Form 3 Business studies topics & Notes
High School level Business course notes and test papers.
Demand and Supply
- Meaning of demand
- Factors which influence demand for a product
- Derived demand and joint demand
- Demand schedule and demand curve
- Movement along a demand curve and shift in a demand curve
- Meaning of supply
- Factors which influence supply of a product
- Supply schedule and supply curve
- Movement along a supply curve and shift in a supply curve
- Equilibrium price and quantity
- Excess demand and excess supply
- Effects of shift in a demand curve and shift in a supply curve on equilibrium price and quantity
- Other methods of determining price of a product
Size and Location of a Firm
- The concept of a firm and an industry
- Decision on what goods and services to produce
- Determining the size of a firm
- Location of a firm
- Localization and delocalization of firms in an economy
- Economies and diseconomies of scale
- Existence of small firms in an economy
- Implications of production activities on the environment and community health
- Maintain healthy environments
- Meaning of a market
- Meaning of product market
- Features of various types of product markets
Chain of Distribution
- Meaning of distribution
- Channels of distribution
- Intermediaries in the distribution chain
- Distribution of various products
- Choosing a distribution channel
- Meaning of national income
- The circular flow of income
- Methods of measuring national income
- Problems encountered in measuring national income
- Uses of national income statistics
- Factors which influence the level of national income
Population and Employment
- Basic concepts in population
- Implication of population size and structure on development
- Employment and unemployment
- Types and causes of unemployment
- Solving unemployment problems
Net Worth of A Business
- Meaning of a business transaction
- Cash and credit transactions
- Cash and credit transactions
- Effects of transactions on the balance sheet
- Causes of changes in capital
- Initial and final capital of a business
- Meaning and purpose of a ledger
- Concept of double entry
- Meaning and format of a ledger account
- Rules of posting of various ledger accounts
- Recording business transaction in the ledger accounts
- Balancing a ledger account
- The trial balance
- Purpose and limitations of a trial balance
- Classification of ledger accounts
- Types of ledgers
The Cash Book
- Meaning and purpose of a cash book
- Basic types of cash books
- Contra entry
- Preparation of a cash book
FORM THREE CHAPTER FIFTEEN DEMAND
By the end of the topic the learner should be able to:
a) Explain the meaning of demand;
b) Explain the factors which influence demand for a product;
c) Distinguish between derived demand and joint demand;
d) Derive a demand curve from a demand schedule;
e) Distinguish between movement along a demand curve and shift in the demand curve;
f) Explain the meaning of supply;
g) Explain the factors which influence supply of a product;
h) Derive a supply curve from a supply schedule;
i) Distinguish between movement along a supply curve and shift in supply curve;
j ) Determine equilibrium price and quantity;
k) Explain the effects of excess demand and excess supply in the market;
1) Explain the effect of a shift in demand curve on equilibrium price and equilibrium quantity; m) Explain the effect of a shift in supply curve on equilibrium price and equilibrium quantity; n) Explain other methods of determining price of a product.
a.) Meaning of demand
b.) Factors which influence demand for a product c.) Derived demand and joint demand
d.) Demand schedule and demand curve
e.) Movement along a demand curve and shift in a demand curve f.) Meaning of supply
g.) Factors which influence supply of a product h.) Supply schedule and supply curve
i.) Movement along a supply curve and shift in the supply curve j.) Equilibrium price and quantity
k.) Excess demand and excess supply
l.) Effects of shift in a demand curve and shift in a supply curve on equilibrium price and quantity
m.) Other methods of determining price of a product.
Quantity of a commodity that buyers are willing and are able to buy at a given price over a given period of time.
Factors that influence the demand of a product/determinant of demand.
a.) Price of the commodity
When the price of a product increases its demand decreases and when the price decreases its demand increases.
b.) Level of consumer income
An increase in consumers disposable income generally leads to an increase in the demand for goods and services because the ability to buy increases.
c.) Price of other related products
Commodities are related in two ways. That is as either complimentary or as a substitute. Complementary are goods used together while substitutes can be used instead of each other. Hence the demand for a commodity can be affected by the prices of other commodities depending on the relationship. Reduction of price of a substitute will reduce the demand of the substituted goods while increase in price of the complimentary goods will reduce the demand for the goods.
d.) Changes in taste, fashion and preference of consumers
If taste change in favor of commodity, more of that commodity is likely to be bought even if it’s
e.) Government policy
The government may come up with policies that are meant to encourages or discourage the consumption of certain commodities.
This policy may be inform of:
An increase in tax on commodity increases its price which makes its demand to fall and vice versa.
The government meets part of a cost or production of a commodity so that it can be sold cheaply. Hence the demand rises
The government may pass laws meant to encourage or discourage consumption of a certain commodities.
The government may control the price of certain commodities to ensure that they do not go beyond a certain limit.
f.) Change in the population
An increase in population will bring about an increase in demand for goods and services. While a decrease in population will reduce demand.
g.) Future expectations of changes in price and quantities supplied
If the consumers expect prices of commodity to rise or shortage of the supply of the commodities in future they will buy more of it. While if they anticipate a decline in price of a commodity, they may buy less of it when the price is still high.
h.) Seasonal changes
Demand for some commodities depends on the season.
i.) The distribution of incomes
The demand for goods and services is usually higher when incomes are distributed among many people as opposed to where incomes are in the hands of a few people.
j.) Terms of sale
The demands for goods or services can increase if and when favorable terms of sale are offered to consumers. The terms may be offering goods on credit, giving discounts to consumers and lengthening the credit period.
Derived demand is where a good is needed because it give rise to a commodity that is actually demanded e.g. hen and eggs
These are goods that are consumed together .E.g. tea and sugar
It is a table showing the quantities of commodities that consumers are willing and are able to buy at different prices within a given period of time.
A graph showing the quantities demanded against the prices. On the y axis is recorded the price and on the x axis the quantities demanded.
The tendency of the demand to increase as prices decrease and to reduce as prices increase is referred to as the law of demand. By obeying the law of demand, the demand curve slopes downwards from left to right.
Movement along and shift in demand curve.
Movement along the demand curve
The quantities demanded increase with decreases in prices while the demand decreases with the increase in prices.
From the above diagram it can be observed that:
The initial price was 0 and the quantity demanded was 0 .The price/quantity combination is at point a.
When prices increased to P2, The quantity demanded reduced to Q2, leading to a movement along the demand curve from point a to point c.
When the price reduced to P1, the quantity demanded increased to Q1, Resulting to a movement
along the demand curve from point a and point b.
Shift in demand curve
Shift in demand curve is caused by other factors except price. An increase in demand would be indicated by a shift of the demand curve to the right as shown below.
The original demand curve 0 0has shifted to 1 1 .Note that the quantities demanded have increased even though the prices have remained unchanged.
On the other hand, reduction in demand may be indicated by a shift of the demand curve 0 0has shifted to 1 1 as shown below.
The quantity of a commodity that sellers are willing and able to bring to the market at a particular price over a given period of time.
Factors which influence supply of a product.
a.) Price of the product
Producers will supply more goods to the market when the prices are high while if the prices go down ,less of the commodity will be supplied in the market.
b.) Law of supply
Increase in supply increases with the increase in price and reduce with the reduction in prices.
c.) Cost of production
An increase in the cost of factors of production or of inputs such as raw materials and labor will lead to an increase in total production costs, The prices of the commodity will go up making the demand to fall hence producers will reduce their supply to avoid excess supply in the market.
d.) Availability of factors of production
The amount of commodity supplied to the market will depend on availability of factors of production and inputs such as raw materials. The lower the factors of production the lower the supply of the commodities
e.) Government policies
Government policies such as taxes, subsidies, quotas and price controls affect supply.
f.) Future expectations of changes in price
The supply will reduce when producers expect prices to rise as they will hoard the goods and sell them when the prices are higher reducing the supplies at the current time.
g.) Natural factors
These can affect the quantity of the commodity supplied favorably or unfavourably.eg in case of agricultural products, weather, diseases and pests may affect the quantity supplied either negatively or positively.
It takes time for supply to adjust to market changes. For example in agriculture, one has to wait for the crops to grow.
A supply schedule shows, in a tabular form, the quantity of a commodity that the producers are willing and able to bring about to the market at different prices over a given period of time.
A supply curve is a graph showing the relationship between the price of a commodity and the quantity of the commodity supplied.
Movement along the supply curve
A normal supply curves slopes upwards from left to right. Therefore the quantities supplied increases with the increase in prices and decreases with decrease in prices of the commodity.
Quantity supplied at price P1 is Q1.If the price increase from P1 to P2 the quantity supplied also increases from Q1 to Q2. The price /quantity combination therefore moves along the supply curve from point Y to Z.
On the other hand, if price reduces from P1 to P3 the quantity supplied also reduces from Q1 to Q3 .The price/quantity combination moves along the supply curve from point Y to point X.
Shift in supply Curves
Apart from the price of the commodity, a change in any other factor that influences supply of the commodity will lead to a completely new supply curve. Thus an increase in supply will result into a shift of the supply curve to the right as shown below.
In the above diagram, an increase in supply resulted to a shift of supply curve from S1S1 to S2S2.A
reduction in supply will be indicated by a shift in supply curve to the left as shown below.
From the above graph, it can be noted that a decrease in supply resulted into a shift in supply curve from
S1S1 to S3S3.
Equilibrium price and quantity.
The price which equates the quantity demanded to quantity supplied is the equilibrium price. The corresponding quantity is known as equilibrium quantity
𝑒 = 𝑖 𝑖 𝑖 𝑖 𝑒
𝑒 = 𝑖 𝑖
Equilibrium as used in price determination shows that:
The buyers and sellers are both satisfied with the prices and quantity.
Setting any prices or quantity other than the equilibrium, results in market instability.
If the factors determining demand and supply do not change, the equilibrium price will prevail in the market.
Below figure shows movements of price towards the equilibrium
Excess demand refers to the quantities demanded by customers over the quantities that the suppliers are able to supply in the market.
Refers to the quantities supplied over the quantities that customers are able to buy. Note from the above diagram:
If the price is set at p1 which is above the equilibrium price, there would be excess supply in the market. In order to clear this excess supply, sellers will be compelled to lower their prices towards the equilibrium.
If the price is set at p2 which is below the equilibrium price, there would be excess demand. The buyers will then be forced to increase their prices towards the equilibrium price in order to attract more supply.
Effects on shift in demand curve and supply curve on the equilibrium. Change in demand curve.
Where the demand curve slopes downwards to the right and supply curve upwards to the right an increase
in demand will result into an increase in equilibrium price and also the equilibrium quantity.
This is because an increase in demand will attract higher prices and the high prices will attract more supply.
Increase in demand
From the above diagram, demand increased from D1D1 to D2D2 with the effect that the equilibrium price and quantity changed from P1 to P2 and Q1 to Q2 respectively. This change moved the equilibrium point from E1 to E2.
A decrease in demand will result into a decrease in the equilibrium price and also the equilibrium quantity.
From the figure above, a reduction in demand from D3D3 to D4D4 changed the equilibrium price and quantity from P3 to P4 and Q3 to Q4 respectively. The point of equilibrium hence shifted from E3 to E4.
Change in supply
In a normal situation in which the demand curve slopes downwards from left to the right and the supply curve upwards from left to right ,an increase in supply will bring about a drop in equilibrium price and an increase in equilibrium quantity.
This is because with the increase in goods supplied, the suppliers will be compelled to lower their prices so that they can sell the surplus. At the reduced prices the quantities demanded will be higher.
A decrease in supply will result in an increase in equilibrium price and a decrease in equilibrium quantity as shown below.
Other methods of Price determination
a.) Haggling /bargaining
Buyer and seller negotiate over the price. This process continuous until the two agrees on the prices.
Public is invited to make bids for the supply or sale of a particular product. The person who offers the most reasonable / lowest price usually wins the tender.
c.) Government intervention
Government may impose tax or offer subsidies thus determine price. Government may also set a price level at which a product may be sold.
d.) Recommending or fixing by a producer
Producer may determine the prices of their products and recommend or even require that they be sold at those prices.
This is a situation where the prices of the commodity is set through bidding ,buyers are given an opportunity to suggest the price one after the other and the one that sugest the highest price called the highest bidder buys the commodity.
