INTRODUCTION
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This Revision kit (Questions and Answers) contains kasneb past examination past papers and their suggested answers as provided by a team of lecturers who are experts in their area of training. The book is intended to help the learner do enough practice on how to handle exam questions and this makes it easy to pass kasneb exams.
UNIT DESCRIPTION
This paper is intended to equip the candidate with knowledge, skills and attitude to identify the impact and interaction of economic principles in various situations and apply the principles in decision making.
LEARNING OUTCOMES
A candidate who passes this paper should be able to:
- Apply basic mathematical and graphical techniques to analyse economic relationships
- Apply the knowledge of economics in decision making
- Analyse economic problems and suggest possible policy related recommendations
- Apply knowledge of economics in international trade and finance
- Relate economics to income levels and development in a country
CONTENT
MICROECONOMICS
- Introduction to economics
- Definition of economics
- Basic economic concepts: economic resources, human wants, scarcity and choice, opportunity cost, production possibility curves/frontiers
- Scope of economics: Micro and macro economics
- Methodology of economics: positive and normative economics, scientific methods, economics as a social science.
- Economic systems: planned economy, free market economy, mixed economy
- Consumers’ sovereignty and its limitations
- Demand, supply and determination of equilibrium
- Demand analysis
- Definition
- Law of demand
- Exceptional demand curves
- Individual demand versus market demand
- Factors influencing demand
- Types of demand
- Movement along and shifts of demand curves
- Elasticity of demand
- Types of elasticity: price, income and cross elasticity
- Measurement of elasticity; point and arc elasticity
- Factors influencing elasticity of demand
- Application of elasticity of demand
- Supply analysis
- Definition
- Individual versus market supply
- Factors influencing supply
- Movements along and shifts of supply curves
- Definition of elasticity of supply
- Price elasticity of supply
- Factors influencing elasticity of supply
- Application of elasticity of supply
- Determination of equilibrium
- Interaction of supply and demand, equilibrium price and quantity
- Mathematical approach to equilibrium analysis
- Stable versus unstable equilibrium
- Effects of shifts in demand and supply on market equilibrium
- Effect of taxes and subsidies on market equilibrium
- Price controls: Maximum and Minimum price control
- Price decontrol: Effect of Minimum and Maximum price decontrol
- Reasons for price fluctuations in agriculture
- The theory of consumer behaviour
- Approaches to the theory of the consumer – cardinal versus ordinal approach
- Utility analysis, marginal utility (MU), law of diminishing marginal utility (DMU)
- Limitations of cardinal approach
- Indifference curve analysis; Indifference curve and budget line
- Consumer equilibrium; effects of changes in prices and incomes on consumer equilibrium
- Derivation of a demand curve
- Applications of indifference curve analysis: substitution effect and income effect for a normal good, inferior good and a giffen good; derivation of the Engels curve
- Consumer surplus/Marshallian surplus
- The theory of a firm: The theory of production
- Factors of production
- Mobility of factors of production
- Short run analysis
- Total product, average and marginal products
- Stages in production and the law of variable proportions/the law of diminishing returns
- Long run analysis
- Isoquant and isocost lines
- The concept of producer equilibrium and firm’s expansion curve
- Law of diminishing returns to scale
- Demand and supply of factors of production
- Wage determination: demand and supply for labour
- Wage differential
- Trade unions: functions, effectiveness and challenges
- Transfer earnings and economic rent
- The theory of costs
- Short run costs analysis and size of the firm’s total cost, fixed cost, average cost, variable costs and marginal cost
- Long run costs analysis
- Optimal size of a firm
- Economies and diseconomies of scale
- Market structures
- Definition of a market
- Necessary and sufficient conditions for profit maximisation
- Mathematical approach to profit maximisation
- Output, prices and efficiency of: Perfect competition, monopoly, monopolistic competition, oligopolistic competition
- MACROECONOMICS
- National income
- Definition of national income
- Circular flow of income
- Methods/approaches to measuring national income
- Concepts of national income: gross domestic product (GDP), gross national product (GNP) and net national product (NNP), net national income (NNI) at market price and factor cost, disposable income
- Difficulties in measuring national income
- Uses of income statistics
- Analysis of consumption, saving and investment and their interaction in a simple economic model
- Mathematical approach to the determination of equilibrium national income
- Inflationary and deflationary gaps
- The multiplier and accelerator concepts
- Business cycles/cyclical fluctuations
- Economic growth, economic development and economic planning
- The differences between economic growth and economic development
- Actual and potential growth
- The benefits and costs of economic growth
- Determinants of economic development
- Common characteristics of developing countries
