WAEC Economics 2002 past questions and answers

Economics studies how people use scarce resources to satisfy their wants, i.e. how man provides for his everyday needs.

Matured students take 360° − 60° = 300°, so 300/360 × 1,200 = 1,000.

The mode is the value that occurs most often.

In subsistence production, the producer makes goods mainly for his own and his family's consumption, not for sale.

Wholesalers buy in bulk and store goods in warehouses until retailers need them.

Interest is the reward for capital; donations, gifts and subsidies are not payments for a factor's service.

Anything is a factor of production because it helps produce goods and services (creates utility); land does this.

A large firm can afford expensive labour-saving machines, which lower cost per unit (technical economies).

Breaking work into simple tasks makes it possible to use machines for them, raising output.

A firm cannot grow beyond what its market can buy, so the size of the market limits it.

Localisation means firms of the same industry concentrate in one area.

Opportunity cost is the alternative given up when a choice is made.

Fixed costs such as rent must be paid even at zero output.

The MC curve is the steep curve that falls a little and then rises sharply, cutting the U-shaped average curves at their lowest points: curve L.

Logs are bulky and lose weight in processing, so timber industries are sited near the forests (raw materials).

Private businesses are set up mainly to make profit.

Small firms deal directly with customers and give personal attention to their needs.

The shareholders own a limited liability company.

NEPA was set up by law, owned and run by government: a public corporation.

A vertical demand curve means the same quantity is bought at every price: perfectly inelastic demand.

Butter and margarine are substitutes that compete for the same use, so their demand is competitive.

Derived demand is demand for a thing because of the goods it helps to produce.

With too few people, there is not enough labour to make full use of the resources.

Malthus said population grows geometrically while food grows arithmetically, so population tends to outgrow food supply.

More people need more schools, hospitals and amenities, which raises government spending.

A growing population shares income among more people, so high per capita income is unlikely.

Many illiterate people cannot give their correct ages or understand the census, leading to inaccurate figures.

Without a common measure of value, it is hard to decide how much of one good should exchange for another.

A cheque is only an order to a bank to pay; people can refuse it, so it is not generally acceptable.

Deposits belong to customers and must be repaid, so they are the bank's liabilities; loans and money at call are assets.

The value of money is what it can buy: its purchasing power.

The central bank keeps the reserves of commercial banks and lends to them: it is the bankers' bank.

Debtors repay loans with money that has lost value, so they gain.

More goods and services reduce excess demand and so reduce the pressure on prices.

Merchant banks accept (guarantee) bills of exchange, acting as acceptance houses.

Most people earn low incomes and spend almost all of it on necessities, leaving little to save.

Co-operative societies are usually exempted from company tax on their surplus.

Petroleum (crude oil) mining provides most of Nigeria's government revenue and exports.

Equilibrium is where quantity demanded equals quantity supplied, so there is no pressure on price to change.

Buyers keep buying the same amount at any price, so the whole tax is passed on to the consumer.

A surplus budget plans to collect more revenue than it spends.

Countries gain by specialising in goods in which they have the lowest opportunity cost: comparative advantage.

Net exports = exports − imports, which is negative when imports are greater.

A current account deficit is paid for by capital inflows (borrowing, investment) or by running down reserves, recorded in the capital/financial account.

After devaluation foreigners need less of their currency to buy the country's goods, so exports become cheaper.

The oil industry is capital-intensive and employs only a small share of the population.

GNP = GDP + net factor income from abroad.

Equilibrium: price $2.00, where 9 (thousand) is both demanded and supplied.
(a)(i) At $1.50: quantity demanded 14 − quantity supplied 6 = excess demand of 8 (thousand), i.e. 8,000 kg.
(ii) A black market develops and the price rises towards the equilibrium price of $2.00 (or above).
(b) $3.00 is a minimum price above equilibrium, giving a surplus of 16 − 3 = 13 (thousand). Government can keep it by buying up the surplus (buffer stock / marketing board) and storing or exporting it, by limiting output with quotas, and by punishing sellers who sell below $3.00.
(c) At $1.00 (below the equilibrium of $2.00): quantity demanded rises from 9 to 19 (thousand), up by 10; quantity supplied falls from 9 to 3 (thousand), down by 6; there is a shortage of 16 (thousand), leading to queues, rationing, hoarding and black markets.

Find the equilibrium first; a price below it gives a shortage, above it a surplus.

(a)(i) Raw materials.
(ii) They are left out (subtracted from sales) so that the same output is not counted twice (double counting); only value added is counted.
(iii) Value added: Firm A = 200 − 100 = $100,000; Firm B = 400 − 60 = $340,000; GDP = $440,000. (Check: labour + depreciation + profit = 100 + 340 = 440 thousand.)
(b)(i) Depreciation = 16 + 40 = $56,000.
(ii) NDP = GDP − depreciation = 440,000 − 56,000 = $384,000.

GDP is the sum of value added, not the sum of sales.

Shortage of capital and difficulty in getting bank loans.
Small market due to low incomes of the people.
Lack of managerial and technical skills.
Poor infrastructure: power, roads, water, communication.
Most firms are sole proprietorships or partnerships, which cannot raise large capital.
Competition from foreign firms and imported goods.
Shortage of local raw materials and high cost of imported inputs.
Inconsistent government policies, multiple taxes and political instability.
Nature of the product (perishables, personal services) and the firms' recent establishment.