End of topic
Past KCSE Questions on the topic
1. Indicate by writing a demand or supply whether each of the following factors influence demand or supply of a commodity. (5mks)
a) Changes in the prices of inputs
b) Change in tastes and preferences. c) Changes in technology
d) Changes in outcomes
e) Changes on the price of other related products.
2. State the law relating to each of the following. a) Demand
c) Demand and supply
3. In each of the following cases, indicate whether the supply will increase, decrease or remain constant. a) If the demand for coffee rises, the supply of tea is likely to
b) If the prices of cars fall, the supply of petrol as likely to
c) if the demand for beef increases the supply of wool is likely to
4. State four factors that may cause an increase in the supply of a product. (4mks)
5. Outline four factors that may cause a decrease in the quantity demand for a product.
5 Quantity demanded
6. Draw a demand curve based on the demand schedule below
7. The following diagrams represent demand and supply of a product. (5mks)
a) Labels the cover (a) and (b)
b) State what is represented by point (c)
c) On the diagram, indicate equilibrium price (PE) and equilibrium quantity (QF).
8. State four factors that may lead to an increase in market supply of a product. (4mks)
9. The diagram below shows a shift in demand curve from d0d0 to d1d1.
e to shift f
Identify four factors that have made t curv
11. The table below illustrates the demand and supply of commodity. Price Quantity demanded kg Quantity
Kg per month kg per month
15.00 80 20
20.00 70 30
25.00 60 40
30.00 50 50
35.00 40 60
40.00 30 70
From the table above, state
a) The nature of the demand for the commodity b) The nature of the supply of the commodity
c) The equilibrium price
d) The equilibrium quantity.
1. Outline four ways in which the price of goods and services can be determined in the market other than through the forces of demand and supply curve.
SIZE OF THE FIRM
By the end of the topic the learner should be able to:
a) Distinguish between a firm and an industry;
b) Discuss the factors which influence the decision on what goods and services to produce;
c) Describe the criteria for determining the size of a firm;
d) Explain the factors that influence the location of a firm;
e) Discuss advantages and disadvantages of localization and delocalization of firms;
f) Discuss the economies and diseconomies of scale;
g) Justify the reasons for existence of small firms;
h) Discuss the implication of production activities on the environment and community health;
i) Explain the need for maintaining a healthy environment.
a.) The concepts of a firm and industry
b.) Decision on what goods and services to produce c.) Determining the size of a firm
d.) Location of a firm
e.) Localization and delocalization of firms in an economy. f.) Economies and diseconomies of scale.
g.) Existence of small firms in an economy.
h.) Implications of production activities on the environment and community health. i.) Maintaining healthy environments
Firm refers to a single unit of business organizations that brings together the factors of production to produce any given commodity.
Factors to determining decision on what goods and services to produce.
Businesses will produce goods and services that would yield maximum profit.
b.) Level of competition
A firm will produce goods that meet least competition such as goods that are either not available in the market or improvement on existing ones.
c.) Availability of resources
A firm will produce commodities that the resources for which is necessary to produce them are available
.e.g. raw materials, appropriate labor, equipment and space.
d.) Government policy
A firm should produce commodities that are favored by government policy. For example the firm should not produce goods which are not illegal.
e.) Demand /market
A firm should produce commodities that have the highest demand. High demand leads to high sales volume.
f.) Cost of production.
A firm would normally produce for which production costs are low.
Factors determining the size of a firm.
a.) The number of employees
Large firms always have a large number of workers compared to a small firm.
b.) Volume of outputs
A firm would be considered big if it has a large volume of output
c.) Floor area covered by premises
A firm may be considered to be large if the floor area covered by the premises is large.
d.) Capital invested
The larger the capital invested in assets the larger the firm.
e.) Production methods
Larger firms are associated with specialization and division of labor as compared to small firms
f.) Market served
A firm having many branches all over the country is said to be big
g.) Sales volume
The amount of sales also determines the size of the firm. The larger the sales volume the larger the firm.
Location of the firm
Location of a firm is the selection of a place where the proposed firm will be established.
Factors that influence the location of firms
a.) Availability of raw materials
If the raw materials are bulky and heavy to transport the firm would be located near the source of the raw. The nature of raw material, perishable raw material also determines the location of a firm.
b.) Market availability
A firm may be located near the market for its products to avoid the costs involved in transportation of the finished products. For example firms that deals in heavy and bulky commodities.
c.) Availability of human resource (labor)
Labor intensive firms should be located in areas where there are abundant and appropriate labour forces.
d.) Appropriate transport and communication network
Good transport network for transporting raw materials to the firm and also finished products to the market is needed so the firm will be located in areas with good transport and communication networks.
e.) Adequate power and water supply.
Firms that requires a lot of power and water need to be located where there is adequate supply for power for running machines and clean water supply for cleaning, cooling and even as a raw material.
f.) Government policies
The government may encourage or discourage the development of firms in particular areas to create jobs and prevent congestion by using the following:
Offering free or cheap land.
Reduction of taxes.
Offering direct financial assistance.
Improvement of infrastructure.
g.) Availability of security
Firms cannot be located in areas without securities compared to areas with maximum security
Localization and Delocalization of Firms.
Localization of Firms
This means the concentration of similar firms in one particular area or region.
Factors which encourage localization of firms.
Well-developed infrastructure in an area.
Availability of large population which may provide both labour and a market for its products.
Government policy requiring firms to be located in a certain area.
Availability of raw materials in a certain area.
Availability of support industries such as banks
Advantages of localization.
a.) Establishment of support business
Encourages the established of support business enterprises such as banks, insurance companies and distributors.
b.) Employment opportunities
An employment opportunity is always generated in the areas they are located which benefits the people living in those areas.
c.) Development of infrastructure
Infrastructure such as roads, communication network, health and education facilities are likely to arise.
d.) Creation of Pool of labour
Encourages a pool of labour as people tend to migrate to that region in search of employment this enables the firms to meet their labour force requirements.
e.) Easy disposal of waste
Localized firms are able to easily dispose of their waste by either selling it to other firms for recycling or by jointly undertaking waste disposal projects.
f.) Arise of industries
Industries dealing in by products are likely to arise and the communities in those areas will be able to use the by-products.
When industries are closely related, these are few security problems experienced as compared to the dispersed industries.
Disadvantages of Localization
a.) Cause pollution
Emission from firms may cause both air and water population which have negative effects on the environment.
b.) Regional imbalance
Imbalance in development is experienced because areas of industrial concentration tend to enjoy provision of social amenities such as roads schools while other areas may suffer.
c.) Rural to urban migration
People migrate from rural to urban areas in search of jobs and better living conditions, these movements cause unemployment in urban areas and labour deficiency in rural areas.
d.) Increase social evils
Increased population in areas of industrial concentration leads to series of problems such as congestion, increased rate of crimes.
e.) Economic depression during times of war or calamities
Localization of firms may be risky because if any undesirable thing happens to the region it may destroy
the country’s economic and industrial base.
f.) Leads to widespread unemployment
A fall in demand for products produced by localized firms, would result in wide spread unemployment in the affected area.
Delocalization of firms
Refers to establishment of firms in different parts of the country
Advantages of delocalization
a.) Employment opportunities
Creates employment opportunities for people living in rural areas
b.) Reduces rural to urban migration
Rural to urban migration is reduced due to the spread of industries to all parts of the country which creates employment to those parts.
c.) Balanced regional development
Due to the spread of industries a balanced regional development is achieved in all the areas where the industries are located.
d.) Increased accessibility of produced goods.
The local communities are able to get the produced goods without necessarily travelling very far.
e.) Provision of market
Provides a market for locally produced raw materials.
Disadvantages of delocalization
a.) Spread of pollution
When industries are spread to many parts of the country, they also spread the pollution to those parts of the countries.
b.) Inadequate skilled manpower
Skilled man power may not be available in rural areas where the industries are spread. c.) Security
Some areas especially rural areas may lack proper security and some areas such as slums are generally insecure.
d.) Lack of service industry.
Service industries like banks may not be available in rural areas such as banks and many others.
e.) Production of substandard products.
Continued protection of firms from foreign competition by the government may make the firm to continue producing sub- standard products.
f.) Burden to tax payers
Incentives offered by government are an added burden to the taxpayer.
Economies and Diseconomies of scale.
The advantage of expansion of industries is called economies of scale while the disadvantages are called diseconomies of scale.
Economies of scale
Divided into two types
Internal economies of scale
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. They include the following:
a.) Marketing economies
A firm that buys in large quantities is likely to get benefits such as large trade discounts and they also incur less cost per unit in transporting the goods bought.
b.) Financial economies
A firm with strong financial base can obtain loans at a low interest rates against their assets.
c.) Risk bearing economies
Large firms can reduce the risks involved in market failure through diversification of products or markets. This can be done so that failure of one product is offset by the success of the other products.
d.) Managerial economies
Large firms are able to practices division of labour which leads to specialization hence an overall increase
in the firm’s outputs.
e.) Technical economies
These refer to benefits which accrue to a firm due to specialization of both labour and machinery. This is because large scale firms are able to hire specialized labour and machinery more economically than small scale firms.
f.) Research economies
Research is very important in production but it’s always very expensive and only firms large firms can
afford to raise the needed finance to carry it out.
External economies of scale
These are those benefits that accrue to a firm as a result of the growth of the whole industry. They include the following:
Skilled labour force.
Ready market may be available from the surrounding industry.
Easy disposal of waste products
Diseconomies of scale
These are problems which a firm experience due to expansion.
a.) Internal diseconomies of scale.
These are problems a firm experiences as a result of large – scale production arising from its persistent growth. They include:
High overhead costs.
b.) External economies of scale
These are the demerits that a firm experience as a result of growth of the entire industry.
Scramble for raw materials.
Non-availability of land for expansion.
Scramble for available labour.
Competition for available markets.
Easy target especially in times of war.
Reasons for the continued existence of small firms in an economy
It is easier for small scale retailers to change from one form of business to another location compared to large scale firms.
b.) Size of the market
If the demand for a product is not high, large scale production may not be necessary and it’s only
appropriate for such a market to be served by small firms.
c.) Nature of the product
Nature of the product may make it very difficult to be produced in large quantities, such as personalized services as painting which can only be provided by one individual.
d.) Need to retain control
The owners of the firm may wish to keep it small in order to retain control and independence.
e.) Simplicity of organization
Where the firm intends to take advantage of simplicity to avoid the bureaucracy, wastage and management complexity associated with large scale organizations, it may chose to remain small.
f.) Quick decision making
In a situation where the founders want to avoid delay in decision making they may opt to maintain a small business as this would involve less consultations.
g.) Rising cost of production
In situations where production costs rise so fast, such that diseconomies of scale set in very early, the firm has to remain small.
h.) Legal constraints
The law may restrict the growth of a firm hence the existing firms has to remain small.
Implication of production activities on environmental and community health
Air and water pollution from factories.
Destruction of environment.
Solid waste pollution.
End of topic
Past KCSE Questions on the topic
1. State disadvantages of concentrating industries in one area within a country. (4mks)
2. Highlight four circumstances under which a firm would be located near the market for its product. (4 marks)
3. Outline four ways in which land influences the location of industries. (4 marks)
4. State four circumstances under which a firm would be located near the market for its
Products. (4 marks)
5. State four advantages of locating a firm near the source of raw materials. (4 marks)
6. Identify four problems that tend to limit the growth of small –scale retail business in rural Kenya. (4 marks)
7. Highlight four measures a government may take to attract firms to an area. (4 marks)
8. State four disadvantages of locating a business away from other related business. (4 marks)
9. State four disadvantages of delocalization of industries to a country. (4 marks)
10. State four factors which influence the location of business enterprises. (4 marks)
11. State four measures that local authority could take in order to attract investors to locate their industries within its boundaries. (4 marks)
1. Outline five benefits that country would get by encouraging businessmen to locate new industries in rural areas. (10 marks)
2. Discuss the factors that have led to the survival of small scale retailers despite competition from supermarkets. (10 marks)
3. Discuss the economic benefits to a community that may result from the concentration of industries in an area. (10 marks)
4. Explain five circumstances that may influence a firm to locate its operations near the source of raw materials. (10 marks)
5. Explain five measures that a government may take to encourage establishment of industries in rural areas. (10 marks)
6. Highlight five advantages of having a business enterprises located in an area. (10 marks)
By the end of the topic the learner should be able to:
a) Explain the meaning of a market;
b) Explain the meaning of product market;
c) Discuss the features of various types of product markets.
a.) Meaning of a market
b.) Meaning of product market
c.) Features of various types of product markets
The product market is the interaction of buyers and sellers to transact business pertaining to a particular commodity.
