Form Three Business Studies

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BUSINESS STUDIES FORM 3

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TOPIC 1: DEMAND
CONTENTS
• Introduction
• Factors influencing demand
• Types of demand
• Demand schedule and demand curve
INTRODUCTION
Demand refers to the quantity of a good or service which is purchased at a specific
price within a given period of time.
Demand therefore exists only when there is willingness and ability to pay for the
product.
THE LAW OF DEMAND
The law of demand states that, “with all other factors held constant, the higher the
market price, the lower the market demand and vice versa”
Assumptions of the law of demand
a) The demand for a product is normal and not habit forming
b) Demand and price in the market are constant for a specific period of time
c) Consumers’ tastes and preferences do not change
d) There are no anticipated future changes in market price
e) There is no change in the income levels of the consumers
f) There are no changes in the prices of related products
FACTORS INFLUENCING DEMAND
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• Price of the product

• Price and availability of related products
• Income of consumers
• Tastes and preferences
• Consumer expectations
• Size of the population
• Income distribution
• Government policies
• Sociological factors
• Seasonal changes
• Terms of sale
PRICE OF THE PRODUCT
For a normal product, the higher the market price, the lower the market demand and
vice versa.
PRICE AND AVAILABILITY OF RELATED PRODUCTS
Related products are classified into two:
• Substitutes
• Compliments
Substitutes: These are products that can be used in place of one another e.g. tea and
coffee. If the price for one substitute product goes up, it’s demand fall as consumers
switch to the other product.
Complements: Compliments are those products which are used together e.g. car and
petrol. If the price for one product increases, its demand will fall and so will be the
demand for its compliment
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INCOME OF CONSUMERS
Income determines the ability of consumers to buy. The higher the income, the
higher the demand and vice versa.
TASTES AND PREFERENCES
Taste is the desire of the product by the consumer due to the satisfaction he derives
from using the product. When consumer tastes and preferences change in favor of
the product, its demand will increase and vice versa
CONSUMER EXPECTATIONS
Expectations refer to future anticipated changes. These changes may relate to price
and supply. When consumers expect price to fall in future, they will buy less now
and more in future. On the other hand, if consumers expect a future shortage, they
will buy more now and less later
SIZE OF POPULATION
An increase in population means more products are demanded to satisfy the needs of
the growing population. The opposite will happen if the population decreases.
INCOME DISTRIBUTION
When income is evenly distributed, more consumers will have the ability to buy
hence demand will increase. On the other hand, when income is in the hands of a
few, ability to buy is reduced hence demand decreases.
GOVERNMENT POLICIES
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Government influences demand through the following methods:
• Taxation
• Subsidies
• Legislations
• Price control
Taxation: Imposing a tax increases the price of the product hence reducing its
demand. On the other hand a reduction in tax will reduce price leading to price
reduction.
Subsidies: Subsidies reduce the production costs enabling producers reduce their
selling prices hence increasing demand.
Legislations: The government may pass laws that encourage or discourage
consumption of certain products e.g. cigarettes. This will increase or decrease
demand for such product.
Price control: The government may control the price of certain products by ensuring
that they don’t exceed certain limits. This move will increase the demand for such
products. SOCIALOGICAL FACTORS
Refers to factors such as age, education, marital status, culture etc. All these factors
may dictate the kind and amount of product consumers’ demand. For instance, young
people are likely to buy more movies than the aged.
SEASONAL CHANGES
Demand for some products depends on the season. For example, umbrellas are
demanded more during the rainy season.
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TERMS OF SALE
Terms of sale refers to credit, cash sales or discounts. When terms of sale are
favorable, demand will be high unlike when they are unfavorable.
TYPES OF DEMAND
There are FOUR types of demand:
• Joint demand
• Derived demand
• Competitive demand
• Composite demand
JOINT DEMAND
This is demand that arises from complementary goods. It is the demand that exists
between goods that are used together e.g. tea and sugar such that as demand for
one product increases, demand for the other product also increases.
DERIVED DEMAND
This is where the demand for one product is triggered by the demand for the other
product. For example, demand for hens is derived from the demand for eggs.
COMPETITIVE DEMAND
This is demand existing between close substitutes e.g. tea and coffee. An increase
in demand for one product reduces the demand for the other product.
COMPOSITE DEMAND
This is the demand that arises where the product is used for more than one
purpose e.g. demand for timber which is required for building, making furniture
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etc. Therefore a rise in need for one of the purposes, will increase the demand for
timber.
DEMAND SCHEDULE AND DEMAND CURVE
DEMAND SCHEDULE
A demand schedule is a table that shows the quantities of goods demanded at a
particular time
TYPES OF DEMAND SCHEDULE
Demand schedule can be classified into two:
• Individual demand schedule

• Market demand schedule
Individual demand schedule: This is a table showing the quantities demanded
by a single consumer at a particular time.
Illustration: The table below shows the demand schedule of consumer A
PRICE(Ksh) QUANTITIES
DEMANDED(Kgs)
10 40
20 30
30 20
40 10
Market demand schedule: This is a table showing the sum of all the quantities
demanded by all consumers at a particular time.
Illustration: The table below shows the demand schedules for consumers A, B
and C
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PRICE(Ksh) QUANTITY QUANTITY QUANTITY TOTAL

DEMANDED DEMANDED DEMANDED MARKET
BY A(Kgs) BY B BY C(Kgs) DEMAND(Kgs)
10 40 40 40 120
20 30 30 30 90
30 20 20 20 60
40 10 10 10 30
DEMAND CURVE: A demand curve is a graphical representation of the

information contained in a demand schedule.
NOTE: Mention the law of demand
TYPES OF DEMAND CURVES
Individual demand curve
This is a graphical representation of an individual demand schedule.
Assign: Draw the demand curve for the individual demand schedule above
Market demand curve
This is a graphical representation of a market demand schedule.
Assign: Draw the demand curve for the market demand schedule above
ABNORMAL DEMAND
Refers to a situation where a decrease in the price of the commodity may not
result in an increase in the quantity demanded for the commodity and vice versa
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(Illustrate)
Reasons for abnormal demand
a) Goods of ostentation (prestigious goods)
b) Inferior goods
c) Giffen goods
d) Necessities
e) Habitual goods and services
f) Expectations of future shortages
g) Expectations of future increase in price
MOVEMENTS ALONG THE DEMAND CURVE

The demand curve may either contract or extend due to changes in market price.
An extension in demand refers to an increase in quantity demanded while a
contraction refers to a decrease in quantity demanded. (Illustrate)
SHIFTS IN DEMAND CURVE
Refers to the dislocation of the entire demand curve either to the right or to the
left. A shift to the right indicates an increase in demand where as a shift to the left
indicates a decrease in demand. (Illustrate)
A shift in demand curve is caused by changes in any other factor affecting
demand other than market price.
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Causes of a shift to the right (increase in demand)
• A rise in the incomes of consumers

• A rise in the price of the substitute product
• A fall in the price of the complement product
• A positive change in consumers’ tastes towards the product
• Favorable government policies e.g. lower taxes
• Increase in consumer in incomes
• Increase in population
• Even distribution of income
Causes of a shift to the left (decrease in demand)
• A fall in consumer income

• A fall in price of the substitute product
• A rise in the price of the complement product
• Negative change in consumer preferences
• Uneven income distribution
• Decrease in population
• Decrease in consumer income
• Unfavorable government policies e.g. increase in taxes
TOPIC 2: SUPPLY
CONTENTS
• Introduction
• Factors influencing supply
• Types of supply
• Supply schedule and curve
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INTRODUCTION
Supply refers to the quantity of a product that sellers are able and willing to bring
to the market at a particular price over a given period of time
THE LAW OF SUPPLY
The law of supply states that, “with other factors held constant, the higher the
market price, the higher the market supply and vice versa”
Assumptions of the law of supply
a) Suppliers have perfect knowledge of price changes in the market
b) Suppliers have the ability to offer any quantity of a commodity in the at any
given price
c) Consumers are rational in their consumption behavior
d) There are no abnormal price fluctuations in the market
FACTORS INFLUENCING SUPPLY
• Price of the product

• Prices of other related products
• Prices of factors of production
• State of technology
• Goals of the firm
• Time
• Government policies
• Natural factors
• Industrial unrest
• Entry of new firms
• Future expectation of changes in price
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PRICE OF THE PRODUCT

The higher the market price of a product the higher the market supply. This is due
to the fact that sellers will be motivated to make more profits from increased
prices.
PRICES OF RELATED PRODUCTS
Related products can be classified into two:
• Substitutes
• Complements
Substitutes: These are products which compete for the same piece of land e.g.
maize and wheat. An increase in the supply of one product causes a decrease in
the supply of the other product.
Complements: These are products which undergo the same production process
e.g. hide and beef. An increase in supply for one product leads to an increase in
supply for the other product.
PRICES OF FACTORS OF PRODUCTION
Factors of production refer to the inputs to the production process. If these inputs
are expensive to acquire, the cost of production will increase hence reducing the
quantity supplied in the market.
STATE OF TECHNOLOGY
With improved technology, production of commodities may increase. Therefore,
producers will produce more and market supply will increase.
GOALS OF THE FIRM
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Goals set by a firm may also influence what they produce and how much they
produce. For instance, a firm may decide to continue producing a particular
product irrespective of the risks incurred. In this case supply for the product will
increase. On the other hand, if a firm fears taking risks, its production of certain
products may reduce.
TIME
Supply for some products is seasonal e.g. agricultural products. In this case, their
supply will be high during harvesting season. Some products are also supplied
more during specific seasons e.g. umbrellas are demanded more during the rainy
season.
GOVERNMENT POLICIES
Government can influence supply through the following methods:
• Subsidies
• Taxation
• Quotas
• Price control
Subsidies: Subsidies are incentives given to producers e.g. free seeds for farmers.
Subsidies have the effect of lowering production cost hence increasing supply
Taxation: Taxes have the effect of increasing the cost of production therefore
discouraging producers leading to lower market supply.
Quotas: A quota is a restriction on the amount of a product that can be produced.
Quotas therefore control the amount of a product thereby reducing its market
supply.
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Price control: If the government sets a low price for the product, its supply will
be lower.
NATURAL FACTORS
Refers to factors related to weather and climate. Such factors affect the production
of agricultural products. When these factors are favorable, supply will increase
and vice versa.
INDUSTRIAL UNREST
Industrial unrest refers to disagreements between the employers and the
employees which in most cases lead to strikes. Industrial unrests hinders
production therefore reducing market supply.
ENTRY OF NEW FIRMS
Entry of new firms in the industry will increase market supply. On the other hand,
withdrawal of firms from an industry will lead to a reduction in market supply.
FUTURE EXPECTATIONS OF CHANGES IN PRICE
If producers expect a future increase in market price, they will hoard their
products and sell them later. This will reduce the current supply for the product.
But if producers expect a future decrease in price, they will sell more products
hence increasing its supply.
TYPES OF SUPPLY
There are two major types of supply:
• Joint supply
• Competitive supply
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JOINT SUPPLY
This is supply which exists between products which undergo the same production
process e.g. hide and beef. An increase in the supply of one product will cause an
increase in supply for the other product and vice versa.
COMPETITIVE SUPPLY
This is a kind of supply which occurs when a factor of production is used to
produce two or more products e.g. maize and wheat.an increase in the supply of
one product leads in a decrease in supply for the other product.
SUPPLY SCHEDULE AND CURVE
SUPPLY SCHEDULE
A supply schedule is a table which shows the quantities of a commodity that
sellers are willing and able to offer for sale at a specific price at a given period of
time.
The supply schedule

PRICE(Ksh) QUANTITY(Kgs)
10 10
20 20
30 30
40 40
SUPPLY CURVE
A supply curve is a graphical representation of the information contained in the
supply schedule. (Illustrate)
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MOVEMENT ALONG THE SUPPLY CURVE

Refers to extension or contraction of supply due to changes in market price. When
price increases, quantity supplied increases (extension).On the other hand, when
price decreases, quantity supplied will decrease (contraction) (Illustrate)
SHIFT IN SUPPLY CURVE
Refers to the dislocation of the entire demand curve either to the left or to the
right. A shift to the right indicates an increase in supply whereas a shift to the left
indicates a decrease in supply (Illustrate)
Causes of a shift to the right (increase in supply)
• A fall in price of factors of production

• Improvement in technology
• Favorable government policies
• Entry of new firms in the industry
• Favorable weather conditions
• Industrial peace
Causes of a shift to the left (decrease in supply)
• An increase in the price of competing products

