HRD 2315: ECONOMICS FOR CIVIL ENGINEERS.

1
The Nature and Scope of Economics
 What is Economics?
 The importance of Economics.
 Microeconomics –vs.- Macroeconomics
 Economic methodology.
 Importance of diagrams in economics
 The Economizing Problem
 Basic Economic Problems/questions.
 The Foundations of Economics
 Types of Economic Systems.
 The Production Possibility Frontier.
 Consumer sovereignty and its limitations
2 Economic Resources and the Uses
 Land, Capital, Labour and Enterprise
3 Industry:
 Definition, location
 Sectors of construction industry
 Organization in construction industry
4 Production:
 Factors of Production
 Types of business ownership
 Firm analysis, planning, input/output analysis
5 Finance
 Sources of finance i.e. equity finance, ordinary share capital, retained
earnings.
CAT 1
6 Money and Banking.
 Definitions, uses
 Demand for money
 Supply of money
 The money Market.
7
8 The Stock market
9 Marketing:
Principles and practices
Scope of marketing
Types of marketing
10 Advertising and Sales promotion
Mechanics
Techniques of sales promotion
11 Investment:
Types and appraisal methods
12 Feasibility and studies..
13 CAT 2
14 REVISION
HRD 2315ECONOMICS FOR CIVIL ENGINEERS
Def.
 Economics is a social science, which seeks to explain the economic basis of human society.
Its the study of how society makes choices about what output is to be produced, by what
means and for whom, i.e. it is the study of how the society allocates its scare resources
among competing alternatives.
 The economic resources referred to in this definition are usually classified as land, labor,
capital and enterprise. The problem of allocating these resources to achieve give ends is
fundamental in the study of economics.

Importance of economics:
 Economics covers topics that are highly relevant to many of the most pressing issues facing
today’s world, e.g. free market versus government controlled markets, resource exhaustion,
pollution, the population explosion, government, inflation, the EU, their, changing living
standards in advance nations, growth and stagnation among the world’s poorer nations
 Economics provides the skills for analyzing, explaining and where appropriate offering
solutions to economic problems.
 Economics has a core of useful theory that explains how markets work and that evaluates
their performance.

Microeconomics versus Macroeconomics:

 Microeconomics is concerned with the behavior of individual firms industries and customers
or households and deals with the effects of individual taxes and specific public spending
programmes.
 Microeconomics deals with the problems of resources allocation, considers the problems of
income distribution, and is chiefly interested in the determination of the relative prices of
goods and services.
 Macroeconomics, however, concerns itself with large aggregates, particularly for the
economy as a whole. It deals with the factors which determine national output and
employment, the general price level, total spending and saving in the economy, total imports
and exports, and the demand for and supply of money and other financial assets.
N.B
If from aggregate data - data which may blur or hide quite different behavior patterns of
individual nits comprising our whole (e.g. statistics of annual agricultural output for a particular
country tells us nothing about the performance of say, groundnut growers), then we have “a
macroeconomic function”; if the function has been built up from a careful study of the individual
units of which it is comprised (e.g. estimating the supply schedule of cotton producers), then we
have “a micro-economic function”.

Economic methodology
Economics is often called a social science since the subject matter is a human being. This means
that controlled experiments of the natural science are impossible. It is therefore difficult to link
cause to effect. Human beings react differently to external economic events making prediction
more difficult that in the natural science. Fortunately, reaction of groups of individuals to events
is more stable, with extremes canceling each other.

The term methodology refers to the way in which economists go about the study of their subject
matter. Broadly, economists have followed positive and normative economics.
Positive economics is concerned with propositions that can be tested by reference to empirical
evidence. It relates to statements of what is, was or will be. The accuracy of positive statements
can be checked against facts and proved correct or incorrect Thus to say that, “the rate of
inflation in Kenya over the last 12 months has been 6%”, is a positive statement. By reference to
the facts, it can be proved correct or incorrect.
Normative economics is concerned with propositions, which are based on value judgements,
i.e., statements that are expressions of opinions. Normative statements, therefore relates to
statements of what should or ought to be the case. Normative statements are matters of opinion
which cannot be proved or disapproved by reference to the facts, since they are based on value
judgements e.g., to say that: “the govt.’s main aim should be the control of inflation”, is a
normative statement since its validity cannot be checked against any facts. It is a statement,
which we may either agree or disagree, but there is no way of providing that it is correct.
Deduction and Empirical Testing.
The process of deduction and empirical testing is the most important approach followed by
modern economists. In this case, a theory is proposed, logical deduction applied to develop
predictions, and a test made of these predictions against the facts. For instance, one theory is that
the amount of a commodity consumers wish to purchase will usually vary with its price. This
prediction can be tested against how consumers actually behave. If the facts do not support the
theory it must be rejected in favor of other theories which better explain actual observation.
Induction.
This is an alternative methodological approach in economics. The facts themselves are starting
point for this approach, with any observed pattern or regularity in the facts giving the economist
some guidance. It involves, first, the collection, presentation and analysis of economic data and
then the derivation of relationship among observed variables, i.e., the available statistical closely
examined in the search, for the general economic principles.
The economizing problem
 The economizing problem stems from two related facts. Economic wants are unlimited
because they can not be completely satisfied with the existing limited supply of resources
available for production.
 Resources are said to be scarce relative to these unlimited economic wants. For this reason,
people must make choices and economize on resource use.

The Economic problem/Questions:

 The basic economic problem confronting all societies is how to allocate scarce resources
between alternative uses. Resources are scarce because the collective desires of society for
consumption at any moment in time exceed the ability to satisfy those desires.
 The economic problem thus arises because individuals’ wants are virtually unlimited, whilst
the resources available to satisfy those wants are scarce.
Because there are insufficient resources to produce all that is desired, society is forced to make a
choice. These choices are:
(a) What output will be produced? The society must choose which goods and services to be
produced from the available resources.
(b) How shall the goods be produced? There are various ways of producing given output e.g.,
labor intensive or capital intensive techniques. The technique chosen must be cost effective.
(c) For whom shall the output be produced? Clearly, if an output is produced there must be
some means of allocating it to consumers and of deciding who receives what.
In choosing which goods will be produced from scarce resources society is forced to do without
those goods that might otherwise have been produced. This is very important to the economists,
and in choosing what to produced, the new best alternative forgone or sacrificed is referred to as
opportunity cost (or real cost) of what is produced. Opportunity cost of a decision to produce or
to consume more of one good is the next best-forgone alternative. A decision to buy a T.V set,
for example, might mean giving up the purchase of a sofa set. In taking decision about
production, the concept of opportunity cost is vital.