Types and features of a product Market.
1.) Perfect competition
A perfect competition is very rare and it has the following characterizes
a.) Large number of buyers and sellers
Buyers and sellers are so many that the separate actions of each person of them has no effect on the market. This implies that no single buyer or seller can influence the price of the commodity.
b.) Homogeneity (uniformity) of the product.
Commodities from different producers are identical in all aspects such that one cannot distinguish them hence there would be no advantage or disadvantage of buying from a particular producer.
c.) Perfect knowledge of the market
Each buyer and seller has perfect knowledge about the market and therefore no one would affect business at any price other than the equilibrium price.
d.) Freedom of entry or exit
The buyers and sellers have the freedom to enter and leave the market at will.
e.) Uniformity of buyers and sellers
All buyers and sellers are identical so there is no benefit of selling to a particular buyer or buying from a particular seller.
f.) No government interference
The price prevailing in the market is determined strictly by the interplay of demand and supply and there should not be any form of government intervention.
g.) No excess supply or demand
The sellers are able to sell all that they supply into the market and the buyers are able to buy all what they require hence there are no excess supply and demand.
h.) No transport costs
In a perfect competition market, it is assumed that the buyers and sellers are located in one area hence there is no need for transportation.
This is a market situation where there are many buyers but only one seller called a monopolist.
a.) Only one supply
There is only one supplier for the entire market hence the firm is the industry.
b.) No close substitute
The commodity supplied does not have close substitutes which may bring competition.
c.) Difficulty to enter
It is difficulty for other firms to enter into the market
d.) Fixed prices
Prices are fixed by the supplier
e.) Possibility of price discrimination
Price discrimination may be possible. This is charging different prices for the same commodity in different markets.
Conditions necessary for price discrimination
Consumers are in different markets making it difficult for one to go to another market.
The cost of maintaining the separate market is not very high.
The production of the commodity is in the hands of monopolist hence they are able to control production.
Basis of Market separation
Goods may be sold differently in different market. The price charged in local market may be cheaper than foreign market.
Consumers may be charged differently according to their income level
A firm may sell the same commodity at a high price during the peak period and lower the price during the off peak period.
Sources of monopoly power
a.) Control of an important input in production.
A firm may draw its monopoly from having control of an important factor of production such as raw material.
b.) Ownership of production rights
Monopoly can be created if a firm has the right to production or ownership of a commodity such as patents rights, copyrights and royalties belonging only to the firm.
c.) Internal economies of scale
The existence of internal economies of scale that enables a firm to reduce its production costs to the level that other firms cannot. This will force these firms out of business leaving creating a monopoly
d.) Size of the market
The size of a market may be best served by one person or a firm. Addition of more than one firm may lead to all of them incurring losses.
e.) Addition costs by other firms
If other firms have to incur additional cost to enter into the market then their products may be less attractive due to increased price. This make the local firm to be monopolist.
f.) Where a group of firms combines to act as one
Some firms may combine/amalgamate or work together for the purpose of controlling the market of their product. They therefore create monopoly.
g.) Restrictive practices
A firm may include price limit where a firm sells its product at a very low price to drive away competitors, then raising the price after putting the other firms out of business creating monopoly.
h.) Financial factors
If huge capital is required to enter into the market, it may make it very difficult for other firms to enter into the market making the existing firm to operate as a monopoly.
3.) Monopolistic competition
A market structure that combines the aspects of perfect competition and those of a monopoly.
a.) Many buyers and sellers
Many buyers and sellers acting independently
b.) Variation in quality
The products vary in quality or are a close substitutes of each other.
c.) No barriers to entry or exit exists.
New firms wishing to supply the same commodity are free to do so and existing firms wishing to leave are also free.
d.) Perfect knowledge of the market
There is perfect knowledge of the market for both sellers and buyers.
A market structure with few firms
Where the industry is made up of two firms. ii.) Perfect /pure oligopoly
Where the products are identical
iii.) Imperfect/differentiated oligopoly
Where the markets have products which are close substitutes or are the same but made to appear different.
There are few firms in the market.
Interdependence among the firms.
The kinked Demand Curve
Once a price has been arrived at in an oligopolistic market it tends to remain stable. It follows that a firm in oligopolistic market faces two sets of demand curves. One curve, for prices above the determined one. Which is fairly gentle. The other curve, for prices below the determined one which is fairly steep. This is illustrated below.
It can be noted from the above diagram that:
i.) The price that is generally charged in the industry is P. This is the point at which the price is rigid.
ii.) The demand curve (kinked) is 0𝐴 1.
iii.) At prices above P the curve is fairly gradual and as such, an increase in price will lead to a
big loss in quantities demanded as consumers will shift to suppliers who have not raised their prices.
iv.) At prices below P the curve is fairly steep. A reduction in price will therefore create little additional sales as other firms are likely to reduce their prices to the same level or even lower.
End of topic
Past KCSE Questions on the topic
1. State four reasons why the government should control activities on monopoly
2. The following diagram shows how price and output is determined under monopolistic competition
Name the curves:
3. The diagram below represents the short-run equilibrium of a firm in monopolistic competition.
Label the curves and show the best output and price on the graph
State four circumstances under which the phenomenon exhibited above can be experienced in a market structure
5. State four sources of Monopoly power
6. The diagram below relate to a market structure
i) Name the market structure represented in the diagram shown above ii) Name the curves marked
7. Give four reasons why market research is important to a trader
CHAIN OF DISTRIBUTION
By the end of the topic the learner should be able to:
a) Explain the meaning of distribution
b) Describe the various channels of distribution
c) Discuss the role of intermediaries in the distribution chain
d) Discuss the factors which may influence choice of a distribution channel.
a.) Meaning of distribution b.) Channels of distribution
c.) Intermediaries in the distribution chain d.) Choosing a distribution channel
The paths that that goods or services follows from the producers to the consumers.
These are traders that are engaged in distributing goods and services between the producers and consumers.
Expenses incurred by wholesalers when they buy goods from producers.
Actual cost of buying the goods.
Salaries and wages.
Packing and blending.
Channels of distribution for various products
Distribution of imported goods
i.) Foreign producer to local consumer.
ii.) Foreign producer to agent to wholesalers to retailers to local consumer.
iii.) Foreign producer local agents / importers to local consumer.
iv.) Foreign producer’s to wholesaler then to retailer and local finally consumer.
v.) Foreign producer to Local retailer then to local consumer.
vi.) Foreign producer to wholesalers to local consumers.
vii.) Foreign producer’s manufactures representatives to wholesaler to retailers to
Distribution of locally manufactured goods
i.) Local Manufacturers sell direct to consumers.
ii.) Local manufacturers through wholesalers through retailers to consumers.
iii.) Local manufacturers through wholesalers directly to consumers.
iv.) Local manufacturers through retailers to consumers.
v.) Local manufacturers through government agent through wholesaler to retailers to consumers. vi.) Local manufacturers through government agent through wholesaler and directly consumers. vii.) Local manufacturers through government agent through wholesaler and directly consumer.
Distribution of local Agriculture Produce.
i.) Farmer (producer) to local cooperative then to marketing board to wholesalers to retailers and finally to consumers.
ii.) Farmer (producer) to retailers and directly to consumers. iii.) Farmer (producer) may sell directly to consumers.
iv.) Farmer (producer) through wholesaler to retailer then consumers.
v.) Farmer (producer) through marketing board through wholesalers to retailers and finally to consumers.
vi.) Farmer (producer) through marketing board through retailers and finally to consumers.
Roles played by intermediaries in the distribution chain.
a.) Reducing transaction between producers and consumers.
They reduce the number of transaction between many producers and consumers and also assist the producers in searching for and communicating with prospective customers.
b.) Breaking bulk
They buy in large quantities and sell in small quantities breaking the bulk as required by their customers.
c.) Accumulating bulk
Some buy small quantities of the same product from many small producers and then offering the large amount gathered to buyers who may be wanting large quantities.
d.) Risk taking
By taking the possession of goods from producers they assume all the risks associated with the movement of such products from the producers to the consumers.
e.) Provide finance
When intermediaries take the goods immediately they are produced, they relieve the producers from finances needed to sell the goods directly to consumers.
f.) Transport and storage
The intermediaries transport and stores the goods in their warehouses until the demand arises.
g.) Availing goods to consumers
Intermediaries avail goods at places conveniently accessible to consumers. They also ensure steady supply of goods by carrying out warehousing.
h.) Product promotion
They promote the product by passing relevant information to consumers about the product.
Factors influencing the choice of distribution channel
a.) The nature of goods
Where perishable a direct channel to consumers is more preferred because delays may
Result into losses.
b.) Size of the market
Where the market is large it may require longer channels to reach consumers while if the
Consumers are concentrated in one area, it requires shorter channel. c.) Costs
Where the cost of marketing and distribution are high manufacturers will dispose goods
d.) Lack of facilities / skills
Where the produces lacks facilities to help in distribution he will call upon intermediaries
To help them reach consumers. e.) Government policy.
If the government policy prohibits /required use of a certain channel then it has to be
f.) Nature of market
Depending on consumer’s preferences / taste it may require a personal attention of the
Where competition is high manufacture may have to be closer to the consumer. h.) Technical goods
Technical goods need to be sold direct to consumer in order to provide necessary information.
End of topic
Past KCSE Questions on the topic
1. Outline four benefits that customers get from small – scale retailers. (4 mks)
2. Highlight four benefits that accrue to a customer who buys directly from a manufacturer
3. Name four channels the a manufacturer would use to distribute his goods to the
Customer (4 mks)
4. Highlight four factors that should be considered in choosing a method of distributing agricultural produce (4 mks)
5. Give disadvantages of long chain of distribution of goods to a buyer (4 mks)
6. State four benefits to a large consumer who buys directly from the producer. (4 mks)
7. Outline four benefits to a large consumer who buys directly from the producer.
8. Highlight four circumstances under which a manufacturer may prefer to sell goods directly to the consumers (4 mks)
1. Describe five circumstances under which a producer would sell his goods to his consumers
2. Zango manufacturers who have been selling their products directly as retailers have decided to distribute the products through wholesalers. Explain five benefits that Zango manufacturers may get from these new arrangements. (10 mks)
3. Describe five channels that can be used to distribute locally manufactured goods
4. Explain four factors that may be considered in determining the appropriate channel for distributing goods (10 mks)
5. Discuss circumstances under which a wholesaler becomes essential in the chain of distribution
6. Explain the channel of distribution for imported goods (10 mks)
7. Kabu manufacturers have decided to distribute their goods through wholesalers. Discuss five benefits that would account to Kabu manufacturers (10 mks)
By the end of the topic the learner should be able to:
a) Explain the meaning of national income;
b) Describe the circular flow of income;
c) Explain the methods of measuring national income;
d) Explain the problems encountered in measuring national income;
e) Discuss the uses of national income statistics;
f) Discuss the factors which influence the level of national income.
a.) Meaning of national income b.) The circular flow of income
c.) Methods of measuring national income
d.) Problems encountered in measuring national income e.) Uses of national income statistics
f.) Factors which influence the level of national income
The total income received by the owners of the factors of production in a given country over a given period of time usually one year. It is the same as National output or national product.
Terms used in national income
Gross Domestic product (GDP) and Net Domestic product (NDP)
GDP refers to the total monetary value of all goods and services produced in a country over a period of one year.
Net Domestic Product is equal to gross domestic product less depreciation. Gross National Product (GNP) and Net National Product (NNP)
Gross National Product measures the total monetary value of all goods and services produced by the individuals of a given country irrespective of whether they are producing it in their country or outside the country.
GNP = GDP + Net factor income from aboard (export less imports).