• An increase in the price of relevant factors of production
• Improved technology in the production of a competing product
• Unfavorable weather conditions
• Industrial unrest
TOPIC 3: EQUILIBRIUM PRICE AND QUANTITY
CONTENTS
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• Introduction
• Excess demand and excess supply
• Effects of shifts in demand and supply curves on equilibrium price and
quantity(Illustrate)
• Other methods of determining market price other than price mechanism
INTRODUCTION
The term equilibrium means equal or balanced. Equilibrium price is the price that
equates quantity demanded and quantity supplied. Equilibrium quantity is that
quantity that is bought and sold at the equilibrium price. The point at which
demand and supply are equal is the equilibrium point. (Illustrate)
EXCESS DEMAND AND EXCESS SUPPLY
Excess demand is the amount by which the quantity demanded exceeds the
quantity supplied at a given price. On the other hand, excess supply is the amount
by which the quantity supplied exceeds the quantity demanded.
Excess demand or excess supply will cause disequilibrium in the market
(illustrate)
EFFECTS OF SHIFTS IN BDEMAND AND SUPPLY ON EQUILIBRIUM
PRICE AND QUANTITY
(Illustrate)
OTHER METHODS OF DETERMINING MARKET PRICE
Apart from price mechanism, other methods of determining market price include
• Haggling
• Government intervention
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• Auction
• Tendering
Haggling: Refers to bargaining
Government intervention: Refers to a system where prices are influenced by the
government through:
• Price control
• Taxation
• subsidies
Auction: A method of selling where buyers are given the opportunity to compete
for the product by quoting different prices. The one who quotes the highest price
becomes the buyer.
Tendering: A method of selling where buyers are given an opportunity to suggest
the selling price independently. The highest bidder becomes the buyer.
TOPIC 4: THEORY OF A FIRM
CONTENTS
• Introduction
• Factors influencing what to produce
• Determining the size of a firm
• Location of a firm
• Localization and delocalization of firms
• Economies and diseconomies of scale
• Existence of small firms in an economy
• Effects of production activities on the environment and community health
• Ensuring a health environment
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A FIRM: The term firm refers to a single unit of business organization that
brings together factors of production in order to produce a given product e.g.
Bata shoe company
AN INDUSTRY: An industry refers to all those firms producing a particular
product for a given market.
Types of production decisions made a firm
a) What to produce
b) How production is to take place
c) Where the production plant is to be located
d) When to produce
e) What the scale of production will be
f) When and where to invest
g) How to improve and control production
h) What type of business activity to engage in
Factors influencing the decisions made by the firm
a) Whether the firm is product oriented or market oriented
b) Level of market competition
c) Level of technology
d) Financial viability of the firm
e) Socio-cultural factors
f) The level of the country’s economy
g) Government policy
h) Profitability of the business
i) Environmental issues
j) Costs of production
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FACTORS INFLUENCING WHAT TO PRODUCE

These are factors considered by a firm before it makes a decision on the kind of
goods and services to produce. These factors may include:
PROFITABILITY
Businesses tend to produce those goods and services that yield more profit
LEVEL OF COMPETITION
Firms tend to produce those products whose market competition is minimum i.e.
those that are scarce in the market
AVAILABILITY OF RESOURCES
A firm will produce those products whose required resources it has. These resources
may include labor, raw materials, equipment etc.
GOVERNMENT POLICY
A firm will produce those products which are favored by the government i.e. those
which are lowly taxed and legal
MARKET DEMAND
Firms will produce products whose demand is high in order to ensure high sales
volume
COST OF PRODUCTION
A firm will produce those products whose production cost is low.
DETERMINING THE SIZE OF A FIRM

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INDICATORS OF THE SIZE OF A FIRM

NUMBER OF EMPLOYEES
Large firms employ more staff since there several functions to be executed unlike
small firms which only require fewer staff
VOLUME OF OUTPUT
Large firms unlike small firms produce more goods and services
AREA COVERED BY PREMISES
Large firms have several building which covers a lot of space unlike small firms
AMOUNT OF CAPITAL INVESTED
Firms with high invested capital are considered large firms whereas firms with little
capital investment are small firms.
TYPE OF PRODUCTION METHODS USED
Large firms have the financial capability to afford advanced production methods
such as division of labor and specialization unlike small firms
SIZE OF MARKET SERVED
Large firms unlike small firms control a large market
SALES VOLUME
If a firm presents many goods and services to the market, then it is considered to be
a large firm unlike when it presents fewer goods and services to the market
LOCATION OF A FIRM
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Location of a firm refers to selection of a place where the proposed firm is to be

established
FACTORS TO CONSIDER WHEN LOCATING A FIRM
AVAILABILITY OF RAW MATERIALS
Most firms are located near a source of raw materials. This is because of the need to:
• Lower the cost of transporting raw materials to the firm

• Prevent raw materials from going bad especially when they are perishable
• Minimize the handling costs of raw materials
• Ensure constant supply of raw materials in order to facilitate continuous
production
• Counter competition especially when competition for raw materials is high
• Comply with the government policy e.g. when the government requires firms
to be located near a source of raw materials
AVAILABILITY OF MARKET
It is advisable to locate a firm near a market. This is because of the need to:
• Lower cost of transportation to the market

• Avoid breakages especially where fragile goods are produced
• Prevent perishable goods from going bad
AVAILABILITY OF LABOUR
Labour intensive firms are located near an abundant labour source e.g. in urban
areas
AVAILABILITY OF APPROPRIATE TRANSPORT AND
COMMUNICATION NETWORK
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Firms are located in area with a good transport network in order to:
• Ensure constant supply of raw materials

• Facilitate easy transportation of finished goods to the market
• Facilitate information flow
• Facilitate easy movement of labour to and from work
• Save on transport cost and frequent repair of vehicles
AVAILABILITY OF ADEQUATE POWER AND WATER SUPPLY
Water and power are very essential to a firm’s operations. Power is required to run
the machines whereas water is used as a machine coolant, for cleaning or even as a
raw material. Firms should therefore be located in places with adequate supply of
water and power.
GOVERNMENT POLICIES
Government may also influence the location of firms using the following methods:
• Offering free or cheap land

• Reduction of taxes
• Offering subsidies
• Offering financial assistance
• Improving infrastructure
• Providing credit facilities to investors
OTHER FACTORS
1. Availability of auxiliary services such as banking and insurance
2. Availability of room for expansion
3. Effects of a firm’s operation on the environment
4. Availability of security
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5. Nature of terrain
6. Climatic conditions
LOCALISATION AND DELOCALISATION OF FIRMS
LOCALISATION OF FIRMS
Localization refers to concentration of similar firms in one particular region.
REASONS FOR LOCALISATION
• A well-developed infrastructure
• Availability of a large population to provide labour and market
• Need for interdependence among firms in areas such as training of personnel
• Government policy requiring firms to be located in a given area
• Availability of raw materials in a given area
• Availability of support industries such as banks
ADVANTAGES OF LOCALISATION
a) It encourages the establishment of support industries e.g. banking, insurance,
warehousing etc.
b) Encourages the creation of a pool of labour due to rural urban migration
c) Establishment of firms that use finished goods as raw materials are encouraged
d) Disposal of waste products is made easier since it can be sold to other firms or
recycled
e) Creation of employment opportunities is encouraged
f) Encourages the development of infrastructure such as roads, communication,
health and education facilities
DISADVANTAGES OF LOCALISATION
a) May cause environmental pollution from industry emissions
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b) Results in regional imbalance in development

c) Encourages rural-urban migration leading to overcrowding in towns
d) Emergency of social problems such crimes, diseases, immorality etc.
e) May attract terrorist attacks since terrorists mostly target congested areas
f) A fall in the of the product produced by a localized firm may spark widespread
unemployment
DELOCALISATION OF FIRMS
Refers to establishment of firms in different parts of the country. It is highly
encouraged by the government
ADVANTAGES OF DELOCALISATION
a) Reduces effects of terrorist attacks
b) Provides employment opportunities to every part of the country
c) Reduces rural-urban migration
d) Ensures balanced regional development
e) Widens market for local produce
f) Makes products easily available to local consumers
DISADVANTAGES OF DELOCALISATION
a) Spreads pollution all over the country
b) Lack of skilled manpower in the rural areas
c) There may be insecurity in some areas
d) Service industries may not be available in the rural areas
e) Incentives offered by the government to encourage delocalization may burden
the taxpayer
f) Continued protection of local firms from competition from foreign firms by the
government may make local firms produce poor quality goods.
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Disadvantages of locating a business away from other businesses

a) Difficulty in acquiring relevant labour
b) Exchange of ideas is not easy
c) Difficulty in acquiring raw materials
d) The firm may produce poor quality goods due to lack of competition
e) Exchange of technology is not possible
Objectives of delocalization
a) To promote a balance regional development
b) To redistribute income by ensuring that there is a widespread location of
industries
c) To ensure better use of resources in different parts of the country
d) To create employment in various regions
e) To reduce congestion in urban centres
Methods used to delocalize industries
a) Offering cheap land
b) Offering tax concessions
c) Provision of infrastructure
d) Establishment of rules and regulations
e) Development of training institutions in different regions
f) Government directives
ECONOMIES AND DISECONOMIES OF SCALE
ECONOMIES OF SCALE
Refers to advantages a firm enjoys as a result of expansion.
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There are two economies of scale:
• Internal economies of scale

• External economies of scale
INTERNAL ECONOMIES OF SCALE
These are advantages accruing to a single firm as a result of it’s expansion
irrespective of what happens in other firms. These economies may include:
• Marketing economies
As the firm expands, it buys and sells goods in large quantities thus enjoying the
following:
• Trade discounts
• Lower transport cost
• Lower cost of advertising
• Lower distribution cost
• Financial economies
As a firm expands its scale of operations, it is in a position of accessing loans
easily and in large amount from financial institutions.
• Risk bearing economies

Large firms are able to reduce risks though selling many products in several
markets such if one product fails or demand in one market declines, the firm
can still make profit.
• Managerial economies
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As the firm expands, it is in a position of employing qualified staff. These staff

can go a long way in increasing the efficiency and productivity of the firm.
• Technical economies
Technical economies are those benefits associated with specialization of both
labour and machinery. A large scale firm is able to hire qualified staff and buy
modern machines to improve its productivity.
• Research economies
Research is a very expensive exercise and it can only be afforded by large firms
• Welfare economies
Welfare facilities are those things which motivate workers. Such things may
include: recreation, health, education etc. These facilities are expensive and can
only be afforded by large firms.
EXTERNAL ECONOMIES OF SCALE
These are those benefits which accrue to a firm as a result of growth in the
entire industry. These benefits include:
• Availability of ready skilled labour

• Ready market
• Easy disposal mechanisms
• Improved infrastructure
Ways in which large-scale businesses reduce their cost of operations

a) Buying goods in bulk from suppliers hence enjoying quantity discounts
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b) Promoting their products hence increasing sales

c) Bargaining for lower interest rates on loans
d) Diversifying products and markets hence spreading risks
e) Attracting skilled manpower hence lowering supervisory costs, wastes and
losses so as to improve efficiency
f) Using modern technology hence ensuring efficient production
g) Producing and selling in large quantities thereby reducing average costs
h) Carrying out research hence improving methods of production
DISECONOMIES OF SCALE
These are those problems a firm experiences as a result of expansion. They may be
classified into two.
• Internal diseconomies of scale

• External diseconomies of scale
INTERNAL DISECONOMIES OF SCALE
Refers to those problems which arise from within the firm as it expands. They
include:
• Managerial diseconomies
Continued expansion of a firm may pose problems associated with poor control
and coordination, long decision making and poor relations between staff and
management
• High operational costs

As the firm expands, money required for the day to day running of the firm will
increase. This is likely to lower the profits of the firm.
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EXTERNAL DISECONOMIES OF SCALE

These are problems a firm experiences as a result of growth in the entire industry.
They include:
• Struggle for raw materials

• Lack of land for expansion
• Scramble for qualified labour
• Market competition
• Easy target for terrorist activities
Ways of expanding a business
a) Entering into a suitable merger or amalgamation
b) Diversifying operations/ dealing in a variety of products so as to capture a
wider market
c) Buying/acquiring other similar businesses so as to widen the scope of
operations
d) Securing loans to expand the capital base
e) Arranging for franchising by acquiring rights to produce/sell goods under the
name of another firm
f) Expanding market to increase the volume of sales
g) Adopting appropriate technology to increase the quantity and quality of output
h) Ploughing back profits to finance its operations
i) Forming cartels with similar businesses
EXISTENCE OF SMALL FIRMS IN AN ECONOMY
Despite the benefits enjoyed by large firms, small firms still exist alongside large
firms. Some of the reasons for this existence may include:
• Size and nature of market

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In cases where the market size is small, small firms will prevail since it will be
uneconomical for large firms to operate in such markets. Consumers in some markets
may demand goods in small quantities, in such cases small firms will be preferred.
• Nature of the product

