May 28, 2022

1.1 Introduction Purchasing describes the process of buying: learning of need, locating and selecting suppliers negotiating prices and other pertinent terms, and follow up to ensure delivery. It entails the following activities: Purchase needs identification through liaison with user departments. Identification of potential suppliers and negotiation. Selection of suppliers. Market research for important materials. Analysis of proposals. Issuance of purchase orders. Administration of contracts and resolutions of related problems Maintenance of purchasing records. Procurement is a broader term and includes purchasing stores, traffic, receiving, incoming inspection and salvage. Procurement and purchasing are used interchangeably, this is however somewhat imprecise. Procurements process or concept encompasses a wider range of supply activities than those included in the purchasing functions .it includes the traditional role, with more buyer participation is related material activities. These activities include; Development of material and service requirements and other specifications. Materials research and value analysis activities. Extensive market research. Conduct of all purchasing functions. Suppliers quality management Management of investments recovery activities (salvage of surplus and scrap) Essentially therefore procurement tends to be broader and more proactive, focusing on strategic matters, rather than mere implementation of purchasing concept. Supply management is a system management concept employed by some organizations designed to optimize the factors of materials costs, quality and services. It is a process responsible for the development and management of a firm’s material management of a firm total supply system. It includes and expands the activities of the purchasing function and the procurement process. The other activities in supply management are: Early Purchasing Involvement (EPI) and Early Supplier Involvement (ESI) in product design and subsequent specification development for crucial items. Heavy use of cross–functional teams in supplier qualification and selection. It depicts effect to develop better, more responsive supplies than the term purchasing. Purchasing partnering and strategic alliances with supplies. Strengths Weaknesses Opportunities and Threats (SWOT) analysis. Continuous monitoring and improvement in the supply chain. Participation in strategic planning process. Materials Management is the integration of related materials functions to provide cost effective delivery of material and services to an organization. It is an organizational concept from a managerial perspective designed to enhance coordination and control of the various materials activities. Since action or decision taken at any point in the materials chain, usually impacts on a number of other activities or decision point in the chain, it is imperative to enhance reporting, communication and control procedures designed to enhance a coordinated decision making among the involved groups or departments. Materials management includes the following activities: Purchasing and supply management activities. Inventory management Receiving activities Stores and warehousing In-plant material movement Production planning, scheduling and control Traffic and transportation Scrap and surplus disposal. Supply chain management is a system approach to managing the entire flow of information, materials and services from raw materials, supplier through factories, warehouses to end customers 1.2 The Evolution of Purchasing Purchasing can be traced as far back as 2800 BC in cuneiform clay tablets purchasing orders. Curiously only during the past two countries has purchasing been addressed in trade books and text books. In 1832 Charles Babbage addressed purchasing in his book “On the Economy, Machinery and Manufacturing” The first book devoted specifically to purchasing, “The Handling of Railway Supplies: The Purchase and Disposition” published in 1887 was authored by Marshall M. Kirkman. The first college textbook on purchasing was authorized by Howard T. Lewis of Harvard University in 1933. Although interest of purchasing and supply function has been a phenomenon in the 20th, it was recognized as independent and importing function well before 1900. Growth of interest and attention to purchasing was rather uneven in the early 1900’s but by 1915, several books on purchase had appeared and several articles had been published in trade press primarily in the engineering journals. Yet prior to World War I (1914-1918) most firms regarded the purchase function primarily as a clerical activity. However during the world war, the ability to obtain raw materials supplies ad services needed to keep the factories and mines operating were the key determinates of organizational success. Attention was given to the organization policies and procedures for purchase functions, and so it emerged as a recognized management activity. Historically since management interest has focused on research and development, marketing, finance and operations, purchasing has frequently been subordinated to these functions. Mangers are however becoming aware impact on the bottom line that does any other functions. It is with such insights the