**ECN 001 – PRINCIPLES OF ECONOMICS I**
1. Discuss the relationship between elasticity of demand and total revenue of the seller. (15 marks)
2. (a) Explain what is meant by indifference curve and marginal rate of substitution. (8 marks)
(b) Discuss the basic properties of an indifference curve. (7 marks)
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**ECN 002 – PRINCIPLES OF ECONOMICS II**
3. The economy model of a country is characterized as follows:
- Consumption function, C = 85 + 0.5Yd
- Investment Function, I = 85
- Government Spending, G = 60
- Net taxes, T = 40 + 0.25Y
Solve for the following:
(a) Equilibrium income (3 marks)
(b) Equilibrium consumption (3 marks)
(c) Net taxes (3 marks)
(d) What type of budget is the economy operating? (3 marks)
(e) By how much will output increase when investment spending increases by 50%? (3 marks)
4. (a) With the aid of a well labelled diagram, explain the circular flow of income in a three-sector economy. (8 marks)
(b) If the income of civil servants earning ₦75,000 per month increases by 40% and their consumption expenditure consequently increased from ₦52,000 to ₦65,000 per month:
- i. Calculate the multiplier (4 marks)
- ii. By how much will the national income be increased if the total consumption expenditure increased by ₦20,000. (3 marks)
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**ECN 003 – APPLIED ECONOMICS I**
5. (a) Explain the term 'demographic transition'. (5 marks)
(b) Discuss the implications of Malthusian population theory. (10 marks)
6. (a) Examine the effects of increasing population on the Nigerian economy. (10 marks)
(b) How could the trend be curtailed? (5 marks)
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**ECN 004 – APPLIED ECONOMICS II**
7. (a) Using a diagram, explain what is meant by recessionary gap? (5 marks)
(b) What policies might government use to correct recessionary gap? (10 marks)
8. Use the information below to answer the questions that follow.
**Nigeria Economic Outlook**
*(Passage about Nigeria's 2016 recession and 2017 economic outlook — Source: African Economic Outlook (AEO) 2017)*
i. What do you understand by the term 'economic recession'? (2 marks)
ii. With good examples, explain the term "economic shocks" and how they can affect the Nigerian economy. (2 marks)
iii. With good examples and illustration, explain the term expansionary fiscal policy and how it can affect an economy. (3 marks)
iv. Mention 4 macroeconomic objectives that all governments can pursue. (4 marks)
v. Aside from the above, given reasons for economic recession in Nigeria, explain some other reasons that can cause economic recession especially in West Africa. (4 marks)
#solutions
**ECN 001 – PRINCIPLES OF ECONOMICS I**
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**Question 1: Elasticity of Demand and Total Revenue**
Total Revenue (TR) = Price (P) × Quantity (Q)
The relationship depends on the Price Elasticity of Demand (PED):
**When demand is elastic (PED > 1):**
A price decrease → proportionally larger increase in quantity demanded → TR increases. A price increase → TR decreases. Sellers benefit from lowering price.
**When demand is inelastic (PED < 1):**
A price decrease → proportionally smaller increase in quantity → TR decreases. A price increase → TR increases. Sellers benefit from raising price.
**When demand is unit elastic (PED = 1):**
Any price change → TR remains constant. The percentage change in quantity exactly offsets the percentage change in price.
**Summary Table:**
| PED | Price Rise | Price Fall |
|-----|-----------|-----------|
| Elastic (>1) | TR falls | TR rises |
| Unit elastic (=1) | TR unchanged | TR unchanged |
| Inelastic (<1) | TR rises | TR falls |
**Conclusion:** A seller maximises total revenue at the point of unit elasticity. For elastic goods, reducing price increases revenue; for inelastic goods, raising price increases revenue.
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**Question 2(a): Indifference Curve and Marginal Rate of Substitution**
**Indifference Curve:** A graphical representation showing all combinations of two goods that give a consumer equal satisfaction or utility. The consumer is indifferent among all points on the curve.
**Marginal Rate of Substitution (MRS):** The rate at which a consumer is willing to give up one good to obtain an additional unit of another good while maintaining the same level of utility.
MRS = ΔY/ΔX = MUx/MUy
MRS diminishes along the curve (Law of Diminishing MRS) — as a consumer obtains more of Good X, they are willing to sacrifice less of Good Y, causing the curve to be convex to the origin.
