Modern Day Commerce Senior 1 PDF

MODERN DAY FIRST EDITION 1  1.1Definition of commerce Commerce is the study of how man organizes the exchange and distribution of goods and services in order to satisfy his needs and wants as efficiently as possible. Alternatively, Commerce can also b...

MODERN DAY FIRST EDITION 1  1.1Definition of commerce Commerce is the study of how man organizes the exchange and distribution of goods and services in order to satisfy his needs and wants as efficiently as possible. Alternatively, Commerce can also be defined as trade and aids to trade. 1.2Branches of commerce: The two main branches of commerce are: 1) Trade: 2) Aids to trade Trade Trade is a branch of commerce which deals with the buying and selling of goods. Trade can be divided into two: 1) Home trade 2) International trade 1) Home trade/Local trade: This is trade carried out within the boundaries of a country. Home trade can further be divided into, Wholesale trade and retail trade.  Wholesale trade is the buying of goods/products in large quantities from the producers/manufacturers and selling them to the retailers. For example, Wholesalers buying ‘Steem Apple’ soft drink from the producer  Retail trade is the buying of goods in relatively large quantities from the wholesalers/producers and selling them to the final consumers in small and affordable quantities. For example, a retailer buying ten cartons of ‘Aqua’na drinking water’ from the wholesaler. 2) International trade/foreign trade: This is the trade carried out between two or more countries. It can be bilateral trade or multilateral trade. Bilateral trade is trade between two countries only. For example, trade between South Sudan and Kenya. Multilateral trade is trade carried out between more than two countries. For trade between states of East African Com- munity i.e. South Sudan, Uganda, Kenya, DR Congo, Rwanda, Burundi etc. 2 International trade can be divided into three forms:  Import trade: The buying of goods from other countries  Export trade: The selling of goods to other countries  Entrepot trade: The importing of goods for export to other countries. This can be for purpose of further processing before exporting to other countries. This a new form of international trade that is fast gaining popularity. Aids to trade These are services which facilitate the smooth running of trade. They are also called commercial services or auxiliary services to trade. Alternatively, we can say, aids to trade are activities that boost trade. They include transport, insurance, banking warehousing, communication, advertising and market research. 1) Transport This is an aid to trade involving movement of goods, services and passengers from one place to another. For example, by use of vehicles, airplanes etc. 2) Insurance This is a contract between an individual or organization and the insurance company whereby the company undertakes to protect the individual or organization against risks that may result into losses. Examples of such risks in business include fire, theft, machine breakdown, damage of goods in transit, accidents and many others. 3) Banking Refers to all the activities carried out by financial institutions involving money. Banking promotes trading activities by providing financial services like accepting deposits and withdrawals from their clients as well as providing loan facilities. 4);Warehousing Warehousing is the process of storing goods until the time they are required. The place where the goods are kept is called a warehouse. This serves as an important aid to trade by creating time utility. Utility is the ability of goods and services to satisfy human wants. 5) Communication Communication is the process of passing information from one person to another. It enables traders to inform the consumers of goods and service available in the market as well as convey their complaints and opinions to producers. 3 6) Advertising This is an aid to trade involving attracting of peoples’ attentions towards a good/service on the market. For ex- ample, a school or advertising for registration of students and teaching vacancies for teachers. 7) Market research This refers to the process of finding out consumers opinion about the goods and services already in the market or yet to come in the market. For example, a chapati maker giving free samples to customers to taste in order to get their opinions in relation to size, taste etc. 1.3 Important terms used in commerce: 1) Wants: These are requirements that one can do without but are necessary to make life more comfortable e.g.education, car, furniture, entertainment etc. Characteristics of Human wants Human wants possess the following characteristics; i)They are competitive They compete with each other for satisfaction. For example, if someone has money enough to buy a book or a soda, the two wants will compete for satisfaction. ii)Some human wants are habitual. 4  Some human wants with time may turn to be habitual for example drinking and smoking iii) Human wants are unlimited/insatiable Human wants are too many yet the resources to satisfy them are limited. iv Human wants are recurrent Human wants keep on repeating themselves over and over again even after satisfaction. For example, after eating, one will still feel hunger after some time. v)They are universal Human wants are common to all human beings no matter their race, religion, political affiliation or social status. vi)They require resources Human wants can only be satisfied using goods and services vii)They are complementary Satisfaction of some wants may create a second want derived from the first e.g If you satisfy your need for a pair of shoes you will need shoe brush and polish. viii)They vary in intensity and urgency Some human wants are felt with greater urgency than others e.g the need for food is more intense and urgent than the need for entertainment. 2):Needs: These are basic requirements that one cannot do without because they are necessary for survival. They include food, clothes and shelter. 3) Goods: These are tangible things which yield satisfaction to human beings. Goods can also be 5 defined as tangible items that can be used to satisfy human wants. Characteristics of Goods The following are some of the characteristics of goods: (a) Are tangible: Most goods can be touched (b) Can be stored: Goods can be stored for future use. Goods which can be stored for long without getting spoilt are called durable goods while goods that go bad easily unless kept under special condition are called perishable goods. (c) Quality can be standardized: The quality of goods can be made uniform especially through mechanization. (d) Can change possession: Through trade, goods can change ownership from one person to another. (e) ) Can be seen: Most goods can be seen. There are however few exceptions to this feature. For example, air is a good but cannot be seen. (f) ) Can change in quality over time: Some goods such as furniture and motorcars may lose value over time. Other goods such as land may increase in value over time. Types of goods a) Capital goods. These are goods which are used in the production of other goods for example sewing ma- chines, tractors, Hoes among others. b) Consumer goods. These are goods which are ready for consumption in their present form for example bread, sugar etc. c) Free goods. These are goods that are consumed at zero price. They exist in abundance relative to demand for them e.g Air, sunshine, Rain, sea water etc. Free goods are gifts of nature. d) Private goods. These are goods which are exclusively enjoyed by private individuals and one’s consumption excludes others from consuming the same goods e.g private cars. e) Public goods. These are goods owned and enjoyed collectively by the entire public. They are normally owned by the government for example Roads, bridges, security lights among others. f) Normal goods. These are goods whose demand increase with an increase in one’s income g) Complementary goods. These are goods which are jointly demanded for example car and petrol. h) Substitutes. These are goods which serve the same purpose for example tea and coffee. 4) Services: Services are actions or activities that may be sold. Therefore, unlike goods, services are intangible. Examples are teaching, banking, hairdressing and shoe shining. 6  Characteristics of Services Services generally have the following unique characteristics: (a) Are intangible: This means that services cannot be touched and felt (b) Cannot be stored: Services cannot be kept for future use because they are consumed as they : are provided. This means that services are highly perishable. (c) Quality cannot be standardized: It is very difficult to standardise the quality of services because services are highly variable over time or from one service provider to another. (d) Inseparable from the provider: Services are provided directly to the consumer (s) and hence cannot be separated from the provider. (e) ) Cannot be seen: Since services are in form of actions and are immaterial, they cannot be seen. 5) Scarcity: This is the limitation or shortage or absence of a required resource. When something is scarce it means it is in short supply or simply limited in supply. 6) Choice: This is the best alternative taken out of many. For example, one’s favorite soda could be ‘Novida’ out of the different brands of soda. 7) Scale of preference: This is a list of human wants arranged according to priority, that is, from the most important to the least important. 8) Opportunity cost: This is the best alternative foregone or sacrificed when a choice is made i.e. if one is faced with the decision to choose between buying food and buying a pair of shoes, if one chooses to buy food and forego buying the pair of shoes, the alternative sacrificed or foregone, that is buying shoes, becomes the opportunity cost. 9) Commodities: These refer to the goods and services used to satisfy human wants. Goods are items that can be seen and touched while services are human actions that can be sold. Commodities are obtained at a price. e.g we pay for commodities such as food stuff and clothes as well as services such as medical care, legal ser- vices, hairdressing, entertainment etc. 10) Consumption: This is the act of using goods and services (commodities) to satisfy human needs and wants. A person who uses good and services is called a consumer. 11);Resources: These are things used to achieve a given objective. e.g raw materials are resources needed to produce goods and services, workers are also an important resource for production of goods and services. 