purchasing has evolved and evolves through the following four stages. Passive stage– Purchasing function has no strategic direction and primarily reacts to the requests of other functions, This stage is characterized by: High proportion and individual communications due to purchasing low visibility Supplier selections based on price and availability. Independent stage– Purchasing functions adopts the latest purchasing techniques and processes, but its strategic direction is independent of the firms competitive strategic. In this stage; Performance is based primary on cost reduction and efficiency measures. Coordination links are established between purchasing and technical discipline. Top management recognizes the importance of professional development. Top management recognizes the opportunities in purchasing for contribution to profitability Supportive– Purchasing function support the firm’s competitive strategy by adoption purchasing techniques and products which strengthens the firm’s competitive position In this stage; Purchase is included in sales proposal teams. Suppliers are considered a resource with emphases on experience motivation and attitude. Market product and suppliers are continuously monitored and analyzed. Integrative stage- Purchasing strategy is fully integrated into the firm’s competitive strategy and constitutes part of an integrated effort among peers to formulate and implement a strategic plan. In this stage; Cross-functional training of purchasing professionals executive is made available Permanent lines of communication are established among other functional areas. Professional development focuses on strategic elements of the competitive strategy Purchasing performance is measures in terms of contributions to the firm’s success 1.3 The Role of the Purchasing Department The purchasing department is expected by the management to fulfill the following five rights. Right Quality

THE EVOLUTION AND ORGANIZATION OF PURCHASING AND SUPPLIES MANAGEMENT NOTES – Click to view PURCHASING PROCEDURES NOTES – Click to view SOURCING NOTES – Click to view STOCK AND STOCK CONTROL NOTES – Click to view PHYSICAL DISTRIBUTION NOTES – Click to view ETHICS IN PURCHASING AND SUPPLY NOTES – Click to view

10.1 Definition of Economic growth is the increase of per capita gross domestic product (GDP) or other measure of aggregate income. It is often measured as the rate of change in real GDP. Economic growth refers only to the quantity of goods and services produced. An industrial economy gets its resource from other countries. Economic growth can be either positive or negative. Negative growth can be referred to by saying that the economy is shrinking. Negative growth is associated with economic recession and economic depression. In order to compare per capita income among countries, the statistics may be quoted in a single currency, based on either prevailing exchange rates or purchasing power parity. To compensate for changes in the value of money (inflation or deflation) the GDP or GNP is usually given in “real” or inflation adjusted, terms rather than the actual money figure compiled in a given year, which is called the nominal or current figure. Economists draw a distinction between short-term economic stabilization and long-term economic growth. The topic of economic growth is primarily concerned with the long run. The short-run variation of economic growth is termed the business cycle. The long-run path of economic growth is one of the central questions of economics; despite some problems of measurement, an increase in GDP of a country is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects through compounding (see exponential growth). A growth rate of 2.5% per annum will lead to a doubling of GDP within 29 years, whilst a growth rate of 8% per annum (experienced by some Four Asian Tigers) will lead to a doubling of GDP within 10 years. This exponential characteristic can exacerbate differences across nations. 10.2 Theories of Economic Growth Classical growth theory The modern conception of economic growth began with the critique of Mercantilism, especially by the physiocrats and with the Scottish Enlightenment thinkers such as David Hume and Adam Smith, and the foundation of the discipline of modern political economy. The theory of the physiocrats was that productive capacity, itself, allowed for growth, and the improving and increasing capital to allow that capacity was “the wealth of nations”. Whereas they stressed the importance of agriculture and saw urban industry as “sterile”, Smith extended the notion that manufacturing was central to the entire economy David Ricardo argued that trade was a benefit to a country, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. This theory of “comparative advantage” would be the central basis for arguments in favor of free trade as an essential component of growth. Creative destruction and economic growth Many economists view entrepreneurship as having a major influence on a society’s rate of technological progress and thus economic growth. Joseph Schumpeter was a key figure in understanding the influence of entrepreneurs on technological progress. In Schumpeter’s Capitalism, Socialism and Democracy, published in 