Latest Business Studies Form Three Refined Notes
Demand is the quantity of a product that buyers are to buy at a over a given .
a product is said to have derived demand when it is demanded to help in the production of other goods and services for example the demand of building materials arising from the demand of houses.
items are said to have joint demand if the use of one will require the use of another. The goods are complimentarily used together like pen and ink.
Business Studies Topical Questions And Answers (F1-4)
Business studies free secondary school notes and exams (Form one to four)
BUSINESS STUDIES NOTES FORM 1-4: UPDATED
BUSINESS STUDIES FORM ONE NOTES FREE
BUSINESS STUDIES NOTES, FORM 3 ALL TOPICS
Business Studies free lesson plans for all topics (Form one to four)
A demand schedule is a table showing the quantities of a commodity that consumers are willing and able to buy at different prices within a given period of time. A demand schedule can be prepared for an individual or for the entire market.
A demand curve is the graph showing the quantities demanded against the prices. On the y-axis is recorded price and the x-axis the quantities demanded.
| 10 20 30 40 50 60 70 80 | 40 35 30 25 20 15 10 5 |
The graph shows that the demand curve (DD) slopes from the left to the right, indicating that as prices goes down the quantity demanded increases and vice versa.
This tendency of demand to increase as price decrease and to reduce as the price increase is referred to as the Therefore a normal demand curve slopes from left to right.
A movement along a demand curve refers to changes in quantity of a product demanded as a result of As the price of the product increases the quantity demanded decreases. It leads to a movement from one point to another on the same demand curve as shown below:
This is when the demand curve moves either to the right or left. It occurs as results of changes in factors influencing demand other than price of the product concerned. This can be illustrated as below:
In (i) at price OP the quantity demanded is OQ. After the demand curve shift from D0D0 to DD a different quantity OQ1 is demanded although the price remains at OP. thus points L and M are on different demand curves.
Similarly when the demand curve shifts from D1D1 to D2D2 as in (ii) a different quantity OQ3 is demand at the same price OP2 as before. Thus the two points R and S are on two different demand curves.
| (i) It involves only one demand curve | It involves two demand curves |
| (ii) It is brought about by changes in the quantity demanded. | Brought about a change in other factors that influences demand other the price of the product. |
| (iii) It involves a change in the quantity demanded. | Involves a change in demand. |
| (iv) A different quantity is demanded only at a different price. | A different quantity is demanded at the same price as before. |
| (v) A movement along the curve can be traced up and down along the same curve. | A shift causes to move either to the right or left. |
Supply is defined as the quantity that suppliers are willing and are able to take to market at a given price over a given period of time.
A supply schedule is a table showing the relationship between supply of a commodity and its price. It shows the quantity supplied at various prices. The supply curve is a graphical illustration showing the trend taken by supply as price either increases or decrease.
| Price of x | 2 | 4 | 6 | 8 | 10 | 12 | 14 | 16 | 18 |
| Supply of x | 5 | 10 | 15 | 20 | 25 | 30 | 35 | 40 | 45 |
The supply curve (SS) slopes from the right to the left showing that as the price increases, the supply also increase. For example, at a price Shs. 8, the supply is 20 units. As the price goes up to Shs. 16, the supply also goes up to 40 units.
This is said to be a movement along a supply curve when the quantity supplied of a commodity changes as a result of a change in its price “all other factors remaining constant”. It leads to a movement from one point to another on the same supply curve as shown below:
In (i) when price changes from OP0 to OP1 the movement is downwards from point X to point Y on the same supply curve S0S0. This leads to the supply of OQ1 instead of OQ0.
In (ii) when the price changes from OP2 to OP3 the movement is upwards from T to point Z on the same supply curve. The quantity supplied changes from OQ2 to OQ3.
A shift of the supply curve is when the entire curve moves either to the left or right as a result of changes in factors influencing supply other than the price of the commodity involved.
