Table of Contents
These values indicate the extent to which a given dataset or set of values converges toward the central point of the data.
Measures of central tendency, also known as measures of location, provide statistical insights into the middle, center, or average of a dataset. They encompass the arithmetic mean, median, and mode.
MEAN: Representing the average of variables in a study, it is the most prevalent form of average. For group data, the mean is calculated using the formula ∑fx / ∑f, where ∑ denotes summation, f is frequency, and x is observation.
MEDIAN: This refers to the middle number in a given distribution and is calculated by the formula Median = L + (N/2 – Fb)c / f. Here, L is the lower-class limit, N is the sum of frequencies, Fb is the cumulative frequency before the median class, f is the frequency of the median class, and c is the class size.
MODE: Identifying the number with the highest frequency in a distribution, the mode is determined by the formula Mode = L + D1 / D1 + D2, where L is the lower-class boundary of the modal class, D1 is the frequency difference between the modal class and the class before it, D2 is the frequency difference between the modal class and the class after it, and c is the width of the modal class.
Example: Consider a dataset of JSS 3 mathematics marks without the table:
Marks: 1-5, 6-10, 11-15, 16-20, 21-25, 26-30
Frequency: 2, 3, 4, 5, 6, 7
Using this information, calculate the mean, median, and mode.
Solution:
Mean = 506 / 27 ≈ 18.7
The theory of consumer behaviour also called the theory of household behaviour, focuses on how individuals or households allocate their limited income among various commodities to achieve equal satisfaction.
What is utility?
Utility is the satisfaction derived from consuming a specific commodity. Thus, when a consumer finds satisfaction in consuming a commodity, it indicates that the commodity possesses utility.
Utility is relative to the consumer and depends on factors such as time, place, and form. A commodity satisfying one consumer’s want at a particular time and place may not fulfill another’s desire.
Two main schools of thought analyze utility: the Cardinal School of Thought and the Ordinal School of Thought.
This approach asserts that utility is measurable. After consuming a certain quantity of a commodity, a consumer can evaluate satisfaction using figures ranging from zero to infinity.
Assumptions Of Cardinal Approach
Total Utility: The overall satisfaction a consumer derives from consuming a commodity at a specific point in time. While utility increases with the quantity consumed, it does so at a decreasing rate due to a saturation point.
Average Utility: Derived by dividing total utility by the units of the commodity consumed. It represents satisfaction per unit of the commodity consumed (AU = TU/Q).
Marginal Utility: Additional satisfaction from consuming an extra unit of a commodity. It is the change in total utility resulting from consuming an additional unit (MU = ∆TU/∆Q).
In the context of utility analysis, a utility schedule provides a detailed account of the relationship between the quantity of a consumed good and various utility measures, including Total Utility (TU), Average Utility (AU), and Marginal Utility (MU). Each row in the schedule corresponds to a different quantity of the commodity consumed.
Quantity 1:
Quantity 2:
Quantity 3:
Quantity 4:
Quantity 5:
The utility schedule illustrates the changing dynamics of total, average, and marginal utility as the quantity of the consumed good varies, providing insights into consumer satisfaction patterns and the diminishing marginal utility principle.
RELATIONSHIP BETWEEN TOTAL UTILITY AND MARGINAL UTILITY
The Marginal Utility (MU) starts to decline after consuming the first unit, reaching zero on the x-axis. Total Utility (TU) peaks when MU hits zero, and as MU descends below the x-axis, TU starts to decrease.
A change in quantity demanded refers to a shift along a specific demand curve, influenced solely by price. The demand curve remains unchanged when there is a shift in quantity demanded, as only the price of the commodity is responsible for this alteration, with all other factors held constant.
Illustrated in the provided diagram, the movement from point A to B occurs as the price decreases from $50 to $30, resulting in an increase in quantity demanded from 60 to 80 units. This movement signifies a change along the same demand curve.
Further variations in price, whether an increase or decrease, will similarly impact movement along the existing demand curve.
Changes in demand occur when various quantities of goods and services are sought at a specific price due to factors beyond the commodity’s price, such as shifts in taste, fashion, or income. This change prompts a shift of the demand curve to a new position — a rightward shift denotes an increase in demand, while a leftward shift indicates a decrease.
Conversely, a change in quantity supplied is solely influenced by price, leading to movement along the same supply curve.
Change in supply is instigated by factors other than the commodity’s price, resulting in a physical shift of the supply curve to the right (increase) or left (decrease).
Changes in demand and supply disrupt the initial equilibrium, creating a new equilibrium and affecting the market equilibrium price and quantity. Increases in demand lead to an elevated equilibrium price (from P1 to P2) and quantity (from Q1 to Q2). Conversely, a decrease in demand causes a reduction in both equilibrium price (from P1 to P2) and quantity (from Q1 to Q2). An increase in supply lowers the equilibrium price (from P1 to P2) but raises the equilibrium quantity (from Q1 to Q2). Conversely, a decrease in supply raises the equilibrium price (from P1 to P2) but diminishes the equilibrium quantity (from Q1 to Q2).
Definition Of Elasticity Of Demand
Elasticity of demand may be defined as the degree of responsiveness of demand as changes in price, income, prices of other commodities etc.
Types of Elasticity of Demand
Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Price Elasticity Of Demand
Price elasticity of demand is the degree of responsiveness of demand for a particular commodity to changes in its price. It is the rate at which the quantity demanded changes as its price changes.
To measure the price elasticity of demand we use the formula:
% change in Quantity Demanded
% change in price
This formula can be broken down or simplified as:
Old Quantity – New Quantity X 100
Old quantity
E= Old Price – New Price X 100
Old Price
Illustration
When the price of a given product is reduced from N90 to N80, the quantity demanded increases from 50 to 60 units. Deduce the coefficient of elasticity of demand.
Solution
Old price = N90, New price = N80
Change in price = 80 – 90 = -10
= 10 x 100
90 1 = 11.1%
Old quantity = 50, New quantity = 60
Change in quantity = 60 – 50 = 10
= 10 x 100
50 1 = 20%
PE = 20
11.1 = 1.8%
The types of elasticity of demand and their graphical representation can be shown as follows:
Perfectly Elastic (or Infinitely Elastic) Demand.
Consumers react sharply to changes in price. They are willing to buy all the goods available at a particular price and none at all at a slightly higher price. The co-efficient of elasticity tends to infinity.
When the quantity demanded remains the same regardless of the change in price. The demand is said to be perfectly inelastic. The co-efficient of elasticity is zero
This is the situation where a change in price or income brings about the same percentage change in the quantity demanded. The coefficient of elasticity of demand is equal to 1
Price
Fairly Elastic Demand
In this case, a small percentage change in price gives rise to more than proportionate change in the quantity demanded. For example, where a 20% fall in price leads to a 50% rise in demand, the coefficient of elasticity is greater than 1 but less than infinity.