12) Utility: This is the ability of goods and services to satisfy human wants e.g. food can satisfy our hunger and a pen can satisfy our need for writing etc. 7 13) Economies of scale: These are the benefits or advantages that are enjoyed by a business as it grows or pro- duces goods in large-scale e.g ability to employ qualified personnel, easy acquisition of loans etc. 14);Dis-economies of scale: These are the problems or challenges or disadvantages that a business will experience as it becomes large or expand its scale pf production. Such challenges may include increased complexity in management 1.4 The growth of commerce Historically, trade as a branch of commerce has developed from barter trade where goods and services were being exchanged for other goods and services to where goods and services were being exchanged for items like precious metals and cowrie shells. Today commerce has developed into a money economy where goods and services are exchanged for money. Money can be in the form of notes and coins (hard cash) or electronic money. Trade has also improved from reliance on ancient aids to trade like transport and communication to more sophisticated services such as insurance, warehousing, advertising, banking and market research. Today, the world has moved to more efficient ways of conducting trade called e-commerce (electronic commerce). E-commerce entails the carrying out of business transactions through the internet without need for physical interaction between buyers and sellers. Businesses that have embraced this kind of trading are known as online businesses. 1.5 Relationship between commerce, business and economics Commerce is the study of trade and aids to trade while business refers to activities carried out by an individual or organization with a view of profit. Economics on the other hand refers to how man strives to satisfy their unlimited wants using limited resources. While commerce and business aim at providing goods and services necessary to satisfy human needs and wants, economics is concerned with how man strives to satisfy his/her unlimited wants using limited or scarce resources. 8 1.6 Importance of commerce to the learner 1) Helps students to understand the business environment 2) Enable students to appreciate the importance of commercial activities in the society 3) Equips learners with the commercial language needed to participate in trade 4) Provides learners with knowledge of facilities available in banks, insurance companies and advertising agencies. 5) Provides learners with an understanding of how goods and services are made available in society 6) Enables the student to understand various marketing techniques 7) Helps the learner to acquire basic knowledge and skills for running a business 8) Prepares the learner to pursue business related careers such as: Sales and marketing, accounting, business administration etc. 9) Helps the learner to know the sources of government revenue such as taxes and licenses. Importance of commerce to the society/community 1) Provides a link between producers and consumers 2) Enables consumers to be informed of available goods and services through advertising and sales promotion 3) Helps traders to know consumers opinion about their goods through market research 4) Enables people to get goods and services they cannot produce themselves 5) Enables business persons and members of the public to wisely choose appropriate banking services including loans 6) Creates employment opportunities in the import and export sector. 7) Creates utility in goods through production, storage, distribution, and trade 8) Enables movement of goods and people from one place to another through transport. 9 END OF TOPIC CHALLENGE Test how much you can remember without referring OBJETIVE QUESTIONS 1) The main branches of commerce are; A. Buying, selling and aids to trade B. Home trade and foreign trade. C. Production and exchange D. Production and consumption. 2) The final stage in the process of production is A. Exchange B. Distribution C. Consumption D. Pre-packing 3) Aids to trade are activities concerned with: A. Getting the goods in the access of the consumer. B. Helping the producer to earn profit C. Helping the consumer to earn profit. D. Transforming raw materials into better forms. 4) The ability of a good or service to satisfy a need is called: A. Consumption B. Utility C. Production D. Demand 10 5) Trade means A. Any activity undertaken for profit B. Buying and selling of goods and services with an intention of making a profit C. Selling of goods and services to the ultimate customers. D. Buying and selling of manufactured goods only. 6) The type of trade between South Sudan and China only is called? A. Oil trade B. Barter-trade C. Bi-lateral trade D. Multi-lateral trade 7) Identify the aid to trade which reaches consumers through impersonal presentation of a product A. Newspaper B. Market research C. Communication D. Advertising 8) What is the meaning of online businesses? A. Business conducted through correspondence B. Businesses that lend money through mobile phone services C. Businesses that are conducted through the internet D. Businesses that require payment before goods are delivered 11 9) Retail trade as a branch of home trade involves the following, except? A. Promoting goods in order to earn a commission B. Buying goods from wholesalers C. Selling goods in small quantities to consumers D. Re-packaging goods according to consumer needs 10) The term used for describing the carrying out of business transactions through the internet is called? A. E-commerce B. Online business C. Online shopping D. Global trade NON-OBJECTIVE QUESTIONS 1. Define commerce 2. Name any five aids to trade 3. Give any five importance of commerce to the learner 4. Give any five importance of commerce to the community 5. What is entrepot trade? 6. What is E-commerce? 7. Name the two branches of home trade 8. Give five differences between goods and services 12 8. Identify whether the following are needs or wants ticking the appropriate space Need/Want Need Want a) A pair of shoes b) Education c) A bungalow d) Chips and fish e) Security 9. Define the following terms: i) Economics ii) Business iii) Opportunity cost iv) Scale of preference 10. Match the words below with the correct description using an arrow Word Description 1 Insurance Impersonal presentation of a product intended at making a sale 2 Banking The process of storing goods until when they are needed 3 Market research An agreement where a company undertakes to cover an individual or 4 Advertising Activities carried out by ffinancial institutions f ( involving ) money 5 Warehousing The process of finding out consumers opinion about a product 13 11. Below is a list of Deng’s wants arranged in order of priority: 1. Chips 2. Book 3. Buying bundles for his phone 4. Buying a watch a) What is the name of the list? b) Given that the money Deng was given could only buy one item i) What would be Deng’s choice ii) Identify Deng’s opportunity cost Proposed Class Scenario: Today in our society and in the country at large, there is an increase in population, increase in the number of educated people, some of whom are our relatives and are graduates. However, despite the fact that they are educated, a number of youths are not employed but rather moving from one place to another looking for better paying jobs. In your group as students of commerce senior one, use the knowledge of Commerce to; 1) Advice the educated youths who do not have jobs 2) Discuss the causes of unemployment among the youths today 3) Outline the challenges or effects associated with high rate of unemployment in your community 4) Suggest the possible solutions to reduce the high rate of unemployment among the youths in South Sudan 14  2.0 PRODUCTION Specific objectives By the end of this topic, the learner should be able to: 1) Explain the meaning of production. 2) State the types and levels of production. 3) Mention the factors of production. 4) Define specialization. 5) Explain the types of specialization 6) State the merits and demerits of specialization 7) Define the term standard of living 8) Explain factors affecting standard of living. 2.1 Meaning of production Production is the transformation of raw materials or inputs into finished products to satisfy human wants/ needs. The product may be a good or service. For example, baking wheat flour into cakes, chapatis etc. Alternatively, it refers to any activity aimed at bringing physical change on a good/service to satisfy human wants/needs. Production can also be defined as the creation of utility. Utility refers to the ability of a commodity to satisfy human wants. Types of Utility Utility is classified under the following;  Place utility. This refers to increasing the usefulness of a commodity by transferring it from one place to another. For example, delivering a commodity from the producer to consumer  Form utility. This type of utility is created by changing a raw material into a finished good. For example, when a carpenter makes a chair out of wood.  Time utility. This is a type of utility created when a commodity is stored for some time and sold when prices increase. 15   Possession utility. This a form of utility is created when ownership of a commodity is changed from one person to another. For example, when one buys an item, the ownership or possession is transferred to them.  Service utility. This is created when a service provider satisfies wants of others through provision of his/her service. For example, a teacher creates service utility by teaching his students.  Natural utility. All free goods possess natural utility because they have the capacity of satisfying hu- man wants in their natural state. Such goods include water, air, and sunshine among others. 2.2 Types of production There are two types of production:  Direct production/subsistence production  Indirect production. Direct production/subsistence production This is production of goods and services for personal use and not for selling. In direct production, the producer is also the consumer. Direct production is also called subsistence production or non- monetary production. Example of direct production is subsistence farming where one practices farming to take care of his/her family. Characteristics of Direct Production 1. Goods are usually produced in small-scale (in small quantities) 2. Goods and services are produced for own consumption 3. Uses simple/traditional methods of production 4. Goods and Services are of low quality 5. Usually there is no surplus goods produced 6. Use of cheap family labour in production 7. Limited capital is invested in production 16 Advantages of direct production 1) Source of employment especially to the rural population 2) Reduces the family budget by producing food for home consumption 3) Simple to manage because production is in small-scale 4) Cheap to undertake since it uses family labour 5) Limited wastage of resources since usually there is no surplus 6) It is flexible as it allows for easy change of production from one commodity to another Disadvantages of direct production 1) Goods and services produced are of low quality due to lack of competition 2) Does not encourage creativity and innovation 3) Contributes northing to government revenue since goods and services produced are not taxed 4) There is no specialization and exchange 5) Creates limited employment opportunity since it is practiced in small-scale 6) The producer realizes little or no income because production is for own consumption 7) The producer enjoys no economies of scale (Economies of scale are the benefits enjoyed when goods are produced in large quantities) 8) It is less efficient due to use of simple tools and methods of production. Indirect production This is the production of goods and services with the aim of selling or for commercial purpose. Indirect pro- duction is usually done in large scale which means goods are produced in large quantities. Characteristics of Indirect Production 1. Goods and services are produced with a view of exchange. 