In (iii) the whole supply curves S2S2 shifts to S3S3 resulting in the reduction of quantity supplied from OQ3 to OQ4 at the same price OP3 as before. Instead a point on curve S2S2
is an individual enterprise or business unit under one control an ownership e.g. a business unit carrying the production of a good or service such as production of soap or a legal service firm.
is a single business unit or enterprise under one ownership, management and control e.g. KCC, Brookside etc.
consists of all those firms producing the same type of products in the same line of production. A sop industry consists of all those firms producing soap while an insurance industry consists of all these firms providing insurance services.
refers to a group of firms producing the same products for a given market e.g. the milk industry which includes firms such KCC and Brookside. In some cases where we have a single firm, the firm becomes the industry.
Businesses tend to provide goods and services that would yield maximum profit.
In order to survive in a competitive market, firms must come up with products with products that consumers prefer. A firm may therefore develop products that are not currently available or copy rivals ideals and improve on them.
A firm would produce commodities for which production costs are low.
A firm will produce commodities that have the highest demand since demand leads to high sales volume.
A firm can only produce commodities for which the necessary resources are available. Such resources include raw materials, labor, equipment, adequate space and appropriate technology.
A firm should produce goods which are favored by the government policy e.g. low taxation and subsidies. Firms should not produce goods that are illegal as it will be breaking the law.
The following are some of the ways/factors which the size of a firm may be determined:
A firm’s size may be judged by the level of output. A large firm will produce on large scale, while a small firm will produce on small scale.
A small firm is likely to employ only a few employees, while a large firm will most often employ many workers.
A firm with large floor area covered by premises may be said to be large.
Large firms control large proportions of the total market of a particular product. Small firms may only control a small size of the market.
The larger the capital of the firm in terms of assets the larger the firm and vice versa.
A large firm will most often adopt capital intensive methods of technology, where operations will be highly mechanized while small firms use more labour then machinery.
Small firms have low levels of sales with a given period while large firms have huge levels of sales.
Location is the site or place from which the business operations/firms would be established. The management has to make appropriate decisions concerning the location of the firm since a good location would lead to success while a bad location would lead to failure of the business enterprise.
The availability of raw materials is one of the factors that determine the locations of a firm. Firms should be located near the source of raw material when:
Labour is a basic factor of production. It can be skilled, unskilled or semi-skilled labour. It is important for firms ton be located in an area where there is large supply of labour so as to ensure adequate supply of this important factor. Location of the firms near the source of labour reduces the cost of transporting labour force to factories and also reduces time wasting in transporting labour from far.
A firm should be located in an area that is well served by means of transport. This ensures that both raw materials and finished products can be transported with ease.
A firm should be located in an area that is well served by means of communication. This ensures that the firm is able to communicate with its customers and suppliers, and vice versa.
Industries require electric power to operate. They should, therefore be located where electricity is readily available.
Industries should be located in areas with adequate security .
Firms should be located where auxiliary services such as insurance, banking and warehousing are available.
Many firms require water in one or more processes. Such firms should be located in an area where water is readily available.
The government may formulate policies that may have implications on the location of the firms, especially with regard to physical planning. Such planning may be aimed at checking rural-urban migration, environmental degradation or for strategic concerns.
The government may therefore encourage the development of firms in some areas by offering concessions to industrialists such as:
of firms is a situation where many firms are concentrated in a particular area.
of firms describes a situation where location of firms is spread in different regions to minimize the problems of localization.
Economies of scale are the benefits the firm or industry derives from expanding its scale of production/the advantages of operating on large scale.
There are two types of economies of scale;
These are advantages that accrue to a single firm as its production increases, independent of what happens in the other firms in the industry.
Internal economies of scale result from an increase in the level of output and cannot be realized unless output increases.
The internal economies of scale may be achieved by a single plant of the firm or they may arise from an increase in the number of plants.
The internal economies of scale include;
These are the benefits which a firm derives from large purchases of inputs or factors of production due to the discounts offered in the process e.g. trade and quantity discounts
The firms may also incur less cost per unit in transportation of the goods bought
Selling economies of scale arise from the distribution and sale of the finished product as the scale of production increases, i.e it is likely to incur less cost per unit in areas such as advertising, distribution e.t.c
Large firms can also raise more funds through selling and buying of shares and debentures.