Net national product is the gross national product less value of capital used in the production process
NNP = GNP – Depreciation. Per capita income.
The average income per head per year in a given country. Per capita income = National income/total population.
The circular Flow of income.
The movement of income from households to the firm and then back to the households is known as the circular flow of income.
The flow money (income) round the economy is shown by the dotted lines while the flow of goods and factor services is shown by continuous (inside) line.
Assumptions made for the circular flow of income to hold.
There are only two sectors in the economy that is households and firms.
Households spend all their income on goods and services produced by the firms.
Firms spend all their revenues on factors of production provided by the household.
There is no government intervention.
The economy is closed, that is no foreign trade.
The assumptions do not hold because of the following
No country can exist without dealing with other countries.
It is difficult to have an economy where all incomes are spent on only acquisition of goods and services without savings and investments.
It is not possible to have an economy where the government does not take part
They are factors that increase income and expenditure in the circular flow are referred to as injections.
The factors that reduce the volume of flow are referred to as withdrawals/leakages.
Factors that affect the circular flow of income
Savings by households reduce income received by firms since they have been withdrawn from the circular flow.
The government affects the circular flow by either taxation which reduce the amount of income available for spending or through government expenditure.
Firms borrow money that households have saved in financial institutions such as banks and use it to invest. The investments leads to higher income to households since the capital goods are either hired or bought from households.
d.) Foreign trade
Through exports a country is able to earn income from other countries. The income earned from the foreigners is an addition to the circular flow of income and hence an injection.
Equilibrium National Income
The national income equilibrium is achieved when total injections are equal to total withdrawals
For national income to be in equilibrium the following equation must
Savings + taxes + imports = investments + exports + government expenditure.
Measurement of national income
National income may be measured using the following methods.
1.) Expenditure approach
The national income is arrived at by adding together the expenditure on all final goods and services in the economy. The total expenditure is broken into the following stages:
a.) Expenditure on consumer goods by the general public (C).
b.) Expenditure on capital goods. Capital goods are also called investments denoted by letter (l).
c.) Government expenditure which may be divided into expenditure on goods and services from firms and expenditure on factor services from households. Government is denoted by (G)
d.) Expenditure on net exports.Net exports are a total exports less total imports. Its denoted by the expression ( X – M ).
National income = C + I + G + ( X – M)
Only expenditure on new goods is added in the calculation while expenditure on second hand goods is not added as no production has taken place.
The national income arrived at using the expenditure approach is at market price because it involves expenditure on final goods and services thereby including indirect taxes and subsidies in order to get the national income at factor cost, subsidies are added while indirect taxes are subtracted.
G.N.E at factor cost = C + I + G + (x – m) + (subsidies – Indirect taxes)
To get net national expenditure/national income capital consumption (depreciation) is subtracted from
Gross National Expenditure.
Thus: National income = Gross National Expenditure – Depreciation
Problems associated with the expenditure approach
i.) No accurate records of expenditure are kept especially in the private sector.
ii.) Expenditures for the subsistence sectors are only approximations due to lack of records in the sector.
iii.) Differentiating between final expenditure and intermediate expenditure may be difficult. iv.) Suffers from the problem of double counting.
v.) Fluctuating exchange rates may pose challenges especially in valuation of exports and imports.
2.) Income approach
Income approach takes into account the sum of money that is received as income by different individuals who contribute to the production of goods and services. The incomes include rent, interest, wages and profit.
In addition public income and retained profits are included, it should be noted that transfer payments are excluded from the final calculations of national income because they represent a redistribution of incomes from those who have earned them to the recipients.
Such income include, national insurance and social security benefits to individuals, student’s grants and
National income may be calculated as:
G.N.I = personal income + retained profit – (transfer payments + stock appreciation).
The national income arrived at using this method is at factor cost because it represents the actual payments to the factors of production. In order to get national income at market price, indirect taxes are added and subsidies subtracted.
Gross National income is got by adding the net income from abroad to gross Domestic product. Thus .G.N.I = GDP + ( x – m )
To arrive at the net National income or simply National income, capital consumption
(Depreciation) is subtracted from Gross National income. Thus, N.I = G.N.I – depreciation.
Problems associated with the income approach
i.) Problem of inaccurate data
ii.) Price fluctuations make it difficult to calculate national income.
iii.) Problem of handling illegal and unrecorded yield income to recipients. iv.) Transfer payments pose a problem
v.) Income disclosures aren’t true because people and firms like evading tax
3.) Output approach( value added )
The national income is arrived at by adding up the values of all final goods and services produced by firms during the year or it may be calculated by adding up the values to the product at each stage of production.
Government contribution to the national output is also taken into an account. Such services include education, health care and security. To find their value we get what it cost the government to provide them.
The GDP aimed at using this method is a factor cost as it excludes subsidies and indirect taxes. To arrive at the Gross National Product, Net Income from abroad is added to the Gross Domestic Product
Thus, GNP = GDP + (x-m)
To get the Net National Product/National Income depreciation is subtracted from the gross National product.
National Income = GNP – Depreciation
Problems with the output approach
I.) Problems of valuation due to unavailability/inaccuracy of output figure especially in the private section.
II.) Problem of deciding on the goods/services to include e.g. Whether the output of a house wife should be included or not.
III.) The problem of valuing output in the subsistence sector. IV.) Problem of frequent changing process.
V.) Problem of valuing government output since many of its services are not sold in the market. VI.) Problems of differentiating primary inputs from intermediate inputs.
VII.) Valuing illegal activities like drug trafficking.
National Income statistics
National income statistics refers to all the data collected or computed from various sources that gives information about national income.
Uses of National Income Statistics
i. Use to measure rate of economic growth of a country. When output figures are high it means productivity has improved.
ii. Helps the government to plan its economy since it provides useful information required by planners.
iii. Used to compare the standards of living of people in a country. By comparing the per capita figures.
iv. Help the country to know the size and contribution of various sectors to natural income hence can take appropriate measures to improve them.
v. Shows the progress of the economy over a given period by comparing national income statistics over given period.
Disadvantages of using National income to compare standards of living in different countries.
a.) Different currencies
Conversation of currencies may be tedious.
b.) Different goods and services
The type of goods and services that are used to compute national income may differ from country to country.
c.) Disparity in distribution of income
Although income per capita may be similar in both countries, standards of living may differ considerably because of disparity in income distribution.
d.) Different needs and tastes
National income statistics may not give a true and a fair picture of standard of living due to different in taste and needs of the people.
Factors that influence the level of national income
a.) Labour supply
A country with more labour produces more than a country with less labour and also a country with more skilled labour force would produce high quality goods and services than a country with less skilled labour force.
A country which uses modern equipment such as tractors in ploughing, would be able to produce more than a country using simple tools like jembes. This is because capital varies from simple tools to modern equipment’s.
Availability of Entrepreneurs who have the ability to organize the factors of production in correct proportions, make their output to increase thereby increasing the national income.
d.) Availability of natural resources
The size of national income of a country depends on the natural resources endowment of that country. Therefore a country with abundant resources is likely to have a higher national income relative to a country without.
e.) Level of technology
If advance technology and latest equipment used in the process of production, then more goods can lie produced, which increase the volume or size of national income.
f.) Political stability.
If there is political stability in the country, the production can be sustained at the highest level and the size of national income will be large. In case of political condition is not good the production will be adversely affected and so the size of national income will be small.
g.) Attitude of citizens towards work.
A country whose labour force has negative attitude towards work may register low level of national income compared to another country where citizens are hard working.
End of topic
Past KCSE Questions on the topic
1. Outline four reasons why an increase in per capita income may not necessarily lead to a rise in the standard of living of the citizens
2. State four factors that affect the circular flow of income in an economy
3. Identify four factors that may be contributing to income disparity between the rich and poor citizens in Kenya
4. Account for the difference between the gross National Income figures between Kenya and
5. Name three approaches for measuring national income
6. Highlight four problems associated with income approach
7. Highlight four problems associated with the output approach in computation of National income
8. Highlight four uses of National Income statistics in any given country
9. Outline four circumstances under which per capita income would be a good indicator
POPULATION AND EMPLOYMENT
By the end of the topic the learner should be able to:
a) Explain the basic concepts in population
b) Explain the implications of population size and structure on the development of a country c) Explain the meaning of employment and unemployment
d) Discuss the various types and causes of unemployment
e) Discuss the measures that may be taken to solve unemployment problems
a.) Basic concepts in population: Fertility, Mortality, Growth rate, Optimum population, Under- population, Over-population, Young population, ageing population, Declining Population.
b.) Implication of population size and structure on development. c.) Employment and Unemployment.
d.) Types and causes of unemployment. e.) Solving unemployment problems
Population refers to the number of people living in a particular region at a particular time.
Basic concepts in population
1.) Population growth rate
Rate at which the size of a population changes over a given period of time usually one year.
Factors associated with growth rate
Mortality rate-the rate of death in every 1000 people.
Birth rate-the number of live births in a year per 1000 people.
Migration –population movement from one region to another.it can either be:
Immigration-migration into an area.
Emigration-migration out of an area.
Factors leading to high birth rate
Cultural practices like believing that many children act as a source of security.
Early marriages prolonging the woman reproductive life.
Children being seen as a source of cheap labour.
Many births as a family searches for a male child.
Religious beliefs which encourage large families.
Ignorance leading to opposition of family planning.
Factors that leads to decline in birth rates
Delayed marriages due to such things as staying in school for too long.
Craving for a higher standard of living leading to people having few children.
Desire to give children better lives than the parents.
Where a small family is considered fashionable.
Due to reduced infant mortality rates, most people have confident that all the children will survive hence no need of having many children.
Availability of viable retirement benefits schemes which made people to stop viewing children as a source of security in old age.
2.) Optimum population
The population level which is equal to the availability resources.
What optimum population depicts
It is the population that can generate the highest living standards at the available resources and the state of technology.
It is the population size that can lead to the most efficient use of resources while maximizing output per capita.
Population below optimum level implies that resources are under-utilized and standards of
living are low.
An increase in population beyond optimum population level leads to overutilization of resources and hence standard of living.
3.) Under population
This is a situation where available resources in a country are greater than the size of population in the country.
Factors leading to under population
a.) An increase in Death Rate
Natural Catastrophes such as earthquakes, flood etc. will lead to an increase in death rate therefore the country witnesses a reduction of population
b.) A fall in Birth Rate:
When a country decides to reduce the number of children for fear of eventual overpopulation or any socio-political factor which does not favor children, the country becomes under populated
c.) High Level of Emigration
A persistent increase in emigration over immigration will leads to a reduction in a country
d.) Low birth rates
If the birth rate is low, the total population may remain small to the extent that it does not get to the optimum.
Positive effects of under population
a.) No Congestion:
A country with less population experiences little or no congestion b.) Employment Opportunities:
As a result of small size of the population, there will be enough job opportunity for the people
c.) Increased in Social and Infrastructural Facilities:
An under Populated Country experiences a higher per capita in terms of social and infrastructural facilities available to the people in the country.
d.) Availability of Idle Resources:
The fact that a country is less populated means that the resource available in that country is higher than the number of people; hence, many idle resources would abound everywhere.
Negative Effects of under population
a.) Lower Standard of Living:
Under Population engender lower standard of living as a result of inadequate labor force that would have conveniently boost output and production of goods and services.
b.) Lack of Adequate Manpower:
Under population results to shortage of labor with that attendant effect of low investments and income
c.) Underutilization of Resources:
Resources are highly underutilized in a country with low population
d.) Lack of People to Defend the Country:
At times of war and emergency, a country might find it difficult to mobilize enough people to defend it.
e.) Equilibrium at Less than Full Employment:
Under population leads to reaching of equilibrium at less than full employment as a result of idle resources.
4.) Over population
Occurs when a country’s population is large compared to its resources such that the resources are
Advantages of over population
a.) Widening Market
Large population provides a wide market for goods and services.
b.) Better utilization of resources
Large population creates increased demand for goods and services and in an attempt to meet the increased demand, there is better utilization of the available resources.
c.) Creates a pool of labour
A pool of labour force is created where producers can satisfy their labour force needs.
d.) Stimulates investments
Due to large population, entrepreneurs may expand their business to meet the growing demand for goods and services due to over population while at the same time new investments are made.
e.) Promotes labour mobility
Overpopulation increases labour mobility as jobless people tend to move from one area to another in search of employment.
