Economics 2017 Theory
1.
A dealer in deep freezers increased the price of his product from $450 to $500 and sales dropped from 800 units to 600 units a week.
Use the information above to answer the questions that follow.
(a)(i) Calculate the price elasticity of demand
(ii) What type of elasticity is it? Explain your answer
(b)Calculate the (i) total revenue of the company before and after price increase; (ii) change in total revenue.
(c) What is the effect of the increase in price on the total revenue?
(d) State two factors influencing price elasticity of demand.
Solution & Explanation:
(a)(i) P1 = $450, P2 = $500 ΔP = $500
= 800 units, = 600 units Q = -200 units
Price Elasticity = ΔQ/Q×P/ΔP OR ΔQ/ΔP
= −200/800×450/50
= −14×91
= [-2.25]
OR
% change in quantity demanded/% change in price
Quantity Demanded = 600−800/800×100 = -25%
% Change in Price = 500−450/450×100 = 11.1%
Therefore, % change in quantity demanded/% change in price= [-2.25]
(ii) Demand is price elastic because the coefficient is greater than 1.
(b)(i) Total revenue before = $450 x 800 = $360,000
Total revenue after = $500 x 600 = $300,000
(ii) Change in total revenue = $360,000 – $300,000 = $60,000
(c) The firm’s revenue has fallen by $60,000 after the price increase.
(d) Factors influencing price elasticity of demand;
(i) Availability of substitutes: Commodities with close substitutes tend to have elastic demand while those without close substitute have inelastic demand.
(ii) Degree of necessity: Necessities tend to have inelastic demand while luxuries tend to have elastic demand.
(iii) Percentage of income spent on the commodity: Commodities that takes a very small percentage of consumers’ incomes tend to be price inelastic while those that take a very large proportion of one’s income tend to have elastic demand.
(iv) Habit or strength of consumer’s taste: Goods which are habit-forming tend to have inelastic demand and vice versa.
(v) Income of consumer: Very high income earners tend to have inelastic demand for many goods while low income earners have elastic demand for many commodities. (vi) Time factor: In the short-run, most goods do not have sub-stitutes and so demand is inelastic, but in the long-run when goods have substitutes, demand is elastic.
(vii) Scope of definition of the good: The broader the definition e.g (food) demand is inelastic, but if the definition is narrow e.g (yam) demand is elastic.
(viii) Number of uses of the commodity: If a comodity has several uses, demand is elastic, but if there is only one use demand is inelastic.
(ix) Degree of durability: If a commodity is durable, it has inelastic demand and vice versa.
2.
The market for apples is represented by the following demand and supply functions:
Qd = 30 – p;
Qs = 15 + 2p.
(a) Prepare a demand and supply schedule for the market, given the prices $2.00, $4.00 and $7.00.
(b) (i) Determine the equilibrium price and equilibrium quantity of apples in the market.
(ii) If the price of apple is fixed at $3.00, what will be the excess demand or excess supply.
(c) Suppose the demand function changed to Qd = 40 – p. Using the prices in (a) above:
(i) prepare a new demand schedule;
(ii) does it represent an increase or a decrease in demand?
(iii) explain your answer in (c) (ii) above
Solution & Explanation:
(a) Demand and supply shedule
When price = $2, Qd = 30 – 2 =28 Qs = 15 + 2(2) = 19
When price = $4, Qd = 30 – 4 = 26 Qs = 15 + 2(4) = 23
When price = $7 Qd = 30 – 7 = 23 Qs = 15 + 2(7) = 29
Prices ($) | Quantity demanded | Quantity supplied |
2 | 28 | 19 |
4 | 26 | 23 |
7 | 23 | 29 |
(b)(i) In equilibrium, Qd = Qs
Therefore, 15 + 2p = 3- -p
2p +p = 30 – 15
3p = 15
p = 5
Equilibrium price is $5.00
Substituting for p = 5, we have
Qd = 30 – 5= 25
OR Qs = 15 + 2(5) = 25
(ii) If price is fixed at $3
Qd = 30 – 3 = 27
Qs = 15 + 2(3) = 21
Excess demand is 27 -21 = 6
(c) If the demand function changes to Qd = 40 – p
(i) When price = $2, Qd = 40 – 2 = 38
When price = $4, Qd = 40 – 4 = 36
When price = $7, Qd = 40 – 7 = 33
Price ($) | Quantity demanded |
2 | 38 |
4 | 36 |
7 | 33 |
(ii) It represents an increase in demand
(iii) At the same prices, more quatities of apples are demanded.