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**Question 2(b): Basic Properties of an Indifference Curve**
1. **Downward sloping (negative slope):** To maintain the same utility, gaining more of one good requires giving up some of the other.
2. **Convex to the origin:** Reflects the diminishing MRS — as more of X is consumed, less Y is sacrificed per additional unit of X.
3. **Cannot intersect:** Two indifference curves can never cross. Intersection would imply that two different utility levels are equal at the point of crossing — a logical contradiction.
4. **Higher curves represent higher satisfaction:** A curve farther from the origin gives greater utility than one closer to it.
5. **Each curve is continuous and smooth:** Assumes goods are perfectly divisible and preferences are consistent.
6. **Does not touch the axes (for perfect substitutes excluded):** Implies the consumer desires some of both goods.
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**ECN 002 – PRINCIPLES OF ECONOMICS II**
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**Question 3:**
Given:
- C = 85 + 0.5Yd
- I = 85
- G = 60
- T = 40 + 0.25Y
Disposable income: Yd = Y − T = Y − (40 + 0.25Y) = 0.75Y − 40
Substitute into C:
C = 85 + 0.5(0.75Y − 40)
C = 85 + 0.375Y − 20
C = 65 + 0.375Y
**Equilibrium condition:** Y = C + I + G
Y = (65 + 0.375Y) + 85 + 60
Y = 210 + 0.375Y
Y − 0.375Y = 210
0.625Y = 210
**Y = 336**
**(a) Equilibrium Income = ₦336**
**(b) Equilibrium Consumption:**
C = 65 + 0.375(336)
C = 65 + 126
**C = ₦191**
**(c) Net Taxes:**
T = 40 + 0.25(336)
T = 40 + 84
**T = ₦124**
**(d) Type of Budget:**
Government Revenue (T) = 124
Government Spending (G) = 60
Since T > G → **Budget Surplus**
**(e) Increase in output when I increases by 50%:**
New I = 85 × 1.5 = 127.5
Increase in I = ΔI = 42.5
Multiplier (k) = 1/(1 − MPC(1−t))
MPC = 0.5, t = 0.25
k = 1/(1 − 0.5 × 0.75)
k = 1/(1 − 0.375)
k = 1/0.625
**k = 1.6**
ΔY = k × ΔI = 1.6 × 42.5
**ΔY = ₦68**
Output increases by **₦68**.
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**Question 4(a): Circular Flow of Income — Three-Sector Economy**
A three-sector economy includes households, firms, and government.
**Flow description:**
- **Households** supply factors of production (land, labour, capital, entrepreneurship) to **firms** and receive factor payments (wages, rent, interest, profit).
- Households pay **taxes** to government and receive **transfer payments** (subsidies, pensions).
- **Firms** pay taxes to government and receive **government expenditure** (contracts, subsidies).
- **Government** injects spending (G) into the economy and withdraws taxes (T).
**Injections:** Government spending (G), Investment (I)
**Withdrawals/Leakages:** Taxes (T), Savings (S)
**Equilibrium:** Total injections = Total withdrawals
I + G = S + T
*(A diagram would show three boxes — Households, Firms, Government — with arrows representing factor payments, consumption expenditure, taxes, and government spending flowing between them in a circular pattern.)*
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**Question 4(b):**
**i. The Multiplier:**
MPC = ΔC/ΔY = (65,000 − 52,000)/(75,000 × 1.4 − 75,000)
= 13,000/30,000
**MPC = 0.433**
Multiplier k = 1/(1 − MPC)
k = 1/(1 − 0.433)
k = 1/0.567
**k ≈ 1.76**
**ii. Increase in National Income:**
ΔY = k × ΔC
ΔY = 1.76 × 20,000
**ΔY = ₦35,200**
National income will increase by approximately **₦35,200**.
**ECN 003 – APPLIED ECONOMICS I**
**Question 5(a): Demographic Transition**
Demographic transition refers to the historical process by which a country moves from high birth and death rates to low birth and death rates as it undergoes economic and social development. It occurs in four stages:
1. **Pre-industrial stage:** High birth rate, high death rate → low/stable population growth.
2. **Early transitional stage:** Death rate falls (due to improved healthcare, sanitation) while birth rate remains high → rapid population growth.