Inelastic Demand (Fairly Inelastic Demand)
When a change in price of a commodity leads to a less than proportionate change in the quantity demanded then demand is inelastic e g a 15% increase in price bringing about 10% decrease in quantity demanded.
The coefficient of elasticity is less than 1 but greater than zero
Availability of Close Substitutes: A commodity that has close substitutes is likely to have an elastic demand
Degree of Necessity of the Goods: If a commodity is a necessity or a near-necessity, increase or
decrease of its price are not likely to affect its demand
Proportion of Consumer’s Income that Is Spent on that Commodity: Generally the higher a persons income, the more inelastic his demand for commodities
Habit: If a consumer has become addicted to a commodity, his demand for the good will tend to be monastic. An increase in the price of the commodity may therefore not affect (reduce) his quantity demanded.
The Level of Consumer’s Income: The larger the income of the consumer the more inelastic is his demand for commodities. On the other hand, the demand of consumers with low income tends to be elastic.
Cheap Commodities: The cost of some commodities are relatively insignificant and as such consumers demand for them will be inelastic.
The elasticity of supply can be defined as the degree of responsiveness of change in quantity supplied as a result of price change. The elasticity of supply measures the extent to which the quantity of a commodity supplied by a producer changes as a result of a little change in the price of the commodity.
The elasticity of supply can be measured or calculated by using the coefficient of price elasticity of supply. The formula used in calculating the elasticity of supply is :
Elasticity of supply (ES) = % change in supply
% change in price = %∆QS
% ∆P where ∆ = Change
QS = Quantity supplied
P = Price
% = Percentage
The table below shows the relationship between prices of goods and the unit of commodity supplied.
Price (N) Quantity Supplied
9 850
10 1000
11 1,150
Calculate the elasticity of supply when price falls from N10.00 to N9.00 State whether the supply in (iii) above is elastic or inelastic (WASSCE 1994)
New Qty – Old Qty x 100
Old Qty 1
Old Quantity = 1000
New Quantity = 850
New – Old x 100
Old 1
850 – 1000 x 100
1000 1
150 x 100 = 15%
1000 1
Old Price = N10
New Price = N9
New Price – Old Price x 100
Old Price 1
9 – 10 x 100 = 1 x 100 = 10%
10 1 10 1
Elasticity of Supply = 15 = 1.5
10
Perfectly (Zero) Inelastic Supply: Supply is said to be perfectly inelastic if a change in price has no effect whatsoever on the quantity of commodity supplied. In this case, elasticity is equal to zero, E = 0
Fairly Inelastic Supply: Supply is said to be inelastic, if a change in price leads to a smaller or slight change in the quantity of goods supplied. In this case, elasticity is less than one but greater than zero, E > 0 < 1 s
Unity or Unitary Elastic Supply: Supply is said to be unitary when a change in price leads to an equal change in the quantity of goods supplied. In other words, a 5% change in price will equally lead to a 5% change in supply. In this case, elasticity of supply is equal to one, E = 1.
Fairly Elastic Supply: Supply is said to be fairly elastic if a small change in price leads to a greater change in the quantity of commodity supply. In this case, elasticity is greater than one but less than infinity, E > 1 < o0.
Perfectly ( Infinitely ) Elastic Supply: Supply is said to be perfectly elastic when a change in price brings about an infinite effect on the quantity of goods supplied. In other words, a slight increase in price can make producer to increase the supply of the commodity, while a slight decrease in price will make producer to stop the supply of the commodity. In this case, elasticity is equal to infinity, E = o0.
Cost of Production: The low cost of production normally results in elastic supply, and while the high cost of production results in inelastic supply.
Nature of Goods: While durable goods are inelastic due to their nature, perishable goods are elastic in supply.
Cost of Storage: Producer will supply all their goods to the market if the cost of storage is very thereby making the supply to be elastic, and vice – versa.
Time: This relates mainly to agricultural produces which remain for a long time in the farm before they are harvested. Before their harvest, their supply is inelastic but after harvest, it becomes elastics.
Market Discrimination: Elasticity of supply of a commodity depends on where it is sold. When few commodities are sold at a particular location as a result of lower price, such commodity can be taken to another location where the price are higher. In this case, supply is elastic and vice – versa.
Availability of Storage Facilities: The availability of storage facilities leads to inelastic supply after harvest, while non – availability of storage facilities leads to elastic supply.
Income elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a little change in consumer’s income. That is, it measures how changes in income of consumers will affect the quantity of commodities demanded by such consumers.
Mathematically, income elasticity of demand is expressed as:
% change in Quantity Demanded
% change in Income
When the percentage change in income brings about an equal change in the quantity demanded, then income elasticity is unit.
When the percentage change in income is greater than the percentage change in quantity demanded, income elasticity is less than unit, hence income is inelastic.
When the percentage change in quantity demanded is greater than the percentage change in income, then income elasticity is greater than unit, hence income elasticity is elastic.
Positive Income Elasticity of Demand: is the type of income elasticity of demand in which an increase in income of consumer will equally lead to an increase in the quantity of commodity demanded. This is applicable majorly to normal goods.
Negative Income Elasticity of Demand: is the type in which an increase in income of consumers will lead to a decrease in the quantity of commodity demanded. This is applicable to inferior goods.
Illustration: The table below shows the various income and demand for different commodities.
Income Quantity Demanded
# Kg
20,000 120
36,000 96
40,000 160
44,000 200
45,000 240
47,000 252
SOLUTION
Income Elasticity of Demand = % Change in Quantity Demanded
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% Change in Income
(a) Income Elasticity of Demand
i Between A and B
= 120– 96 x 100
120 = 0.25
36000 – 20,000 x 1000
20,000
ii Between C and D
200 – 160 x 100
160 = 2.5
44000 – 40,000 x 100
40,000
iii Between E and F
252 – 240 x 100
240
= 1.125
47000 – 45000 x 100
45000
(b) i. Giffen goods or inferior good
Normal goods
It should be re-emphasized that positive income elasticity of demand is for ‘normal’ or ‘superior’ or ‘luxury goods’, whereas Negative income elasticity of demand is for ‘abnormal’, or ‘inferior goods.
Cross Elasticity of Demand is the degree of responsiveness of quantity demanded of commodity X to a little change in the price of commodity Y. Cross elasticity of demand is applicable mainly to goods that are close substitute as well as complementary goods. For example the demand for Milo will increase as a result of an increase in the price of Bournvita, all other things being equal.
Mathematically, cross elasticity of demand can be expressed as
% change in quantity demanded of commodity X
% change in price of commodity Y
Positive Cross Elasticity of Demand: With substitute goods, the cross elasticity of demand is always positive, ( ie greater than zero), which means it is Elastic. This positive relationship is high with close substitutes and low with substitutes not very close.
