INTRODUCTION TO ECONOMIC DEVELOPMENT AND PLANNING
This is the increase in the productivity of a country which can be seen in the continued increase in the national income over a period of years.
It can be measured by taking the average percentage of increase in national income over a period of time (number of years) and be assumed to be the average rate of economic growth in the country.
This is the quantitative change or increase in a country’s national income over the years, accompanied by favorable changes in the structures within the country that leads to general improvement of the individual well being, as well as the entire nation.
A country may experience economic growth without experiencing economic development. This is because the increase in the national income may be as a result of people working for long hours without any time for rest, recreation and other development to occur in their body. This will make them not to have better living, despite the fact that the national income shall have increased.
The expected structural changes to be realized in a case of economic development include;
Outline the differences that exist between economic growth and economic development
This refers to a situation whereby the economic growth is in the negative direction (decreasing) accompanied by uneven distribution of wealth and decrease in quality and quantity of the factors of production available
Characteristics of Underdevelopment
Goals of Economic Development
The following are the changes that economic development seeks to put in place, which in Kenya they have been joined together in what is referred to as the millennium development goals. They includes
Factor which may hinder development in a country
The rate of a country’s economic development may be influenced negatively by the following factors
This is the process through which the country establishes their objectives to be achieved, identify the resources that will be required and put in place the strategies or methods of acquiring the resources and achieving their pre-determined objectives.
In most cases their objectives or goals are the goals of economic development
The plan will prioritize the objectives to be achieved and even break it down in to targets that if achieved with the planned strategy and resources, the objective shall have been achieved.
Need for economic planning
It enhances the following
Problems encountered in development planning
Problems at the planning stage
Problems at the implementation stage
Trends in International Trade
Most of them employ foreigners in their management team, denying the locals a chance to get employed
International Financial Institutions
Some of the institutions that play a role in international monetary system include;
International Monetary Fund (I.M.F)
This bank operates like the central bank of the central banks of the member countries. Its objective includes the following;
African Development Bank (A.D.B)
This bank was formed to promote the economic and social progress of its regional member countries in Africa. It main source of finance is the members’ contributions and the interest charged on the money they lend members.
Its functions include;
African Development Fund (A.D.F)
This was formed to provide long term financial assistance to the low income countries that cannot obtain loan from other financial institutions at the prevailing terms and condition. Their loans may recover a longer repayment periods with no interest except the commitment fees and service charge which is minimal.
They fund activities, which includes;
International Bank for Reconstruction and Development (World Bank)
The World Bank was formed to carry out the following functions;
This occurs where two or more countries enter into a mutual agreement to cooperate with each other for their own economic benefit. They may do this by allowing free trade or relaxing their existing trade barriers for the member countries.
Economic integration may occur in the following forms;
Free Trade Area
This is a case where the member countries agree to abolish or minimize tariffs and other trade restrictions but the individual countries are free to impose restrictions on non-member countries. They includes; Preferential Trade Area (P.T.A), European Free Trade Area (E.F.T.A), Latin America Free Trade Area (L.A.F.T.A), etc.
This is where the members of the free trade area may agree not only to abolish or minimize their tariffs, but also establish a common tariff for the exchange of goods and services with the non member countries. They include; Economic Community of West Africa States (E.C.O.W.A.S), East Africa Custom Union (E.A.C.U), Central Africa Custom and Economic Union (C.A.C.E.U)
This is where the member countries allow for free movement of factors of production across the boarders. People are free to move and establish their business in any member country. They include; East Africa Common Market (E.A.C.M), European Economic Community (E.E.C), Central American Common Market (C.A.C.M), Common Market for Eastern and Southern Africa (COMESA)
This is where the members of the common market agree for put in place a common currency and a common central bank for the member countries. They even develop common infrastructures which includes railways, communication networks, common tariffs, etc
Importance of economic integration
Economic integration will ensure the following benefits for the member countries;
Free Trade Area
This is a situation where there is unrestricted exchange of goods and services between the countries. It has benefits/advantages similar to those of economic integration.
Disadvantages of free trade area
Some of the problems it is likely to bring include;
These are deliberate measures by the government to limit the imports and exports of a country.
They are also known as protectionism and include the following;
Reasons for trade restrictions
Advantages of trade restrictions
Disadvantages of trade restriction
TERMS OF TRADE
This refers to the rate at which the country’s export exchanges with those from other country. That is:
It determine the value of export in relations to import so that a country can know whether its trade with the other country is favourable or unfavourable
Favourable terms of trade will make the country spent little on import and gain a lot of foreign exchange from other countries
Then table below shows trade between Kenya and China in the year 2004 and 2005, with the Kenyan government exporting and importing to and from china, and China also importing and Exporting from and to Kenya.
Calculate the Terms of trade for;
BALANCE/IMBALANCE OF TRADE
Factors that may lead to either favourable or unfavourable terms of trade
The country is experiencing a favourable terms of trade if:
The country will experience unfavourable terms of trade if;
Reasons for differences in terms of trade between countries
The terms of trade may differ due to:
Balance of trade
This is the difference between value of country’s visible exports and visible imports over a period of time. If the value of visible/tangible export is higher than the value of visible/tangible imports, then the country experiences favourable terms. If less than the invisible value, then the country is experiencing unfavourable. The country is at equilibrium if the value of visible export and import is the same,
BALANCE OF PAYMENT
This is the difference in the sum of visible and invisible export and the visible and invisible imports. If positive then it means the country is having favourable terms, while if negative, then it means unfavourable It goes beyond the balance of trade in that it considers the following
Balance of Payment account
This is the summary showing all the transactions that have taken place between a particular country and the rest of the world over a period of time. The transaction may arise from
Components of balance of payments account
The balance of payment account is made up of the following
Balance of payment on current account
This is the account that is used to determine the difference between the value of the country’s visible and invisible imports and exports. That is
In the account, the payments for the visible and invisible imports are debited while the receipts from visible and invisible exports are credited that is
A given country had the following values of visible and invisible export and import during the year 2004 and 2005
Prepare the country’s balance of payments on current account for the years 2004 and 2005 and comment on each of them.
Balance of payments on capital account
This account shows the summary of the difference between the receipt and payments on the investment (capital). Receipts are income from investments in foreign countries while payments are income on local investments by foreigners paid out of the country. The capital inflow includes investments, loans and grants from foreign donors, while capital outflow includes dividends paid to the foreign investors, loan repayments, donations and grants to other countries. In the account the payments are debited, while the receipts are credited. That is;
The official settlement account
This account records the financial dealings with other countries through the IMF. It is also called the foreign exchange transaction account, and is always expected to balance which a times may not be the case. That is;
Balance of payment disequilibrium
This occurs when there is either deficit or surplus in the balance of payments accounts. If there is surplus, then the country would like to maintain it because it is favourable, while if deficit, the country would like to correct it.
Causes of balance of payment disequilibrium
It may be caused by the following;
Correcting the balance of payment disequilibrium
The measures that may be taken to correct this may include;
Terms of sales in international trade
Here the cost trading which includes the cost of the product, cost of transporting, loading, shipping, insurance, warehousing and unloading may be expensive. This makes some of the cost to be borne by the exporter, as some being borne by the importer. The price of the goods quoted therefore at the exporters premises should clearly explain the part of the cost that he/she is going to bear and the ones that the importer will bear before receiving his/her goods. This is what is referred to as the terms of sale
Terms of sales therefore refers to the price quotation that state the expenses that are paid for by the exporter and those paid for by the importer.
Some of the common terms include;
INTRODUCTION & MEANING OF INTERNATIONAL TRADE
A trade involving the exchange of goods and services between two or more countries is referred to as international trade.
If the exchange is between two countries only, then it is referred to as bilateral trade, but if it is between more than two countries then it is referred to as multilateral trade.
