INTRODUCTORY IDEAS

Definition of Economics
Economics is a social science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses.
This definition was given by Lionel Robbins and it is the universally
accepted definition.
1. Ends refer to human wants. Human wants are unlimited. Some human
wants include, food, shelter, education, clothing etc.
2. Means or scarce means refer to factors of production (land, labour,
capital and entrepreneur) that is economic resources used for the
production of goods and services. They are scarce because they are
never enough to satisfy the unlimited human wants.
3. Shortage. It is a temporal situation when demand exceeds the supply
of goods/services at a particular time. Shortage is temporal, does not
affect all societies and can be solved.
4. Scarcity. It means limited in supply relative to demand. It means
resources are not always enough to satisfy human wants. We are
therefore faced with a situation of unlimited wants and limited
economic resources. Scarcity is permanent, affects all societies and
cannot be solved.
5. Scale of preference. It is a list of unsatisfied wants arranged in order
of importance with the most important at the top and the least
important at the bottom
6. Choice. It is the act of selecting from many alternatives. When make a
choice opportunity cost is incurred. Choices arises because of scarcity
and it is made from a scale of preference.
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7. Opportunity cost (real cost, true cost, alternative cost). It refers to the
next best alternative which is forgone in order to satisfy a want.
Branches of Economics
There are two branches in Economics: Microeconomics and
Macroeconomics.
1. Microeconomics
It is that branch of economics which studies the behaviour of individual
economic agents, and how they try to maximise their objectives taking
into consideration their constraints. Thus, it focuses on the behaviour and
performance of individual units that is individuals, households, firms and
government.
2. Macroeconomics
It is that branch of economics which studies the behaviour of a set of
economic agents, how they are reacting towards economic aggregates.
Thus, it studies the economy as a whole such as national income, balance
of payment, aggregate savings, consumer expenditure etc.
Some other differences between microeconomics and macroeconomics
include:
1. Microeconomics is concerned with small segments of the economy
while macroeconomics is concerned with the whole economy.
2. There are little debates about the basic principles of microeconomics
while there is much debate in macroeconomics because there are
many schools of thought offering different explanations.
3. Microeconomics begins with theories while macroeconomics places
more emphasis on empirical data.
4. Microeconomics is concerned with determining the price of a
particular good while
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 macroeconomics is helpful in determining and maintaining the
general price level.
Reasons for studying economics or the importance of economics
1. It increases the intellectual value of human beings making them to
realise how interdependent they are.
2. It helps a consumer to control his/her expenditure taking into
consideration his budget constraint so as to achieve maximum
satisfaction.
3. It helps producers to choose the best option from available resources
so as to optimise the utilisation of these resources and maximise
profits.
4. It helps business men to determine the right price for their products
given the conditions of demand and supply.
5. It provides learners with skills of analysing economic problems and
formulating solutions thereby preparing them for the job market.
6. It permits governments to understand the complex problems of
unemployment, inflation, poverty, BOP disequilibrium which they
may be facing and how to solve them.
7. It assists the government in framing proper monetary and fiscal
policies to permit her generate revenue for building, maintaining and
developing the country.
8. It provides the bases for the society to solve the problems of what,
how and for whom to produce.

Tools used in Economic Analysis

1. Mathematics
2. Statistics
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3. Demography
4. History
5. Sociology
6. Accounting
7. Econometrics
8. Psychology
Positive and Normative Statements/Economics
1. Positive Statement/Positive Economics
It is that part of economics that deals with facts which can be verified.
Such statements are based on what can be proven with objective and
factual evidence. Therefore, it expresses what actually happens or will
happen under various conditions. It deals with what is and not what
ought to be eg a fall in price leads to an increase in quantity demanded, if
the rate of investment increases, the national income will also increase,
an increase in price leads to an increase in quantity supplied etc.
2.Normative Statement/Normative Economics
It is that part of economics that deal value judgement and opinions. Such
statements are based on what cannot be proven with objective and
factual evidence. Such statements are characterised by words such as,
should, ought to, ought not to, would, eg the government ought to
increase salaries, the rate of unemployment ought to be low in
Cameroon, the government should build schools in all villages etc.
Economics as a Science
Economics is considered a science because it uses the scientific
methodology to develop theories that can help explain relationships
between concepts, the behaviour of individuals, groups and organisations

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as it is the case with other sciences like Biology, Physics, Chemistry etc.
Thus, it is based on systematic study of facts and knowledge. All the
theories and facts related with economics are systematically collected,
classified, and analysed. The following reasons justify why Economics is
considered a science
1. Observation of facts and defining concepts
It observes facts related to economic concepts which are of interest to us.
2. Formulation of hypotheses
Economics formulates hypothesis from observations. A hypothesis is an
untested statement used to explain how one concept is related to another
based on observations and assumptions.
3. Testing of hypotheses
All economic laws and theories are tested and are based on experiments.
This can be done by using the either the inductive or the deductive
methods to develop theories. Thus, data is collected so as to find some
consistent behaviour to be able to explain some economic concepts
around us.
4. Use of hypotheses to make predictions
Economics makes use of laws related to theories which have been
verified by other economists and have been universally accepted. These
laws are used to predict what may happen in the future if human beings
adopt certain behaviour. eg the law of diminishing marginal utility and
the law of diminishing returns.
5. Use of positive statements
Economics uses positive statements which are statements based on facts
that can be verified to be either true of false.

