THE APPLICATION OF MICROECONOMICS STUDY TO NIGERIA ECONOMY
CHAPTER ONE
INTRODUCTION
Microeconomics (from Greek prefix mikro- meaning "small") is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources. Typically, it applies to markets where goods or services are bought and sold. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.
This is in contrast to macroeconomics, which involves the "sum total of economic activity, dealing with the issues of growth, inflation, and unemployment." Microeconomics also deals with the effects of national economic policies (such as changing taxation levels) on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'microfoundations' i.e. based upon basic assumptions about micro-level behavior.
One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics also analyzes market failure, where markets fail to produce efficient results, and describes the theoretical conditions needed for perfect competition. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. Also considered is the elasticity of products within the market system
THE APPLICATION OF MICROECONOMICS STUDY IN NIGERIA ECONOMY
The study of microeconomics involves several "key" areas:
Demand, supply, and equilibrium
Supply and demand is an economic model of price determination in a perfectly competitive market. It concludes that in a perfectly competitive market with no externalities, per unit taxes, or price controls, the unit price for a particular good is the price at which the quantity demanded by consumers equals the quantity supplied by producers. This price results in a stable economic equilibrium.
Measurement of elasticities
Elasticity is the measurement of how responsive an economic variable is to a change in another variable. Elasticity can be quantified as the ratio of the percentage change in one variable to the percentage change in another variable, when the later variable has a causal influence on the former. It is a tool for measuring the responsiveness of a variable, or of the function that determines it, to changes in causative variables in unitless ways. Frequently used elasticities include price elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution between factors of production and elasticity of intertemporal substitution.
Consumer demand theory
Consumer demand theory relates preferences for the consumption of both goods and services to the consumption expenditures; ultimately, this relationship between preferences and consumption expenditures is used to relate preferences to consumer demand curves. The link between personal preferences, consumption and the demand curve is one of the most closely studied relations in economics. It is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility subject to consumer budget constraints.
Theory of production
Production theory is the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy. This can include manufacturing, storing, shipping, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production.
Costs of production
The cost-of-production theory of value states that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production: labour, capital, land. Technology can be viewed either as a form of fixed capital (ex:plant) or circulating capital (ex:intermediate goods).
Perfect competition
Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. A good example would be that of digital marketplaces, such as eBay, on which many different sellers sell similar products to many different buyers.
Monopoly
A monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell)) exists when a single company is the only supplier of a particular commodity.
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can create the incentive for firms to engage in collusion and form cartels that reduce competition leading to higher prices for consumers and less overall market output.[5]
Market structure
The market structure can have several types of interacting market systems. Different forms of markets is a feature of capitalism and advocates of socialism often criticize markets and aim to substitute markets with economic planning to varying degrees. Competition is the regulatory mechanism of the market system.
• Monopolistic competition, also called competitive market, where there is a large number of firms, each having a small proportion of the market share and slightly differentiated products.
• Oligopoly, in which a market is run by a small number of firms that together control the majority of the market share.
• Duopoly, a special case of an oligopoly with two firms.
• Monopsony, when there is only one buyer in a market.
• Oligopsony, a market where many sellers can be present but meet only a few buyers.
• Monopoly, where there is only one provider of a product or service.
• Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.
• Perfect competition, a theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.
Examples of markets include but are not limited to: commodity markets, insurance markets, bond markets, energy markets, flea markets, debt markets, stock markets, online auctions, media exchange markets, real estate market.
Game theory
Game theory is a major method used in mathematical economics and business for modeling competing behaviors of interacting agents. Applications include a wide array of economic phenomena and approaches, such as auctions, bargaining, mergers & acquisitions pricing, fair division, duopolies, oligopolies, social network formation, agent-based computational economics, general equilibrium, mechanism design, and voting systems, and across such broad areas as experimental economics, behavioral economics, information economics, industrial organization, and political economy.
Labour economics
Labour economics seeks to understand the functioning and dynamics of the markets for wage labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demands of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income. In economics, labour is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production as land and capital. There are theories which have developed a concept called human capital (referring to the skills that workers possess, not necessarily their actual work), although there are also counter posing macro-economic system theories that think human capital is a contradiction in terms.
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being from allocation of productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium. It analyzes social welfare, however measured, in terms of economic activities of the individuals that compose the theoretical society considered. Accordingly, individuals, with associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units.
