BUSINESS STUDIES NOTES FORM THREE

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BUSINESS STUDIES NOTES

FORM THREE

  1. DEMAND AND SUPPLY

Meaning of demand

Demand is the quantity of a product that buyers are willing and able to buy at a given price over a given period of time.

Factors that determine the demand for a product (determinants of demand)

  1. The price of a product:  if the price is low, more will be demanded, if high less will be demanded.
  2. The buyer’s income: the higher the people’s income the higher the demand for gods and services and vice versa.
  3. Government policy: if the government imposes high taxes on a commodity, it becomes expensive and less of it is demanded. The effects of a subsidy are to lower the price of the product leading to an increase in its demand. The government may also influence the demand of a product by enacting laws that either limits or promotes the consumption of a product.
  4. The population: with many people available more of the goods are demanded and if the people are few, less is bought from the market.
  5. Tastes, fashions and preferences:  if people have a preference for a product they will demand more of it. If their preferences changes to another product, they will reduce the demand of the product they were using before.
  6. The distribution of incomes: where income is well distributed, the demand for goods and services is high as opposed to when the income in the hands of a few people.
  7. Future expectations of price changes: if the prices are expected to go up in the future, more goods will be demanded in the present and if the price is expected to go down in the future, fewer goods will be demanded in the present.
  8. The weather: certain goods are demanded more during certain weather conditions e.g heavy clothes during cold seasons or umbrellas during rainy seasons.
  9. Price of related products: for goods that are compliments of one another, e.g pen and ink, a fall in the price of one leads to an increase in the demand of the other. In the case of the goods that are substitutes of one another, e.g soda and fruit juice, an increase in the price of one leads to an increase in the demand of the other.
  10. The terms of sale: the better the terms of sale, for example, provision of credit or better discounts, the higher the demand for a given product.

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Types of demand

 

Derived demand:  a product is said to have derived demand when it is demanded to help in the production of other goods and services for example the demand of building materials arising from the demand of houses.

Joint demand: items are said to have joint demand if the use of one will require the use of another. The goods are complimentarily used together like pen and ink.

 

 

 

 

 

 

 

Demand schedule and demand curve

Demand schedule

A demand schedule is a table showing the quantities of a commodity that consumers are willing and able to buy at different prices within a given period of time. A demand schedule can be prepared for an individual or for the entire market.

 

Demand curve

A demand curve is the graph showing the quantities demanded against the prices. On the y-axis is recorded price and the x-axis the quantities demanded.

 

Draw a demand curve given the following demand schedule

 

Price of the product in shs Quantity of the goods demanded in kg
10

20

30

40

50

60

70

80

 40

35

30

25

20

15

10

5

 

 

The graph shows that the demand curve (DD) slopes from the left to the right, indicating that as prices goes down the quantity demanded increases and vice versa.

This tendency of demand to increase as price decrease and to reduce as the price increase is referred to as the law of demand. Therefore a normal demand curve slopes from left to right.

 

 

 

 

Movement along a demand curve and a shift in demand curve

 

Movement along the demand curve

A movement along a demand curve refers to changes in quantity of a product demanded as a result of change in its price only. As the price of the product increases the quantity demanded decreases. It leads to a movement from one point to another on the same demand curve as shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shift of the demand curve

 

This is when the demand curve moves either to the right or left. It occurs as results of changes in factors influencing demand other than price of the product concerned. This can be illustrated as below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In (i) at price OP the quantity demanded is OQ. After the demand curve shift from D0D0 to DD a different quantity OQ1 is demanded although the price remains at OP. thus points L and M are on different demand curves.

 

Similarly when the demand curve shifts from D1D1 to D2D2 as in (ii) a different quantity OQ3 is demand at the sameprice OP2 as before. Thus the two points R and S are on two different demand curves.

A shift of demand curve to the left (decrease in demand) can be brought about by the following factors:

 

 

A shift of demand curve to the right (increase in demand) can be as a result of:

 

Differences between a movement along a demand curve and a shift of a demand curve

 

Movement along a demand curve Shift of a demand curve
(i)             It involves only one demand curve It involves two demand curves
(ii)           It is brought about by changes in the quantity demanded. Brought about a change in other factors that influences demand other the price of the product.
(iii)         It involves a change in the quantity demanded. Involves a change in demand.
(iv)         A different quantity is demanded only at a different price. A different quantity is demanded at the same price as before.
(v)           A movement along the curve can be traced up and down along the same curve. A shift causes to move either to the right or left.