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6. Economics develops correlation between cause-and-effect eg supply
has a positive relationship with price, demand has a negative
relationship with price etc.
GCE 2017
(a) Distinguish between micro and macroeconomics. (5marks)
(b) Why is economics considered a science? (15 marks)
Economics as a social science
Economics is not a pure science like Physics and Chemistry. It is a social
science because:
1. It deals with human behaviour in the society and how human

beings deal with the problem of scarcity to meet their unlimited

wants. Therefore, it cannot carry laboratory experiments like pure
scientists do in making findings because human beings cannot be
subjected to lab tests under controlled conditions.
2. The laboratory of economics is human society and human
behaviour itself is unpredictable and is not identical unlike other
sciences that deal with inanimate matter whose predictions are exact.
It is constantly changing and does not have controlled conditions like
other labs.
3. Economics deals with human behaviour in a very complex and
dynamic (changing) world where many things are changing at the
same time. This makes it difficult to determine the exact cause of an
effect, or predict with certainty unlike Physics and Chemistry.
Economics cannot hold other things constant. This is the reason why
economic propositions often begin with the assumption of other
things being equal (ceteris paribus). Ceteris paribus means that all

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 other factors which can have an effect on the concept under study are
held constant or not considered.
4. Economics makes use of both quantitative and qualitative data,
making predictions more difficult than pure science where mostly
quantitative data are used.
Methodologies of Economic Analysis
Economic theories and laws are obtained using two methods: The
Inductive and the Deductive methodically.
1. Inductive Methodology
It involves the process of reasoning from particular facts to a general
principle. Thus, specific situations are observed and analysed to establish
general principles. This method uses the bottom – top approach in
establishing economic theories since it leaves from particular to general.
2. Deductive Methodology
It involves the process of reasoning from general principles to particular
conclusions. Thus, general situations are observed and analysed to
establish particular conclusions. This method uses the top – bottom
approach in establishing economic theories since it leaves from general
to particular.
Why Do Economists Disagree
Despite the fact that economics is a social science and in principle there
should very little room for disagreements among economists, they
frequently disagree for a number of reasons which include;
1. Difficulty of testing economic theories. Economics deals with human
behaviour which cannot be studied and tested under laboratory
conditions unlike pure sciences like Physics and Chemistry. It is
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 difficult to experiment with human beings because they are
inconsistent, unpredictable, the economy is complex and dynamic and
it is difficult to know facts about people.
2. Causal connection. It is not easy to identify with certainty the actual
cause of an effect observed in society. This is because the causes are
generally many and interrelated making it difficult for one particular
cause to be universally agreed upon therefore, not only one solution
will exist to a particular problem since there are many causes.
3. Differences in value judgement. Economic policy matters are mostly
normative in nature since they express opinions and not facts.
Individuals differ in their preferences in life therefore; it is difficult to
have an opinion which is accepted by all.
4. Differences in schools of thought. Different ideologies may be carried
by different schools of thoughts which are always very defensive in
nature. There are two main schools of thought; the Keynesians and the
Monetarists. They disagree on nearly all economic principles. The
Keynesians will hardly support any principle developed by the
Monetarists and vice versa.
5. Unconsciously bias. As scientists, economists are supposed to be as
objective as possible but personal feelings might set in and influence
the analysis made making economists to disagree.
6. Differences in definition. Since economists have different views to
different concepts, they will always disagree because in some
analysis, what is considered as the standard definition is not the same
for others. This is because, there is disagreement as to what variable
should be included in some definitions eg what should be included in
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 a country’s national income or what class of people should be
considered unemployed.
7. Lack of data. Economist disagree because data on some economic
aggregates are either not available, inadequate or are not easily
accessible. This makes testing difficult.
8. With the passage of time, some assumptions and hypotheses become
irrelevant because of technical, cultural and economic changes.
9. Economics is a young science and growing science therefore; many
aspects of the subjects are still hidden and are not yet tested.
Economists disagree on some few issues but disagree on many others.
With the intensive use of econometrics, disagreements have greatly
reduced.
GCE 2024
(a) With the use of examples, differentiate between positive and
normative statements. (8marks)
(b) Why do economists disagree? (12marks)
The Production Possibility Curve (PPC)
It is a curve which shows the maximum combination of two goods which
a country can produce with all its resources within a given period of
time. It is equally called the Production Possibility
Frontier/Boundary, Transformation Curve.
Assumptions of the PPC
1. Only two goods are produced eg capital and consumer goods.
2. The quantity of resources is fixed.
3. The state of technology is fixed.
4. Resources are fully utilised.
5. Full use of technology
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6. Time period is fixed/constant.
7. Efficient allocation of resources.
8. Factors of production are perfectly mobile within the industry
Resources
9. Capital goods
A are substitutable at the margin that is the supply of factors
is fixed but they can be reallocated
E for the production of the two
B
180------------------------------------
-------------------------------
goods within limit.
C
150-------------------------------------------
---------------------

D Consumer goods
50 100 150

200

The country can choose any combination from points A to D. At

point A, only capital goods are produced that is all resources are shifted
to the production of capital goods. At point D, all resources are shifted to
the production of consumer goods. At point B, 180 units of capital goods
and 50 units of consumer goods are produced.
The PPC can be used to explain the concepts/principles of scarcity,
choice and opportunity
cost.
Scarcity means limited in supply relative to demand. It means
resources are not always enough to satisfy human wants. Scarcity is
shown on the PPC by the fact that any combinations outside the PPC eg
point E are unattainable with the current available resources and the state
of technology even though the point is desirable.

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 Choice is the act of selecting from many alternatives. Choice is
illustrated by the fact that because of the scarcity of economic resources,
the country is bound to select from the alternatives A, B, C, and D as all
of them can be attained.
Opportunity cost is to the next best alternative which is forgone in
order to satisfy a want. It is illustrated by the fact that once a country is
already operating along its PPC (AD) with full employment of resources,
it becomes impossible to increase the production/output of one good
without reducing the production/output of the other since resources are
scarce. At point A, 200 units of capital goods and zero units of consumer
goods are produced. It means that, to move from point A to B, the
production of capital goods must be reduced so as to permit an increase
in the production of consumer goods.
Therefore, the opportunity cost of moving from point A to B is 20 units
of capital goods (180 – 200).

GCE 2023
(a) What are the concepts illustrated by the production possibility curve?
(14 marks)
(b) Distinguish between the inductive and deductive methodologies used
in Economics. (6 marks)

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Points along, inside and outside the Production Possibility Curve (PPC)
Capital goods
A

B Consumer goods

A. Points along the PPC

With respect to a country’s productive capacity, all points along the PPC,
AB are attainable and represent full/efficient allocation of resources.
Therefore, once a country is already producing on its PPC, it is
impossible to increase the output of the two goods at the same time that
is the output of one good can only be increased by reducing the output of
the other because there is no spare capacity or unused resources.
B. Points inside the PPC
Any points inside the PPC eg point C shows inefficient use of resources.
The point is attainable but it is undesirable because it shows a condition
of under utilisation of resources. It is possible to produce inside the PPC
when there is;
1. Underemployment of resources
2. Inefficient use of resources
3. Excess capacity
4. Less than full use of technology
5. Underutilisation of resources.