Types of Economic Systems

Economic systems are concerned with the ownership and control of resources. The main types
of economic systems are:
a) Traditional economy,
b) Market economy,
c) Command economy,
d) Mixed economy.
(a) Traditional Economy.
 A traditional economy is one in which behavior is based primarily on tradition, custom and
habit. Young men follow their fathers’ occupation, typically, hunting, fishing and tool
making. Women do what their mothers did, typically, cooking and fieldwork.
 Traditional economy is characterized by few changes in the pattern of goods produced from
year to year; production techniques follow traditional patterns, except when the effects of
occasional new inventions are felt. Property is often held in common and the concept of
private property not well defined.
 The answers to economic questions of what to produce, how to produce, and for who to
produce or how to distribute are determined by traditions.
b) Market Economy.
 In this case, resources are allocated through price mechanism. This simply means that
individuals, as consumers freely choose which goods and services they will purchase, and
producers freely choose which goods and services they will provide. Because of this, market
economies are often referred to as free enterprise or laissez-faire economies.
Characteristics of Market Economies
 Individuals pursue their own self-interest buying and selling what seems best for
themselves and their families.
 People respond to incentives. Other things being equal, sellers seek high prices while
buyers seek low prices.
 There is reliance on price mechanism to allocate resources. Prices are set in open markets
in which would be sellers compete to sell their wares to would be buyers.
 There is limited role of state. Indeed, in a strictly free enterprise economy, the only major
role performed by the govt. would be that of creating a framework of rules (i.e. laws) within
which both private individuals and firms could conduct their affairs.
 There is the existence of the right to own and dispose of private property. Any individual
is free to own and dispose off factors of production.
(b) Command Economy.
 This is an economy in which resources are allocated by central planning authority appointed
by the state. In this case, key industries and resources are controlled and owned by the state.
The government issues directives (i.e. instructions) to firms indicating what they should
produce the quantities that should be produced, and so on.
The following are some of the advantages of command economy.
 Because production is not undertaken for profit, there is greater likelihood that both public
goods and merit goods are produced. The government simply has to issue directive to ensure
production.
 The production and consumption of demerit goods, which impose, relatively large social
costs on the society can be prevented or limited through taxes or subsidies.
 Greater equality in the distribution of wealth and income can be guaranteed in centrally
planned economies. In a fully command economy, there are no private entrepreneurs who
derive profits from combing the factors of production.
Disadvantages:
 With command economy, there is greater reduction of consumer sovereignty. I.e., the state
decides what to produce and the consumers have much less influence over production than in
market economies. This culminates into shortages of certain commodities and surfaces of
others.
 Moreover, there may be tendency towards bureaucratic structures. It is the govt. planning
departments, which govern resource allocation. The opportunity cost of employing people to
gather information, process it formulates plans is the alternative output these people could
otherwise have produced.
 There is also less incentive to increase efficiency because profit motive is absent.
(d) The Mixed Economy.
 Fully traditional, fully centrally controlled and fully free market economies are useful
concepts for studying the basic principles of resource allocation. However, there is always
some mixture of central control and market determination, with a certain amount of
traditional behavior as well.
 Mixed economy refers to an economy in which both free markets and governments have
significant effects on the allocation of resources and the distribution of income.
 The degree of mixture varies from economy to economy and over time.

ECONOMIC RESOURCES
 The factors of production refer to the inputs used in production process. Economists place the
factors of production into one of the three categories. These are land, labour and capital.
Sometimes, enterprise is also added to the list
i) Land
- This include minerals, forest water and other natural resources as well as land itself used in
agriculture and as a site upon which economic activities take place. Land therefore refers to
all natural resources which are used in production.
ii) Labour
- This refers to all human attributes, physical and mental, that are used in production. Labour is
not a homogeneous factors of production as some jobs require little, if any, training while
 others require several years to training e.g. surgeons and civil engineers. The education that
is invested or embodied in trained labour is sometimes referred to as human capital.
iii) Capital
- Capital refers to goods which are not for current consumption but which will assist consumer
goods to be produced in the future. Capital goods are sometimes called investment or
producer goods. They are wanted because of the contribution they make to production.
Capitals include all plant machined and industrial buildings that contribute to production.
- Capital is a stock, i.e., it exists at a point in time. Capital stock could be measured at a
particulate moment. With time as it consumed capital depreciates in value.
- Depreciation (or capital consumption) is a measure of the extent to which the capital stock
falls in value as a result of use (or wear and tear) during the relevant time period, normally a
year.
- The purchase of new plant or machinery is called investment. Investments a flow- i.e., it can
be measured as ‘so much’ per time period.
iv) Enterprise
 It is the entrepreneur who organizes the produce and what quantities of the factors of
production to use. The entrepreneur bears the risk of production because he/she incurs the
costs of production before receiving any revenue from the sale of the finished product.

INDUSTRY

Industry is the production of a good or service within an economy. Manufacturing industry

became a key sector of production and labour in European and North American countries during
the Industrial Revolution, upsetting previous mercantile and feudal economies. This occurred
through many successive rapid advances in technology, such as the production of steel and coal.

Following the Industrial Revolution, perhaps a third of the world's economic output is derived
from manufacturing industries. Many developed countries and many developing/semi-developed
countries (People's Republic of China, India etc.) depend significantly on manufacturing
industry. Industries, the countries they reside in, and the economies of those countries are
interlinked in a complex web of interdependence

Classification of industry

Industries is and always can be classified in a variety of ways. At the top level, industry is often
classified into sectors: Primary or extractive, secondary or manufacturing, and tertiary or
services. Some authors add quaternary (knowledge) or even quinary (culture and research)
sectors. Over time, the fraction of a society's industry within each sector changes. They are-
 Sector Definition
This involves the extraction of resources directly from the Earth; this includes
Primary farming, mining and logging. They do not process the products at all. They send it
off to factories to make a profit.
This group is involved in the processing products from primary industries. This
Secondary includes all factories—those that refine metals, produce furniture, or pack farm
products such as meat.
This group is involved in the provision of services. They include teachers,
Tertiary
managers and other service providers.
This group is involved in the research of science and technology and other high
Quaternary
level tasks. They include scientists, doctors, and lawyers.
Some consider there to be a branch of the quaternary sector called the quinary
Quinary sector, which includes the highest levels of decision making in a society or
Sector economy. This sector would include the top executives or officials in such fields as
government, science, universities, nonprofit, healthcare, culture, and the media.

There are many other different kinds of industries, and often organized into different classes or
sectors by a variety of industrial classifications. Market-based classification systems such as the
Global Industry Classification Standard and the Industry Classification Benchmark are used in
finance and market research. These classification systems commonly divide industries according
to similar functions and markets and identify businesses producing related products.

Industries can also be identified by product, such as: chemical industry, petroleum industry,
automotive industry, electronic industry, meatpacking industry, hospitality industry, food
industry, fish industry, software industry, paper industry, entertainment industry, semiconductor
industry, cultural industry, and poverty industry.

Industrial development
A factory, a traditional symbol of the industrial development (a paper mill in Georgetown, the
United States)

The industrial revolution led to the development of factories for large-scale production, with
consequent changes in society. Originally the factories were steam-powered, but later
transitioned to electricity once an electrical grid was developed. The mechanized assembly line
was introduced to assemble parts in a repeatable fashion, with individual workers performing
specific steps during the process.
This led to significant increases in efficiency, lowering the cost of the end process. Later
automation was increasingly used to replace human operators. This process has accelerated with
the development of the computer and the robot.

Factors influencing industrial location

Many factors influence the location of industry. Initially, in the United Kingdom industry was
fairly closely tied to where the raw materials were, in particular coal for power.

