society:

1. It supplies goods to members at fair and reasonable prices, eliminating exploitation by middlemen.
2. It buys in bulk directly from producers, enjoying economies of scale and passing savings to members.
3. It shares its surplus among members as dividends (bonus), raising their real incomes.
4. It protects consumers by supplying genuine, good-quality goods and gives members the chance to save.

Maelezo ya Majibu

(a) Economic integration is an arrangement in which two or more countries agree to reduce or remove trade barriers among themselves and to co-operate economically, in order to enjoy the benefits of a larger combined market. Examples include ECOWAS and the European Union.

(b) Free trade area versus customs union.

In short, a customs union is a free trade area plus a common external tariff.

(c) Free trade area - advantages and disadvantages.

Two advantages:

1. Larger market. Producers can sell to a wider combined market, encouraging economies of scale and specialisation.
2. Cheaper goods and wider choice. Removing tariffs among members lowers prices and gives consumers a greater variety of goods.

Two disadvantages:

1. Loss of government revenue from the tariffs that used to be charged on trade between members.
2. Harm to infant and weak domestic industries, which may be unable to compete with stronger firms from partner countries, and possible trade deflection because members keep different external tariffs.

Maelezo ya Majibu

(a) Public debt is the total amount of money owed by a government to its citizens, institutions and to foreign countries or international organisations. It is made up of internal debt (owed within the country) and external debt (owed abroad).

(b) Three reasons why countries borrow:

1. To finance budget deficits when government expenditure exceeds its revenue.
2. To finance capital (development) projects such as roads, electricity, schools and hospitals.
3. To meet emergencies such as war, natural disasters or economic crises.

(Other valid reasons: to service or repay existing debts, and to correct a balance of payments deficit.)

(c) Three effects of a huge national debt:

1. Heavy debt-servicing burden. Large sums are spent yearly on interest and repayment, leaving less money for development.
2. Increased taxation. Government may raise taxes to service the debt, reducing citizens' disposable income.
3. Reduced investment and slower growth, as scarce funds are diverted to repayment and external debt drains foreign exchange, weakening the currency.

(Other valid effects: loss of economic sovereignty where lenders impose conditions, and inflationary pressure if the debt is financed by printing money.)

Maelezo ya Majibu

Note on the source diagram. The provided image is incomplete (truncated at the lower part), so the quantity axis and the exact equilibrium output cannot be read with certainty. From the visible portion the axis is labelled Cost/Price, the curves shown are a U-shaped MC and a U-shaped ATC (average total cost), and there is a single horizontal line labelled \(AR = MR\) at the price level $20. Further guide values of $12 and $10 are marked lower on the price axis. Because the firm's demand line \(AR = MR\) is horizontal, the diagram is that of a firm in perfect competition (a price taker). The following gives the method a candidate should apply.

Step 1: Establish the equilibrium output. A profit-maximising firm produces where marginal cost equals marginal revenue. Here \(MR = \$20\), so equilibrium is where the rising MC curve cuts the horizontal \(AR = MR\) line at the price of \(\$20\). Call this output \(Q^{*}\) (the point directly below the MC = MR intersection on the quantity axis).

Step 2: Read the price and average cost at \(Q^{*}\). At the equilibrium output:

• Average revenue (price) \(= AR = \$20\).
• Average total cost \(= ATC\), read where the vertical line at \(Q^{*}\) meets the ATC curve. Using the marked guide value, \(ATC \approx \$12\) at that output (with the minimum of ATC near \(\$10\)).

Step 3: Determine the type and size of profit. Compare price with average cost:

Since \(AR (\$20) > ATC (\$12)\), the firm earns supernormal (abnormal) profit. The total supernormal profit is the rectangle of height \((AR - ATC)\) and width \(Q^{*}\):

where \(Q^{*}\) is the equilibrium quantity. If instead price had equalled minimum ATC the firm would earn only normal profit, and if price were below minimum ATC it would make a loss.

Step 4: Identify the market. Because \(AR = MR\) is a horizontal straight line, the firm faces a perfectly elastic demand and is a price taker, which identifies the market as perfect competition.

