Economics May/Jun 2023

paper 2

Question 1
(a) Define EACH of the following terms:
(i) Labour
Labour refers to the human effort, both physical and mental, used in the
production of goods and services. It includes all types of work done by people for
which they are paid.
(2 marks)

(ii) Capital
Capital refers to man-made resources used in the production of goods and
services. This includes machinery, buildings, tools, and equipment (physical
/tangible) It also refers to working capital (intangible assets) like money and
stock.
(2 marks)

(b) State TWO disadvantages of the division of labour for employees.

Workers may become bored and demotivated by doing the same task
repeatedly, leading to decreased productivity.
It limits the skills of workers to only one area, making them less flexible in the job
market.
(2 marks)

(c) Explain how a large chain of fast-food restaurants might use EACH of the
following economies of scale to its advantage:
(i) Financial economies of scale
The restaurant chain can borrow money at lower interest rates because of its
large size and strong financial position, reducing its cost of capital.
(2 marks)
(ii) Marketing economies of scale
It can spread advertising costs over a larger number of outlets, making
marketing more cost-effective per unit sold.
(2 marks)
(iii) Technical economies of scale
The chain can afford advanced kitchen equipment that speeds up food
preparation and reduces waste, improving efficiency.
(2 marks)

(iv) Managerial economies of scale

The business can hire specialized managers (e.g., for finance, HR, marketing),
leading to better decision-making and increased efficiency.
(2 marks)

(d) Use the information in Table 1 to answer the following:

TABLE 1: COSTS FOR XYZ LIMITED

Quantity Fixed Cost ($) Variable Cost ($) Total Cost ($)
0 10 - 10
1 - 4 14
2 10 7 17

(i) Calculate the fixed cost when no bicycles are produced.

Answer: Fixed cost = Total cost at 0 output = $10
(2 marks)

(ii) Calculate the variable cost when 1 bicycle is produced.

Answer: Variable cost = Total cost − Fixed cost = 14 − 10 = $4
(2 marks)

(iii) Calculate the total cost when 2 bicycles are produced.

Answer: Total cost = Fixed cost + Variable cost = 10 + 7 = $17
(2 marks)

Question 2
(a) List THREE non-price factors, other than its own price, that impact demand
for a good.
Consumer income – If income rises, demand for normal goods increases.
Tastes and preferences – Favourable trends or advertising can boost demand.
Price of related goods – Demand may change due to substitutes (e.g., Pepsi for
Coke) or complements (e.g., printers and ink).
(3 marks)

(b) List THREE factors that impact the price elasticity of supply.
Time period – Supply is more elastic in the long run as firms can adjust
production.
Availability of resources – Easily available resources make supply more elastic.
Storage capacity – Goods that can be stored have more elastic supply
Mobility of labour and capital
(3 marks)

(c) For EACH of the following pairs of goods, explain which good has more price
elastic demand.
(i) A red motorcar or all motor vehicles
A red motorcar has more price elastic demand because it is a specific type of
product with many substitutes (other colours), making consumers more
responsive to price changes.
(2 marks)

(ii) Jewellery or prescription medicine

Jewellery has more price elastic demand because it is a luxury, not a necessity.
Prescription medicine is a necessity, so its demand is inelastic.
(2 marks)

(iii) An increase in gas prices today or a tax on gas a year after the tax is
introduced
A tax a year after the tax is introduced is more price elastic, as consumers have
time to adjust their behaviour or find alternatives.
(2 marks)

(iv) Laptops or electricity

Laptops have more price elastic demand because they are not essential and
have substitutes. Electricity is a basic necessity, so demand is less responsive to
price changes.
(2 marks)

(d) Study Figure 2 (Market for coffee in Joeland)

(i) On the diagram in Figure 2, label the demand curve with the letter D and the
supply curve with the letter S.
The demand curve (D) should slope downward from left to right.

The supply curve (S) should slope upward from left to right.
(2 marks)

(ii) On the diagram in Figure 2, identify the market equilibrium.

Market equilibrium is the point where the demand and supply curves intersect.
(1 mark)
(e) On the diagram below, illustrate how a severe storm in Joeland would impact
the coffee market.

A severe storm would reduce supply of coffee (crop damage).

