ii) - Production possibilities or possibility curve Production possibility frontier Production possibilities boundary Transformation curve
Opportunity cost frontier
b (i). If the economy is already producing 100 units of good X, then in order to produce an additional 25 units of good Y, the production of good X has to be reduced from 100 to 75 i.e.
Opportunity cost of 25 units of good Y=100-75 units of good X =25 units of good X
(ii)    . See point A on the graph. The reasons are: - Inefficient utilisation of resources - Underutilisation of resources
c)    - Only two goods X and Y are being produced Resources are fully utilised Resources are equally efficient Technology is fixed
Resources are perfectly mobile Stock of resources is fixed
d)    . - An increase in resources
An improvement in technology Economies of large scale production Political and social stability
NB: The aforementioned points can all be classified under either improved technology or increased resources

b)     i) Inefficient use of resources.

ii) Less than full employment of resources.

b)     No. Because this combination falls outside the production possibilities curve.

c)     The opportunity cost is 20 units of good Y.

d)     More of good X would be now produced for each level of resources while the production of good Y remains the same resulting in the production possibilities curve sketched below.

I)      This is because resources used for the production of good Y are not perfectly adaptable to the production of good X. In other words, there are increasing costs of production or diminishing returns to production as resources are successively moved from one domain to the other.

g) No, because there could be the discovery of new economic resources, improvements in technology etc . leading to an outward shift of the production possibilities curve or economic growth.

a)     If each worker can now make 4 clay pots a day, then following the same reasoning as in “a” the new production combinations would be as represented below and illustrated by the resultant production possibilities curve as follows;

b)     These production possibilities curves are all straight lines. This reflects the fact that resources are perfectly adaptable to different uses or that there are constant returns to production. If we were to take the more realistic situation where resources are not perfectly adaptable to different uses, or where there could be increasing and decreasing returns to production, then the production possibilities curves would be concave and not straight lines as in “a” and "b” above.

a)

b)   No because this combination falls outside the production possibilities curve.

c)   20 units of good X. In order to increase the production of good Y from 300 to 500 units, the production of good X would have to fall from 40 to 20 units.

d)   - Diminishing returns or increasing costs.

-       Factors of production not being perfectly adaptable between different uses.

Diseconomies of scale

a)     i) Scarcity of resources

the concept of opportunity cost or real cost, the alternative use of resources.

11)   - the marginal rate of substitution.

b)     i) When some resources are lying idle or under­utilised or when all resources are being utilised but inefficiently.

11)   It is possible to produce at point C when there is an improvement in technology, discovery of new resources etc or in short when economic growth takes place.

c)     Growth path Y to A or YA. This permits the initial production of more producer goods and less consumer goods. Subsequently, the greater amount of producer goods can be used to produce more of consumer and producer goods and hence long-term economic growth.

d)     i) Point A permits current lower living standards because it involves more of capital goods and less consumer goods while point B allows for present higher living standards because it has more of consumer goods than producer goods.

11)   Point A makes for higher living standards in the future while point B makes for lower future living standards as explained in d(i) above.

Economics is the study of how individuals, firms and governments use scarce resources that have alternative

uses to produce goods and services and how the goods and services are distributed. Economics is a Social Science that can be split into two main categories - Micro-economics and Macro-economics.

Micro-economics is concerned with the objectives and decisions of individual economic units like consumers, firms, government agencies etc.

On the other hand, macro-economics is concerned with the behaviour of the economy as a whole and consequently with aggregates like national income, the general price level, balance of payments etc. Macro- economcis is also concerned with how changes in these aggregates affect other aggregates.

Economics is considered a science for the simple reason that Economics uses the scientific method of analysis.

Economics like any other subject is concerned with developing theories to help explain and predict economic phenomena around us. In so doing, economics uses the scientific method as earlier mentioned and this scientific method consists of the following stages:

In the first phase of the scientific method of analysis in Economics, there is the observation of facts and definition of concepts. There is need to observe facts relating to whatever interests the economist e.g,saving, investment etc.

In the second step, a hypothesis (prediction) is constructed about human behaviour and which may be right or wrong. The hypothesis could be something like “more of a good is demanded at a lower price, everything being equal”.

In the third stage, a model is built describing the behaviour of economic variables or influencing factors involved in the initial hypothesis. For instance, the factors that influence demand as per the previous hypothesis.

In the fourth phase, the hypothesis is tested against empirical or real world evidence by the use of a model. An economic model is a simplified framework designed to illustrate complex processes and often but not always using mathematical techniques.

If in the final analysis, the hypothesis cannot be disproved, it becomes an accepted theory.

From the foregoing analysis, it follows that economics is a science and a social science for that matter because it follows the scientific method of analysis and is concerned with the behaviour of society from a given perspective.

A market economic system is one in which the production and distribution of goods and services is essentially carried out by the price system or the price mechanism. This is as opposed to a planned economic system in which the production and distribution of goods and services is essentially carried out by a central planning committee. These two main economic systems have their relative merits and demerits but emphasis in this essay shall obviously be on the merits of a planned economic system in order to justify the preference for a planned economic system.