Diversification of markets or products can be done so that;
-Large scale firms are also able to obtain supplies from alternative sources so that failure in one does not significantly affect the activities of the firm.
Large firms are able to hire/employ specialized staff and management. This increases the firms efficiency and productivity i.e.
-the costs of hiring/employing the specialized staff/management are spread over a large number of units of output of variable cost of production.Thus,the cost of labour is minimized when production increases leading to increased profits.
These are benefits that accrue to a firm from the use of specialized labour and machinery. Large firms have access to large capital which they utilize to obtain those machines and hire the specialized labour.The machines use the latest technology and are put to full use, making the firm production more efficient i.e. cost of the machines and labour are spread over many units of output hence less costly but giving higher profits.
Large firms can afford to carry out research into better methods of production and marketing.(Research is necessary because of the increased competition in the business world today) This improves the quality of the products and increases the sales and profits made by the firm.
Large firms can easily provide social amenities to their employees including recreations, housing, education, canteens and wide range of allowances. These amenities work as incentives to boost the morale of the employees to work harder and increase the quality and quantity of output. This leads to higher sales and profits.
A large sized firm can establish warehouses to stock raw materials and therefore enjoy large stocks of raw materials for use when the raw materials are in short supply.Thus, the firm can avoid production stoppages that can be occasioned by shortages of the raw materials. The suppliers of such material may be sold at a higher price to realize profit.
External economies of scale are those benefits which accrue to a firm as a result of growth of the whole industry. They are realized by a firm due to its location near other firms. They include;
A firm cannot continue to expand indefinitely or without a limit.As a firm grows or industry expands, the benefits the firm can reap or get from such growth or expansion have a limit.
Any further expansion in the scale of production beyond the limit will actually create negative which would increase the cost of production.
The negative effects to a firm due to its size or scale of production are referred to as
Diseconomies of scale are therefore the problems a firm experiences due to expansion.
Diseconomies of scale may arise from;
There are two forms of diseconomies of scale fiz internal diseconomies and external diseconomies of scale.
These are the problems a firm experiences as a result of large scale production due to its persistant growth. They include;
These are the losses which may arise due to the failure of management to supervise and control the operations properly. This may be because the firm is large resulting into;
These are losses which may arise due to changes in consumer tastes. These may be as a result of;
When the output of a firm increases beyond a certain limit, some factors may set in to increase the average costs.e.g the overhead costs incurred in production and marketing activities may increase. This is because firms may intensify their promotional campaign, incur heavy transport expenses and be forced to offer generous discounts in an effort to attract more clients. All these are factors that may increase overheads without any corresponding increase in real benefits to the firm.
These are losses which may arise due to a firm’s inability to acquire adequate finances for its expansion. This will prevent the firm from expanding further thereby limiting its capacity to increase the volume of its output.
These are demerits that affirm experiences as a result of growth of the entire industry. These include;
-scramble for raw materials
-inavailability of land for expansion
-scramble for available labour
-competition for available market
-easy targets especially in times of war.
As the firm grows in size, its scale of production increases.However, many firms remain small even though they face stiff competition from larger firms. Some of the reasons for existence of small scale firms include;
Large scale production can only be sustained by a high demand for a product. If the demand for a product is low, it may not be advisable for a firm to produce on a large scale, hence it will remain small.
The nature of the product sometimes makes it impossible to produce in large quantities e.g. personal services e.g. hairdressing, painting or nursing can only be provided by an individual or a small firm.
Small firms have the considerable advantage of simplicity in organization. They avoid bureaucracy, wastage and managerial complexity associated with large scale organizations.
Where a firm intends to take advantage of simplicity, the proprietor may maintain its small firm.
Small firms are flexible i.e. one can easily switch from one business to another where an owner of a business wishes to maintain flexibility so as to take advantage of any new opportunity, he/she may have to maintain a small firm.