Negative Cross Elasticity of Demand: With complementary (or jointly demanded goods), eg car and petrol, the cross elasticity of demand is always negative ( ie less than zero), which means it is Inelastic. Here, too, a high negative cross elasticity of demand indicates that the goods involves are highly complementary and, vice versa, i.e, a low negative cross elasticity of demand means that the goods concerned are not highly complementary.
The table below shows the response of quantity demanded to changes in price for two pairs of commodities. Use the table to answer the questions that follow:
Commodities Changes in Commodities Changes in Quantity
Price Demanded
Old# New# Old kg New kg
Bread 25 40 Yam 1000 3000
Liter of petrol 50 100 Car 400 250
Calculate the cross elasticity of demand for : (i) Bread and Yam, (ii) Petrol and Car.
Solution:
Cross elasticity of demand for bread and yam
Let x = yam, y = bread
Old demand = 1000kg, New demand = 3000kg
Change in demand = 3000 – 1000 = 2000kg
2000 x 100
= 1000 1 = 200%
Old price = #25, New price = #40
Change in price = 40 – 25 = #15
15 x 100
25 1 =60%
CE = 200
60 = 3.3%
Cross elasticity of demand for petrol and car
Let x = car, y = petrol
Old demand = 400, New demand = 250
Change in demand = 400 – 250 = 150cars
150 x 100
400 1 = 37.5%
Old price = #50, New price = #100
Change in price = 100 – 50 = #50
50 x 100
50 1 = 100%
CE = 37.5
100 = 0.4%
Price Control Policy
The Price Control Policy is characterized as a procedure in which the government or its designated agency establishes the pricing of essential commodities. In essence, it involves the government utilizing legal means to determine the prices of specific goods, with options including both maximum and minimum price control. In Nigeria, the Price Control Board is responsible for implementing and overseeing price regulations on essential commodities.
Objectives Of Price Control Policy
Minimum Price Control Policy: This establishes the legally lowest price for goods and services, allowing buyers to offer a higher, but not lower, price. The primary purpose is to ensure a minimum income for workers, especially during inflation, and to safeguard agricultural producers from income decline due to bumper harvests. However, it may lead to excess supply and unemployment in labor markets, as well as the emergence of a black market.
Maximum Price Control Policy: This sets the legally highest price at which goods and services can be sold. Sellers can offer prices below it but not above it. The objective is to protect consumers, particularly the poor, during periods of rising prices. This often results in excess demand, shortages, black market activities, secret sales, and rationing.
Rationing
Rationing is an economic circumstance characterized by a shortage of essential commodities in the market. Under this condition, consumers are granted access to these commodities in specified quantities and regulated time intervals. The scarcity of essential goods may be artificially induced, often by certain individuals aiming to derive super-normal profits from their sales.
Impacts of Rationing:
Hoarding
Hoarding refers to a deliberate action taken by a seller or producer to create an artificial scarcity of a specific commodity by storing it and refraining from releasing it to the market. This tactic is often employed to inflate the selling price of commodities to make excessive profits, or by refusing to adhere to the government-regulated lower prices for essential commodities.
Impacts of Hoarding:
The black market is a market situation where trading transactions and resource allocations occur outside the conventional norms of market forces, demand and supply, or government-set prices for essential commodities. This market pattern deviates from the fundamental principles of open exchange, operating in secrecy and hence earning its designation as the black market.
Impacts of the Black Market:
A production possibility curve (PPC) is a graphical or diagrammatic illustration of all possible bundles or combinations of two types of goods which a society can produce using its present level of resources and given the existing level of technology.
The idea behind the production possibility curve is that to produce a particular commodity, the production of another commodity has to be sacrificed.
For example, the production possibility curves for the production of cattle and motor vehicles in South Africa.
Production Possibility Table for The Production of Cattle and Motor Vehicles by South Africa
Possible combination head of cattle no of motor vehicles
A 200 0
B 170 30
C 100 70
D 80 130
E 40 150
F 0 180
The table shows the alternative open to South Africa to substitute the production of cattle for vehicles monthly, assuming a given state of technology and a given total of resources.
Production Possibility Curve for the Production of Cattle and motor Vehicles in South Africa.
Interpretation Or Points To Note From The Graph
Points A to F on the graph indicate the efficient use of resources
At points O and P (outside the curve), production is not feasible. Production of these points is not feasible due to the limited resources and technology.
At points K and L (inside the curve), production is feasible. It represents where resources are not efficiently utilized.
The downward slope of the PPC indicates that there is an opportunity cost of producing more of one type of commodity and less of the other due to limited resources and technical know-how
LAW OF DIMINISHING RETURNS OR VARIABLE PROPORTION
This law refers to a short-run production situation. The law of diminishing returns states that as more of the variable factor (e.g. labour or capital) is added to other factors which are constant (e.g. land), outputs will eventually increase at a decreasing rate.
The law of diminishing returns follows three stages, these are;
Increasing returns
Constant returns
Decreasing returns
Concept Of Total Product (Tp), Average Product (Ap) And Marginal Product (Mp)
TOTAL PRODUCT (TP): Total product refers to the total quantity of goods produced at a particular time as a result of the use of all the factors of production.
Symbolically written as TP = AP X Q
total Point of diminishing returns
output TP
Average Product (Ap): Average product is defined as the output per unit of the variable factor (labour or capital) employed. This is obtained by dividing the total output by the number of labour or capital employed.Symbolically written as AP:TP/Q
Y
AP
AP
3.Maginal Product (Mp): This is the additional product produced as a result of the application of additional unit of a variable factor when all other factors are fixed.
MP
Unit of labour
MP
Symbolically written as MP = CHANGE IN TP/CHANGE IN VARIABLE FACTOR =
TP1 – TPO
Q1 –QO
VARIABLE UNIT FIXED FACTOR TOTAL PRODUCT AVERAGE PRODUCT MARGINAL PRODUCT
OF LABOUR hectares of land (Kg) (Kg) (kg)
1 3 8 8 ……
2 3 18 9 10
3 3 36 12 18
4 3 48 12 12
5 3 55 11 7
6 3 60 10 5
7 3 60 86 0
8 3 56 7 -4
The relationship between total products, average product and marginal product can be demonstrated by a graph. Both TP and MP initially rise. The TP curve remains at maximum point when MP is zero. To declines after MP = 0 and MP afterwards assumes negative values.
Meaning Of Cost Of Production
Cost of production can be defined as the sum of the total of all the payments to the factors of production used in the production of goods and services.
For goods and services to be produced, all the four factors of production, which are land, capital, labour and entrepreneur, must work together.
Economist’s View Of Cost
Economists view cost as opportunity cost. He is not concerned about the real amount of money spent on a particular item but the value of the sacrificed alternative. For example, if an individual bought a shoe instead of a handset. The opportunity cost is the handset forgone.
Accountant’s View Of Cost
To an accountant, cost is the total amount of money spent to acquire a product.
Total Cost (TC): Total cost may be defined as the total sum of fixed and variable costs incurred by an enterprise in the production of a particular commodity.