 

SUPPLY

Supply is defined as the quantity that suppliers are willing and are able to take to market at a given price over a given period of time.

 

Factors which influence supply of a product

 

Supply schedule and supply curve

 

A supply schedule is a table showing the relationship between supply of a commodity and its price. It shows the quantity supplied at various prices. The supply curve is a graphical illustration showing the trend taken by supply as price either increases or decrease.

Draw a supply curve using the figures given in the supply curve below.

 

Price of x 2 4 6 8 10 12 14 16 18
Supply of x 5 10 15 20 25 30 35 40 45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The supply curve (SS) slopes from the right to the left showing that as the price increases, the supply also increase. For example, at a price Shs. 8, the supply is 20 units. As the price goes up to Shs. 16, the supply also goes up to 40 units.

 

Movement along the supply curve

This is said to be a movement along a supply curve when the quantity supplied of a commodity changes as a result of a change in its price “all other factors remaining constant”. It leads to a movement from one point to another on the same supply curve as shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In (i) when price changes from OP0 to OP1 the movement is downwards from point X to point Y on the same supply curve S0S0. This leads to the supply of OQ1 instead of OQ0.

In (ii) when the price changes from OP2 to OP3 the movement is upwards from T to point Z on the same supply curve. The quantity supplied changes from OQ2 to OQ3.

 

Shift of a Supply curve

A shift of the supply curve is when the entire curve moves either to the left or right as a result of changes in factors influencing supply other than the price of the commodity involved.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In (iii) the whole supply curves S2S2 shifts to S3S3 resulting in the reduction of quantity supplied from OQ3 to OQ4 at the same price OP3 as before. Instead a point on curve S2S2

 

 

 

EQUILIBRIUM PRICE AND EQUILIBRIUM QUANTITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. SIZE AND LOCATION OF A FIRM
  1. Meaning of firm and industry

A firm is an individual enterprise or business unit under one control an ownership e.g. a business unit carrying the production of a good or service such as production of soap or a legal service firm.

A firm is a single business unit or enterprise under one ownership, management and control e.g. KCC, Brookside etc.

An industry consists of all those firms producing the same type of products in the same line of production. A sop industry consists of all those firms producing soap while an insurance industry consists of all these firms providing insurance services.

An industry refers to a group of firms producing the same products for a given market e.g. the milk industry which includes firms such KCC and Brookside. In some cases where we have a single firm, the firm becomes the industry.

  1. Factors which influence the decision on what goods and services to produce.

Businesses tend to provide goods and services that would yield maximum profit.

In order to survive in a competitive market, firms must come up with products with products that consumers prefer. A firm may therefore develop products that are not currently available or copy rivals ideals and improve on them.

A firm would produce commodities for which production costs are low.

A firm will produce commodities that have the highest demand since demand leads to high sales volume.

A firm can only produce commodities for which the necessary resources are available. Such resources include raw materials, labor, equipment, adequate space and appropriate technology.

A firm should produce goods which are favored by the government policy e.g. low taxation and subsidies. Firms should not produce goods that are illegal as it will be breaking the law.

  1. Determining the size of the firm

The following are some of the ways/factors which the size of a firm may be determined:

A firm’s size may be judged by the level of output. A large firm will produce on large scale, while a small firm will produce on small scale.

A small firm is likely to employ only a few employees, while a large firm will most often employ many workers.

A firm with large floor area covered by premises may be said to be large.

Large firms control large proportions of the total market of a particular product. Small firms may only control a small size of the market.

The larger the capital of the firm in terms of assets the larger the firm and vice versa.

A large firm will most often adopt capital intensive methods of technology, where operations will be highly mechanized while small firms use more labour then machinery.

Small firms have low levels of sales with a given period while large firms have huge levels of sales.