2. There is specialization in production. 3. Goods and services are produced in excess 4. Goods produced are of high quality. 17 5. Uses modern methods of production 6. Usually there is surplus production Advantages of indirect production 1) Promotes specialization and exchange and their related advantages 2) Efficient due to use of modern technology 3) Goods and services produced are of high quality 4) Economies of scale are enjoyed due to large-scale production 5) Creates mass employment opportunities due to large-scale production 6) Contributes to government revenue through taxes 7) It is a source of income since production is for exchange 8) Encourages creativity, innovation and research due to profit motive Disadvantages of indirect production 1) Expensive to undertake due to large capital and labour required 2) May lead to wastage due to overproduction 3) It requires skilled labour which is limited 4) Huge losses may be incurred due to fall in demand and price of goods produced 5) Extensive use of machines may lead to unemployment 6) May lead to exhaustion of resources due to overexploitation 7) Emphasizes production for the market at the expense of home consumption 2.1.2 Levels of production and Related Occupations These are the various stages of production. They define what happens from the start of production until the goods reach the final consumer. There are three levels of production. A)Primary level/extractive level This level involves extraction of goods from their natural setting. Examples of occupations or activities at this level are: Mining, farming, fishing, quarrying and lumbering. The goods obtained at this stage of production become the raw materials or input for the next level of production. It is important to note that some goods from this stage of production can be used in their raw form. 18  An example is sugar cane and raw cotton. The firms or enterprises that are involved in the extraction of goods from their natural setting make up the ex- tractive industry.e.g mining and agriculture industries. INSERT A PHOTO OF OIL MINING PROCESSN IN A LOCAL COMPANY B) Secondary level In this level raw materials are transformed into finished products or into more useful forms. This level of pro- duction includes manufacturing and construction industries. Examples of manufacturing activities/ occupations are: food processing, textile manufacturing and furniture making while examples of construction activities/occupations are: building of houses, roads and railways. Firms or enterprises that are involved in this level of production either belong to the manufacturing industry, the processing industry or construction industry C) Tertiary level This level of production deals with provision of services and it is divided into two categories as follows:  Commercial Services: These are activities that are either related to trade or assist trade to take place. Some of the occupations in commercial services are; wholesaling, retailing, banking and insurance Direct personal services: These are services that are rendered by individuals directly to the consumer (s). Some of the occupations in this category are; nursing, teaching, legal practice and pastoral care. Firms engaged in provision of services belong to the service industry e.g the transport industry and entertain- ment industries. 19  LEVELS OF PRODUCTION PRIMARY LEVEL SECONDARY LEVEL TERTIARY LEVEL EXTRACTIV MANUFACTUR PRO- CON- SERVICE E - ING CESSING STRUCTIO INDUSTR INDUSTRY INDUSTRY INDUSTR N Y 2.3 Factors of production These are resources that are necessary in the production process. They are resources or agents required in pro- duction, without which production is not possible. They are discussed as follows: 1) Land Land refers to all the natural resources on, above or below the earth’s surface. For example, soil, minerals, rivers, lakes and climate. Rewards for land are: royalty, rent and rates. Royalty is paid to the owner of land for allowing mining in his/her land. Rent is paid to the owner of land that has been hired out or leased. Rates are paid on land that is located mostly in Central Business district (CBD) of towns and cities. It is paid to the local government authority. 20 Characteristics of land as a factor of production 1) It is a natural resource 2) It is a basic factor of production: production cannot take place without it. 3) Its supply is fixed to what nature has provided. 4) It lacks geographical mobility: it cannot be moved from one geographical area to another 5) It is occupationally mobile: It can be put into alternative uses. 6) Its quality is not homogeneous: Productivity of one piece of land is different from that of another. 7) Its productivity can be increased by increasing quantity and quality of capital. 8) It is subject to the law of diminishing returns: Its productivity reduces with time and repeated use Importance of land 1) It is a source of raw materials such as crude oil, gold, diamond etc. 2) It supports agriculture (keeping of livestock and growing of crops), 3) Land features such as mountains and waterfalls are a source of tourist attraction 4) Provides dumping ground for industrial waste during production 5) Provides the base for construction of infrastructures such as roads, railway lines etc. 6) Source of water for domestic and industrial use 7) Provides site for production activities 8) Used for recreation activities such as fishing, swimming and other sporting activities 2) Labour This is human effort, physical or mental applied in production. Rewards for labor are: wages, salaries, com- mission and bonus. The people who offer labour are called labourers. They are also referred to as human re- source/personnel/workers/employees. Work that is mostly done by workers is said to be labour intensive. Characteristic of labor as a factor of production 1) It is a basic factor of production. 2) It is highly perishable hence cannot be stored. 3) Labour cannot be separated from the laborer. 21 4) Laborers sell their labour and not themselves.Labour is mobile both geographically and occupationally 5) It may be mental or physical 3) Capital This refers to all man – made resources used in production of goods and services. Examples of capital are tools and equipment and machinery. Reward for capital is interest. Work that is mostly done using machines and equipment is said to be capital intensive. Characteristics of Capital as a factor of production 1) It is a man-made resource 2) It is a basic factor of production. 3) It is subjected to depreciation. 4) It can be improved through technology. 5) It accumulates over time: The stock of capital owned increases with time 6) It is mobile geographically as well as occupationally Importance of capital 1) It facilitates full utilization of resources hence more employment opportunities 2) It increases output of goods and services 3) It facilitates industrialization by funding research to discover new methods of production 4) Capital in the form of physical assets can be used as collateral/security in the acquisition of loan from financial institutions 5) It promotes specialization in the production process hence encouraging exchange 6) Money which is a form of capital is used to reward other factors of production 7) It facilitates the development of social and economic infrastructures such as roads, communication system, schools, hospitals etc. 8) It increases the productivity of other factors of production such as land and labour 22 Forms of capital The following are the main types or forms of capital: 1) Real capital This refers to the physical assets that are used to produce goods and services e.g Land, building, furniture, machinery etc. For this reason, they are also called physical capital 2) Liquid capital This is capital in the form of cash or assets that can quickly be converted into cash e.g Cash at hand, Cash at bank, sock, debtors etc. It is also called quick assets/Liquid assets or fluid capital 3) Working capital This is capital needed for the daily running of the business such as purchase of stock, payment of wages, transport and other expenses. 4) Fixed capital This refers to capital that is tied up in fixed assets such as Machinery, building, motor vehicles etc. 5) Human capital This is capital in the form of skills and knowledge of people in a country. It is normally acquired through education and training 6);Private capital This is capital that is owned by private individuals in their capacity as private individuals e.g personal car, private land and residence etc. 7) Public capital This refers to assets that are owned by the government for the benefit or use of the public. 8);Debt/borrowed capital This is capital borrowed from external sources that is repayable within a period of more than one year. Examples of borrowed capital are loans from banks, issue of debentures etc. 9) Equity capital This refers to capital generated by the owner of the business hence also called owners' equity 10);Social capital 23 This refers to the relationships people have with each other and the desire they have to do things for and with others within their social network. 11);Nominal capital Also known as authorized capital refers to the maximum amount of share capital that a company is authorized to issue to shareholders. 12) Capital employed This is the sum of owners’ capital and borrowed capital. In other words, it is the aggregate of capital from all sources whether internal or external. 4) Entrepreneurship This is the ability to organize other factors of production in appropriate proportions for effective production. It is also defined as the process of identifying a business opportunity and acquiring the necessary resources to start and run a business successfully. This factor is unique in the sense that it brings all the other factors of pro- duction into a working relationship. The person involved in entrepreneurship is called an entrepreneur. The reward of entrepreneurship is profit. Functions/roles of an entrepreneur in production 1) Starts the business 2) Acquires and pays for the other factors of production 3) Bears all the risks and losses. 