Shift the supply curve leftward from S to S1.

This causes the equilibrium price to rise and the equilibrium quantity to fall.
(Diagram must show the leftward shift in supply curve and new equilibrium
point.)
(3 marks)

Total: 20 marks

Question 3
(a) Identify TWO characteristics of EACH of the following types of market
structures

(i) Perfect competition

A large number of buyers and sellers exist in the market.
All firms sell identical or homogeneous products.
There is perfect knowledge in the market.

(2 marks)

(ii) Monopoly
There is only one seller or producer in the market.
The firm is a price maker due to lack of competition.
Differentiated goods
(2 marks)

(iii) Monopolistic competition

Many sellers and many buyers.
Offer similar but not identical products (product differentiation).
There is some degree of price control due to brand loyalty.
(2 marks)

(b)Using economic concepts, explain the problem created when community

members are asked to make a voluntary monthly contribution for public internet
access.
The problem arises because public internet access is a public good, which is
both non-excludable (people cannot be prevented from using it even if they
don't pay) and non-rivalrous (one person's use does not reduce availability for
others). These characteristics lead to the free rider problem, where individuals
benefit from the service without contributing financially. As a result, many
community members may choose not to make the voluntary monthly payment,
assuming others will cover the cost. This leads to underfunding and under-
provision of the internet service.
Since public internet access is also a merit good (a good that is socially
desirable and likely to be under-consumed if left to the private market), its under-
provision results in market failure. In this case, the service is not supplied at
the socially optimal level of output, where marginal social benefits exceed
marginal private benefits. This justifies possible government intervention or
alternative funding mechanisms to ensure efficient provision.
(4 marks)

(c) Indicate whether the following goods and services are merit or public goods:
(i) Primary school provided by a private organization
Merit good
(It is beneficial to individuals and society but can be under-consumed without
government support.)
(ii) The national army of a country
Public good
(Non-excludable and non-rivalrous; everyone benefits regardless of payment.)
(iii) Health care
Merit good
(iv) Lighting of a village along main streets
Public good
(4 marks)
(d) Study Table 1 and answer the following:

(i) Identify the cause of the market failure in Roadville’s road repair market.
The cause of the market failure is that the marginal social benefit (MSB) exceeds
the private demand, meaning the road repairs provide more benefit to society
than individuals are willing to pay for.
(2 marks)

(ii) Using the information in the table, explain the market failure identified in (d)
(i).
At each price, the marginal social benefit (MSB) is higher than the private
demand. For example, at a price of $50, the demand is 8 units, but the MSB is
12. This means that society values road repairs more than the number of
potholes being repaired through private demand.
The table shows that at every price; the marginal social benefit (MSB) is higher
than what people are willing to pay. For example, when the price is $50, people
want 8 potholes fixed, but the MSB is 12 — meaning society would benefit more
if more potholes were fixed.
This shows that people are only thinking about their own benefit, not the total
benefit to everyone. So, fewer potholes get fixed than what would be best for the
community. That’s why the market fails — it doesn’t give the right number of
repairs unless the government steps in (Under provision of merit goods)
(4 marks)
Total: 20 marks

Question 4
(a)(i) List FOUR qualities of money.
Durability – Money must withstand wear and tear from repeated use.
Portability – Money should be easy to carry and transfer.
Divisibility – Money should be capable of being divided into smaller units.
Acceptability – Money must be widely accepted in exchange for goods and
services.
(4 marks)

(ii) Define the term ‘financial sector’.

The financial sector refers to the part of the economy made up of institutions
that provide financial services, such as banks, credit unions, insurance
companies, and stock markets. These institutions facilitate saving, borrowing,
investment, and the flow of money.
(2 marks)

(b) Ann's activities and the FOUR functions of money:

Ann goes to the bank to withdraw money to buy a dress and checks her savings
toward buying a house. She plans to take out a loan to buy that house in the
future.