Nowadays, the change from heavy industry to light, footloose industry, has meant that industries
can locate anywhere and so other factors, such as communications links and government policy,
become far more important.

Location factors are easily divided into two sections: Physical factors and socio-economic
(human) factors.

A general rule is that the physical factors were the primary influence over the location of the old
industries in Britain, whilst the economic ones are increasingly important in industrial location
now.

Physical factors

Accessibility: The site of the new factor needs to be accessible, so that importing of raw
materials and exporting of finished products is easy.

Early industry had to have good access to raw materials, usually though natural routes like rivers.
Nowadays access is needed to transport routes.

Climate: The climate could affect where an industry locates, as it needs to attract workers to the
area. This is not a particularly important factor.

Land: The site of an industry is very important. Usually, flat land is the most essential thing to
find. Most industries also try to find areas where there is room to expand once production has
become successful.

Victorian industries often located in the inner city areas of towns, which didn't allow much room
for expansion, but was required because the work-force could live within walking distance of the
factory.

Today cars have allowed industry to move to out-of-town locations as the workers can drive to
the factory.

Power: Initially, industry had to locate right beside its power source. Water power was used at
first, and then the burning of coal produced steam power. Both sources of energy restricted
where industries could locate, as they had to be beside a suitable river or near the coal field.

Now, industries can gain their power from the National Grid and so power does not really
influence location a great deal.

Raw Materials: Old, heavy industry required large amounts of bulky raw materials, which were
very costly to transport, and so the industry located close to them. Newer industries are described
as being footloose, as they are not tied by being near raw materials, which are smaller and easier
to transport.

Socio-economic factors
Capital: Very important to any industry. Companies cannot set up their chosen industry without
investment of money. This may come from private sources or from the government.

Communications: Probably the most important factor for new industries nowadays. Most need
communications links not only to the rest of the country, but to the rest of Europe and the World.
Transport routes such as the motorways, airports, railways and the ports are all things that will
attract industrial location.

Communications increasingly also includes access to the internet, fax and phones. All these
allow industries to have a greater freedom of choice over their location.

Government policy: Governments can greatly influence the location of industry, by giving tax
incentives, cheap rent and other benefits to companies locating in certain areas of the country.
Often these are places, which the government wants to develop economically. Government
policy also lead to the closure of many of the heavy industries in the United Kingdom, such as
numerous coal mines and ship building yards.

Labour Supply: Very important to old, labor-intensive industries. This is why many of them
located in the inner cities, so that there was a huge pool of potential workers close by. With the
growth in car ownership, and industries becoming more mechanized labour supply is not such an
important factor for most industries. However, some industries rely on it.

Many of the quaternary industries in the UK are found near the university towns of Oxford and
Cambridge, as they wants to attract skilled, knowledgeable graduates for their industry.

Markets: Access to markets is vital, and this ties in with the section on communications. In the
last 19th Century the market for most industries would be fairly local. Into the 20th century the
market widened with improved transport technology. Now, the market for many companies is a
global one.

PRODUCTION
 Production is defined as any economic activity which satisfies human wants. It is thus the
creation of utility (where utility means the ability of a good or service to satisfy a human
want). Indeed, to the economist, the chain of production is only complete when a good or
services is sold to the consumer.
 For any community, the volume of production depends on many factors, including the
quantity and quality of available resources, the extent to which they are utilized and the
efficiency with which they are combined. The volume of production can therefore be
increased when existing inputs yield a higher output. The latter is referred to as an increase in
productivity and is usually measured as average production per worker.
 The theory of production consists of an analysis of how the entrepreneur, given the state of
art or technology, combines the various inputs to produce a stipulated output in an
economically efficient manner. Production takes place within various forms of business
organizations.

Types of Business Organizations.

1. Sole proprietorship.
 A sole proprietorship (or one person business) is a business under the ownership and control
of a single individual. It is not only easier to start but it also does not involve a lot of
formalities and capital.
 In Kenya, such businesses are very common and are run on family grounds and members of a
specific family manage them for profit.
 Sources of fund for sole proprietorship are owners saving, loans from relatives, friends, trade
credit and to a lesser extent short term loans from financial institutions.
 Such businesses are usually short term in that the death of the owner leads to its dissolution
or closure. In legal circles, there is no difference between the business and its owner. The two
are the same from the legal point of view.
 Furthermore, the sole trader has no limited liability, i.e., his assets and liabilities and those of
his business are one and the same thing. In the event of its dissolution, should the business
assets fail to meet the claims of the creditors, then the personal assets to the sole proprietor
can be attached to meet the creditor’s claims.
Advantages of sole proprietorships
- It is simple to start and dissolve this type of business.
- The sole trader enjoys top secret of his business success/failures.
- Profit motives usually motivate the sole trader to work harder.
- Close supervision by sole trader enables him to boost sales.
- The owner can give personal attention to customers because the business is small in size.
- It’s the most highly adoptable and flexible form of business when it comes to changes.
- Sole decision making guarantees swift abrupt decision making.
Disadvantages
- The economic life of a sole trader business is usually equal to the life of the sole proprietor. It
can therefore not attract long term financing to finance long term plans due to lack of
continuity.
- The sole proprietor has unlimited liability.
- The success of the business depends upon the judgment and management abilities of its
owners.’ Laymen’ find it very hard at times.
- Relies on traditional sources of finance.
- Lack of proper accounting knowledge hence the difficulty of distinguishing between their
own cash and business capital.
 One person businesses are common in retailing, farming, building and personal services such
as hairdressing.

2. Partnerships
 A partnership business is a business under the ownership and control of two or more
individuals with a view of profit.
 Usually, most partnerships are of unlimited status, meaning that in the event of the
partnership business failing to meet its obligations, then the personal assets of individual
partners may be attached to settle such obligations.
 A partnership is ideal where the amount of capital requirement is reasonably large and so
calls for contributions from various persons
 Its also ideal where pooling of effort is necessary for best performance and thus efficiency
e.g. in legal or audit professions. Ownership of any one partner can not be transferred without
the consent of other partner or partners.
 Admission or dismissal of any one partner must have full consent of the other partners.
 By law, its account do not have to be audited,
Advantages:
- The business can benefit from talents of individuals partners.
- More capital can be raised from individual partners.
- Unanimous stand on decision making guarantees sound decisions
- Partnerships have high growth due to adequate managerial talents.
Disadvantages:
- Partners may not pool their talents equally and this may lead to apathy among partners who
put more efforts in running of the businesses.
- There may be lack of mutual trust among partners therefore, suspicion.
- Disagreements among partners may delay the decision making process.
- Active partners may use business assets to achieve personal interests/gain at the expense of
dormant partners.
- Partnership businesses may have a short life span.