Disadvantages of overpopulation
a.) Strain on the available social amenities
Excess demand of the available social amenities such school and health facilities may put pressure on the them resulting to poor services delivery.
b.) Low standard of living
As the population increases while income remain constant, the income per head reduces. Reduced income
reduces individual’s ability to acquire basic needs such as food and health care.
c.) Encourages rural to urban migration
Many people move from rural to urban areas where they think they can get employment. As a result the urban areas get more people than the available jobs.
d.) High dependency level
In overpopulation areas, there are many people who are not employed. Such people tend to depend on the employed ones for their upkeep and this may strain those who are employed
e.) Imbalance in demand and supply
Overpopulation creates excess demand in population to the supply of goods and services, where the supply of goods and services is not able to keep pace with the increase in demand for them, prices may keep on increasing.
f.) Food shortage
Overpopulation may result in shortage of foods due to increased population in which the amount of food is not enough to feed the whole population.
g.) Increased crime rates
When many people are unemployed because of overpopulation it may make it hard to acquire even the basic necessities and they may engaged in crimes such as stealing to survive.
h.) Environmental degradation
Overpopulation may cause over exploitation of natural resources leading to environmental degradation.
5.) Young population
This a population where there are more young people than old people.
Causes of young population
High birth rate and low infant mortality rate.
Low life expectancy.
High mortality rate be among aging adult.
Problems associated with young population
a.) High dependency ratio
There is high dependency ratio on working population as it may be forced to cater for a large number of young population who are unemployment.
b.) High rate of unemployment
The demand for jobs by many young people entering the labour market is higher than the available jobs creating unemployment.
c.) Increased social evils/crimes
Young population may have a large number of youth idle. They may engage in cries in order to survive.
d.) Low labour supply
Young population may experience low labour supply as many of the youths may have not attained the working age
e.) Pressure on goods and services
Increased demand for goods and services required by the youths may put pressure on them as the demand overtake supply.
f.) Reduced savings and investments
Due to high rate of consumptions by the young people savings is reduced and in turn results in low investments.
g.) Diversion of government expenditure
The government may be forced to divert its expenditure from other needy sectors as it caters for the welfare of the youth.
6.) Ageing population
This is a population with higher proportion of older people. These people are above 65 years old.
Problems associated with ageing population
Old people tend to provide a less mobile labour force.
Low labour supply is likely as old people tend to be less productive.
High dependence of old people on working populations.
Society becomes less progressive as it lacks the input of the energetic youth.
May led to unemployment due to fall in demand for goods and services required by the youth.
7.) Declining population
This is a population that has been reducing over time.
Effects of declining population
a.) Reduces government expenditure
The government may spend less in provision of resources such as infrastructure and social services making them to improve on the quality of their services to the citizens.
b.) Attainment of optimum population
Declining population may enable a country that has been overpopulated to attain optimum population.
c.) Proper utilization of land and other resources
For a country that is overpopulated, declining population may reduce pressure created on land and other resources and this may lead to improved productivity while declining population may lead to underutilization land and other resources.
d.) Discouraging investments
As the population declines, the market for goods and services also declines. This may force the existing business to close down while new investors may be scared away.
e.) Reducing dependency of the unemployed on the employed
For over populated country, decline in population may reduce the dependency of the unemployed because they will now get employment due to reduced population.
8.) Population structure
This is the composition of population according to age, sex, income distribution and levels of literacy. Below is a hypothetical population structure of a country that assumes equal number of male and female.
Implication of Population size and structure on Development
The population structure may have both negative and positive implications.
a.) Increase in market demand
When population increases a wide market for goods and services is created depending on the structure of the population.
b.) Enough labour supply
Rapid population growth leads to increased labour supply which would in turn lead to payment of low wages.
c.) Technological advancement
Competition and pressure of resources may lead to increased labour supply which would lead to higher efficiency and also insipire people to look for new methods of improving productivity.
d.) Diverse talents
In a rapid growing population the number of talents are likely to be many.
Negative implications of a rapid population growth.
a.) Decrease in per capita income
When the growing population depends on a fixed factor of production, output may increase up to a certain point and beyond this point, output per head which also determines per capita income declines.
b.) Increased dependency ratio
In a rapid growing population most the people depend on the available work force for survival.
c.) Reduction in savings and investments
In a large population most of the earnings is spend leaving nothing or very little to save. This will in turn lead to low investment.
The number of people in the labour force exceeds the number of jobs available leading to unemployment.
e.) Strain on social amenities
Due to overpopulation, the government may find it difficult to provide adequate essential social services such as health, education and housing.
f.) Uneven distribution of income
In over populated countries there are very few rich people and very many poor people leading to unequal distribution of income.
g.) Environmental degradation
Over population usually leads to over exploitation of the natural resources leading to environmental degradation
Employment and unemployment. Employment
The term refers to engagement in any type of income generating activity.
The term refers to inability of people who are capable and willing to work to get meaningful employment opportunities
Types of unemployment
Cyclical unemployment – occurs due to relatively low general demand for goods and services.
Structural unemployment – caused by changes in production methods, change in technology and changes in demand for goods and services.
Frictional unemployment – occurs when people are unable to secure jobs due to barriers which hinder them from getting jobs such as ignorance. Or when people lose jobs and go looking for new ones
Seasonal unemployment – occurs due to relatively low demand for labour at certain times of the year. Involuntary unemployment/open unemployment – results from lack of jobs. For example people willing
to work at the prevailing wages but work is not available
Real wage/Voluntary unemployment – occurs when job seekers are not willing take up jobs at the prevailing wage rates
Disguised/Hidden unemployment – Occurs when the number of people employed exceeds the number which is required for the job.
Residual unemployment – Affects people who are physically & mentally challenged.
Erratic /Casual unemployment – Affects certain sectors of the economy like construction where demands for labour is erratic and not regular.
Causes of unemployment
a.) Poor education system
The education structure used in developing countries is not beneficial to the students as it does not directly correspond to the prevailing economic activities outside the school system. Rather than providing
useful skills to students and molding professionals, theory is what is being taught instead of practical.
This mismatch between the school levers and jobs requirements creates unemployment’
b.) Bad leadership
Lack of employment in developing countries is also linked to the bad leadership and corrupt attitude of individuals in power. Moreover, there is a lot of money embezzlement and power retention exhibited by policy makers in the education sector in Africa. This means funds required for improvement of education are diverted for selfish personal use. Hence, the education sector remains largely undeveloped.
c.) Rural to urban migration
When people move from rural areas to urban areas in search of employment, they put tremendous pressure on the available resource and expanding work force that cannot be absorbed.
d.) Rapid population growth
If the population is growing at a faster rate than the economy is expanding, it leads to more workforce entering a labour market which causes unemployment.
e.) Lack of product market
If the demand for goods and services is less due to low income producers will be discouraged to produce more leading to unemployment.
f.) Seasonality in production
Seasonal variations cause unemployment such that during the peak season, employment is high and during off peak seasons employment is low.
g.) Use of inappropriate technology
If a country uses labour intensive methods of production it will limit the growth of employment opportunities.
Methods to solve unemployment
a.) Population control
Advocating for reduction in the population growth rates in the country through various ways such as family planning.
b.) Adaption of appropriate education systems
Introducing the appropriate forms of education and training people for the jobs that are available.
c.) Use of labour intensive methods
Use of labour intensive techniques in government institutions and projects.
d.) Proper planning
By proper planning and management of natural resources and fighting corruption so that resources can be used well to create jobs.
e.) Entrepreneur culture
Through encouraging the entrepreneurship culture in the country by providing a conducive environment for investment.
f.) Delocalization of firms/Rural development
Delocalization of firms by the government to create jobs in rural areas hence reducing rural to urban migration of people in search of employment.
g.) Encouraging direct foreign investments.
Encouraging foreign investment enough various policies such as tax holidays and enabling repatriation of profits from the businesses of foreigners.
h.) Increase government spending or expenditure.
Expenditure on infrastructure such as roads railways and electricity supply creates jobs and releases money in circulation creating demand for goods and services.
i.) Encouraging the use of local resources
Government can increase its expenditure on projects that will create more jobs opportunities.
j.) Encouraging the use of local resources
Government can encourage investment on economic activities that use locally available raw materials or inputs which will intern create more jobs opportunities.
k.) Encouraging the use of local resources
Government can encourage investment on economic activities that use locally available raw materials or inputs which will in turn create employment for those involved in provision.
End of topic
Past KCSE Questions on the topic
1. Explain the following terms as used in business i) Census
ii) Unemployment iii) Mortality…
iv) Optimum population.
2. Highlight four negative implications of a rapid population growth in developing countries
3. State five causes of unemployment in Kenya
4. Highlight four challenges passed to a country by a rapidly growing population
5. The table below shows a change in population size in country X for a period of four years
Year Total population
6. Give four reasons to account for this trend
7. Give four advantages of high population growth rate
CHAPTER TWENTY ONE
MONEY AND BANKING
By the end of the topic the learner should be able to:
a) Explain the meaning and limitations of barter trade; b) Explain the meaning and characteristics of money; c) Explain the functions of money;
d) Discuss demand for and supply of money;
e) Explain the meaning of banking;
f) Describe the development of banking;
g) Explain the functions of commercial banks;
h) Explain the main types of accounts offered by commercial banks;
i) explain the functions of non-bank financial institutions;
j ) Distinguish between commercial banks and non-bank financial institutions;
k) Discuss the role of a Central Bank in an economy;
1) Discuss trends in banking. Content
a.) Meaning of barter trade
b.) Meaning and characteristics of money c.) Functions of money
d.) Demand for and supply of money e.) Meaning of banking
f.) Development of banking
g.) Functions of commercial banks
h.) Types of accounts offered by commercial banks i.) Functions of non-bank financial institutions
j.) The role of the Central Bank in an economy k.) Trends in banking
Money is anything that is generally accepted as a medium of exchange for goods and services. Banking refers to all the activities carried out by financial institutions involving money Financial institutions includes
– Central bank
– Commercial banks
– Non-financial institutions
Exchange of goods and services for other goods and services
Merits/Advantages /Benefits of barter trade.
Buyer and sellers are able to get the goods and services they require immediately. a.) A country or person is able to dispose of the surplus
b.) Promote social relations among the trading communities
c.) Promote specialization in production of goods and services. d.) Promotes the standard of living of people involved in it.
Limitations/draw backs of Barter trade
a.) Lacks standard measure of value.
It is very difficult to determine how much of a commodity can be exchanged for another
b.) Perish ability of commodities
Some commodities cannot be stored for a long period to be used in future for exchange purposes
c.) Requires double coincidence of wants
There must be somebody who wants exactly what you have for you want he has for barter trade to take place.
d.) Indivisibility of commodities
Some commodities cannot be divided into smaller units without loss of value.
e.) Inconvenience in Transporting some Goods
Heavy and bulky goods are difficult to carry as you look for a trading partner.
f.) Lacks units of Account
Where barter trade is used, it is difficult to calculate and hence keep a record of the values of different commodities.
Characteristics of Money
It must be accepted by everyone to be used as a medium of exchange
It should be divided into smaller units without loss of value.
Should be light and not bulky to carry around
It should be able to last for long without getting defaced torn or losing its shape and texture
Money should be able to last for a long time without changing in value so that it maintains credibility and acceptability.
Money of the same denomination should be uniform in quality and therefore identical.
Money should be relatively scarce in supply. If it’s abundant in supply then it would loss value
Functions of money
a.) Medium of exchange
Money is generally accepted by everybody in exchange for goods and services
b.) Measure of value
Money provides a common denominator in which the value of various goods and services are expressed
c.) Unit of account
The values of different commodities are calculated and records kept in terms of money
d.) Store of value
Money is the most convenient means of storing wealth. This is because money is easily convertible into other forms of assets
e.) Standard Deferred payments
A debt incurred today can be paid later using money .This is because money is acceptable by everyone at all times.