4) Makes all the decisions in the business. 5) Enjoys the profits 6) Pays for expenses such as water and electricity 7) Owns the whole project 8) Directs and co-ordinates other factors of production to bring them into a working relationship 24 2.4 SPECIALIZATION Refers to the concentration on the production of what one or a region can do better and leaving the rest to others thereby encouraging exchange. Specialization is important as it allows one to concentrate in doing what they can do best leaving others to do the rest. Imagine if one person was a teacher, a doctor, an engineer and a lawyer at the same time– would they be effective in the work they do? 2.5 Forms/Types of specialization 1) Specialization by commodity; this is the concentration on the production of one product e.g. a maize farmer. 2) Specialization by craft; This is where one specializes in a particular craft (handwork) such as pottery, iron smelting, farming etc. 3) Specialization by process; This is the concentration on a particular stage in the production process e.g. ginning, spinning, weaving or dyeing in the textile industry. 4) Specialization by profession; This is the concentration on a particular work one has gained expertise through training or by practice e.g. teaching, engineering etc. 5) Specialization by region (Regional specialization); This is where a particular area concentrates on production of a particular commodity e.g. crude oil mining in Nile region of South Sudan 6) International specialization; This is where a country concentrates on production of a commodity in which it has comparative advantage over others e.g. Oil mining in South Sudan and coffee farming in Kenya. 7) Specialization by Skill; This is where a given activity is divided into a series of activities and individuals are allocated to specific tasks according to their skills. 2.6 Advantages of Specialization 1) Leads to increase in production 2) Leads to production of high-quality goods and services 3) Encourages invention and innovation 4) Saves time by making production fast and efficient 5) Improves skills of workers hence increased productivity of labour 25 6) Encourages trade and exchange due to surplus production. 7) Enables use of specialized machines and equipment. 8) Improves standards of living due to increased quality and quantities of goods and services available. 9) Creates interdependency among countries hence promotes peace 10)Leads to full utilization of resources. Disadvantages of Specialization 1) It creates monotony and boredom as one does the same task repeatedly. 2) It leads to over production which may lead to wastage. 3) May lead to depletion / exhaustion of a country’s natural resources due to over exploitation. 4) The absence of one specialist worker brings the whole production process to a halt. 5) Break down of machinery at one stage brings the entire production process to a standstill. 6) Makes a worker dependent on one trade only 7) Encourages the use of machines leading to unemployment 8) Makes a country dependent on other countries 9) Brings many people together which may lead to social problems such as crimes and prostitution. 26  2.7 Standards of Living This refers to a relative measure of the quality of life of people in a given community or society. Standard of living is said to be high if majority of people in the community have access to basic needs, education and healthcare. Lack of access to the three is an indication of low standards of living. 2.8 Factors affecting standards of living: 1) Cost of living: High cost of living denies low income earners access to basic needs leading to low standards of living. This can be contributed by high rates of inflation. Inflation is an economic situation where prices of goods and services keep increasing rapidly. Low cost of living allows most people to be in a position to afford their basic wants leading to high living standards. 2) Access to goods and services: Scarcity of essential goods and services can contribute to low standards of living while access to a wide variety of goods and services lead to high standards of living. 3) Availability of job opportunities: When people lack jobs, they lack a source of income hence unable to make a living leading to low standards of living. Similarly, when employment opportunities are many, most people are able to earn a living hence improve their living standards. 4) Roads and communication network: Poorly developed roads and communication system/network prevent access to essential goods and services leading to low standards of living. In like manner, a well-developed road and communication system allow people to access important goods and services leading to high standards of living 5) Access to social amenities: Lack of essential social amenities like schools and hospitals deny people access to education and medical services leading to low living standards. In the same way, easy access to such social amenities improves peoples’ living standards. 6) Political stability/security: Political stability/security promotes carrying out of economic activities leading to enhanced living standards while political instability and insecurity hinders the carrying out of economic activities leading to low standards of living. 7) Per capita income: This is defined as the income per head of a country. In other words, the total income of a country divided among the population. Increase in a country’s per capita income can lead to improved standards of living as it will imply increase in the average income earned by people in a country. Likewise, low per capita income may contribute to low standards of living. 27 END OF SUB-TOPIC CHALLENGE Test how much you can remember without referring OBJETIVE QUESTIONS 1. Workers involved in mining, quarry or fishing are engaged in A. Secondary production B. Primary production C. Tertiary production D. The manufacturing industry 2. The reward of capital is A. Dividend B. Interest C. Profit D. Rent 3. An individual who makes the final use of goods and services provided by a firm is the A. Manufacturer B. Wholesaler C. Consumer D. retailer 4. Which of the following is not a factor of production? A. capital B. land C. labor D. Staffing 28  5. Which of the following level of production converts raw materials into finished goods? A. Extractive level B. Secondary level C. Commercial service D. Tertiary level 6. Production ends when goods A. and services are used by the producer B. are packed and labeled C. are sold in the market D. and services reach the final user 7. The process of increasing the usefulness of goods and services refers to? A. Value addition B. Production C. Utility D. Promotion 8. Bread-baking is an occupation at which level of production? A. Manufacturing B. Primary C. Secondary D. Tertiary 9. The term used to describe income per head in a country is called? E. National income F. Gross income G. Income per person H. Per capita income 10. A farmer who is producing maize to take care of his family is said to be engaging in which type of production? I. Self-production J. Primary production 29  K. Indirect production L. Subsistence production 11. The type of specialization where an individual or organization concentrates on production of one type of product is called? M. Specialization by commodity N. Specialization by skill O. Specialization by profession P. Specialization by craft 12. Which of the following services is not regarded as a direct service? Q. Retailing R. Hairdressing S. Pastoral care T. Teaching 13. The factor of production which brings the other factors into a working relationship is called? U. Capital V. Labour W. Entrepreneurship X. Land 14. The type of specialization where an individual or firm concentrate on production of one product is called? Y. Specialized specialization Z. Specialization by skill AA. Specialization by commodity AB.Specialization by region 15. Standard of living refers to? AC. The amount of wealth people in a community possess AD. The number of people who have jobs in a country AE.The income per head of a country AF.The quality of life people in a community are living 30 NONE-OBJECTIVE QUESTIONS 1) Name any four rewards of labour as a factor of production 2) Name any 4 occupations at the primary level of production 3) Identify the reward associated with each of the following factors Factor Reward a) Land b) Labour c) Entrepreneurship d) Capital 4) Highlight five advantages of specialization 5) Highlight five disadvantages of specialization 6) Identify five factors which affect standard of living 31 7) Match the following types of specialization with the correct description Type of specialization Description a) Specialization by skill The concentration on a particular work or skill one is good at, b) Specialization by product Where a country concentrates on production of a commodity in c) Specialization by craft Where an individual concentrate on practicing and perfecting a d) Specialization by region The concentration on a particular stage in the production pro- e) International specialization Where a given activity is divided into a series of activities and f) Specialization by Where a particular area concentrates on a particular profession economic g) Specialization by process The concentration on the production of one commodity Proposed Class In a group or as an A) Collect papers around your class/compound, wrap a reasonable size and come up B) Using water and clay soil, mold any item of your C) Present your pieces of art made in A) and B) above to the teacher; make comparisons with other D) State the raw materials used to come up with the items E) Using the available resources around you, what other things define 32  2.9.0 DEMAND, SUPPLY AND MARKET Specific objectives By the end of this sub-topic, the learner should be 1) Define demand. 2) Describe the law of demand. 3) Explain the factors affecting demand 4) Define supply. 5) Describe the law of supply. 6) Explain the factors affecting supply. 7) Define market. 8) St t th h t i ti f 2.9.1 Demand Demand is the quantity of a commodity that buyers are willing and are able to buy at a given price over a given period of time. If you went to a shop and asked the shop keeper how many loaves of bread he sells in a week that will be the weekly demand for bread in that shop. 2.9.2 The law of demand: States that, other things constant, when the price of a commodity increases its demand reduces and when the price reduces its demand increases. The expression, other things constant, can be replaced with the Latin phrase ceteris paribus. Thus, we can redefine the law of demand and say that it states that, ceteris paribus, when the price of a commodity increases, its demand reduces and when the price reduces, its demand increases. 