3. Joint stock companies

 A joint stock company is a legal entity that carries out business in its own name. The
company is owned by its shareholders whose liability is limited.
 These companies are usually governed by an Act of parliament which lay down the
formation and general conduct of joint stock companies.
 Joint stock companies are distinct from their owners and its assets are owned by the company
and not its shareholders.
 A joint stock company can either be a private limited company or a public limited company.
 The shares of a private company cannot be offered to the public for sale and thus can not be
transferred without the consent of other members. They require a minimum of two and a
maximum of 50 shareholders or members.
 The shares of a public company can be offered for sale to the public. A public company
requires a minimum of 7 shareholders, but there is no upper limit. The shares are freely
transferable and the company is required to hold an annual general meeting where
shareholders are able to question directors, to change the company’s article of association, to
elect or dismiss the board of directors, to sanction the payment of dividends to approve the
choice of auditor and to fix their remuneration.

4 Co-operatives
 A co-operative is an entity owned and controlled by its members on the basis of one- member
one-vote. The movement which comprises a familiar section of the retail trade is based on
consumer ownership and control. Producer co-operative, however, are owned by producers.

5 Public Corporations
 These types of enterprises develop when the government decides to place production in the
hands of the state. The government appoints the chairman and board of directors which is
responsible to the minister of the crown for fulfilling the statutory requirements for the public
corporation laid down by parliament. The minister is supposed not to concern himself/herself
with the day to day running of the company.
 Public utilities such as railways, gas, electricity and water supply are state owned in most
countries.
Production function
 Production involves the transformation of resources into final goods and services. The
relationship between inputs and output is a technological relationship which economist’s
summaries in a production function.
 Production function is a schedule or table or mathematical equation showing the maximum
amount of output that can be produced from any specified set of inputs, given the existing
technology or ‘‘state of the art’’. In short, the production function is like a ‘recipe book’
showing what outputs are associated with which sets of inputs. Suppose that the production
of good x requires inputs of capital, labor and land; Using functional notation, we can write:
 Qx = f(K, L, LD), where QX is output per time period, f is the functional relationship;
and K, L and LD represent the inputs of the services of capital, labor and land
respectively into the production process. This is production function of the inputs of
the services of capital, labour and land.
 A production method is said to be technologically efficient if for a given level of factor
inputs, it is impossible to obtain a higher level of output, given existing technology. An
improvement in technology, of course, would enable more output to be produced from a
given level of inputs and this is a possible source of economic growth. Technology therefore
acts as a constraint on production possibilities.
 The production function may be shown as a table, a graph or as a mathematical equation.

Short-run variations in output.

 A manufacturing firm wishing to increase its output is unable to have a bigger factory built
overnight and so in the short-run can only produce more by employing more of its variable
factors such as labour, raw materials and fuel. Short-run is that period over which at least one
factor of production can not be varied. Those factors which can be varied in the short run are
called variable factors. Those which can not be varied in the short-run are called fixed
factors.
 The laws of returns explain the relationship between changes in the input of these and
changes in the level of production. The general relationship is summarized in two laws which
are sometimes combined into a single law known as the law of variable proportions.

a) The law of increasing returns - This law states that in the early stages of production, as
successive units of a variable factor are combined with a fixed factor, both marginal and
average product will initially rise i.e., total output will rise more than in proportion to the rise
in inputs.

b) The law of diminishing returns - This law states that as successive units of a variable factor
are combined with a fixed factor with a given state of technology, after a certain point both
marginal product and average product will fall. In other words, total output will rise less than
in proportion to the rise in inputs. Eventually total output will even diminish as marginal
product become negative.
 The changing nature of returns to a variable factor can be seen in the table below: We assume
that an increasing amount of labour works on a fixed quantity of land that each worker is
homogeneous and that techniques of production are unchanged.

Wheat production illustrating the law of diminishing returns

No of Total Average Marginal
workers product product product
1 4 4 4
2 10 5 6
3 20 6.7 10
4 35 8.8 15
5 50 10 15
 6 60 10 10
7 65 9.3 5
8 65 8.1 0
9 55 6.1 -10

 Under these circumstances, the firm’s production function for wheat can be written as:

( )
¿ ¿ ¿
Qw =f L, K ,L D ,T
Where QW is the output of wheat in tones per time period, L is
¿ ¿ ¿
L
labour and is changing, K is capital (fixed) D is land (fixed), and T is technology
 (fixed).
It can be seen that upon the employment of the fourth worker, the firm experiences increasing
marginal returns because the increase in total product is proportionately greater than the increase in
the variable factor. This clearly shown by the rising marginal product of each worker up to the
employment of the 4th worker. When marginal product is rising, the rate of increase of total product
must also be rising. The main reason why firms experience increasing returns is because there is
greater scope of division of labour as the number of workers employed increase.
 Diminishing marginal returns set in after employing a fifth worker when it is clear that the rate of
increase of total product, i.e. marginal product begins to fall. Diminishing returns set in because the
proportions in which the factors of production are employed have become progressively less
favourable, reflecting the fact that there are limits to the gains from specialization. The fixed factors
of product have become over utilized.
 The average product of a factor of production is the total output per unit of factor input, i.e., AP
=TP/L.
 The marginal product of a factor of production is the change in total output as a result of a unit
change in the factor input. i.e., MP= ∆TP/∆L.
 The diagram below illustrates the relationship between total, average and marginal products.
The AP and MP curves, the relationship between them can be derived from the total product
(TP) curve.

C TP
products

AP
0
L1 L2
of variable factors
Units
(No. of workers) MP

 Since AP=TP/L, then AP is given by the slope of the ray from the origin to the relevant point
on the AP is equal to the slope of 0L 1 units of labour are used, the AP is equal to the slope of
the ray 0A, i.e., AL1/0L1 . AP is at maximum where the ray from the origin is target to TP
curve, i.e., at point C where 0L2 units of labour are employed, there are employed until 0L 2
 units of labour are employed, there are increasing average returns to the variable factor
(labour) .A t that point, the slope of TP is given by CL2/OL2 which is equal to AP, confirming
that AP = MP when AP is at maximum. MP is at maximum when TP curve is steepest, i.e.,
between A and C
 TP reaches maximum when OL3 units of labour are employed. At this point MP=O,
confirmed by the slope of TP curve at point D. If additional units of labour are hired, total
product (TP) falls and MP is negative.

Short-run variations in costs

In the short-run it is possible to categorize the firm’s costs as either fixed costs or variable costs.
Fixed costs are incurred on fixed factors of production and variable costs on variable factors of
production.

Fixed costs
 Because it is impossible to vary the input of fixed factors in the short-run, fixed costs do not
change as output increases. Additionally, it is important to realize that fixed costs are
incurred ever when the firm’s output is zero. Fixed costs include mortgage or rent on
premises, hire purchase repayments, local authority rates, insurance charges, depreciation and
so on. None of these costs is directly related to output and they are all costs which are still
incurred in the short-run ever if the firm produces no output
 Because total fixed costs are constant with respect to output, average fixed costs (AFC), i.e.,
total fixed costs (TFC) divided by output (TFC/Q), decline continuously as output expands.
Diagrammatically, the behaviour of total fixed costs and average fixed costs as output
expands are shown below.