Demand for Money /liquidity preference
It refers to the tendency of an individual or general public to hold onto money instead of speeding it.
a.) The transaction motive
This is a situation where one holds money with a motive of meeting daily expenses such as buying food, paying for transport costs and entertainment. It is divided into two: Business motive and income motive
b.) The precautionary Motive
This is where people tend to hold money to meet expenses that might occur unexpectedly such as sickness accidents.
c.) The speculative Motive
Money can held to be used in the future especially when people anticipate that the prices of goods and services will be lower than they are presently.
Supply of Money
Supply of money therefore refers to the stock of monetary items that are in circulation in an economy at a particular time. It includes Total currency and Total demand deposits
The banking system of Kenya consists of four elements
a.) Central bank at the top
b.) Commercial banks follows
c.) Specialized development banks is next
d.) The fourth category are non-bank financial institutions
Formed with the main aim of making profit through financial intermediation. There profits are usually generated through
a.) Interests earned on loans and overdrafts extended to customers b.) Investments in medium term government securities
c.) Income from operations
Services Offered by Commercial Banks a.) Accepting deposits
Commercial banks play an important role in the economy by mobilizing domestic savings and enabling
efficiency and convenience in transactions by accepting deposits
It has three main accounts
Money is withdraw able on demand by means of cheque. Characteristics
A cheque is used to withdraw money from the account
Money is withdraw able on demand
No minimum balance is required to be maintained
Does not earn interest but instead the bank charges ledger fees for services rendered
Have overdrafts that is bank allows customers to withdraw more money than they have in their current accounts.
Balance on the account above a certain minimum earn interest
Funds are not withdrawn by use of cheques
Overdrafts not allowed
Most cases one is required to maintain a certain amount in the account
Withdraw able of money exceeding certain maximum amount may require a notice to be given by the customer.
Ordinarily withdrawals can only be made by the account holders themselves.
They are called fixed deposit account because they do not allow withdrawal or addition of money before the end of a fixed pre-determined period.
Earns interests at an agreed rate
There is minimum account that can be allowed for this type of account
On expiry of the deposits period the account holder can withdraw all the money together with interests.
If money is withdrawn before the agreed period the customer losses accrued interest, but can be charged for breach of contract
b.) Lending money
They may lend money to individuals, private businesses, the government and other public authorities in form of loans and overdrafts
c.) Safekeeping of valuable items
They accept valuable items such as title deeds, share certificates, jewelry and wills for safe keeping for their customers.
d.) Provision of foreign Exchange
A person with foreign currency can convert it into local currency at the prevailing exchange rates
e.) Giving Advice on investments and Management of Funds
Commercial banks can give advice to their clients on available investment opportunities and the best ways of managing their funds.
f.) Acting as a Guarantor or Referee
Commercial banks may act as guarantors to customers who would want to either get goods on credit from new supplies or secure loans from a financial institution.
g.) Acting as intermediaries Between savers and borrowers
By accepting money from people who have excess to save and give loans to investors, commercial banks act as intermediaries between the two parties.
h.) Money transfer Facilities
Commercial banks provide convenient methods of transferring money through facilities such as;
Instruction to the bank by the customer to be paying a certain amount of money to a named person or institution after a given interval until a specified date.
A method of paying many people using one cheque. Its main advantages are saving time, stationary and bank handling costs
Method of remitting money offered by commercial banks to anybody who wants to send money to another,
It must have the following information:
i.) Name of the person ii.) Name of payee
iii.) The amount of money being remitted
iv.) The bank where the money would be paid
A cheque is a written order by the drawer to a bank to pay on demand a specified amount of money to the person named as the payee or to the bearer.
Non- banking financial Institutions (NBFI)
They address themselves to the financial needs of particular sectors of the economy which commercial banks have not been able to cater for adequately.
a.) Development Finance Institutions (DFI)
Provide medium and long term finances especially to the manufacturing sector. They include:
– Kenya Industrial Estate KIE
– Development Finance Company of Kenya DFCCK\
– Industrial Development Bank IDB
– Small Enterprise Finance Company SEFC
b.) Housing Finance Companies
They are mainly involved in financing housing activities. Examples
– Houses Finance Company of Kenya HFCK
– East Africa Building Society EABS
c.) Savings and credit co-operation Societies (SACCOS)
These are co-operative societies formed to mainly enable the members save and also obtain loans most conveniently and at a favorable conditions.
d.) Insurance companies
These companies provides finance to commercial organizations as well as to individuals. Difference between commercial banks and Non-banking Financial Institutions.
i.) Commercial banks provides current account facilities to their customers while NBFIs do not. ii.) Commercial banks normally provide short –term and medium –term finance while NBFIs
provide medium and long term finance
iii.) Commercial banks provides finance that is not restricted to any particular activity while
NBFIs provide finance for specified purpose.
iv.) Commercial banks can provide foreign exchange transactions to their customers while NBFIs do not.
v.) Commercial banks provide finance mainly for working capital while NBFIs provides finance for capital development
vi.) Commercial banks do not participate in capital market trade while NBFIs can participate
vii.) Commercial banks participate in clearing houses while non-bank institutions do not.
The central bank
An institution that control and manage the supply of and demand for money in a particular country. The objective of monetary control by the central bank
a.) Facilitate rapid and steady economic growth b.) Create employment
c.) Stabilize prices of commodities d.) Ensure balance development
e.) Enhance equilibrium in the balance of payment
Function of central bank
a.) Issue of currency
The responsibility of issuing new currency that is notes and coins is solely in the hands of the central bank
b.) Acts as a bank banker
The central bank acts as a banker to commercial banks and other financial institutions in that it accepts deposits from these organizations. It also acts as a lender of last resort
c.) Acts as the government bank
The government operates its account with the central bank. The central bank is also the government financial adviser
d.) Controlling commercial Banks
The central bank controls commercial banks and other financial institutions by giving instructions to them on lending procedures and proper banking practices.
e.) Acts as a link bank to external financial institutions
The central bank acts as a link to central bank and monetary authorities of the other countries thereby facilitating international financial relationships.
f.) Maintaining stability in Exchange Rates
The central bank is responsible for maintaining a suitable exchange rate between the local currency and foreign currencies.it does this through setting off specific foreign exchange rates or intervening in the foreign exchange market through revaluation or devaluation of domestic currency.
g.) Administering Public Debt
Public debt is the amount money the government has borrowed both internally and externally that is outstanding. The central bank is responsible for management and repayment of the debt when it matures.
h.) Lender of last resort
The central bank plays the role of lender of last resort to the commercial bank. This means that commercial banks can obtain loans to meet their day to day financial obligations.
i.) Control of Monetary system
The central bank is responsible for controlling the monetary system in order to regulate the economy.
Ways in which the central bank regulate money in the economy
a.) Bank rates.
This is the rate at which the central bank lends to commercial banks. It can be varied to encourage or discourage credit/ raising/ lowering bank rate
b.) Open market operation
The central bank may sell or buy securities in the market. Selling securities reduces the money supply
c.) Special deposits/ compulsory deposits/ minimum reserve requirements
The central bank require other financial institutions to have a certain percentage of deposits deposited in the central bank which can be varied to encourage / discourage credits
d.) Cash ratio/ liquidity ratio
The ration of cash/ deposits may be carried to control money supply credit which can be increased to reduce money supply/ can be decreased to increase money supply.
e.) Moral persuasion/ Liquid assets persuasion
The central bank may appeal/ request/ persuade/ restrain leading/ credit rationing. The commercial banks may be required by the central bank to approve loans only for special types of projects e.g. agriculture, manufacturing etc.
f.) Direct action/ directive/ instructions
Central banks can use its authority to direct/instruct the financial Institutions to lend more/ less/ apply credits squeeze/ credit expansions margins requirements.
Trends in banking
a.) Use of computers
b.) Automated Teller Machine ( A.T.M)
c.) Credit facilities are now easier to get due to competition
d.) Mobile banks to give access to people who are in remote areas e.) Customer care services being set up by banks
f.) M-banking to allow an account holder to access his or her bank account anywhere any time
End of topic
Past KCSE Questions on the topic
1. State how a credit transfer is used as a means of transferring money through the commercial banks (3 mks)
2. Highlight four advantages of using a telegraphic money order as a means of remitting money though the post office. (4 mks)
3. state four limitations of barter trade (4 mks)
4. In the spaces provide below indicate with a tick whether each of the following statements is true or false about commercial banks (5 marks)
– Accept deposits from the members of the public
– Provides safe custody for the valuables
– Issues currency for the use in the country
– Controls money supply in the country
– Lends more to the public
5. List four characteristics of money (4 mks)
6. State four methods that central bank may use to control credit (4 mks)
7. List four functions of development (4 mks)
8. highlight four reasons why loans advanced by commercial bank in Kenya may not appeal to
many people (4 mks)
9. Give four disadvantages of barter trade (4 mks)
10. State four banking services that the central bank of Kenya provides to the government
11. Wambua intends to import a car from Dubai which costs Kshs. 20, 0000 Dirams. If 4 Dirams = 1
Us Dollar and Kshs 70 = 1 Dollar, calculate the amount in Kenya shillings that Wambua will pay for the car.
12. Highlight 4 functions of the Central Bank of Kenya
13. Given below is the first stage in the historical development of money list the next four stages in their order of occurrence (4 mks)
1. Explain five in which banks contribute to the development of Kenya (10 mks)
2. Outline five reasons why banks currently account is popular with traders(10 mks)
3. Explain service offered to commercial banks by the central bank of Kenya(10 mks)
4. In what ways of the functions of commercial bank differ with those of non- bank
Financial institutions (10 mks)
5. Explain five ways in which central bank of Kenya may control the supply of money in
The country (10 mks)
6. Describe methods which may be used by commercial banks to advance money to
7. A businessman wishes to obtain a loan from a commercial bank. Highlight the
Conditions that he should satisfy before the bank can grant him the loan (10 mks)
8. Explain five services that the central bank of Kenya offers to commercial banks
9. Explain four disadvantages of using a bank overdraft as a source of finances
10. Describe four ways in which a non- bank financial institutions differ from the commercial banks
11. Discuss five reasons why business people prefer to operate bank current accounts
12. Outline the benefits that bank customer gets from operating a current account
13. Explain the 5 services offered by a commercial banks to their customers(10 mks)
CHAPTER TWENTY TWO
By the end of the topic the learner should be able to:
a) Explain the meaning and purpose of public finance;
b) Describe the various sources of public finance;
c) Categorize government expenditure;
d) Explain the principles of government expenditure;
e) Explain the meaning and purpose of taxation;
f) Explain the principles of taxation;
g) Classify taxes;
h) Explain the merits and demerits of each type of tax;
a.) Meaning and purpose of public finance b.) Sources of public finance
c.) Categories of Government expenditure d.) Principles of Government expenditure e.) Meaning and purpose of taxation
f.) Principles of taxation g.) Classification of taxes
h.) Merits and demerits of each type of tax
These refers to the activities carried out by the government associated with raising revenue.
Sources of finance
i.) Fines imposed by courts on offenders
ii.) Rent and rates paid for the use of government properties iii.) License fees paid by those who want to operate businesses
iv.) Dividends and profits earned from government direct investments
v.) Investments earned on loans advanced by government to firms vi.) Taxes
vii.) Government borrowing
viii.) Proceeds from sale of government property ix.) Government Borrowing
a.) Internal borrowing
Borrowing by government from firms and individuals within the country. b.) External borrowing
Government borrows money externally through bilateral or multilateral basis.
Factors to consider before the government can decide whether to borrow internally or externally
Conditions laid by external financiers
The crowding out effect
The relative cost of internal borrowing as compared to external borrowing.