Some products cannot be provided in large quantities e.g. personal services such as
nursing or painting. These products can only be provided by a small firm.
• Simplicity in organization and operation

Small firms may also exist due to the fact that they are easy to operate as compared
with big firms
• Flexibility
Compared with large firms, small firms are easily adaptable to changes in the
environment. For example it is easy for a small scale firm to switch from one line of
trade to another unlike a large. Small firms will therefore exist in an economy due to
the fact that they highly flexible.
• Quick decision making

Most people go for small firms because it is easier to make decisions in these firms
given that few people are to be consulted when making a decision
• Simplicity in management
Most businessmen may opt for small firms due to the belief that they are easy to run
as compared to big firms
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• Lower costs of production

Small firms unlike large firms enjoy lower operational costs
• Desire to retain control

The need to exercise control and be the own boss may drive business people towards
operating in small scale
• Legal constraints
Measures put in place by the government may also hinder the growth of firms e.g.
the government may impose a higher tax if sales exceed a given limit, in this case,
the firm will rather remain small.
Disadvantages of small firms
a) High overhead costs due to low output
b) It is difficulty for small firms to diversify
c) Low profits due to limited capital
d) Overworking due to lack of division of labour
Role of small firms in developing countries
a) They create employment since they mostly use labour intensive techniques
b) They allow more low income earners to participate in economic activities
c) They promote delocalization of industries
d) They lend valuable support to large industries
IMPLICATION OF PRODUCTION ACTIVITIES ON ENVIRONMENTAL
AND COMMUNITY HEALTH
As production activities take place in a given area, environment and the health of
people around may be adversely affected. Some these effects may include:
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a) Affects the health of the people and animals due to pollution of water, air and
soil
b) Disrupts the ecosystem of the area as animals and plants may have to be moved
or destroyed
c) Leads to excessive use of resources resulting in land degradation and reduction
in the productivity of land
d) Depletion of the environment especially the ozone layer through toxic
emissions from industries
e) Causes negative social effects such as crimes in areas where production
activities take place due to high population in those areas
MAINTAINING A HEALTHY ENVIRONMENT
A healthy business environment can be promoted using the following methods
• Preventing pollution
• Providing security
• Ensuring availability of necessary resources such as labour, finance, machines
etc.
• Maintaining a healthy relationship
TOPIC 5: PRODUCT MARKETS
CONTENTS
• Introduction
• Types and features of product markets
INTRODUCTION
A product refers to goods or services sold in the market. A product is also known as
a commodity.
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A market refers to the mechanism through which the buyer and the seller interact to
transact
Essentials of a market
a) There must be willing buyers and sellers
b) There must be commodities to be bought or sold
c) There must be an acceptable medium of exchange e.g. money
d) There must be a market price
TYPES AND FEATURES OF PRODUCT MARKETS

Markets are classified based on the nature of the buyer, seller, and the product. These
classifications include:
• Perfect competition market

• Monopoly market
• Monopolistic competition market
• Oligopoly markets
PERFECT COMPETITION MARKET
This is a market with very many buyers and sellers dealing in an identical product.
Its features
• Large number of buyers and sellers

Buyers and sellers are very many such that any decision by any of them won’t affect
the market. Hence no single buyer or seller may influence market price.
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• Uniformity of the product

Commodities dealt in are similar in all respects such that they cannot be
distinguished. Therefore there is no advantage or disadvantage by buying from a
specific seller
• Perfect knowledge of the market

All sellers and buyers have a perfect knowledge about the market hence no seller can
sell above the market price
• Freedom of entry or exit

Buyers and sellers are free to enter and leave the market at will
• Uniformity of buyers and sellers

All buyers are identical in the eyes of the seller. All sellers are also identical before
the eyes of the buyer hence there is no advantage gained by selling to a specific
buyer or buying from a specific seller
• No government interference
Government does not interfere with the operations in this market. Therefore there are
no taxes, subsidies. Quotas, price control etc. Price is determined by the forces of
demand and supply
• No excess supply or demand

In this market, sellers sell everything they supply whereas buyers are able to buy
everything they need
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• Perfect mobility of factors of production

Land, labour, capital and entrepreneurship are assumed to move from one supplier to
another or from one occupation to another with easy
• No transport costs
It is assumed that buyers and seller live in one region. Firms therefore do not incur
carriage costs
• Common prevailing price

The selling price in a perfect competition market tends to be uniform
• No preferential treatment of buyers and sellers

All sellers are seen to be equal by buyers. Similarly, all buyers are seen to be equal
by sellers
MONOPOLY MARKET
This is a market situation where there are many buyers with only one seller known as
a monopolist.
Its features
• There only one supplier for the entire market. The supplier is therefore the
industry
• The product sold has no close substitutes hence there is no competition
• No freedom of entry
• The supplier sets the market price
• Price discrimination may be possible
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Price discrimination
Price discrimination refers to charging different prices for the same product in
different markets
Conditions necessary for price discrimination
• There must be no close substitutes for the product

• The different markets must be separated and the cost of separating should not
be too high
• Consumers should not be able to buy the product at a lower price in one market
and sell it at a higher price in another market where its price is higher
• Communication should not be possible between/among the markets
• Elasticity of demand must be different between/among the markets
Basis of market separation
Refers to what firms use to separate market. Includes:
a) Geographical
Goods are sold in different prices in different markets
b) Income
Different prices can be charged to different class of consumers depending on their
level of income e.g. in hospitals
c) Time
A seller may charge different prices during peak and off-peak periods e.g. in
matatus.
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Sources of monopoly power
• Control of an important input in production

Firms may become monopolies by controlling an important raw material, factor of
production or technical knowhow of producing a particular product
• Ownership of production rights

If production rights such as patents rights, copyrights and patents belong to one
supplier, this supplier may grow to become a monopoly. The government may also
encourage a monopoly by giving production license to a specific firm
• Existence of internal economies of scale

Existence of Internal economies may enable a firm lower its cost of production to
earn more profits and keep expanding to a point where other firms cannot compete
with it.
• Size and nature of the market

The market may be such that it can only be served by a single seller to avoid running
at losses
• High costs of entering the market

It may be expensive for other firms to enter a certain market due to high costs of
transportation and advertising incurred. This will eliminate competition resulting in a
monopoly
• Business combinations
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Some businesses may merge their operations in order tom operate as one. This will
result in the formation of a very big firm that is able to eliminate competition and
control the entire market
• Application of restrictive practices

A firm may employ unfair practices that will eliminate other firms from the market
e.g. lowering price to eliminate competition and later increasing price once the
competition has been eliminated.
• High capital requirement

Sometimes amount of capital required to start a particular business may be too much
for many firms to afford. A firm that can afford this start-up capital will therefore
become a monopoly.
Advantages of monopolies
a) It provides standard goods hence gives equal benefits to consumers
b) It provides price and output stability
c) The firm is able to produce in large scale thus enjoying economies of scale
d) Provides revenue to the government by taxing the huge profits made by
monopolies
e) The firm can use its huge profits to carry out research
f) There is no wastage of resources either in product differentiation or in
advertising because there is no competition
g) The firm can distribute its products to all parts of the country
h) The firm is able to spend its surplus funds on research and development hence
introducing new production techniques
Disadvantages of monopolies
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a) Monopolies may charge high prices hence exploiting consumers

b) Due to lack of competition, monopolies can produce substandard/inferior
quality goods
c) Causes unequal distribution of income
d) Too much monopoly power may influence the government to adopt
unfavorable policies
e) Denies consumers a variety of goods and services
f) Monopolists may overlook some markets which are less profitable hence
denying consumers in those markets access to goods and services
g) Monopolists may cause artificial shortages so as to manipulate prices
Differences between monopolies and perfect competition markets
Monopoly Perfect competition
There is government interference There is no government
interference
There is only one seller There are many sellers
Products are differentiated Products are identical
There is price discrimination Common price prevailing
Entry into the market is restricted There is freedom of entry into the
market
Abnormal profits are made in the Normal profits are made in the
long run long run
Control of monopolies
The government can control monopolies by using the following methods
a) Using price controls to control their selling prices
b) Taxing monopoly’s profits and redistributing the money to citizens in the form
of service provision
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c) Reducing barriers to entry into monopoly markets so as to introduce

competition
d) Breaking large monopoly firms into smaller business units under different
management
e) Forming monopoly commissions to oversee and control the operations of
monopolies
f) Nationalization of the firm i.e. the government can take over the firm and start
supplying products at reasonable prices
g) Refusing to license monopolies
MONOPOLISTIC COMPETITION MARKET
This is a market that combines features of a perfect competition and a monopoly. In
this market, there is a large number of buyers and sellers dealing in a similar product
which is differentiated e.g. toothpastes, bread etc. Methods used in differentiating
products may include:
• Branding
• Wrapping
• Packaging
• coloring
Its features
• There are many buyers and sellers who act independently of one another
• Products are differentiated making each firm enjoy some level of monopoly
• There is freedom of entry and exit
• Sellers and buyers have a perfect knowledge about the market
• The firm is a price maker i.e. it is able to determine its selling prices
Advantages of monopolistic competition
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a) It provides a variety of consumer goods from the many brands

b) It provides information to consumers through aggressive advertising
c) It encourages innovation among the competing firms
Disadvantages of monopolistic competition
a) There is a duplication of resources in producing similar goods
b) There is wasteful advertising
c) Firms operate at excessive capacity in the long run
d) Expenditure on advertising increases the cost of production
e) Inefficient firms may survive in business due to differentiation
f) Competition prevents standardization
Differences between monopolistic competition and perfect competition markets
Monopolistic competition Perfect competition
Products are differentiated Products are homogeneous
Demand curve is downward Demand curve is horizontal
sloping
The firm is a price maker No single firm decides the price
Differences between monopoly and monopolistic competition markets

Monopoly Monopolistic competition
Has one seller Has many sellers
Products sold have no close Products sold have close
substitutes substitutes
Firms make abnormal profits in the Firms make normal profits in the
long run long run
Entry into the market is restrictedThere is freedom of entry into the
market
There is no competition for market Firms compete for market
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Similarities between monopoly and monopolistic competition

a) Both have downward sloping demand curves
b) Both are price makers
OLIGOPOLY MARKET
This is a market with very few firms which are very big to control a large percentage
of the market e.g. nation and standard newspapers.
Types of oligopoly
1) Duopoly
This is an oligopoly with only two firms e.g. BAT and mastermind tobacco Kenya
2) Perfect or pure oligopoly
This is an oligopoly that is made up of firms dealing in identical products e.g. firms
selling petroleum products
3) Imperfect or differentiated oligopoly
This is an oligopoly that is made up of firms dealing in close substitutes i.e. similar
products that are made to appear different e.g. bread
4) Collusive or cooperative oligopoly
This is an oligopoly where firms cooperate with each other in determining price or
output or both
5) Non-collusive or non-cooperative oligopoly
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This is an oligopoly market where firms compete with each other.
Price leadership
This is a situation where one or two of the firms in an oligopolistic market greatly
influences the market price. They set the price first and the other firms become price
takers
ASSUMPTIONS OF OLIGOPOLY
a) firms are profit maximizers
b) if one firm increases its selling price, the other firms won’t follow suit
c) if one firm decreases its selling price, the other firms are likely to follow suit
because they don’t want to lose their market
FEATURES OF OLIGOPOLY MARKETS
a) Products can be identical or differentiated
b) There is rivalry among firms
c) Composed of few but large firms
d) There is interdependence among firms i.e. actions of one firm affects the
actions of other firms
e) There is non-price competition i.e. firms tend to follow the fixed price for a
long period of time
f) No freedom of entry of new firms into the market. This is achieved through the
use of barriers such as patents and high capital requirements
g) High advertising and selling costs due to need for a lot of product promotion
h) Firms tend to work as a group in decision making so as to protect the interest of
all firms.
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The kinked demand curve
The price charged by the firm is at point P. If price increases beyond P, there will a
big loss in amount of quantities demanded since customers will shift to buying from
competitors
Lowering the price below P may lead to a very small increase in sale since
competing firms are also likely to lower their prices
This explains why prices in oligopoly markets are always stable
NOTE: one of the major limitations of the kinked demand curve is the fact that it
doesn't explain how price was arrived
Differences between oligopoly and perfect competition
Oligopoly Perfect competition
Composed of few but large sellers Composed of very many sellers
There is inter-dependency among Firms make decisions
firms in decision making independently
Products have close substitutes Products are homogeneous
(identical)
There is no freedom of entry into There is freedom of entry into the
the market market
There is government interference There is no government
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interference
Firms have a kinked demand curve Firms have a perfectly elastic
demand curve
TOPIC 6: CHAIN OF DISTRIBUTION