TFC

AFC
0
Output
Variable Costs:
Unlike fixed costs, variable costs (VC) are directly related to output. When firms produce no
output, they incur no variable costs, but as output is expanded variable costs are incurred.
Because they vary directly with output, these costs are sometimes referred to as direct costs or
supplementary costs. Examples of these costs include costs of raw materials and power to drive
machinery, wages of direct labour and so on. The diagram below shows the behaviour of
variable costs as output changes.
 Total
TVC
Variable
Cost

0
Output
 Total costs: TC =TFC + TVC. TC is the sum of total fixed costs and total variable costs
 Average variable costs is the variable costs per unit of output ,i.e., AVC = TVC/Q
 Average total cost (ATC) is the total cost per unit of output, i.e., TC/Q.
 ATC = AFC+AVC = TC/Q.
 Marginal costs (MC) is the change in total cost as a result of changing the level of output
by one unit, i.e., MC = ∆TC/ ∆Q

The relationship between Marginal costs and Variable costs

 Since marginal costs is the change in total cost when one more unit is produced, it is
entirely a variable costs. Because in the short-run only the input of variable factors can be
changed, it is clear that the sum of MC of producing each unit equals the total variable
costs of production.
 Additionally, although variable costs (VC) vary directly with output, they are unlikely to
vary proportionately because of the effect of increasing and diminishing returns.
 It is clear that TVCs at first rise les than proportionately as output expands and the firm
experience increasing returns. Subsequently, as the firm experiences diminishing returns
TVCs rise more than proportionately as output expands.
 The changes in TVCs brought about increasing and diminishing returns also imply
changes in AVCs.
 When the firm experiences increasing marginal returns, marginal product rises and
marginal costs fall. Conversely, when the firm experiences diminishing marginal returns,
marginal product falls and marginal costs rises. The diagrams below illustrate the effect
of changes in marginal and average product on the marginal and average cost.
Product

AP

MP

Quantity of Variable
ctor
MC
Cost
AVC

0
OUTPUT

 When MC is below AVC, the latter is falling. This is because in the short-run MC is the
addition to total variable cost (TVC). When the last unit adds less to the total than the
current average, then the average must falls, just like in any average must fall. AVC rises
when MC lies above it. The implication of this is that the MCS curve cuts the AVC curve
at its minimum point.

The Behavior of Different costs of production

 We know that average fixed costs fall continuously as output expands and that initially,
because of increasing average returns, average variable costs (AVCs) fall.
 It follows that average total costs (ATCs) will initially fall. However, beyond a certain
point, average variable costs (AVCs) will begin to rise because of diminishing average
returns, and once the rise in AVCs move than offset the fall in AFCs (average Fixed
costs), ATCs will rise. This is clearly shown in the diagram below:

MONEY AND BANKING

Despite the fact that we are all familiar with money and use it almost every day of our lives, it is
difficult to define exactly what money is over the years, a variety of commodities have been
accepted as money, ranging from precious metals to cattle. The fact is that money is as money
does, and therefore anything, which performs the functions of money, is money. Money is a
means of payment accepted in exchange. It is thus anything, which is generally acceptable as a
medium of exchange, acts as a measure of value and a store of value.

Functions of money
1. Medium of exchange or means of payment:
Money is unique in performing this function since it is the only asset that is universally
acceptable in exchange for goods and services. In the absence of a medium of exchange,
trade could only take place if there was a double coincidence of wants.

2. Unit of account:
Money also provides means of expressing value. The prices quoted for goods and services
reflect their relative value and in this way, money acts as a unit of account.

3. Store of wealth:
Because money can be exchanged immediately for goods and services, it is a convenient way
of holding wealth until goods and services are required. In this sense money act as a store of
wealth.
4. Standard of deferred payment:
In the modern world, goods are often purchases on credit with the amount to be repaid being
fixed in money terms. It would be impossible or impractical to fix repayment in term of some
other commodity. It may not always be easy to predict the future availability or the future
requirements of that commodity.

5. Transferring immovable property:

E.g. land; house from one place to the other.

MONEY SU PPLY
 Central banks have the legal mandate to issue currency. However, in some countries, there
are no central banks and this responsibility lies elsewhere, say, with the treasury. Because of
this monopoly, the Central Bank has an influence on money supply.
 The central bank determines the supplies of the monetary base (also referred to as base
money or high-powered money), that are in form of currency held, and financial institutions
reserves held at the central bank.
 Parts of the money (currency) is held by the public and is called currency in circulation
while the banks as part of vault cash, hold another part.
 Money supply is importantly influenced by the central bank’s actions and it is also affected
by factors that are not under the control of the central bank like the portfolio behavior of the
commercial banks and the public’s preference to hold different financial assets (currency,
demand deposits, etc).
  The reason to focus on the central bank balance sheet is to see how central bank operations
affect the stock of high - powered money. Creating liabilities creates high-powered money
when the central bank requires assets and pays for them. Two main classes of liabilities of
the central bank are currency and bank deposits at the central bank.
NB: Money supply consists of M1 which refers to currency (coins and paper money) in the
hands of the public and all checkable deposits (all deposits in commercial banks)

Bank Deposit and the Money Supply

 Bank deposits come into being in three ways:
1. When a bank receives a deposit of cash
2. When a bank buys a security
3. When a bank makes a loan
The Demand for Money.
There are 3 major motives underlying the demand for money:
a) Transactions motive, which is the demand for money arising from the use of money
in making regular payments.
b) Precautionary motive, which is the demand for money to meet any unforeseen needs.
c) Speculative motive, which results from the uncertainties about the value of other
assets that an individual can hold.
NB Asset demand for money:

Dt
Rate of Rate of
Interest Interest Rate of
Interest

Dm
Da

Amount of money demanded Amount of money demanded Amount of money demanded

Transactions demand for money Asset demand for money Total demand for money

Clearing System:
Refers to the process by which banks settle claims and counter claims between themselves.

The Money Market

We can combine the demand for money with the supply of money to portray the money market
and determine the equilibrium rate of interest. The money market is thus the market in which the
 demand for and the supply of money determine the rate of interest (or the level of interest rate) in
the economy.
 We all make basic portfolio choice; we either hold our money or put it to work. People hold
(demand) money (m1) by keeping cash in their wallets or maintaining positive balances in
their transaction accounts. Money kept in this form earns little or no interest. However,
money lent to someone or used to buy bonds is likely to earn a higher rate of interest. The
choice therefore is to hold (demand) money or to use it.
 People holding money are foregoing an opportunity to earn interest. The same applies to
people who hold money in checking accounts.
 The three motives of demand for money create the market demand for money. People cut on
their money balances when interest rates are very high. At such times, the opportunity cost of
holding money is simply too high.
 The market demand curve for money slopes downwards from left to right indicating that
quantity of money people are willing and able to hold (demand) increases as interest rates
fall, ceteris paribus. The diagram below illustrates this

All points on the market demand curve

Interest
Rate represent the quantity of money people are
willing to hold at specific interest rate.
Money
Demand

q1 q2

 In practice, the position of the money supply curve depends on the central bank reserve
policy, the lending behavior of the private commercial banks and the willingness of
consumers and the willingness of investors to borrow money.
 If the central bank decides to supply the same amount of money at all rates of interest then
the supply would be perfectly inelastic. The point of intersection of money demand and
money supply curves is the equilibrium rate of interest. At this point, the money demand
quantity ofMoney
money supplied equals the quantity of money demanded. The diagram below
Supply
illustrates this