Total cost = Fixed cost + variable cost or Average cost x Quantity.
Fixed Cost (FC): Fixed cost, also called overhead cost or unavoidable cost, is defined as the cost that remains constant in the short run no matter the level of output. g. money spent on rent, etc.
FC = Total Cost – Variable or TFC = AFC x Q
Variable Cost (COST): Variable cost, also called direct cost, is defined as the cost of production which varies or changes directly with the level of output. E.g. cost of raw materials, labour, etc. VC = TC – FC
Average Cost (AC) OR Average Total Cost (ATC): Average cost is defined as cost per unit of output.
Average cost is the total cost of producing a given output divided by the number of units of output.
AC =
Average Variable Cost: The average variable cost is the cost per unit of variable cost of output.
AVC =
Average Fixed Cost (AFC): This is the fixed cost per unit of output.
AFC =
Marginal Cost (MC): It is referred to as incremental cost. Marginal cost is the addition to total cost needed to produce a unit increase in output.
Marginal cost does not depend on fixed cost but on variable cost, because fixed cost do not vary with the level of output.
Cost Schedule Of A Firm
Unit of Output (TQ) Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC) Average Total Cost (ATC) Average Variable Cost (AVC) Average Fixed Cost (AFC) Marginal Cost (Mc)
1 20 12 32 32 12 20 –
2 20 14 34 17 7 10 2
3 20 16 36 12 5.3 6.6 2
4 20 18 38 9.5 4.5 5 2
5 20 20 40 8 4 4 2
6 20 22 42 7 3.6 3.3 2
7 20 24 44 6.3 3.4 2.8 2
Revenue refers to the income derived by a producer or firm from business activities or from the sale of his or its products.
Types Of Revenue
Tota Revenue (TR): This refers to the total income which a firm derives from the sale of its products.
Total Revenue = Price x Quantity (TR = PxQ)
Average Revenue (A.R): The average revenue is the same as the price per unit of the commodity. It is derived by dividing the total revenue by the total unit of the commodity sold.
= = P
Marginal revenue: This is the additional income earned by selling an extra unit of a commodity.
Revenue Schedule Of A Firm
Quantity sold (Output) Total revenue (N) Average Revenue (Unit Price) N Napinal Revenue (N)
0 0 0 –
1 400 400 400
2 700 350 300
3 900 300 200
4 1040 260 140
5 1150 230 110
6 1200 200 50
The most profitable output is the point where marginal cost is equal to marginal revenue.
An economic system can be characterized as the organized means by which a state’s production resources are employed to fulfill human needs.
The primary economic systems include capitalism, socialism, and mixed economies.
Capitalism, also known as a free-market economy, is described as an economic system where private individuals own and control the means of production. A country practicing capitalism is often referred to as having a market economy, laissez-faire economy, uncontrolled economy, free enterprise, or a capitalist economy. Examples of capitalist countries include the USA, Japan, Australia, France, and Italy.
Advantages of Capitalism:
Disadvantages of Capitalism:
Socialism, also known as a centrally planned or controlled economic system, is defined as a type of economic system where the means of production and distribution are collectively owned and controlled by the state (government).
Features of Socialism:
Advantages of Socialism:
Disadvantages of Socialism:
A mixed economy is defined as an economic system in which both private and public ownership of means of production and distribution coexist in a country.
Features of Mixed Economy:
Advantages of Mixed Economy:
Disadvantages of Mixed Economy:
The labor market can be defined as the arena where workers and employers interact to determine working conditions. It comprises individuals seeking employment, employers, and governmental entities.
The Concept Of Labor Force
The labor force encompasses the total number of working-age individuals in a country who are either employed or capable and willing to work but currently unemployed. This group falls within the legally defined working age and represents both those with jobs and those actively seeking employment. The working-age population varies between countries.
Factors Influencing The Supply Of Labor Or Size Of Labor Force (Working Population)
Population Size: A larger population generally results in a higher working population, and vice versa.
Official School Leaving Age: A lower school leaving age correlates with a higher proportion of the labor force, and vice versa.
Official Age Of Retirement: Raising the retirement age tends to increase the labor force as more individuals remain available for work.
Remuneration Or Wage Rate: The level of salaries and wages directly influences the number of people willing to work.
Migration: Immigration increases, while emigration decreases the supply of labor.
Mobility Of Labor
Labor mobility pertains to the ease with which workers can transition between occupations or geographic locations.
Types Of Labor Mobility
Occupational Mobility: This involves workers moving easily from one job to another. For example, a messenger can switch to roles like cleaning or farming.
Geographical Mobility: This refers to the ease with which workers can relocate from one geographic area to another, such as from Port Harcourt to Jos.
Industrial Mobility: This involves movement within or between industries. Vertical mobility involves promotion within the same industry, while horizontal mobility involves moving between industries while performing the same role.
Causes Of Labor Mobility
Factors influencing labor mobility include unfavorable working conditions, marriage, irregular salary payments, promotion opportunities, poor management, climate, lack of job security, absence of social amenities, accommodation issues, political instability, and personal reasons.
The Efficiency Of Labor
Labor efficiency is the degree to which labor can be combined with other production factors to achieve maximum output without compromising quality.
Factors Determining Labor Efficiency
Factors influencing labor efficiency include education and training, general working conditions, worker health and access to healthcare facilities, incentive and remuneration levels, efficiency of other production factors, degree of specialization and division of labor, welfare services, and the worker’s state of mind, as well as weather conditions.
at a specific time and a given wage rate. This supply is also linked to the quantity of available labor.
Demand For Labor
Demand for labor is defined as the total number of workers that employers are willing and prepared to hire at a specific time and wage rate. It pertains to the quantity of human effort needed by entrepreneurs for production. The demand for labor is considered a derived demand.
Factors Influencing Labor Demand
Wages denote payment to labor on a daily or weekly basis, while salaries represent monthly payments.
Types Of Wages
Nominal Wages: The actual money paid for labor within a specific time frame.
Real Wages: The purchasing power of labor, indicating wages in terms of goods and services they can buy.
Determination Of Wages
Wage rates in a competitive labor market are determined by the interplay of demand and supply forces. In a competitive labor market:
Government activities and policies, including wages commissions, play a role in wage determination, especially in public services. Considerations include the cost of living, productivity levels, and the type of occupation.
Factors Contributing To Wage Variation
Unemployment is the state where individuals of working age, willing and able to work, are unable to find paid employment. It occurs when qualified individuals cannot secure jobs due to various factors.
Types Of Unemployment
Causes Of Unemployment
Consequences Of Unemployment
Solutions To Unemployment Problems
A trade union is an organization of workers formed to collectively address issues related to their welfare and working conditions. Examples include the Academic Staff Union of Universities (ASUU) and the National Union of Petroleum and Natural Gas Workers (NUPENG).
