FORM

THREE
BUSINESS
STUDIES
TEACHING
NOTES.
FORM THREE BUSINESS STUDIES TEACHING NOTES Page 1 of 81
DEMAND AND SUPPLY.

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

 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

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 2 of 81

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.

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: 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.

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 3 of 81

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.

SOCIOLOGICAL 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.

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 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

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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

PRICE(Ksh) QUANTITY QUANTITY QUANTITY TOTAL MARKET

DEMANDED BY DEMANDED BY DEMANDED BY DEMAND(Kgs)
A(Kgs) B C(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

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 5 of 81

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

(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)

Price
Y
P1
X
P
Z
P2

0 Q1 Q Q2
Quantity Demanded

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 6 of 81

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 P 1 leads
to an reduction of the quantity demanded from Q to Q 1 causing a movement
along the demand curve from point X to point Y. a decrease from P to P 2 also
causes an increase in quantity demanded from point Q to Q 2 leading to a
movement from X to Z along the demand curve.

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.

SHIFT OF DEMAND CURVE TO THE RIGHT. (Increase in demand)

D1
Price
D0

D1

D0

0 Q0
Quantity Demanded
Q1

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 7 of 81

SHIFT OF DEMAND CURVE TO THE LEFT.(Decrease in demand)

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.

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

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 8 of 81

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

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
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.

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COST 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

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.
 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.

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 10 of 81

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
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.

Price

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 S

Quantity supplied

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).

Price S

Z
P2

P X

Y
P1

Q1 Q Q2 Quantity

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.

S0 S1

Price (shs) S1 Price (shs) S0

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 12 of 81

 S0 S1

S1 S0

0 Quantity supplied 0 Quantity supplied

(a)Increase in supply (b) Decrease in supply

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
EQUILIBRIUM PRICE AND QUANTITY

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)

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 13 of 81

 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)

D
S
Price
EXCESS
SUPPLY
P1
E

PE

P2
EXCESS
DEMAND
D
S

0 Q3 QE Q Quantity
4

EFFECTS OF SHIFTS IN DEMAND AND SUPPLY ON EQUILIBRIUM PRICE AND

QUANTITY

D1 S0
S1
Price

D1
S0
S1

Quantity

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OTHER METHODS OF DETERMINING MARKET PRICE

Apart from price mechanism, other methods of determining market price include

 Haggling
 Government intervention
 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.

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 15 of 81

SIZE AND LOCATION 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
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

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 f) The level of the country’s economy
g) Government policy
h) Profitability of the business
i) Environmental issues
j) Costs of production
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

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 TECHNOLOGY/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

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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

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

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

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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
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

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 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
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.
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

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 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.

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.

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  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.

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

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

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  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.

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 quantitiese.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

 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

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 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:

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

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PRODUCT MARKETS

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

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

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 
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
 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
 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 giver.
 Price discrimination may be possible
Pricediscrimination

Price discrimination refers to charging different prices for the same product in different markets

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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.
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;-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.

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  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

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 long run Normal profits are made in the 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
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

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 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
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.
Advantages of monopolistic competition

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 sloping Demand curve is horizontal
The firm is a price maker No single firm decides the price

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Differences between monopoly and monopolistic competition markets

Monopoly Monopolistic competition

Has one seller Has many sellers
Products sold have no close substitutes Products sold have close substitutes
Firms make abnormal profits in the long run Firms make normal profits in the long run
Entry into the market is restricted There is freedom of entry into the market
There is no competition for market Firms compete for market
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;-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

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 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 along 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/tactic collusion so as to protect the
interest of all firms.
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

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There is inter-dependency among firms in Firms make decisions independently
decision making
Products have close substitutes Products are homogeneous (identical)
There is no freedom of entry into the market There is freedom of entry into the market
There is government interference There is no government interference
Firms have a kinked demand curve Firms have a perfectly elastic demand curve

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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
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

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  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
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.

2) Channels for distributing locally manufactured goods

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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 smallquantitiesto
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

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.

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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----LOCALCONSUMER

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

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
e) Packing and blending costs
f) Insurance costs
CHANNEL LENGTH

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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
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

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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 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.
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.

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 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;-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
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

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 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
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 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

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 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

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.

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

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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

TERMS USED IN NATIONAL INCOME

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

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:

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

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 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

THE CIRCULAR FLOW OF INCOME

Refers to the movement of money in an economy.

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.

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 FIRMS

Supply of Payment for factors Payment for Supply of

factors of (rent, profit, goods and goods and
production interest, services services.
wages,salaries.)

HOUSEHOLDS

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

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
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 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:
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
1. Expenditure approach
Using this approach, national income is arrived at by adding all expenditures incurred in the
economy on final goods and services

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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:

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:

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  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
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

Value added by C = Ksh (90-65) = Ksh 25

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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
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

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 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

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;-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

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 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
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;-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

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 e) Population size;-Highly populated countries experience poor living standards due to low
per-capita incomes as compared to countries with low population

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.

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

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  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

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

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.At optimum population resources are well utilized hence living standards are high.

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 Optimum
population

Income per
capita

Underpopulatio
n Overpopulation

0
Population

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:

 Low birth rate

 High rate of emigration
 Emergence of natural calamities such as war and diseases

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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
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
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

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 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-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
 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

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 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

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
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

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 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.

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
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

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 e) Strain on social amenities-Overpopulation strains the available social amenities such as
schools, hospitals, housing etc. this makes them insufficient.
f) Unequal distributions of income-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

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
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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-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

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

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 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.
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

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 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-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. kaziKwavijana 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-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

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 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
e) Checking illegal immigration from war ton countries

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 64 of 81

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
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.

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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

 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

THE BOOK-KEEPING EQUATION

This equation is also referred to as the balance sheet equation or the accounting equation

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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

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

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 67 of 81

(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:
 Comparing performance with the previous year
 Comparing their performance with other business
 Identifying areas in the business requiring improvement

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

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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

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)
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:

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Final capital = initial capital + profit + additional investments – drawings

NOTE: where a loss is made, it is subtracted

(Illustrate)

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
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  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 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)

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

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 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.

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

(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:

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  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)

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)

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 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)

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.

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

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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

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

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  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
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-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.

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 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.
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

THE CASH BOOK

CONTENTS

 Introduction

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  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 CASH BOOKS

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.

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

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 78 of 81

 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.

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

Date Details L.F Disc Cash Bank Date Details L.F Disc Cash Bank
all 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

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 79 of 81

 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
f) It allows easy monitoring of cash flows in the business.

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 80 of 81

FORM THREE BUSINESS STUDIES TEACHING NOTES Page 81 of 81