1942, an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation. Entrepreneurship forces “creative destruction” across markets and industries, simultaneously creating new products and business models. In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth. Former Federal Reserve chairman Alan Greenspan has described the influence of creative destruction on economic growth as follows: “Capitalism expands wealth primarily through creative destruction—the process by which the cash flow from obsolescent, low-return capital is invested in high-return, cutting-edge technologies.” The neoclassical growth model/Solow-Swan Growth Model The notion of growth as increased stocks of capital goods (means of production) was codified as the Solow-Swan Growth Model, which involved a series of equations which showed the relationship between labor-time, capital goods, output, and investment. According to this view, the role of technological change became crucial, even more important than the accumulation of capital. This model, developed by Robert Solow and Trevor Swan in the 1950s, was the first attempt to model long-run growth analytically. This model assumes that countries use their resources efficiently and that there are diminishing returns to capital and labor increases. From these two premises, the neoclassical model makes three important predictions. First, increasing capital relative to labor creates economic growth, since people can be more productive given more capital. Second, poor countries with less capital per person will grow faster because each investment in capital will produce a higher return than rich countries with ample capital. Third, because of diminishing returns to capital, economies will eventually reach a point at which no new increase in capital will create economic growth. This point is called a “steady state”. The model also notes that countries can overcome this steady state and continue growing by inventing new technology. In the long run, output per capita depends on the rate of saving, but the rate of output growth should be equal for any saving rate. In this model, the process by which countries continue growing despite the diminishing returns is “exogenous” and represents the creation of new technology that allows production with fewer resources. Technology improves, the steady state level of capital increases, and the country invests and grows. The data does not support some of this model’s predictions, in particular, that all countries grow at the same rate in the long run, or that poorer countries should grow faster until they reach their steady state. Also, the data suggests the world has slowly increased its rate of growth. However modern economic research shows that the baseline version of the neoclassical model of economic growth is not supported by the evidence. Endogenous growth theory Growth theory advanced again with the theories of economist Paul Romer and Robert Lucas, Jr. in the late 1980s and early 1990s. Unsatisfied with Solow’s explanation, economists worked to “endogenize” technology in the 1980s. They developed the endogenous growth theory that includes a mathematical explanation

9.1 Phases of the Business Cycle Four phases of the business cycle are identified as follows A peak is when business activity reaches a temporary maximum with full employment and near-capacity output. A recession is a decline in total output, income, employment, and trade lasting six months or more. The trough is the bottom of the recession period. Recovery is when output and employment are expanding toward full employment level. 9.2 Unemployment: Unemployment generally refers to a state/situation where factors of production (resources) are readily available and capable of being utilized at the ruling market returns/rewards but they are either underemployed or completely unengaged. When referring to labour, unemployment is considered to be a situation where there are people ready, willing and able to work at the going market wage rate but they cannot get jobs. This definition focuses only on those who are involuntarily not employed. It is noteworthy to mention here that all countries suffer unemployment but most developing countries experience it at relatively higher degree, and the following can be some of the causes. 9.2.1 Types and Causes of Unemployment 1. Transitional unemployment: Transitional unemployment is that situation which prevails due to some temporary reasons. The main reason for this type of unemployment are: Turnover unemployment: Some individuals leave their present jobs and make efforts to secure better ones and in this way, they remain unemployed for some time. Casual unemployment: Casual workers are employed for a specific job and when the job is competed, such workers become eventually unemployed. E.g. shipping or building construction workers. Seasonal unemployment: Some industries, for instance have seasonal demand and their produce is manufactured for a specific period of time (a specific period of the year). The workers of such industries remain unemployed for that time e.g. ice factories may remain closed during winter. 