Professional Documents
Culture Documents
BUSINESS
STUDIES
TEACHING
NOTES.
DEMAND AND SUPPLY.
CONTENTS
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 states that, “with all other factors held constant, the higher the market price,
the lower the market demand and vice versa”
PRICE OF THE PRODUCT:For a normal product, the higher the market price, the lower the
market demand and vice versa.
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.
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.
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.
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.
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.
SEASONAL CHANGES: Demand for some products depends on the season. For example,
umbrellas are demanded more during the rainy season.
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
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 etc.
Therefore a rise in need for one of the purposes will increase the demand for timber.
Individual demand schedule: This is a table showing the quantities demanded by a single
consumer at a particular time.
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
Assign: Draw the demand curve for the individual demand schedule above
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
(Illustrate)
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)
If the initial price is P and corresponding quantity is Q,the price and quantity meet at point
x on the demand curve. An increase in price from P to P1 leads to an reduction of the
quantity demanded from Q to Q1 causing a movement along the demand curve from point
X to point Y. a decrease from P to P2 also causes an increase in quantity demanded from
point Q to Q2 leading to a movement from X to Z along the 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.
D1
Price
D0
D1
D0
0 Q0 Q1
Quantity Demanded
D0
Price
D1
D0
D1
0 Q1 Q0
Quantity Demanded
A shift in demand curve is caused by changes in any other factor affecting demand other than
market price.
SUPPLY
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 states that, “with other factors held constant, the higher the market price,
the higher the market supply and vice versa”
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.
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.
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.
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.
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.
TYPES OF SUPPLY
Joint supply
Competitive supply
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.
PRICE(Ksh) QUANTITY(Kgs)
10 10
20 20
30 30
40 40
SUPPLY CURVE
Price
Quantity supplied
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).
Z
P2
P X
Y
P1
Q1 Q Q2 Quantity
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.
S0 S1
S0 S1
S1 S0
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.
D S
Price
(Shs)
E
PE
S D
0 QE Quantity
(Shs)
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)
PE
P2
EXCESS DEMAND
D
S
0 Q3 QE Q4 Quantity
D1 S0
S1
Price
D1
S0
S1
Quantity
Apart from price mechanism, other methods of determining market price include
Haggling
Government intervention
Auction
Tendering
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.
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
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.
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.
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
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.
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.
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 refers to selection of a place where the proposed firm is to be established
Most firms are located near a source of raw materials. This is because of the need to:
AVAILABILITY OF MARKET
It is advisable to locate a firm near a market. This is because of the need to:
AVAILABILITY OF LABOUR
Labour intensive firms are located near an abundant labour source e.g. in urban areas
Firms are located in area with a good transport network in order to:
GOVERNMENT POLICIES
Government may also influence the location of firms using the following methods:
OTHER FACTORS
LOCALISATION OF FIRMS
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
DISADVANTAGES OF LOCALISATION
DELOCALISATION OF FIRMS
Refers to establishment of firms in different parts of the country. It is highly encouraged by the
government
ADVANTAGES OF DELOCALISATION
DISADVANTAGES OF DELOCALISATION
Objectives of delocalization
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
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.
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
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.
These are those benefits which accrue to a firm as a result of growth in the entire
industry. These benefits include:
DISECONOMIES OF SCALE
These are those problems a firm experiences as a result of expansion.They may be classified into
two.
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
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.
These are problems a firm experiences as a result of growth in the entire industry. They include:
Despite the benefits enjoyed by large firms, small firms still exist alongside large firms. Some of
the reasons for this existence may include:
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.
Some products cannot be provided in large quantitiese.g. personal services such as nursing or
painting. These products can only be provided by a small firm.
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.
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
Most businessmen may opt for small firms due to the belief that they are easy to run as compared
to big firms
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.
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
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:
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
Preventing pollution
Providing security
Ensuring availability of necessary resources such as labour,finance,machines etc.
Maintaining a healthy relationship
INTRODUCTION
A product refers to goods or services sold in the market. A product is also known as a
commodity.
A market refers to the mechanism through which the buyer and the seller interact to transact
Essentials of a market
Markets are classified based on the nature of the buyer, seller, and the product. These
classifications include:
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.
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
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 giver.
Price discrimination may be possible
Pricediscrimination
Price discrimination refers to charging different prices for the same product in different markets
Advantages of monopolies
Disadvantages of monopolies
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
differentiatede.g.toothpastes, breadetc. 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.
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;-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
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
NOTE: one of the major limitations of the kinked demand curve is the fact that it doesn't explain
how price was arrived
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
These are traders who buy goods and services for resell e.g. whole salers and retailers
These are traders who represent other traders in the exchange of goods and services e.g. agents,
brokers, factors etc.
There are six channels which can be used to distribute local agricultural produce. They include
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
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
Farmers can sell to marketing boards from which retailers can buy the product and sell it to the
consumer.
The following seven channels can be used to distribute locally manufactured goods
Wholesalers can buy in large quantities from the manufacturer and later sell in smallquantitiesto
retailers who later sell the product to the consumer
The manufacturer can sell in large quantities to wholesalers who later sell the product to
consumers
Large scale retailers can buy directly the from manufacturer and sell to consumers
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.
