Economics — March/April 2024

Question 1(a)

State the meaning of the following terms as used in economics: (a) wants;

(2 marks)

Answer

Wants are human desires for goods and services that provide satisfaction. They extend beyond necessities and are numerous and recurring, while the resources used to satisfy them are limited.

Question 1(b)

State the meaning of the following terms as used in economics: (b) opportunity cost.

(2 marks)

Answer

Opportunity cost is the value of the next best alternative forgone when a choice is made. For example, using a limited piece of land to grow maize means giving up the best alternative use of that land.

Question 2

Give three reasons that may lead to abnormal demand curve.

(3 marks)

Answer

1. Prestige or Veblen effects: a high price may make a status good more desirable.
2. Giffen behaviour: for a strongly inferior staple taking a large budget share, the income effect of a price rise may outweigh the substitution effect.
3. Speculation: expected further price rises may lead buyers to purchase more even as the current price rises.

Question 3

State three challenges that are associated with direct production.

(3 marks)

Answer

1. Limited specialisation can keep productivity and output low.
2. A household may be unable to produce the full variety of goods it needs.
3. Small-scale production can limit access to machinery and economies of scale.

Question 4

List three determinants of the size of a firm.

(3 marks)

Answer

1. The capital and finance available.
2. The size of the market and demand for its products.
3. The nature of the product and the production technology required.

Question 5

State three services that bank customers may obtain form mobile-banking operations.

(3 marks)

Answer

1. Checking account balances and transaction information.
2. Transferring funds between accounts or to recipients.
3. Paying bills or merchants through mobile banking.

Question 6

List four types of direct tax.

(4 marks)

Answer

1. Personal income tax.
2. Corporation tax on company profits.
3. Capital gains tax.
4. Property tax or rates on land and buildings.

Question 7

State four causes of unemployment in developing countries.

(4 marks)

Answer

1. Growth of the labour force faster than job creation.
2. Low investment and insufficient expansion of businesses.
3. A mismatch between workers’ skills and available jobs.
4. Seasonal production that leaves workers without employment during part of the year.

Question 8

List two types of foreign exchange rate systems that may be adopted by a country.

(2 marks)

Answer

1. Fixed exchange-rate system.
2. Floating or flexible exchange-rate system.

Question 9

State three challenges that may be encountered at the implementation stage of an economic development plan in a country.

(3 marks)

Answer

1. Insufficient funding, staff or other resources.
2. Poor coordination, weak administration or corruption.
3. Unexpected changes such as drought, political instability or external economic shocks.

Question 10

List three fiscal measures that may be taken to control inflation in a country.

(3 marks)

Answer

1. Increase taxes to reduce disposable income and aggregate demand.
2. Reduce or postpone non-essential government expenditure.
3. Borrow from the non-bank public to absorb spending power, without immediately returning the funds to expenditure.

Question 11(a)

Explain six factors that may cause a decrease in supply of a commodity in a market.

(9 marks)

Answer

1. Higher input prices raise production costs, making firms willing to supply less at each selling price.
2. Higher indirect taxes or reduced subsidies lower producers’ net returns and discourage output.
3. Adverse weather, pests or natural disasters can reduce agricultural output and disrupt other production.
4. The exit of firms from the industry reduces the number of suppliers and total market output.
5. Production disruptions, such as power failures, damaged equipment or labour stoppages, reduce productive capacity.
6. More profitable alternative products encourage firms to divert resources away from the commodity.

Question 11(b)

Outline four benefits that a firm may derive from expanding its production capacity.

(8 marks)

Answer

1. It can meet growing demand and reduce lost sales caused by insufficient output.
2. It may spread fixed costs over more units, lowering average cost when the extra capacity is used effectively.
3. It can adopt specialised equipment or labour arrangements that improve efficiency.
4. It may gain a larger market share and increase total revenue and profit where additional output can be sold profitably.

Question 12(a)

Country Z has been experiencing a decline in the level of national income for the past four years. Explain six reasons that may account for this trend.

(9 marks)

Answer

1. Falling private investment reduces demand for capital goods and limits future productive capacity.
2. Weak household consumption reduces firms’ sales, encouraging cuts in output and employment.
3. A decline in export demand lowers production for foreign markets and reduces export earnings.
4. Reduced government expenditure can lower demand for goods, services and construction projects.
5. Drought, conflict, disease outbreaks or other disruptions can damage crops, infrastructure and business operations.
6. Falling productivity or a loss of productive resources can reduce output per worker and total goods and services produced.

Question 12(b)

Outline four principles that should be observed when incurring public expenditure.

(8 marks)

Answer

1. Maximum social benefit: spending should provide the greatest practical benefit to the community.
2. Economy: public funds should be used efficiently, avoiding waste and unnecessary costs.
3. Authorisation or sanction: spending should follow the approved budget and the required lawful authority.
4. Accountability: expenditure should be recorded, reported and subject to scrutiny so that funds are used for the intended purpose.

Question 13(a)

Outline six functions of the Central Bank of Kenya.

(9 marks)

Answer

1. Formulates and implements monetary policy directed towards price stability.
2. Issues and manages the supply of Kenya’s currency notes and coins.
3. Acts as banker, adviser and fiscal agent to the Government.
4. Provides banking services and settlement accounts for commercial banks and other eligible financial institutions.
5. Formulates foreign-exchange policy and holds and manages foreign-exchange reserves.
6. Regulates and supervises financial institutions under its mandate to support a sound financial system.

Reference: Central Bank of Kenya, Our Mission and Banking Services.

Question 13(b)

Explain four measures that the government of Kenya may take to increase the volume of exports in the country.

(8 marks)

Answer

1. Improve transport, power and port infrastructure to reduce export costs and delivery delays.
2. Facilitate access to export finance and suitable risk-cover arrangements so firms can fulfil overseas orders.
3. Promote products abroad and negotiate market access or trade agreements to reach more buyers.
4. Support productivity, product quality and compliance with destination-market standards so local goods compete effectively.

Question 14(a)

Outline four differences between economic growth and economic development.

(8 marks)

Answer

Question 14(b)

Describe six characteristics of the perfect competition market structure.

(9 marks)

Answer

1. Many buyers and sellers: each is small relative to the whole market and cannot individually control it.
2. Homogeneous products: buyers regard one seller’s product as identical to another’s.
3. Free entry and exit: firms can join or leave the market without significant artificial barriers.
4. Perfect information: participants know relevant prices and product characteristics.
5. Mobility of factors: labour and capital can move between uses in response to opportunities.
6. Price-taking firms: an individual firm accepts the market price determined by overall demand and supply.

Question 15(a)

Explain four causes of cost-push inflation in a country.

(8 marks)

Answer

1. Higher wages without matching productivity growth increase labour cost per unit and may be passed on in selling prices.
2. More expensive raw materials, including imported inputs, raise production costs across affected industries.
3. Higher energy and transport costs increase the cost of manufacturing and distributing goods.
4. Increased indirect taxes or removal of subsidies raises firms’ net production costs and can increase final prices.

Question 15(b)

Outline six roles that an entrepreneur plays in the process of production.

(9 marks)

Answer

1. Identifies business opportunities and decides what goods or services to produce.
2. Mobilises the finance and other resources needed to establish or expand production.
3. Combines and organises land, labour and capital into a working enterprise.
4. Makes key decisions about production methods, scale, location and markets.
5. Introduces innovations such as new products, processes or ways of serving customers.
6. Bears business uncertainty and the risk of losses in return for the possibility of profit.