2. Structural unemployment: Caused by structural changes such that there exist: Cyclical unemployment: During depression, prices are too low and profit margins remain distinctively low. In this case, investment decreases and unemployment increases. Technological unemployment: Due to inappropriate technology. Technology is not inappropriate per se but in relation to the environment in which it is applied. In most developing countries, most production structures tend to be labour saving (capitalintensive), which is not appropriate as these countries experience high labour supply. Capital – labour ratios tend to be high in these countries implying that less labour is absorbed compared to capital in production undertakings causing unemployment. Industrial change: The establishment of new industries decreases the demand for the products of existing industries e.g. the rapid increase in the demand for Japanese industrial products is one reason for greater unemployment in some European countries. Keynesian unemployment: According to Keynesian theory of income and employment, unemployment occurs due to lack of effective demand. If effective demand is less, production of goods and services will fall which will further result in the unemployment of labour. Another feature of Keynesian unemployment is that unemployment of labour is associated with unemployed capital such as plant and machinery which tend to be idle during depression. Urban unemployment: Due to availability of more facilities in urban areas, more and more people tend to move to these areas. The employment opportunities are not sufficient to absorb all those people who settled in the urban areas. This kind of unemployment is therefore due to rural-urban migration. Disguised unemployment: Situation where some people are employed apparently, but if they are withdrawn form this job, total production remains the same. In most developing countries this type of unemployment is estimated at 20 to 30% and measures should be taken to employ such people in other sectors of the economy. 3. Insufficient Capital: Shortage of capital is a hindrance in the establishment of more industries and other productive installations, and due to this reason, more employment opportunities are not created. 4. Nature of education system: Education systems for most developing countries are whitecollar oriented, yet the nature of productive capacities of these economies are not sufficiently supportive. Moreover, inadequate education and training facilities render(s) most people unable to secure those job opportunities that require high skills and specialized training. 5. Rapidly increasing population: The rate of growth in population exceeds the amount of job opportunities that the economy can generate. Thus in summary, of the causes of unemployment in developing countries can be said to include: Rapidly increasing population Inappropriate technology Insufficient capital base Demand deficiency/structural changes Presence of expatriates Education Systems – white-collar orientation Rural-urban migration One person for more than one job Corruption and general mismanagement Inadequate knowledge on market opportunities Cost of Unemployment Unemployment is a problem because it imposes costs on society and the individual. The cost of unemployment to a nation can be categorized under three headings: the social costs, the cost to the exchequer and the economic cost. The Social Cost of Unemployment  For the individual, there is the demoralizing effect which can be devastating particularly when they are old. This is because as some job seekers become more and more pessimistic about their chances of finding a job, so their motivation is reduced and their changes of succeeding in finding jobs become even more remote.  Many of the longer-term unemployed become bored, idle, lose their friends and suffer from depression There is also evidence of increased family tension leading in some cases to violence, infidelity, divorce and family breakups. Unemployment may also lead to homelessness, as in some circumstances building societies may foreclose on a mortgage if the repayments are not kept up. Long-term unemployment may also lead to vandalism, football, hooliganism and increases in the crime rate and insecurity in general. The cost to the exchequer (Ministry of Finance) There is increasing dependency ratio on the few who are employed in the form of: The loss of tax revenues which would otherwise have been received: This consists mostly of lost income tax but also includes lost indirect taxes because of the reduction in spending. The loss of national insurance contributions which