  1. Location of the firm

Location is the site or place from which the business operations/firms would be established. The management has to make appropriate decisions concerning the location of the firm since a good location would lead to success while a bad location would lead to failure of the business enterprise.

 

Factors that influence the location of a firm

  1. Raw materials

The availability of raw materials is one of the factors that determine the locations of a firm. Firms should be located near the source of raw material when:

  1. The raw materials are heavy and bulky so as to avoid high transport as cost to the firm.
  2. The raw materials are perishable so as to ensure they get the firm in fresh.

Advantages of locating a firm near the source of raw materials

  1. Transport cost of raw materials in minimized
  2. Storage cost of raw materials will be minimized.
  1. Easier to get fresh raw materials and undamaged raw materials.
  2. Production process can run uninterrupted because of constant supply of raw materials thus continuous production.
  3. Labour (human resources)

Labour is a basic factor of production. It can be skilled, unskilled or semi-skilled labour. It is important for firms ton be located in an area where there is large supply of labour so as to ensure adequate supply of this important factor. Location of the firms near the source of labour reduces the cost of transporting labour force to factories and also reduces time wasting in transporting labour from far.

  1. The market

Reasons for locating near market

  1. If the finished product is perishable, then the firm should be located near the market so as to ensure that it gets to the market in fresh state.
  2. If the finished product is bulky, the firm should be located near the market so as to avoid high cost of transport to the market.
  1. If there is high completion, the firm should be located near the market as this will make it easy to get to the customers fast.
  2. Where a product is made as per customers’ specification, the firm should be located near the market.
  3. Transport and communication

A firm should be located in an area that is well served by means of transport. This ensures that both raw materials and finished products can be transported with ease.

A firm should be located in an area that is well served by means of communication. This ensures that the firm is able to communicate with its customers and suppliers, and vice versa.

Poor developed transport and communication facilities may lead to:

  1. High transport cost especially where raw material or the finished products are bulky.
  2. Delays in receiving the raw materials and distributing the finished products.
  1. Availability of power

Industries require electric power to operate. They should, therefore be located where electricity is readily available.

  1. Security

Industries should be located in areas with adequate security .

  1. Auxiliary services

Firms should be located where auxiliary services such as insurance, banking and warehousing are available.

  1. Water

Many firms require water in one or more processes. Such firms should be located in an area where water is readily available.

  1. Government policy

The government may formulate policies that may have implications on the location of the firms, especially with regard to physical planning. Such planning may be aimed at checking rural-urban migration, environmental degradation or for strategic concerns.

The government may therefore encourage the development of firms in some areas by offering concessions to industrialists such as:

  1. Offering free land
  2. Reduction on taxes
  1. Improvement of infrastructure
  2. Offering direct financial assistance

 

LOCALISATION AND DELOCALISATION

Localization of firms is a situation where many firm are concentrated in a particular area.

Delocalization of firms describes a situation where location of firms is spread in different regions to minimize the problems of localization.

Advantages of localization

  1. Firms will benefit from already from established skilled labour pool from which they can recruit their employees.
  2. Firms will benefit from already established infrastructure such as transportation and communication.
  1. Such areas have social amenities such as hospitals and schools.
  2. Employment is created in such areas.
  3. Joint management of wastes can be carried out by all firms.

Disadvantages of localization

  1. As many people move to such areas in search of jobs, slums may be created.
  2. Land becomes very expensive in such areas.
  1. In case of war such areas can become a target of attacks.
  2. Leads to rural-urban migration leaving the old and the young in the rural areas.
  3. A lot of environmental degradation through pollution by many cars, deforestation, discharges of waste and mining in the area.

Advantages of delocalization

  1. It ensures that all areas are developed.
  2. To ensure that employment opportunities are evenly distributed all over the country.
  1. It promotes the development of infrastructure all over the country.
  2. It leads to the establishment of auxiliary services e.g. banks and insurance firms, in rural areas for the benefit of the residents.
  3. It enhances the development of social amenities such as schools and hospitals in all areas of the country.

Disadvantages of delocalization 

  1. Pollution is spread to the rural areas.
  2. The security in such areas may not be guaranteed.
  1. Auxiliary services such as banks and postal services may be lacking in such areas.
  2. Incentives offered by the government to industries in order to delocalize add to public expenditure, which is an added burden to tax payers.
  3. Industries may not enjoy the benefits that accrue from concentration of industries e.g. developed infrastructure.