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Therefore, when a country is producing inside its PPC, it is possible to
increase the output of the two goods at the same time by moving to any
new points on the PPC AB. This can be done by the employment of idle
resources, increase the efficiency of using resources, full use of
technology and full utilisation of resources. This represents, actual
economic growth.
C. Points outside the PPC
Any points outside the PPC eg point D is unattainable but desirable with
respect to the present productive capacity and level of technology. Such
a point can only be attained if there is an increase in the country’s
productive capacity that is when the PPC completely shifts outward. This
is known as potential economic growth. When this happens, it becomes
possible for the country to increase the production of the two goods at
the same time.
Shifts in the Production Possibility Curve (PPC) and their causes
A. Complete outward shift of the Production Possibility Curve (PPC)
This shows an increase in the country’s productive capacity that is, an
increase in its ability to produce more goods.
Capital goods
A1

B B1 Consumer goods

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There is an outward shift of the PPC from AB to A 1B1. This increases the
ability of the country to produce more capital and consumer goods at the
same time. However, this complete shift of the PPC does not solve the
problem of scarcity. It only reduces the problem.
Causes of the complete outward shift of the PPC
1. Improvement in technology
2. Political stability which encourages economic activities
3. Importation of raw material
4. Economies of scale
5. Increase in the capital stock of the country
6. Increase in the size of the of the labour force through higher birth rate,
net immigration of the active population.
7. Discovery and use of more natural resources
8. Increase in the wealthy population with high purchasing power
9. Efficient reallocation of resources that is moving resources to the
secondary and tertiary sectors.
10. An increase in the quantity and quality of resources. The quantity of
resources can be increased through the discovery of new sources and
the quality of resources can be increased through education and
training.
B. Complete inward shift of the PPC
This shows a fall in the productive capacity of the country that is, a
decrease in its ability to produce more goods.

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 Capital goods
A

A1

B1 B Consumer goods

The movement of the PPC from AB to A 1B1 shows an inward movement

of the PPC. This shows that there is a fall in the country’s capacity to
produce both goods.
Causes of the complete inward shift of the PPC
1. Fall in technology. A fall in technology takes a country to an inferior
method of production thereby reducing the productive capacity.
2. War and conflicts (political instability). A conflict or war which lasts
for a long period is likely to destroy economic resources and human
lives. This will reduce the productive capacity of the country thereby
causing the PPC to move inward.
3. Natural disasters. If there are natural disasters such as landslide,
drought, earthquakes, floods, volcanoes, then its damaging effects on
resources will reduce the country’s productive capacity to produce
goods/services.
4. Epidemics/pandemics. The outbreak of diseases such as ebola, covid
19, HIV/AIDS can slow down economic activities, reduce the labour
force and thereby reducing the country’s productive capacity.
5. Fall in labour force. Large scale net emigration of the labour force of
the country due to high rate unemployment and hardship may lead to
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 loss of skilled labour leading to a fall in the country’s ability to
produce goods/services.
6. Fall in affluent population. A fall in the number of wealthy people in
the economy may reduce demand and investment. This will cause the
productive capacity of the country to fall.
7. Exhaustion of resources. If key non-renewable resources like oil are
exhausted, the productive capacity of the country can fall especially
when the country is over specialised in producing goods from non-
renewable resources.
8. Failure to invest. Failure to invest in human and physical capital like
machines will reduce the economy’s capacity to produce
goods/services.

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GCE 2020
(a) Explain the inward movement of the production possibility curve. (10
marks)
(b) How can the production possibility curve be used to explain the
concepts of scarcity and opportunity cost? (10 marks)
GCE 2021
(a) What factors may lead to an outward shift of the production
possibility curve? (8 marks)
(b) How can an outward shift of the production possibility curve help in
the management of the problem of scarcity? (12 marks)

Changes in the slope of the PPC

the PPC can partially shift in favour of the production of one good. This
will increase the potential output of such a good as shown below.
Capital
goods A

B B1 Consumer goods

The above diagram shows a shift in favour of the production of

consumer goods from AB to AB1. This maybe as a result of;
1. Technological advancement in the consumer good industry
2. Fall in the price of raw materials used in the production of consumer
goods
3. Increase in the productivity of factors of production suited for the
production of consumer goods while the capital good industry remains
unaffected.

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 Capital
goods A1

B Consumer
goods

The above diagram shows a shift in favour of the production of

consumer goods from AB to A1B. This maybe as a result of;
1. Technological advancement in the capital good industry
2. Fall in the price of raw materials used in the production of capital
goods
3. Increase in the productivity of factors of production suited for the
production of capital goods while the consumer good industry remains
unaffected.

Capital
goods A1

B1 B Consumer goods

The shift from AB to A1B1 shows that there is an increase in the output of
capital goods from A to A1 and a fall in the output of consumer goods
from B to B1. This can be a result of;

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1. Increase in the productivity in the capital good industry and a fall in
the productivity in the consumer good industry.
2. Improvement in technology in the capital good industry and a fall in
technology in the consumer good industry.
3. Fall in the prices of raw materials used in the capital good industry
and an increase in the prices of raw materials used in the consumer
good industry.
4. Heavy movement of labour and other resources from the consumer
good industry to the capital good industry.
Capital
goods A

A1

B B1 Consumer goods

The shift from AB to A1B1 shows that there is an increase in the output of
consumer goods from B to
B1 and a fall in the output of capital goods from A to A 1. This can be a
result of;
1. Increase in the productivity in the consumer good industry and a fall

in the productivity in the capital good industry.