Because the source diagram is incomplete, the exact equilibrium quantity and the precise ATC value at that output cannot be confirmed; the method above is correct and the numerical profit follows once \(Q^{*}\) is read from a complete diagram.

Maelezo ya Majibu

The total population is 200,000, so each group size is its percentage of 200,000.

(a)(i) Working population is normally taken as ages 19 to 60, that is the 19-40 and 41-60 groups: \((35\%+25\%)\times200{,}000=60\%\times200{,}000=120{,}000\) people.

(a)(ii) Dependent population is ages 0-18 and 60 and above: \((30\%+10\%)\times200{,}000=40\%\times200{,}000=80{,}000\) people.

(b) The 0-18 group is \(30\%\times200{,}000=60{,}000\); a 2% rise adds births of \(0.02\times60{,}000=1{,}200\). The 60-and-above group is \(10\%\times200{,}000=20{,}000\); a 0.5% death rate gives deaths of \(0.005\times20{,}000=100\). Natural increase \(=\text{births}-\text{deaths}=1{,}200-100=1{,}100\) people.

(c) The population is a young (broad-based) population: a large share (40%) is dependent and a heavy proportion is in the younger age groups, giving a high dependency ratio of \(\dfrac{80{,}000}{120{,}000}=0.67\) (about 67%).

Maelezo ya Majibu

a. Meaning of public debt. Public debt (national debt) is the total amount of money that a government owes to individuals, business firms, financial institutions, other governments and international organisations as a result of its borrowing, together with the interest payable on it. It is made up of internal debt (owed to lenders within the country) and external debt (owed to lenders outside the country), and the government is legally obliged to repay it.

b. Reasons why countries borrow.

• To finance a budget deficit: when planned government expenditure exceeds expected revenue, borrowing bridges the gap.
• To finance capital/development projects: roads, schools, hospitals, dams and other infrastructure require large sums that current revenue cannot cover.
• To meet emergencies: war, drought, flood or other disasters call for sudden heavy spending.

(Other acceptable reasons: to correct a balance-of-payments deficit, or to repay/service an existing debt.)

c. Effects of a huge national debt.

• Heavy debt-servicing burden: a large share of revenue is used to pay interest and principal instead of financing development.
• Higher taxation: government raises taxes to repay the debt, reducing disposable income and discouraging effort and investment.
• Loss of economic independence: external creditors may impose harsh conditions, weakening the country's control over its own economic policy.

(Other valid effects: inflation, currency depreciation, and reduced future consumption as today's borrowing must be repaid by future generations.)

Maelezo ya Majibu

(a)(i) Elastic vs inelastic demand.

(a)(ii) Income elasticity vs cross elasticity of demand.

• Income elasticity of demand measures the responsiveness of quantity demanded of a good to a change in consumers' income: \[ e_y = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}} \]
• Cross elasticity of demand measures the responsiveness of quantity demanded of one good (X) to a change in the price of another good (Y): \[ e_{xy} = \frac{\% \text{ change in quantity demanded of X}}{\% \text{ change in price of Y}} \] It is positive for substitutes and negative for complements.

(b) Effect of a price increase on total revenue. Total revenue is \( TR = P \times Q \).

• (i) If demand is price elastic: a rise in price causes a larger proportionate fall in quantity demanded, so total revenue falls. On a diagram, the demand curve is fairly flat (gentle slope); the revenue lost from selling far fewer units outweighs the revenue gained from the higher price.
• (ii) If demand is price inelastic: a rise in price causes only a small proportionate fall in quantity demanded, so total revenue rises. On a diagram, the demand curve is fairly steep; the higher price more than makes up for the small drop in sales.

Examination reminder: the second part of (b) reads "price elastic" twice in the paper, but the intended contrast is elastic versus inelastic, which is answered above.