Trade Union Objectives
Instruments Of Trade Unions
Definition of Industry
An industry comprises a cluster of companies involved in the production of similar commodities, such as the shoe, transport, or cement industry. The term “industry” refers to the productive aspect of business activities, encompassing processes like cultivation, production, processing, or manufacturing of goods.
These goods are classified into consumer goods and producer goods. Consumer goods, like food grains, textiles, and cosmetics, are directly used by end consumers. Producer goods, such as machinery and equipment, are utilized by manufacturers in the production of other goods, representing the supply side of the market and influencing the expansion of trade and commerce.
Business Entity
A firm is an independently managed business entity engaged in production, construction, or distribution activities. Examples of firms in Nigeria include Dangote Cement and Cadbury Nigeria Plc.
Plant
Synonymous with a factory, a plant consists of the tools, equipment, machines, and buildings associated with a business. It serves as the physical location where production is organized, as seen in establishments like the Aladja Steel Plant.
Primary industries involve the production of goods with minimal human effort, relying on natural resources. Examples include agriculture, farming, forestry, fishing, and horticulture.
Genetic industries focus on the reproduction and multiplication of plant and animal species for profit, encompassing activities like plant nurseries, cattle rearing, poultry, and cattle breeding.
Extractive industries involve the extraction of goods from soil, air, or water in raw form, supplying materials for manufacturing and construction industries. Examples include the mining industry, coal and oil extraction, iron ore extraction, and timber and rubber extraction from forests.
Manufacturing industries transform raw materials into finished products using machinery and manpower. Finished goods can be either consumer goods or producer goods, as seen in textiles, chemicals, sugar, and paper industries.
Construction industries focus on building structures like buildings, bridges, roads, dams, and canals. Unlike other industries, the goods produced and sold by the construction industry are erected at the same location.
The service sector, crucial for national development, includes industries like hotels, tourism, and entertainment. In modern times, service industries play a vital role in the economic landscape.
The location of an industry refers to the placement of the industry in a specific area.
Factors Affecting Industrial Location:
In general, economic considerations primarily influence the location of industries, although certain non-economic factors can also play a role in influencing specific industries’ locations. The paramount objective is to maximize profit, which implies minimizing costs, leading to a careful selection of specific locations for industries. Various factors contribute to pulling industries toward particular places, and some of the major influencers are discussed below:
The proximity to sources of raw materials is crucial in determining an industry’s location. Being close to raw material sources reduces production costs, which is particularly significant for industries heavily reliant on raw materials, such as agro-based and forest-based industries.
Industries require an adequate supply of affordable and skilled labour. The attraction of industries to labour centres depends on the labour cost index, with skilled workers’ availability influencing the initial concentration of certain industries in specific regions.
Access to markets is crucial for industries, especially those producing perishable or bulky goods. Industries located near markets can reduce transportation costs for distributing finished products, especially in the case of consumer goods.
Transport infrastructure, including waterways, roadways, and railways, significantly influences industrial location. Junction points of these transportation modes become centers of industrial activity, and transportation policies can impact the location of industrial units.
The availability of cheap power sources, such as water, wind, coal, gas, oil, and electricity, influences industrial location. The flexibility introduced by alternative power sources has led to the dispersal and decentralization of industries.
The existence of public utilities, site affordability, and amenities like ground level, vegetation, and related activities can influence industrial location. Government incentives in designated backward areas may attract entrepreneurs to establish units there.
Availability of capital at favorable interest rates is a dominant factor in industrial location. Historical reviews indicate that concentrations of industries were influenced by the presence of wealthy and enterprising individuals providing financial resources.
Factors like ground level, topography, water facilities, drainage, and climate can influence industrial location. For instance, humid climates may provide advantages in certain industries like cotton textile manufacturing.
Occasionally, personal preferences and prejudices of entrepreneurs may influence industrial location, although this is rare.
In modern times, strategic considerations, especially safety during wartime, play a vital role in industrial location. Safe locations become crucial during war, considering potential air attacks on crucial industrial targets.
The growth of specialized subsidiary activities and the concentration of industries in specific centers with port and shipping facilities can lead to external economies influencing industrial location.
Historical incidents and the size of industrial units can also impact industrial location. The development of the cotton-textile industry in Lancashire and the size of industrial units based on profitable distribution areas and population density are examples of such influences.
Localization of industries refers to the clustering of numerous firms from a specific sector in a particular geographical area.
Advantages
Disadvantages
Money Demand
Demand for money represents the total amount of money an individual wishes to hold for various reasons. It reflects the inclination to keep resources in a liquid form rather than spending them and is termed Liquidity Preference in economics.
Motives For Holding Money
Lord Menard Keynes proposed three main motives for holding money:
Money Supply
Money supply refers to the total amount of money available for use in the economy at a given time. It encompasses currency in the form of banknotes and coins circulating outside the banking system, as well as bank deposits in current accounts that can be withdrawn by cheque (i.e., bank money).
Several factors influence the supply of money:
Sir Irving Fisher’s quantity theory of money posits that the value of money depends on its circulation quantity. The theory, expressed as MV=PT (where M is the stock of money, V is the velocity of money, P is the average price level, and T is the total volume of transactions), establishes a connection between money, output, and prices.
EXAMPLE:
Using MV=PT with P=20, M=200,000, and T=20,000, the velocity of money (V) is calculated as V=20 x 20,000/200,000, resulting in V=2.
Criticisms Of The Quantity Theory Of Money
Critics argue that the quantity theory of money:
Money Market
The money market is a trading platform for short-term securities, involving institutions or individuals with funds to lend or a need for short-term borrowing.
Instruments Utilized In The Money Market
Issued by the Central Bank, these instruments enable the government to raise capital for a ninety-day period.
Similar to a Treasury Bill but with a longer maturation period (twelve to twenty-four months), earning a higher discount rate.
A promissory note where the debtor acknowledges the debt and commits to repayment within ninety days.
Surplus funds are invested overnight through a special arrangement, enhancing liquidity in the money market.
Institutions Involved In The Money Market
Functions Of The Money Market
Addressing the long-term funding needs of entrepreneurs, governments, and businesses, the capital market is where long-term securities are traded.
Instruments Utilized In The Capital Market
Institutions Involved In The Capital Market
Functions Of The Capital Market
Inflation:
Inflation is the sustained increase in the overall price level of goods and services, resulting from a rise in the money supply without a corresponding increase in production volume.
Demand-Pull Inflation occurs when there is an excess demand for goods and services compared to the available supply, often driven by factors such as population growth and increases in workers’ salaries.
Cost-Push Inflation happens when the cost of production factors rises, causing an automatic increase in the prices of goods and services. For example, an increase in the cost of raw materials can lead to higher prices for finished products.
Hyper-Inflation is characterized by a rapid and substantial rise in the prices of goods and services, leading to a loss of value in currency. War, budget deficits, and other factors contribute to hyperinflation.
Creeping Inflation is a slow but steady increase in the general prices of goods and services, also known as persistent inflation.