 

 

 

Ways in which the government may motivate industries to delocalize

  1. By giving entrepreneurs free of cheap land to construct their factories.
  2. By giving tax incentives to those who locate their industries in the delocalized area.
  1. By providing security in the new industrial areas.
  2. By providing subsidies to those industrialists who are willing to delocalize.
  3. By providing the appropriate infrastructure in the area.

ECONOMIES OF SCALE

Economies of scale are the benefits the firm or industry derives from expanding its scale of production/the advantages of operating on large scale.

There are two types of economies of scale;

  1. Internal economies of scale
  2. External economies of scale

Internal economies of scale

These are advantages that accrue to a single firm as its production increases, independent of what happens in the other firms in the industry.

Internal economies of scale result from an increase in the level of output and cannot be realized unless output increases.

The internal economies of scale may be achieved by a single plant of the firm or they may arise from an increase in the number of plants.

The internal economies of scale include;

  1. Marketing economies (Buying and selling economies)

These are the benefits which a firm derives from large purchases of inputs or factors of production due to the discounts offered in the process e.g. trade and quantity discounts

The firms may also incur less cost per unit in transportation of the goods bought

Selling economies of scale arise from the distribution and sale of the finished product as the scale of production increases, i.e it is likely to incur less cost per unit in areas such as advertising, distribution e.t.c

  1. Financial economies;As a firm grows, its assets also increase. These assets can be used as security to borrow money/loan from financial institutions at low interest rates.

Large firms can also raise more funds through selling and buying of shares and debentures.

Diversification of markets or products can be done so that;

  1. Failure of one product is offset by the success of other products
  2. A failure of a product in one part of the market may be offset by the success of the same product in another part of the market

-Large scale firms are also able to obtain supplies from alternative sources so that failure in one does not significantly affect the activities of the firm.

  1. iv) Managerial economies/staff economies

Large firms are able to hire/employ specialized staff and management. This increases the firms efficiency and productivity i.e.

  1. The staff is able to make viable decisions that can go along way in increasing the firms output.
  2. The firm/management is also able to put in place better organizational structures which allow for departmentalization and subsequent division of labour.Division of labour leads to specialization and hence the overall increase in the firms output.

-the costs of hiring/employing the specialized staff/management are spread over a large number of units of output of variable cost of production.Thus,the cost of labour is minimized when production increases leading to increased profits.

  1. v) Technical economies;

These are benefits that accrue to a firm from the use of specialized labour and machinery. Large firms have access to large capital which they utilize to obtain those machines and hire the specialized labour.The machines use the latest technology and are put to full use, making the firm production more efficient i.e. cost of the machines and labour are spread over many units of output hence less costly but giving higher profits.

 

  1. vi) Research economies;

Large firms can afford to carry out research into better methods of production and marketing.(Research is necessary because of the increased competition in the business world today) This improves the quality of the products and increases the sales and profits made by the firm.

  1. Staff welfare economies;

Large firms can easily provide social amenities to their employees including recreations, housing, education, canteens and wide range of allowances. These amenities work as incentives to boost the morale of the employees to work harder and increase the quality and quantity of output. This leads to higher sales and profits.

  1. Inventory economies

A large sized firm can establish warehouses to stock raw materials and therefore enjoy large stocks of raw materials for use when the raw materials are in short supply.Thus, the firm can avoid production stoppages that can be occasioned by shortages of the raw materials. The suppliers of such material may be sold at a higher price to realize profit.

External economies of scale;

External economies of scale are those benefits which accrue to a firm as a result of growth of the whole industry. They are realized by a firm due to its location near other firms. They include;

  1. Easier access to labour;Where many firms are located in one area a pool of labour of various skills is usually available. Therefore firms relocating to the area find it easy to obtain.
  2. Improved/efficient infrastructure;Usually where many firms are located, infrastructure would be highly developed e.g. roads, power, water and communication facilities. Firms relocating in that area thus enjoy the services of infrastructure already in place.
  3. Firms may be able to dispose off their waste product easily
  4. Ready market may be available from the surrounding firms
  5. Readily available services such as banking, insurance and medical care
  6. Adequate supply of power due to large volume of consumption e.t.c

 

 

Diseconomies of scale

A firm cannot continue to expand indefinitely or without a limit.As a firm grows or industry expands, the benefits the firm can reap or get from such growth or expansion have a limit.

