WAEC Economics 2004 past questions and answers

An economic activity involves using money or resources to satisfy wants; paying school fees buys a service (education).

Land earns rent.

Production is grouped into primary (extractive), secondary (manufacturing, construction) and tertiary (services).

Rice, shoes and socks satisfy the carpenter's personal wants; screwdrivers are tools for his work, so they are capital goods.

Under capitalism, private individuals and firms own the means of production.

In a mixed economy, both the private sector and the government own and control productive resources.

An economic good is scarce, gives satisfaction (utility) and so has a price.

Comparing the alternatives given up helps a firm decide how best to use its limited resources.

The cost advantages a firm gets from its own growth are internal economies of scale.

If cost per unit falls while price stays the same, profit per unit rises.

Natural increase = birth rate − death rate (migration is not included).

When a larger share of people are old and retired, the working (labour) force shrinks.

Middlemen sometimes hoard goods to create artificial scarcity and raise prices.

Production and distribution are complete only when goods reach the final consumer.

Below equilibrium price, quantity demanded exceeds quantity supplied, giving excess demand (a shortage).

If quantity does not change at all when price changes, elasticity is zero: perfectly inelastic.

Every firm maximises profit where MC = MR, with MC rising, i.e. MC cuts MR from below.

In a perfect market there are very many buyers and sellers, so each is a price taker.

Partners can divide the work according to their skills; partnerships cannot sell shares on the stock exchange and have no separate legal entity.

A joint venture is jointly owned, typically by government and private (often foreign) investors.

The value of money is the quantity of goods and services it can buy.

Borrowers repay with money that has lost value, so they gain during inflation.

Cutting government spending reduces aggregate demand and so reduces inflation.

Currencies are traded in the foreign exchange market.

OMO is the central bank buying or selling government securities to change the money supply.

Private owners driven by profit tend to run enterprises more efficiently than government.

The working population (labour force) is those of working age who are able and willing to work.

Falling prices (deflation) reduce profits and production, so firms lay off workers and unemployment rises.

The NYSC is a national service scheme for graduates, not a farm programme.

Protecting young local industries helps them grow and employ more workers.

Dumping is selling abroad more cheaply than at home (often below cost).

Taxes on goods are indirect because their burden can be shifted to consumers.

High income taxes reduce the reward for extra work, so they may discourage effort.

Countries trade because each specialises where its opportunity cost is lowest: comparative advantage.

Poor transport and communication links between West African countries limit trade among them.

Exchange control is government regulation of the buying and selling of foreign currency.

Loans and their repayment are capital movements; imports and exports are current account items.

A surplus can be invested abroad (or added to reserves) to earn future income.

Aggregate (comprehensive) planning covers the whole economy; sectoral planning covers one sector.

National income is measured by the output, income and expenditure methods.

Transfer payments (pensions, gifts) are not payments for current production, so they are left out to avoid double counting.

Coups and civil wars in member states have disrupted ECOWAS programmes.

By controlling members' output quotas, OPEC has helped to keep crude oil prices relatively stable.

(a) A monopolist is in equilibrium (maximising profit) when marginal cost equals marginal revenue (MC = MR), with MC cutting MR from below.
(b)(i) The AR curve is the monopolist's demand curve.
(ii) d is the point where MC = MR: the equilibrium (profit-maximising) point.
(iii) Equilibrium quantity is Oq₁; equilibrium price is OP₁ (read up from q₁ to the AR curve).
(iv) The rectangle P₁abC (the gap between price and average cost multiplied by output).
(c) Profit = (price − average cost) × quantity = (5 − 2) × 50 = N150 (TR = 250, TC = 100).

Output is set where MC = MR; price is read from the demand (AR) curve above that output.

(a)(i) C = 20 + 2(12) = N44. (ii) C = 20 + 2(36) = N92.
(b)(i) TC = 20 + 96 = N116; AC = 116 ÷ 48 ≈ N2.42. (ii) TC = 20 + 116 = N136; AC = 136 ÷ 58 ≈ N2.34.
(c) Each extra unit adds N2 to total cost, so MC = N2 at any output. (i) From 12 to 23 units: (66 − 44) ÷ 11 = N2. (ii) From 23 to 36 units: (92 − 66) ÷ 13 = N2.
(d)(i) TR = 5 × 23 = N115; TC = 20 + 46 = N66; profit = N49. (ii) TR = 5 × 48 = N240; TC = N116; profit = N124.

Total cost = fixed part (20) + 2 × output; profit = TR − TC.

(a) Any two, explained: fall in birth rate (family planning, late marriage, education of women, high cost of raising children); rise in death rate (wars, epidemics, famine, natural disasters); net emigration (more people leaving than arriving).
(b) Any three: size of total population; age structure (proportion aged about 15–65); school-leaving age and length of education; retirement age; number of women in paid work (custom, religion); health of the population; government policy, e.g. on child labour; migration.