3.
(a) Define land as a factor of production.
(b) State three features of land.
(c) Explain four ways in which land contributes to the economics development of your country
Solution & Explanation:
(a) Land refers to the natural resources, or free gift of nature such as farmlands, mineral deposits, water bodies, sunshine etc.
(b)(i) Land is a free gift of nature; man has not incurred any cost to bring it into existence.
(ii) Land is fixed in supply as given by nature
(iii) Land is geographically immobile
(iv) Land is subject to the law of diminishing returns
(v) The quality and value of land varies from place to place.
(c)(i) Land is used for crop production and hence is a source of food for the population
(ii) Land is the source of, fishing i.e. the water bodies serve as the source of fishing
(iii) Land is the source of raw materials for industry e.g tiber, minerals etc
(iv) Land is used
4.
(a) What is subsistence farming?
(b) Distinguish between crop farming and livestock farming with specific examples.
(c) Identify four measures that the government of your country can adopt to boost agricultural production.
Solution & Explanation:
(a) Subsistence farming is a system of farming in which crops and livestock are raised for the farmer’s family consumption and not for sale.
(b) Crop farming is the cultivation of both food crops such as plantain, cassava and cash crops such as cocoa, oil palm etc while livestock farming involves the rearing of animals e.g poultry, sheep, goats.
(c)(i) Granting easy credit to farmers to expand their farms
(ii) Improving the land tenure system and ensuring easy access to land
(iii) Provision of adequate infrastructure such as roads and utilities in the farming areas
(iv) Expanding agricultural extension services to educate farmers on modern farming techniques.
(v) Promotion of all year round cultivation through provision of irrigation schemes.
(vi) Improving agricultural marketing through introduction of guaranteed prices
(vii) Providing subsidies on agricultural inputs so that farmers can afford them
(viii) Measures to minimise insect and pest infestation to reduce post-harvest losses
(ix) Provision of storage facilities such as silos and refrigeration equipment
(x) Introduction of high yielding and improved seeds through research
(xi) Introduction of improved tools and implements through mechanisation and modern techniques.
(xii) Organsation of agricultural fairs to make agriculture more attractive.
5.
(a) State two features each of:
(i) perfect competition; (ii)monopolistic competition.
(b) What does it mean for a firm to be a : (i) price taker; (ii)price maker?
(c) Explain the following sources of monopoly power: (i) acts of parliament; (ii) copyright; (iii) natural monopoly; (iv) cartel
Solution & Explanation:
(a) Perfect competition:
(i) Large numbers of buyers and sellers such that no single seller or buyer can influence the price
(ii) Free entry and exit such that there is no barrier to entering or leaving the market.
(iii) Common price rules the market because price is fixed by the forces of demand and supply
(iv) Homogenous product (the same product) is sold by all sellers in the market
(v) There is perfect knowledge about prices prevailing in the market by both sellers and buyers.
(vi) Absence of government control. Government does not interfere in the activities of the market
(vii) No preferential treatment as sellers and buyers are indifferent as to whom they buy from or sell to.
(viii) Identical cost conditions exist as there are no transport costs that may influence price.
(ix) There is perfect mobility of factors of production since producers can easily move from one line of production to another without hindrance.
Monopolistic competition:
(i) There is a large number of sellers but each seller chooses his own market strategy.
(ii) Products are differentiated by branding, packaging, weight so that they are not homogenous.
(iii) Any firm can enter with a variety, or exit if it is not making profits
(iv) There is a large number of buyers with their own preferences
(v) Different prices rule the market i.e. each firm is a price maker controlling a portion of the market
(vi) It faces a downward- sloping demand curve.
(b)i. A firm is a price taker if its output is only a small fraction of the total output of the industry and thereby exerts no significant control over the price of the product in the market i.e. if it is a perfect competitor. OR The price is determined by the forces of demand and supply.
ii. A firm is a price maker if it controls the entire output or a major part of the output of the industry i.e. if it is a monopolist or a monopolistic competitor. Such a firm has considerable control over the price of the product in the market.