33 Demand Schedule This is a list of the prices of a commodity against quantities demanded. Below is an example of a demand Schedule representing annual demand for phones in a certain shop in Juba, South Sudan: Price (USD) Quantity Demanded (Units) 100 450 200 400 300 350 400 300 500 250 600 200 700 150 800 100 As can be seen from the list, a demand schedule clearly illustrates the law of demand as it shows that as price increases, quantity demanded reduces and as price reduces, the quantity demanded increases. Demand curve Demand curve is a graphical representation of the demand schedule. It is a graph of price of a commodity against quantities demanded. It is the locus of points showing quantities demanded of a commodity at various price levels. A demand curve also clearly illustrates the law of demand as shown in the figure below: 34 As can be seen in the diagram, the demand curve slopes from left to right downwards. The vertical axis shows the prices while the horizontal axis represents the quantity demanded for the commodity in a given period. If you notice, as price increases, the quantity demanded reduces. Similarly, when price reduces, the quantity demanded increases. From the demand curve above, what are the respective quantities demanded for phones at the following prices? Price (USD) Quantity demanded (Units) 300 450 600 750 800 2.9.3 Factors that influence the demand of a product 1) Price of the commodity When the price of a product increases its demand decreases and when the price decreases its demand increases. 2) Level of consumer income An increase in consumers’ disposable income generally leads to an increase in the demand for goods and ser- vices because the ability to buy or the purchasing power increases. 3) Price of other related products Commodities are related in two ways. That is as either as complimentary or as substitutes. Complementary goods are goods that are used together while substitutes are goods that can be used instead of each other. The demand for a commodity can be affected by the prices of other commodities depending on the relationship e.g reduction of price of one substitute good will reduce the demand for the other substitute good while increase in price of one complimentary good will reduce the demand for its complementary good. 35 4) Changes in consumer taste, fashion and preference If consumer taste change in favor of a commodity, more of that commodity is likely to be bought even if it is expensive 5) Changes in population size The larger the size of the population, the higher the demand for goods and services and the smaller the size of the population, the lower the quantity demanded of goods and services. 6) Level of advertisement Massive advertisement campaigns increase demand for a commodity whereas little or lack of advertisement a for a commodity will lead to low sales. 7) Government policy The government may come up with policies that are meant to encourage or discourage the consumption of certain commodities. These policies may be in the form of:  Taxation This is the process by which governments charge or levy a compulsory payment on goods and services offered by individuals and organizations as well as incomes earned. The payment or levy is known as tax. An increase in tax on a commodity increases its price which makes its demand to fall and vice versa.  Subsidies This a payment given by governments to traders to meet part of the cost of production of a commodity so that they can sell the commodity at an affordable price. This is likely to lead to an increase in the demand for such commodities.  Legislation The government may pass laws meant to encourage or discourage consumption of a certain commodities.  Price control The government may control the price of certain commodities to ensure that they do not go beyond a certain limit.  Quota This is a limitation on the quantity of a product that can be imported or exported by a country. Some governments allow importation of commodities of up to a given quantity only to protect their 36  local industries that pro- duce the same commodity that is imported. 8) Future expectations of changes in price a commodity If the consumers expect prices of commodity to rise in the future, they will buy more of it while if they anticipate a decline in price of a commodity, they may buy less of it when the price is still high. 9) Future expectation of shortage When consumers expect that there is likely to be a shortage of a particular commodity in the future, they will buy more of it. The converse is also true. 10)!Seasonal changes: The demand for some commodities depends on seasons e.g umbrellas and jackets are demanded more during rainy seasons while cold drinks and ice cream are demand more during hot seasons. 11) The distribution of incomes The demand for goods and services is usually higher when incomes are distributed fairly among many people as opposed to where a greater proportion of income is in the hands of a few people. 12);Terms of sale The demand for goods or services can increase if and when favorable terms of sale are offered to consumers such as sale of goods on credit, giving of discounts or lengthening of the credit period. This may result in high demand for goods and services. 13) Availability of credit facilities Availability of credit facilities such as mobile phone loans increases demand for goods and services. Similarly, lack of credit facilities may reduce the demand for goods and services 37 Types of demand The following are the common types of demand: 1) Derived demand This is the demand for a commodity that arises from the demand for another commodity. e.g an increase in de- mand for hens may be derived or arise from increase in the demand for eggs. It is thus also known as indirect demand 2) Joint demand This is the demand for commodities that are demanded together e.g ink and pen, car and petrol, tea and sugar etc. 3) Composite demand This is the demand for a commodity that can be used for more than one purpose e.g the demand for steel is a composite demand because it can be used for many purposes such car manufacture, building construction etc. 4) Competitive demand This is the demand for commodities that are substitutes of one another, that is, one can be used instead of the other e.g. The demand for tea and coffee. When the demand for one increase, it is likely that the demand for the other commodity decreased. 5) Alternative demand This is demand that can be satisfied using different resources e.g. the demand for clothes can be satisfied using different varieties of clothes such as t-shirts, jeans, suits etc. 6) Direct demand If a commodity satisfies human wants directly, its demand is known as direct demand e.g the demand for books and food stuffs is direct demand as they satisfy the consumer directly. 38  2.9.4 SUPPLY This is the quantity of a commodity that sellers are willing and able to take to the market (offer for sale) at a particular price over a given period of time. 2.9.5 The law of supply The law of supply states that, other things constant, when the price of a commodity increases its supply also increases and when the price of a commodity reduces its supply also reduces. Similarly, we can say that the law of supply states that, ceteris paribus, when the price of a commodity increases its supply also increases and when the price reduces, its supply also reduces, Supply Schedule This is a list of the prices of a commodity against quantities supplied. Below is an example of a supply schedule representing the supply of a certain model of phone in Juba, South Sudan: Price (USD) Quantity Supplied (Units) 300 450 400 500 500 550 600 600 700 650 800 700 900 750 1000 800 As can be seen from the list, a supply schedule clearly illustrates the law of supply as it shows that as price increases, quantity supplied also increases and as price reduces, the quantity supplied also reduces. 39 Supply curve The information presented in a supply schedule can be used to draw a supply curve. A supply curve is a graph of price of a commodity against quantities supplied. A supply curve also clearly illustrates the law of supply as shown in the figure below: As can be seen in the diagram, the supply curve slopes from left to right upwards. The vertical axis shows the prices while the horizontal axis represents the quantity supplied for the commodity in a given period. If you notice, as price increases, the quantity supplied also increases. Similarly, when price reduces, the quantity supplied also reduces. What is the respective quantity supplied for the phone model at the following prices? Price (USD) Quantity Supplied (Units) 400 650 700 750 900 40 2.9.6 Factors which influence supply of a product 1) Price of the product Producers will supply more goods to the market when the prices are high while if the prices go down, less of the commodity will be supplied in the market. 2) Cost of production An increase in the cost of factors of production or of inputs such as raw materials and labor will lead to an in- crease in total production cost leading to decrease in supply 3) Availability of factors of production The quantity of a commodity supplied to the market will depend on availability of factors of production and inputs such as raw materials. The lower the supply of factors of production the lower the supply of commodities 4) Government policies Government policies such as taxes, subsidies, quotas and price controls affect supply e.g an increase in taxes on commodities may reduce its supply. On the other hand, government subsidies may boost supply. Quota is a restriction by the government on the quantity of a commodity that can be supplied hence reduces supply. 5) Future expectations of changes in price Supply will reduce when producers expect prices to rise as they will hoard the goods and sell them when the prices are higher reducing the supply at the current time. Hoarding is the hiding of goods in anticipation of creating an artificial shortage in order to make profit. It is a malpractice that is prosecutable in some countries. 6) Time It takes time for supply to adjust to market changes. For example, in agriculture, one has to wait for the crops to grow to meet the supply need for agricultural products. This time needed for supply of a product to respond to demand is knowns as the product gestation period. Goods with a longer product gestation period take longer to supply in response to demand and vice-versa. 7) The level of technology Improved technology leads to increased supply and poor technology reduces the supply of a given product. For example, cultivation using a tractor leads to high production hence supply while cultivation using a hoe results into low supply. 