Causes of Inflation:
Inflation is triggered by various factors such as excess demand, low productivity in sectors like agriculture, salary and wage increases, high production costs, budget deficits, population growth, excessive bank lending, high import costs, hoarding, industrial strikes, poor storage facilities, and money laundering.
Effects of Inflation:
Positive Effects:
Negative Effects:
How to Control Inflation:
Terminologies Associated with Inflation:
Deflation is a persistent decrease in the general price level, resulting from insufficient money circulation and is the opposite of inflation.
Causes of Deflation:
Public finance is the branch of economics concerned with the financial activities related to income, expenditure, and national debt operations, and their overall impact on the economy. In essence, it involves the management and control of government income and expenditure to achieve policy objectives. This field requires a thorough analysis of the sources of government revenue, government spending priorities, and the repercussions of such expenditures on various facets of the economy.
Fiscal policy is the government’s plan of action regarding revenue generation through taxation and other means, coupled with decisions on expenditure patterns. It entails using government income and expenditure instruments to regulate the economy and achieve specific economic objectives.
Economic Objectives of Government Fiscal Policy:
Government revenue encompasses the total income accrued to all levels of administration from various sources.
Classification of Public Revenue:
Sources of Government Revenue:
Government expenditure is the total expenses incurred by public authorities at all levels, covering infrastructure projects, social amenities, and other permanent investments.
Classification of Public Expenditure:
Objectives of Government Expenditure:
Reasons for Increase in Government Expenditure:
Effects of Public Expenditure:
Taxation is the act of imposing a mandatory levy by the government on the income of individuals, businesses, and goods and services. It entails a compulsory payment made by eligible citizens toward the country’s expenditures, irrespective of the specific benefits received. This contribution is imposed by the government on goods, individuals, and corporate entities without consideration for the individual benefits received by the taxpayer.
Features of Taxation:
Reasons for Government Taxation:
Principles of Taxation (Adam Smith’s Canons):
Systems of Taxation/Forms of Income Tax:
Economic Effects of Taxes:
Tax Evasion and Tax Avoidance:
Concept of Tax Base and Tax Rate:
Incidence of Taxation:
Incidence of Taxation and Elasticity of Demand:
A budget is a financial statement outlining the estimated total revenue and proposed expenditures of a government within a specified period, typically a year.
The national budget serves several purposes:
Economic Conditions Warranting Budget Types:
National debt encompasses all debts owed by a government, both internally and externally, with or without interest.
Reasons for Government Borrowing:
Effects of Huge National Debt on the Economy:
Revenue Allocation:
Revenue allocation involves sharing a nation’s wealth among different tiers of government, namely Federal, State, and local governments.
Parts of Revenue Allocation:
Revenue Allocation Formula:
The formula assigns weights to various principles (e.g., Federal government – 48.5%, State – 24%, Local government – 20%, special fund – 7.5%). The Revenue Mobilization Allocation and Fiscal Commission (RMFC) continually works on proposals for new revenue sharing formulas.
Capital Market- is a market for medium and long-term loans. The capital market serves the needs of industries and the commercial sectors. It comprises all institutions which are concerned with either the supply of or demand for long-term loans. The capital market provides a system by which money for investment is distributed to institutions which require funds for their further growth.
It helps to provide long-term loans to investors
It helps to mobilize savings for investment purposes
It helps to enhance the growth and development of merchant banks
It gives opportunity to the general public to participate in the running of the economy.
Primary Or First-Tier Securities Market
Primary Market– is a market where new securities (shares, stock, bonds, etc) are either bought or sold. That is a market where securities are traded for the first time. The operators in this market are the issuing houses such as stockbrokers, merchant banks, commercial banks, mortgage banks, insurance companies, the Central Bank of Nigeria and government. Investors pass on their resources to some of these institutions for investment purposes. Thus, these financial institutions effectively play the role of financial intermediation by mobilizing the savings of investors and investing them. The Securities and Exchange Commission sits at the apex of the primary market, regulating the issues of public companies and all private companies with foreign participation.
Secondary Or Second-Tier Securities Market
Secondary Market- is a market in which buying and selling of existing securities of companies take place. It came into existence to complement the efforts of the Stock Exchange Market towards funds mobilization for investment. Second tier securities market is an appendage of the Stock Exchange and therefore serves to assist. The major participants in this market are stockbrokers and banks such as acceptance houses, investment banks, issuing houses, etc. The mode of operation in this market is similar to that of the first-tier securities market but less restricted. The centre of activities for the secondary market is the Stock Exchange which provides a market in which holders of existing ‘quoted’ shares wishing to sell such shares can make contact with individuals and institutions who are interested in buying them. Hence the secondary market is dominated by the Stock Exchange, which provides a forum for trading in securities. Such a forum is absolutely necessary since many of the buyers of new securities will eventually resell them.
Capital serves as the nucleus of any functional business unit. The need to source for this factor becomes a major focus of the finance manager. Registered companies or Limited Liabilities companies need fund in large volume. Hence there’s need to source for fund. A market which provides an answer to this is the stock exchange market.
Stock Exchange– is a highly organized market where investors can buy and sell existing securities such as shares, debenture, stock. The stock Exchange serves as medium through which companies raise capital for growth and development. The stock exchange market ensures that every transaction must follow prescribed set or rules and regulations, which are complex in nature. The Lagos Stock Exchange which is an essential part of the capital market was established in 1960 through the Act of parliament with its branches in Abuja and Port Harcourt. All public Limited Liability companies are quoted in stock exchange.
A transaction at the stock exchange is facilitated by the brokers and jobbers. Not everybody is permitted to trade directly at exchange except the members. The actual dealers (participants) in securities are the jobbers who tend to specialize in particular types of stocks while the brokers act as agent for potential buyers. A broker working on behalf of a client will approach the Jobber with the intension of knowing the price. The Jobber will then quote for him two prices; higher price as the selling price and lower price as the buying price. The difference is the ‘Jobbers turn’. When the broker signifies his intention to buy, the necessary documents will be prepared.
The shares of well known companies are known as blue chips, while gilt-edged refers to government stocks. Prices of shares are quoted “cum-div” or “ex-div”. “cum-div” denotes price at which the holders of such shares has the right to receive the next dividend payable, while “ex-div” denotes price at which the holder of such share has no right to receive the next dividend.
Two documents are prepared to speed up transactions: contract not and transfer form note
Contract Note– is a document sent by a stockbroker to his client to confirm a purchase or sale made on his behalf, while Transfer Note– is used to transfer ownership of shares.
Stock Exchange market serves as avenue of raising capital for business growth.
It provides employment opportunities for vast number of people e.g. brokers, jobbers, clerks and others
Information which informs business decision are made available to foreign and local investors through stock exchange.
Stock Exchange provides yardstick for measuring performance of quoted companies.
Stock Exchange provides avenue for the public to invest their idle fund in form of subscribing shares.
Dividends that accrued to shareholders serves as revenue in turn improve their living standard.