TYPES, CAUSES, CONTROL AND CONSUMER PRICE INDEX IN INFLATION
Inflation refers to an economic situation where the demand for goods and services in the economy is continuously increasing without corresponding increase in supply which pushes the general prices up. The opposite of inflation is called deflation.
Inflation is measured by considering the Consumer Price Index (C.P.I) which involves comparison of prices of certain goods and services for two different periods.
In constructing the C.P.I;
Types and causes of inflation
Inflation is classified in relation to its causes.
Demand pull inflation
This is a type of inflation caused by excessive demand for goods and services without a corresponding increase in production resulting into rise in prices.
Causes of demand pull inflation
Cost push inflation
This is a type of inflation caused by increase in cost of factors of production which translates to increased prices of goods and services.
Causes of cost push inflation.
This is a type of inflation which is caused by importation of high priced inputs of production such as; technology/machines, skilled human resources and crude oil.
This in turn increases the prices of locally produced goods which may lead to inflation.
Causes of imported inflation
LEVELS OF INFLATION
Effects of inflation in an economy
Desirable effects of inflation
Control of Inflation
The govt. may adopt the following policies depending on their situation to reduce inflation to manageable levels. They include;
a) Monetary policy
This is a deliberate move by the govt. through the central bank to regulate and control the money supply in the economy which may lead to demand pull inflation. The policies include;
These are the measures taken by the govt. to influence the level of demand in the economy especially through taxation process controlling government expenditure. They include;
These are laws made by the govt. to help in controlling the inflation. They include;
Introduction to Inflation
What is inflation?
The rate at which the price of goods and services rise over a given period of time is referred to as inflation.
Inflation has a major effect on the economy of a country or can even impact the life of individuals on a daily basis.
Causes of Inflation
Measures Governments put in place to combat/control inflation
a) Monetary policy
This is a deliberate move by the government through the central bank to regulate and control the money supply in the economy which may lead to demand price inflation. The policies include:
b) Fiscal policy
These are the measures taken by the government to influence the level of demand in the economy through taxation process. They include
c) Statutory Measures
These are laws made by the government to help in controlling the inflation. They include:
Sampled KNEC KCSE Questions & Answers
Download a copy of these notes inclusive of answers Here.
By the end of the topic, the learner should be able to:
Public finance refers to the activities carried out by the government associated with raising of finances and the spending of the finances raised (it is the study of how government collects revenue and how it spends it)
The components of public finance are;
Purpose of public finance
Sources of public finance
There are two major sources of public finance i.e.
This is the income that the government gets from its citizens. The main sources of public revenue are:
This refers to borrowing by government from firms and individuals within the country. This may be done through:
Open market operation; the government sells its securities such as treasury bonds and treasury bills. This however has a disadvantage of causing ‘crowding out effect’ where the government leaves the private investors with little to borrow from.
Classes of public (National debt)
These are two classes of national debt:
This is borrowed money used to finance project(s) that can generate revenue. Such projects, once started may become self-sustaining and may contribute towards servicing/repaying the debt. E.g. money used to finance irrigation schemes, electricity production etc.
This is borrowed money that is used to finance activities that do not generate any revenue. Examples are money used to finance recurrent expenditure e.g. payment of salaries or for famine relief etc.
Dead-weight debt is a burden to members of the public since they are the ones who are expected to contribute towards its repayment.
Factors to consider before the government decides whether to borrow internally or externally
This refers to how the government spends the finances it has raised on behalf of its citizens.
Categories of government expenditure
This refers to government spending that takes place regularly e.g. payments of salaries to civil servants, fuelling of government vehicles e.g.
Every financial year, the government must allocate funds to meet such expenditure.
Recurrent expenditure is also known as consumption expenditure.
This is also referred to as capital expenditure .It is government spending on projects that facilitate economic development. Such projects includes construction of railway lines, roads, airports, rural electrification etc.
Once completed expenditure on such projects ceases and may only require maintenance.
This is expenditure on things/people who do not directly contribute to a country’s national income. Such expenditure include money spent on famine relief, pension, bursaries etc.
Principles of Public/Government Expenditure
These are the considerations that are necessary before any expenditure can be incurred by the government.
Tax: is a compulsory payment by either individuals or organizations to the government without any direct benefit to the payer.
Taxation-refers to the process through which the government raises revenue by collecting taxes.
Purposes/reasons for taxation
Principles of taxation
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question & answer session
Discuss five principles of taxation
Outline five sources of non-tax public revenue
Explain five principles of public expenditure
Highlight five reasons for imposition of tax by the government
Discuss five characteristics of a good tax system
Outline five reasons why the Kenya government must impose tax
KCSE PAST PAPERS
KCPE PAST PAPERS
MONEY AND BANKING
By the end of the topic, the learner should be able to:
Money and Banking
Q & A
FINANCIAL STATEMENTS - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER
- Financial Statements
- Trading account
- Profit and loss account
- Trading, profit and loss account
- Balance sheet
- Importance of the financial statements
- Concept of trading period
- Preparation of simple financial statements
- Types of capital
- Working capital
- Borrowed capital
- Capital owned
- Capital employed
- Calculating basic financial ratios e.g
- Margins and mark-ups
- Current ratio/ working capital ratio
- Rate of stock turn-over
- Return on capital
- Importance of financial ratios
- identify the various financial statements
- explain the importance of each of the financial statements
- explain the concept of trading period
- prepare simple Financial Statements
- explain the various types of capital
- calculate basic ratios from financial statements
- explain the importance of each of the basic financial ratios.
The trading period is the duration through which the trading activities are carried out in the business before it decides to determines it performances in terms of profit or loss. It may be one week, month, six months or even a year depending on what the owner wants. Most of the business use one year as their trading period. It is also referred to as the accounting period.
At the end of the accounting period, the following takes place;
- All the accounts are balanced off
- A trial balance is extracted
- Profit or loss is determined
- The balance sheet is prepared
Determining the profit or loss of a business
It is referred to as the gross profit /loss because it has not been used to cater for the expenses that may have been incurred in selling that stock, such as the salary of the salesman, rent for the premises, water bills, etc. it therefore implies that the businessman cannot take the whole gross profit for its personal use but must first deduct the total cost of all other expenses that may have been incurred.
The profit realized after the cost of all the expenses incurred has been deducted is what becomes the real profit for the owner of the business, and is referred to as Net profit. The net profit can be determined through calculation or preparation of profit and loss account.
In calculating the gross profit, the following adjustments are put in place
- Return inwards/Sales return: - these are goods that had been sold to the customers, but they have returned them to the business for one reason or the other. It therefore reduces the value of sales, and is therefore subtracted from sales to obtain the net sales
Therefore Net sales = Sales – Return inwards
- Return outwards/purchases return: - these are goods that had been bought from the suppliers to the business and have been returned to them for one reason or another. It reduces the purchases and is therefore subtracted from the purchases to obtain the net purchases.
- Drawings: - this refers to goods that the owner of the business has taken from the business for his own use. It reduces the value of purchases, and is therefore subtracted from purchases when determining the net purchases. It is different from the other drawing in that it is purely goods and not money
- Carriage inwards/Carriage on purchases: - this is the cost incurred by the suppliers in transporting the goods from his premises to the customers’ business. It is treated as part of the purchases, and therefore increases the value of purchases. It is added to purchases to determine the actual value of purchases/Net purchases.
Therefore Net Purchases = Purchases + Carriage inwards – Return Outwards - Drawings
- Carriage outwards/Carriage on sales: - this is the cost that the business has incurred in transporting goods from its premises to the customer’s premises. The cost reduces the business profit that would have been realized as a result of the sale, and is therefore treated as an expense and is subtracted from the gross profit, before determining the net profit.