2. Improvement in technology in the consumer good industry and a fall
in technology in the capital good industry.
3. Fall in the prices of raw materials used in the consumer good industry
and an increase in the prices of raw materials used in the capital good
industry.
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4. Heavy movement of labour and other resources from the capital good
industry to the consumer good industry.
Types/shapes/forms of the Production Possibility Curve (PPC)
There are generally three forms/shapes/types of PPC and each illustrates
specific principles.
1. The Concave PPC. It is a PPC which bows outward and shows
increasing opportunity cost meaning that resources are less efficient in
the production of the other good than in the original use therefore it
explains the fact that some resources are more adapted to the
production of one of the goods than the other leading to increasing
cost opportunity cost. Thus, the productivity of a factor cannot be the
same as it moves from one industry to another. It shows increasing
opportunity cost
or decreasing returns.
Capital
goods
A

B Consumer goods

2. The Convex PPC. It is a PPC which bows inward and illustrates

decreasing opportunity cost meaning that resources are more efficient
in the alternative use than in the original use. Thus, the productivity of
a factor is the increases as it moves from one industry to another
leading to
decreasing cost or increasing returns.
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 Capital
goods
A

B Consumer goods

3. The straight line or linear PPC. It shows constant opportunity cost and
constant returns to scale. This shows that resources are equally
efficient in the alternative use as in the original use leading to constant
opportunity cost. But this is not very realistic. Thus, the productivity
of a factor is the same as it moves from one industry to another.
Capital
goods
A

B Consumer goods

GCE 2018
(a) State the assumptions of the production possibility curve. (5 marks)
(b) Describe the various shapes of the production possibility curve. (15
marks)
Growth Paths
This is a line drawn from the origin across the PPC indicating the route
which a country can choose to follow as it experiences economic growth.

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 Capital
goods K
A

0 B Consumer goods

0K and 0R are two growth paths. The growth path 0K shows the
production of more capital goods. This will permit the country to achieve
a faster rate of economic growth. Therefore, 0K will experience a low
living standard in the present but the living standard will increase in the
future. This path thus presents more sacrifice in terms of current living
standard but a better option for a faster rate of economic growth.
The growth path 0R shows the production of more consumer goods. The
country will experience slow rate of economic growth. Therefore, 0R
will experience a high living standard in the present but the living
standard will fall in the future. Living standard is influenced by the
quantity of consumer goods.
Uses/importance of the PPC
1. It helps in explaining how the economy grows and the potential
growth of the economy.
2. It helps to better explain and understand the interrelationship between
the concepts of scarcity, choice and opportunity cost.
3. It can be used to explain the differences in the rate of economic
growth between countries based on the growth path chosen.
4. It can help to assess a country’s future rate of economic through
growth paths.
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5. It shows the level of efficiency with which a country uses its
resources by indicating whether it is operating along or inside the
PPC.
6. It is used to described changes in technology. If technology makes the
production of one good more efficient, the PPC will expand in the
direction of that good.
7. It is used to describe inefficiency in production and unemployment of
resources.
8. It is used to describe the production capacity of any economic entity
such as a country, a firm or any business unit.
Calculating Opportunity Cost
Opportunity cost is the next best alternative which is forgone in order to
satisfy a want. Opportunity cost is measured in physical terms and not in
monetary terms because:
1. Monetary cost is subject to price fluctuations while real cost is not.
2. Opportunity cost measures the real cost incurred or the actual
sacrifices made which monetary cost does not portray.
3. Opportunity cost helps one make more economically accurate
decisions that maximises the use of monetary resources
4. A commodity having the same monetary cost to different consumers
may have may have different opportunity cost.
1. Opportunity Cost in Absolute (Aggregate) Terms.
It involves calculating the total amount of one good that is given up or
sacrificed to increase the production of the other good by a given amount
or moving from one combination/point to another on the PPC.
Combinations Good X Good Y
A. 0 25
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 B. 9 22
C. 17 17
D. 24 10
E. 30 0

The opportunity cost of moving from point A to B or producing 9 more

units of good x is 3 units of good y (22 – 25 units). Therefore,
opportunity cost of 9 units of good x are 3 units of good y forgone.
2. Opportunity Cost in Per Unit Terms.
It is opportunity cost of producing one extra unit of one of the goods that
is, the number of units of a good that must be forgone/given
up/sacrificed to increase the production of the other good by one unit.
This method gives a clear picture of the slope of the PPC. This is usually
called the Marginal Rate of Transformation.
Opportunity cost per unit of good x measures how many units of good y
must be given up to produce an additional/extra or one more unit of good
x
=Change in good y/change in good x
=fall in good y/increase in good x
Opportunity cost of good x in
Combination Good Good terms of good y
x y Absolute terms Per unit
A. 0 100 / /
B. 25 90 10 10/25=0.4
C. 50 75 15 15/25=0.6
D. 75 55 20 20/25=0.8
E. 100 30 25 25/25=1.0
F. 125 0 30 30/25=1.2

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The opportunity cost of good x in terms of good y shows that any
attempt to increase the output of good x leads to ever increasing units of
good y that must be sacrificed. This is the law of increasing cost which
states that, as more of a particular good is produced, its opportunity cost
per unit increases”. This is because resources are not perfectly adaptable
to the production of the two goods.
Thus, the above PPC is concave.

Externalities
These are the are costs and benefits (spillover effects) of an economic
activity that are not reflected in the price of good. It can be positive or
negative.
1. Positive externality (external benefit). It is the advantage that the
society as a whole enjoys because of an economic activity but which
is not reflected in the price of the product eg a firm that creates a road
leading to its production unit and the community uses the road, a man
who plants flowers and society benefits from the beauty or nectar of
the flower. External benefit is not considered when calculating the
firm’s benefits.
2. Negative externality (external cost). It is any loss that the society as a
whole suffers because of an economic activity but which is not
reflected in the price of the product eg noise, pollution of the air, land,
water etc. The firms only consider their private cost in pricing policy
of their goods.