The government agent may sell the product to the wholesaler who later sells to the consumer
The government agent may buy from the manufacturer and sell to the retailer who finally sells to
the consumer
There are six channels that can be used to distribute imported goods. They include:
The local wholesaler may buy directly from the foreign producer and sell to the local retailer
who later sells to the 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 wholesaler who later sells to
the local retailer. The local retailer finally sells to the local consumer
The foreign producer may sell goods to the local wholesaler who in turn sells to the local
consumer
Foreign producer may sell to the local retailer who will in turn sell to the local consumer
a) Handling
b) Storage
c) Packing/packaging
d) Transportation
e) Grading
f) Blending
g) Sorting
h) Breaking the bulk
a) Storage costs
b) Transport costs
c) Advertising costs
d) Salaries and wages
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.
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.
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 producer with inadequate finances will
involve intermediaries in order to distribute his/her products to consumers resulting in a longer
channel of distribution
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
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.
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
a) When the market is spread out for the producer to reach the consumers
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
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.
TRENDS IN DISTRIBUTION
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
National income is measured by the government after a given period of time usually one year
a) Gross domestic product(G.D.P);-.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
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
e) Per capita income;-Per capita income refers to the average income per head per year in a
country. It is calculated as follows:
Circumstances when per-capita income may be used as a good indicator of the standard of
living
f) Personal income(P.I);-This is the sum of all incomes received by the residents of a country
during a year
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
FIRMS
HOUSEHOLDS
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
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
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: 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:
a) Savings
b) Taxes
c) Imports
Equilibrium in national income is achieved when total injections equal total withdrawals.
S+T+M=I+X+G
Where:
S=savings
T=taxes
M=imports
I=investments
G=government expenditure
Expenditure approach
Income approach
Output approach
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:
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
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.
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 grantsto needy students
Grants from friends
Students’ pocket money
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:
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
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
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
National income statistics refers to the information gathered from different sources of national
income. This information has the following uses:
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.
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:
By comparing national income levels at different periods, information is provided on the period
of the year the economy was doing well
The government will use information on national income to come up with plans on how grow the
economy
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
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;-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
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.
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.
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
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
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:
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
The difference between immigration and emigration is the net immigration. Therefore
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.At optimum population resources are well utilized hence living standards are high.
Optimum population
Underpopulation
Overpopulation
0
Population
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
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
Refers to the population which is higher than the available resources such that resources are
overstretched.
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
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
This is where a bigger proportion of the population is composed of young people. It may be as
result of:
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
g) Changes government expenditure structure-Increase in number of the youth may force
the government to divert its expenditure to youth welfare programs
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
This is a population that keeps reducing over time. This may be as a result of:
Refer to the composition of the population in terms of age, gender, levels of education, income
distribution etc.
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.
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
Negative implications
Employment
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
Peak/boom
Recession
Depression
Recovery
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-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
Effects of unemployment
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.
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
d) Assets
Refers to property that a business owns to which monetary value can be attached e.g. vehicles,
stock, tables, cash etc.
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.
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
Refers to what is owed to others. Includes borrowed money and goods bought on credit.
Examples includes loans, creditors etc.
These are those debts that are not intended to be settled within a year e.g. a three year loan
These are those debts that are payable within a year e.g. bank overdrafts, creditors etc.
Characteristics of liabilities
f) Capital
Refers to money or items contributed by the owner in order to start or sustain a business
Refers to the actual value of the business at a particular date. It is used to refer to capital and is
given by
This equation is also referred to as the balance sheet equation or the accounting equation
(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
Contains
Assets are recorded on one side while capital and liabilities are recorded on the other side
Items in a balance sheet are either prepared according to the order of permanency or order of
liquidity
(Illustrations)
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:
Comparing performance with the previous year
Comparing their performance with other business
Identifying areas in the business requiring improvement
CONTENTS
Introduction
Effects of transactions on the balance sheet
Changes in capital
Initial and final capital
INTRODUCTION
Cash transactions
Credit transactions
a) Cash transactions
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
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
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
(Illustrate)
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
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) 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”
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
NOTE: assets and expenses are recorded the same way while liabilities, capital and revenue are
recorded the same way.
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 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
(Illustrations)
Stock refers to those goods bought to the business for resale purposes. Stock may increase or
decrease.
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
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)
2) Purchases on credited
When goods are bought on credit, purchases account is debited while the respective creditor’s
account is credited. (Illustrate)
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.
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
The value of sales returns is debited in the sales returns account while the respective customer is
credited(Illustrate)
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)
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)
FORM THREE BUSINESS STUDIES TEACHING NOTES Page 77 of 86
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
Items with debit balances include the following; assets, expenses, purchases, sales returns and
drawings.
Items with credit balances include; liabilities, revenues, sales and purchase returns
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
(Illustrate)
Its format
Details Dr Cr
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;
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:
CLASSIFICATION OF ACCOUNTS
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
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
CONTENTS
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
The first three types are covered in form three and the remaining two in form four
This is a cash book with only one amount column. This amount column is used to record cash in
hand or cash at bank.
It is normally kept by small businesses which either operates only cash accounts or bank
accounts.
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
FORM THREE BUSINESS STUDIES TEACHING NOTES Page 82 of 86
(Illustrations)
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)
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
creditbalance in the cash book is known as a bank overdraft.
This is a cash book with three columns both on the debit and credit side. These columns are for
discount, cash and bank
Date Details L.F Disc.all Cash Bank Date Detail L.F Disc Cash Bank
s 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.