CONTENTS
• Introduction
• Channels of distribution.
• Roles played by intermediaries in the distribution chain
• Factors influencing the choice of a distribution channel
INTRODUCTION
Distribution refers to the movement of goods and services from the production point
to the consumption point
CHANNELS OF DISTRIBUTION
Channels of distribution are the paths that products follow from the producers to the
consumers.
Traders and organizations which play a role in delivering goods to the consumer are
known as middlemen or intermediaries
The more the middlemen in a distribution chain the more the expenses and hence the
higher the market price
Types of middlemen
a) Merchant traders
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These are traders who buy goods and services for resell e.g. whole salers and
retailers
Their features include:
• They buy and sell goods on their own behalf

• They earn profit as a reward for their services
• They take business risks. They can also suffer losses in case their
business fails
• They work independent of producers whose goods they deal in
b) Mercantile traders
These are traders who represent other traders in the exchange of goods and services
e.g. agents, brokers, factors etc.
Their features include
• They do not buy or sell goods on their own behalf

• They act on behalf of producers and other traders
• They earn a commission for their services
• They do not take business risks
• They do not work independently i.e. their activities are controlled by those who
hire them (principals)
TYPES OF CHANNELS OF DISTRIBUTION
The following are the most common distribution channels:
a) Channels for distributing local agricultural produce
b) Channels for distributing locally manufactured goods
c) Channels for distributing imported goods
1) Channels for distributing local agricultural produce
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There are six channels which can be used to distribute local agricultural produce.
They include
Channel 1: FARMER----cooperative----marketing board----wholesaler----
retailer----CONSUMER
The farmer sells the product through a producer cooperative society. The cooperative
society will sell the product to the marketing board. The marketing board will sell to
the wholesaler who will sell to the retailer. The retailer sells the product to the final
consumer
Channel 2: FARMER----retailer----CONSUMER
The retailer can buy directly from the farmer and sell to the final consumer
Channel 3: FARMER----wholesaler----retailer----CONSUMER
Large scale wholesalers can buy goods directly from farmers and later sell to
retailers who will finally sell to consumers
Channel 4: FARMER----CONSUMER
Farmers may take the product to the market and sell directly to the consumer.
products sold through this channel are relatively cheap
Channel 5: FARMER----marketing board----wholesaler----retailer----
CONSUMER
Farmers can sell to the marketing board who sells the product to the wholesaler. The
wholesaler sells to the retailer who in turn sells to the consumer
Channel 6: FARMER----marketing board----retailer----CONSUMER
Farmers can sell to marketing boards from which retailers can buy the product and
sell it to the consumer
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2) Channels for distributing locally manufactured goods

The following seven channels can be used to distribute locally manufactured goods
Channel 1: LOCAL MANUFACTURER----wholesaler----retailer----
CONSUMER
Wholesalers can buy in large quantities from the manufacturer and later sell in small
quantities to retailers who later sell the product to the consumer
Channel 2: LOCAL MANUFACTURER----CONSUMER
The consumer can buy directly from the manufacturer
Channel 3: LOCAL MANUFACTURER----wholesaler----CONSUMER
The manufacturer can sell in large quantities to wholesalers who later sell the
product to consumers
Channel 4: LOCAL MANUFACTURER----retailer----CONSUMER
Large scale retailers can buy directly the from manufacturer and sell to consumers
Channel 5: LOCAL MANUFACTURER---government agent---wholesaler---
retailer---CONSUMER
The government may appoint an agent who buys goods from manufacturers and sells
them to wholesalers. The wholesaler sells to retailers who later sell goods to
consumers. The role of the government agent is to ensure that goods are equally
distributed to all consumers and that consumers are not exploited through high
prices.
Channel 6: LOCAL MANUFACTURER----government agent----wholesaler----
CONSUMER
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The government agent may sell the product to the wholesaler who later sells to the
consumer
Channel 7: LOCAL MANUFACTURER----government agent----retailer----
CONSUMER
The government agent may buy from the manufacturer and sell to the retailer who
finally sells to the consumer
3) Channels for distributing imported products
There are six channels that can be used to distribute imported goods. They include:
Channel 1: FOREIGN PRODUCER----agent----wholesaler----retailer----
LOCAL CONSUMER
A foreign producer may appoint an agent in the importing country whose main
responsibility is to look for market. The agent then sells to the local wholesaler who
later sells to the local retailer. The local retailer finally sells to the local consumer.
Channel 2: FOREGN PRODUCER----wholesaler----retailer----LOCAL
CONSUMER
The local wholesaler may buy directly from the foreign producer and sell to the local
retailer who later sells to the local consumer
Channel 3: FOREIGN PRODUCER----LOCAL CONSUMER
The foreign producer can sell directly to the local consumer
Channel 4: FOREIGN PRODUCER----foreign producer’s representative----
wholesaler----retailer----LOCAL CONSUMER
The foreign producer may appoint his own representative in the importing country
who sells goods on his behalf. This representative may sell goods to the local
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wholesaler who later sells to the local retailer. The local retailer finally sells to the
local consumer
Channel 5: FOREIGN PRODUCER----wholesaler---- LOCAL CONSUMER

The foreign producer may sell goods to the local wholesaler who in turn sells to the
local consumer
Channel 6: FOREIGN PRODUCER----retailer----LOCAL CONSUMER
Foreign producer may sell to the local retailer who will in turn sell to the local
consumer
Activities carried out during distribution of goods and services
a) Handling
b) Storage
c) Packing/packaging
d) Transportation
e) Grading
f) Blending
g) Sorting
h) Breaking the bulk
Expenses incurred during distribution
a) Storage costs
b) Transport costs
c) Advertising costs
d) Salaries and wages
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e) Packing and blending costs

f) Insurance costs
CHANNEL LENGTH
Channel length refers to the number of intermediaries involved in the distribution or
movement of goods from the producer to the final consumer’
The more the number of intermediaries in the channel, the longer the channel.
The length of the channel affects the final price of the product. Therefore the longer
the channel, the higher the selling price and vice versa.
Advantages of a short channel
a) The price of the goods is lower
b) Goods reach the consumer faster
c) The producer is able to have direct contact with his/her customers
d) Goods reach the consumer while still fresh
e) Producers are able to get feedback from consumers
Disadvantages of a short channel
a) Distribution of goods is limited to a small area
b) Producers bear all the risks involved in distribution
c) Limited profits since goods don’t reach a wider market
d) Limited market raises the cost of production
Advantages of a long channel
a) Goods reach wider markets
b) Enables the producer to pass some risks tom middlemen
c) It is convenient to producers
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Disadvantages of a long channel

a) Prices of goods are higher
b) It causes delays
c) The producer has no direct contact with the customers.
d) Perishable goods will go bad before reaching the consumer
e) There are increased chances of damage to the goods due to handling
Advantages of buying directly from the producer
a) Goods may be bought at relatively lower prices
b) The buyer may be provided with transport by the seller
c) The buyer may be allowed cash discount
d) The buyer may be allowed to buy on credit
e) The buyer has the opportunity of selecting best quality items
FACTORS INFLUENCING THE LENGTH OF A DISTRIBUTION
CHANNEL (Number of intermediaries in the channel of distribution)
a) Producer’s marketing skills
A producer with good marketing skill will prefer selling directly to consumers
resulting in a shorter channel of distribution. On the other hand, a producer with poor
marketing skills will prefer selling through intermediaries resulting in a longer
channel of distribution.
b) Financial capability of the producer

A producer with adequate finances in invest in transport will sell directly to
consumers resulting in a shorter channel of distribution. On the other hand, a
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producer with inadequate finances will involve intermediaries in order to distribute

his/her products to consumers resulting in a longer channel of distribution
c) Nature of the product
Low valued goods with lower profit margins require high sales volume compared to
high valued goods. As such these goods require to be distributed to wider markets
hence a longer channel is used.
Perishable goods unlike durable goods require shorter channels in order to reach the
consumer when still fresh
d) Availability and geographical size of market
A wider distribution of consumers require a longer channel unlike when consumers
are concentrated near the producer
e) Availability of middlemen
Where there are enough middlemen, a longer channel may be used unlike when there
are few middlemen.
ROLES PLAYED BY INTERMEDIARIES IN THE CHAIN OF
DISTRIBUTION
a) Reducing the number of transactions between producers and consumers
Intermediaries help in reaching potential consumers on behalf of the producer
thereby conducting transactions on behalf of the producer
b) Breaking the bulk
Intermediaries play an important role in buying goods in large quantities from
producers and selling in small quantities to consumers
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c) Accumulating bulk
Some intermediaries may accumulate bulk by buying goods in small quantities
from several producers which they later sell to consumers who demand goods in
large quantities. Such intermediaries are known as assemblers
d) Risk taking
Intermediaries relieve the producer of any risks associated with the movement of
goods to the consumer. This may include the risk of damage to the goods.
e) Providing finance
Intermediaries provide finances which facilitate the movement of goods to the
consumer
f) Passing information
Intermediaries link consumers and producers. As such they gather important
information concerning market demand to producers as they also inform consumers
on the type of goods available
g) Product promotion
Intermediaries advertise goods on behalf of producers thereby promoting sales
h) Transport and storage
Intermediaries may store goods in their warehouses before taking them to the market.
When demand increases they transport these goods to the market.
i) Providing varieties
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Intermediaries may buy different varieties of goods from various producers which
they sell to consumers
j) Availing goods to consumers
Intermediaries make goods accessible to consumers apart from ensuring steady
supply of goods
Reasons for eliminating intermediaries (selling directly to consumers)
a) When the market is localized/a small market such that the producer is able to
sell directly to consumers
b) When products require long period of negotiation before they are sold
c) When products require specialized after-sale-services
d) When market competition is high hence the producer sells directly to consumer
so as to counter market competition by selling at lower prices
e) When products are perishable
f) When the producer is producing in small scale
g) When customers order products directly from the producer
h) When the producer is financially capable of opening his/her own retail outlets
i) When the government requires certain products to be sold directly to
consumers
j) When products are designed to specific customers’ specifications
k) When there is need to make the product affordable to the consumer
l) When the producer wants to have personal contact with consumers.
m)When the producer wants to take charge of the marketing of his/her products
Circumstances under which the wholesaler becomes essential in the channel of
distribution
a) When the market is spread out for the producer to reach the consumers
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b) When the producer does not have enough finances to set up his/her own
distribution points
c) Where the infrastructure is poor hence hindering the distribution of goods
d) Government policy
e) Where the producers requires finances which will be provided by the
wholesaler
f) Where the producer lacks transport facilities which can be provided by the
wholesaler
g) Where the producer wants to promote sales hence uses the wholesaler to
advertise
h) Where the producer wants to get information about the market
Effects of eliminating wholesalers from the distribution chain
a) Producers/manufacturers will be forced to set up their own distribution centres,
depots or warehouses which are an additional cost to the producer
b) The cost of distribution may be increased and the effects passed over to the
consumer in form of high selling prices
c) The retailer will have to go to the producer for the goods which will be an
additional cost to the retailer
d) The producers will have to break the bulk because the retailers may not be able
to buy in large quantities
e) Retailers may be forced to pay for the goods in cash requiring them to have
more working capital
f) Producers may be forced to extend credit facilities to retailers which requires
more capital
g) Results in reduction in specialization due to increased functions
h) Market prices may fluctuate due to unsteady flow of goods
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FACTORS INFLUENCING THE CHOICE OF A DISTRIBUTION

CHANNEL
Before deciding on the channel of distribution, the following factors need to be
considered:
a) Nature of the product