3. **Late transitional stage:** Birth rate begins to fall as education improves, urbanisation increases, and family planning is adopted.
4. **Post-industrial stage:** Both birth and death rates are low → stable or declining population.
Nigeria is currently in Stage 2–3, with declining mortality but still high fertility.
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**Question 5(b): Implications of Malthusian Population Theory**
Thomas Robert Malthus (1798) argued that:
- Population grows **geometrically** (1, 2, 4, 8…)
- Food production grows **arithmetically** (1, 2, 3, 4…)
- This leads to a **population-food gap** unless controlled
**Positive checks** (reduce population): famine, disease, war.
**Preventive checks** (control birth): moral restraint, late marriage, celibacy.
**Implications:**
1. **Food shortage:** If population outstrips agricultural output, widespread hunger results.
2. **Poverty trap:** Rapid population growth reduces per capita income, keeping nations poor.
3. **Pressure on resources:** Overpopulation depletes natural resources faster than they can be replenished.
4. **Wage suppression:** A large labour supply drives wages down, reducing living standards.
5. **Necessity of population control:** Governments must implement family planning policies.
6. **Agricultural development imperative:** Nations must invest heavily in food production technology.
7. **Criticism of optimism:** Malthus warned against poor relief, arguing it encouraged higher birth rates among the poor.
**Criticism of Malthus:** He underestimated technological progress (Green Revolution), birth control, and the demographic transition. Many developed nations now face underpopulation, not overpopulation.
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**Question 6(a): Effects of Increasing Population on the Nigerian Economy**
1. **Unemployment:** Labour supply outpaces job creation, increasing unemployment and underemployment.
2. **Pressure on infrastructure:** Schools, hospitals, roads, and utilities become overstretched.
3. **Environmental degradation:** Deforestation, erosion, and pollution intensify with increased human activity.
4. **Food insecurity:** Agricultural output struggles to match population growth, raising food prices.
5. **Urban congestion:** Rural-urban migration creates slums, traffic congestion, and urban poverty.
6. **Increased government expenditure:** Government spends more on social services, reducing funds for capital investment.
7. **Low per capita income:** GDP growth is divided among more people, reducing average income.
8. **Dependency burden:** A high proportion of children and youth increases the dependency ratio on the working population.
9. **Security challenges:** Unemployment and poverty fuel crime, insurgency, and social unrest.
10. **Slow human capital development:** Resources are spread thin, reducing quality of education and health outcomes.
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**Question 6(b): How the Trend Could Be Curtailed**
1. **Family planning programmes:** Government and NGOs should promote contraceptive use and reproductive health education.
2. **Female education:** Educated women tend to have fewer children and marry later.
3. **Poverty alleviation:** Reducing poverty decreases reliance on large families as a source of labour/security.
4. **Rural development:** Reducing urban migration pressures by developing rural infrastructure and employment.
5. **Incentive/disincentive policies:** Tax incentives for smaller families; withdrawal of benefits beyond a set number of children.
6. **Youth empowerment:** Skills acquisition reduces early marriage and childbearing.
7. **Strengthening healthcare:** Access to maternal health services reduces infant mortality, reducing the need to have many children as insurance.
**ECN 004 – APPLIED ECONOMICS II**
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**Question 7(a): Recessionary Gap**
A **recessionary gap** (also called a deflationary gap) occurs when the actual (equilibrium) level of national income is **below** the full employment level of national income.
It represents the shortfall in aggregate demand needed to bring the economy to full employment output.
**Diagram:**
- The 45° line represents Y = AD (equilibrium).
- The full employment income level (Yf) is to the right of the actual equilibrium (Ye).
- The vertical distance between the full employment AD line and the actual AD line at Yf is the **recessionary gap**.
*(A standard Keynesian cross diagram would show the AD line intersecting the 45° line at Ye, while Yf is further right, with the gap between actual AD and required AD marked.)*
**Key features:**
- Economy operates below potential output
- Unemployment is above natural rate
- Deflationary pressures exist
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**Question 7(b): Government Policies to Correct a Recessionary Gap**
**1. Expansionary Fiscal Policy:**
- Increase government spending (G) on infrastructure, public works, education.
- Reduce taxes to increase disposable income and boost consumer spending.