Two causes in (a), three factors in (b).

(a)(i) Abnormal demand (exceptional demand) is demand that does not obey the law of demand: more is bought when price rises, or less when price falls, so the demand curve slopes upward.
(ii) Effective demand is the desire for a commodity backed by the ability and willingness to pay for it at a given price and time.
(b) Any three: Giffen goods (inferior staples bought more when their price rises); goods of ostentation/prestige (articles of conspicuous consumption); expectation of further price rises (or of further falls); ignorance – buyers judge quality by price; emergencies/necessities, e.g. during war or scarcity.

Abnormal demand gives an upward-sloping demand curve.

(a) Any two: to protect consumers from exploitation; to make essential goods affordable to the poor; to control inflation; to protect producers/farmers with minimum prices; to stabilise prices; to protect workers with minimum wages.
(b) Any three: shortage (excess demand) because the price is below equilibrium; black markets and hoarding; queues and rationing; fall in supply as producers lose interest; corruption and favouritism in distribution; low-income consumers get the goods more cheaply if supplies are available.

A maximum price is set below equilibrium.

(a) Public corporations are business enterprises set up by an Act of parliament or decree, owned, financed and controlled by government and run by a board appointed by government, mainly to provide essential services, e.g. power, railways.
(b) Any four: provide essential services at affordable prices; prevent private monopolies exploiting consumers; can undertake projects too large for private firms; create employment; profits go to government for public use; encourage balanced development (services in rural areas); protect national security in strategic industries.

Four distinct merits are needed.

(a)(i) A firm is a single business unit producing goods or services under one management; an industry is the group of all firms producing the same or similar product.
(ii) Location of industry is the choice of the place where a firm or industry is sited; localisation is the concentration of many firms of the same industry in one particular area.
(b) Any four: nearness to raw materials; nearness to market; availability of power and water; availability of transport; availability of labour; government policy; availability of land and finance; external economies/existing industries; climate and security.

Explain how each factor affects cost or convenience.

(a) Any four: lack of capital and credit to expand; land tenure system and fragmentation of land; use of simple tools that limit acreage; illiteracy and traditional methods; farming as a way of life (subsistence); small and scattered markets; poor infrastructure and storage; lack of modern inputs.
(b) Any two: give credit/loans at low interest to farmers; land reform to make large plots available; supply of tractors and machinery at subsidised rates; extension services and training; good guaranteed prices and markets; provision of rural infrastructure; encourage co-operatives.

Four reasons in (a), two measures in (b).

(a)(i) A mortgage bank gives long-term loans for building or buying houses, using the property as security; a merchant bank gives medium- and long-term finance to businesses, accepts bills of exchange, underwrites new share issues and advises firms.
(ii) A commercial bank accepts deposits from the public and gives mainly short-term loans and overdrafts for profit; a development bank gives long-term loans for development projects in particular sectors (industry, agriculture) and does not usually take deposits from the public.
(b) Any four: accept deposits; give loans and overdrafts; operate the cheque system; credit creation; safe keeping of valuables; foreign exchange services; act as agents (paying bills, standing orders); advise customers; discount bills of exchange.

Explain each function, not just list it.

(a) A tax is a compulsory payment levied by government on persons, firms or goods, for which the payer receives no direct benefit in return, used to finance government spending.
(b) Any four (canons of taxation): Equity – tax based on ability to pay; Certainty – the amount, time and method of payment are clear; Convenience – paid at a time and in a way convenient to the taxpayer; Economy – the cost of collection is low compared with the yield; Flexibility – easy to change as conditions change; Productivity – it yields enough revenue; Simplicity – easy to understand; Neutrality – it does not discourage work or investment.

Name each principle and explain it.

(a) Export promotion: government measures to increase the volume and value of exports, e.g. export subsidies, tax rebates, trade fairs, export credit and better quality control.
(b) Depreciation: a fall in the value of a country's currency in terms of other currencies under a floating exchange rate (also: the fall in value of capital assets through wear and tear).
(c) Terms of trade: the rate at which a country's exports exchange for its imports, measured as (index of export prices ÷ index of import prices) × 100.
(d) Balance of trade: the difference between the value of a country's visible exports and visible imports in a period; it is favourable (surplus) if exports exceed imports.

Give a definition and a short example or formula for each.

(a) GNP is the total money value of all final goods and services produced by a country's residents in a year, i.e. GDP plus net factor income from abroad.
(b) Output (product) method: add the value added (or value of final goods and services) by all sectors of the economy, avoiding double counting.
Income method: add all incomes earned by factors of production in producing the output – wages, rent, interest and profits – leaving out transfer payments.
Expenditure method: add all spending on final goods and services – consumption (C), investment (I), government spending (G) and net exports (X − M).
All three should give the same total.

Mention how double counting is avoided in each method.