The following are the participants in the stock exchange.
Public Limited Liability Companies e.g. Dunlop Nig. Plc, Access Bank Plc, First Bank of Nigeria Plc, Zenith Bank, Guinness Nigeria Plc, UTC Nigeria Plc, Longman Nigeria Plc etc.
Brokers
Jobbers
Speculators (Bull, Bear and Stag)
Issuing houses
The instruments used in stock exchange market are shares, stock and debenture
Shares and Stock – Stocks and shares are securities purchased by individuals, which is evidence of contributing part of the total capital used in running an existing industry. Share and stockholders are entitled to dividend
Debenture – In financing business, the owner’s fund (equity) can be used or debt. A debenture is a debt instrument which entitles the owner to a series of cash flow known as interest. A debenture holder is a creditor to a business unlike the shareholders.
A development bank is a financial institution setup purposely to offer medium and long term loans meant for development. It provides loans for projects in the area of agriculture, commerce and industry.
Examples Of Development Banks In Nigeria
(1) BO1- Bank of Industry
(2) NARDB- Nigerian Agricultural and Rural Development Bank
(3) FMBN- Federal Mortgage Bank of Nigeria
(4) UDB – Urban Development Bank
(5) NEB – Nigerian Education Bank
(6) NEXIM – Nigerian Export and Import Bank
(7) NACB – Nigeria Agricultural and Co-operative Bank
Functions Of Development Banks
Provision of long-term loans for capital projects
Implementation of government’s industrial development policies
Supervision of projects
They give advice to both the government and industrialists
They underwrite securities issue
They contribute to manpower development and provision of technical support
They conduct extensive study on the industrial sector e.g. feasibility studies
They monitor and enhance general economic development activities
They undertake research on industrial development
As individuals and firms keep account of their economic activities such as their annual report which shows all their activities during the past year, countries too like individuals and firms do record and keep their economic activities.
National Income– is defined as the monetary value of the total volume of goods and services produced by a country in a year. It is the money value of the total income earned by all the factors of production in a given country over a period of time usually a year. On the other hand, it is the sum total of money value of all individual expenditure on goods and services at the market price.
The National Income is different from the income of the government which refers to the revenue the government raises through taxation and borrowing.
Definition Of Concepts
This is defined as the total monetary value of all the goods and services produced in a country in a year by all the residents of the country regardless of whether they are citizens or foreigners. It relates to a closed economy, that is, it excludes the earnings or investment of citizens abroad but includes the earnings of foreigners or earnings from foreign investment in the country.
It can be measured at factor cost (adding together of production) or at the market prices.
In its calculation, no allowance is made for depreciation. So, it is best expressed as the addition of these three aggregates.
GDP = C + I + G
where C = Consumption
I = Investment
G = Government expenditure
The GDP is used as an economic indicator in determining whether the country is growing, declining or stagnant.
This is the monetary value of goods and services produced by the citizens of a country (including income from their investments both at home and abroad).
It is the total value of goods and services plus Net income from abroad which can be represented as ( x – m ) where x = export and m = import
That is to say, it includes the earnings of the citizens or their investment in other countries but excludes the earnings of foreigners or their investment in the country. In this case, no allowance is also made for depreciation.
Mathematically, it is expressed as: GNP = GDP + Net Income from abroad; or
= GDP + x – m; or
= C + I + G + x – m
It is defined as the total monetary value of goods and services produced by all the residents of a country and earnings from their investment (whether citizens or foreigners) after allowance have been made for depreciation.
Mathematically, it is represented as:
NDP = GDP – Depreciation; or
= C + I + G – Depreciation
This is the difference between GNP and estimated Depreciation or capital consumed during the year; this is the GNP less depreciation. This is the monetary value of goods and services produced by all the citizens of a country and income from their investments (whether at home or abroad) after allowance has been made for depreciation.
NNP = GNP – Depreciation; or
= C + I + G + (x – m) – Depreciation
It can therefore be summarized as: Disposable Income = Personal Income – Personal Tax.
Per Capita Income (PCI): It is the national Income head of the population. It is the National Income divided by the total population of a country. It is an economic indication of a country’s level of standard of living. Whether the PCI of a country is high or low depends majorly on the available resources and the size of the population of the country.
However, an increase in GNP of a country does not mean an increase in PCI.
By formula, it is expressed as PCI = GNP / Total population
Income Approach: In this method, the total monetary values of income received by individuals, business organizations, government agencies within a year for their participation in production. The income received by factors of production in the form of wages or salaries, rent, interest and profits is added together. To avoid double-counting, transfer incomes or payments are not included. By using this approach, we arrive at either the G.N.P or G.D.P at factor cost.
Output or Net product Approach: – This is based on the census of production. It measures the value of all goods and services produced in a country during the year. To avoid double-country, income is measured on a value- added basis. (Value-added is the value of output, less cost of input). Natural income derived in this way gives the G.D.P at market prices. To get the G.D.P at factor cost, we subtract taxes and add subsidies.
Expenditure Approach: – This is the calculation of the total monetary value of expenditure on goods and services by government individual organization etc. within a country in a given period. In this calculation expenditure on inter mediate goods and services bought and used for further production must be excluded. This is done in order to avoid double counting and therefore, the calculation should particularize only on expenditure on the monetary value of final goods and services.
It gives an indication of the standard of living of the country through the measure of per capita income.
It helps the country to determine the growth rate of the economy
The national income estimate is vital for economic policy and planning.
Measured through the output approach enables the country to know the performance of the various sectors of the economy.
The national income data gives an idea of the pattern of expenditure of households.
It influences foreign investments. Foreign investors usually seek countries with rich or fast growing markets.
It forms the basis for contribution to international organizations.
They do not reveal the income distribution in a country. National income estimate does not indicate whether income is widely spread or concentrated in a few hands.
There is a difference in the internal value of money. The standard of living to a large extent depends on the value of money.
Double counting: At times it is problematic differentiating capital goods from consumer ones, they are therefore counted twice which give false national income.
Determining what income is: Determining what is income to a person, what constitutes economic activities the rewards for some services like that of full-time house wives subsistence farmers, self-employed etc. constituting problems to national income measurement.
The problems created by the self employed. Many self-employed in our society do not keep proper book of account and therefore, it is very difficult to ascertain what their incomes, expenditures and outputs are.
Inflation and deflation: Inflation raises national income figure, while deflation reduces it. Problems here is how to arrive at accurate national income figure that is not affected by either inflation, or deflation
Determining Depreciation Value: – The inability of many business units and individuals ventures to calculate the depreciation of their machinery makes it difficult to ascertain the true position of a country’s national income.
Insufficient Statistical data: It is extremely difficult to collect and assemble the required information for national income computation. In most cases, the information is just not available.
Ignorance and Illiteracy:- These factors make majority of the people in west Africa not willing to supply basis information that will be used for computation of national income
There are differences in the structure of production.