- Opening stock is the stock of goods at the beginning of the trading period, while the closing stock is the stock of the goods at the end of the trading period
Gross profit is therefore calculated as follows;
Gross Profit = Sales – Return inwards – (Opening stock + Purchases + carriage inwards – Return outwards – Closing stock)
Gross profit = Net sales – Cost of Goods Sold (COGS)
COGS = Opening Stock + Net Purchases – Closing stock
Net Profit = Gross profit – Total expenses
It takes the following format
The following balances were obtained from the books of Ramera Traders for the year ending may 31st 2010
- Sales 670 000
- Purchases 380 000
- Return inwards 40 000
- Carriage outwards 18 000
- Return outwards 20 000
- Carriage inwards 10 000
- During the year the owner took goods worth shs 5 000 for his family use
- The stock as at 1st June 2009 was shs 60 000, while the stock as at 31st May 2011 was shs 70 000
Q & A
THE LEDGER AND THE CASHBOOK
- Meaning and purpose of a ledger
- Concept of double entry
- Meaning and format of a ledger account
- Rules of posting of various ledger accounts
a) Assets accounts
b) Liability accounts
c) Expenses accounts
d) Revenue accounts
e) Capital 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
a) Single - column
b) Two - column
c) Three - column
THE CASH BOOKS AND THE LEDGER
This is a special ledger which is used to record cash and cheque transactions.
It contains only the cash in hand and cash at bank (i.e. cash and bank) accounts
This ledger is used to record business expenses and incomes (gains). It contains all the nominal accounts.
This ledger is used in recording private accounts i.e. confidential and valuable fixed assets and the personal accounts of the proprietors such as capital accounts and drawing accounts.
The general ledger
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.
- 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 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 herein are as a result of sale of goods on credit. An account is kept for each customer to which is debited the value of credit sale. Payment made by the debtor are credited to the account and debited in the cash book.
The purchases ledger contains accounts of creditors i.e. contains the records of the value of goods bought on credit and the suppliers of such goods.
It is a record of the debts payable by the business due to credit purchases.
An account is kept for each creditor to the credit side of which is posted the value of.
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
These are accounts of tangible assets or property e.g. buildings, land, furniture, fittings, machinery, stock, cash (at bank and in hand) etc.
These accounts are also used to draw up the balance sheet.
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.
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Classification of ledger accounts
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.
(i) Since many transactions are cash transactions which are normally recorded in the bank and cash accounts a need arises to remove them from the main/general ledger to a separate ledger called the cash book.
(ii) The number of ledgers kept depends on the size of the business.
Classes of accounts
All accounts can be classified into either personal or impersonal accounts.
- These are account of persons
- They relate to personal, companies or associations.
- They are mainly accounts of debtors and creditors.
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;
- The rule of double entry has been adhered to or observed/ complied with.
- 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
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;
- 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.
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.
- Transferring (posting): a wrong balance to a trial balance.
- Different amounts for the same transaction might have been entered in the accounts
- 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
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Q & A
NATIONAL INCOME CONTENT
- 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
NATIONAL INCOME SPECIFIC OBJECTIVES
- explain the meaning of national income
- describe the circular flow of income
- explain the methods of measuring national income
- explain the problems encountered in measuring national income
- discuss the uses of national income statistics
- discuss the factors that influence the level of national income.
Terms used in national income
- Gross Domestic Product (GDP). This is the total monetary value of all goods and services produced in a country during a particular year. Such goods and services must have been produced within the country.
- Net Domestic Product (NDP). This is the GDP less depreciation. Depreciation is the loss in value of the assets such as machines used in the production of goods and services.
- Gross National Product (GNP). This measures the total monetary value of all the goods and services produced by the people of a country regardless of whether they in or outside the country. It takes into account exports and imports. The difference between exports and imports is called net Factor Income from abroad. GNP therefore is the sum of GDP and net factor income from abroad.
- Net National Product (NNP). This recognizes the loss in value of the capital used in the production of goods. Capital here refers to capital goods. NNP is the difference between GNP and the depreciation.
- Per capita income. This is the average income per head per year in a given country. It is also the national income divided by the population of the country.
Circular Flow of Income
- This is the continuous movement of income between the households (providers of factors of production) and the firms (producers of goods and services).
- The factors of production are received from households.
- The firms pay the rewards of such factors to the households (expenditure to the firms and income to the households).
- The households in turn use the income to buy the goods and services produced by the firms (expenditure to households and income to firms).
- Existence of two sectors only. It is assumed that the economy has only two sectors that is households and firms. The households provide the factors of production while firms are involved in the production of goods and services.
- Total spending by households. It is assumed that the households spend all their income on the goods and services produced by the firms i.e. no savings.
- Total spending by the firms. It is assumed that the firms spend the money received from the sale of goods and services to pay for the rewards of production factors.
- Lack of government intervention. The government does not influence how the firms and households carry out their activities. Such interventions are in the form of taxes, price controls among others.
- Closed economy. Exports and imports do not exist in such an economy.
- The factors can either lead to increase in income and expenditure (injections) or lead to a reduction in the volume of flow (withdrawals).
- Savings. This takes place when the households do not spend all their income on the purchase of goods and services. This reduces the income to be received by firms hence savings is a withdrawal from the circular flow of income.
- Taxation. Taxation reduces the amount of money available for spending therefore it is a withdrawal/leakage from the circular flow of income.
- Government expenditure. The government may buy goods from the firms or provide subsidies. This will translate in to an injection into the circular flow of income.
- Investments. When firms put more capital into the production, output will increase hence an increase in income (injection).
- Imports. When goods and services are bought from other countries, money will be spent hence a reduction in the circular flow of income (withdrawal).
- Exports. Through exports, a country is able to receive money from other countries (injections)
- Government spending
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:
- Expenditure on consumer goods ( C)
- Expenditure on capital goods (I)
- Expenditure by government (G)
- Expenditure on net exports (X – M)
Problems associated with expenditure approach
- Lack of accurate records particularly in the private sector
- Approximation of expenditure of the subsistence sector
- Difficulty in differentiating between final expenditure and intermediate expenditure
- Double counting may exist
- Fluctuating exchange rates may cause problems in the valuation of imports and exports.
- In this method, the national income is arrived at by summing all the money received by those who participate in the production of goods and services.
- Such incomes are in the form of rewards to the production factors (wages, rent, interest and profits).
- Public income is also taken into account i.e. it is the income received by the government from its investments (Parastatals, joint ventures).
- Transfer payments are excluded since they represent a redistribution of incomes from those who have earned them to the recipient’s e.g. National insurance schemes.
- Determination of what proportion of transfer payments constitute in the income of a country.
- Inaccurate data may exist since business people may not tell the truth about their income in order to evade tax.
- Price fluctuations may make national income determination difficult.
- Income from illegal activities is not captured.
- Valuation of income from subsistence economy may be difficult e.g. housewives.
Uses of National Income Statistics
- Indicators of standards of living. If the national income is equitably distributed, then the standards of living will be high.
- Measuring economic growth. The statistics of one year are compared with previous year to show whether there is improvement or not.
- Inter country comparison. They are used to compare the economic welfare among countries hence knowing which country is better off and by how much. However, the following challenges may be faced when carrying the comparisons: different in currencies, different goods and services, disparity in income distribution and difference in tastes and preferences.
- Investment decisions. They assist the government and other investors to know the sectors to put their money. The statistics provide relevant information concerning the performance of each sector.
- Basis of equitable distribution of income. The statistics can be used to spread income to the hands of majority of the citizens in case a few individuals control the economy.
- Planning purposes. The statistics will show the contribution of each sector thus helping the government in allocating the funds to the various sectors.
- Quantity and quality of production. If the factors are more in terms of quantity of good quality, the output will be high hence increasing in national income.
- State of technology. A country with high level of technology will produce goods in large volumes hence high national income.
- Political stability. Countries which are relatively stable politically experience high production hence high national income level.
