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JUPEB: ECONOMICS

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2019 JUPEB ECONOMICS: Essay Questions

JUPEB: ECONOMICS 2019 JUPEB ECONOMICS: Essay Questions

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Price   elasticity   of  demand   measures   the responsiveness of quantity demanded to a change in price. The law of demand says that when price falls (rises), quantity demanded increases (decreases).

  1. When the quantity increase (or decrease) is greater than fall (rise) in price, elasticity of demand is greater than 1. Hence, high responsiveness of demand to change in price.
  2. When the quantity increase (decrease) is equal to fall (rise) in price, elasticity of demand is equal to 1. Hence, responsiveness of demand is moderate to change in price.
  3. When the quantity increase (decrease) is less than fall (rise) in price, elasticity of demand is less than 1. Hence, responsiveness of demand is low to change in price. We know, Revenue = Price (P) * Quantity (Q). Now for a producer the most favourable situation is the last one when the consumers (demanders) have no option but to decrease the quantity consumed by not much when price is increased.

An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. The marginal rate of substitution (MRS) is the; rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. At equilibrium consumption levels (assuming no externalities), marginal rates of substitution are identical. The marginal rate of substitution is one of the three factors from marginal productivity, the others being marginal rates of transformation and marginal productivity of a factor.

Properties of Indifference Curve I. Downward Sloping: An indifference curve slope downward, which means, that with the: more consumption of one good the consumption of the other is to be reduced to maintain the utility. Here, the principle of the marginal rate of substitution (MRS) applies,; which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference curve is negatively sloped.

  1. Convex to the Origin: The indifference curves are convex to the origin because of the diminishing marginal rate of substitution. The MRS diminishes because of the decline in the marginal utility, which means with more and more consumption of one commodity, the customer’s utility starts declining and he is not willing to consume it more ‘at the cost of the other commodity. For example, let’s say there are two chocolates, dairy milk, and Nestle, with more and more consumption of dairy milk chocolates the utility continues to decline, and the customer will no more give up the Nestle chocolates to buy the dairy milk. Here, MRS shows the slope of the indifference curve.

iii. Higher the indifference curve, the higher is the level of satisfaction: The consumer derives more satisfaction from the combination of two goods on a higher indifference curve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations.

Cannot Intersect or be tangent to each other: The indifference curves cannot intersect with each other, because if it does so, then the combinations of two commodities lying on two different curves will yield same level of satisfaction which is not correct.

 

. C = 85 + O.5 Yd                                   (1)

Yd    —Y — T

Yd   = Y – (40 + 0.25r)

Yd   = Y -40 – 0.25Y

Yd   = 0.75Y – 40                                    (2)

Substitute   (2) into (1)

C = 85 + 0.5(0.75^ – 40) C = 85 + 0.3757-20

C = 65 + 0.375F

  1. Equilibrium income is expressed as:

 

  • = C + 1 + G
  • = 65 + 0.375F + 85 + 60 r – 0.375F = 210 0.625y = 210

Y =   2100.625

Y   = 336

Equilibrium consumption
C = 65 + 0.375(336)

C = 191

Net taxes

T = 40 + 0.25(336) T = 124

Government spending = 60

Government revenue (Tax) =124

Since government revenue is greater than government spending

The above diagram shows the reciprocal flow of income in a 3 sector economy.

The firms, which are the producing unit, employ; factors of production (Land, labour, capital and entrepreneur) and reward factors accordingly (rent, wages, interest rate and profit). In return, firm supply household goods and services and earn income from household. Government represents the regulatory body in a three sector economy. As such, both Household and firm pay tax to the government to execute fiscal responsibility (recurrent and capital expenditure). Also, firm supply goods and services to government to earn income and meet the needs of the regulatory body. Original Income = 75,00

New    =          75,000 +   40100        (75,000)

=          75,000  + 30,000

=          105,000

 

Original consumption = 52,000

Multiplier        =         11 – mpc

MPC = Marginal Propensity to Consume

MPC = △c (change in consumption)△Y (change in income

MPC= 65 –52(000)105,000 – 75,000

MPC= 65 –52000105,000 – 75,000

 

MPC= 13,00030,000

MPC=0.43

Multiplier = 11–0.43

= 10.57

= 1.754

~ 1.75

Demographic transition expresses a paradigm shift in demographic structure of a country from high birth and infant death rate to low birth and infant death rate as a result of the adoption of technology, modern education and implementation of economic development programmes.