Explain each factor in one or two sentences.

Demand for and supply of labour: scarce skills earn higher wages.
Productivity (marginal productivity) of labour.
Level of education, training and skill required.
Trade union bargaining power.
Government wage policy, e.g. minimum wage legislation.
Ability of the employer/industry to pay (profitability).
Cost of living: higher prices lead to demands for higher wages.
Nature of the job: danger, unpleasantness or responsibility attract higher pay.
Mobility of labour and the location of the job.

Explain how each factor raises or lowers wages.

(a) Fixed costs do not vary with output and are paid even when nothing is produced (rent, insurance, salaries of permanent staff, depreciation). Variable costs vary directly with output and are zero at zero output (raw materials, fuel, wages of casual workers).
(b) In the short run a firm continues to produce at a loss as long as price (average revenue) covers average variable cost (P ≥ AVC).
It then pays all variable costs and part of the fixed costs; if it shut down it would still lose all its fixed costs, so producing reduces the loss.
Example: fixed cost ₦100, variable cost ₦300, revenue ₦350: producing gives a loss of ₦50, shutting down a loss of ₦100, so it keeps producing.
Diagram: AC and AVC curves with price line between minimum AVC and minimum AC; the firm produces where MC = MR.
If price falls below AVC, the firm shuts down (shut-down point at minimum AVC).

The key condition is price ≥ average variable cost.

(a) A perfectly competitive market is a market with very many buyers and sellers of an identical product, in which no one buyer or seller can influence the price; price is set by market demand and supply.
(b) Large number of buyers and sellers, each too small to affect price (price takers).
Homogeneous (identical) products.
Free entry into and exit from the industry.
Perfect knowledge of market conditions by buyers and sellers.
Perfect mobility of factors of production.
No government interference and no preferential treatment of buyers or sellers.
No transport costs (or negligible).
Firms aim to maximise profit.

Explain each condition briefly.

(a) A market economy (capitalism / free enterprise) is an economic system in which the means of production are privately owned and decisions on what, how and for whom to produce are made through the price mechanism, with little government intervention.
(b) Private ownership of property and means of production.
Price mechanism allocates resources.
Profit motive drives producers.
Consumer sovereignty.
Free competition among producers.
Freedom of enterprise and choice of occupation.
Minimal government intervention.
Income inequality.

List and briefly explain at least five features.

(a) A direct tax is levied on the income or wealth of persons and firms and is paid directly to the tax authority by the person on whom it is imposed; its burden cannot be shifted (e.g. personal income tax, company tax). An indirect tax is levied on goods and services; it is paid to government by the seller but its burden can be shifted to consumers through higher prices (e.g. VAT, excise and import duties).
(b) Advantages of direct taxes: can be progressive, so equitable (based on ability to pay).
Reduce income inequality.
Certain: the taxpayer knows how much and when to pay.
Revenue is easy to estimate.
Economical to collect, especially PAYE.
Not inflationary: they reduce spending power rather than raise prices.
Make citizens aware of their civic responsibility.

Explain the difference in who finally bears the tax.

Level of aggregate demand for goods and services.
Level of public and private investment.
Availability of capital and credit.
Government policies (fiscal and monetary, wage policy, retirement age).
Level of technology (labour-saving machines reduce jobs).
Size of the labour force / population growth.
Educational system and skills relevant to available jobs.
Availability of infrastructure (power, roads).
Seasonal factors, e.g. weather in agriculture.
Trade union demands for high wages.
Political stability and investment climate.

Explain how each factor creates or reduces jobs.

Larger market, allowing large-scale production and economies of scale.
Specialisation according to comparative advantage.
Increased trade among member countries as tariffs are removed.
Free movement of labour and capital.
More competition, raising efficiency and quality.
Attraction of foreign investment.
Joint development of infrastructure (roads, telecommunications, power).
Greater bargaining power in world trade and international bodies.
Job creation and faster economic development.
Political co-operation and peace in the sub-region.

Explain at least five benefits.

Debt servicing (interest and repayment) takes a large share of revenue, leaving less for development projects.
External debt servicing drains foreign exchange.
Higher taxes may be needed to pay the debt, reducing incentives.
Large domestic borrowing raises interest rates and crowds out private investment.
It can worsen income distribution (bondholders gain from taxpayers).
It may cause inflation if financed by money creation.
External creditors may impose conditions (e.g. IMF conditions), reducing economic independence.
It reduces the country's credit rating and ability to borrow again.
Burden passed on to future generations.

Distinguish internal and external debt effects where you can.

Use of crude implements (hoe, cutlass) instead of machinery.
Land tenure system and land fragmentation.
Lack of credit facilities for farmers.
Poor storage, processing and transport facilities.
Inadequate extension services and research.
Illiteracy of farmers and resistance to new methods.
Pests, diseases and poor seeds/inputs.
Unfavourable weather, e.g. drought or floods.
Migration of young people to towns (rural–urban drift), leaving ageing farmers.
Poor pricing policies and unstable prices of farm produce.
Low use of fertilisers and irrigation.

Explain at least five causes.