In a situation where proprietors want to avoid delay in decision-making, they may opt to maintain a small business as this would involve less consultation.
Many small businesses have the potential of expansion, yet their owners prefer to have them remain small believing that big businesses are difficult to run.
In situations where production costs rise too fast, such that diseconomies of scale set is very early, the firm has to remain small.
In order to retain control and independence, the owners of the firm may wish to keep it small.
In some situations, the laws may restrict the growth of a firm. In such circumstances the existing firms remain small.
As opposed to large scale firms, small firms require little amounts of capital to start and operate.
As production activities take place in a given area, the environment and the health of the community around may be adversely affected by these activities. Some of these effects include;
This is caused by waste which is discharged into the atmosphere leading to contamination of the air. Such waste may be in funs of industrial emissions and toxic chemicals from the firms. These pollutants cause air-borne diseases. Acid rain due to such emission may also affect plants.
The term ‘market’ is usually used to mean the place where buyers and sellers meet to transact business. In Business studies, however, the term ‘market’ is used to refer to the interaction of buyers and sellers where there is an exchange of goods and services for a consideration.
NOTE: The contact between sellers and buyers may be physical or otherwise hence a market is not necessarily a place, but any situation in which buying and selling takes place. A market exists whenever opportunities for exchange of goods and services are available, made known and used regularly.
-The features are mainly in terms of the number of sellers and buyers and whether the goods sold are homogeneous or heterogeneous
-Product market is also referred to as market structure.
-Markets may be classified according to the number of firms in the industry or the type of products sold in them..
The number of firms operating in a particular market will determine the degree of competition that will exist in a given industry. In some markets there are many sellers meaning that the degree of competition is very high, where as in other markets there is no competition because only one firm exists.
When markets are classified according to the degree of competition, there are four main types, these are;
The word ‘perfect’ connotes an ideal situation.
This kind of situation is however very rare in real life; a perfect competition is therefore an hypothetical situation.
This is a market structure in which there are many small buyers and many sellers who produce a homogeneous product. The action of any firm in this market has no effect on the price and output levels in the market since its production is negligible.
Firms (suppliers) in such a market structure are therefore price takers i.e. they accept the prevailing market price for their products.
In this market structure, it is assumed that no barrier exists in entering or leaving the industry.
The market (perfect competition) has normal demand and supply curves. The individual buyers demand curve is however; perfectly elastic since one can buy all what he/she wants at the equilibrium price. Similarly, the individual sellers supply curve is also perfectly elastic because one can sell all what he/she produces at the equilibrium price.
Perfect competition market hold on the following assumptions;
Examples of perfect competitions are very difficult to get in the real life but some transactions e.g. on the stock exchange market, are very close to this.
In reality, there is no market in which perfect competition exists. This is due to the following factors:
A monopoly is a market structure in which only one firm produces a commodity which has no close substitutes.
Some of the features in this market structure are;
Price discrimination may be facilitated by conditions such as;
Market separation may be based on the following factors;
Monopolistic competition is a market structure that falls within the range of imperfect competition i.e. falls between perfect competition and pure monopoly. It is therefore a market structure that combines the aspects of perfect competition and those of a monopoly.
Since it is not possible to have a market that is perfectly competitive or a market that is pure monopoly in real world, all market structures in real world lie between the two and are thus known as imperfect market structures.
In a monopolistic market, there are many sellers of a similar product which is made to look different. This is known as product differentiation. These similar products are made different through packaging, design, colour, branding e.t.c
This is a market structure where there are few firms. The firms are relatively large and command a substantial part of the market. It is a market structure between the monopolistic competition and monopoly.
Oligopoly may be classified according to the number of firms or the type of products they sell. They include;
This feature explains why a firm in oligopolistic market faces two sets of demand curves resulting to a Kinked Demand Curve. One curve, for prices above the determined one, which is fairly gentle and the othere curve for prices below the determined one which is fairly steep.
iii) Sellers cannot increase price from price OPo to OP1 because the Quantity bought will decrease (fall).
increase in demand.