- Increase transfer payments (unemployment benefits, subsidies) to stimulate demand.
**2. Expansionary Monetary Policy:**
- Central bank reduces interest rates → cheaper borrowing → increased investment and consumption.
- Open market operations: CBN buys government securities, injecting money into the economy.
- Reduction in Cash Reserve Ratio (CRR) and Liquidity Ratio → banks lend more.
**3. Supply-side Policies:**
- Investment in education and training to improve labour productivity.
- Deregulation to encourage private investment.
- Subsidies to businesses to stimulate production and employment.
**4. Exchange Rate Policy:**
- Devaluation of the currency makes exports cheaper, boosting external demand and aggregate demand.
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**Question 8:**
**i. Economic Recession:**
An economic recession is a significant, widespread, and prolonged decline in economic activity, typically defined as two consecutive quarters of negative GDP growth. It is characterised by rising unemployment, falling consumer spending, reduced investment, and declining industrial output. In Nigeria's case (2016), the recession was marked by a GDP growth rate of −1.5%.
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**ii. Economic Shocks and Their Effect on Nigeria:**
An **economic shock** is an unexpected event that significantly disrupts the normal functioning of an economy, either positively or negatively.
**Types and Nigerian examples:**
- **Supply shock:** The sharp decline in global oil prices (2014–2016) drastically reduced Nigeria's oil revenue, which accounts for over 70% of government income, leading to foreign exchange scarcity and budget deficits.
- **Demand shock:** The COVID-19 pandemic (2020) collapsed demand for goods and services, forcing businesses to shut down and causing mass unemployment.
- **Security shock:** Insurgency in the Northeast and militancy in the Niger Delta disrupted oil production and agricultural activity.
- **Exchange rate shock:** Sudden devaluation of the naira increases import costs, triggering inflation and reducing purchasing power.
**Effects on Nigeria:** Reduced government revenue, rising inflation, unemployment, capital flight, and reduced investor confidence.
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**iii. Expansionary Fiscal Policy:**
**Expansionary fiscal policy** refers to government measures to increase aggregate demand by raising public spending, reducing taxes, or both, especially during periods of recession.
**How it works:**
- Government increases spending on infrastructure (roads, hospitals, schools) → creates jobs → raises income → increases consumer spending (multiplier effect).
- Tax cuts increase households' disposable income → higher consumption → firms produce more → GDP rises.
**Nigerian example:** During the 2016 recession, the Nigerian government pursued an expansionary fiscal policy by allocating approximately 30% of the budget to capital expenditure, aiming to stimulate growth through infrastructure development.
**Effect on economy:**
- Increases national income through the multiplier
- Reduces unemployment
- Stimulates private sector activity
- May cause budget deficit if financed by borrowing
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**iv. Four Macroeconomic Objectives of Government:**
1. **Full employment:** Achieving the highest possible level of employment in the economy.
2. **Price stability:** Maintaining low and stable inflation rates.
3. **Economic growth:** Sustaining a positive and consistent increase in real GDP over time.
4. **Balance of payments equilibrium:** Ensuring exports and imports are balanced to maintain external financial stability.
*(Additional objectives include equitable income distribution and exchange rate stability.)*
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**v. Other Causes of Economic Recession in West Africa:**
Beyond Nigeria's specific shocks (oil price decline, insecurity, forex shortages), other causes of recession in West Africa include:
1. **Over-dependence on primary commodities:** Countries like Ghana (cocoa, gold) and Sierra Leone (diamonds) are vulnerable to global commodity price crashes, which reduce export earnings and government revenue.
2. **Political instability and coups:** Military takeovers (e.g., Mali, Guinea, Burkina Faso) disrupt governance, scare away investors, and collapse institutional frameworks.
3. **Corruption and poor governance:** Mismanagement of public funds reduces productive investment and undermines public confidence.
4. **External debt burden:** Heavy debt servicing obligations reduce government capacity to spend on growth-stimulating activities.
5. **Climate change and natural disasters:** Droughts (Sahel region), flooding, and desertification reduce agricultural output — a key sector in West African economies.
6. **Weak financial systems:** Underdeveloped banking and capital markets limit access to credit for businesses, constraining investment and growth.
7. **Structural dependence on imports:** Limited industrialisation means most manufactured goods are imported, creating persistent trade deficits and currency pressure.