Economics of information
Information economics or the economics of information is a branch of microeconomic theory that studies how information and information systems affect an economy and economic decisions. Information has special characteristics. It is easy to create but hard to trust. It is easy to spread but hard to control. It influences many decisions. These special characteristics (as compared with other types of goods) complicate many standard economic theories.
Opportunity cost
Opportunity cost of an activity (or goods) is equal to the best next alternative uses/foregone. Although opportunity cost can be hard to quantify, the effect of opportunity cost is universal and very real on the individual level. In fact, this principle applies to all decisions, not just economic ones.
Opportunity cost is one way to measure the cost of something. Rather than merely identifying and adding the costs of a project, one may also identify the next best alternative way to spend the same amount of money. The forgone profit of this next best alternative is the opportunity cost of the original choice. A common example is a farmer that chooses to farm their land rather than rent it to neighbors, wherein the opportunity cost is the forgone profit from renting. In this case, the farmer may expect to generate more profit alone. This kind of reasoning is a very important part of the calculation of discount rates in discounted cash flow investment valuation methodologies. Similarly, the opportunity cost of attending university is the lost wages a student could have earned in the workforce, rather than the cost of tuition, books, and other requisite items (whose sum makes up the total cost of attendance).
Note that opportunity cost is not the sum of the available alternatives, but rather the benefit of the single, best alternative. Possible opportunity costs of a city's decision to build a hospital on its vacant land are the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses but not all of these in aggregate. The true opportunity cost would be the forgone profit of the most lucrative of those listed.
One question that arises here is how to determine a money value for each alternative to facilitate comparison and assess opportunity cost, which may be more or less difficult depending on the things we are trying to compare. For example, many decisions involve environmental impacts whose monetary value is difficult to assess because of scientific uncertainty. Valuing a human life or the economic impact of an Arctic oil spill involves making subjective choices with ethical implications.
It is imperative to understand that no decision on allocating time is free. No matter what one chooses to do, they are always giving something up in return. An example of opportunity cost is deciding between going to a concert and doing homework. If one decides to go the concert, then they are giving up valuable time to study, but if they choose to do homework then the cost is giving up the concert. Any decision in allocating capital is likewise: there is an opportunity cost of capital, or a hurdle rate, defined as the expected rate one could get by investing in similar projects on the open market. Opportunity cost is vital in understanding microeconomics and decisions that are made.
Applied microeconomics
United States Capitol Building: meeting place of the United States Congress, where many tax laws are passed, which directly impact economic welfare. This is studied in the subject of public economics.
Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields. Industrial organization examines topics such as the entry and exit of firms, innovation, and the role of trademarks. Labor economics examines wages, employment, and labor market dynamics. Financial economics examines topics such as the structure of optimal portfolios, the rate of return to capital, econometric analysis of security returns, and corporate financial behavior. Public economics examines the design of government tax and expenditure policies and economic effects of these policies (e.g., social insurance programs). Political economy examines the role of political institutions in determining policy outcomes. Health economics examines the organization of health care systems, including the role of the health care workforce and health insurance programs. Urban economics, which examines the challenges faced by cities, such as sprawl, air and water pollution, traffic congestion, and poverty, draws on the fields of urban geography and sociology. Law and economics applies microeconomic principles to the selection and enforcement of competing legal regimes and their relative efficiencies. Economic history examines the evolution of the economy and economic institutions, using methods and techniques from the fields of economics, history, geography, sociology, psychology, and political science.
HOW MICROECONICS KNOWLEDGE CAN BE UTILIZED FOR SUSTAINING NIGERIA'S ECONOMIC GROWTH
The current administration must ensure that its economic policies are geared towards elevating the living condition of Nigerians as well sustaining the country's economic growth, writes Obinna Chima
Despite the hurdles and obstacles that continue to hinder the Nigerian economy from realising its potential, the country, has been on the right path of growth since 1999 when its current democratic journey started. Nigeria, clearly, is a different place now from what it was when it began the journey towards democratic governance 16 years ago. The country has grown to be the largest economy in Africa, with key reforms in various sectors of the economy opening doors for the influx of foreign direct investments in critical sectors of the economy.
Of course, Nigeria's democratic credentials were further consolidated with the recent peaceful outcome of the presidential election that saw the emergence of Major General Muhammed Buhari as the president-elect. He defeated the incumbent, president Goodluck Jonathan.