Despite the advantages of market economic systems like greater efficiency resulting from competition and self­interest, consumer sovereignty and satisfaction of consumer choices, greater variety of goods and services, self-regulation through the functioning of the price system, flexibility, faster economic growth and higher

living standards, many economies still opt for the planned economic system because of its advantages. These advantages of the planned economic system include the following:

There is little or no consumer exploitation because production is generally void of profit motives.

In a planned economic system, there is greater stability of economic activities because of constant government intervention and hence no likelihood of monetary crises.

In a planned economy, there are fewer monopolies and consequently fewer ills of monopoly and hence a more equitable distribution of income.

There is a greater production of public and merit goods in a command economy given the absence of the profit motive. There is equally a minimal level of negative externalities for the same reason.

The absence of competition in a planned economy implies a more optimal allocation of resources.

Furthermore, if countries were to opt for market economies and not planned economies, they would or could face the following problems:

There could be excessive competition thus leading to a wastage of resources.

There could be the excessive production of demerit and harmful goods like hard drugs in so far as they are demanded and this would be done at the expense of basic products for the poor.

There would be a likelihood of instability in economic activities due to the lack of or very limited government regulation and resulting in costs like inflation and unemployment, exploitative monopolies, etc.

There would be great inequalities in the distribution of wealth and income as a result of self-interest and the profit motive.

There would be lots of negative externalities in terms of pollution, congestion etc., as individuals pursue their profit motives.

By way of conclusion, it can be said that if there is a preference for the planned economic system, this is as a result of its dominant advantages vis a vis the demerits of other systems.

a) What is meant by the basic economic problem of scarcity? (10 marks)

The basic economic problem of scarcity arises because human wants and needs are unlimited, whereas the resources available to satisfy these wants are limited or finite. This fundamental issue forces societies to make choices about how to allocate their scarce resources among competing uses. Scarcity implies that resources such as land, labor, capital, and entrepreneurship are insufficient to produce all the goods and services that people desire, leading to the necessity of prioritization and trade-offs.

In economic terms, scarcity necessitates the existence of opportunity costs—the value of the next best alternative foregone when making a decision. It underpins the entire economic system, influencing what to produce, how to produce, and for whom to produce. Without scarcity, economic questions would be irrelevant because resources would be abundant enough to meet all human wants effortlessly.

In summary, the basic economic problem of scarcity refers to the condition where resources are limited relative to human wants, compelling societies to make choices about resource allocation, resulting in the need for economic decision-making and prioritization.

b) Discuss whether economic growth solves the problem of scarcity. (15 marks)

Economic growth, defined as an increase in a country's output of goods and services over time, is often seen as a means to alleviate scarcity by expanding the availability of resources and goods. However, whether economic growth truly solves the fundamental problem of scarcity is subject to debate.

Discussion:

Arguments that economic growth can help solve scarcity:

1. Increased Resource Availability: Economic growth can lead to the discovery and development of new resources, technological advancements, and improvements in productivity, thereby increasing the total output of goods and services.

2. Enhanced Living Standards: Growth can improve living standards and reduce poverty, enabling more people to access essential goods and services.

3. Technological Progress: Innovations can make production more efficient, reducing the amount of scarce resources needed for certain goods, thus freeing resources for other uses.

Counterarguments and limitations:

1. Unlimited Wants: Despite growth, human wants continue to expand, often at a faster rate than growth, meaning scarcity persists in new forms.

2. Environmental Constraints: Economic growth can deplete natural resources and cause environmental degradation, which may ultimately exacerbate scarcity of vital ecological resources.

3. Finite Resources: Some resources are inherently finite, and technological progress cannot always replace or regenerate them, leading to persistent scarcity.

4. Distribution Issues: Growth does not necessarily ensure equitable distribution of resources; some populations may still face scarcity despite overall increases in output.

While economic growth can temporarily or locally reduce certain types of scarcity and improve material well-being, it does not fundamentally eliminate the problem of scarcity because human wants keep rising, and environmental and resource constraints remain. The core issue of unlimited wants versus limited resources continues to persist, making scarcity an inherent feature of economic life. Therefore, economic growth is a tool that can mitigate some aspects of scarcity but does not provide a complete solution.

Remark:
This discussion aligns with the perspectives highlighted in London 2007, emphasizing that the problem of scarcity remains ongoing because technological progress and economic growth tend to stimulate further wants, preventing the complete resolution of scarcity.

The tendency nowadays is for most countries to move away from planned to market economies. Explain why. (20 marks)

Historically, many countries, especially those in the USSR, Eastern Europe, and China, adopted planned or command economies, believing this system could accelerate industrialization and promote social equality. However, over time, the limitations of planned economies became apparent, prompting a shift toward market economies. This trend is driven by the advantages of market systems and the disadvantages inherent in planned economies.

1. Advantages of a Market Economy

• Efficiency in Resource Allocation:

  • Prices in a market economy are determined by supply and demand, guiding resources to where they are most valued.
  • This leads to optimal production and minimizes waste.

• Encourages Innovation and Entrepreneurship:

  • Profit motive motivates firms and individuals to innovate, improve products, and increase productivity.
  • Competitive markets foster technological progress.