At equilibrium rate of interest people are

willing to hold as much money as is
Interest
Rate
available. At any point above the
Money equilibrium (E), the quantity of money
Demand people are willing to hold will not be equal
the quantity available, and people will adjust
their portfolios.
 M Quantity of money

NB Liquidity trap: the portion

of money demand curve that is
horizontal, people are willing to
hold unlimited amount of money
at some (low) interest rate.
Interest
Rate

Money
Demand

M1 M2

Credit Creation
 Credit creation is the process by which banks are able to increase the volume of credit by
granting loans. The process results in an increase in the volume of bank deposits and hence in
the money supply.
 The receipt of new cash by the banking system may lead to multiple expansion of the bank
lending, and multiple increase in money supply. This is because most of the money lent to
one person will, when spent, find its way back to the banking system. The receipts of
borrowed money generally deposit in their own bank accounts. This is the principle of credit
creation.
 Assume a hypothetical economy with a single monopoly bank, which observes a minimum
cash ratio. Suppose the bank wishes to maintain 10% of total deposits in cash in order to
meet day to day demands of its customers, then the banks initial position (balance sheet) will
be as below if total deposit amounts to US $10,000

The Bank’s initial balance sheet

Liabilities US $ Assets US $
Deposits 10,000 Cash 1,000
Loans and Investment 9,0000
10,000 10,000
Credit Multiplier:
Refers to the multiples by which total bank deposits increase relative to a new cash deposit.
MARKETING AND THE MARKETING PROCESS
Marketing Defined
Several definitions have been given by different writers:
 The American marketing association defines marketing as "the performance of business
activities that direct the flow of goods and services from producer or seller to the
consumer or user".
 Kotler defines it as "the satisfaction of human needs and wants through exchange".
Stanton says that "marketing comprises a system of business activities designed to plan,
price, promote and distribute want satisfying products and services to present and
potential consumer segments.
 Drucker says "marketing is the whole business seen from the point of view of its final
result that is from the customer's point of view!”
 What we must note is that marketing is very broad and encompassing, and no one
definition will suffice. However all the definitions are clear on the main issue underlying
the discipline of marketing: that is there must be two sets of factors—givers and takers or
producers and users.
 Note that one individual or organization can be both a producer and a consumer of
different products. The two sets of factors must interact through a process of exchange
where they give and simultaneously receive something of value. Marketing as an
exchange process does not include production for own use, robbing, stealing or begging.
Human beings who form the buyers have unlimited wants which must be satisfied with
limited income, therefore they must make choices.
 Components of Marketing
 Has two sets of factors:
(a) Controllable variables: marketing mix
 These are the activities or areas that are under the control of the marketing executive and
which he can manipulate to achieve his marketing objectives. They include product,
price, promotion and place (distribution) and they are popularly known as the
 4p's of marketing or the marketing mix. A marketing programme contains a "mix" of
these variables. The way the marketing manager mixes these variables determines the
effectiveness of the firm's marketing programmes.
 To have an optimum mix of the 4p's the market must have a clear understanding of the
target market, e.g. size, composition, ages, incomes, education, lifestyle etc. This
information is usually gathered through marketing research.
Note
Services, however, have additional 3ps (people, physical facilities and process) in addition to the
usual 4ps giving a total of 7ps.
(b) Non-Controllable variables
 Marketing takes place in an environment that has other factors which can be divided into
micro and macro environmental factors.
 The micro factors include such factors as buyers, suppliers, competitors, marketing
intermediaries and employees. The macro environmental factors include economic
factors, political-legal factors, socio-cultural factors, technological factors, the
international marketing environmental and physical or geographical factors.

Importance of Marketing
 Marketing helps people consume goods and services that they would not otherwise
consume.
 It is through marketing that we get goods produced within our country and also from
other countries.
 It is through marketing that we are able to export our products like tea and coffee to other
countries.
 Marketing therefore plays a big role in raising our standards of living as it creates utility.
 Marketing also creates employment. Many people in Kenya earn their living by
performing marketing activities e.g. all those people in wholesaling, warehousing,
retailing, transportation, advertising agents etc. Marketing gives us information and also
pays for most of the entertainment and news that the mass media provide to the public.
The Core Concepts of Marketing
The starting point for the discipline of marketing lies in human needs and wants.
 Needs
A human need is a state of deprivation of some basic consumption e.g. hunger, shelter, safety
belonging. These needs exist within our biological makeup.
 Wants
Wants are desires for specific satisfiers of these deeper needs. Wants are influenced by the
environmental factors. So they are continually shaped and reshaped by social forces and
institutions, such as churches, schools, families and business corporations e.g. different people
can satisfy their need for transport differently depending on where they are. Also people in
different environments satisfy the need for food differently.
 Demands
Are wants for specific products that are backed by the ability and willingness to buy. So wants
become demands when they are backed by purchasing power. Many people may want bread but
only a few are able to buy it. In marketing companies they must therefore measure not how many
people want their product but more importantly how many are willing and able to buy the
product. Marketers do not create needs, but they influence wants. For instance marketers suggest
to us that a Mercedes-Benz would satisfy our needs for social status, they do not create the need
for social status. Marketers also suggest to people that a toilet soap would satisfy their need for
beauty—they do not create the need for beauty. So needs actually precede marketers.
Marketers try to influence demand by making the products attractive, affordable and easily
available.
 Products
People satisfy their needs and wants through products. So a product is anything that can be
offered to someone to satisfy a need or a want. The product can be tangible (physical) e.g. T.V,
soap, car, pen, etc. or intangible (service) like a haircut, transport, cleaning etc. People do not
buy physical product for their own sake but because of the benefits they think they will receive
from the product. So when a lady buys a tube of lipstick she is in effect buying beauty or a better
look. When we choose to travel by bus we are looking for certain benefits e.g. safety, comfort,
speed, etc. So marketers should concentrate on the benefits in-built in the product. Some
marketers however fall in love with their products and keep emphasizing the physical features of
the product and how the product is good (to their eyes of course) forgetting that people buy
products because they satisfy certain needs. Such marketers are said to suffer from marketing
myopia.
 Utility, Value, Satisfaction
How do consumers choose among the products that might satisfy a given need? The guiding
concept is utility. It is the consumer’s estimate of the products overall capacity to satisfy his
needs. But each alternative has a price, so to make a choice the consumer must consider the
products utility with the price and choose the product that gives the highest utility per shilling
(greatest value). So although one product may offer more utility to a consumer, it may represent
less value in relation to another product. A product that is of better value than another is one that
offers more for the price.
 Exchange, Transactions and Relationships
The fact that people have needs and wants and can place value and utility on them does not fully
explain marketing. Marketing emerges when people decide to satisfy needs and wants through
exchange. Exchange is the act of obtaining a desired product from someone by offering
something in return. For exchange to take place the following must exist:
a) two parties
b) each party has something that might be of value to the other
 c) each party can communicate and deliver
d) each party is free to accept or reject the offer
e) each party feels it’s desirable to deal with the other party.
Whether the exchange will take place or not will depend on whether the parties can agree on the
terms of exchange. If they agree then a transaction takes place i.e. trade of value between the two
parties. So transactions are the basic units of exchange. A transaction can either be a monetary
transaction or a barter transaction.
Smart marketers try to build long-term trusting, win-win relationships with customers,
distributors, dealers and suppliers. This way a company builds a marketing network of solid
dependable relationships between itself and other actors in the market place.
Markets
 The concept of exchange leads to the concept of a market. A market consists of all
potential customers with a certain need or want and who are willing and able to engage in
exchange to satisfy that need or want. The size of the market depends on the number of
people who exhibit the needs, have resources that interest others and are willing to offer
the resources to acquire the product.