Injections
Withdrawals
APPROACHES USED IN MEASURING NATIONAL INCOME
National income is arrived at summing expenditure on all final goods and services (that have reached the final stage of production). Such expenditure is divided into:
Therefore national income = C+I+G+(X – M)
Problems associated with expenditure approach
Problems related to this method
Assignment: Read and make short notes on Output approach (refer to Inventor book three pages 65 – 66).
USES OF NATIONAL INCOME STATISTICS
put their money. The statistics provide relevant information concerning the performance of each sector.
Factors which influences the level of national income.
Reasons why high per capita income is not an indicator of a better living standard in a country
Questions
Introduction
Population refers to the number of human beings living in a particular region at a particular time.
The size of the population is ascertained through national headcount, which is referred to as a national census. It is an international requirement that each country must hold a national census at least every ten years.
Population issues are major concerns to business people because people are consumers of goods and services as well as providers of factors of production.
Basic concepts in population
Factors that determine fertility rate
CBR= Number of Births x 1000
Total population
Factors that are likely to lead to high birth rates
Factors that may lead to decline in birth rates
MR= Number of death x 1000
Total population
- THE LEDGER
This is a special ledger which is used to record cash and cheque transactions.
It contains only the cash in hand and cash at bank (i.e. cash and bank) accounts
- Nominal ledger
This ledger is used to record business expenses and incomes (gains).It contains all the nominal accounts.
- Private ledger
This ledger is used in recording private accounts i.e. confidential and valuable fixed assets and the personal accounts of the proprietors such as capital accounts and drawing accounts.
- The general ledger
The general ledger contains all other accounts that are not kept in any other ledger e.g. buildings, furniture and stock accounts.
-Personal accounts of debtors or creditors who do not arise out of sale or purchase of goods on credit are found in the general ledger e.g. debtors as a result of sale of fixed asset on credit and expense creditors.
- C) Private accounts
These are accounts that the business considers to be confidential and are not availed to everybody except the management and the owners.
-These accounts may be personal or impersonal.
-They include capital account, drawings accounts, trading, profit and loss accounts.
Types of ledgers
The following are the main types of ledgers that are used to keep the various accounts
- The sales ledger (Debtors ledger)
This is the ledger in which accounts of individual debtors are kept.
-It is used to record the value of goods sold on credit and the customers to whom the credit sales are made, hence contains the personal names of the debtors.
-It is called a sales ledger because the accounts of debtors kept here in are as a result of sale of goods on credit. An account is kept for each customer to which is debited the value of credit sale. Payment made by the debtor are credited to the account and debited in the cash book.
- Purchases ledger(creditors ledger)
The purchases ledger contains accounts of creditors i.e. contains the records of the value of goods bought on credit and the suppliers of such goods.
It is a record of the debts payable by the business due to credit purchases.
An account is kept for each creditor to the credit side of which is posted the value of.
- b) Impersonal accounts
This category of ledger accounts includes all other accounts that are not personal in nature e.g. buildings, purchases, rent, sales and discounts received.
Impersonal accounts fall into two types
- Real accounts
- Nominal accounts
- Real accounts; These are accounts of tangible assets or property e.g. buildings,land,furniture,fittings,machinery,stock,cash(at bank and in hand)e.t.c
These accounts are also used to draw up the balance sheet.
- Nominal accounts; These are accounts of items that relate to gains and losses and whose balances at the end of the accounting period.
-All expenses, revenues, sales and purchases are hence nominal accounts.
-The main business expenses include purchases,sales,returns,insurance,stationary,repairs,depreciation,heating,discount allowed, lighting interests,printing,wages,rent,rates and advertising.
The value of losses is included in the same side as the expenses when drawing up the final accounts though it is not an expense.
-The income (revenues) include sales,returns,claims out, interest receivable, dividends receivable and commission receivable. Profit is usually categorised together with these incomes when drawing up the final accounts.