Spending by the government on the finances it has raised
Categories of Government Expenditure
Government expenditure that takes place on regular basis e.g. payments of salaries to civil servants, provision of drugs in public hospitals and fuelling of government vehicles
This refers to government spending that goes into financing specific projects such as construction of railway lines, roads airports industries and administration offices
Principles of public Expenditures
These are the considerations made by government before any expenditure is incurred
Public expenditure must be sanctioned or approved by relevant authority before it is incurred
b.) Maximum social Benefits
Majority of people should be able to reap maximum benefit out of it
The policy on public expenditure should be flexible enough to meet the prevailing economic situations
Public expenditure must be incurred in the most economical way by avoiding any possible waste
e.) Proper Financial Management
Public finance should be well managed by proper accounting records which should also be audited as required
Tax is a compulsory payments by either individuals or organizations to the government
This refers to the process through which the government raises its revenue by collecting taxes
Reasons for taxation
a.) Raising revenue
Government raises revenue which is used in providing goods and services
b.) Discouraging consumption
Discouraging consumption of certain products such as beer or cigarettes
c.) Discouraging importation
Discouraging importation of certain products in order to protect local industries such as high tax on imported products
d.) Reducing inequality in income distribution
This is done by taxing the rich and using the money on development projects that benefits the poor
e.) Controlling inflation
Taxation reduces money supply through reduction of people’s disposal income thereby controlling
f.) Helping locates businesses
High tax on businesses located on urban areas would make entrepreneurs locate their business in rural areas where tax is less
g.) Correcting balance of payments
High tax on imported products would discourage importation, thereby increasing the balance of payments
The amount of revenue to collected through taxation depends on
Distribution of incomes
Social and political factors
Honesty and efficiency of tax authorities
Citizens level of real incomes
Economic structure of the country
Principle of taxation
These are characteristics or cannons of a good taxation system
A good tax system should ensure that there is fairness in payments of taxes i.e tax burden should be distributed to the community as equitable as possible.
The tax that an individual is supposed to pay should be clear in terms of the amount, time and manner in which it should be paid.
Tax should be levied at a time when the payee has money and it should be paid in a way that is most convenient to the payees
The cost of administering tax should be lower than revenue to be collected
A good tax system should allow the government to increase revenue as need arises under the current tax system.
A good tax system should be capable of changing in accordance with changes in national income. Tax should therefore rise when incomes increases and reduce when income reduces
A good tax system should be diversified so that it meets revenue requirements of the country and also be in line with the principle of equity.
Impact and incidence of tax
The burden of tax on initial person is the impact of tax and the final resting place of the tax burden is the incidence of tax.
Classification of taxes
According to structure
Taxes are classified according to the relationship between the amount paid as tax and the income of the tax payers as follows.
This is a type of tax which takes a higher proportion of low income earners as compared to high income earners.eg sales tax
b.) Proportional Tax
Tax payers pay a fixed percentage of their income as tax.eg corporate tax
c.) Progressive tax
Amount paid increases proportionately with increase in income.
Disadvantages of progressive tax
May discourage people from working more as additional income goes to tax
Investors may be discouraged from taking risks because if the venture is successful than average then the government takes high proportion of the extra profit
It is based on the assumption that people earning the same amount of income have similar needs and ability to pay tax.
Classification according to impact on the tax.
We get the following taxes;
The impact and the incidence of the tax are on the same person and the person is unable to shift any part of the tax to anybody else. The tax includes the following;
Personal income tax
Imposed on income earned by individuals. The tax is always progressive in nature as the tax rate increases with increase in income.
Levied on profits of companies. The tax paid is always proportional in nature as the tax rate remains the same.
Tax paid in areas such as conveyance of land or securities from one person to another.
Tax imposed on properties transfers after the owner’s death. This helps in generating revenue and also in
redistributing income since the inheritor has not worked for it.
This tax is levied on personal wealth that goes beyond a certain limit. The main disadvantage is that it may discourage people from accumulating wealth
Capital transfer/ Gifts tax
This is tax imposed on the value of property transferred from one person to another as gifts.
Merits of Direct tax
a.) Economical in collection
Direct taxes are mostly collected at the source and the cost of collecting them is fairly low.
b.) Tax revenue is certain
Yields from direct tax such as income tax is fairly certain and maybe calculated accurately in advance
Direct tax ensures that there is fairness in contribution of tax. This because contributors pay according’s to the size of their income
d.) Does not affect the price of goods and services
It affects consumer’s disposable income and not the price of goods and services.
e.) Brings redistribution of wealth
The wealthier members of the society are taxed more than the poorer in the case of progressive tax systems. Finance obtained from the wealthier members are used to finance services that benefits the poor.
d.) Simple to understand
Direct tax is both simple and easier to understand by both the contributors and the tax collector.
The tax is desirable as it only affects people who fall within the jurisdiction of income tax and corporation tax.
The tax is flexible in that it can be expanded to cover as many areas as desirable
The tax is elastic in that it may be raised or reduced according to the needs of the economy.
Demerits of Direct tax
a.) Possible tax evasion
It can easily be evaded by tax payers by either ignoring the payments or falsifying their income information
b.) Deterrent to savings
High taxation on people would reduce their ability to save as it leaves them with less disposable income.
c.) Deterrent to work
High tax on personal income may discourage people from working harder. This is because the extra amount of money would be taxed more.
d.) Deterrent to investment
Heavy tax on profits may discourage entrepreneurs from investing in highly risky but profitable areas this is because such profits are highly eroded by tax
Taxation inconveniences the tax-payer who has to comply with complicated formalities relating to sources of income as well as expenses incurred while generating it. This complication may force the tax payer to engage services of tax experts who has to be paid.
f.) Not imposed on all citizens.
The tax is not imposed on all citizens as low income earners who do not fall within the tax brackets are exempted.
In this type of tax the person on whom it is initially imposed may not shoulder the whole tax burden but may shift either the whole or part of it to someone else. The impact and the incidence of tax maybe on different individuals.
This tax is based on consumption of goods and services that involves the following: Sales tax
Sales tax is based on the sales made by the seller, it may be assessed on either as a percentage such as20%
of the sales or fixed amount
Value added tax (VAT)
The tax levied on the value that a business adds to a product. Export duty
A type of tax that is levied on exports the purpose being to discourage exportation of certain commodity or to raise revenue.
Import duty is a tax that is charged on goods entering into a country. The purpose may include:
Raising revenue for the government.
Reducing incidences of dumping
Discouraging consumption of imported goods
Merits of indirect tax
a.) Can be used selectively
It can be used selectively to achieve a specific objective for example if the government want to discourage consumption of beer it imposes a high tax on it.
b.) Tax payment is voluntary
It is only paid by those who consume the taxed commodity. If one does not want to pay the tax he or she would only need to avoid the consumption of taxed commodity.
c.) Not possible to evade
It is not possible to evade because all those who buy the taxed commodity have to pay the tax.
d.) Stimulate effort
Increase in indirect tax is likely to stimulate efforts as people struggles to maintain their current standards of living
e.) More revenue can be raised(broad based)
Indirect tax is likely to yield more revenue. This is because all people are likely to consume the taxed commodities thereby making the tax have a broader base.
Indirect tax is convenient because it is not paid in lump sum but in small bits as one buys the commodity. The tax is also hidden in the price of commodity and therefore the payer may not be aware of it.
The tax is flexible which enables the government to either raise or reduce the tax rate to suite the prevailing economic situations in the country.
Demerits of indirect tax.
a.) May fuel inflation
Continued increase in indirect tax may fuel inflation as it directly increases prices of goods and services.
b.) Less equitable
The burden of indirect tax falls heavily on consumers with low income compared to those with high income with high income. This is because all consumers pay the same amount of tax per unit consumed irrespective of the levels of their incomes.
c.) Can be avoided
Indirect tax can be avoided by people who do not consume the taxed commodity.
d.) Might interfere with resource allocation
Indirect tax increases the price of the taxed commodities relative to others. This might discourage consumers from buying them shifting consumption and production resource towards commodities that are not being taxed.
e.) Uncertainty in revenue yield
One cannot predict the amount of revenue yield in indirect tax due to difficulty in forcasing sales as they may be affected by other factors.
f.) Lack of contributor’s awareness.
Many of the contributors of indirect tax are not aware that they are contribution anything to the state inform of tax.
A budget is a statement of estimates or proposals of the way the government plans to raise finances and how such finances are to be spent in a given financial year.
Types of budgets
I.) Balanced budget
A balanced budget is where budgeted expenditure is equal to budgeted revenue
II.) Deficit budget
A budget having a deficit is where budgeted revenue is less than budgeted expenditure
III.) Surplus budget
A budget having a surplus is where budgeted revenue is less than budgeted expenditure
The raising of government revenue and the expenditure of the revenue raised in order to achieve the desired objectives is referred to as the fiscal policy.
Budget as a tool for planning
The government uses the budget to achieve the following;
Checking inflation by collecting more revenue and spending less.
Stimulating economic growth by collecting less revenue and spending more
The budget may point out specific objectives expected of a particular sectors of the economy
Spelling out the measures that the government, intends to take in order to achieve the said objects.
End of topic
Past KCSE Questions on the topic
1. Highlight five reasons why budgeting is important to a business organization
( 10 mks)
2. Discuss the reasons why a business organization may prepare a budget (10 mks)
3. Discuss the various classes of taxes ( 10 mks)
4. Outline the disadvantages of direct taxes ( 10 mks)
5. Explain any 5 principles of public expenditures ( 10 mks)
6. Discuss the importance of a budget as a toll of control ( 10 mks)
7. Highlight any five features that a government should consider when deciding on a good tax system
1. Discuss five principles of taxation
2. Outline five sources of non- tax public revenue
3. Explain five principles of public expenditure
4. Highlight five reasons for imposition of tax by the government
5. Discuss five characteristics of a good tax system
6. Outline five reasons why the Kenya government must impose tax.
CHAPTER TWENTY THREE
By the end of the topic the learner should be able to:
a) Explain the meaning of inflation;
b) Determine consumer price index;
c) Explain the various types of inflation;
d) Discuss the causes of each type of inflation;
e) Explain the levels of inflation in an economy; f) Assess the effects of inflation in an economy; g) Discuss the methods of controlling inflation.
a.) Meaning of inflation b.) Consumer price index c.) Types of inflation
d.) Causes of inflation e.) Levels of inflation
f.) Effects of inflation in an economy g.) Controlling inflation
This is a situation where the general prices of goods and services in a particular country or region are rising. The opposite of inflation is deflation which refers to a situation where the general prices of goods and services to fall.
Inflation is measured using a consumer price index.
Consumer price index ( C.P.I)
Consumer price index measures and allows comparison of prices of goods and services for two different periods.
It also measures the changes in the purchasing power of the consumers in the said periods.
Factors to consider when constructing the consumer price index
a.) Selection of commodities
Commodities selected are those that are generally consumed by average consumers. This is because these commodities are more representative of the state of the economy
b.) Selection of the base year
The year selected for the base year should be a year when the prices were fairly stable.
c.) Determination of Average prices
In computing price index, the average of relative prices of the commodities need to be computed. Simple average may be calculated by adding the indices for all the commodities and then dividing y the number of the commodities. The index for each commodity is calculated by diving the current year’s price with the base year’s price and multiplying by 100.
Thus, index of current year = 1 100
Where; 1 = 𝑖 𝑒 𝑖 ℎ𝑒
0 = 𝑖 𝑒 𝑖 ℎ𝑒 𝑒
commodities Price unit year
(21 – 0 ) per base Index of base year Price in current year (21 – 4 )
Bread 16 100 20 125
Sugar 40 100 60 150
Salt 10 100 12 120
Rice 20 100 40 200
Maize 48 100 60 125
500 average = 720
Average = 500
Comparison of the consumer price index of the year 21 – 0 and that of the year 21-4 indicates that the purchasing power of sh.144 in the year 21-4 is the same as the purchasing power of sh.100 in the year 21-
This means that the standard of living went down by 44% between the year 21 – 0 and year 21-4.
Types of inflation
a.) Moderate/creeping/mild inflation
The general prices of commodities increases slowly. The percentage increase is usually less than 10.
b.) Galloping inflation/rapid inflation
The general price levels increases rapididy.The percentage rate of increase is in terms of tens or hundreds.
c.) Hyper- inflation/runaway inflation
The rise in price levels are extremely high. In this situation the inflation rates can be in thousands or even in millions per cent per annum
Courses of inflation
Demand pull inflation
This type of inflation is caused by excessive demand for goods and services leading to increase of prices.
a.) Increase in government expenditure
When the government spend more money it had borrowed from central bank or printed it increases the supply of money in the economy leading to increase in aggregate demand which may led to upward pressure on the prices of goods and services.
b.) Effects of credit creation
When commercial banks lend more money than the deposit they hold they increases the supply of money which leads to consumers purchasing ability. This increases consumer’s ability to purchases more goods and services eventually leading to inflation
c.) Increase in money income
When money income increases, purchasing power will increase and this will have upward pressure on prices as the demand for goods and services increases
d.) General shortages of goods and services
If there is shortage of commodities supplied the demand will be high causing demand pull inflation because the demand pulls the prices of the commodities upwards.