• Consumer Sovereignty:

  • Consumers influence what is produced through their purchasing choices.
  • This ensures that goods and services match consumer preferences.

• Flexibility and Dynamic Response:

  • Market economies can adapt quickly to changing conditions, shocks, or innovations.

• Higher Economic Growth:

  • Competition and innovation promote economic expansion and higher standards of living.

2. Disadvantages of Planned Economies

• Inefficiency and Bureaucracy:

  • Central planning often results in misallocation of resources due to information asymmetry and bureaucratic delays.
  • Over-centralization can lead to waste and shortages.

• Lack of Incentives:

  • Absence of profit motive reduces motivation for innovation, efficiency, and hard work.
  • State enterprises may become complacent or inefficient.

• Inflexibility:

  • Planned economies are often slow to respond to changes in consumer preferences or technological advancements.

• Corruption and Lack of Competition:

  • Monopoly or state control can lead to corruption, complacency, and lack of innovation.

• Limited Consumer Choice:

  • Consumers have less influence over production, leading to potential dissatisfaction.

3. Reasons for the Shift from Planned to Market Economies

• Failure to Achieve Rapid Growth:

  • Many planned economies, like the USSR, struggled with stagnation, inefficiency, and failure to meet consumer needs.

• Technological and Economic Inefficiencies:

  • Central planning struggled to keep pace with technological progress and global competition.

• Global Trends and International Trade:

  • Countries recognized that integration into global markets required market-oriented reforms.

• Political Changes and Reforms:

  • The decline of communist regimes and the fall of the Soviet Union in the late 1980s and early 1990s accelerated the shift toward market economies.

• Desire for Improved Living Standards:

  • Market economies tend to deliver higher productivity, innovation, and improved standards of living.

• Experience of Success in Market-Oriented Countries:

  • Countries like South Korea and Taiwan demonstrated that market economies could achieve rapid industrialization and economic growth.

The move away from planned economies toward market-oriented systems is primarily motivated by the recognition that market economies are generally more efficient, innovative, and adaptable. While planned economies aimed to promote equality and rapid development, their inherent inefficiencies and inflexibility often hindered sustainable growth. The advantages of market economies—such as better resource allocation, incentives for innovation, consumer choice, and adaptability—have made them the preferred model in the modern global economy.

“A mixed economic system is a bridge between the free enterprise and planned economic systems.” Discuss. (20 marks)

A mixed economy combines elements of both free market (capitalist) and planned (socialist) systems. It seeks to harness the advantages of individual initiative and private enterprise while also allowing government intervention to address market failures and promote social welfare. Thus, it functions as a “bridge” or middle ground, balancing the roles of the private sector and the state.

1. Characteristics of a Free Enterprise (Market) System

• Private Ownership: Resources and means of production are owned privately.
• Profit Motive: Firms operate primarily to maximize profits.
• Minimal Government Intervention: The government’s role is limited to enforcing laws and protecting property rights.
• Price Mechanism: Prices are determined by supply and demand, guiding resource allocation efficiently.
• Consumer Sovereignty: Consumers influence what is produced through their purchasing choices.

2. Characteristics of a Planned (Command) Economy

• State Ownership: Resources and industries are owned and controlled by the government.
• Central Planning: The government plans what, how, and for whom to produce, aiming for equitable distribution and social welfare.
• Limited Role for Market Forces: Prices and production are set by authorities, not by market forces.
• Focus on Social Objectives: Emphasis on reducing inequality, providing public goods, and achieving economic stability.

3. How a Mixed Economy Serves as a Bridge

• Combination of Private and Public Ownership:

  • In a mixed economy, key industries may be owned or regulated by the government (e.g., healthcare, transportation), while others remain under private ownership.
  • This blending allows for private enterprise to operate freely within a framework of government regulation.

• Role of Government:

  • The government intervenes to correct market failures—such as externalities, monopolies, or public goods.
  • It also implements social policies—like welfare, education, and health services—aimed at promoting social equity.

• Market and Planning Coexistence:

  • Prices are generally determined by supply and demand but can be regulated to prevent inflation, monopolies, or ensure essential goods are affordable.
  • Economic planning is used selectively to guide investment and development, especially in strategic sectors.

• Flexibility and Adaptability:

  • A mixed system can adapt to changing economic circumstances more effectively than purely planned or free-market systems, combining efficiency with social objectives.

4. Advantages of a Mixed Economy

• Promotes economic efficiency through private enterprise.
• Ensures social justice and reduces inequality via government intervention.
• Provides public goods and services that the market may underprovide.
• Stabilizes the economy through fiscal and monetary policies.

5. Limitations

• Potential for government failure if intervention is excessive.
• Risk of excessive regulation stifling enterprise.
• Possible conflicts between private interests and social welfare.

A mixed economic system indeed acts as a “bridge” by integrating the strengths of both free enterprise and planned economies. It allows for private initiative and market efficiency while enabling government intervention to promote social justice, correct market failures, and provide public goods. This hybrid approach seeks to balance economic efficiency with social equity, making it a flexible and pragmatic model suited to modern economies.