Maelezo ya Majibu

a. Distinctions.

i. Growing population versus declining population. A growing population is one that is increasing over time because the sum of births and immigration exceeds the sum of deaths and emigration. A declining population is one that is falling over time because the sum of deaths and emigration exceeds the sum of births and immigration.

ii. Overpopulation versus underpopulation. Overpopulation exists when a country's population is greater than the optimum, so that available resources are too few for the people and per-capita output and living standards fall. Underpopulation exists when the population is below the optimum, so that resources are under-utilised and a larger population could raise per-capita output.

b. Four disadvantages of a rapidly growing population.

• Pressure on social amenities: schools, hospitals, housing, water and roads become overstretched and inadequate for the people.
• Unemployment: the labour force grows faster than the economy can create jobs, raising the level of unemployment and underemployment.
• Low savings and investment: a high number of dependants forces households and government to spend on consumption rather than save, so capital formation is low.
• Falling standard of living: national output is shared among more people, so per-capita income and welfare fall, and food shortages may occur.

Maelezo ya Majibu

(a)(i) Distribution of goods is the process of moving goods from the producer to the final consumer through a chain of middlemen. It bridges the gap between production and consumption in place and time.

(a)(ii) Normal chain of distribution:

The producer manufactures the goods, the wholesaler buys in bulk and breaks them into smaller lots, the retailer sells in small quantities near the consumer, and the consumer finally uses the goods.

(b) Consumers' co-operative society. This is a voluntary association of consumers who pool their funds to buy goods in bulk and sell them to members (and the public) at fair prices, sharing any surplus (profit) among members as a dividend usually in proportion to their purchases (patronage). It is owned and democratically controlled by its members on the principle of one member, one vote.

(c) Four roles of a consumers' co-operative society:

1. It supplies goods to members at fair and reasonable prices, eliminating exploitation by middlemen.
2. It buys in bulk directly from producers, enjoying economies of scale and passing savings to members.
3. It shares its surplus among members as dividends (bonus), raising their real incomes.
4. It protects consumers by supplying genuine, good-quality goods and gives members the chance to save.

Maelezo ya Majibu

Visible (merchandise) trade covers physical goods; invisible trade covers services and other transfers. All figures are in $ million.

(a) Balance of trade (visible exports minus visible imports): visible exports \(=200+300=500\); visible imports \(=250+400=650\). \[\text{Balance of trade}=500-650=-150.\] This is a trade deficit of $150 million.

(b) Invisible trade balance (invisible receipts minus invisible payments): receipts \(=25+30+25+60=140\); payments \(=50+75+85+150=360\). \[\text{Invisible balance}=140-360=-220.\] This is an invisible deficit of $220 million.

(c) Balance on current account (balance of trade plus invisible balance): \[-150+(-220)=-370.\] The current account has a deficit of $370 million.

Maelezo ya Majibu

(a) What is money? Money is anything that is generally acceptable as a medium of exchange and for the settlement of debts. It performs the functions of a medium of exchange, a measure of value, a store of value and a standard of deferred payments.

(b) Three characteristics of money:

1. General acceptability - it must be accepted by everyone in payment.
2. Durability - it must not wear out or perish quickly.
3. Portability - it must be easy to carry about. (Other qualities: divisibility, homogeneity, relative scarcity and difficulty to counterfeit.)

(c) Effect of inflation on each function of money. Inflation is a persistent rise in the general price level, which reduces the value (purchasing power) of money. Its effect on the functions is:

• Medium of exchange: as prices rise, people lose confidence in money and may become reluctant to accept it, in extreme cases returning to barter or foreign currency.
• Measure (unit) of value: money becomes an unreliable yardstick because the same amount buys less over time, so prices must be constantly adjusted and comparisons become difficult.
• Store of value: money loses value when kept, so savers are discouraged; wealth held as cash falls in real terms.
• Standard of deferred payment: lenders and creditors lose because the money repaid in future has less purchasing power than the money originally lent, discouraging lending and long-term contracts.

Maelezo ya Majibu

Total cost is fixed cost plus total variable cost, \(TC=TFC+TVC\). When output is zero, \(TVC=0\) and \(TC=10\), so the total fixed cost is 10 dollars.