- Accuracy of accounting systems. If the methods used to gather data are accurate, then the overall statistical figures will the accurate hence reliable.
- Proportion of the subsistence sector. Subsistence sector’s output is not normally included in the statistical figures. If it represents a large proportion, therefore the national income level will be low.
- Statistical problems. The collection of the national income data may be inaccurate meaning that the national income figures might be incorrect hence wrong per capita income.
- Changes in money value. If the currency has been devalued, there can be change in the value of money without necessarily representing any changes in the welfare of the people.
- Income distribution. The per capita may be high even though the income is in the hands of very few people thus it is not a representative of the majority.
- Nature of products. If the products are not meant to satisfy immediate wants of the people, then an increase in per capita income may not lead to a higher economic welfare.
- Peoples’ hard work and attitude. Increased national income may mean less sleep and more worries. People have no time to enjoy what they produce and their welfare may be low despite the rise in national income.
- Social costs. People may migrate from rural areas to urban areas straining family relationships while an increase in industries may create pollution, congestion and other environmental disruptions.
questions and answers session
- 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
- State four factors that affect the circular flow of income in an economy
- Identify four factors that may be contributing to income disparity between the rich and poor citizens in Kenya
- Account for the difference between the gross National Income figures between Kenya and Uganda
- Name three approaches for measuring national income
- Highlight four problems associated with income approach
- Highlight four problems associated with the output approach in computation of National income
- Highlight four uses of National Income statistics in any given country
- Outline four circumstances under which per capita income would be a good indicator
- Collection of data of the national income may be inaccurate.
- Changes in per capita income may be due to change in the value of money.
- Income may be in the hands of only a few.
- The products produces may not satisfy immediate wants of the people.
- Increased national income may mean less sleep and more worries.
- Foreign trade
- Taxation (government interference)
- Individual talents and personal endowment
- Inheritance from parents
- Differences in natural resource endowment
- Difference in stock capital equipment
- Differences in entrepreneurial cultures in the two countries
- Differences in stock of man power
- Differences in general attitude of people towards work
- Availability and states of technology
- Income approach
- Output approach
- Expenditure approach
- Problem of inaccurate data
- Price fluctuations make it difficult to calculate national income
- Problem of handling illegal and unrecorded yield income to recipients
- Transfer payments pose a problem
- Income disclosures aren’t true because people and firms like evading tax
- Problems of valuation due to unavailability/inaccuracy of output figure especially in the private section
- Problem of deciding on the goods/services to include eg. Whether the output of a house wife should be included or not
- The problem of valuing output in the subsistence sector
- Problem of frequent changing process
- Problem of valuing government output since many of its services are not sold in the market
- Problems of differentiating primary inputs from intermediate inputs
- Valuing illegal activities like drug trafficking.
- It shows average standards of living of the people
- It determines the economic development of a country
- It shows the country’s network or actual income
- It is used for economic planning
- Helps to know the contribution of different sectors of the economy
- Used to compare economic performance of different countries- Used to compare economic performance of a country over the years
- When the national income is equitably distributed among the people
- When statistics obtained consider price changes in the economy
- When population size of the country is real and not more projections
- When statistics of output is based essential commodities consumed by the messes/large number of people
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FORM 3-Topic 17-PRODUCT MARKETS.pdf
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FORM 3-Topic 18-CHAIN OF DISTRIBUTION.pdf
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FORM 3-Topic 19-NATIONAL INCOME.pdf
Q & A
CHAIN OF DISTRIBUTION
- explain the meaning of distribution
- describe the various channels of distribution
- discuss the role of intermediaries in the distribution chain
- discuss the factors which may influence choice of a distribution channel.
- Meaning o f distribution
- Channels of distribution
- Intermediaries in the distribution chain
- Distribution of various products
- Choosing a distribution channel
The persons involved in the distribution of goods from the producer to consumer are called middlemen or intermediaries.
There are different channels that different products follow. Some of the channels include the following:
- Producer to agent to wholesaler to retailer to consumer.
- Producer to co – operative society to marketing board to wholesaler to retailer to consumer.
- Producer to marketing board to wholesaler to retailer to consumer.
- Producer to wholesaler to retailer to consumer.
- Producer to wholesaler to consumer
- Producer to retailer to consumer
- Producer to consumer
Costs incurred by middlemen while distributing goods
- Buying costs. They incur this cost by paying for them from the producers or other middlemen.
- Transport cost. Some middlemen do transport goods from the producer to other middlemen or to the final users.
- Storage costs. Middlemen do keep the goods until their demand arises. This will therefore require them to hire or construct their own warehouses.
- Advertising or marketing costs. Some middlemen do carry out marketing of goods on behalf of the producers and other middlemen. In the process, they pay for such services.
- Insurance costs. Middlemen do insure the goods they are trading in to ensure compensation in the event of loss.
- Operation costs. Middlemen just like other businesses do incur operating costs such as salaries to employees, electricity, maintenance among others.
- Preparation costs. Some middlemen to prepare goods before they are sold to the consumers. Such activities include packing, assembling and blending. They have to meet such costs on behalf the producer, other middlemen and consumers.
Roles of Middlemen
- Bulk accumulation (assembling). They similar goods from different producers in small quantities and then offering the large amount gathered to buyers who may want to buy in large volumes.
- Reducing transactions. The interactions between the producers and the consumers will be reduced since the middlemen are the ones who will be communicating to the consumers.
- Bulk breaking. They buy in large quantities and then sell in small quantities as desired by the consumers.
- Risk taking. They assume all the risks related with the movement of goods from the producers to the consumers. Such risks include theft, damages, loss due to bad debts.
- Finance provision. Middlemen provide finance to the producers by buying goods in large quantities and paying for them in time.
- Provision of information. Middlemen gather market information from the consumers then pass to the producers who in turn produce goods in line with the tastes of consumers.
- Marketing/product promotion. Middlemen are involved in marketing of goods hence stimulating the interest of consumers.
- Provision of transport. Middlemen do transport goods from the producers up to the where the consumers can access them. Both the producers and consumers are hence relieved of transport costs.
- Variety provision
- Availing goods to consumers
Factors to Consider Before Selecting a Distribution Channel
- Product nature. Perishable products should be sold directly to the consumers because delays may result to losses since they go bad fast. In addition, bulky products need direct selling in order to reduce transportation and stock handling costs.
- Nature of the market. Where the market is concentrated in one area, direct selling is appropriate. A longer channel of distribution is preferred where the market is widely spread.
- Role of intermediary. The channel chosen should be able to perform the services related to the product being sold e.g. for technical goods, the middleman should be able to offer technical support to the customers.
- Resources and size of the firm/producer. If the producer is small, then direct selling would be appropriate. Large firms with sufficient financial resources can opt for long channels of distribution.
- Channels used by competitors. If a firm wants its products to compete with those of the competitors, then is it prudent to use similar channels. A firm that wants to avoid competition should use a different channel of distribution.
- Government policy. The channel chosen should be able to meet government regulations such as all middlemen distributing pharmaceutical products must be recognized by the relevant government bodies (Pharmacy and Poisons Board).
- Marketing risks. In the event the firm wants to avoid risks related to distribution, it will opt for middlemen.