Buhari satisfied the constitutional requirement of polling the majority votes of 15.4 million, compared to president Jonathan's 12.9 million total votes, while also winning at least 25 per cent of the votes cast in 28 states. Prior to the electoral contest, they were the two contending words -- Change versus Transformation.
As a result of the uncertainties in the air prior to the elections, the Nigerian economy suffered certain setbacks against the backdrop of weakening macroeconomic variables (exchange rate, oil prices, inflation, GDP) and massive outflow of foreign portfolio investments. These rubbed off on the financial market as investors became overtly cautious to jettison fundamentals for fear of the unknown. Investments were on a halt while investible funds stayed on the sideline. Therefore, with the successful completion of the election, experts have stressed the need for the incoming administration to focus on policies that would engender sustainable development of the country.
Awaiting the 'Change'
Analysts at Afrinvest West Africa Limited stated that the victory and emergence of Buhari points to the dawn of a new era in Africa's largest economy.
"When the President-elect assumed office on the May 29, 2015, the Nigerian masses look up to him for "Change" in the country that has seen 16 years of unbroken reign of the ruling Peoples Democractic Party. Hence, the question in the mind of many is, how soon will this 'Change' come?" they queried.
While advising the president-elect on how to improve national security, Afrinvest stressed the need to urgently address the poor security situation in the country via a well-trained, adequately equipped and goals driven serious crime squad to combat terrorism, kidnapping, armed robbery, militants, ethno-religious and communal clashes nationwide.
On job ceation, they advised the incoming administration to "make our economy one of the fastest growing emerging economies in the world with a real GDP growth averaging 10 per cent annually; to be driven by ICT, manufacturing, agriculture and entertainment. This is to thrive under a sound macro-economic policy environment, run by an efficient government which preserves the independence of the central bank, and modernise agricultural sector hinged on a change from self-subsistence farming to medium/commercial scale farming."
They also called for the formulation of a private sector- led lndustrial base for the economy, entrepreneurship promotion, economic diversification and heavy investment in research and development to boost industrial development, even as they called for a speedy passage of the much-delayed Petroleum Industry Bill (PIB) and ensure that local content issues are fully addressed to grow the oil and gas sector.
In terms of infrastructure, they added: "There is need to generate, transmit and distribute power from current 5,000 - 6,000 MW to at least 20,000 MW of electricity within four years and increasing to 50,000 MW with a view to achieving 24/7 uninterrupted power supply within ten years, whilst simultaneously ensuring development of sustainable/renewable energy; Construction of 3,000km of Superhighway including service trunks and building of up to 4,800km of modern railway lines -- one third to be completed by 2019 via a Public Private Partnership (PPP) arrangement."
On its part, the Institute of Credit Administration (ICA) advised the president-elect to ensure that his government drastically cut the cost of doing business in Nigeria when he assumes office. The institute pointed out that the Buhari's administration would gain local and global acceptance if the aforementioned is achieved. The ICA insisted that " it is really possible to fix electricity by all means within six months," even as it urged Buhari to prioritise nationwide road construction
The ICA further advised him not to: "fail Nigeria and Nigerians; do not also fail the friends of Nigeria in the uttermost parts of the world. Endeavor to deliver in accordance with your campaign promises to which you must expect that Nigerians and international community will hold your government.
"The ICA is confident that you, General Mohammed Buhari, has the requisite discipline to lead our great country into the next regime of strong economic prosperity, social justice and freedom.
"First among your priorities should be to address the nation's urgent economic, social and security situation, and to build a strong economy for the future. Your approach no doubt should be to focus very quickly on structural reforms, fiscal responsibility and investment.
"Set up as a matter of urgency a national agency that guarantees access to loans by SMEs, and not to disburse loan to them. Such agency can be called - Nigerian Credit Guarantee Corporation (NCGC). Surprisingly, up till today, Nigerian government is still not dreaming of creating this national platform that would support the development of SMEs.
"If a National Credit Guarantee Corporation is set up by the federal government with strong capital base and very robust operating fund, you can be sure that that corporation would serve as collateral and security which people who want to borrow money do not have, that is, those within the class of SMEs. This is the practice in other countries.
"The policy thrust of your government should be economic growth revival and massive infrastructural build ups to help boost economic growth," it added. Also, the Chief Executive Officer, RTC Advisory Services Limited, Mr. Opeyemi Agbaje, recently stressed the need for the government to create policies and incentives that could promote non-oil exports by Nigerian firms.