(a) The fixed part of total cost is $10, because it is the cost the firm bears even when output (and therefore variable cost) is zero.

(b) Using \(TC=TVC+10\) and \(TR=\text{price}\times\text{quantity}=20\times Q\):

• \(w=TC\text{ at }1=8+10=18\)
• \(x=TC\text{ at }2=10+10=20\)
• \(u=TVC\text{ at }3=25-10=15\)
• \(v=TVC\text{ at }4=32-10=22\)
• \(y=TR\text{ at }3=20\times3=60\)
• \(z=TR\text{ at }4=20\times4=80\)

(c) Profit \(=TR-TC\). At output 1, profit \(=20-18=\$2\). At output 4, profit \(=80-32=\$48\).

(d) The firm sells every bag at a constant price of $20 no matter how much it produces, so it operates under perfect competition; the constant price means the firm is a price taker facing a perfectly elastic demand.

Maelezo ya Majibu

Maelezo ya Majibu

(a) Joint venture. A joint venture is a business arrangement in which two or more independent firms (or a private firm and the government) pool resources, skills and capital to carry out a specific business project, sharing the risks, control and profits, while remaining separate organisations.

(b) Three merits of a private (limited liability) company over a partnership:

1. Limited liability. Shareholders can lose only the amount they invested, whereas partners have unlimited liability and can lose personal property.
2. Larger capital. A company can raise more capital by issuing shares to up to fifty members, while a partnership is limited to few partners.
3. Continuity of existence. A company has perpetual succession and continues despite the death or withdrawal of a member, whereas a partnership may dissolve when a partner dies or leaves.

(Other valid merits: separate legal personality, and easier transfer of ownership through shares.)

(c) Three sources of finance to a public enterprise:

1. Government grants and subventions from the national budget.
2. Loans from banks and other financial institutions (internal and external).
3. Revenue (ploughed-back profits) earned from the sale of its own goods and services.

(Other valid sources: issue of bonds/stocks and aid or loans from international agencies.)

Maelezo ya Majibu

(a) Industry. An industry is a group of firms engaged in the production of the same or similar kinds of goods or services (for example, the textile industry or the banking industry).

(b) Concepts:

• (i) Division of labour is the splitting of a production process into separate tasks so that each worker specialises in one particular task rather than doing the whole job. It raises output through greater skill and speed.
• (ii) Economies of scale are the cost advantages (falling average cost per unit) that a firm enjoys as it expands its scale of production and produces on a larger scale.

(c) Four internal economies of scale:

1. Technical economies: a large firm can use large, specialised and more efficient machines, lowering unit cost.
2. Managerial economies: a big firm can employ specialist managers for each department, improving efficiency.
3. Marketing (commercial) economies: it can buy raw materials in bulk at discounts and spread selling and advertising costs over more units.
4. Financial economies: a large firm can borrow more easily and at lower interest rates because it is seen as more creditworthy.

(Other valid internal economies: risk-bearing economies through diversification and research economies.)

Maelezo ya Majibu

(a)(i) Equilibrium output and price

A firm in a perfectly competitive market maximises profit where \(MC = MR\) with \(MC\) rising. On the diagram the rising part of the \(MC\) curve cuts the \(AR = MR\) line at an output of 50 kg and a price of $20. So the firm is in equilibrium at \(Q = 50\) kg and \(P = \$20\).

(a)(ii) Profit in equilibrium

At \(Q = 50\) kg, average revenue \(= \$20\) and average total cost, read off the \(ATC\) curve, \(= \$12\).

\[\text{Profit per unit} = AR - ATC = \$20 - \$12 = \$8\]

\[\text{Total profit} = (AR - ATC)\times Q = \$8 \times 50 = \$400\]

(a)(iii) Type of profit

Since \(AR > ATC\), the firm earns supernormal (abnormal) profit of $400. In perfect competition this survives only in the short run; in the long run new firms are attracted in, supply rises, price falls to the level of \(ATC\), and only normal profit remains.