Question and Answer
- 1. Identify the type of utility created in the following circumstances
- 2. State four roles played by intermediaries in the chain of distribution
- 3. Highlight four consequences of eliminating a wholesaler from a chain of distribution
- 4. Outline four factors used to determine the distribution of Omo, as a common household detergent in Kenya
- 5. State four circumstances under which it would be advisable for a manufacturer to sell directly to consumers
- 6. Dady a traders at Kibigori trading centre wishes to import goods from Brand kamp , a Germany. Describe four channels of distribution that Dady’s goods are likely to take to reach his consumers at Kibgori
- 7. Kenya co-operative creameries (KCC) sell its dairy products directly to retailers. Highlight four factors that were considered in the choice of this channel of Distribution
Selling bread to students
Warehousing of goods imported
Carriage of cargo to the market
- Reducing transaction between producers and consumers
- Breaking bulk
- Accumulating bulk
- Taking of holding goods
- Providing finance to producers
- Product promotion
- Transporting goods
- Storage goods
- Reduces the range of goods offered to the retailers
- Reduces the cost of goods acquired by retailers
- Lowers the price of goods because of reduction in the length of distribution
- Preparing to meet customers/locating prospective customers
- Opening sale/presenting the product
- Handling objections
- Closing of sales
- Where the commodity is perishable
- Where the commodity is a service
- Where the use of the commodity requires demonstration
- Where the quantity of the commodity is small
- Where technical advice is required
- Where immediate feed back is required
- Where the law requires to be done so
- Brand Kamp/ Exporter - Consumer
- Exporter / Brand Kamp-Government agent –Wholesaler- Consumer
- Exporter/ Brand Kamp-Government Agent – Wholesaler- Retail – Consumer
- Exporter / Brand Kamp-Wholesaler- Consumer
- Exporter / Brand Kamp- Import agent – Consumer
- Nature of products - perishable
- Availability of the channel
- The cost of the channel
- Channels used by competitors
- Market concentration not in use area
- Spread of the risk
FORM 1-Topic 2-Business Environment.pdf
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FORM 3-Topic 15-THEORY OF THE FIRM.pdf
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FORM 3-Topic 17-PRODUCT MARKETS.pdf
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CONTENTS AND OBJECTIVES
Q & A
PRODUCT MARKETS - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER
- explain the meaning of a market
- explain the meaning of product market
- discuss the features of various types of product markets.
- Meaning of a market
- Meaning of product market
- Features of various types of product markets
NOTE: The contact between sellers and buyers may be physical or otherwise hence a market is not necessarily a place, but any situation in which buying and selling takes place. A market exists whenever opportunities for exchange of goods and services are available, made known and used regularly.
Definition of Product market
TYPES OF PRODUCT MARKET
When markets are classified according to the degree of competition, there are four main types, these are;
- Perfect competition
- Pure monopoly (monopoly)
- Monopolistic competition
QUESTIONS ON PRODUCT MARKETS
- Explain five characteristic of a monopolistic market.
- By use of a diagram, explain how price and output are determined in a collusive oligopoly (centralized cartel) market situation
- Highlight five differences between perfect competition and monopolistic competition
- Using a well labeled diagram, explain how a monopolist enjoy a supernormal profit in both short and long run
- With the aid of a diagram, explain how a firm under monopolistic competition is at equilibrium in the short run
- With the aid of a diagram, explain the difference between perfect competition and monopoly revenue curves
- To check on the quality of goods produced by monopoly.
- Ensure there are a variety of goods in the market.
- Monopolist may resist emergence of new ideas or technology due to lack of competition.
- Monopolies tend to be inefficient in their operation due to lack of competition.
- The consumers may not enjoy quality goods and services because they can only consume what his monopolis produces.
- To control the prices charges by the monopolies
- Make sure monopolies operate at optimum capacity so as not to charge high prices.
- Sellers deal in homogeneous products
- Are not involved in promotion of products.
- It’s a price taker
- Large number of sellers
- Activities of one firm does not influence the activities of other firms
- Sellers deal in differentiated products
- incur heavy expenses in promotion of products
- it’s a price setter /giver
- Large number of sellers operating independently.
- Activities of one firm are closely monitored by the rest in the industry.
- When the product is a necessity
- When the product is the only one in the market
- When the consumers are not aware of the market changes
- When the price of the product makes an insignificant figure of the consumers income
THEORY OF THE FIRM - KCSE BUSINESS STUDIES NOTES, SCHEMES OF WORK, OBJECTIVES, QUESTIONS AND ANSWERS
THE THEORY OF THE FIRM
- Describe the meaning and distinction between firm and industry;.
- Discuss factors that influence the decision on what to produce.
- Discuss the various costs of production and their derivation.
- Differentiate between small and large firms
- Discuss the various factors influencing location of firms; reasons for localization and delocalization.
- Explain meaning of economies and diseconomies of scale and how they influence production decisions of the firm.
- Explain the reasons for continued existence of small firms despite economies enjoyed by large scale firms.
- Discuss environmental implications on production activities.
THE THEORY OF THE FIRM COURSE OUTLINE
- The concepts of a firm and industry
- Decision on what goods and serves to produce
- Costs of production:
Fixed costs and variable costs, Direct costs and indirect costs, Total costs, average costs and maral costs,
- Determining the size of a firm
- Location of a firm
- Economies and diseconomies of scale
- Localization and delocalization of firms in an economy.
- Existence of small firms in an economy
- Implications of production activities on the environment and community health
THEORY OF THE FIRM Definition:
- This is a single unit of business organization that brings together the factors of production to produce any given commodity.
- A firm may also be defined as a business enterprise under one management and control.
- Firms may be sole proprietorship, partnerships or companies. They may therefore be small e.g. an artisan or mechanic working in her/his garage or large like a multinational limited company producing many different products e.g. coca-cola company.
- A firm even though under one management and control may have several branches/plants.
This refers to all those firms producing the same product for a specific market/a group of related firms that compete with one another i.e.
- Firms that produce the same product e.g. the firms operating as sugar manufactures as Mumias Sugar Company, Sony Sugar Company and Miwani Sugar Company.
- Firms that extract the same raw materials e.g. the salt mining firms, Magadi Soda Company and other firms which mine salt at the North coast Region near Malindi.
- Firms that provide similar services e.g. the transport industry such as Akamba Bus service, coast Bus Company and Easy Coach Company.
- All firms are profit-maximisers i.e. they seek to make as much profit as possible.
- Each firm can be regarded as a single consistent decision making unit.
DECISION ON WHAT GOODS AND SERVICES TO PRODUCE
- What to produce
- How production is to take place e.g. what raw materials and machinery should be utilized
- Where a production plant should be located
- When to produce
- The scale of production e.g. how big should the factory
- When and where to invest
- How the production can be improved and controlled
- What type of business activity to engage in
- For a firm to decide on what goods and services to produce, market research to evaluate the likely success of the product is necessary.
- After establishing the viability of the product in the market, other activities like product design are carried out (the firm may consider redesigning existing products, introducing a product similar to the one in the market or developing a completely new product.
- production may then follow
Factors that influence decisions on what goods and services to produce
These factors include;
Whether the firm is product-oriented or market-oriented
Product oriented firms: This is when the nature of the product itself (its functions and unique qualities) are enough to make sure that the product sells e.g. when cars were first developed, its uniqueness sold it
Market oriented firms; these are firms that produce products that are meant to meet the consumer needs e.g. over time cars are being developed to suit consumer needs.
Level of competition
In order to survive in a competitive market, firms must come up with products that consumers prefer.
Firms may therefore develop products which are not currently available or copy rivals ideas and improve on them
Level of available technology
The level of technology has a strong influence on the product that a firm produces
New inventions and innovations often result in new products or improved products
Improved technology may also reduce the costs of production. This means the same output maybe produced using less factors of production or more output may be produced using the same factors of production.
Senior management have the sole responsibility of deciding on what product to produce. A wrong decision may ruin rather than bailed the enterprise. The manager’s ability to design a viable product is therefore a vital factor in product development
In order to determine whether a product will be viable or not, the cost of production and the expected returns should be considered. Funds may only be approved for the product that promises long term benefits to the firm. So if the benefits of the product outweigh the costs, then such product will be developed and if not so, it will be dropped.
Amount and type of capital in the firm
Capital refers to machines, equipment, factories, plants and other human made aids to production.