Any further expansion in the scale of production beyond the limit will actually create negative which would increase the cost of production.

The negative effects to a firm due to its size or scale of production are referred to as diseconomies of scale.

Diseconomies of scale are therefore the problems a firm experiences due to expansion.

Sources of diseconomies of scale

Diseconomies of scale may arise from;

  1. Managerial functions which become increasingly difficult to perform as the firm expands. Communication and consultations take more time than before.
  2. Changing consumer tastes which may not be fulfilled immediately because decision-making may take too long.
  3. Increase in the costs of transporting raw materials, components and finished products.
  4. Labour unrest or disputes and lack of commitment from the employees because they are not involved in decision making
  5. Stoppage of production process when disputes arise since all production stages are interdependent and labour specialized.
  6. Lack of adequate finances for further expansion of the firm.

There are two forms of diseconomies of scale fiz internal diseconomies and external diseconomies of scale.

 

Internal diseconomies of scale

These are the problems a firm experiences as a result of large scale production due to its persistant growth. They include;

  1. Managerial diseconomies of scale

These are the losses which may arise due to the failure of management to supervise and control the operations properly. This may be because the firm is large resulting into;

  1. Difficulties in controlling and coordinating the departments leading to laxity among employees.
  2. Difficult in decision making and communication and co-ordination between management and workers. Delays in decision making means lost opportunities.
  3. Impersonal relationship between management and workers, and staff problems not easily established which could lead to low morale, disputes, unrests/skills.
  4. An increase in management tasks leading to increase in number and impact of risks i.e. any error in judgement on the part of management may lead to big losses.

 

  1. Marketing diseconomies of scale

These are losses which may arise due to changes in consumer tastes. These may be as a result of;

  1. A change in tastes leading to fall in demand for the firms products. A large firm may find it difficult to immediately adjust to the changes in the tastes of consumers, hence it will experience fall in its scale.
  2. An increase in the scale of production, which leads to higher demand for factor of production such as labour, raw materials and capital. This will result into higher prices for them. This will push up the prices of the goods and services produced, which will cause a fall in sales.

 

When the output of a firm increases beyond a certain limit, some factors may set in to increase the average costs.e.g the overhead costs incurred in production and marketing activities may increase. This is because firms may intensify their promotional campaign, incur heavy transport expenses and be forced to offer generous discounts in an effort to attract more clients. All these are factors that may increase overheads without any corresponding increase in real benefits to the firm.

  1. Financial diseconomies of scale

These are losses which may arise due to a firm’s inability to acquire adequate finances for its expansion. This will prevent the firm from expanding further thereby limiting its capacity to increase the volume of its output.

External diseconomies of scale

These are demerits that affirm experiences as a result of growth of the entire industry. These include;

-scramble for raw materials

-inavailability of land for expansion

-scramble for available labour

-competition for available market

-easy targets especially in times of war.

Existence of small firms in an economy

As the firm grows in size, its scale of production increases.However, many firms remain small even though they face stiff competition from larger firms. Some of the reasons for existence of small scale firms include;

  1. Size of the market

Large scale production can only be sustained by a high demand for a product. If the demand for a product is low, it may not be advisable for a firm to produce on a large scale, hence it will remain small.

  1. Nature of the product;

The nature of the product sometimes makes it impossible to produce in large quantities e.g. personal services e.g. hairdressing, painting or nursing can only be provided by an individual or a small firm.

  1. Simplicity of organization

Small firms have the considerable advantage of simplicity in organization. They avoid bureaucracy, wastage and managerial complexity associated with large scale organizations.

Where a firm intends to take advantage of simplicity, the proprietor may maintain its small firm.

 

  1. Flexibility of small firms

Small firms are flexible i.e. one can easily switch from one business to another where an owner of a business wishes to maintain flexibility so as to take advantage of any new opportunity, he/she may have to maintain a small firm.