Before deciding on the distribution channel, one has to consider whether the products
are perishable, durable or bulk. Perishable goods unlike durable goods require a
shorter channel in order to reach the consumer as soon as possible. Bulky goods
require a shorter channel to reduce transportation and handling costs
b) Nature of the market
When consumers are closer to the producer, a shorter channel can be used but when
they are spread out a longer channel involving many intermediaries is used in order
to reach these consumers
c) Role of intermediaries
The role played to be played by intermediaries may determine the distribution
channel. For example if the producer requires branding to be done on the goods, he
will go for that intermediary who can do brand the goods to his requirement.
d) Resources and the size of a firm
Smaller firms unlike large firms produce goods in small scale. Such goods can only
serve a small market hence a shorter channel is required to distribute those goods. On
the other hand small firms unlike large firms have fewer resources that can only
enable them produce in small scale which can only serve smaller markets hence they
require a shorter channel of distribution. Alternatively bigger firms have enough
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finances to enable them set up their own retail outlets from where they sell directly to
consumers.
e) Level of market competition
When a firm wants to avoid direct market competition with the competing firm, it
will use a channel different from the one used by the competitor. On the other hand
when the firm wants to compete directly with the competitor, it will choose a channel
similar to that of the competitor
f) Government policy
The government may abolish the use of certain channels in order to protect
consumers from exploitation. This means a firm will have to use those channels
which are approved by the government.
g) Marketing risks
To avoid risks involved in distribution, a firm will sell its goods through middlemen.
Therefore the more the risks, the more the middlemen
h) Scale of production
A firm that producers in large scale will require the services of middlemen to
distribute its products to consumers. Such a firm will use longer channels of
distribution for its products.
TRENDS IN DISTRIBUTION
a) The development of e-commerce has reduced the length of distribution
channels
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b) The development of the concept of one-stop shopping e.g. shopping from the
supermarkets and hypermarkets have reduced channel lengths
c) The increasing developments of modern forms of hawking which bring
products closer to consumers hence reducing channel length
d) The development of mail order services for selling products have reduce the
length of the distribution channel
e) Orders are made over the internet
f) Conversion of premises into large shopping malls.
TOPIC 7: NATIONAL INCOME
CONTENTS
• Introduction
• Terms used in national income
• The circular flow of income
• Injections and withdrawals
• Equilibrium national income
• Measures of national income
• Uses of national income statistics
• Factors which influence the level of national income
INTRODUCTION
National income refers to the total income earned by owners of factors of production.
Incomes earned by factors of production may constitute:
• Rent
• Salaries/wages
• Interest
• Profit
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National income is measured by the government after a given period of time usually
one year
TERMS USED IN NATIONAL INCOME
a) Gross domestic product (G.D.P)
G.D.P refers to the total money value of all goods and services produced within a
country over a given period of time. Note that G.D.P excludes incomes from abroad
b) Net domestic product (N.D.P)
N.D.P refers is equal to G.D.P less depreciation on capital goods used to produce
goods and services
N.D.P=G.D.P-Depreciation
c) Gross national product (G.N.P)
G.N.P refers to the monetary value of all goods and services produced by citizens of
the country both from within the country and from overseas countries
G.N.P=G.D.P-Net income from abroad
Net income from abroad=Exports-Imports
d) Net national product (N.N.P)
N.N.P refers G.N.P less depreciation on capital equipment used in production
N.N.P=G.N.P-Depreciation
e) Per capita income
Per capita income refers to the average income per head per year in a country. It is
calculated as follows:
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Per capita income=National income ÷ Total population

Limitations of per-capita income (National income) as a measure of the
standard of living
a) Per- capita income may be computed using inaccurate population data
b) Per-capita income may be computed from inaccurate national income data
c) There are inequalities in income distribution i.e. few people with high incomes
and very many people with low incomes
d) Improper government expenditure i.e. spending most income on matters which
do not directly improve the living standards of citizens
e) National income may have been earned through strain and hard work.
Therefore even if Per-capita income is high, it does not show better living
standards
f) High per-capita income may be obtained at the expense of leisure
Circumstances when per-capita income may be used as a good indicator of the
standard of living
a) When income is evenly distributed
b) When actual statistics on population are available
c) When output per year is based on essential and final goods and services
consumed by the masses
d) When national income is in real terms
f) Personal income (P.I)
This is the sum of all incomes received by the residents of a country during a year
g) Disposable personal income (D.P.I)
This is the income that an individual or a resident of a country receives after paying
direct taxes to the government
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THE CIRCULAR FLOW OF INCOME

Refers to the movement of money in an economy. (Illustrate)
Households spend their money by buying goods and services produced by firms.
Firms on the other hand spend their money on paying for factors of production
provided by households
Note that for the circular flow of income to exist, the following conditions should be
met:
• There are only two players in the economy i.e. firms and households
• There is no foreign trade
• There is no government interference
• Firms spend all their incomes on factors of production
• Households spend all their incomes on goods and services
• All goods and services produced are bought
• A person or a firm cannot be a producer and a consumer at the same time
FACTORS AFFECTING THE FLOW OF NATIONAL INCOME
In the circular flow of income illustrated above, we are assuming that consumers
spend all their money on buying goods and services whereas firms spend all their
money on paying for factors of production. In reality this may not be the case since
consumers save part of their income while firms pay part of their income as tax. The
following factors will therefore affect the amount money flowing between firms and
households
a) Savings
Savings refers to that part of income that is kept for future use. Savings by
households reduces the amount of money reaching firms hence reducing amount of
money in the circular flow
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b) Government
The government may also influence the amount of money changing hands between
firms and households in two ways
• Taxation: taxation reduces amount of money available for spending by firms

therefore reducing amount of money in the circular flow
• Government expenditure: government expenditure introduces more money to
the economy. This may be through giving subsidies, buying products from
firms or paying salaries to consumers. Government expenditure will therefore
increase the amount of money in the circular flow.
c) Investment
Investments refer to amount spent by firms on buying capital goods such as
machines from households. Investments therefore ensures additional incomes for
households hence increasing money in the circular flow
d) Foreign trade
Foreign trade constitutes exports and imports. Exports earn income to the country;
they therefore increase money in the circular flow. On the other hand imports
withdraw money from the economy therefore reducing money in the circular
INJECTIONS AND WITHDRAWALS
• Injections: Refers to factors that introduce additional moneys in the circular

flow of income. They constitute:
a) Investments
b) Government expenditure
c) Exports
• Withdrawals: Refers to those factors which reduce the amount of money in
the circular flow of income. Also known as leakages. They constitute:
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a) Savings
b) Taxes
c) Imports
NATIONAL INCOME EQUILIBRIUM
Equilibrium in national income is achieved when total injections equal total
withdrawals.
At this point, the economy is at balance
National income equilibrium equation can therefore be given as:
S+T+M=I+X+G
Where:
S=savings
T=taxes
M=imports
I=investments
X=exports
G=government expenditure
MEASURTEMENT OF NATIONAL INCOME
National income can be measured using either of the following methods
• Expenditure approach
• Income approach
• Output approach
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1. Expenditure approach
Using this approach, national income is arrived at by adding all expenditures
incurred in the economy on final goods and services
NOTE: Final goods and services refer to those goods and services which are meant
for final consumption i.e. not for use as raw materials
Using this approach therefore, the following expenditures are added to arrive at
national income:
• Consumption expenditure: Refers to expenditure by consumers. Denoted

using letter C
• Investment expenditure: Refers to expenditure by firms. Denoted using
letter I
• Government expenditure: refers to expenditure by the government.
Denoted using letter G
• Net expenditure on exports: refers to total expenditure incurred when
exporting goods. Represented by (x-m)
(x-m) means exports – imports
This approach gives national income at market prices
NOTE:
Expenditure approach calculates national income by adding the market prices at
which different goods are bought; these market prices can be influenced by subsidies
and taxes. The market price of products may also be influenced by depreciation.
When calculating national income using expenditure approach, taxes, subsidies and
depreciation has to be taken into consideration
Therefore national income using expenditure approach is given as follows:
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National income=C+I+G+(x-m) +subsidies-taxes-depreciation

Problems associated with expenditure approach
a) Lack of expenditure records especially in the private sector
b) Expenditure in the subsistence sector can only be estimated since no accurate
records are available
c) Difficulty in distinguishing between final and intermediate expenditures
d) Double counting of expenditures may result
e) Changes in foreign exchange rates may affect valuation of imports and exports
f) Incorrect values of government expenditure
2. Income approach
This approach sums up all incomes received by those individuals who take part in
the production of goods and services (personal income) and the income received by
the government on its investments (public income).It gives national income at factor
prices.
Incomes received by individuals constitute:
• Rent
• Interest
• Wages
• Profit
Incomes received without working are excluded from the calculation of national
income. These incomes are known as transfer payments are may include:
• Insurance compensations
• Pension payments
• School fees
• Bursary allocations and grants to needy students
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• Grants from friends

• Students’ pocket money
Transfer payments if included may constitute double counting
Therefore national income using income approach is given as follows:
National income=Personal income + public income + retained profit + appreciation -
transfer payments – depreciation
Problems associated with income approach
• Difficulty in identifying and value amount constituting transfer payments so as

to exclude them from the calculation of national income
• Lack of accurate data on incomes since businesses will state lower incomes in
order to pay less taxes
• Changes in prices of commodities affects profits earned by firms
• Difficulty in identifying incomes from illegal activities such smuggling which
is to be excluded from national income
• It is difficulty to obtained statistics on the total earned by the government
3. Output (value added) approach
Using this approach, national income is arrived at by adding the values of all final
goods and services produced by firms in a given year
National income may also be arrived at by adding the value added on different
products for example if A sells a product to B at Ksh 40,B sells it to be at Ksh65, and
C sell it to D at Ksh 90,then value added Is calculated as follows:
Value added by A = Ksh40
Value added by B = Ksh (65-40) = Ksh 25
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Value added by C = Ksh (90-65) = Ksh 25

Total value added (national income) = Ksh 90
Note: Ksh 90 equals total output
The value of goods and services produced from abroad is also included in the
calculation of national income. Therefore using this approach, national income is
given as follows:
National income=GDP+(x-m)-depreciation
Problems associated with the output approach
• Lack of accurate output figures especially in the private sector

• Difficulty in identifying value of illegal activities to be excluded
• Difficulty in valuing government output which does not reach the market
• Changes in market prices making valuation difficult
• Problems in differentiating between final and intermediate products
• Difficulty in valuing output from the subsistence sector
Reasons why high national income may not lead to high living standards
a) Income distribution may be uneven with so much of it in the hands of very few
citizens and the little being shared by very many citizens
b) Incorrect statistics might have been used to compute national income resulting
in wrong national income figures
c) Higher national income may have cost the labour force their leisure time
d) Higher national income may have been obtained after working under
unfavourable working conditions
e) Higher national income might have been realized from activities that were
detrimental to the environment or health of the worker
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f) Higher national income might have been obtained from illegal activities
g) Rising levels of inflation may limit the purchasing power of the citizens despite
increase in national income
Reasons for disparities in income distribution among citizens in a country
a) Disparity in natural resource endowment where some parts of the country have
more natural resources than others
b) Corruption which results in outright stealing of a country’s resources that are
meant to benefit everyone
c) Disparity in access to education i.e. some people have limited access to
education than others. Such people are not able to access employment
opportunities
d) Differences in individual and personal talents
e) Rampant use of nepotism to secure good job opportunities
f) Some people are mare politically advantaged than others
g) Some get their wealth through illegal means e.g. robbery
USES OF NATIONAL INCOME STATISTICS
National income statistics refers to the information gathered from different sources
of national income. This information has the following uses:
a) Indicates the standard of living
Standard of living refers the quality of life of people in an economy. Standard of
living is influenced by the levels of income. The level of national income therefore
has a direct impact on standards of living in the sense that the higher the national
income, the better the standard of living and vice versa.
b) Enables comparison of living standards in different countries
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Levels of national income are used to compare which country is more developed and
therefore has better living standards than the other .A country with high national
income level is assumed to enjoy better living standards. Sometimes however high
national income levels may not reflect improved standards of living due to the
following factors:
• Differences in currency rates

• Differences in goods and services used to compute national income in different
countries
• Differences in equality in income distribution
• Differences in needs, tastes and preferences
c) Facilitates the assessment of economic performance over time
By comparing national income levels at different periods, information is provided on
the period of the year the economy was doing well
d) Facilitates economic planning
The government will use information on national income to come up with plans on
how grow the economy
e) Enables entrepreneurs make investment decisions
Investors will use information on national income level to make decisions on which
markets and sectors to invest in. This is because a higher national income means
more per capita incomes hence high market demand and vice versa. Information on
national income also enables investors know which sectors in the economy are doing
better than others
FACTORS INFLUENCING THE LEVEL OF NATIONAL INCOME
a) Supply of labour
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Labour supply refers to the quantity and quality of a country’s workforce. The higher
the number of workers, the higher the output hence more national income. On other
hand, with skilled labour, high quality goods and services which generate higher
national incomes will be produced
b) Amount and quality of capital
Capital refers to tools and equipment used in production. When capital is of high
quality, output will be high hence more national income is earned unlike when poor
quality goods are used
c) Level of entrepreneurship
Availability of entrepreneurs who have the ability to organize the factors of
production in the right proportions to produce goods and services will influence the
level of national income .A country with efficient entrepreneurs is likely to produce
more and increase its level of national income as compared to a country with
inefficient entrepreneurs.
d) Availability of land
Land contains all the natural resources required in production, therefore a country
with enough land will produce more and increase its level of national income
e) Level of technology
Technology refers to the techniques used in the production of goods and services.
The higher the level of appropriate technology, the higher the output and hence
higher national incomes
f) Political stability
A country with peace and stability is likely to encourage investors who will
contribute greatly in increasing the level of national income
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g) Attitude of citizens towards work