He pointed out that although the current structure of Nigeria's GDP shows that the country has achieved significant diversification in terms of local production and consumption, there is need for Nigeria to be competitive in the area of non-oil exports of goods and services by the private sector.
Agbaje cited the case of South Africa, whose export revenue is driven largely by private sector firms such as MTN, DSTV and South African Breweries, among others.
"The challenge for the Nigerian economy is for government to create policies and incentives that will allow our private sector to become exporters.
"If our export revenue was earned by thousands of Nigerian companies exporting their services, we would not collapse anytime the price of oil falls. "We also need to start refining our oil domestically and exporting it. We should be one of the biggest exporters of refined petroleum products in the world.
"There are significant opportunities in Nigeria. If you look at the structure of Nigeria's GDP, you will see that huge opportunities abound in Nigeria.
"In terms of the structure of domestic production, we have done a good job of diversification, but the problem is that in terms of the structure of export and government revenue, we have not done enough," he said.
Similarly, the President of Chartered Institute of Taxation of Nigeria, Mr. M. A. Chidolue Dike, called for improved tax revenues.
"So, no matter what you do, tax is very critical. Tax is the price we pay to improve our society. It can't be the other way round that the government has to provide road before we pay tax, no, we have to pay.
"Having paid, we would have the moral justification to demand for performance, accountability and stewardship. It has been found that countries that rely almost completely on taxation are more responsible, more accountable and more responsive," Dike added.
From the foregoing therefore, while a lot is expected from the incoming administration in ensuring that the economy remain on the path of growth, the real challenge however remains the need to ensure that as a developing and middle-income country, there is still a lot more to be done to further reduce poverty, expand infrastructure and provide more social services for our people. These challenges are formidable, but they are not insurmountable.
Expectedly, goodwill messages have deservedly, poured in from far and wide to congratulate the clear victor of the 2015 elections and President Elect, Mohammed Buhari, may not be unduly disturbed that President Jonathan's inspirational and totally unexpected early acceptance of defeat, ironically, favorably raised the incumbent's rating as a statesman beyond the pedestrian perception induced by his performance in governance.
Indeed, despite the complimentary economic growth rates gleefully presented by Ngozi Okonjo Iweala, sadly, more Nigerians joined the already bloated poverty ranks. Indeed, the horrid level of insecurity, apparently instigated by ethnic and religious divide, may infact find their true origin in the pervading level of poverty nationwide. Consequently, expectations are high that Buhari will provide an antidote to poverty and corruption; clearly, our poverty cannot be blamed on an inhospitable climate or a shortage of natural resources.
Infact, citizens from nations with considerably less natural endowments may be excused for decrying what they consider to be an inexplicable inequity by Providence. In reality, our inability to galvanise our resources to the greater benefit of the critical mass is actually caused by the application of fiscal and monetary strategies that are antagonistic to consumer demand, and job creation.
CHAPTER TWO
THE TRENDS IN NIGERIA ECONOMY
Nigeria is a middle income, mixed economy and emerging market, with expanding financial, service, communications, technology and entertainment sectors. It is ranked as the 21st largest economy in the world in terms of nominal GDP, and the 20th largest in terms of Purchasing Power Parity. It is the largest economy in Africa; its re-emergent, though currently underperforming, manufacturing sector is the third-largest on the continent, and produces a large proportion of goods and services for the West African subregion. Nigeria recently changed its economic analysis to account for rapidly growing contributors to its GDP, such as telecommunications, banking, and its film industry. Previously hindered by years of mismanagement, economic reforms of the past decade have put Nigeria back on track towards achieving its full economic potential. Nigerian GDP at purchasing power parity (PPP) has almost tripled from $170 billion in 2000 to $451 billion in 2012, although estimates of the size of the informal sector (which is not included in official figures) put the actual numbers closer to $630 billion. Correspondingly, the GDP per capita doubled from $1400 per person in 2000 to an estimated $2,800 per person in 2012 (again, with the inclusion of the informal sector, it is estimated that GDP per capita hovers around $3,900 per person). (Population increased from 120 million in 2000 to 160 million in 2010). These figures are to be revised upwards by as much as 80% when metrics are recalculated subsequent to the rebasing of its economy in April 2014.
