2020 NABTEB ECONOMICS COMPLETE ANSWER (THEORY $ OBJECTIVE)

ECONOMICS OBJ
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11-20: CAABCCBCBA
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31-40: DBCCCDBACA
41-50: BBCBBCDBCA

*ECONOMICS THEORY*

*PART II*

3a)
I) Value
ii) Value and Price
iii) Wealth
iv) Stocks and Flows
v) Optimisation

3b)

I) *Value:*
Ordinarily, the concept of value is related to the concept of utility. Utility is the want satisfying quality of a thing when we use or consume it. Thus utility is the value-in-use of a commodity. For instance, water quenches our thirst. When we use water to quench our thirst, it is the value-in-use of water.

ii) *Value and Price:*
In common language, the terms ‘value’ and ‘price’ are used as synonyms (i.e. the same). But in economics, the meaning of price is different from that of value. Price is value expressed in terms of money. Value is expressed in terms of other goods. If one pen is equal to two pencils and one pen can be had for Rs.10. Then the price of one pen is N100 and the price of one pencil is N50

iii) *Wealth:*
In common use, the term ‘wealth’ means money, property, gold, etc. But in economics it is used to describe all things that have value. For a commodity to be called wealth, it must prossess utility, scarcity and transferability. If it lacks even one quality, it cannot be termed as wealth.

iv) *Stocks and Flows:*
Distinction may be made here between a stock variable and a flow variable. A stock variable has no time dimension. Its value is ascertained at some point in time. A stock variable does not involve the specification of any particular length of time. On the other hand, a flow variable has a time dimension. It is related to a specified period of time.

V) *Optimisation:*
Optimisation means the most efficient use of resources subject to certain constraints it is the choice from all possible uses of resources which gives the best results, it is the task of maximisation or minimisation of an objective function it is a technique which is used by a consumer and a producer as decision-maker.

3c) Typing…….

4a)
I) Natural Conditions
ii) Technical Progress
iii) Change in factor prices
iv) Transport Improvement
v) Calamities

4b)

(i) Natural Conditions:
If rainfall is plentiful, timely, and well distributed, there will be bumper crops. On the contrary, floods, droughts, or earthquakes and other natural calamities are bound, to affect production adversely. This is one set of conditions which brings about a change in the supply.

(ii) Technical Progress:
The volume of production or supply is also influenced by progress in the technique of production. In manufacturing industries, this is a very important factor. A new machine may have been invented, a new process discovered, or a new material found, or perhaps a new use may have been found for a by-product. The discoveries of synthetic dyes, artificial rubber and wool are some such discoveries or improvements in technique.

(iii) Change in Factor Prices:
A change in the prices of the factors of production also brings about a change in the supply of the commodity. If the factors of production become cheap, the supply will increase, and vice versa.

(iv) Transport Improvements:
Improvement in the means of transport reduces the cost and increases the supply of the product. Thus conditions of supply change.

(v) Calamities:
Calamities like war or famine must also affect the supply of goods. We are only too familiar with the shortage-of commodities caused by the war and the dislocation of production by famine. Even at higher prices adequate supplies are not forthcoming.

*Economics*

6a)

The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.

6b)

i) When Average Product is rising, Marginal Product lies above Average Product.

ii) When Average Product is declining, Marginal Product lies below Average Product.

iii) At the maximum of Average Product, Marginal and Average Product equal each other.

6c)

i) Value Determination

The law of diminishing marginal utility is helpful to determine the value or price of a commodity. For example, the law explains that the marginal utility of a commodity decreases as the quantity of it increases. When the marginal utility falls, consumers do not prefer to pay high price. Therefore, the seller has to reduce the price of the commodity, if he or she wants to sell more. In this way, the law plays a crucial role in determining price of a commodity.

ii) Water – Diamond Paradox

The principle of diminishing marginal utility is beneficial to understand the difference between value-in-use and value-in-exchange. For instance, let us consider two commodities – water and diamond. Water is essential for our survival (value-in-use) but it is not costly (no or little value-in-exchange). On the contrary, diamonds are useful just for showy purpose (no value-in-use) but they are very costly (high value-in-exchange).

7a)
*Monopoly:*
Is a market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute.

7b)

1. Economies of Scale. Economies of scale occur when increased output leads to lower average costs. Therefore new firms, with relatively low output, will find it difficult to compete because theirs average costs will be higher than the incumbent firms benefiting from economies of scale. The prospect of higher average costs may deter entry.

2. Natural / Geographical Barriers, e.g. Zimbabwe has 85% of the world supply of Chromium. If you don’t have oil in your country, you can’t enter the oil market. Geographical barriers could be more local, e.g. if you don’t have access to a good location for a theatre in say Covent Garden, it creates a barrier to entry.

3. Brand loyalty through advertising. Developing consumer loyalty through establishing a strong brand image can deter entry. With a very strong brand image, a new firm would have to spend a lot of money on advertising, which is a sunk cost and a deterrent to entry. Some brands may be so strong, that no amount of advertising may be able to dislodge the incumbent firm. For example, many firms have tried to enter the cola market, but none have been able to dislodge Coca-Cola and to a lesser extent Pepsi. The strong brand loyalty of Google means it will be very difficult for any search engine to displace Google – no matter how technically good it is.

4. Limit Pricing. This occurs when a firm sets price sufficiently low to deter entry. A monopoly may engage in limit pricing – even though it means fewer profits, it prefers to keep prices lower to prevent competition. It is related to economies of scale.

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