  1. Quick decision making

In a situation where proprietors want to avoid delay in decision-making, they may opt to maintain a small business as this would involve less consultation.

  1. Belief that a small firm is more manageable

Many small businesses have the potential of expansion, yet their owners prefer to have them remain small believing that big businesses are difficult to run.

  1. Rising costs of production

In situations where production costs rise too fast, such that diseconomies of scale set is very early, the firm has to remain small.

  1. Need to retain control

In order to retain control and independence, the owners of the firm may wish to keep it small.

  1. Legal constraints/Government policy

In some situations, the laws may restrict the growth of a firm. In such circumstances the existing firms remain small.

  1. Small capital requirements

As opposed to large scale firms, small firms require little amounts of capital to start and operate.

Implication of production activities on environmental and community health

As production activities take place in a given area, the environment and the health of the community around may be adversely affected by these activities. Some of these effects include;

  1. Air pollution

This is caused by waste which is discharged into the atmosphere leading to contamination of the air. Such waste may be in funs of industrial emissions and toxic chemicals from the firms. These pollutants cause air-borne diseases. Acid rain due to such emission may also affect plants.

 

 

 

 

 

 

 

 

 

 

 

 

  1. PRODUCT MARKET

The term ‘market’ is usually used to mean the place where buyers and sellers meet to transact business. In Business studies, however, the term ‘market’ is used to refer to the interaction of buyers and sellers where there is an exchange of goods and services for a consideration.

NOTE: The contact between sellers and buyers may be physical or otherwise hence a market is not necessarily a place, but any situation in which buying and selling takes place. A market exists whenever opportunities for exchange of goods and services are available, made known and used regularly.

Definition:

-The features are mainly in terms of the number of sellers and buyers and whether the goods sold are homogeneous or heterogeneous

-Product market is also referred to as market structure.

-Markets may be classified according to the number of firms in the industry or the type of products sold in them..

TYPES OF PRODUCT MARKET

The number of firms operating in a particular market will determine the degree of competition that will exist in a given industry. In some markets there are many sellers meaning that the degree of competition is very high, where as in other markets there is no competition because only one firm exists.

When markets are classified according to the degree of competition, there are four main types, these are;

PERFECT COMPETITION

The word ‘perfect’ connotes an ideal situation.

This kind of situation is however very rare in real life; a perfect competition is therefore an hypothetical situation.

This is a market structure in which there are many small buyers and many sellers who produce a homogeneous product. The action of any firm in this market has no effect on the price and output levels in the market since its production is negligible.

Feature of Perfect Competition

Firms (suppliers) in such a market structure are therefore price takers i.e. they accept the prevailing market price for their products.

In this market structure, it is assumed that no barrier exists in entering or leaving the industry.

NOTE: The market (perfect competition) has normal demand and supply curves. The individual buyers demand curve is however; perfectly elastic since one can buy all what he/she wants at the equilibrium price. Similarly, the individual sellers supply curve is also perfectly elastic because one can sell all what he/she produces at the equilibrium price.

Perfect competition market hold on the following assumptions;

Examples of perfect competitions are very difficult to get in the real life but some transactions e.g. on the stock exchange market, are very close to this.

Criticism of the concept of perfect competition

In reality, there is no market in which perfect competition exists. This is due to the following factors:

MONOPOLY

A monopoly is a market structure in which only one firm produces a commodity which has no close substitutes.

Some of the features in this market structure are;

Price discrimination may be facilitated by conditions such as;

Market separation may be based on the following factors;

Sources of monopoly power

Advantages of monopoly

Disadvantages of monopoly

 

MONOPOLISTIC COMPETITION

Monopolistic competition is a market structure that falls within the range of imperfect competition i.e. falls between perfect competition and pure monopoly. It is therefore a market structure that combines the aspects of perfect competition and those of a monopoly.

Since it is not possible to have a market that is perfectly competitive or a market that is pure monopoly in real world, all market structures in real world lie between the two and are thus known as imperfect market structures.

In a monopolistic market, there are many sellers of a similar product which is made to look different. This is known as product differentiation. These similar products are made different through packaging, design, colour, branding e.t.c

The following are the assumptions of a monopolistic competition.