Although much has been made of its status as a major exporter of oil, Nigeria produces only about 2.7% of the world's supply (Saudi Arabia: 12.9%, Russia: 12.7%, USA:8.6%). To put oil revenues in perspective: at an estimated export rate of 1.9 Mbbl/d (300,000 m3/d), with a projected sales price of $65 per barrel in 2011, Nigeria's anticipated revenue from petroleum is about $52.2 billion (2012 GDP: $451 billion). This accounts about 11% of official GDP figures (and drops to 8% when the informal economy is included in these calculations). Therefore, though the petroleum sector is important, it remains in fact a small part of the country's overall vibrant and diversified economy.
The largely subsistence agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now imports a large quantity of its food products, though there is a resurgence in manufacturing and exporting of food products. In 2006, Nigeria successfully convinced the Paris Club to let it buy back the bulk of its debts owed to the Paris Club for a cash payment of roughly $12 billion (USD).
According to a Citigroup report published in February 2011, Nigeria will get the highest average GDP growth in the world between 2010 and 2050. Nigeria is one of two countries from Africa among 11 Global Growth Generators countries.
Nigeria's economy is struggling to leverage the country's vast wealth in fossil fuels in order to displace the poverty that affects about 33% of its population. Economists refer to the coexistence of vast wealth in natural resources and extreme personal poverty in developing countries like Nigeria as the "resource curse", although "resource curse" is more widely understood to mean an abundance of natural resources which fuels official corruption resulting in a violent competition for the resource by the citizens of the nation.
Nigeria's exports of oil and natural gas at a time of peak prices have enabled the country to post merchandise trade and current account surpluses in recent years. Reportedly, 80% of Nigeria's energy revenues flow to the government, 16% cover operational costs, and the remaining 4% go to investors. However, the World Bank has estimated that as a result of corruption 80% of energy revenues benefit only 1% of the population.
In 2005, Nigeria achieved a milestone agreement with the Paris Club of lending nations to eliminate all of its bilateral external debt. Under the agreement, the lenders will forgive most of the debt, and Nigeria will pay off the remainder with a portion of its energy revenues. Outside of the energy sector, Nigeria's economy is highly inefficient. Moreover, human capital is underdeveloped—Nigeria ranked 151 out of countries in the United Nations Development Index in 2004 and non-energy-related infrastructure is inadequate.
From 2003 to 2007, Nigeria attempted to implement an economic reform program called the National Economic Empowerment Development Strategy (NEEDS). The purpose of the NEEDS was to raise the country's standard of living through a variety of reforms, including macroeconomic stability, deregulation, liberalization, privatization, transparency, and accountability.
The NEEDS addressed basic deficiencies, such as the lack of freshwater for household use and irrigation, unreliable power supplies, decaying infrastructure, impediments to private enterprise, and corruption. The government hoped that the NEEDS would create 7 million new jobs, diversify the economy, boost non-energy exports, increase industrial capacity utilization, and improve agricultural productivity. A related initiative on the state level is the State Economic Empowerment Development Strategy (SEEDS).
A longer-term economic development program is the United Nations (UN)-sponsored National Millennium Goals for Nigeria. Under the program, which covers the years from 2000 to 2015, Nigeria is committed to achieve a wide range of ambitious objectives involving poverty reduction, education, gender equality, health, the environment, and international development cooperation. In an update released in 2004, the UN found that Nigeria was making progress toward achieving several goals but was falling short on others.
Specifically, Nigeria had advanced efforts to provide universal primary education, protect the environment, and develop a global development partnership. However, the country lagged behind on the goals of eliminating extreme poverty and hunger, reducing child and maternal mortality, and combating diseases such as human immunodeficiency virus/acquired immune deficiency syndrome (HIV/AIDS) and malaria.
A prerequisite for achieving many of these worthwhile objectives is curtailing endemic corruption, which stymies development and taints Nigeria's business environment. President Olusegun Obasanjo's campaign against corruption, which includes the arrest of officials accused of misdeeds and recovering stolen funds, has won praise from the World Bank. In September 2005, Nigeria, with the assistance of the World Bank, began to recover US$458 million of illicit funds that had been deposited in Swiss banks by the late military dictator Sani Abacha, who ruled Nigeria from 1993 to 1998. However, while broad-based progress has been slow, these efforts have begun to become evident in international surveys of corruption. In fact, Nigeria's ranking has consistently improved since 2001 ranking 147 out of 180 countries in Transparency International's 2007 Corruption Perceptions Index.
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