Both financial and physical capital facilitates the production process. The amount of capital in a business will therefore influence what goods it can produce and in what qualities i.e. a firm with physical capital that is very specific may not be able to produce other type of products e.g. a clothing factory may not be able to produce any other goods such as cement.
Other factors may include;
- Need of the consumers
- Need for better quality or more fashionable product
- Need for an easier to market product
- Unmet needs
- Need for a product for which factors of production and technology are easily available
COST OF PRODUCTION
This is a payment made to the factors of production for their services. Production costs thus refers to the expenses incurred in acquiring factors of production (inputs) The sum total of all payments to the factors of production engaged in its production.
Types of production costs:
These are values of any alternatives forgone. The cost forgone when the choice of one thing requires the next best alternative to be abandoned
A student with only sh.50 may have to decide on whether to buy a textbook or a pair of shoes. If she decides to buy a textbook, the pair of shoes will have to be forgone because it’s not possible to buy both with only sh.500.
The opportunity cost of buying a text book in this case is the cost of the pair of shoes which was abandoned.
Fixed and variable costs
Costs may be classified according to their behavior in relation to various levels of output as follows:
- Fixed costs
- Variable costs
- Semi-variable costs
These are expenses which do not change with changes in levels of output/quantity of output. These costs therefore remain the same whether the firm is producing anything or not i.e. whether production is maximum or zero.
- Rent for premises/buildings
- Depreciation charge on physical facilities
- Salary of administrative staff
- Interest paid on loans (borrowed capital)
- Licence fees etc.
FIXED COST (SH)
the theory of the firm questions on topic
- Highlight five reasons why a firm may be located near the market for its products
- Explain five reasons why the government may adopt the delocalization policy of locating
- Discuss five factors that may account for the existence of small firms in an economy
- Explain five factors that determine the size of a firm
- Explain five factors that determine the decision of a firm on what goods and services to produce
- Explain five circumstances under which a firm may be located near the source of raw Materials
- Outline any five reasons that account for the popularity of small scale retails in Kenya
- Explain five factors that may account for the survival of small firms in an industry.
Advantages of public relations
- May be used to correct the dented image of the firm
- It informs the public about the activities of the firm
- Assist in upholding the good image of the firm
- It improves the relationship between the firm and its customers
Disadvantages of public relations
- It is costly in terms of time and finance involved
- The customer may make premature buying arising from the picture created by the firm
- Effects may take long before they are actually realized
- It may be difficult to evaluate the impact of the message, since the customers are not obliged to respond to it
5. Point of purchase (Window) display
Advantages of Point of purchase display
- May induce the customer to buy the product due to their arrangement
- As the customers get in to the shop, they are likely to buy including the other goods that were not being displayed
- The customers are able to determine the features of the product with ease
- It is relatively a cheaper method of promotion
Disadvantages of point of purchase
- The method only work well with the potential customers who are near the shop and not far away
- They may also attract thieves especially if the product displayed is of high value
- In case the arrangement does not appeal so much to the customers, they may not get into the shop
- It may be expensive setting up the display area
6. Direct mail Advertisement
Advantages of direct mail advertisement
- It is able to reach the targeted group as they are sent to the potential customer directly
- The message may be made to suit the requirement of the specific customer to be
- There may be an immediate respond on the message
- The potential customers incurs no cost to acquire the information
Disadvantages of direct mail advertisement
- Some mails may not get to the intended customers in time
- The prospective customer may ignore the advertisement
- May not be effective where the customer needs to examine the product
- This method may be expensive especially in terms of material and money
- It may only appeal to the literate group only
Advantages of catalogue
- It may be used to advertise all the products in the organization
- The owner/organization has the total control over the catalogue
- It gives detailed information about the product
- Its colourful nature makes it an attractive promotion tool
Disadvantages of catalogue
- It is expensive to produce increasing the cost of production
- Change in price may affect the whole catalogue
8. Guarantee (warranty issue)
- The confidence built in the customer by the guarantee to the customers makes them to buy more products.
- It may create the customers loyalty to the product of the firm
- The fact that the product can be replaced if it gets spoilt within the period is an advantage to the customer
Disadvantages of guarantee
- Repairing or replacing the product may be very costly to the organization
- The method may only be suitable for the durable goods
- The customer may be tempted to mishandle the good during this period
Types of discount
- Quantity discount: - Allowed by trader to encourage him/her to buy more quantity of the product being offer
- Trade discount: - Allowed to another trader who is buying products for resale to the consumers
- Cash discount: - Allowed to the customer to enable him pay promptly for the goods bought
11. Psychological sellingPlaying with the customer’s psychology in terms of pricing by quoting odd prices such as 999, 199, 99, etc. to convince the customer that the price has been reduced
12. Credit facilitiesWhere the customer is allowed to take a product for his consumption and pay for it later. This entices the customer to buy more of the product
13. After sales serviceThese are services offered to the buyer after the goods have been bought. They may be in terms of packaging, transportation or installation which may be offered to the customers free of charge. This makes the customer to buy more goods with confidence
The methods of carrying out sales promotion includes all the methods of carrying out product promotion as discussed earlier, that is, shows and trade fair, showrooms, free gifts, free sample, personal selling, advertisement, window display, credit facilities, after sales services, etc.
Factors to consider when choosing a promotion method
- The cost of the promotion that is whether the company can afford it or not, for some promotion methods are very expensive that may not be easily affordable to the company.
- The nature of the product being promoted especially whether it requires demonstration or not. Products which requires demonstration are best promoted through personal selling
- The targeted group for the advertisement, on whether they can be reached by that method or not. The promotion method must reach the targeted group, if it has to be effective
- The objective that the firm would like to achieve with the promotion, and whether the method is helping them to achieve that particular objective
- The method used by the competitor in the market to enable them choose a method that will enable them compete favourably
- The requirement of the law concerning product promotion, to enable them not use what the law does not allow
Ethical issues in product promotion
- Cheating on performance of the product to attract more customers by given them wrong and enticing information about what the product can do.
- Cheating on the ingredients of the product by telling them that the product contains a suitable type of ingredient which does not exist just to lure them to buy the product
- Not telling them the side effects of the product which may affect them should they continuously use the product due to fear of losing customer
- False pricing, especially a case where they overprice their and later on reduce them slightly just to lure the customer, yet exploit them
- Not caring about the negative effect of the product on the environment, which may include littering of the environment by the posters used for advertisement
- Social cultural conflict, especially putting up some forms of advertisement which are considered a taboo buy the community leaving around, such as hanging a billboard of a female advertising inner wears next to a church
Trends in product promotion
- Use of website/internet to advertise product worldwide, which has increased the coverage
- Encouraging gender sensitivity and awareness in product promotion to bring about gender balance
- Use of electronic billboards in advertisement to increase their visibility even at night
- Intensifying personal selling by the business to reach more customers
- Development of promotion convoys to move from one place to the other with music and dancers to attract more prospective customers
- Catering for the rights of the youths when carrying out product promotion and even involving them in carrying out the promotion
- Catering for the interest of those with special needs when carrying out advertisement
- Advertisement through mobile phones by sending them sms about the product
PRODUCT PROMOTION (12 LESSONS)
TOPIC/ SUB-TOPIC OUTLINES
- Meaning of a product
- Meaning and importance of product promotion
- Methods of product promotion
- Advantages and disadvantages of each method of product promotion
- Choice of promotion method
- Ethical issues in product promotion
- Trends in product promotion
- explain the meaning of a product
- explain the meaning and importance of product promotion
- explain the various methods of product promotion
- explain the advantages and disadvantages of each method of product promotion
- discuss factors which influence choice of promotion method
- recognize the need for ethical practices in product promotion
- discuss trends in product promotion.
introduction to Product Promotion.