The standard of Living and Cost of Living
Standard of living
This is the level of welfare attain by individuals in a country at a particular time . This level of welfare is measured in terms of the quantity and quality of goods and services consumed within a period of time. The average standard of living in the country is partly determined by the income per head via distribution of income.
Cost of Living
An individual cost of living refers to the total amount of money spent to obtain the goods and services which will enable him exist at a particular time. The cost of living depends on the prices of gods and services which an individual consumes.
Price Index
The price index is a number are figures used to show the average rises and fall of price in percentage terms with reference to a base period.
Index Number = Current year price X 100
Base year price
Circular Flow Of Income
Circular flow of income shows the independence or relationship between households and business enterprise. Commodity and money flows between households and firms. It shows the flow of payments from business sector to households in exchange for labour and other productive services and the return flow of payments from households to business sector in exchange for goods and services.
The household or the personal sector offers its labour services to the business sector or firms in the production of goods and services. The household is rewarded in form of wages, interest and rent which it spends on the consumption of goods and services produced in the economy.
Factors That Brings About Changes In The Circular Flow Of Income
Withdrawal: This part of all the income that is not all owed to pass through the normal channel of circular flow of income.
Injection: This forms an increase in the income of households, producers outside their normal processes of selling productive resources and manufactured goods.
Savings: These are part of income which are not consumed immediately and they reduce households and producers expenditures.
Investment: This reduces and creates additional income either immediately or in future.
Gifts and grants: They may come from governments to households and firms and help increasing their incomes
Taxes: They reduce the expenditures of households and firms on goods and factor services.
Imports: They involve expenditure on foreign made goods and services and constitute withdrawals from the circular flow of income.
Export: They Provide money from other countries and act as injection into the domestic circular flow of income.
Savings
Savings are made up of disposable income which is not spent on consumer goods and services. Saving involves forgoing some present consumption.
Individuals save for the following reasons
To raise capital
For unforeseen contingencies
For speculation
To acquire assets
For future purposes
To raise social status
Factors that affect savings
The size of income
The rate of interest
Cultural attitude
Government polices
Availability of financial institutions.
Investment may be defined as expenditure on physical assets which are not for immediate consumption but for production of consumer and capital goods and services.
Types of Investment
Individual investment: This may be on building, motor vehicles and other assets the individual hopes may increase his income and standard of living.
Investment by firms: This can be on buildings machines, furniture, raw materials, semi finished and finished goods.
Government investment in social capital; These are in the areas of roads, electricity, pipe borne water, hospitals schools.
Purpose: to improve the living condition of the citizen.
Government investment in public corporations: To render essential services create more employment opportunities among others, are sure of the reasons why government invest.
Factors that determine investment
The amount of income earned.
Savings
Profit
The amount paid as tax
The rate of interest
Expectation
Business atmosphere
Political factor
Consumption is the sum of current expenditure on goods and services by individuals, firms and government. It is also mean part of income not saved or invested. The level of consumption of an individual depends largely on his level of current income.
Factors that determine the level of consumption
The level of income
Savings
Expectation of price changes
The rate of taxes paid
The influence of other households
Assets owned
The rate of interest received
Business profit
The Relationship Between Income, Consumption, Savings And Investment
Income, consumption and savings are related. The amount of income earned (household) determines to a large extent the level of consumption of an individual as well as the amount which can be saved. This is represented by the formula. Y = C+S, where Y = Income, C = Consumption expenditure and S = Savings
Also, income, consumption and investment are related. The amount of income earned (business sector) determines to a large extent the level of spending on the running overhead cost (consumption) as well as the amount spent on further investment. This is represented by the formula: Y = C + I , where Y = Income , C = Consumption expenditure , I = Investment Expenditures
In forming an equation with household income and the business sector’s income, we have:
C + S = C + I
S = I
Consumption influences the level of national income. If people consume more, it encourages further production. Economy is at equilibrium when aggregate saving equals aggregate investment and full employment is achieved at this level. We save in order to accumulate capital for investment and for many other personal reasons. There will be no investment without saving. Investment, in turn, creates employment and income for people. Without income, we shall have nothing to save and nothing to spend on consumption of goods and services.
The theory of the multiplier– states that an increase in consumer or business investment spending in a country would produce a multiplier effect by raising the level of national income. The multiplier effect can be a result of changes in consumption expenditure, which is known as consumption multiplier or investment changes, which is known as investment multiplier.
The concept of multiplier shows that a small change in investment can have a magnified effect on income. Multiplier = 1 / (1-MPC) where MPC equals marginal propensity to consume.
The total increase in income depends on the marginal propensity to consume. If MPC is high, the
multiplier will be high and rise in income will be high when people spend on consumption, the level of national income rises.
Example:
Considering #100 million increase in investment, suppose 4/5 of the investment was consumed 1/5 would have been saved.
Increases in Income = Investment / 1- MPC
= 100m/ (1- 4/5 ) = 100m / (1/5)
= 100m x 5/1
= 500 million
The total increase in income is five times the initial increase in investment. Therefore, Multiplier is 5.
The multiplier denoted by K is usually calculated with the aid of formula
K = 1 = 1
1 – mpc mps
K = ∆Y
∆C
Where K = multiplier
Mpc = marginal propensity to consume
Mps = marginal propensity to save.
Y = change in national income
C = Consumption expenditure
I = Investment
Example 1
If the marginal propersity to consume is 0.8, calculate the multiplier.
By how much must consumption expenditure be increased to increase income by N10,000.
Solution
(a). K = 1 = 1 = 1 = 5
1 – mpc 1 – 0.8 0.2
The multiplier K has a value of 5
(b) K = ∆Y
∆C
5 = N10,000
C
Cross multiply
5 x C = 10,000 x 1
C = 10,000 = N2,000
5
Equilibrium Level of Income– is a situation where the total amount people wish to save equals total investment of business units. It refers to a point at which the aggregate saving equals aggregate investments. At equilibrium level of income, there is a balance between or equality of saving and investment as illustrated in the diagram below:
Again, at equilibrium level of income, there is a balance between the aggregate demand and aggregate supply, and there will be no tendency to increase or decrease output. The business sector is satisfied that the right volume of output has been achieved and there will be no tendency to alter it.
For equilibrium national income to be maintained, the volume of total withdrawals from the circular flow of income must be equal to the volume of total injections. That is, total amount of saving must be equal to total value of investment, and aggregate expenditure must be equal to total output.
Income earners (household) can spend their income on consumption of goods and services or save it, hence, Y = C + S. On the other hand, the firms can spend its income on the running overhead expenses or invest it, hence, Y = C + I. Probing this equation further, we will arrive at a situation of, S = I, where the aggregate saving equals aggregate investment that indicates the general equilibrium level of income.
NOTE: For Y to be constant, the level of savings (S) must be equal to investment (I). By implication, the amount of consumption goods and services produced by firms will be equal to the aggregate demand of the people (household).