Marketing and Marketers

 The concept of markets brings us to the concept of marketing. (Human activity taking
place in relation to markets). It means working with markets to actualize potential
exchanges for the satisfaction of human needs and wants.
 The party that is seeking the exchange more aggressively i.e. making the offer is the
marketer while the other is the prospect. So a marketer is the person seeking a resource
from someone and willing to offer something of value in exchange. The marketer is
seeking a response from the other either to sell something or to buy something. The
marketer can be a seller or a buyer.
 Where both parties are actually seeking an exchange, they become both marketers and the
situation is reciprocal marketing. Marketing therefore is the social and managerial
process by which individuals or groups obtain what they need and want through creating
and exchanging products and value with others.

MARKETING MANAGEMENT
 Marketing management takes place when at least one party to a potential exchange gives
thought to objectives and means of achieving desired responses from other parties. It is
therefore the process of planning and executing the conception, pricing, promotion and
distribution of ideas, goods and services to create exchanges that satisfy individual and
organizational objectives.
  Marketing management is historically identified with tasks and personnel dealing with
customer (final consumer) market. So the people carrying out marketing management are
going to include sales manager, marketing managers, advertising managers, marketing
researchers, customer service managers, product managers etc.
 Marketing management has the task of influencing the level, timing and composition of
demand in a way that will help the organization achieve its objectives. Essentially
marketing management is demand management. Each organization has a desired level of
demand with its target market. The actual demand may be below or above desired level,
i.e. there may be no demand, weak demand, adequate demand or excessive demand.
Stages in New Product Development
a. Idea Generation—where a pool of ideas is developed. Sources of ideas include customers,
sales people, competitors, researchers, group discussions or company laboratories.
b. Idea Screening—where ideas are analyzed to see their viability bearing in mind the
following:
i. Size of demand
ii. Marketing capability
iii. Expected life cycle
iv. Technical capability
v. Expected sales growth
c) Business analysis—the concern is future sales and profits. Here forecasts of sales and cost
are made to see whether the venture is worth it.
d) Product development— Here the company tries to find out if the product is technically
feasible. Decisions on names, brands, packaging are resolved and a model is developed.
f) Test Marketing— The product is introduced into the market on a small scale to see the
reactions of the market.
g) Commercialization—Full scale production and marketing of the product is implemented.
Once the product is made available to the market the consumer adoption process begins.
Consumer Adoption Process
The process represents the mental sequence of stages through which an individual progresses
from awareness of a new product to final acceptance or rejection. In deciding whether to accept
or reject a product, the consumer may go through three stages:
(c) Knowledge phase
(d) Attitude development
(e) Action phase
One becomes aware of the new product, then analyses it to see how it may suit his tastes, then he
may sample small quantities and finally adopt the product. Different individuals adopt new
products at different time periods. Where the consumer attention process ends there begins the
product life cycle.

Advertising
Has been defined as any paid form of non-personal presentation by an identifiable sponsor.
Advertising is used to communicate persuasive information about a product to the target group
through use of spoken or written word and by visual materials.
Advertising has certain distinctive qualities:
i. Public presentation: Advertising is a highly public mode of communication, which
suggests a standardized offering to customers.
ii. Pervasiveness: Advertising is pervasive as it permits the seller to repeat a message many
times.
iii. Amplified Expressiveness: Advertising provides opportunities for dramatizing the
company and its products through the artful use of print, sound and color.
iv. Impersonality: In developing an advertising program marketing managers must make five
major decisions:
• what are the advertising objectives? (mission)
• How much will be spent? (budget)
• What is to be communicated? (message)
• What channel will be used? (media)
• How should the results be measured? (effectiveness)
Advertising Objectives Include:
i. To inform
ii. To persuade
iii. To remind
(b) Personal Selling
• Involves use of sales people to communicate the product to the market. It involves face to
face contact between the sales person and the prospective customer. Because of the
personal contact personal selling is the most expensive of the promotional elements but it
can also be the most rewarding and effective in clinching deals.
• Sales people besides just selling the product have other duties which include: after-sales
servicing, information gathering, communicating new information to customers and
prospecting.
• To be effective sales people need information about the company, the products offered
sales and profit targets, customers, sales plan, promotional material, techniques of selling
and knowledge of competitor products.
 • A company must decide on how to structure its sales force depending on the product and
the market being targeted. The alternative forms of sales force structure includes:
i. Territorial Structured Sales Force—here each sales person is assigned an exclusive
territory in which to represent the company's full line.
ii. Product Structured Sales Force—where each sales person is in charge of a specific
product or line of products.
iii. Customer Structured Sales Force—where sales force are set up for different groups
of customers.
iv. Combined Structure (Complex)
v. Sales force effectiveness can be measured either by net sales achieved, call rate,
value of sales per call, number of new sales or by sales expenses in proportion to
sales achieved.

(c)Sales Promotion
• Sales promotion involves attempts to stimulate sales by use of incentives. These
incentives may include free samples, special discounts, bonus for sales people, temporary
price reductions, bargain packs, gifts, point of sale demonstrations etc.
When directed at consumers, sales promotion has the following objectives:
i. Draw attention to new products
ii. Encourage sales of slow moving products
iii. Stimulate off peak sales
iv. Increase usage of products
Sales promotion can also be directed at traders with the following objectives:
i. Encourage dealer/retailer cooperation
ii. Persuade dealers/retailers to devote increased shelf space to the company's products
iii. Develop goodwill of dealers/retailers
(d)Publicity
• Publicity often does not cost the organization money. It is news about the product or the
organization reported in the press and other media without charge to the organization, but
there are however certain costs involved in setting up the publicity programme. In
publicity the firm aims to secure editorial space as divorced from paid space in the media
available to customers.
• Publicity is a part of the larger concept of public relations. A company's public relations
has several objectives including, obtaining favourable publicity for the company, building
up a good company image, and handling adverse rumors or stories about the company.
To carry out these objectives the public relations department of a company could use
press relations, product publicity, corporate communications, lobbying, and counseling.
The people in charge of publicity must make the following major decisions:
i. Establish the publicity objectives
ii. Choosing the publicity message and media
iii. Implementing the publicity plan and
iv. Evaluating the publicity results