41 8) Natural factors These can affect the quantity of the commodity supplied favorably or unfavourably.eg in case of agricultural products, adverse weather, diseases and pests may affect the quantity supplied either negatively. 2.9.7 MARKET A market is an arrangement in which buyers and sellers meet for purposes of exchanging goods or services/ transacting business. A market is not necessarily a physical place but involve any mechanism by which buyers and sellers interact to transact business or exchange goods and services. INSEERT A PHOTO OF TRADERS SELLING IN A PHYSICAL INSERT PHOTO OF A ONLOIBE OR VIRTUAL MARKET MARKET FOR COM- PARISON WITH A PHYSICAL market. Price determination in a market Think of the last time you visited a market to buy something, how did you agree with the seller on the price of the good? Most likely you settled on the price through bargaining. This method is also called haggling. This is only but one of the methods through which prices are determined. Therefore, the price of a commodity can be determined in the following ways: 1) Bargaining/Haggling This when price is arrived at through dialogue between the buyer and the seller that ends in both agreeing on a particular price for the product. 42 2) Auctioneering/Auctioning/Bidding This method used for selling goods that have been seized from those who have failed to pay their loans. The lender usually enlists the services of auctioneers to recover their money from defaulters. To sell a product on auction, the auctioneer announces the sell in public and willing buyers suggest the price they are willing to offer for the commodity. The winning buyer called “the highest bidder” is the one that offers the highest price. 3) Tendering This method is popularly used by organizations to buy their supplies. At a certain agreed period in the organization’s calendar they put tender adverts for willing suppliers to apply by filling a form. In the form they state the price they are willing to supply the commodity. The organization forms a committee called “tendering committee” to choose on the winning supplier. 4) Price control/Government intervention This method is used by governments to ensure that prices of essential commodities remain affordable. The government sets price limits for such commodities and sellers are expected to abide by the set price. 5) Fixing price by treaty/ agreement. This involves the buyer sitting with the seller to negotiate and fix the price at which a good or service shall be sold and the price remains fixed. The price agreed upon at the time of signing the agreement can be changed or revived by amending the treaty. For example, hire purchase and deferred payments agreement, rental agreements, land purchase agreements 6) Price leadership This is the setting of price by either a leader firm or low-cost firm in the industry and other firms follow by charging the same price. This form of price determination is common in oligopolistic market/industry. Price leadership takes on the following forms; i) Dominant price leadership: Occurs where one firm controls the vast majority of the market share of an industry ii) Barometric price leadership: Occurs where the price leading firm acts as a barometer for other firms in the industry who simply copy the actions of the price leader iii) Aggressive or exploitative price leadership: occurs where the price leading firm sets a price which is un- reasonably low in an effort to drive competing firms out of business. 43 7) Price mechanism This method is also called “Price determination by forces of demand and supply”. In this method, prices are determined through interaction of demand and supply. The prevailing market price is the price where the demand curve meets the supply curve. Such price is called “the equilibrium price”. At this price the quantity demanded is equal to the quantity supplied. Such quantity is called “The equilibrium quantity”. The point where the demand and supply curve meet is called “The equilibrium point”. This can be illustrated in the diagram below. 2.9.8 Characteristics of a market/Essentials of a market i) Presence of buyers and sellers: Without buyers and sellers there cannot be a market. The sellers offer goods for sale and the willing buyers make a purchase. ii) Presence of an interaction platform: For a market to exist, there must be a place or forum from where buyers and sellers meet to transact business. Such forum may be a geographical area or a virtual platform provided through the internet. iii) Availability of commodities to be exchanged: These are the goods and services to be sold in the market. The absence of a commodity to sell completely erases the idea of a market. iv) Availability of a medium of exchange: The medium of exchange can be in the form of money. A medium of exchange helps in assigning a particular value to a commodity on sale. v) Existence of a prevailing price: Every commodity has a price attached to it. The predominant price of a particular commodity in a market becomes the prevailing market price. 44 2.9.9 Functions of a market 1) Avails a variety of goods and services to consumers: In a market, consumers can get a wide variety of the goods and services they need. 2) Provides investment opportunities to traders: Potential investors find an opportunity of making profitable gains from providing particular goods or services. 3) Provides employment opportunities to many: Many people who are unable to secure salaried jobs find self- employment in markets by starting businesses of their own or working for market traders. 4) Provides revenue to the government through taxation: The government receives revenue by charging taxes on business owners as well as other market levies. 5) Reduces wastage by providing outlet for surplus produce: Without markets goods produced in excess would go to waste. 6) Promotes peace through interaction of buyers and sellers: As people interact in a market, it creates cordial relationship between them leading to their peaceful co-existence 7) Promotes urbanization of rural areas: Development of markets is usually accompanied by development of infrastructures such as business premises, roads and communication systems as well as electricity. This promotes urbanization of areas where markets are located. Types of markets (market structures) The following are the types of markets: 1) Perfect competition market 2) Monopoly 3) Monopolistic competition 4) Oligopoly A) Perfect competition market This a market structure that has many sellers and buyers who have perfect knowledge of the market making it impossible for any seller to charge a different price from the prevailing market price. 45 Characteristics /assumptions of perfect competition market Perfect competition market can only exist under the following assumptions: 1) Perfect knowledge of the market Both buyers and sellers have perfect knowledge of the market and therefore no individual buyer or seller can influence the market price to their advantage. 2) Freedom of entry or exit The buyers and sellers have the freedom to enter and leave the market at will. 3) Uniformity of buyers and sellers All buyers and sellers are identical so there is no benefit of selling to a particular buyer or buying from a particular seller. 4) No government interference The prevailing market price is determined strictly by the interplay of demand and supply and there should not be any form of government intervention in the form of price control or otherwise. 5) No excess supply or demand The sellers are able to sell all that they supply into the market and the buyers are able to buy all what they re- quire hence there are no excess supply and demand. 6) No transport costs In a perfect competition market, it is assumed that the buyers and sellers are located in one area hence there is no need for transportation. Note: It is important to note that perfect competition market is only hypothetical and does not exist in real life. However, the assumptions/characteristics gives us a basis for the study and understanding of other market structures. 46. B) Monopoly This is a market situation where there are many buyers but only one seller called a monopolist. Characteristics/Assumptions 1) Only one supply There is only one supplier for the entire market hence the firm is the industry. 2) No close substitute The commodity supplied does not have close substitutes which may bring competition 3) Difficulty to enter the market It is difficulty for other firms to enter into the market 4) The monopolist is a price giver Prices are fixed by the monopolist 5) Possibility of price discrimination. Price discrimination refers to charging of different prices for the same commodity in different markets. Price discrimination by the monopolist may be possible under the following conditions: Conditions necessary for price discrimination 1) Consumers must be in different markets making it difficult for one to go to another market. 2) The cost of maintaining the separate market should not be very high. 3) The production of the commodity is in the hands of monopolist hence they are able to control production Basis of Market separation by the monopolist i)Geographical Goods may be sold differently in different market. The price charged in the local market may be cheaper than in the foreign market. ii) Income Consumers may be charged differently according to their income level iii)Time A firm may sell the same commodity at a high price during the peak period and lower the price during the off- p e a k period. 47 Sources of monopoly power 1) Control of an important input in production. A firm may draw its monopoly power from having control of an important factor of production such as raw material. 2) Ownership of production rights By owning business legal rights such as patent right, copyright and royalties , a firm can remain the only producer of a commodity hence the monopolist.  A patent right is a right given to the inventor of a product that ensures that their work is not duplicated by others  Copyright is a legal right to the owner of intellectual property such as a book that makes them the only authorized producer or any one they give the right.  Royalties Is a sum of money given to the original owner of a product s u c h as a book, film etc. for each unit of the product sold. 3) Internal economies of scale The existence of internal economies of scale that enables a firm to reduce its production costs to the level that other firms cannot. This will force these firms out of business leaving creating a monopoly 4) Size of the market The size of a market may be best served by one person or a firm. Addition of more than one firm may lead to all of them incurring losses. 5) Addition costs by other firms If other firms have to incur additional cost to enter into the market then their products may be less attractive due to increased price. This make the local firm to be monopolist. 