Factors causing shortages of commodities
Adverse climatic conditions
Withdrawal of firms from the industry
Decline in level of technology
Cost – push inflation
It is caused by an increase in the total production cost of goods and services leading to increase in prices of the commodities.
a.) Rise in wages and salary
An increase in wages and salaries which will be reflected in the increased prices of commodities, which will in turn cause inflation
b.) Increase in taxes
Increase in indirect taxes (e.g. VAT), can increase the cost of production which make firms to increase their prices.
c.) Increase in profit margin
Increase in profit margins by management and shareholders leading to an increase in prices. This is possible where there is no price control.
d.) Increase in cost of inputs other than labor.
Increase in cost of inputs (e.g. raw material) causes the price of finished goods to be high. These inputs can either locally available or imported.
e.) Reduction in subsidies
Reduction in subsidies also lead to an increase in cost of production which will be reflected in an increase in the price of the commodities.
Effects of inflation
The effects can be divided onto;
Negative effects of inflation
a.) Loss of confidence in the monetary system
People lose confidence in local currency as it’s difficult to use in transaction when it loses value very fast.
b.) Retardation of economic growth
Hinders implementation of development plans since the cost of projects increases, business people are also not willing to either take risks, invest in new ventures, expand production or hire more workers .This leads to retardation in economic growth.
c.) Reduction in profit
Rise in prices of commodities may lead to reduced sales volume for firms. This in turn may reduce the
d.) Wastage of time
During inflation individuals and firms waste a lot of time hopping around for reasonable prices. The time wasted can be an extra cost to the firm or individual.
e.) Increase in wages and salaries
During inflation firms are always forced by trade unions to raise employees’ salaries to cope with
inflation. This normally leads to conflict between the parties concerned. f.) Decline in standards of living
During inflation consumers’ purchasing power decreases especially for people who earns fixed income such as pensioners. The reduction in purchasing power bring about a decrease in standards of living.
g.) Loss to creditors
Creditor’s loss money when they lend out when the value is high but got paid when the value is less due to inflation.
h.) Discourages savings
Discourages savings/investments since people fear their money will lose value/as they have less disposable incomes.
i.) Adverse effects on the balance of payments.
Leads to balance of payment deficits as imports are highly demanded than exports because the exports are very expensive leading to fall in demand.
j.) Loss of confidence in the monetary system
High levels of inflation may lead to loss of confidence in money both as a medium of exchange and store of value. This may lead to collapse of the momentary system.
Positive effects of inflation
a.) Benefits to Debtors
Debtors will end up paying less in real terms. This is because the debtor end up paying for the old price of the commodity in the future after it would have increased.
b.) Benefit to sellers
Sellers will buy commodities at low prices and sell them later when the prices are high making more profits
c.) Motivation to work
People may be motivated to work harder to cope up with effects of inflation as the prices of the commodities goes up.
d.) Increased job opportunities
Inflation may cause increased job opportunities due to high level of resource use to cope up with inflation.
a.) Control of money supply
The government should ensure that increase in money is matched with supply of goods and services. The supply of money can be controlled by monetary policies carried out by the central bank which include:
Increasing commercial banks’ lending interest
Restricting lending capacity by commercial banks
Selling of government properties through open market operations
Controlling the public sector
b.) Control of the level of demand
Demand pull inflation can be controlled by reducing the level of demand in an economy as a whole. This is achieved by the following fiscal policies:
Change in taxation e.g. increase in tax such as income tax would reduce consumer demand for goods and services.
Reducing government spending. This will restrict the amount of money in circulation reducing demand for commodities.
Restricting terms of hire purchase and credit terms of sale. This will reduce demand for goods and services.
c.) Cost controls
Cost push inflation can be controlled by controlling the factors that contribute to rise in costs. These factors include:
Increase in wages and salaries
To curb inflation brought by increase in wages and salaries the government may restrict the increase.
Taxes such as VAT are believed to be the cause of cost –push inflation, the government can reduce such taxes in order to control inflation.
Where inflation is caused by increase in prices of imports, the importing country can control the inflation by reducing the of such imports.
End of topic
Past KCSE Questions on the topic
1. A country’s domestic currency has been depreciating over time highlight five disadvantages of
this to the country
2. State four negative effect of inflation to a country
3. State any four causes of demand-pull inflation
4. State four non-monetary methods of controlling inflation in a country
5. Mention four desirable effects if inflation
6. Highlight four negative effects of inflation in Kenya
7. Highlight four negative effects of inflation in Kenya
1. Explain five negative effects of inflation to an economy
2. Explain five positive inflation effects of inflation to the economy.
3. Explain five causes of inflation in an economy
4. Write short notes on the following strains of inflation;
i) Mild inflation
ii) Hyper inflation
iii) Demand-pull inflation iv) Cost push inflation
v) Imported inflation
CHAPTER TWENTY FOUR
ECONOMIC DEVELOPMENT AND PLANNING
By the end of the topic the learner should be able to:
a) Distinguish between economic growth and economic development;
b) Discuss the characteristics of under-development;
c) Explain the goals of development;
d) Discuss the factors which may hinder development;
e) Explain the meaning of development planning;
f) Explain the need for development planning;
g) Discuss problems encountered in development planning.
a.) Economic growth and development b.) Characteristics of underdevelopment c.) Goal s of development
d.) Factors which hinder development e.) Meaning of development planning f.) Need for development planning
g.) Problems encountered in development planning.
This is an increase in country’s productivity which can be determined by a continued rise in national income over a period of years
This is the qualitative change in national income. It is associated with an increase in a fairly distributed national income such that more people are able to lead better lives.
Structural changes which may takes place when a country is experiencing development
Shift from agricultural to manufacturing sectors
Reduction in illiteracy
Increase in skilled non power
Improvement in health facilities
Increase in technology and improvement in entrepreneurial ability
Increase and improvement of institutions that handle new methods of productive economic activities.
Underdevelopment is growth in the negative direction which can be associated with uneven distribution of wealth and also decrease in quality or quantity of factors such as land, labour, capital and technology.
Characteristics of under-development.
a.) High level of poverty
An underdeveloped country is poverty ridden such that majority of its people are living below poverty level and the per capita income especially when compared with those of developed countries is very low.
b.) Disparity in income distribution
Income is not evenly distributed because few rich people owns majority of the country’s wealth while many other people are living below poverty line.
c.) Low level of savings and investments
When the per capita income is low it makes people have very little or nothing to save leading to low investments.
d.) High population growth rate
There is always high population growth rate in underdeveloped countries. Population explosion increases the number of people living at or below the poverty line and also increases the dependency ratio.
e.) Dominance of subsistence sector
Traditional subsistence sector tend to dominate the modern industrial sector.
f.) Problem of unemployment
There is always high rate of unemployment in underdeveloped countries because of the high population
.The population is always higher than the available jobs in the country,
g.) Underutilization of natural resources
Natural resources in underdeveloped economies, remain under – exploited due to lack of either capital or appropriate technology.
h.) Dependence on the developed countries
Most underdeveloped countries are unable to financially sustain themselves. As a result they keep on relying on the developed countries for financial aid.
i.) Low labour productivity
Labour productivity in underdeveloped countries is extremely low compared with that of developed countries. This due to lack of complimentary factor inputs such as physical capital and skilled management.
Goals of Development
Elimination or reduction of poverty
Provision of important human basic needs such as food, shelter, health and protection
Reduction of disparities in income distribution
Provision of opportunities in areas as employment and self-advancement
Factors hindering development
a.) Low Natural Resource Endowment
Inadequacy or absence of significant quantities of natural resources such as raw materials, fertile land, favorable climate and good terrain maybe a barrier to development.
b.) Inadequate capital
If capital is either lacking or not adequate there may be a problem in activities such as exploitation of resources, industrialization and creation of employment opportunities.
c.) Poor technology
Where technology use is low or backward, productivity is also low
d.) Poor human resource Endowment
If there is a shortage of skilled man power it can lead to a barrier in development as the skills to needed for exploitation of the resources is not there
e.) Unfavorable Domestic environment
The quality of social political and economic environment determines the growth of entrepreneurships that in turn determines the rate at which resources are utilized and capital accumulated
The policy objectives to be achieved in the long run established by the government include:
Eradication of illiteracy in the country
Improving its peoples health
Raising peoples standard of living
Reducing the economy’s foreign dominance.
Importance of development planning
a.) Appropriate resource allocation
Planning enables resources to be used efficiently by not being wasted and used for wrong purpose or left idle.
b.) Stimulation of effort
Well laid out development plan may help the government to stimulate the efforts of the people in the desired direction.
c.) Support foreign Aid bargain
A country with a well laid out development plan is better equipped when soliciting for foreign aid as it is able to use the plan in convincing the donors.
d.) Project evaluation
Projects became possible to evaluate at various stages of implementation to assess whether they are in line with the expected outcomes. Where there are deviations they are noted and corrective measures taken before it’s too late.
e.) Long term Decision making
A development plan provides a long term view for making decisions in various sectors.
f.) Avoiding duplication of industries
It helps in avoiding duplication of industries. Duplication of industries might happen if similar industries are located in different parts of the country. Through planning, different industries in different parts are set thereby ensuring balanced development in the country.
g.) Promoting balanced in Regional Development
Planning helps in distributing industries to various part thereby achieving balanced regional development.
Problems encountered in development planning
These problems are divided into two
Problems encountered at the plan formulation stage
Problems encountered at the implementation stage
Problems encountered at the plan formulation stage
a.) Lack of accurate of detailed data
The quality of development plan is greatly reduced when the data on which is based on is either inaccurate, unreliable or simply not existing.
b.) Existence of a large subsistence sector
The large substance sectors in less developed countries makes planning unrealistic.
c.) Lack of qualified personnel
Due to lack of locally qualified personnel, many less developed countries rely on foreign experts, who may not be having adequate knowledge about the local economies they are planning for.
d.) Transfer of inappropriate development plan
Transferring development plans which have worked in developed countries with assumption that they will work in developing countries always end up failing because they may be inappropriate.
Problems encountered at the implementation stage.
a.) Reliance on donor funding
Most of the development plans in developing countries are based on aids from developed countries, if such aid is not released the implementation of the plan becomes difficult.
b.) Lack of domestic resources
Limited domestic resources such as; skilled personnel, finance and capital equipment may hamper implementation of a well laid out development plan.
c.) Failure to involve local people in planning
If the local people who are expected to implement plans are left out during the plan formulation stage, they may fail to support the plan at implementation stage.
d.) Natural calamities
Natural calamities affect implementation of development plan either directly or directly as the funds set aside for the implementation of the development plan may be diverted to cater for the effects of the natural calamity such as floods, or outbreak of diseases.
e.) Over –ambitious plans
Unrealistic plans which are over ambitious to impression donors are so that they releases funds are difficult to implement.
f.) Lack of co-operation among the executing parties
Lack of co-operation among the experts who are expected to implement the plan may bring it down. For example, if there is conflict between the ministry of finance and the planning agencies, the plan may not take off.
If prices are rising too rapidly, the resultant change in planned resource costs may negatively affect its implementation.
h.) Lack of political will
No matter how good the development plan is, if there is no political will or commitment to implement it, then it will never take off.
End of topic
Past KCSE Questions on the topic
1. Discuss five principles of taxation
2. Highlight distinguishing features between developing and developed countries.
3. Explain five obstacles in the implementation of development plans in the developing countries
4. Every third world country aspires to develop but it is faced with some obstacles. Explain five
of such obstacles to economic development
5. Every third world country aspires to develop but it is faced with some obstacles. Explain five
of such obstacles to economic development
6. Explain five factors that have frustrated economic development in a developing country like Kenya for the last few decades
7. The national budget is drawn before the beginning of every financial year by the government discuss five functions it plays as a planning tool
8. Explain five challenges that Kenya is facing in the implementation of her development plans
9. a) Explain five changes that may take place when a country is experiencing economic development