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Types of Goods
1. Free goods. These are goods which are very abundant and do not
command any price. They have no opportunity cost eg sunlight, sand
in the desert, air in the atmosphere, water in the ocean.
2. Economic goods. These are goods and services that are scarce and
command a price. They have an opportunity cost eg books, pens,
shoes etc.
3. Public goods. These are goods which when provided to one person
can be provided to another person at no extra cost like defence, street
lights, law and order, public roads, public monument, non-coded TV
and radio waves. They have two major characteristics;
i. Non-Rivalry in Consumption. Non rivalry means that the
consumption of the good by one consumer does not stop another
consumer from consuming the good at the same time because of
all them can have it. The quantity provided does not reduce once
provided
ii. Non excludability. It means that people who do not pay for the
good cannot be prevented from consuming it therefore not only
those who pay consume it but the whole society. People who
consume the good without paying are called free riders.
iii. Non-rejectability. It means that people may not be able to
abstain (stay away) from using a public good even if they want
to do so.
iv. No market price. This is because, people cannot be prevented
from consuming the good and it is possible to measure how
much an individual has consumed.
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 Reasons why it is preferable for the state to provide public goods than
private individuals
1. To avoid under production and ensure that enough quantity of the
good is produced.
2. To avoid the quality of the good from being compromised by private
production given the importance to the welfare of the citizens.
3. To check negative externality which is always ignored by private
individuals who are often for profit-maximisation.
4. It increases the development of the country as most public goods are
in the form of infrastructural development eg roads, straight lights,
public monument etc.
5. It redistributes income because state provision of public goods is
mostly financed from taxes especially progressive taxes in which the
rich pay higher rates than the poor.
6. It checks consumer exploitation in the form of high prices if it is
provided by private individuals.
7. It eliminates waste of resources through wasteful competition which
will be the case if public goods are provided through the market.
8. It maximises consumption as they are considered very important for
the welfare of the citizens.

4. Merit goods. These are goods whose consumption gives more benefits
to the society than to the individual thus they are socially useful.
Consumers pay before consuming them and often it is under
consumed. They have a positive externality which is greater than the
private benefit.

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Examples include education, health, refuse collection, libraries etc.
merit goods are a special form of private goods. They are profitable
and are supplied by both the state and private producers.
Reasons for government supply of merit goods
1. To increase consumption at low prices. The state assists the price
mechanism in providing this good maybe under supplied. These
goods will be under consumed if they are supplied at the real market
prices which are generally high. This is because people under estimate
the benefit and will not be willing/able to pay the real market price.
2. To create a skilled labour force. Education and training will
produce a strong skilled labour force for the country. Workers can
learn new skills at low cost in government schools and training
centres. This will raise the productivity of labour and the total output.
3. To ensure a greater distribution of income and wealth. The poor
will have the opportunity to acquire education and also be treated in
government hospitals at very low prices. This is financed from taxes
which is generally progressive taxes in which the rich pay higher rates
than the poor.
4. To create employment and improve on the standard of living.
Many people are employed in government schools and government
hospitals eg teachers, nurses, doctors etc. cheap educational and
health facilities will reduce misery among the poor and improve living
standard in general.
5. Balanced regional development. Some government schools and
hospitals or health centres are created in some remote areas to

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 stimulate development in such areas. The creation of the University of
Bamenda has influenced the development of the localities around.
6. To stop rural urban migration (rural exodus). Most private
entrepreneurs will set up their schools and hospitals in towns and
cities where they are sure to have customers. This will cause the
massive movement of people the rural areas to these towns and cities
in order to benefit from these facilitates. The government should
provide rural areas with these facilities to stop these massive
movements from rural areas to urban areas because it has negative
effects in both the urban areas and the rural areas.
7. It checks consumer exploitation in the form of high prices if it is
provided by private individuals only.
8. To check negative externality which is always ignored by private
individuals who are often forprofit maximisation eg pollution.
Reasons against the state provision of merit goods.
1. Increase in taxes. The government schools and hospitals are financed
from tax payers’ money. Increase in taxes are sometimes made to
finance these infrastructures which hardly cover their costs.
2. It distorts the functioning of the price mechanism. Resources are not
efficiently allocated since the government intervenes in the
functioning of the price mechanism. The price mechanism therefore
fails in sending appropriate signals in the economy.
3. An increase in opportunity cost to the state. The state forgoes other
alternatives and economic objectives in order to supply merit goods.
These merit goods could be supplied by the market forces while the
state uses the scarce resources in achieving other economic objectives.
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4. Quality versus price. Consumers tend to under value services which
are provided freely or at low prices by the state. The public usually
demands higher quality services from the state institutions but at the
same time, complain bitterly when they are asked to pay a price
proportionate (commensurate) to the quality of the good/service they
are demanding.
5. Mismanagement. Most government institutions are characterised by
mismanagement and embezzlement. There is thus inefficiency in
managing the resources since there is individual/selfinterest and most
of its leaders are appointed not based on merit.
Questions
1. Examine the arguments for and against the supply of merit goods by
the state. (10 + 10 marks)
2. Discuss the case for and against the provision of free education in
Cameroon by the government.
(10 + 10 marks)
The Economic Problem
All nations are faced with the problem of scarcity because of unlimited
wants and limited resources. This has given rise to three basic economic
problems any nation must answer that is, what, how and for whom to
produce.
1. What to produce. A nation must decide which goods to produce and in
what quantity with its limited resources. A country can choose to
produce more capital goods and less consumer goods or construct
more hospitals than roads etc. This is also known as the output
question.