8.1 Categories of investment Before developing any theories investment choices by people it is important to define what is meant by investment. Investment: is the formation of real capital, tangible or intangible, that will produce a stream of good and service in the future. Investment undertaken in an economy is classified according to the following categories: 1. Business fixed Investment which include plant and machinery, office buildings . 2. Residential Construction Investment which includes houses and significant additions to house ( that require building permit) 3. Changes in firm‘s Inventories –as they provide revenue in the future, not today. 4. Purchases of Durable Goods by Households for example cars, fridges. 5. Government purchases of investment Goods and Building for example roads Hospital, harbours, 6. Investment in Human Capital for example schooling university study, apprenticeships etc. 7. Knowledge which. Includes things we know about scientific and other areas. 8. The national income accounts only measure 1,2,3 and 5 as investment and it is not clears how well they measure 2 and 5 )eg. Additions not requiring permits and durables purchased by government departments|. The national accounts do not measure 6 or 7 Investment Affects Future Output The capital is a very important used to produce output and the level of investment ultimately determines the level of the capital stock and thus the growth of output. The relationship between investment and the capital stock can be expressed in the following way: Where In,t is net investment at time t. This implies that if . In,t increase then kt+1 increase and thus Yt+1>Yt, that is output should increase . Not that the notation used above assumes that investment undertaken today not really become productive until the future. This is usually the assumption we sue in modern macroeconomics. Investment Fluctuates A Lot 1. A well established fact of modern economies is that 1 fluctuates a lot more C or Y ( we can also see that Y fluctuates more than C, probably because of the large fluctuations in I which helps to make up Y). 2. Furthermore, inventory investment, which makes up only a small percentage of GDP, is extremely volatile and in a recession more than half the fall in spending for a typical industrialized country comes from a decline in inventory investment as firms rundown their inventories. As a result, if we want to explain fluctuations in output, then we need to understand what causes fluctuations in an economy‘s investment behaviors. this has been recognized for quite a long time, including by Keynes himself who put it down to ―animal spirits‖, or that fluctuations of firm‘s investments is due to seemingly random fluctuations in firm‘s expectations about future profitability, there is likely an element of truth in this view, since we have seen that people‘s consumption choices depend on future income, but it is in some sense a pessimistic view since it essentially says that investment is what it is and that is all we can say . For the rest of the lecture we shall study three categories of investment and in the process see if Keynes was right. 8.2 Business Fixed Investment Many people are intensely interested in business fixed investment and it not difficult to understand why; it constitute the basic equipments used by firms to produce output whether it be computers, factories, machine tools or offices. We will learn about the most common theory develop to explain this form of investment. Neoclassical theory of Investment Our next theory of aggregate investment is the one currently used by economists. An important underlying assumption of the accelerators model is that firms do not change their production techniques In effect they employ the same proportions of capital and labour independents of their affected by output, but on the basis of cost-benefit decision. That is, firms may have a desired output level they wish to produce, given the price the output can be sold at, but the bundle of inputs they use will depend on their relative costs and benefit so as to maximize the profits of firms. The Formal Model We will now write the basic idea described a above as a formal model . To begin with define the following variables: Y= the quantity of output produced by the firm K= the quantity of capital used by the firm L= the quantity of labour used by the firm F(…] = the production which related how the inputs capital and labour are used to produce output. Next, we need to specify the key assumption used by the model: 1. Firms act to maximize their profits where profits equal revenue less costs. If firms maximize profits by hiring labour and capital, then the amount they choose to hire will satisfy the condition MB = MC for each factor, or in this case their MRP equals their cost Let, W= the marginal nominal wage paid to employees. R= the marginal nominal ―rental‖ cost that films incur in using capital Py= price the firms receive for their output. P= the aggregate price level. Where it is important to note that the implicit or explicit cost of cost of using capital is not simply the actual price of the capital, since the capital can be resold. The cost of using the using the capital is the implicit (or explicit (or explicit if rented from another firm) cost of renting the capital over the period it is used ( we will discuss this is more detail soon) which we are calling R( eg. if we build a dam and use it to produce electricity then the capital cost per unit of electricity is not the total cost of the dam, fraction of it relating to what portion of it was use to produce the unit electricity). Given our assumption, we know that the logical implication is that capital labour are employed up to the point where. Py x MPL= W or MPL= WPy and PY x MPK = MPK =RPy .And we will now explore