How to Determine Industrial Market Demand

(Analysis of the Industrial Market)
The consumer market is studied by analyzing population distribution, demographic factors,
economic and political considerations, and consumers’ motives and behaviour. The same kind of
analysis is done for the industrial users. The main factors affecting the industrial are outlined
below:-
• The number or potential number of business users.
• The type of potential business users
• The purchasing power of the users
• Their buying motives and buying behaviour
• The size of their purchases
• Regional concentration of business users
• Vertical and horizontal business markets
• Manufacturing activity
• Mining activity
• Agriculture activity
• Construction activity
• Innovation (technology) activities.
The size of Industrial Market
• The industrial market contains fewer buyers then the consumer market. One way of
organizing required information for the market analysis is to use the standard industrial
classification (SIC) system. It enables a firm to identify small segments of its business
market.
• The system divides all types of businesses into groups. Then the subgroups are developed
with the SIC sub-code numbers following the main SIC range of two-digit category. The
diversity of a conglomerate is hidden. Four digit details cannot be made available to an
industry in a geographical location where the information would identify a particular
firm. Sometimes the industrial market may be limited in size regarding the total number
of buyers. However, it may have a big purchasing power. Few firms in the country can
account for the greatest share of the value added which is defined as the shillings value of
 a company’s output minus the value of the inputs it purchases from other companies. The
buying power in many industrial markets is highly concentrated in the hands of a
relatively few firms. A high percentage of industry sales is done by a small number of
companies.
Regional Concentration of Industrial Users
• In Kenya at Thika, Ruaraka, Industrial area of Nairobi, there is a substantial
concentration of many major industries and industrial users as a whole. They have
vertical and horizontal markets.
Vertical and Horizontal Industrial Markets
• It is useful for an industrial marketer to know whether his/her market is vertical or
horizontal. This is necessary for effective marketing planning. A vertical business market
applies if a firm’s product is virtually usable by all firms in only one or two industries.
For example, a precision instrument may be intended only for the marine market although
the boat builder and ship builder are potential market segments. A horizontal business
market applies if the product is usable by many industries. Products such as lubricating
oils and electric wires can be sold to a variety of industries.
• The marketer normally tailor makes his product to meet the specific needs of one
industry. The industry is expected to buy enough in order to support this king of
specialization.
The Purchasing Power of Industrial Customers
• The way to measure the purchasing power of the industrial goods customers is to look
into the expenditure of the industrial users or through their sales volume. But this method
is difficult to estimate because the information is difficult to obtain. Purchasing power
can only be estimated indirectly. By using an activity indicator of buying power, some
market factor is applied in relation to sales and expenditures. The purchasing power and
the number of industrial users can be combined. Various methods of measurement are
outlined below.
Mining Activity
• To measure the purchasing power of the industrial customers in the mining activity
means a reference to output and value. How many mines are operating? What is their
output? What is the shilling value of the output as it leaves the mine? The answers to
these questions can help determine the purchasing power of the mining firms.
Construction Activity
• If a firm markets brick, lumber, gypsum products, builder’s hardware and other building
materials, its market depends on construction activity. Consideration is based on the
number of value of building permits issued by a local authority.
 • Another way is to consider the number of construction work started and the type of
structures, e.g. single houses for residence, commercial houses, flats (apartment) and
maissonettes. Local data are available from the local government offices.
Agricultural Activity
• The buying power of the farm market can be estimated by studying such indicators as
cash from farm income, acreage planted and crop yields. If a firm markets agricultural
products or equipment, the above estimates are essential for its effective marketing. For
example, if you are a chemical producer selling to a fertilizer manufacturer, you need to
study the same indices. Why? Because the demand for chemicals is derived from the
demand for fertilizer.
Manufacturing Activity
If a firm sells to manufacturer’s it can use the following activity indicators:-
• The number of employees
• The number of plants
• The shilling value added by manufacturing.

Industrial Buying Behaviour

As in the case of consumer buying behaviour, industrial buying behaviour follows the usual
pattern outlined below.
• An aroused need (motive) is recognized
• The aroused need leads to goal-oriented activity meant to satisfy the recognized need.
• The need motivator must be determined by marketers who understand the buying
processes and patterns of industrial firms in the markets.
Industrial purchasing has become an important part of overall strategy because tope management
is interested in it. It cannot be left to the purchasing department alone. The overall purchasing
strategy has become, important because:-
• Many companies make less and buy more product contents for the finished products. For
example, motor vehicles manufacturers buy parts form independent suppliers and use the
parts to build the vehicles.
• Firms want to reduce costs and improve efficiency, and they are under intense quality and
time pressures. They no longer buy and hold inventories of parts and supplies. They want
the raw materials and the components that meet their specifications to be delivered
promptly to go into the production process.
• Firms concentrate their purchases in fewer suppliers and develop long-term partnering
relationships. This is essential for them to get what they need. This high level of
involvement goes beyond a purchase. It includes other things such as working together in
order to develop new products and providing financial support.
Buying Motives of Industrial users
• There are two views about the buying motives of the industrial purchases. They are based
on the individual interests and the organisational interests.
Individual Interests
• Buyers in business have their attitudes, perceptions, and values. Therefore they are
motivated more towards personal goals than organisational interests.
Organisational Interests
• Buyers conduct purchases in a methodical and structured manner. The business buying
motives are expected to be practical and unemotional. They are motivated to achieve the
optimal combination of price, quality, and service in the products which they buy. The
two are in conflict.
Individual and Organisational Interests
• Buyers usually have two goals. They want to further their company’s position in profits
and acceptance by society. They want also to protect or improve their position in their
firms. This is about self-interest. These goals can be mutually consistent. For example, if
the firm’s goal is to save money, the buyer may negotiate a low price from a supplier and
he knows that his organization will reward him for good performance.
• The buying decisions are made easier if the individual and organisational goals are
consistent. But in some significant areas the buyer’s goals are not consistent with those of
the firm. The firm may insist in dealing with the lowest price so the buyer does not want
to change. In this situation the seller must stress to the buyer
(i) what is good for the firm and
(ii) What is in it for the buyer?
Promotional appeals should be directed to the buyer’s self-interest if two or more competing
firms offer the same products, prices and post-sale services. Buyers’ purchases range from
routine to complex buying decisions. This means that the buying situations in industrial
organizations’ vary widely in their complexity, the people involved, and the time required. A
great deal of research has been carried out about organisational buying behaviour.
Investment: Types and Appraisal Methods
 To invest is to allocate money with the expectation of a positive benefit/return in the
future. In other words, to invest means owning an asset or an item with the goal of
generating income from the investment or the appreciation of your investment which is
an increase in the value of the asset over a period of time. When a person invests, it
always requires a sacrifice of some present asset that they own, such as time, money, or
effort.
 In finance, the benefit from investing is when you receive a return on your investment.
The return may consist of a gain or a loss realized from the sale of a property or an
investment, unrealized capital appreciation (or depreciation), or investment income such
as dividends, interest, rental income etc., or a combination of capital gain and income.
The return may also include currency gains or losses due to changes in the foreign
currency exchange rates.
 Investors generally expect higher returns from riskier investments. When a low-risk
investment is made, the return is also generally low. Similarly, high risk comes with high
returns.
 Investors, particularly novices, are often advised to adopt a particular investment
strategy and diversify their portfolio. Diversification has the statistical effect of reducing
overall risk.

Types of Investment

Investment Appraisal Methods