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2. How to produce. It involves deciding on the methods of production
that will be used to produce the goods chosen. Different methods of
production exist in different countries depending on the resources
available. A country can use the labour-intensive method or the
capital-intensive method. Labour intensive method is a production
method which uses more labour and less capital while the capital-
intensive method is a production method which uses more capital and
less labour. This is also known as the input problem or factor
combination.
3. For whom to produce. This question deals with the goods produced
will be distributed. Thus, the country must decide the methods of
sharing the total output. This is also known as the distribution
problem. Any of the following methods can be used
 Sharing can be decided according to customs and tradition
 Sharing depends on the individual’s ability to pay the price
 Equal distribution amongst citizens
 Sharing may depend on each individual’s contribution to
production

Economic System (Economy)

It refers to all the rules and regulations and institutions that govern the
production, distribution and consumption of goods and services in a
nation. The function of any economic system is to provide answers to the
problems of what, how and for whom to produce.
Types of Economic Systems
There are four main types of economic systems: the traditional, market,
planned and mixed economic systems.
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1. The Traditional Economic system
It is an economic system in which the choices of what, how and for
whom to produce are made on the basis of custom and tradition. This is
further reinforced by superstition and religious beliefs. People tend to
believe that some misfortune will befall them if they do not follow
accepted patterns of life and work. Things are therefore done, in the
same way as they are always done. Because of this, economists are not
much interested in such societies.
2. The Market Economic System (Capitalist, Laissez Faire, Free
Enterprise Economic System) It is an economic system in which all
resources are owned and controlled by private individuals who are
working to maximise profits and there is no government intervention.
The answers to the basic economic problems of what, how and for whom
to produce are provided by the market forces of demand and supply or
the price mechanism. Examples include: USA, Hong Kong, Australia,
New Zealand and Switzerland. The types of capitalism include: State
Guided, Oligarchic, Big Firm and
Entrepreneurial Capitalism.
Characteristics/features/pillars of the Market Economy
1. Private ownership of resources. Individuals have the right to own,
control and dispose of factors of production. Therefore, they have a
right to earn the income from such resources in the form of rents,
wages, interest and profits.
2. Self-interest. Individuals under take all economic activities only for
self-interest. Each does just what is good for him/herself. Adam Smith
said the market economy functions through the invisible hand. This
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 means that, the individual pursuit of self-interest will indirectly
promote the interest of the whole society. An individual in attempt to
satisfy his personal needs ends up promoting the interest of the society
as a whole without knowing.
3. There is profit motive. The aim of production is for profit motive.
Producers only produce goods/services which yield them the highest
profit.
4. Freedom of choice and enterprise. Producers are free to enter any line
of production or carryout any business activity of their choice. and
consumers too are free to buy what pleases them. Workers too are free
to choose their occupations.
5. Consumer sovereignty. It means producers tend to produce what
consumers need. Therefore, consumers are the ones who determine
what will be purchased through their purchases. By buying a good, the
consumer cast their votes that more of the good should be produced.
Therefore, the rich have a greater power to influence what is produced
than the poor.
6. Use of price mechanism. The price system is used to in the allocation
of economic resources that is what, how and for whom to produce is
decided by the market forces of demand and supply. What to
produced is decided by the purchases of the consumers, how to
produce is decided by choosing the method which is least cost and the
problem of for whom to produce or distribution problem is decided by
the consumers’ ability to pay.

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7. Little or no government intervention. There is little or no government
intervention. The government may only intervene to provide public
and merit goods.
8. Competition. There is heavy/cut throat price competition among the
various producers to the benefit of consumers. There are so many
buyers and sellers.
The Price Mechanism (The Price System)
Price refers to what we pay in order to obtain a unit of a good or service.
It includes the reward to factors of production like wages, interest, profit
and rents. Price is generally determined by the market forces of demand
and supply.
Price mechanism is an automatic device used for the allocation of
resources through the market forces of demand and supply.
Functions (Roles) of the Price Mechanism or Price.
1. Signalling function: prices indicate changes in demand and supply and
provides a means by which consumers inform their changing
preferences to producers. High prices indicate that more of the good is
needed and vice versa. Equally producers send information to
consumers through prices. It tells consumers what is available in the
market and what terms.
2. Rationing function: since economic goods are always scarce, price
helps to distribute these scarce goods. When a good is too scarce, it is
the price that distributes the scarce good to the few who can afford to
pay the high price and when the good is abundant, prices fall so as to
permit consumers clear the stocks.

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3. Rewarding function: price is used to reward the various factors of
production for taking part in the production process that is rents to
land, wages to labour, interest to capital and profit to the entrepreneur.
Therefore, the higher the price, the higher the reward and vice versa.
4. Motivating or inducing function: price motivates/induces produces
producers to either reduce or increase quantity supplied. When
demand increases, prices increase and producers are motivated to
increase quantity supplied in order to make more profits. When
demand falls, prices fall and produces are motivated to reduce
quantity supplied in order to avoid making losses.
5. Allocative function: prices help to allocate resources in the economy
among the competition uses. When the prices of goods in a particular
sector are increasing, entrepreneurs will direct more resources in that
sector so as to make more profits. But when the prices of goods in a
particular sector are falling, entrepreneurs will avoid directing
resources in that sector so as to avoid making losses.
Advantages of the Market Economy/Price Mechanism
1. Self-regulatory. The price mechanism guides producers on what, how
and for whom to produce through the invisible hand without any
interference from any authority.
2. Competition. There is economic rivalry and competition since there is
a large number of buyers and sellers each having accounting for an
insignificant share of the market hence has no influence on the market
demand and supply. Competition therefore,

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  limits the use of economic power since no single firm or
individual is large enough to control the market and exploit
others
 leads to production of high-quality goods
 low prices of goods
 leads to invention and innovation
 better customer care
3. Incentive to innovate and invent. The feature of self-interest wipes all
forms of laziness and hard work is encouraged. Workers know that
they are going to enjoy the fruits of their labour alone and thus it
encourages them to work hard and bear risks thus promoting
invention and innovation.
4. High standard of living. Individuals who live in a market economy
enjoy a high standard of living because, they consume a wide variety
and quantity of products. Market economies are well known for their
relatively higher standard of living.
5. Freedom of choice and enterprise. Producers are free to enter and
leave any line of production or carryout any business activity of their
choice and consumers too are free to spend their income in any way in
buying what pleases them. Workers too are free to choose their
occupations.
6. Economic efficiency. The operation of the price mechanism leads to
an efficient allocation of resources. Scarce resources are used to
produce only what the society wants. Resources are also moved from
declining to expanding industries.