A country with hardworking citizens will have high levels of national income
compared to a country with lazy citizens
h) Size of the subsistence sector
Subsistence sector refers to those who produce goods for consumption purposes.
When the subsistence sector is large, amount of goods and services produced for sale
will be low hence reducing the level of national income
i) Level of foreign investment
Level of foreign investment refers to the number of foreign investors in a country.
Increase in foreign investment therefore increases production thereby raising the
level of national income
REASONS WHY COUNTRIES WITH EQUAL NATIONAL INCOME
LEVELS HAVE DIFFERENT LEVELS OF DEVELOPMENT
a) Inequality in the distribution of income
A country where national income is equally distributed among its citizens will have
better standards of living than a country where incomes are unequally distributed
b) Differences in tastes
Some tastes and preferences are costly than others. A country whose citizens desire
expensive items which they don’t produce will spend a lot of its income importing
such income resulting in poor living standard compared to a country whose citizens
desire cheaper items
c) Differences in money values
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A country with a devalued currency is likely to encourage exports which in turn

increases the level of national income resulting in higher living standards. On the
other hand, a country whose currency is highly valued is likely to encourage imports
which in turn drains its national income resulting in poor living standards
d) Different patterns of expenditure
A wasteful country will experience poor living standards as compared to a country
whose expenditure is not wasteful
e) Population size
Highly populated countries experience poor living standards due to low per-capita
incomes as compared to countries with low population
TOPIC 9: POPULATION AND EMPLOYMENT
CONTENTS
• Introduction to population
• Basic concepts in population
• Introduction to Employment and unemployment
• Types of unemployment
• Causes of unemployment
• Solutions to unemployment problem
POPULATION
Population refers to the number of people living in a particular place at a given time.
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Details on population are obtained through a census. A census is an exercise which

is carried out to determine the number of people living in a particular place
Population is very important in business because it is the source of market for goods
and services produced. Population also provides factors of production such as labour,
entrepreneurship etc.
BASIC CONCEPTS IN POPULATION
Most common concepts in population are:
• Population growth rate

• Optimum population
• Under population
• Overpopulation
• Ageing population
• Young population
• Declining population
• Population structure
1. POPULATION GROWTH RATE

Population growth refers to the rate of change in population with time. This time is
usually one year. Population growth rate may be influenced by three factors, namely;
• Birth rate
• Mortality rate
• Migration
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a) Birth rate
Birth rate is the number of live births per year per 1000 of the population
It is also known as crude birth rate and calculated using the formula
Crude birth rate = (number of live births ÷ total population) × 1000
Birth rate is greatly influenced by fertility rate. Fertility rate refers to rate at which
women in the child bearing age give birth in a given region. Fertility rate is
influenced by the following factors:
• The age and sex structure of the population

• Level of barrenness
• Social and cultural attitudes towards child bearing
• Social significance of children to parents
• The rate of marriages in the population
• Ignorance on demerits of large families
• Government policies which may encourage or discourage large families e.g.
free primary education may encourage large families whereas family planning
discourages large families
Factors leading to high birth rates
• Cultural practices which regard children as a source of labour and financial

security in old age
• Early marriages which may prolong a woman’s productive life
• Desire to have many children as a precaution in case some of the children die
• Ignorance on family planning methods
• Religious beliefs which may encourage large families
• Desire to have a male child in the family
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Factors leading to lower birthrates
• Delayed marriages due to prolonged school life

• Desire for a good living standard for the family will make go smaller families
which they can provide for
• Consideration of a small family as being fashionable
• Declining mortality rates which increases chances of child survival
• Introduction pension schemes has removed the concept of having to regard
children as financial security in old age
b) Mortality/death rates
Mortality refers to the number of deaths in a given region at a given time
Mortality rate is therefore the rate of death per 1000 of the population. It is also
known as the attrition rate and is given by the formula
Mortality rate= (number of deaths ÷ total population) × 1000
Mortality rates are influenced by two major factors:
• Level of health standards

• Level of nutrition
c) Migration
Refers to the movement of people from one place to another. It has two components:
• Immigration: refers to the movement of people into an area

• Emigration: refers movement of people from an area
The difference between immigration and emigration is the net immigration.
Therefore
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Net immigration rate = immigration rate – emigration rate

NOTE: Population growth rate = crude birth rate – death rate + net immigration rate
2. OPTIMUM POPULATION
Refers to that level of population where the number of people is in balance with
available resources (illustrate)
At optimum population resources are well utilized hence living standards are high
NOTE:
• Optimum population is the population that achieves highest living standards

using the available resources
• It is a population which enables efficient utilization of resources
• Population below optimum population means resources are under-utilized
leading to low living standards
• Population above optimum population means resources are over-utilized
leading to low living standards
3. UNDER-POPULATION
This the population which is below the available resources such that the available
resources are under-utilized (illustrate)
NOTE: a country can have a higher population but as long as the resources in the
country are under-utilized; the country is considered under populated
Resources in this case refers to factors of production such as land, labour, capital and
entrepreneurship
Factors that may lead to under population may include:
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• Low birth rate

• High rate of emigration
• Emergence of natural calamities such as war and diseases
Disadvantages of under-population
a) Limited supply of labour
A small population may not make available adequate number of workers required to
facilitate production activities.
b) Limited market
With a small population, demand for goods and services will decline. This will
discourage investments
c) Under-utilization of resources
Due to limited labour supply, most resources in under populated countries are under-
utilized. This will hinder the economic growth of the country
d) High transport costs

People in under populated regions are scattered all over. This increases the cost of
travelling from one place to another, it therefore becomes expensive to transport
goods and services to the people in some regions.
e) Lack of specialization
Limited labour supply in under populated countries makes specialization and
division of labour impossible. This leads to production of poor quality goods and
services
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f) Slow rate of economic growth and development

Underutilization of resources in under populated countries will lead to less national
income and per capita incomes which will result in poor standards of living
4. OVERPOPULATION
Refers to the population which is higher than the available resources such that
resources are overstretched.
Over population is a problem since it may lead to:
• Unemployment
• High dependency ratios
• Poor and insufficient housing
• Insufficient medical and educational facilities
(Illustrate)
Advantages of overpopulation
a) Widens the market
With a large population demand for goods and services increases encouraging
investments
b) Adequate labour supply
The number of people willing to work in regions with large population is high,
therefore firms are able to hire qualified staff that will help in increasing productivity
c) Better utilization of resources
Available resources are optimally utilized. This will increase productivity
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d) Encourages creativity
Competition among individuals to earn a living makes them very creative. This
creativity will finally lead to introduction of new production methods
e) Encourages investments
Large population creates high demand for products. To meet this demand, new
businesses will be created while existing businesses will expand
f) Promotes mobility of labour
Overpopulation increases geographical mobility of labour as the unemployed people
are forced to move to different regions in such of jobs
Disadvantages of overpopulation
a) Strains social amenities
Excess demand on social amenities such as schools and hospitals may lead to
congestion and poor service delivery
b) Lowers standard of living
An increase in population with constant national income may lead to lower per capita
incomes results in a decline in the standards of living
c) Encourages rural-urban migration
Overpopulation forces people to move to urban centres to look for jobs. This results
in congestion in urban centres leading to social problems such as high crime rates,
poor sanitation etc.
d) Results in high dependency level
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With over population there is a high number of people who will be unemployed. The
unemployed will depend on few who are employed for their upkeep. This will strain
the employed making it difficult for them to save and invest
e) Creates excess demand
Overpopulation may lead to a situation where demand for goods and services
exceeds supply. This may trigger a rise in market prices resulting in inflation
f) Results in food shortages

Overpopulation may lead to a situation where available is not enough to feed the
available number of people. This will increase cases of malnutrition
g) Increases crime rates
Overpopulation is always associated with unemployment. The unemployed people in
their struggle to survive may engage in crimes
h) Leads to environmental degradation
Overpopulation may force people to over exploit the environment in order to survive.
For example pressure on housing may force people to clear forests in order to create
homesteads. This may lead to desertification
5. YOUNG POPULATION
This is where a bigger proportion of the population is composed of young people. It
may be as result of:
• High birth rate with low infant mortality rate

• High mortality rate among the aged
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• Low life expectancy

Young population is composed of majority of aged below 18 years
Challenges (Disadvantages) of a young population
a) High dependency level
Many of the young people are not working; as such they depend entirely on those
who are working for upkeep. This will hinder savings and investments
b) High unemployment rate
With many young people looking for jobs, the country may find it difficult to meet
increasing demand for employment leading to unemployment
c) High level of social evils and crimes
Young people who are unemployed may engage in crimes and other vices such as
prostitution in order to survive
d) Low supply of labour

Many young people may not have skills required in the job market or they may be
too young to work. The country will therefore lack adequate supply of labour
e) Increase in demand
Demand on goods and services required by young people may lead to excess demand
that may result in increase in prices
f) Reduction in savings and investment
High dependency level results in low savings leading in lack of investments
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g) Changes government expenditure structure

Increase in number of the youth may force the government to divert its expenditure
to youth welfare programs
Advantages of a young population
a) Provides a large market for goods and services
b) It may result in technological advancement since most young people are
innovative
6. AGEING POPULATION
This is a population which is composed of more old people. Old people are those
aged above 65 years
May result from a decrease in fertility rates and increase in a decrease in adult
mortality rates
Disadvantages of ageing population
• Lack of labour mobility since old people will rarely move

• Low labour supply
• High dependence level leading to low productivity
• Slow economic growth rates due to poor productivity
• Low demand for goods and services required by the youth resulting in closure
of firms and unemployment
7. DECLINING POPULATION
This is a population that keeps reducing over time. This may be as a result of:
• Low birth rate with high mortality rate

• Low immigration rate with high emigration rate
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Declining population may have both negative and positive implications

Effects of declining population
a) Reduction in government expenditure
Amount of money spent by the government on providing essential services will
reduce. This will enable the government the government improve the quality of
services it offers to existing citizens
b) Attainment of optimum population
With declining population an overpopulated country is able to attain an optimum
population
c) Proper utilization of resources
In cases of overpopulation, a declining population will reduce pressure on existing
resources making the fully utilized to increase productivity
d) Discourages investments
Declining population reduces demand for goods and services leading to closure of
firms and discouraging opening of new firms
e) Reduces dependency level
Declining population may result in reduction of unemployment rate since most
people in the population will be employed. This reduces the dependency level
8. POPULATION STRUCTURE
Refer to the composition of the population in terms of age, gender, levels of
education, income distribution etc.
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Age structure is important since it enables the government determine its labour
supply and dependency level. Sex, education levels and income distribution enables
the assessment of demand for different goods and services.
IMPLICATION OF POPULATION SIZE AND STRUCTURE ON
DEVELOPMENT
Refers to the effects of high population. These effects can be positive or negative.
Positive implications
a) Increase in market
High population increases general demand for goods and services. This encourages
investments
b) High labour supply
High population increases labour supply since there will many skilled people in the
population willing to work. This enables firms hire qualified staff at a relatively
lower cost.
c) Advancement in technology
Competition for survival makes people creative. This will introduce new production
methods that will improve productivity
d) Diversity in talents
In high populated regions, there are varieties of talents available. This enables
maximum usage of technology to improve productivity
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Negative implications
a) Decrease in per capita income
When population increases with constant national income, income per person
decreases leading to poor quality lives
b) Increase in dependency ratio
In high population, many people will be unemployed therefore depending on the few
who are employed. This reduces savings and investments
c) Reduction in savings and investments
In high populations, the number of consumers exceeds the number of those who
work, as such more incomes are consumed and very little is saved. This results fewer
investment.
d) High rate of unemployment
In overpopulated regions, number of people willing to work exceeds available jobs,
this leads to many people being unemployed
e) Strain on social amenities