6) Where a group of firms combines to act as one Some firms may combine/amalgamate or work together for the purpose of controlling the market of their product. They therefore create monopoly. 7) Restrictive practices A firm may include price limit where a firm sells its product at a very low price to drive away competitors, then raising the price after putting the other firms out of business creating monopoly. 8) Financial factors If huge capital is required to enter into the market, it may make it very difficult for other firms to 48 enter into the market making the existing firm to operate as a monopoly. C) Monopolistic competition A market structure that combines the aspects of perfect competition and those of a monopoly. Characteristics 1) Many buyers and sellers: Many buyers and sellers acting independently 2) Variation in quality: The products vary in quality or are a close substitutes of each other. 3) No barriers to entry or exit exist.: New firms wishing to supply the same commodity are free to do so and existing firms wishing to leave are also free. 4) Perfect knowledge of the market: There is perfect knowledge of the market for both sellers and buyers. D) Oligopoly A market structure with few firms Types of oligopoly 1) Duopoly: Where the industry is made up of two firms. 2) Perfect /pure oligopoly: Where the products are identical 3) Imperfect/differentiated oligopoly: Where the markets have products which are close substitutes or are the same but made to appear different. Characteristics of oligopoly 1) There are few firms in the market. 2) Interdependence among the firms on pricing and output decisions 3) Products are differentiated i.e. made to appear different in terms of colour, packaging etc. when in real sense they are the same. 4) No freedom of entry into the industry by new firms. 5) Firms are price setters 49 END OF SUB-TOPIC CHALLENGE Test how much you can remember without referring OBJETIVE QUESTIONS 1. Which of the following statements best defines demand? A. The quantity of a commodity bought from a trader B. The act of showing interest to purchase a commodity C. The quantity of a commodity buyers are willing to buy at a particular price, over a given period of time D. The quantity of a commodity buyers are willing and able to buy at a particular price, over a given period of time 2. The demand for a commodity that arises from the demand of another commodity is called? A. Joint demand B. Derived demand C. Secondary demand D. Devolved demand 3. The law of demand is defined as? A. When the price of a commodity increases the demand reduces B. When the price of a commodity reduces, its demand increases C. When the price of a commodity increases, its demand reduces and when the price reduces, its de- mand increases D. Other things constant, when the price of a commodity increases, its demand reduces and when the price reduces, its demand increases. 4. Which of the following factors does not affect demand directly? A. Cost of production B. Consumer income C. Price of other related products D. Taxation 50. 5. Which of the following statements best defines supply? A. The quantity of a commodity sold by a trader B. The act of delivering goods to a customer C. The quantity of a commodity traders are willing to sell at a particular price, over a given period of time D. The quantity of a commodity sellers are willing and able to take to the market at a particular price, over a given period of time. 6. Which of the following statements best describes the law of supply? A. When the price of a commodity increases the supply increases B. When the price of a commodity reduces, its supply also reduces C. When the price of a commodity increases, its supply also increases and when the price reduces, its supply also reduces D. Other things constant, when the price of a commodity increases, its supply increases and when the price reduces, its supply decreases 7. Which of the following factors does not affect supply directly? A. Cost of production B. Availability of factors of production C. Level of consumer income D. Taxation 8. What is a market? A. A place where buyers and sellers meet to exchange goods and services B. An opportunity for selling goods and services C. Mechanisms by which buyers and sellers meet to transact business D. A local center where people meet on particular days to exchange goods and services 9. Which of the following is not a function of a market? A. Avails a variety of goods to consumers B. Provides investment opportunities to traders C. Provides employment opportunities to many D. Promotes government policies in an area 51  10. The following are the ways through which the price of a commodity is determined in the market, except? A. Bargaining B. Arguing C. Auctioneering D. Tendering 11. Which of the following is not a type of market structure? A. Online markets B. Oligopoly market C. Monopoly market D. Perfect competition market 12. Which of the following is a characteristic of perfect competition market? A. The seller alone decides on the market price B. There is price discrimination C. Commodities sold are homogeneous D. There is no freedom of entry ang exit into and out of the market 13. Which of the following is not a basis of price discrimination in a monopoly market? A. Geographical B. Income C. Time D. Nationality 14. Which of the following is a source of monopoly power? A. Control of an important input in production B. Market dominance C. Extensive product promotion D. Long stay in the market 15. Which of the following is not one of the essentials of a market? A. Presence of buyers and sellers B. Availability of commodities to be exchanged C. Availability of a medium of exchange 52  D. Existence of money changers NONE-OBJECTIVE QUESTIONS 1) Explain any five factors that affect demand 2) Describe five factors that affect supply of a commodity 3) Explain five functions of a market in an economy 4) Outline five characteristics of perfect competition market 5) Identify five characteristics of monopoly market structure 6) Explain any five ways pf determining the price of a commodity 7) Explain three basis of price discrimination by monopolies 8) Describe any five sources of monopoly power 9) State any four government policies that affect demand of a commodity Proposed Class Activity A) In a group of five students or any convenient number as determined by the teacher, describe reasons why you think perfect competition market cannot be achieved in South Sudan. B) Each group to appoint a leader to present their views in A) above C) As an individual or in groups, discuss any five factors that you think contributes to the high de- mand for US Dollar in the South Sudan market D) What do you think needs to be done to tame the ever-rising value of the US Dollar in the South Sudan money market? E) If you were the minister of finance, what measures would you take to promote production of goods and services locally to reduce the huge expenditures on imports by your country? Share your answers in class. 53  3.0 LOCATION, LOCALIZATION AND DELOCALIZATION OF INDUSTIES Specific objectives By the end of this topic, the learner should be able to: 1) Explain the meaning of given terms. 2) Identify factors affecting location, localization and delocalization of industries. 3) Explain the advantages and disadvantages of localization of industries. 4) Define amalgamation 5) State the advantages and disadvantages of amalgamation 6) Explain the functions of a market. 3.1 Meaning of firm and industry A firm is a business enterprise that deals in a particular commodity or commodities. An industry is a collection of firms that deal in similar commodity or commodities. A firm is thus a unit of an industry. Size of a firm Some firms are regarded as small while others are regarded as large. The following factors are used to deter- mine the size of a firm: 1) The number of employees Large firms always have a large number of workers compared to small firms. 2) Volume of output A firm would be considered big if it has a large volume of output (goods or services produced) 3) Floor area covered by premises A firm may be considered to be large if the floor area covered by the premises is large. 54 4) Capital invested The larger the capital invested in assets the larger the firm. 45 Production methods Larger firms are associated with specialization and division of labor as compared to small firms 6) Market served A firm having many branches all over the country is said to be big 7) Sales volume The larger the sales volume the larger the firm. Location of a firm Location of a firm is the selection of a place where the proposed firm will be established. For example, a firm called ‘Gumbo Springs ‘ is located at Rajaf Payam. along River Nile in South Sudan. 3.2 Factors that influence the location of firms 1) Availability of raw materials Manufacturing firms may need to be located near the source of raw materials to save on cost of transportation as well as to avoid losses from highly perishable inputs. 2) Market availability A firm may be located near the market for its products to avoid the costs involved in transportation of the finished products. 3) Availability of human resource (labor) Labour intensive firms should be located in areas where there is abundant and appropriate labour force. 4) Appropriate transport network/system A firm should be located where there is good transport network for transporting raw materials to the firm as well as finished products to the market. 55 5) Appropriate communication network/system A firm should be located where there is good communication network for communication with customers and suppliers. 6) Adequate power and water supply Firms that require a lot of power and water should be located where there is adequate supply of power for running machines and clean water for cleaning and cooling production machinery. Water is also an important in- put or raw material for production of many products. 7) Government policies The government may encourage or discourage the establishment of firms in particular areas through policies they formulate. 8) Availability of security Firms will normally be located in areas with adequate security since absence of security discourages the carrying out of commercial activities in any region. Localization and Delocalization of Firms Localization of Firms This is the concentration of similar firms in one particular area or region. For example, in Juba, South Sudan, most industries are found in Shirikat area (the word Shirikat means industries in Arabic language). Factors which encourage localization of firms 1) Well-developed infrastructure in an area. 2) Availability of a large population which may provide both labour and market for its products. 