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7. Consumption of variety of products (Consumer sovereignty).
Consumers enjoy a wide variety of goods and services. consumer
sovereignty means producers respond to the preferences of consumers
that is producers produce just what consumers wants. Therefore, it is
the consumers who determine what has to be produced through their
choices.
8. Reduction in government intervention. State intervention is greatly
reduced. It is limited to the stabilisation of the economy and the
provision of public and merit goods. This limited government role
means that private individuals are free to decide on production and
distribution without any interference from the government.
9. Private ownership of resources. Individuals have the right to own,
control and dispose of factors of production. Therefore, they have a
right to earn the income from such resources in the form of rents,
wages, interest and profits. This promotes invention and innovation.
Disadvantages of the Market Economy/Price Mechanism
1. Inadequate production and consumption of merit goods. These are
goods whose consumption gives more benefits to the society than to
the individual thus they are socially useful. Consumers pay before
consuming them but they can be under consumed at the free market
price even though very useful.
2. Neglect of pubic goods. Public goods are hardly produced in the
market economy because they are not profitable since they have the
characteristics of non-rivalry and non-excludability once supplied.
The price mechanism cannot allocate resources to the production of
goods which are not profitable.
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3. Wide inequality in the distribution of income and wealth. There is a
wide inequality in the distribution of income and wealth. This
increases the gap between the rich and the poor as the rich get richer
and the poor get poorer.
4. Waste of resources through competition. The desire for profit may
lead to high levels of competition. This is will to waste of resources in
the form of duplication of goods and services, cut throat competition
and aggressive advertisement.
5. Development of monopolies. In a market economy, monopolies are
easily formed because excessive price competition drives out small
firms from the market. Therefore, only a few giant firms will survive
with a high probability of becoming monopolies and may exploit
consumers through the production of low-quality goods or high
prices.
6. Production of demerit goods. The high demand for profit may lead to
the production and consumption of harmful goods like cocaine,
marijuana, spirits etc.
7. Producers’ sovereignty. Persuasive advertisement may cause
consumers to buy goods which they did not plan to (impulse buying).
Therefore, producers tend to produce what they want and encourage
consumers through adverts to buy.
3. Negative externalities are neglected. It is any loss that the society as a
whole suffers because of an economic activity and which is not
reflected in the price of the product eg noise, pollution of the air, land,
water etc. in a capitalist economy, producers only consider their

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 private cost and do not care to reduce or control these negative
externalities. This promotes environmental degradation.
8. Unbalanced development. Most private entrepreneurs will set up their
businesses in towns and cities where they are sure to have customers
and since there is little or no government intervention, some areas
may tend to be over developed than others leading to unbalanced
development.

a) Explain the functions of the price mechanism. (10 marks)

b) What are the disadvantages of the price mechanism? (10 marks) GCE
2022
3. The Command (Planned/State Planned, Socialist, Collectivist,
Communist) Economic System
It is an economic system in which all resources are owned and controlled
by the state or government. Therefore, the decisions of what, how and
for whom to produce are decided by the state through a Central Planning
Committee. Eg Cuba, Laos, Vietnam, North Korea, Belarus, China,
Russia etc. The Central Planning Committee/authority is a state organ
that issues directives to firms indicating what they have to produce and
the quantity and then it carries out the physical rationing of the goods
produced.
The mechanism which signals shortages of some goods is often the
existence of queues (long lines) and empty shelves in the shops. On the
other hand, commodities which the society does not desire will
accumulate in stock.

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Characteristics/Features of The Planned Economy
1. Complete state ownership and control of resources that is, all
resources are owned and controlled by the state.
2. Production is not for profit motive
3. There is the production of both public and merit goods
4. There is no consumer sovereignty
5. There is full government intervention
6. There is no competition in production
7. What, how and for whom to produce are decided by the state through
a central planning committee.
8. No freedom of choice and enterprise 9. No self-interest in production
Advantages of the Command Economy
1. Provision of public goods. Since production is not undertaken for
profit motive, it is generally argued that, there is greater provision of
public goods like streetlights and public roads in the state planned
economy.
2. Prevention of the production and consumption of demerit goods. It is
the government that plans and controls production. Goods which are
harmful to the society can hardly be produced hence, demerit goods
can hardly be produced and are completely out of consumption.
3. More equitable distribution of income and wealth. In this economy,
there is no private entrepreneur. This means, it is not possible for
anyone to earn income from factors of production. Because of this,
few people can hardly get very rich while the majority lives in
poverty. The government owns all the wealth of the nation and
ensures a fair distribution to citizens.

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4. No waste of resources through excessive competition. Private
entrepreneurs are absent therefore; firms are not involved in excessive
competition. There is no need for competition since all the firms are
owned and controlled by the state.
5. More stable economy. Consumers have less power to influence
production. This means that production will not change easily because
it does not depend on the taste of the consumers.
6. Increased production and consumption of merit goods. The
government can easily direct more resources to the production of
merit goods since she owns and have total control over such
resources. The consumption of such goods will be high since there is
little or no market price.
7. Full employment of factors of production. The Central Planning
Committee directs resources into the productive activities even they
are not profitable.
8. Negative externality is controlled. Negative externalities in the form
of pollution, congestion, noise, are negligible or minute because the
profit motive which leads private entrepreneurs to generate these costs
is absent in the command economy. Even if few negative externalities
do arise, the Central Planning Committee can handle them.
9. Elimination of monopolies. Monopolies that produce and exploit
consumers through high prices and low-quality goods are eliminated
since the state produces the goods and not private individuals.
Disadvantages of the Command Economy
1. Loss of consumers’ sovereignty. Production is not influenced by
consumers’ choices but it is determined by the state. Consumers do
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 not have the power to influence production but simply consume what
the state can provide.
2. No incentive to innovate and invent. Producers are not encouraged to
improve on efficiency because they are not out for profit. This means
that they do not have the incentive or motivation to innovate and
invent new products and new techniques of production. There is
therefore, a slower rate of technological progress.
3. No freedom of choice. Consumers lack freedom of always choosing
what to consume thus, goods that are produced may not always reflect
their taste and preferences. They simply consume what the state
offers.
4. The production of low quality goods. The absence of competition in
this economy gives rise to inefficiency and the production of low
quality goods. This leads to low standard of living in most planned
economies today. This will also make the exports of the country to be
less competitive in foreign markets.
5. Bureaucratic structures. A single authority planning for the whole
country will always have the problem of bureaucracy that is
complicated administrative procedures. This means that decisions
have to pass through many offices before it is implemented. This will
slow down the decisionmaking process.
6. Increased cost to the government. There is a high opportunity cost of
employing people to gather, process information and formulate plans.
People who work in the central planning committee (the planners) are
all paid by the state.