(b)(i) Why the AR function is horizontal

The firm is one of very many small sellers of an identical product, so it is a price taker. It cannot influence the price and can sell any quantity it wishes at the single ruling market price of $20. Because every extra unit is sold at that same unchanged price, \(AR = MR = \) price, and the curve is a horizontal straight line.

(c) Two ways MC and ATC are related

1. The \(MC\) curve cuts the \(ATC\) curve at the lowest (minimum) point of \(ATC\); on this diagram that is at about $10 and 40 kg.
2. When \(MC < ATC\), the \(ATC\) is falling; when \(MC > ATC\), the \(ATC\) is rising. Marginal cost pulls the average down while it lies below it and pushes the average up once it lies above it.

Maelezo ya Majibu

(a) Joint venture. A joint venture is a business arrangement in which two or more independent firms (or a private firm and the government) pool resources, skills and capital to carry out a specific business project, sharing the risks, control and profits, while remaining separate organisations.

(b) Three merits of a private (limited liability) company over a partnership:

1. Limited liability. Shareholders can lose only the amount they invested, whereas partners have unlimited liability and can lose personal property.
2. Larger capital. A company can raise more capital by issuing shares to up to fifty members, while a partnership is limited to few partners.
3. Continuity of existence. A company has perpetual succession and continues despite the death or withdrawal of a member, whereas a partnership may dissolve when a partner dies or leaves.

(Other valid merits: separate legal personality, and easier transfer of ownership through shares.)

(c) Three sources of finance to a public enterprise:

1. Government grants and subventions from the national budget.
2. Loans from banks and other financial institutions (internal and external).
3. Revenue (ploughed-back profits) earned from the sale of its own goods and services.

(Other valid sources: issue of bonds/stocks and aid or loans from international agencies.)

Maelezo ya Majibu

(a) Robbins' definition. Professor Lionel Robbins defined Economics as "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." It stresses scarcity and choice.

(b) Concepts:

• (i) Opportunity cost. This is the real cost of a choice measured as the next best alternative that is given up (forgone) in order to have it. For example, if a farmer uses his land to grow maize instead of yam, the opportunity cost of the maize is the yam forgone.
• (ii) Scale of preference. This is a list of an individual's wants arranged in order of importance, with the most pressing want placed first. It guides choice because limited resources are used to satisfy the most urgent wants before the less urgent ones.
• (iii) Production possibility curve (PPC). This is a curve that shows the various combinations of two goods that a country can produce when its resources are fully and efficiently employed. Points on the curve show efficient production, points inside show under-utilisation of resources, and points outside are unattainable with current resources. Its downward slope illustrates opportunity cost, because producing more of one good means producing less of the other.

(c) Three reasons for studying Economics:

1. It helps individuals to make rational choices in using their scarce resources.
2. It provides knowledge and skills for careers and for managing personal and business finances.
3. It helps citizens understand and evaluate government economic policies and national issues such as inflation and unemployment.

Maelezo ya Majibu

(a) Unemployment of labour is a situation in which people who are able and willing to work at the prevailing wage rate are unable to find paid employment.

(b) Types of unemployment:

• (i) Frictional unemployment occurs when workers are temporarily out of work while moving between jobs or searching for a first job. Example: a graduate who has left one firm and is still searching for a better job.
• (ii) Structural unemployment occurs when there is a permanent change in the structure of the economy or in technology, so that workers' skills are no longer needed. Example: typists who lost their jobs when computers replaced typewriters.
• (iii) Seasonal unemployment occurs when workers are laid off during the off-season of an activity that operates only at certain times of the year. Example: farm labourers who are idle during the dry season when there is no planting or harvesting.

(c) Four causes of unemployment:

1. Rapid population growth that produces more job seekers than the economy can absorb.
2. Low level of industrial and economic activity (few industries), so few jobs are created.
3. Use of capital-intensive (labour-saving) technology that reduces the number of workers needed.
4. Defective education system that produces graduates whose skills do not match the needs of employers.

Other valid causes include a general fall in aggregate demand (economic recession) and rural to urban migration.