Overpopulation strains the available social amenities such as schools, hospitals,
housing etc. this makes them insufficient.
f) Unequal distribution of income
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Overpopulated countries are always characterized by very few rich people and very
many poor people. This is due to the fact that many people have large families which
they struggle to provide for
g) Environmental degradation
With overpopulation, natural resources will be over exploited as people look for
means of survival. Forests may be cleared to provide homesteads and farmlands
leading to desertification
THE VICIOUS CYCLE OF RAPID POPULATION GROWTH
(Illustrate)
EMPLOYMENT AND UNEMPLOYMENT
Employment
Refers to engagement in any income generating activities
Unemployment
Refers to a situation where people are willing and able to work at the prevailing
wage rates but cannot find jobs
People who are disabled, those not willing to work or those who are on strike are not
considered unemployed
Unemployment rate = (total unemployment ÷ labour force) × 100
TYPES OF UNEMPLOYMENT
a) Seasonal unemployment
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This is a type of employment that is characterized by changes in demand for labour

during different seasons. For example in agriculture demand for labour is high during
harvesting and planting seasons
b) Structural unemployment
This is a type of employment which is caused by the mismatch in the skills of the job
seeker and the skills required in the job market due to changes in production methods
e.g. Use of ATMs which have reduced staff in the banks. It may also be caused by
differences in the locations of the employer and the job seeker
c) Frictional unemployment
This is unemployment which occurs when workers are unemployed after losing jobs
and are actively looking for new jobs.
d) Cyclical unemployment
It is also known as mass unemployment, demand deficit unemployment or general
unemployment.
It is a type of unemployment which is caused by changes in economic performance
such that when the economy is doing well, employment level is high than when the
economy is doing poorly
Economic performance can assume four cycles
• Peak/boom
• Recession
• Depression
• Recovery
(Illustrate)
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e) Voluntary unemployment
It is also known as real wage unemployment.
This is unemployment which is caused by a mismatch in wages demanded by job
seekers and those offered by firms. Firms may be offering lower wages than what job
seekers want to be paid; as such many job seekers will remain unemployment
voluntarily
f) Involuntary unemployment
It is also known as open unemployment
This unemployment occurs when people are looking for jobs at the prevailing wage
rates but cannot find jobs
g) Disguised unemployment
It is also known as hidden unemployment
It occurs when the number of people employed exceeds those who are required to the
extent that some of them remain idle and therefore are laid off thereby becoming
unemployed
h) Residual unemployment
This is a type of unemployment that affects the mentally and physically disabled
such that they cannot be employed to do certain jobs thereby remaining unemployed
i) Erratic(casual) unemployment
This occurs when workers are hired for a short period of time after which they again
become unemployed. For example a school can hire teachers per school term when
students are in school.
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CAUSES OF UNEMPLOYMENT
a) Rapid population growth
When population is high, number of workers entering the job market is quite high for
the available jobs. Therefore many people will remain unemployed
b) Inadequate co-operant factors of production
Co-operant factors of production are those that need to be combined with labour for
production to take place. These factors may include land and capital. When these
factors are inadequate, firms cannot expand hence additional jobs cannot be created
c) Use of inappropriate technology
Inappropriate technology refers to that technology that does not favour use of human
labour in production e.g. use of machines instead of human labour
When firms opt to use capital intensive techniques in production, many people will
remain unemployed as their work is now done by machines
Some of the reasons for using capital intensive techniques may include:
• They are efficient

• They are cheap
• Avoid high wage rates
d) Rural-urban migration
Refers to the movement of people from rural areas to urban areas. With rural-urban
migration many skilled people move to towns in search of jobs. Since available jobs
in urban centres cannot accommodate them, many remain unemployed
e) Inappropriate education system
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An education system that trains the youth to be job seekers but not job creators
makes the youth unable to become self-employed but focusing on looking for
employed. Since available job opportunities cannot accommodate the rising number
of trained youth, many of them become unemployed
f) Seasonality in production
Seasonal production leads to seasonal unemployment in the sense that
unemployment is high during off-peak than peak periods
g) Low market demand
A lower market demand reduces profits made by firms. This discourages investments
and expansion of firms thereby reducing employment opportunities
MEASURES TO SOLVE UNEMPLOYMENT PROBLEM
a) Encouraging the private sector to create employment opportunities
Through measures such as lower taxes and subsidies, firms will be encouraged to
expand their operations and even invest more. This will go a long way in creating
employment opportunities.
b) Encouraging labour intensive techniques
These are those techniques which require the use of more labourers in production.
The government may encourage the use of labour intensive techniques in production
through reducing the minimum wage rate in order to make labour cheaper. The
government may also increase taxes on machines to discourage the use of capital
intensive techniques.
c) Adopting a relevant education system
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An education system that trains the youth to be job creators and not job seekers
should be adopted in order to enable majority of the youth self employed
d) Diversifying economic activities

This refers to putting in place measures that will ensure that economic activities
continue throughout the year without interruptions. This will help in reducing
seasonal unemployment. For example in agriculture, irrigation programmes can
assist in ensuring that agricultural activities continue throughout the year.
e) Increasing government expenditure
The government can solve unemployment problems by increasing its expenditure on
economic activities that create employment e.g. kazi Kwa vijana project.
f) Developing rural areas
Developing rural areas will encourage investors to relocate their firms to those areas
hence creating employment opportunities. Development of rural areas also helps in
reducing rural-urban migration thereby reducing unemployment in urban areas.
g) Encouraging direct foreign investment
Foreign investors can be encouraged to open businesses in a country in order to
provide employment opportunities to the local people. This can be done through
reduction in taxes, provision of security and ensuring that there is political stability
h) Encouraging utilization of local resources
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Local resources can be utilized to create employment opportunities. For example

using locally produced cotton in textile industries in order to encourage more local
farmers to plant more cotton in order to earn a living.
i) Controlling population
Reducing the population size will help in reducing the number of people entering the
labour market thereby reducing unemployment rate. This can be done by
encouraging people to adopt family planning methods
Effects of unemployment
a) It leads to wastage of human resources
b) Creates inequality in income distribution as the unemployed people become
poorer
c) It makes people lose their self-worth
d) It is expensive to the government to provide essential services such as health to
unemployed people
e) May result in high crime rates due to idleness
f) Results into loss of revenue to the government in form of income taxes
g) Results in low standards of living among the unemployed
h) Results in low rate of investments
i) Results in high dependency levels as the unemployed depend on the employed
for upkeep
TRENDS IN POPULATION AND EMPLOYMENT
a) Increased rates of HIV/Aids
b) Increase in population growth rates
c) Provision of free basic health services to all
d) Ensuring the country has food security
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e) Checking illegal immigration from war ton countries

TOPIC 10: DETERMINING THE NETWORTH OF A BUSINESS
CONTENTS
• Introduction
• Some basic terms in business
• Book keeping equation
• The balance sheet
• Net worth of a business
INTRODUCTION
Transactions taking place in the business have to be recorded in the books of account
in order to aid in determining whether the business is making profit. The act of
recording transactions in the books of account is known as book keeping.
BASIC TERMS USED IN BUSINESS
a) Debtor
A debtor is a person or an organisation who owes money to another. For example if
Musa bought goods on credit from Kimani, then Musa is Kimani’s debtor.
b) Creditor
A creditor is a person or organisation to whom money is owed. For example if Musa
bought goods on credit from Kimani, then Kimani is Musa’s creditor
c) Goods
In trade, goods refer to items bought by the business for resale
d) Assets
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Refers to property that a business owns to which monetary value can be attached e.g.
vehicles, stock, tables, cash etc.
There are two types of assets:
• Fixed assets
• Current assets
i. Fixed assets
These are those assets which are expected to stay in the business for more than one
year. They include; buildings, land, vehicles, furniture etc.
ii. Current assets
These are assets which are expected to stay in the business for a period which is less
than one year. They include cash or items easily convertible to cash. Examples
include; stock, debtors, cash in hand, cash at bank etc.
Characteristics of assets
• They are owned and controlled by the business

• They can be measured in monetary terms
• Its benefits are enjoyed by the business
• May either be fixed or current
• Must have been acquired in the past
e) Liabilities
Refers to what is owed to others. Includes borrowed money and goods bought on
credit. Examples includes loans, creditors etc.
There are two types of liabilities:
• Long term liabilities

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• Current liabilities
I. Long term liabilities
These are those debts that are not intended to be settled within a year e.g. a three year
loan
II. Current(short term) liabilities
These are those debts that are payable within a year e.g. bank overdrafts, creditors
etc.
Characteristics of liabilities
• It is a present obligation resulting from past commitment

• Its resettlement may reduce business assets
• Amount involved can be measured reliably in monetary terms
• They are owned by outsiders
• May be classified as long term or short term
f) Capital
Refers to money or items contributed by the owner in order to start or sustain a
business
Capital is what the owner owns in the business
It is also referred to as owner’s claims or owner’s equity
g) Net worth
Refers to the actual value of the business at a particular date. It is used to refer to
capital and is given by
Net worth= assets - liabilities
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THE BOOK-KEEPING EQUATION

This equation is also referred to as the balance sheet equation or the accounting
equation
The book-keeping equation relates assets, liabilities and capital
According to this equation,
Assets = capital + liabilities
(Illustrations)
BALANCE SHEET
This is a statement that shows the financial position of the business at a particular
date. It shows the total assets, capital and liabilities of a business at a particular date
A balance sheet is prepared after a given period of time known as a trading period
or an accounting period
A trading period is a fixed period of time after which a business determines its
financial performance.
Its format
HEADING
ASSETS LIABILITIES+CAPITAL
Heading
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Contains
• Name of the business

• Name of statement
• Date at which it is prepared
Assets, capital and liabilities
Assets are recorded on one side while capital and liabilities are recorded on the other
side
Total assets must equal total liabilities
Totals on each side are double underlined
Items in a balance sheet are either prepared according to the order of permanency
or order of liquidity
(Illustrations)
Uses of a balance sheet
• Enable financiers such as banks determine whether the business is in a position

to pay them
• Enables shareholders determine their money is well invested
• Enables the government in determining whether the business is paying the right
amount of tax
• Enables potential investors decide whether to buy shares in the business or not
• Determines the types of capital invested in the business
• Determines the capital structure of the business
• Determines the financial position of the business
• Helps management in:
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✓ Comparing performance with the previous year

✓ Comparing their performance with other business
✓ Identifying areas in the business requiring improvement
TOPIC 11: BUSINESS TRANSACTIONS
CONTENTS
• Introduction
• Effects of transactions on the balance sheet
• Changes in capital
• Initial and final capital
INTRODUCTION
Business transactions refers to exchange of goods and services for money
There are two types of business transactions:
• Cash transactions
• Credit transactions
a) Cash transactions
This is a transaction where payment is made immediately goods are delivered
Payment may either be in cash or through other forms of payment such as cheques,
money orders etc.
b) Credit transactions
This is where payment for goods and services delivered at a later date. It is also
known as deferred payment
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EFFECTS OF TRANSACTIONS ON THE BALANCE SHEET

A transaction taking place in a business will have the effect of increasing or
decreasing some items in the balance sheet as illustrated below
(Give examples)
CHANGES IN CAPITAL
Capital in a business does not remain static, it keeps on changing. These changes in
capital may be caused by the following;
• Drawings
• Additional investments
• Profits
• Losses
a) Drawings
Refers to cash or items taken from the business by the owner for personal use.
Drawings reduce the amount of capital. (Illustrate)
b) Additional investment
Refers to additional cash or additional assets brought to the business by the owner.
An additional investment increases business capital. (Illustrate)
c) Profit
Refers to excess of selling price over cost price. Profit increases capital. (Illustrate)
d) Loss
Refers to excess of cost price over selling price. Loss reduces capital. (Illustrate)
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INITIAL AND FINAL CAPITAL OF A BUSINESS

Initial capital is the amount of capital available at the start of the trading period
whereas final capital is the Amount of capital available at the end of the trading
period
Final capital is calculated as follows:
Final capital = initial capital + profit + additional investments – drawings
NOTE: where a loss is made, it is subtracted
(Illustrate)
TOPIC 11: THE LEDGER
CONTENTS
• Introduction
• Rules of recording transactions in the ledger
• The concept of double entry
• Recording of stock in the ledger accounts
• Recording of expenses in the ledger accounts
• Recording revenues in the ledger accounts
• Recording drawings in the ledger accounts
• Balancing ledger accounts
• Uses of ledger accounts
• The trial balance
• Purpose of the trial balance
• Limitations of the trial balance
• Classification of accounts
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INTRODUCTION
A ledger is a book of account where transactions are recorded. It contains all
transactions pertaining to a particular item e.g. all cash transactions are recorded in
the cash ledger account
Its format
A ledger is T-shaped with three basic features
a) Title: contains the name of the account, usually centred at the top of the
account
b) Debit side: this is the name given to the left hand side of the ledger account
and is usually abbreviated “Dr”
c) Credit side: this is the name given to the right hand side of the ledger account
and is abbreviated “Cr”
Each side of the ledger has four columns
• Date column where the date of the transaction is recorded

• Particulars(details) column where a short description of the transaction is
recorded
• Folio column which is a cross reference
• Amount columns in which the figures in monetary terms are recorded
Dr Title (Name of account)
Cr
Date Particulars Folio Amount Date Particulars Folio Amount
(sh) (sh)
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RULES OF RECORDING TRANSACTIONS IN LEDGER ACCOUNTS