- Obstacles to economic development
- The need for development planning
- Short term, medium term and long-term planning tools
- Challenges to economic planning in developing countries
- Money and banking
Money
- The nature and functions of money
- Demand and supply of money
- Theories of demand for money: The quantity theory, the Keynesian liquidity preference theory
The banking system
- Definition of commercial banks
- The role of commercial banks and non-banking financial institutions in the economy
- Credit creation
- Definition of central bank
- The role of the central bank; traditional and changing role in a liberalised economy, such as financial sector reform, exchange rate reform
- Monetary policy, definition, objectives, instruments and limitations
- Classical theory of interest rate determination
- Interest rates and their effects on the level of investment, output, inflation and employment
- Harmonisation of fiscal and monetary policies
- Simple IS – LM Model
- Partial equilibrium and general equilibrium
- Inflation and unemployment
- Inflation
- Definition and types of inflation
- Causes of inflation: cost push and demand pull
- Effects of inflation
- Measures to control inflation
- Unemployment
- Definition of unemployment
- Types and causes of unemployment
- Control measures of unemployment
- Relationship between unemployment and inflation: The Phillips curve
- Agriculture and Industry
- Role of agriculture in economic development
- Challenges facing agricultural sector in developing countries
- Policies to improve the agricultural sector
- Role of industry in economic development
- Benefits of small scale industries in developing countries
- Obstacles to industrial development in developing countries
- Policies to enhance industrial development in developing countries
- International trade and finance
- Definition of International trade, advantages and disadvantages
- Theory of absolute advantage and comparative advantage
- World trade organisation (WTO) and concerns of developing countries
- Protection in international trade
- Regional integration organisations, commodity agreements and the relevance to less developed countries (LDCs)
- Terms of trade, balance of trade, balance of payments (causes and methods of correcting deficits in balance of payments)
- Exchange rates: Types of foreign exchange regimes, factors influencing exchange rates, foreign exchange reserves
- Foreign Direct Investment: case for and case against FDI
- Foreign Aid: Case for and case against foreign aid
- Bretton Woods financial institutions: International Monetary Fund (IMF) and World Bank
- Foreign debt management: causes, consequences of excessive debt and interventions
- Structural Adjustment Programmes (SAPs) and their impacts on the LDCs
TOPIC 1
INTRODUCTION TO ECONOMICS
QUESTION 1
August 2023 Question One A
State FIVE advantages of a planned economy. (5 marks)
ANSWER
A planned economy is an economic system in which the government controls the production, distribution, and prices of goods and services. This is in contrast to a market economy, where these decisions are made by private businesses.
There are several advantages of a planned economy:
- Efficiency: The government can allocate resources more efficiently than the market, as it has a better overview of the economy. This can lead to lower production costs and higher output.
- Equality: The government can ensure that everyone has access to basic necessities, such as food, housing, and healthcare. This can lead to a more equal society.
- Stability: The government can control the economy and prevent boom-and-bust cycles. This can lead to a more stable economy.
- Rapid economic growth: The government can direct investment and resources towards strategic industries, which can lead to rapid economic growth.
- Avoiding market failures: The government can intervene in the market to correct market failures, such as monopolies and externalities.
QUESTION 2
August 2023 Question Six B
Analyse FOUR challenges that may be encountered by an economy when transitioning from a planned economy to a free enterprise system. (4 marks)
ANSWER
Transitioning from a planned economy to a free enterprise system is a complex and challenging process. There are a number of factors that can make this transition difficult, including:
- Lack of experience with a market economy: In a planned economy, the government controls most aspects of the economy, including production, distribution, and prices. This means that businesses and individuals have little experience with making decisions in a market economy.
- Weak institutions: A market economy requires strong institutions, such as a legal system that protects property rights and a financial system that can channel capital to businesses. In many countries that are transitioning from a planned economy, these institutions are weak or nonexistent.
- Corruption: Corruption can be a major obstacle to economic reform. In countries where corruption is widespread, businesses may be reluctant to invest or operate in a market economy.
- Political instability: Political instability can also make it difficult to implement economic reforms. If there is frequent change in government, it can be difficult to maintain a consistent policy course.
- Social unrest: The transition from a planned economy to a free enterprise system can lead to social unrest. This is because the transition can lead to job losses and changes in the way that people live and work.