OLIGOPOLY

This is a market structure where there are few firms. The firms are relatively large and command a substantial part of the market. It is a market structure between the monopolistic competition and monopoly.

Types of Oligopoly

Oligopoly may be classified according to the number of firms or the type of products they sell. They include;

Features of oligopoly

This feature explains why a firm in oligopolistic market faces two sets of demand curves resulting to a Kinked Demand Curve. One curve, for prices above the determined one, which is fairly gentle and the othere curve for prices below the determined one which is fairly steep.

 

 

 

 

 

 

 

 

 

THE KINKED DEMAND CURVE

 

 

  1. i) The kinked demand curve illustrates the rigidity price behaviouroligopolists.
  2. ii) The curve has two parts with different elasticities: AB is elastic and BC is inelastic.

iii) Sellers cannot increase price from price OPo to OP1 because the Quantity bought will decrease (fall).

  1. iv) The sellers cannot reduce price from OP1 to OP2 because very little amount will

increase in demand.

  1. The sellers will stick to price OPobecause it is the most profitable and most popular to both sellers & buyers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. CHAIN/CHANNELS OF DISTRIBUTION

Introduction

Costs incurred by middlemen while distributing goods

CHANNELS OF DISTRIBUTING VARIOUS PRODUCTS (refer to Inventor book three pages 50 to 53)

ROLES OF MIDDLEMEN

The following are some the roles performed by middlemen in the chain of distribution

FACTORS TO CONSIDER BEFORE SELECTING A DISTRIBUTION CHANNEL

Factors that influence the choice of a distribution channel include the following:

 

Questions

 

 

 

 

 

 

 

 

  1.  NATIONAL INCOME

Terms used in national income

CIRCULAR FLOW OF INCOME

Assumptions/features of circular flow of income

Factors affecting the circular flow of income

 

The factors include the following:

Injections

Withdrawals

APPROACHES USED IN MEASURING NATIONAL INCOME

National income is arrived at summing expenditure on all final goods and services (that have reached the final stage of production). Such expenditure is divided into:

Therefore national income = C+I+G+(X – M)

Problems associated with expenditure approach

Problems related to this method

Assignment: Read and make short notes on Output approach (refer to Inventor book three pages 65 – 66).

USES OF NATIONAL INCOME STATISTICS

put their money. The statistics provide relevant information concerning the performance of each sector.

Factors which influences the level of national income.

  1. For other factors refer to Inventor book three pages 68 – 69.

Reasons why high per capita income is not an indicator of a better living standard in a country

Questions

 

 

 

 

  1. POPULATION AND EMPLOYMENT

Introduction

Population refers to the number of human beings living in a particular region at a particular time.

The size of the population is ascertained through national headcount, which is referred to as a national census. It is an international requirement that each country must hold a national census at least every ten years.

Population issues are major concerns to business people because people are consumers of goods and services as well as providers of factors of production.

Basic concepts in population

  1. Fertility – this is defined as the ability of a woman to give birth to a live child.
  2. Fertility rate – refers to the average number of children born per woman during her child bearing years in a given population.

Factors that determine fertility rate

  1. Birth rate – refers to the number of live births per 1000 people per year. This is also referred to as crude birth rate and may be calculated as follows:

CBR= Number of Births    x 1000

Total population

Factors that are likely to lead to high birth rates

Factors that may lead to decline in birth rates

  1. Mortality/death rate – refer to the number of people who die per thousand people per year. Is also known as natural attrition rate and may be calculated as follows:

MR= Number of death   x 1000

Total population

  1. Infant mortality rate- refers to the number of child deaths per thousand children below the age one year per annum.
  2. Population growth rate – refers to the rate at which the population of a country is increasing or decreasing. It can be calculated as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. THE LEDGER

This is a special ledger which is used to record cash and cheque transactions.

It contains only the cash in hand and cash at bank (i.e. cash and bank) accounts

This ledger is used to record business expenses and incomes (gains).It contains all the nominal accounts.

This ledger is used in recording private accounts i.e. confidential and valuable fixed assets and the personal accounts of the proprietors such as capital accounts and drawing accounts.

