Economics — July 2021

KNEC Diploma in Sales and Marketing — Module I. Paper code: 2902/105

Independent worked revision answers. These are not official KNEC marking schemes.

Question 1(a)

There are certain features that define economic resources. Highlight five such features. (10 marks)

Answer

  1. Scarcity: resources are limited relative to the many wants they could satisfy.
  2. Usefulness: resources help produce goods and services that satisfy human wants.
  3. Alternative uses: the same resource can often be allocated to different productive activities.
  4. Opportunity cost: using a scarce resource for one purpose sacrifices its next-best alternative use.
  5. Uneven distribution: the quantity and quality of resources differ between individuals, regions and countries.

Question 1(b)

There are certain factors that may determine an individual’s demand for a product. Explain five such determinants. (10 marks)

Answer

  1. The product’s own price: other things equal, a higher price normally reduces quantity demanded.
  2. Income: a rise in income usually raises demand for normal goods but can reduce demand for inferior goods.
  3. Prices of related goods: a dearer substitute can increase demand, while a dearer complement can reduce it.
  4. Tastes and preferences: fashion, advertising and personal priorities can increase or reduce willingness to buy.
  5. Expectations: anticipated price rises, income changes or shortages can change purchases made now.

Question 2(a)

Country X has lately been experiencing reduced supply of some essential household products. Explain five reasons for such reduced supply. (10 marks)

Answer

  1. Higher input prices raise production costs and reduce the quantity firms are willing to supply at a given selling price.
  2. Adverse weather or natural disasters can damage crops, factories and transport links.
  3. Shortages of raw materials, labour or power can interrupt production and reduce output.
  4. Higher production taxes or withdrawal of subsidies can make supplying the products less profitable.
  5. Closure or exit of producers reduces the number of suppliers and total market output.

Question 2(b)

Highlight five factors that could influence price determination by a firm. (10 marks)

Answer

  1. Costs of production and the margin needed to sustain operations.
  2. Customers’ demand, willingness to pay and sensitivity to price changes.
  3. Competitors’ prices and the availability of close substitutes.
  4. The firm’s objectives, such as market entry, profit maximisation or maintaining market share.
  5. Applicable pricing rules, taxes and market conditions, including shortages or seasonal demand.

Question 3(a)

Land as a factor of production possesses certain characteristics. Explain five such characteristics. (10 marks)

Answer

  1. Natural origin: land represents resources supplied by nature, rather than created through production.
  2. Fixed aggregate physical supply: the total earth surface cannot be increased, although usable sites and their productivity can be improved.
  3. Geographical immobility: a particular parcel cannot be moved to another location.
  4. Heterogeneity: parcels differ in fertility, minerals, climate, accessibility and other productive qualities.
  5. Derived demand: businesses demand land because it contributes to producing goods and services that customers want.

Question 3(b)

The location of industries in a country may be influenced by certain factors. Outline five such factors. (10 marks)

Answer

  1. Proximity to raw materials, particularly bulky or perishable inputs.
  2. Access to customers and a sufficiently large market.
  3. Availability of suitable labour and necessary skills.
  4. Reliable transport, electricity, water and communications.
  5. Land costs, planning requirements, security and other local operating conditions.

Question 4(a)

A market is said to be perfectly competitive if certain conditions exist. Highlight five such conditions. (10 marks)

Answer

  1. Many small buyers and sellers, so no individual participant controls the market price.
  2. A homogeneous product that buyers regard as identical across sellers.
  3. Free entry and exit of firms, without restrictive barriers.
  4. Perfect knowledge of relevant prices, quality and market conditions.
  5. Mobility of factors of production so resources can respond to changes in returns.

Question 4(b)

Country Y is in the process of calculating its national income. Explain five factors that could influence the size of national income of the country. (10 marks)

Answer

  1. Natural-resource endowment: productive land, minerals and other resources can support higher output.
  2. Labour supply and skills: a healthy, educated and productively employed workforce produces more goods and services.
  3. Capital stock: machinery, infrastructure and investment increase productive capacity.
  4. Technology and organisation: improved production methods and management raise productivity.
  5. Institutional and economic conditions: stability, functioning markets and supportive infrastructure encourage sustained production.

Question 5(a)

The Central Bank of a country is expected to carry out certain functions. Highlight five such functions. (10 marks)

Answer

  1. Formulating and implementing monetary policy to support price stability.
  2. Issuing and managing the national currency.
  3. Providing banking services to the government and acting as its fiscal agent.
  4. Serving the banking system, including settlement facilities and eligible liquidity assistance.
  5. Holding and managing foreign-exchange reserves and supporting orderly payment and financial systems.

Question 5(b)

A government usually aims at achieving certain objectives through its fiscal policy. Explain five such objectives. (10 marks)

Answer

  1. Promote economic growth by directing spending and taxation toward productive investment.
  2. Support employment by stimulating demand or financing useful public works when activity is weak.
  3. Improve price stability by adjusting overall spending and taxation to moderate excessive demand.
  4. Redistribute income through progressive taxation, transfers and access to public services.
  5. Improve allocation of resources by financing public goods and influencing activities with wider social costs or benefits.

Question 6(a)

Country Z has lately been experiencing a high level of cost push inflation. Highlight five factors that could have led to such inflation. (10 marks)

Answer

  1. Wages rising faster than labour productivity increase labour cost per unit of output.
  2. Higher fuel and electricity prices raise transport and production costs across industries.
  3. More expensive raw materials increase the costs of producing finished goods.
  4. Currency depreciation raises domestic-currency costs of imported inputs.
  5. Higher indirect taxes or production charges raise suppliers’ costs and may be passed into prices.

Question 6(b)

Outline five ways in which a country could restrict its trade with other countries. (10 marks)

Answer

  1. Impose tariffs on imported products.
  2. Set quotas limiting the quantity of imports.
  3. Require import licences that restrict the products or importers permitted to trade.
  4. Apply exchange controls that limit foreign currency available for imports.
  5. Impose embargoes or bans on specified trade, subject to the applicable legal framework.

Question 7(a)

Many developing countries are experiencing high levels of unemployment. Explain five ways in which a government could reduce such unemployment levels. (10 marks)

Answer

  1. Provide relevant education and vocational training to reduce skill mismatches.
  2. Encourage private investment by improving infrastructure and the business environment.
  3. Support viable small enterprises and self-employment through training and access to appropriate finance.
  4. Undertake economically useful public works that create jobs and improve productive infrastructure.
  5. Improve job information, placement services and labour mobility so vacancies can be matched with jobseekers.

Question 7(b)

Country X intends to encourage private investors as a way of enhancing its economic growth. Explain five ways in which the country could encourage private investors. (10 marks)

Answer

  1. Maintain predictable policies and protect lawful property and contractual rights, reducing uncertainty.
  2. Improve roads, power, water and communications to lower business operating costs.
  3. Simplify transparent business-registration and licensing procedures to reduce unnecessary delays.
  4. Promote access to suitable finance and efficient financial services for viable investment.
  5. Develop relevant workforce skills and targeted, sustainable investment incentives that address genuine investment barriers.
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