QUESTION 3
April 2023 Question One B
Enumerate FIVE benefits of studying economics. (5 marks)
ANSWER
- Excellent career prospects: By having economic knowledge, you will have many excellent job prospects and potential career paths available to you. Economists play an important part in everyday life and are present in all sectors of business, meaning economics graduates are in high demand by employers around the world.
- Study of Economics helps to conquer poverty: Economics studies the, vital question of satisfying human wants with scarce resources. The present day poverty and the poor standard of living of the people of many backward countries are due to poor resources, little production and lack of technology. The knowledge of economics is essential to eradicate poverty of a nation and to raise their living standards.
- Develop transferrable skills: One of the best reasons for studying economics is the development of transferrable skills. These skills can be applied to any field of economics and will also boost your employability in any industry you choose to work in.
- Study of Economics helps to frame law: The knowledge of economics is very essential for the legislators and parliamentarians. They will be able to frame laws effectively only by having knowledge of the subject. As citizens and voters and people. Electing the representatives, the knowledge of economics will be much helpful. It will help the people to understand many economic programmes presented by the political parties in their ‘Election Manifesto’. The people can wisely judge the truth of the statements in the Manifesto.
- Study of Economics helps to increase national wealth: By studying economics, we can discover new factors that may lead to increase the national wealth. Modern governments are actively engaged in economic Planning. The purpose of planning is to remove poverty by increasing the national income and wealth and also by effectively distributing the wealth. Without the knowledge of economics, this is absolutely impossible.
- Prepare for the Future: Studying economics helps you prepare for the future. You’ll have a grasp of the economic principles that affect your career prospects, investment decisions and retirement strategies. While other people are more uncertain about the economy and how to adjust to changing conditions, you can make better-informed choices and come up with ideas to deal with problems and benefit from opportunities.
QUESTION 4
December 2022 Question One C
List FOUR characteristics of economic resources. (4 marks)
ANSWER
Characteristics of economic resources
- Scarce: Economic resources are limited in availability and cannot meet all the unlimited wants and needs of society.
- Alternate use: Economic resources can be used for multiple purposes, and the opportunity cost of using them for one purpose is the next best alternative use.
- Transformation: Economic resources can be transformed into other useful resources through production processes.
- Economic value: Economic resources have an economic value, which is determined by their ability to satisfy human wants and needs.
- Excludability: Economic resources can be excluded from use by some people, meaning only certain individuals can use them.
- Rivalrousness: Economic resources are rivalrous, meaning their use by one individual reduces the availability for use by others.
- Transferable: Economic resources can be moved or transferred from one person or group to another.
QUESTION 5
December 2022 Question Three A
Enumerate FIVE factors that could limit consumer sovereignty. (5 marks)
ANSWER
Factors that can limit consumer sovereignty
- Advertising: Advertising campaigns can create the illusion of choice, when in reality the products or services being offered are all very similar.
- Monopolies / oligopolies: When a few companies dominate a market, they can limit consumer choice and can charge higher prices that could not be possible in a competitive market
- Government regulations: Government may impose restrictions or regulations on certain products or services, limiting consumer choices.
- Limited financial resources: Consumers may not be able to afford the products and services they would like due to financial constraints.
- The nature of economic System: In general, the consumer is more sovereign in a free market oriented system where commodities are produced more in line with consumer preferences. In a planned economic systems, less regard is given to consumer preferences.
- The range of goods available: Different consumers have different individual tastes and preferences and it is difficult for the available range of goods and services to satisfy all the consumers.
- Consumer habits: Individual consumers have different habits and are often reluctant to change these habits.
QUESTION 6
December 2022 Question Six A
Outline FOUR disadvantages of a controlled market system. (4 marks)
ANSWER
Disadvantages of a controlled market system
- Limited competition
- Inefficient allocation of resources
- Lack of incentive
- High barriers to entry
- Unfairness
QUESTION 7
August 2022 Question One A
Explain five demerits of trade liberalisation in an economy. (5 marks)
ANSWER
Demerits of trade liberalisation in an economy
Trade liberisation involves removing barriers to trade between different countries and encouraging free trade. It has the following disadvantages:
- Structural unemployment: It often leads to a shift in the balance of an economy. Some industries grow, some decline. Therefore, there may often be structural unemployment from certain industries closing
- Environmental costs: It could lead to greater exploitation of the environment e.g greater production of raw materials, trading toxic waste to countries with weaker environmental laws
- Infant industry argument: It may be damaging for developing countries who cannot compete against free trade.