The general ledger contains all other accounts that are not kept in any other ledger e.g. buildings, furniture and stock accounts.

-Personal accounts of debtors or creditors who do not arise out of sale or purchase of goods on credit are found in the general ledger e.g. debtors as a result of sale of fixed asset on credit and expense creditors.

  1. C) Private accounts

These are accounts that the business considers to be confidential and are not availed to everybody except the management and the owners.

-These accounts may be personal or impersonal.

-They include capital account, drawings accounts, trading, profit and loss accounts.

Types of ledgers

The following are the main types of ledgers that are used to keep the various accounts

This is the ledger in which accounts of individual debtors are kept.

-It is used to record the value of goods sold on credit and the customers to whom the credit sales are made, hence contains the personal names of the debtors.

-It is called a sales ledger because the accounts of debtors kept here in are as a result of sale of goods on credit. An account is kept for each customer to which is debited the value of credit sale. Payment made by the debtor are credited to the account and debited in the cash book.

The purchases ledger contains accounts of creditors i.e. contains the records of the value of goods bought on credit and the suppliers of such goods.

It is a record of the debts payable by the business due to credit purchases.

An account is kept for each creditor to the credit side of which is posted the value of.

  1. b) Impersonal accounts

This category of ledger accounts includes all other accounts that are not personal in nature e.g. buildings, purchases, rent, sales and discounts received.

Impersonal accounts fall into two types

These accounts are also used to draw up the balance sheet.

-All expenses, revenues, sales and purchases are hence nominal accounts.

-The main business expenses include purchases,sales,returns,insurance,stationary,repairs,depreciation,heating,discount allowed, lighting interests,printing,wages,rent,rates and advertising.

The value of losses is included in the same side as the expenses when drawing up the final accounts though it is not an expense.

-The income (revenues) include sales,returns,claims out, interest receivable, dividends receivable and commission receivable. Profit is usually categorised together with these incomes when drawing up the final accounts.

Classification of ledger accounts

Many businesses handle few transactions, hence they have few records to keep. Their accounts can thus be kept in a single ledger referred to as the general ledger

As a business grows the volume of transactions increases. This single ledger, therefore, becomes very bulky with accounts and it becomes difficult to make reference to it.

In order to simplify the recording of transactions and facilitate reference to the accounts, ledger accounts are usually classified and each category kept in a special ledger.

NOTE (i) Since many transactions are cash transactions which are normally recorded in the bank and cash accounts a need arises to remove them from the main/general ledger to a separate ledger called the cash book.

(ii)  The number of ledgers kept depends on the size of the business.

Classes of accounts

All accounts can be classified into either personal or impersonal accounts.

-These are account of persons

-They relate to personal, companies or associations.

-They are mainly accounts of debtors and creditors.

 

NOTE: capital account is the proprietors personal account, showing the net worth of the business hence it is a personal account.

-The account balances of these accounts are used to draw up the balance sheet.

-In the ledger, the trial balance total is not affected.

Purpose of a trial balance

The purpose of a trial balance include;

i-The rule of double entry has been adhered to or observed/ complied with.

ii-There are arithmetical errors in the ledger accounts

Limitations of a trial balance

Even when the trial balance totals are equal, it does not mean that there are no errors made in the ledgers. This is because there are some errors that do not affect the trial balance.

A trial balance only assures the book keeper that the total of debit entries is equal to total credit entries. The errors that do not affect the trial balances are;

 

Dr.sales a/c

Cr.Lydius a/c              instead of

 

 

Dr.Lydius a/c

Cr.sales a/c

 

 

 

TRIAL BALANCE

-A trial balance is a statement prepared at a particular date showing all the debit balances on one column and all the credit balances on another column.

NOTE: A trial balance is not an account but merely a list of assets, expenses and losses on the left and capital liabilities and incomes (including profits) on the right.

-The totals of a trial balance should agree if the double entry has been carried out correctly and there are no arithmetic errors both in the ledger as well as in the trial balance itself.

-If the two sides of a trial balance are not equal, it means there is an error or errors either in the trial balance or in the ledger accounts or in both.

 

Errors that may cause a trial balance not to balance

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