3) Government policy requiring firms to be located in a certain area. 4) Availability of raw materials in a certain area. 5) Availability of support industries such as banks 56 3.3 Advantages of localization 1) Establishment of support business When firms are located in a particular region, it will encourage the established of support business enterprises such as banks, insurance companies and distributors. 2) Employment opportunities Employment opportunities are always generated in the areas where many firms are located which benefits the people living in those areas. 3) Development of infrastructure When firms are set up in a particular region, the government may find it necessary to develop infrastructure such as roads, communication network, health and education facilities. 4) Creation of Pool of labour Localization encourages a pool of labour as people tend to migrate to such regions in search of employment. This enables the firms to meet their labour force requirements. 5) Easy disposal of waste Localized firms are able to easily dispose of their waste by either selling it to other firms for recycling or by jointly undertaking waste disposal projects. 6) Encourages establishment of related industries Industries dealing in by-products of the mainstream firms are likely to arise 7) Security When industries are closely located in one area, there will be few security problems experienced as compared to where firms are dispersed. 57 Disadvantages of Localization 1) Cause pollution Emission of poisonous fumes and industrial effluent (untreated waste) may cause both air and water pollution which have negative effects on the environment. 2) Regional imbalance Imbalance in development is experienced because areas of industrial concentration tend to enjoy provision of social amenities such as roads and schools while other areas are neglected. 3) Rural to urban migration People migrate from rural to urban areas in search of jobs and better living conditions. These movements cause unemployment in urban areas and labour deficiency in rural areas. 4) Increase in social evils Increased population in areas of industrial concentration may lead to a series of problems such as prostitution and increased rate of crimes. 5) Economic depression during times of war or calamities Localization of firms may be risky because if any undesirable thing happens such as war or terrorist attack or even earthquake, the country’s economic and industrial base will be destroyed. 6) Leads to widespread unemployment A fall in demand for products produced by localized firms, would result in wide spread unemployment in the affected area. Delocalization of firms This refers to the establishment of firms in different parts of a country. If, for example, firms within the same industry are located in different states of the South Sudan, we say there is delocalization of firms in South Sudan. 58 Factors affecting/influencing delocalization of firms 1) Lack of adequate land in urban centers may influence the setting of firms in different parts of a country where land is available 2) Government policy aimed at ensuring balanced regional development of the country may require firms to be located in different parts of the country 3) Availability of auxiliary services/support businesses like banks in different parts of the country 4) Availability of raw materials in different parts of the country 5) Availability of a large population in different parts of the country that can provide labour for production as well as market for the goods produced 6) Availability of adequate labour in different regions of a country to provide the needed skills for production Advantages of delocalization 1) Employment opportunities Creates employment opportunities for people living in rural areas 2) Reduces rural to urban migration Rural to urban migration is reduced due to the spread of industries to all parts of the country which creates employment in those parts. 3) Balanced regional development Due to the spread of industries a balanced regional development is achieved in all the areas where the industries are located. 4) Increased accessibility of produced goods. The local communities are able to get the produced goods without necessarily going to town centers. 59 5) Reduced losses during calamities: When firms are dispersed in different parts of a country, losses from undesirable events such as war and natural catastrophes like earthquake and flooding will be minimized Disadvantages of delocalization 1) Spread of pollution When firms are spread in all parts of the country, environmental pollution is also spread to many parts of the country through their production activities. 2) Lack of adequate security Some areas especially rural areas may lack proper security and similarly, some areas such as slums are generally insecure. 3) Lack of service industry. Service industries such as banks, insurance firms and advertising agencies may not be available in rural areas. 4) Production of substandard products. Firms established in different parts of a country enjoy government protection from foreign competition. Such firms may end up producing sub- standard products. 5) Burden to tax payers Incentives offered by the government to encourage localization such as tax holidays and subsidies are an added burden to the taxpayer. 60  3.4 AMALGAMATION Amalgamation is where two or more firms which are separate entities combine to operate as one. It is also commonly referred to as mergers. Mergers or amalgamation is one way through which a firm can undergo external growth as opposed to internal growth. Amalgamations may be voluntary where different firm owners agree to merge their firms or compulsory amalgamation where the government is involved through implementation of nationalization policy. FORMS OF AMALGAMATION 1) Complete amalgamation (consolidation ) This involves the dissolution of all companies intending to amalgamate and creation of a new company to take over their business. The shareholders of the old companies will be issued with shares in the new company. 2) Absorption (Merger). This is a form of combination which takes place when one company takes over the business of another company or companies. The company taking over retains its identity while the shareholders of the liquidated companies are issued with shares in the existing company. 4) Holding company. In this case the various companies entering into the combination retain their identities but one of them which acquires 51% or more of the shares, gains control over the other companies. A holding company is one which owns 51% or more of the shares in a combination while the other companies are called subsidiary companies. 5) Cartel. This is an arrangement in which companies agree to sell their products through a central selling agency. This is normally aimed at avoiding wasteful production among firms and maximizing profits. Cartels are normally used by oligopolistic firms. 61 LINES OF MERGING, INTEGRATION OR COMBINATIONS 1) Horizontal merging This is a form of integration where two or more firms at the same stage of production of similar products come together. The main aim is to have large scale production and enjoy the economies of scale. For example, Gumbo Springs water bottling company combining with Elite water bottling company industry, coca cola merging with Pepsi cola. 2) Vertical merging. This is a form of merging where two or more firms at different stages of production of related products join together. For example, tea growers combining with tea processors. 5) Conglomerate merger. This is where two or more firms producing completely unrelated products join together. This is intended to diversify activities so as to spread the risks. For example, KCB bank merging with DAR Petroleum company. 4) Lateral merger. This occurs where two or more firms producing related products which do not compete join together. For ex- ample, a car making firm joining with a fuel processing firm. 5) Franchising. This is when one firm allows other firms to use its brand name and production techniques. e.g the production of Coca-Cola soft drinks in different countries is under franchise. 6) Consortium. This is where two or more firms jointly undertake a complex task. After the completion of the task, the merger ceases. For example, Wamo General Trading Company Ltd and Dynamic Construction Co. Ltd join to build a bridge. 62 3.4 Merits of amalgamation 1) It reduces stiff competition among firms for the market or raw materials. 2) It increases production through utilization of firm resources to full capacity 3) It eliminates or reduces duplication of goods and services. 4) It increases access to loans as firms have more collateral/security in the form of a wide asset base. 5) It reduces the cost of advertising. 6) Research can easily be undertaken due to large capital base. 7) It increases the market share 8) It increases profits due to increased production. 9) It increases the firm's capital base. 10)There is increased supply of skilled manpower from the different firms. Demerits of amalgamation 1) It results into unemployment through restructuring and retrenchment of some workers. 2) It creates monopoly and its related consequences. 3) It may lead to over production leading to wastage. 4) Huge losses are incurred in case of a disaster. 5) It leads to over utilization of resources. 6) It leads to increase in the level of taxation e.g. corporation tax. 7) Management may become inefficient. 8) It leads to loss of identity or independence of some firms. 63 END OF TOPIC CHALLENGE Test how much you can remember without referring OBJETIVE QUESTIONS 1. Location of a business is defined as: A. The setting up of firms in rural areas B. The spreading out of firms in different parts of the country C. Choosing of the establishment site for a new firm D. The identification of where a firm is located 2. Which of the following is not a factor to consider when choosing the location of a firm? A. The nearness to an entertainment joint B. The availability of market C. The availability of labour D. The government policy ` 3. Which of the following correctly defines localization? A. The conversation of a business ownership to the locals B. The transfer of shares of a company to the local community C. The concentration of similar firms in one area D. The concentration of similar firms in urban centers. 4. The following are advantages of localization, except? A. Encourages establishment of support business B. Creation of employment opportunities to the locals C. Promotes development of infrastructure D. Decline in social evils 64 5. The following factors encourage delocalization, except: A. Lack of adequate land in urban centers B. Government policy C. Availability of auxiliary services D. Availability of social amenities 6. Which of the following is an advantage of delocalization of firms?