Transactions resulting in increases in a particular item are recorded on one side of
the account while those resulting in decreases are recorded on the other side as
explained below
a) Assets
An increase in an asset is recorded on the debit side (debited) while a decrease is
recorded on the credit side (credited)
b) Liability
An increase in a liability is credited while a decrease is debited
c) Capital
An increase in capital credited in the capital account while a decrease is debited
d) Expenses
Expenses are those costs incurred in running the business such electricity, storage,
insurance etc.
An increase in an expense is debited in the respective expense account while a
decrease is credited
e) Revenues
Revenues refer to incomes earned from non-business activities. They may include;
discount received, commission received, rent received etc.
An increase in revenue is credited in the respective revenue account while a decrease
is debited
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NOTE: assets and expenses are recorded the same way while liabilities, capital and
revenue are recorded the same way.
Summary of the rules

a) An increase in the value of an asset is debited in the respective asset account
whereas a decrease in the value of the asset is credited in the respective asset
account
b) An increase in the value of a liability is credited in the respective liability
account whereas a decrease in the value of a liability is debited in the
respective liability account
c) An increase in the value of capital is credited in the capital account whereas a
decrease in the value of capital is debited in the capital account
d) An increase in the value of revenue/income is credited in the respective
revenue/income account whereas a decrease in the value of revenue/income is
debited in the respective revenue/income account
e) An increase in the value of expenses is debited in the respective expense
account whereas a decrease in the value of expenses is credited in the
respective expense account
THE DOUBLE ENTRY CONCEPT
The double entry concept states that, for every debit entry, there is a corresponding
credit entry. This means that for any transaction made, there is an account to be
debited and another account to be credited
The double entry concept must be adhered to whenever recording transactions in the
ledger
RECORDING TRANSACTIONS IN THE LEDGER ACCOUNT
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(Illustrations)
RECORDING OF STOCK IN LEDGER ACCOUNTS
Stock refers to those goods bought to the business for resale purposes. Stock may
increase or decrease.
Causes of increase in stock are:
• Purchase of more goods

• Customers returning goods previously sold to them (sales returns or returns
inwards)
Causes of decrease in stock may include:
• Sale of goods
• Goods previously bought being returned by the business to the suppliers
(purchase returns or returns outwards)
a) Purchase of goods (stock)

When goods are purchased to the business they increase stock. The value of such
goods should be debited in the purchases account.
Note that only those goods purchased for resale are to be recorded in the purchases
account
Purchases can be in cash or on credit
1) Purchases in cash
When goods are bought in cash, purchases account is debited with the value of the
goods while the cash account is credited (Illustrate)
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2) Purchases on credited
When goods are bought on credit, purchases account is debited while the respective
creditor’s account is credited. (Illustrate)
b) Sale of goods (stock)
Sale of goods reduces stock. The value of goods sold is credited in the sales account.
Note that only those goods bought for resale are to be recorded in the sales account.
Sales can be in cash or on credit.
1) Sales in cash
When goods are sold in cash, sales account is credited with the value of goods sold
while the cash account is debited. (Illustrate)
2) Sales on credit
When goods are sold on credit, sales account is credited with the value of the goods
while the respective debtor’s account is debited. (Illustrate)
c) Purchase returns
These are part of goods bought previously now returned to the suppliers because of
reasons such as; poor quality, being defective or being excess.
The value of purchase returns is credited in the purchases returns account while the
respective supplier account is debited (Illustrate)
d) Sales returns
These are part of goods that were previously sold now being returned to the business
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The value of sales returns is debited in the sales returns account while the respective
customer is credited (Illustrate)
RECORDING OF EXPENSES IN THE LEDGER ACCOUNTS
Expenses are those costs incurred in running the business effectively. They may
include; stationery, wages, insurance, advertising, discount allowed etc.
Payment of an expense is debited in the respective expense account while cash/bank
account is credited with the amount paid (Illustration)
RECORDING OF REVENUES IN THE LEDGER ACCOUNTS
Revenues are those incomes obtained from non-trading activities. They may include;
rent received, commission received, discount received etc.
Receipt of revenue is credited in the respective revenue account while cash/bank
account is debited (Illustrate)
RECORDING OF DRAWINGS IN THE LEDGER ACCOUNTS
Drawings refer to assets taken from the business for private use. Such assets may be
in form of goods or cash.
When drawings are made in cash or from the bank, the drawings account is debited
with the amount withdrawn while the cash/bank account is credited
When drawings are in the form of goods (stock), drawings account is debited with
the value of goods withdrawn while the purchases account is credited
SUMMARY OF THE RULES OF RECORDING IN THE LEDGER
Items with debit balances include the following; assets, expenses, purchases, sales
returns and drawings.
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Items with credit balances include; liabilities, revenues, sales and purchase returns
BALANCING LEDGER ACCOUNTS
An account balance is an accounting term meaning the mathematical difference
between the totals of the credit and debit sides of an account.
If the debit side is more than the credit side, the difference is known as a debit
balance but when the credit side is more than the debit side, the difference is known
as credit balance
To balance accounts therefore;
• Find totals of each side

• Find the difference in these totals
• Insert the difference on the side with a smaller total as a balance carried down
(c/d) or balance carried forward (c/f) to make the totals equal
• Write the totals of each side on the same level and double underline them
• Record the account balance on the opposite side below the totals as balance
carried down (b/d) or balance brought forward (b/f)
(Illustrate)
USES OF LEDGER ACCOUNTS
a) Shows the amount by which a particular item increases or decreases
b) Enables the calculation of the value (balance) of an item at any time
c) Can be used for future reference
THE TRIAL BALANCE
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This is a document that is used to check the accuracy of ledgers. It shows all the
debit balances of ledgers on one side and credit balances of ledgers on the side.
The totals of the two sides should be equal.
Its format
details Dr Cr
Failure of the trial balance to balance

When the trial balance fails to balance, it means there is an error either in the
accounts or in the trial balance, these errors may include;
• Failure to observe the concept of double entry

• Transferring (posting) wrong balances to the trial balance
• Arithmetical errors in totaling trial balance totals
• Arithmetical errors when balancing ledger accounts
• Failure to transfer a balance from the ledger to the trial balance
• Transferring a balance to the wrong side of the trial balance
• Transposition of figures i.e. recording 791 as 971
• Failure to transfer all balances from the ledger to the trial balance
PURPOSE OF A TRIAL BALANCE
a) Checking the accuracy of ledger accounts by determining whether
• The double entry concept has been observed
• Accounts are free of arithmetical errors
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b) It gives a summary of the information contains in ledgers

c) Facilitates the preparation of final accounts
d) Provides information to stakeholders in the business such as banks, investors,
customers etc.
LIMITATIONS OF A TRIAL BALANCE
The trial balance has a limitation in the sense that it may feel to identify some errors
made in the ledger account. Such errors include:
a) Error of total omission
This error occurs when a transaction which has taken place is not recorded in the
books of account
b) Error of original entry
This error occurs when a transaction takes place but wrong amount is recorded in the
accounts e.g. a transaction involving Ksh 2000 is recorded as involving Ksh 3000
c) Error of commission
This error is made when a transaction is recorded in a different account of the same
class but with the correct amount e.g. when Ksh 2000 is debited in Onyango’s
account instead of Anyango’s account
d) Compensating errors
These are errors which have an effect of canceling out e.g. debiting stock with Ksh
2000 and crediting cash with the same amount
e) Complete reversal of entries
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This error occurs when a transaction is recorded on the wrong side of the ledger
accounts e.g. cash sales to Kamau are recorded by crediting the cash account and
debiting sales account instead of doing the opposite
f) Error of principle
This occurs when a transaction is a wrong account of different class e.g. rent income
is debited to rent expense account instead of being credited to rent income account.
Rent income is revenue while rent expense is an expense hence they belong to
different classes.
CLASSIFICATION OF LEDGER ACCOUNTS
a) Sales (debtors) ledger
This is a ledger where accounts of debtors are recorded
b) Purchases (creditors) ledger
This is a ledger where accounts of creditors are recorded
c) The cash book
This is a form of ledger account where cash in hand and cash at bank is recorded
d) Nominal ledger
This is a ledger account where transactions relating to sales, expenses, revenues and
purchases are recorded.
e) Private ledger
This is a ledger where confidential transactions are recorded. Such confidential
information may be relating to drawings, capital and trading profit and loss account.
This information is only accessible to owners and management of the business.
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f) The general ledger

This is a ledger where all transactions relating to fixed assets and some current assets
e.g. stock are recorded. Debtors and creditors arising from dealings in fixed assets
are also recorded in this ledger.
CLASSIFICATION OF ACCOUNTS
All accounts operated by a business can be classified into two categories:
• Personal accounts
• Impersonal accounts
a) Personal accounts
These are accounts of persons. They are mainly accounts of creditors and debtors.
Therefore purchases ledger and sales ledger are classified as personal accounts
b) Impersonal accounts
These are accounts that are not for persons. They can further be sub-divided into
real, nominal and private accounts
Real accounts are accounts of tangible assets such as buildings and furniture.
Nominal accounts are accounts of items whose balances are transferred to the profit
and loss account. Such items include expenses, revenues, sales and purchases.
Private accounts are accounts of items the firm considers to be highly confidential
such as capital, drawings and T P & L account
TOPIC 12: THE CASH BOOK
CONTENTS
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• Introduction
• Basic types of cashbooks
INTRODUCTION
The cash book is a ledger that contains cash and bank accounts only
Cash and bank accounts are kept are kept in a separate ledger due to the following
reasons:
• To reduce the bulkiness of the general ledger since most of the transactions
taking place in the business involve cash and bank accounts
• Cash and bank accounts are more sensitive as they record liquid cash hence
have to monitored separately
• Cash and bank accounts are recorded on the same page in the cash book,
therefore making tracing of records easier
BASIC TYPES OF CASHBOOKS
There are five types of cashbooks, these include:
• Single-column cash book

• Two-column cash book
• Three-column cash book
• Petty cash book
• Analysis cash book
The first three types are covered in form three and the remaining two in form four
a) Single-column cash book
This is a cash book with only one amount column. This amount column is used to
record cash in hand or cash at bank.
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It is normally kept by small businesses which either operates only cash accounts or
bank accounts.
The cash and bank accounts are separated
Date Details L.F Amount Date Details L.F Amount
N/B: In the ledger folio column is recorded the name of the ledger and the page
where the account named in the details column is to be found
(Illustrations)
b) The two-column cash book
This is a cash book with two amount columns, i.e. cash and bank amount columns on
the debit and credit sides.
The cash column records cash in hand whereas the bank column records cash at bank
Date Details L.F Cash Bank Date Details L.F Cash Bank
(Sh) (Sh) (Sh) (Sh)
(Illustrations)
Balancing off the two-column cash book

At the end of the trading period, the cash book is balanced to obtain both cash and
bank balances (Illustrate)
The cash account cannot end up with a credit balance but the bank account can. Such
credit balance in the cash book is known as a bank overdraft.
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Uses of a 2-column cashbook

a) It is used to record cash payments
b) It is used to record cash receipts
c) It is used to determine cash balances
d) It reduces the number of transactions in the main ledger
e) It is used to prepare bank reconciliation statements
c) The three-column cash book
This is a cash book with three columns both on the debit and credit side. These
columns are for discount, cash and bank
Dat Detail L. Disc.al Cas Ban Dat Detail L. Dis Cas Ban
e s F l h k e s F c h k
rec
Discount
Discount is an allowance by a seller of goods to a buyer of goods so that the buyer
pays less than the quoted price.
(Illustrations).
Uses of a 3-column cashbook
a) It reduces entries in the general ledger
b) It shows the total expenditure
c) It shows the sources of money that was spent
d) It is used by management to control all transactions since all business
transactions must end in the cashbook
e) It facilitates the preparation of cash budgets
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f) It allows easy monitoring of cash flows in the business.
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BUSINESS STUDIES FORM 3

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• Price of the product

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Government influences demand through the following methods:

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• Individual demand schedule

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PRICE(Ksh) QUANTITY QUANTITY QUANTITY TOTAL

DEMAND CURVE: A demand curve is a graphical representation of the

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MOVEMENTS ALONG THE DEMAND CURVE

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Causes of a shift to the right (increase in demand)

• A rise in the incomes of consumers

• A fall in consumer income

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• Price of the product

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PRICE OF THE PRODUCT

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The supply schedule

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MOVEMENT ALONG THE SUPPLY CURVE

• A fall in price of factors of production

• An increase in the price of competing products

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FACTORS INFLUENCING WHAT TO PRODUCE

DETERMINING THE SIZE OF A FIRM

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INDICATORS OF THE SIZE OF A FIRM

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Location of a firm refers to selection of a place where the proposed firm is to be

• Lower the cost of transporting raw materials to the firm

• Lower cost of transportation to the market

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• Ensure constant supply of raw materials

• Offering free or cheap land

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WhatsApp Sir Obiero Amos @ 0706 851 439

b) Results in regional imbalance in development

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Disadvantages of locating a business away from other businesses

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There are two economies of scale:

• Internal economies of scale

• Risk bearing economies

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As the firm expands, it is in a position of employing qualified staff. These staff

• Availability of ready skilled labour

Ways in which large-scale businesses reduce their cost of operations

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b) Promoting their products hence increasing sales

• Internal diseconomies of scale

• High operational costs