- Due to liberalization, there will be an increased dependence on other nations, for forex, technology etc
- The domestic sector will take a hit as industries will become dependent on cheap raw materials from foreign countries.
- Due to introduction of new technology, there will be less workers who can implement the technology.
- There will be economic instability as any changes in the currency in foreign markets will result in a significant impact on the economy.
QUESTION 8
April 2022 Question One A
Discuss five challenges encountered by planned economic system in their transition to market oriented economies. (10 marks)
ANSWER
Challenges encountered by planned economic system in their transition to market oriented economies.
- Initial decline in output as the work culture develops may lead to loss in tax revenues at a time. When growing poverty has increased the need for increased social spending.
- Introduction of price mechanism: This may indicate a lot of commodities produced previously are no longer needed resulting to unemployment.
- There’s danger of escalation of legitimate market institutions.
- The need to develop an entrepreneurship culture which was not encouraged in planned economies. This is a culture that encourages risk taking and hard work.
- The need to introduce private and property rights which determines who owns what, which may prove challenging.
QUESTION 9
December 2021 Question One D
Outline seven advantages of a free market economic system. (7 marks)
ANSWER
Advantages of a free market economic system
A free market system is where the people in an economy are free to engage in economic activities and transactions without government interference
Advantages
- Efficient allocation of resources
- Competition
- Innovation and economic growth
- More choice
- Absence of red tape
- The free market economy naturally promotes equality
- Free market economies regulate themselves naturally
QUESTION 10
August 2021 Question Six C
(i) Define the term “free enterprise economic system.” (1 mark)
(ii) Highlight four economic advantages of free enterprise economic system. (4 marks)
ANSWER
(i) Definition of the term “free enterprise economic system.”
Refers to an economic system where the price mechanism is given a free reign in resource allocation. Competition is the driving force of free enterprises, resulting in greater efficiency and lower prices for the consumer.
(ii) Economic advantages of free enterprise economic system.
- Absence of red tape
- Freedom to innovate
- Customers drive choice
Incentive: people are encouraged to work hard because opportunities exist for individuals to accumulate high levels of wealth
QUESTION 11
May 2021 Question One A
Evaluate four ways in which the government could influence allocation of resources in a country. (8 marks)
ANSWER
Ways in which the government could influence allocation of resources in a country
- Indirect taxes: indirect taxes can be used to raise the price of de-merit goods and products with negative externalities designed to increase the opportunity cost of consumption and thereby reduce consumer demand towards a socially optimal level.
- Subsidies: subsidies to consumers will lower the price of merit goods. They are designed to boost consumption and output of products with positive externalities – remember that a subsidy causes an increase in market supply and leads to a lower equilibrium price.
- Provision of goods and services: Because of privatization, the state owned sector of the economy is much smaller than it was years ago. State funding can also be used to provide merit goods and services and public goods directly to the public.
- Tax relief: the government may offer financial assistance such as tax credits for business investment in research and development. Or a reduction in corporation tax designed to promote new capital investment and extra employment.
- Legislation and regulation. employment laws may offer some legal protection for workers by setting maximum working hours or by providing a price-floor in the labor market through the setting of a minimum wage regulation may be used to introduce fresh competition into a market- for example breaking up the existing monopoly power of service provider.
QUESTION 12
May 2021 Question One C
(i) Define the term “Consumer Sovereignty” as used in economics. (2 marks)
(ii) Summarise six limitations of consumer sovereignty in an economy. (6 marks)
ANSWER
(i) Term “Consumer Sovereignty” as used in economics. (Nov 2018 1B)
This is an economic belief that societal welfare is maximized when consumers are at liberty to choose goods to satisfy their needs. Simply, the consumer is the best judge of their product choices.
(ii) Limitations of consumer sovereignty in an economy.
- Government policy through taxes and subsidies can influence choices made by consumer.
- Nature of economic system e.g. in a command economy, government dictates what a consumer should do.
- Irrationality of consumer
- Advertising also restricts the consumer’s choice.
- Type of market e.g. in monopolies consumers have limited choice.
- Income of consumer products are only made for rich guy and the choices of the poor are never considered
- In availability of goods means consumers has to use what is available.
- Technical factors may impinge on freedom of consumer. For example the existing technology may not allow producers to make goods desired by consumers.
- Habit individual consumers have different and are reluctant to charge
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