The purpose/Importance of product promotion
- It informs the customer of the availability, price, and where to obtain the product to satisfy their wants
- It persuade the buyer to buy their products a head of their competitors’ products in the market
- It reminds the customers of the continued existence of a given product in the market
- It educate the consumers of the usage of the product to satisfy their needs fully
- It informs them on any improvement that has been made on the product
- It stimulates the demand of the product being promoted in the market
- It brings out the positive features of the product
- It opens new market for the product in the environment
Methods of product promotion
- Personal selling
- Sales promotion
1. Personal selling
Methods of personal selling
Through sales person approaching the customers
A case where the sales person approaches the prospective customers after drawing their attention, explaining details of the product and even demonstrating how the product works in order to persuade the customer to buy.
Steps involved in personal selling through sales person
- Identify prospective customers who could possibly require the product
- Preparing the presentation by gathering all the possible information about the product , as well as designing an appropriate methods that he will be used to present to the customer
- Establishing the customers contact, as well as choosing an appropriate time to meet the customer to be. That is the time when the customer may receive him
- Arousing the consumers interest in the product by attracting his/her attention through approach and languages, as well as making the prospective customer develop interest in the product
- Dealing with the objections on the product which may have been brought about by the customer to be
- Closing the sale by inquiring whether the prospective customer will be interested in the product or not. This should be done in a polite manner
- Offering after sale service to the customer on the product that has been sold
Shows, trade fairs and exhibitions
Advantages of shows, trade fair and exhibitions
- It gives the customer an opportunity to compare various products before making a decision on what to buy
- It gives the sales person an opportunity to explain in fine details the features of the product to the prospective customers
- The manufacturers of the product gets a chance to receive immediate feedback from their customers through interactions during the shows
- The number of people visiting their stall to assess their products will help them determine their potential market size for the product
Disadvantages of shows, trade fairs and exhibitions
- It is expensive to hire a stall for the exhibition of the product
- The sales person may have to explain over and over again for the prospective customers as they may not enter into the stall at the same time
- The trade fairs are not frequently organized, therefore an organization rely on it as the only means of product promotion may not succeed
The room allows the customer to get more information about the product from the sales person in the showroom
Advantages of showrooms
- They enables the seller to get immediate feedback on the product
- They enable the customers to get clarification on the product they need to purchase
- It is a cheap method of production
- It provides an opportunity for the usage of goods to be demonstrated
- The information the prospective customer get from the show room is more reliable
Disadvantages of showrooms
- They are usually located away from the town centers, making them not be accessible by many
- It is expensive to hire showrooms
- They require security to protect the goods inside them which may be very expensive
- Some prospective customers may tamper with goods in the room while trying to operate them
Advantages of free gifts
- It enable the customer to enjoy the product given as a gift without paying for it
- It persuades the customer to buy more of the product in order to get the gift
- It is an additional product, and therefore increases the customers satisfaction
- It may help in creating loyalty in the product being promoted
Disadvantages of free gifts
- It makes the customer buy including products they didn’t require in order to the said gift
- The cost of the product may be very expensive for he customer
- Some middlemen may remove the gift and keep or even sell to the customer to maximize profit
Advantages of free sample
- It enables the customer try the product before making a decision to buy it
- The customer is able to enjoy the product that otherwise he may have not enjoyed
- The organization is able to get immediate feedback from the customer about their new product
- It enables the organization to acquire more customers for their product
Disadvantages of free sample
- Some of those receiving the sample may not come back to buy
- It may be an expensive method of promotion especially where many samples are to be given
- Goods given for free may reduce the value of goods that may have been sold to earn profit
- It is not suitable for expensive products
Circumstances under which personal selling is appropriate
- When launching a new product in the market which requires a lot of awareness to the prospective customers to enable them make a choice
- When a product is tailored to meet the customer’s needs, as different consumers have different needs, taste and preferences to be addressed.
- When demonstration is required on how the product works, especially the technical products
- When the organization has the capacity to finance the sales force carrying out the personal selling.
- Where the market is concentrated within a given region that can easily be accessible by the task force.
Advantages of personal selling
- It is more flexible than any other method for the marketer is able to meet the needs of different people
- It enable the prospective customer to know more details about the product before making a decision
- The sales person is able to demonstrate the use of the product
- The seller is able to get immediate feedback on the product
- The seller is able to obtain the personal contact of the prospective buyer
- It gives the buyer an opportunity to negotiate the terms of purchase
- It takes care of both literate and illiterate prospective customer
- The seller is able to persuade the prospective buyer to buy the product
Disadvantages of personal selling
- It is labour intensive and therefore very expensive when the area to be covered is wide method
- It is time consuming as it involves explanation and demonstration
- It may only target a particular group of people
- The seller has to meet the travelling and other expenses involved which may be very expensive
- Salespersons may misuse the resources allocated for them, making the target not to be achieved
- The process may inconvenience the prospective buyer’s program
- It may only cover a given region which may not be wide enough
Types of Advertising
- Product advertising: - this is a form of advertisement meant to promote a given product or a particular brand of product
- Institutional advertising: - this is a form of advertisement meant to improve the image of the institution or organization and not a particular product. It is meant to create confidence in the customers about the institution
- Primary demand advertising: - a form of advertisement meant to a new product that has been introduced in the market for the first time. It is mainly to create awareness of the existence of that particular product
- Celebrity advertising: - a form of advertisement where a famous/popular person is used to promote a particular product. It is meant to convince those who identify themselves with that personality to buy the product
- Informative advertising: - a form of advertisement meant to give the customer more information about the product to enable them make an informed decision
- Competitive/persuasive advertising: - a form of advertisement carried out with organizations producing similar product to persuade the customers to buy their products ahead of their competitors
- Corrective advertising: - a form of advertising meant to correct a misleading information that may have been given out about the product
- Reminder advertising: - a form of advertising meant to remind the customers that the product still exists in the market and is still capable of satisfying their needs.
Advantages/Importance of advertising to the business
- It maintain the sales of an already existing product
- It create awareness in the customers about a new product in the market
- It informs the customers about the changes that may have been made in the product
- It helps in building image or reputation of the selling organization
- It may increase the volume of the existing sales of a product
- It reaches peoples who may have not been reached by the sales person
- It complements the effort of the sales person to enable them achieve their sales objectives
- It clears the customers misconception and prejudice about the product
- It opens up new markets for the products.