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7. Instability in production. The planned output may not always
correspond to the actual demand. This is because, production is not in
function of market forces of demand and supply. This may result to
frequent shortages and surpluses as the planners may not be
technocrats or experts in the domain.
8. Emergence of black markets. Due to government restrictions, goods
and services that are not offered in the command economy may start
being offered in the black market. A black market is a market whose
activities are not illegal or not declared.
9. Lack of variety. The absence of many firms and the fact that the
central planning committee reduces the number of products to be
produced leads to a restricted variety for consumers. This leads to low
standard of living.
Differences between the market economic system and the planned
economic system
The market economy and the planned economy can be differentiated in
terms of;
1. Ownership of resources
2. Economic freedom
3. Self interest
4. Competition
5. Price mechanism
6. Government intervention
7. Consumer sovereignty
8. Product variety
9. Motive of production
10. The distribution of income and wealth
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 11. Provision public and merit goods
1. Explain why most countries are shifting from the planned economy to
the market economy today. (20 marks)
2. “Despite the numerous advantages of the market economic system,
some countries still prefer the planned economic system”. Discuss (20
marks)
4. The Mixed Economic System
It is an economic system in which resources are owned and controlled by
both the state and private individuals. Therefore, the economic decisions
of what, how and for whom to produce are decided by both the
government and private individuals. This economic system is considered
a bridge between the market and the planned economic systems because
it has a combination of the characteristics of the market economy and the
planned economy.
Characteristics/Features of The Mixed Economy
1. Both private and state ownership of resources
2. Use of price mechanism in the private sector while the public sector
uses the AC and MC pricing policies.
3. There is self-interest in the private sector and welfare improvement in
the public sector.
4. Private sector production is directed by freedom of choice and
enterprise while public sector production is directed by the state.
5. Producers in the private sector compete through prices while
competition is absent in the public sector.

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Advantages of the Mixed Economic System
1. Production of public and merit goods. The production of public and
merit goods is guaranteed by the state. These goods are essential for
the welfare of the citizens.
2. Protection of consumers’ interest. The interest of consumers is
protected as government ensures that negative side effects like
pollution and noise and taken care of.
3. Freedom of choice. There is both economic and occupational freedom
as individuals have the liberty to choose what to consume and what
type of job to do while producers are free to take their desired
decisions regarding production.
4. Lesser inequalities. The state creates measures to secure the interest of
the poor and weak section of the society. There is redistribution of
income by the state through progressive taxes and the provision of
public and merit goods. This reduces the gap between the rich and the
poor.
5. Balanced regional development. The state puts in policies to ensure
the improvement of every region and develop every sector of the
population. This will prevent some regions to be over developed than
others.
6. Promotion of sustainable economic growth and development. Given
that both private and public sectors own and control resources, there
will be efficient use of resources, greater output and reduced
exhaustion of resources.
7. It rewards producers. The most efficient producers are rewarded with
the highest profits thus consumers get the best value of their money.
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 Disadvantages of The Mixed Economic System
1. Inefficiencies. There is inefficiency in the public sector because state
workers do not perform their duty with responsibility while in the
private sector, there is efficiency as the government imposes too many
restrictions on the private sector.
2. Delay in economic decisions. There are delays in taking decisions in
the public sector because there are some administrative procedures
that must be followed strictly. This hinders the smooth functioning of
the economy.
3. Fear of nationalisation. The private sector does not put into full use
their resources for the common good of the society because they are
afraid that their firms can be nationalised. Nationalisation is the
transfer of ownership and control of firms from private individuals to
the state. This discourages foreign investment.
4. Concentration of economic power. The private entrepreneurs take the
advantage of government and accumulate wealth and there is both
private and public ownership, it will be difficult for the government to
stop this economic accumulation of power.
5. Inefficient firms may exist because of government subsidisation. This
leads to waste of resources.
6. Bureaucracy from the state will negatively affect the efficiency of the
economy.
Role of the State in a Mixed Economic System
1. Provision of public goods. These are goods which cannot be provided
by the private sector because they are not profitable eg defence, law
and order. Although they are very necessary for the welfare of the
citizens, they are not profitable.
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2. Provision of merit goods. These goods give more benefit to the
society than to the private individual thus they add to the quality of
life of the whole society when consumed even by an individual eg
education and health. The government provides and subsidises its
production in order to reduce their prices and encourage its
consumption.
3. Redistribution of income and wealth. The state must ensure that
income and wealth are equitably distributed so that the gap between
the rich and the poor is reduced.
4. Maintain balanced regional development. The government makes sure
that all the regions of the country are fairly equal in terms of
development.
5. Control the consumption of harmful goods. The state intervenes to
check the production and consumption of socially harmful goods like
alcohol, cigarettes, cocaine, marijuana etc. Heavy taxes are imposed
on their production and consumption.
6. The establishment of rules. The government ensures the establishment
of rules which ensures fair play between producers and consumers,
employers and employees and also respect of the environment. These
include property rights, hygiene and sanitation, working condition,
consumer protection etc.
7. Regulation of the price system. The government intervenes to modify
the equilibrium price set by the price mechanism. Prices of essential
goods and services like drugs, transport, education are reduced the
state feels that they are too high while the prices of agricultural
products are increased to encourage production.
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8. Stability of prices. Instability in prices will always occur whenever
there are shortages and surpluses in output. Therefore, the government
must ensure that these shortages and surpluses are reduced so that
prices will be stable.
9. Maintain a stable level of employment. The state must ensure that the
rate of unemployment is at its minimal level because unemployment
is very dangerous to the society.
10. Stable rate of economic growth 11. BOP equilibrium 12.
Environmental protection

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