(i) Function 1 – Medium of exchange

Money is used to purchase goods and services.
Ann uses money to buy a dress, showing that money is functioning as a medium
of exchange.
(2 marks)

(ii) Function 2 – Unit of account

Money provides a standard way to measure and compare the value of goods and
services.
The price of the dress is $150, which shows that money is being used to assign
value to goods.
(2 marks)

(iii) Function 3 – Store of value

Money can be saved and used in the future without losing its value.
Ann checks her savings for a house purchase in five years, showing money stores
value over time.
(2 marks)

(iv) Function 4 – Standard of deferred payment

Money allows borrowing and repaying of debts in the future.
Ann plans to take a loan and repay it later, showing that money is used for
deferred payments.
(2 marks)

Total for part (b): 8 marks

(c) Study Table 2: Opportunity Costs and Answer the Following

Country Banana chips Chocolate
Merryville 1/3 chocolate 3 banana chips
Summerville 2 chocolates 1/2 banana chips

(i) Identify the country with the comparative advantage in producing banana
chips.
Answer: Merryville
(Merryville gives up less chocolate to produce 1 unit of banana chips.)
(1 mark)

(ii) Identify the country with the comparative advantage in producing chocolate.
Answer: Summerville
(Summerville gives up fewer banana chips to produce 1 unit of chocolate.)
(1 mark)
(iii) Identify the country with the absolute advantage in producing banana chips.
Answer: Summerville
(Summerville uses less labour than Merryville for banana chips.)
(1 mark)

(iv) Identify the country with the absolute advantage in producing chocolate.
Answer: Summerville
(Summerville also uses less labour than Merryville for chocolate.)
(1 mark)

(v) Suggest the country that should export banana chips.

Answer: Merryville
(Specializes based on comparative advantage.)
(1 mark)

(vi) Suggest the country that should export chocolate.

Answer: Summerville
(Specializes based on comparative advantage.)
(1 mark)

Total: 20 marks

Question 5
(a) Describe the difference between a bilateral agreement and a multilateral
agreement.
A bilateral agreement is a trade or economic agreement between two countries
to promote trade, investment, or cooperation. It typically involves mutually
agreed terms benefiting both nations.

A multilateral agreement involves more than two countries and is usually

negotiated through international organizations. These agreements promote
global cooperation and standardization of trade rules.
(3 marks)
(b) Identify the term described by EACH of the following phrases:
(i) “The increase in a country’s real output of goods and services over a period of
time, usually one year.”
Economic growth – The increase in the value of all goods and services produced
by an economy over time.
Real Output refers to the total production of goods and services, adjusted for
inflation. It reflects the actual increase in volume, not just higher prices.
(1 mark)

(ii) “A set of economic reforms that a country must adhere to in order to secure a
loan from the International Monetary Fund and/or the World Bank.”
Answer: Structural adjustment programme (SAP)
(1 mark)
(iii) “A type of trade bloc or agreement between nations that allows products,
labour and technology to move freely across borders.”
Answer: Common market (Economic integration)
(1 mark)

(c) Explain how the existence of trade unions can lead to unemployment.
Trade unions often negotiate for higher wages and better working conditions. If
wages rise above the level that firms can afford, some employers may reduce
their workforce or delay hiring, leading to unemployment.
(2 marks)

(d) For EACH of the following scenarios, identify the type of unemployment
described and recommend a solution by the government:
(i) Mary lost her job as a travel agent due to the increased popularity of online
booking websites.
Type of unemployment: Structural unemployment
Solution: The government could provide retraining or re-skilling programmes to
help Mary transition to a job in a sector with higher demand, such as digital
services.
(3 marks)
(ii) Patrick was laid off from the fast-food restaurant when sales decreased
because of the economic downturn.
Type of unemployment: Cyclical unemployment
Solution: The government can use expansionary fiscal policies such as increasing
public spending or cutting taxes to stimulate demand and create jobs.
(3 marks)

(e) Study Figure 3 and answer the questions that follow:

(i) Identify the types of flows labelled A and B.

B: Consumer expenditure
A: Rewards from the factors of production (rent / wages /int/profit)
(2 marks)

(ii) Fill in the blanks:

"An increase in income tax will cause the flow of expenditure to decrease
because disposable income will decrease and households will buy less goods and
services."
(2 marks)

(iii) Explain how inflation affects the ability of households to purchase food.
Inflation leads to higher prices, which reduces the purchasing power of
households. As a result, with the same amount of income, households can buy
less food, potentially affecting their nutrition and well-being.
(2 marks)

Total: 20 marks