Disadvantages of advertising to the business
- It may be costly to the business in terms of money and other resources
- It leads to increase in cost of production if at all it has to be done frequently
- The cost of the advertisement will always reduce the profit margin of the business
- Poorly planned advertisement may negatively affect the business
- Misleading advertisement may reduce the level of business operation
Advantages of advertising to the customer
- They educate them on the usage of the product
- They inform them on the products availability
- They guide them on where to get the product
- The outlines all the features about the product including prices to the customer
- Competitive advertisement may lead to improved quality of goods to benefit the customer
- Information on different prices through competitive advertisement makes the customer to benefit from the reduced prices
Disadvantages of advertising to the consumer
- The advertisement may not disclose the side effect of the product
- The advertising cost may be passed to the consumers through increased price
- Some advertisement may persuade customers to buy what they do not require leading to impulse buying
- Some customers may buy substandard goods due to misleading advertisement
Advantages of newspaper
- The can reach areas that other means may not reach
- Many people can afford them as they are relatively cheap
- They cover a wider geographical area, leading to a wider market
- The message on the newspaper can last for a longer period of time, making it to reach more customers
- The advertisement appearing in the newspaper is readily acceptable by the reader
- Colored print makes the advertisement to be more attractive to the reader who in turn gets the information
Disadvantages of the newspaper
- Many of them are written in English or Kiswahili, making them to only target those who can read and understand the language
- It discriminate against the illiterate group who cannot read the information
- They have short lifespan as they may be read only on the day it is circulated
- It cannot be used to focus on a specific target as they are read by almost everybody
- Some of the prospective customers are always in a hurry to read the newspaper and may not pay attention to the advertisement
Magazines and Journals
Advantages of magazines and Journals
- The specific information for the targeted people can be published
- They can be read and re-read before the next publication may the information to last longer and plead with the prospective customer
- Their publication is of high quality and colourful, making them to draw the attention of their targeted group easier and passing the information to them
- The quality material they are made of makes them to last longer and can be accessed even by those who may have not been around during their publication
Disadvantages of magazines and journals
- If the time gap between the publication time and circulation time is wide, the advertisement may fail
- They are a bit expensive which makes some of the potential customers not to afford them
- The cost of advertising on them may be expensive for the organization
- Their circulations may be limited to a small geographical region
- The publications may not be available in the vernacular language to reach those who are not able to read either English or Kiswahili
Posters and Billboards
Advantages of posters and billboards
- They are able to convey the information to the large audience, as they are placed in strategic position
- Posters are cheap and easy to prepare
- The use of different colors makes them to be more attractive and appealing to more audience
- It can be used by both literate and illiterate group
- The message may last for a longer period of time
- Billboards are conspicuous and hence attractive to the audience
Disadvantages of posters and billboards
- May be affected by adverse weather condition, especially rain
- If not placed strategically, it may not reach the targeted group
- Incase destroyed by the passersby, the information may not meet the targeted group
- Bill boards are expensive to make and maintain
Advantages of transit advertisement
- The message reaches most of the people in the environment
- They message last long as the paints always last on the vehicle
- Transit vehicles may carry the message a long way to their final destination
- It is captivating to the members of the public especially the promotion convoy, hence can easily reach the target
Disadvantages of transit advertisement
- During the rush hour, the crowd may hinder some from getting the information
- It mainly relay the information to those served by the vehicles
- The noise produced by the promotion convoy may be a nuisance to some members of the public
Advantages of Brochures
- They are easy to carry around as they are small in size
- They are effective in meeting the targeted group
- Their cost of production is not very high
- They can be distributed at different places to meet the targeted group
- Can be made attractive by the use of different colours
- They have a long life and therefore can be used repeatedly
- They can be used to direct others on where to get the product
Disadvantages of Brochures
- The information may not reach the illiterate group
- They may be ignored by the intended users
- They may require frequent updating if many changes are made on the product making it expensive
Advantages of Radio
- Different languages may be used to reach different people
- It is accessible even to the remote areas that is not covered by other media
- One can choose the time to advertise to reach the targeted group
- Able to serve many people at the same time
- It can be used for both literate and illiterate members of the group
- The advertisement can be repeated over and over again according to the advertisers needs
- The music accompaniment may attract many people to listen to the information
- Can reach even the blind as they are able to hear
- The message can be conveyed in different languages
Disadvantages of Radio
- Their advertisement does not have any reference
- It may be more expensive than the print media
- Poor timing may make the message no to reach the targeted group
- It may interrupt some programmes to the annoyance of the listener
- It short and brief advertisement may be missed by the listeners
- It is difficult for the listener to visualize the product
Television (T.V) and Cinema
Cinema is where the advertised messaged is conveyed during film shows in the cinema halls. It may be before or after the movie.
Advantages of Television (T.V) and Cinema
- It appeals to most people as it is entertaining
- It makes it possible for the demonstration of the use of the product
- It is able to reach both the literate and illiterate viewers
- The advertisement can be aired over and over again to meet the targeted group
- The advertisement may be modified when need arise
- It has wide appeal to many people
- The message can be conveyed in different languages
Disadvantages of Television (T.V) and Cinema
- The cost of advertising through this media is high
- The television sets are expensive to acquire, hence many people may not have them
- Their uses are limited to places with electricity
- The advertisement may not last longer
- The time for airing the information may not suit the targeted audience
Advantages of Neon Signs
- The use of different colours makes them very attractive and catch attention of different people
- They can be put strategically making them to be visible to many people
- Can be used both at night and day
- They direct the customer on where the goods are to be found
Disadvantages of Neon Signs
- Can only be used where there is electricity
- They are expensive to buy and maintain
- The message may not easily reach the illiterate
Functions of Advertising Agencies
- They help the organizations in designing their trademarks, logos and advertising materials
- They book space and airtime for their clients in various media
- They offer advisory services to their client on selling techniques
- They advertise on behalf of their clients
- They choose on behalf of their clients the appropriate media to be used
Advantages of Publicity
- It saves the organization money in case of free publicity
- It is likely to cover a wider region as the publicity is in the media
- The organization may earn credibility due to positive publicity
- The information may be received positively by the customers as the message is likely to be more objective
- It may improve the competitiveness of the firm
Disadvantages of Publicity
- Unfavourable information about the organization may reach the public especially in free publicity
- It is irregular and short lived
- Might require special occasion or event in order to attract the mass media
- The firm does not have control on how the information will appear in the media and the extend of the coverage
4. Public relations
product promotion topical questions
The following are types of advertising
- Product advertising
- Competitive advertising
- Information advertising
- Institutional advertising
a) Create awareness about a product
b) Promotes the name of the manufacturer
c) Persuades a particular brand of a product
d) Promotes a particular brand of a product
2. 1995 P2
Abdullah, a manufacturer, exhibited his goods in a local trade shows. However his sales did not increase significantly thereafter. Outline five reasons that may have led to lack of significant sales increase. (10 marks)
3. 1996 P1
State four ways in which consumers benefit from advertising by business people. (4 marks)
4. 1996 P2
Describe the procedures involved in personal selling methods of sales promotion. (10 marks)
5. 1997 P1
Give three reasons why manufacturer may offer after sales services to his customers (3 marks)
6. 1997 P2
Outline five ways of attracting customers that traders may put into use. (10 marks)
7. 1998 P1
Outline four steps involved in personal selling process. (4 marks)
8. 1998 P2
Explain five benefits that a trader would get by advertising his goods through the radio. (10 marks)
9. 1999 P1
State four circumstances under which a trader would advertise his products over the radio instead of the television. (4 marks)
10. 1999 P2
Explain the reasons why the firms with popular products find it necessary to continually advertise the same products. (10 marks)
11. 2000 P1
Identify four disadvantages of advertising through television in Kenya. (4 marks)
12. 2000 P1
List four disadvantages of advertising through television in Kenya. (4 marks)
13. 2000 P2
A multinational company is planning to launch its products in the local Kenyan market. Highlight the factors that should be considered by the company when choosing the appropriate media through which to advertise the products. (10 marks)
14. 2001 P1
Highlight four limitations of after sales services as a method of promoting products.
15. 2001 P2
Explain the role of a sales department in a business firm (10 marks)
16. 2001 P2
What are the benefits accruing to a seller who uses personal selling methods to promote her products. (10 marks)
17. 2002 P1
Outline the advantages of after sales services as a method of sales promotion to a customer. (4 marks)
18. 2003 P1
Highlight three reasons why traders may engage in sales promotion. (3 marks)
19. 2004 P1
State four advantages of personal selling method of promoting sales. (4 marks)
20. 2004 P2
Advertising in the newspaper is one way of promoting sales of goods. Highlight five limitations of advertising goods in newspapers. (10 marks)
21. 2006 Q6 P1
What are the advantages of personal selling as a method of sales promotion? (4 marks)
22. 2007 Q4 P1
A firm wishes to introduce a new product into the market. Outline four factors that should be considered in choosing an appropriate medium for promotion.
23. 2008 Q15 P1
State four reasons why ethical practice is necessary in Product promotion (4 marks)
24. 2009 Q3 P1
Amboseli Enterprises has been spending heavily on promotion of its products though its sales have consistently declined. Outline four measurers that the company may take to reverse the trend. (4 marks)
25. 2012 Q22 P1
Highlight four advantages of promoting sales through the internet. (4 marks)