Implication of Malthusian Population Theory Thomas Robert Malthus expressed that an uncontrolled population would result in a situation whereby population grows faster than the available resources of a country. According to him, the major preventive check on population growth is birth control. However, he proposed two measures through which a country can effectively check population growth.

  1. Preventive checks
  2. Positive checks

Preventive checks are voluntary actions people can adopt to reduce population growth.

Positive checks are activities that naturally shorten the average life span of people.

The preventive checks include the use of contraceptives, delaying marriage till certain age, mutual agreement not to give birth above certain threshold etc. This approach is more applicable to the advance world as cultural beliefs in the less developed world (especially Africa) usually confront this approach with serious resistance.

The positive check on the other hand is disastrous but it is applicable to all forms of system (Developed, Developing or Underdeveloped). Positive checks include outbreak of diseases, death, etc. Irrespective of the nature of checks, Malthus theory expresses that the excess of population growth over available resources may result in high poverty rate, high unemployment rate and high inequality in income distribution.

High  population  reduces   per  capita   income. Per capita income is simply the ratio of Gross National Product    of   population.    This    can be expressed as:

  1. Increase in population would automatically reduce per capita income of Nigeria
  2. High population  will  increase  capital  and recurrent   expenditure   of the government.   High population  signifies  intensity in the use  of social infrastructure. As such, government’s expenditure across all levels is bound to increase.
  3. iii.     High population result in high unemployment. High population would always create the problem of unemployment as absorption capacity of every economy is limited.
  4. Increase in social vices: Uncontrolled population portends a great threat to the security of every economy. This is evident from recent attacks in the North East and some other parts of the country.

 

  1. Enforcement of birth control policy
  2. Enforcement of effective immigration controls policy
  3. Promotion of effective education across all tribe and culture
  4. Creation of jobs to engage idle hands.

National Income

Line AD – Y represents equilibrium national income point (a-b) represents recessionary gap as AD2 is below full employment level of income.

  1. Expansionary fiscal policy: This involves increase in government spending (deficit budget) and reduction in tax.
  2. Expansionary monetary policy: This involves reduction in monetary policy rate, reserve requirements and bank lending rate.

Economic recession is an expression of down turn (decline) in business cycle of an economy. This is the outcome of consecutive negative GDP of a country for two quartile.

Economic shock is a term used in describing unexpected activities that affect macro and/or macroeconomic variables positively or negatively.

Typical example is global oil price shock of 2014. In June 2014, crude oil price (Brent) fell from $112/barrel to $48/barrel.

This drastically affect fiscal responsibility of Federal  government of Nigeria as revenue from oil, which constitute over 75% of foreign exchange earnings of the federal government fell accordingly.

Expansionary fiscal policy involves deliberate action of the federal government to inject liquidity (money) into the economy. These include:

  1. Reduction of personal and corporate tax
  2. Execution of deficit budget (i.e government spending greater than government earnings in a fiscal year. Expansionary fiscal policy promotes investment and provision of requisite infrastructural facilities essential for creating conducive business environment and promotion of general welfare

Macroeconomic objectives all governments can pursue

  1. Price stability
  2. Low unemployment rate
  3. Favourable balance of payment
  4. Output growth.

The followings are the reasons for economic recession in Nigeria.

  1. High inflation rates.
  2. High interest rates
  3. High external and internal debt
  4. High unemployment rate

High Inflation rate

The nature of inflation in Nigeria is cost push. The producer usually transfer high cost of production to Nigerians in form of high price. This constitute the maj or factor to recession in Nigeria as purchasing power of the people is impaired vis a vis aggregate demand.

High interest rate

The persistence increase in interest rate discourages actual and potential investors in the country. This is responsible for low investment and low output that eventually drag the economy into recession.

High external and internal debts

High debt profile signifies high debts repayment. The country lacks the requisite funds to implement basic fiscal responsibilities as large chunk of her budget goes into debt settlement.

High Unemployment rate

The appalling unemployment rate in the country drastically reduce aggregate output required to meet aggregate demand of the populace. The output an aggregate demand gap led Nigeria into recession.

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