(c)i. Acts of parliament – This is power conferred by law on a firm to be the sole producer or supplier of a particular commodity
ii. Copyright – This is a legal right granted to the producer or seller of a book, play, film or song to be the sole seller for a specific period of time.
iii. Natural monopoly- A situation which makes a firm (because such a firm owns a unique raw material, technology of some other factor), supply a market’s entire demand for a good or service, at a price lower than two or more firms can e.g. the utility firms
iv. Cartel – A cartel is an agreement between two or more producers of the same commodity to regulate the production and sale of the product with a view to obtain dominance in the market e.g OPEC.
6.
(a) Define inflation.
(b) Identify any three causes of: (i) demand-pull inflation; (ii) cost-push inflation .
Solution & Explanation:
(a) Inflation is defined as period of persistence increase in the general price level of goods and services in an economy over a period of time.
A. Demand pull-inflation:
i. Increase in bank lending on activities which do not contribute to increase in output of goods.
ii. Government adopts a deficit financing or budget to provide social infrastructure.
iii. War time expenditure which may increase purchasing power in a situation of limited supply of goods.
iv. Increase in wages and salaries of workers not accompanied by increase in output
v. Expectation of a future rise in prices
vi. Misallocation or misappropriation of funds
vii. Democratisation process which increases government expenditure
viii. Increase in population not accompanied by increase in productivity.
B. Cost-push inflation:
i. Increase in cost of production as a result of increase in wages, raw materials, transport etc.
ii. Increase in interest rate on loans will raise cost of production
iii. Increase in the prices of imported inputs
iv. Devaluation or depreciation of a local currency may also increase the costs of inputs
v. Inadequate infrastructure such as electricity, poor transportation and water supply which increase cost of production
vi. Excessive government taxes on inputs.
7.
(a) What is economic development?
(b) State three features of a developing country.
(c) Explain any four factors that can speed up the economic development of your countr
Solution & Explanation:
(a) Economic development is the persistent growth in real per capital income coupled with structure changes in the economy which results in an improvement in the standard of living of the citizens.
(b)i. Low per capital income because of low levels of national output.
ii. Low life expectancy as a result of poor medical services and poor nutrition.
iii. Heavy dependence on agriculture and primary production because of low levels of technology industrialisation.
iv. High population growth rate due to high birth rate and reduced death rate.
v. Rapid rate of urbanisation due to rural-urban migration as a result of lack of social amenities in the rural areas.
vi. High rate of unemployment as a result of lack of industries and high population growth.
vii. High rate of illiteracy which leads to low levels of productivity.
viii. High dependency ratio leading to low rate of savings and investment.
ix. High indebtedness due to high interest rate payments on foreign loans which constitute a high fraction of the national budget.
x. Heavy dependence on foreign aids and grants
xi. Inadequate infrastructural facilities.
(c) i. Improving the savings ratio and hence capital formation
ii. Population control measures to check rapid population growth.
iii. Manpower training to enhance labour efficiency
iv. Improvement of technology
v. Improving the infrastructure of the economy
vi. Improving the health delivery system to enhance improved health of labour
vii. Exploitation of idle natural resources to add value
viii. Making available regular and cheap energy supply.
ix. Improving agriculture and expanding agro-processing
x. High level of political stability (peace and stability) to encourage investment and growth
xi. Provision of credit facilities for businesses to stimulate :onomic development
8.
(a) State two features each of: (i) free trade area; (ii) common markets.
(b) outline two advantage and two disadvantage of a common market.
Solution & Explanation:
(a) i. Free trade area
– Member countries remove all kinds of restrictions in trade among themselves
– Member countries have no common tariff policy in their trade with outsiders. Each country determines its own tariff policy.
ii. Common market
– Member countries remove all kinds of restrictions on trade long themselves
– Member countries have a common tariff policy against non-members.
– Free movement of factors of production
(b) Advantages
i. Existence of a large market such that firms have access to the market of member countries.
ii. Large scale production with possibility of regional specialization
iii. There is more efficient allocation of resources, since resources move about freely in the region
iv. Development may spread from more advanced countries to less developed ones
v. It fosters peace, unity and understanding among members.
vi. Consumers have a wider market to choose from, and at better prices.
Disadvantages
i. Trade from cheaper sources outside the region are diverted i.e cheaper sources are prevented from entering the union
ii. Developed members may develop at the expense of the weak and poor ones.
iii. There is loss of revenue which affects the growth of the poorer members.