Classification of ledger accounts
Many businesses handle few transactions, hence they have few records to keep. Their accounts can thus be kept in a single ledger referred to as the general ledger
As a business grows the volume of transactions increases. This single ledger, therefore, becomes very bulky with accounts and it becomes difficult to make reference to it.
In order to simplify the recording of transactions and facilitate reference to the accounts, ledger accounts are usually classified and each category kept in a special ledger.
NOTE (i) Since many transactions are cash transactions which are normally recorded in the bank and cash accounts a need arises to remove them from the main/general ledger to a separate ledger called the cash book.
(ii) The number of ledgers kept depends on the size of the business.
Classes of accounts
All accounts can be classified into either personal or impersonal accounts.
- Personal accounts
-These are account of persons
-They relate to personal, companies or associations.
-They are mainly accounts of debtors and creditors.
NOTE: capital account is the proprietors personal account, showing the net worth of the business hence it is a personal account.
-The account balances of these accounts are used to draw up the balance sheet.
-In the ledger, the trial balance total is not affected.
Purpose of a trial balance
The purpose of a trial balance include;
- Checking the accuracy in the ledger accounts as to whether;
i-The rule of double entry has been adhered to or observed/ complied with.
ii-There are arithmetical errors in the ledger accounts
- Gives a summary of the ledger i.e. summary of the transactions which have taken place during a given period
- Provide information (account balances) for preparing final accounts such as the trading account, profit and loss account and the balance sheet.
- Test whether the ledger account balances have been posted to the right side of the trial balance.
Limitations of a trial balance
Even when the trial balance totals are equal, it does not mean that there are no errors made in the ledgers. This is because there are some errors that do not affect the trial balance.
A trial balance only assures the book keeper that the total of debit entries is equal to total credit entries. The errors that do not affect the trial balances are;
- Error of total omission; This occurs when a transaction takes place and nothing about it is recorded in the books of accounts i.e. it is completely omitted such that neither a credit nor a debit entry is made in the ledgers.
- Error of original entry; this occurs where both the debit and credit entries are made using similar but erroneous figures. As the wrong amount is recorded in the two accounts.
- Error of commission; This occurs where double entry is completed but in the wrong persons accounts especially due to a confusion in names e.g. a debit entry of shs.2000 was made in Otieno’s account instead of Atieno’s account.
- Compensating errors; These are errors whose effects cancel out e.g. over debiting debtors account by sh.300 and under debiting cash account by sh.300.
- Complete reversal of entries; This occurs where the account to be debited is credited and the account to be credited is debited e.g. the sale of goods to Lydia on credit may be recorded as follows;
Dr.sales a/c
Cr.Lydius a/c instead of
Dr.Lydius a/c
Cr.sales a/c
- Error of principle; This is where a transaction is recorded in the wrong account of a different class from the correct one e.g. repairs of machinery was debited in the machinery instead of debiting the repairs account.
TRIAL BALANCE
-A trial balance is a statement prepared at a particular date showing all the debit balances on one column and all the credit balances on another column.
NOTE: A trial balance is not an account but merely a list of assets, expenses and losses on the left and capital liabilities and incomes (including profits) on the right.
-The totals of a trial balance should agree if the double entry has been carried out correctly and there are no arithmetic errors both in the ledger as well as in the trial balance itself.
-If the two sides of a trial balance are not equal, it means there is an error or errors either in the trial balance or in the ledger accounts or in both.
Errors that may cause a trial balance not to balance
- Partial omission; A transaction was recorded on only one account i.e. a debit or a credit entry might have been omitted in one of the affected accounts.
- Transfering (posting); a wrong balance to a trial balance.
- Different amounts for the same transaction might have been entered in the accounts(Amount Dr.different from amount cr)
- Failure to post a balance to the trial balance (omission of a balance from the trial balance.
- Posting a balance to the wrong side of the trial balance
- Recording a transaction on the same side of the affected accounts(partial reversal entry)
- Arithmetic mistakes might have been made when balancing the ledger accounts
- Arithmetic errors in balancing the trial balance