We discuss the consumption choices of individuals .the theory of intertemporal choice was developed by irving fisher (1867-1947)the intertemporal choice theory is about individual not aggregate consumption but it does not have important implication for aggregate consumption because aggregate consumption is the sum of consumption by individuals fisher observed that people do not just have a budget constraint for today or for the current period but also for tomorrow or the future .he further observed that people can trade off consumption today for consumption tomorrow by saving or not saving. This means that the budget constraints for each period are linked together. The collection of budget constraint for all the periods plus the linkages between them gives us the inter-temporal budget constraints. This is the constraint limiting the choices; people have between consuming today and consuming tomorrow YC=current received by consumers Yf=future income received by consumers Cc=current consumption of the consumers Cf=future consumption S=how much the currently save R=interest rate R>0. If people prefer consuming today rather than in the future This implies that the budget constraint today can be written as Cc=Yc-S Or the level of consumption today equals the level of income less what was saved. If borrowing occurs, then s is <0 so, current consumption is greater than current income S<0 and Cc>Yc The budget constraint in the future is given by Cf=(1+r)s+Yf Or the level of consumption in the future +future income +whatever has been saved from today. if S>0, then there is positive interest positive interest as well as future Y.if S>0,then the consumer pays some of their income to repay the borrowing that occurred today at the interest rate incurred S+Yc-Cc Substituting the equation tomorrow‘s budget constraint Cf+(1=r)(Yc-Cc)+Yf…………………2 Rearranging this equation and dividing both sides by (1+r) we get the following equation Cc+Cf(1+r) 1 =Yc+Yf(1+r) 1 …………………………intertemporal budget constraint It is important to note that if r>0, then future income and consumption are discounted. This discounting of future income and consumption occurs because of the interest earned on savings The discount factor(1+r) is the price of the future consumption measured in terms of today‘s consumption .it is the amount of current consumption that the consumer I must give up to obtain one unit of future consumption .Since r>0,then (1+r)1 is a unit of current consumption If borrowing or saving did not take place then the budget constraint would just be Yc=Cc and future budget constraint will be Yf=Cf 7.2 Consumer preference Fischer observed that people will have preferences regarding consumption over different periods .we represent such preferences in the following diagram The indifference curve shows the combination of current and future consumption that makes the consumer equally happy. The slope at any point on an indifference curve measures the MRS between current and future consumption. Higher Indifference curves are preferred to lower indifference curve 7.3 Optimal consumption point Assume that consumers chose their consumption to maximize their utility. Given the income of the consumer and the interest rate, the consumer will therefore choose the highest indifference curve that their budget constraint allows. This occurs where the budget line is target to indifference curve It is important to note that there is a key characteristic of this point of tangency .it occurs where the slope of the budget line we =slope of the indifference curve. A long the budget line, any substitution s between current and future substitution must offset each other A long the indifference curve, the utility a person gets is the same ,this means that any substitution on the indifference curve between the current and future period consumption must offset each other Factors Affecting Consumption 7.4.1 Effect of changes in income on consumption Say the current of future income increases. A change in income either today or in the future has the same effect; it increases a person’s present value income. That is it increases, yc+yf(1+r).we show this by a shift outwards in the budget line If Cc and Cf are both normal goods then their consumption increases. That is, the consumer spreads the increase in income over both current and future consumption regardless of when the income increases. This tells us that current consumption primarily depends on the present value over income over the life time of a person not just on current income. Current income does not affect current consumption because it affects the present value of lifetime income, but is only a small part of it and so changes in current income will have only a small effect on current consumption. Not that this can occur because the consumer will have only small effects on current consumption. Note that this can occur because the consumer is free to borrow and lend as much as they wish at the going interest rate subject to their not going bankrupt 7.4.2 Effects of changes in the interest rate on consumption An obvious variable that is part of the intertemporal budget constraint is the interest rate .it determines the price for trading off consumption between periods and the value to saving or the cost of borrowing. When we think about an individual and a change in the interest rate we have to consider two cases When the consumer borrows ,or is a dissever(s,0) When the consumer lends or is a saver(s>0) There are two effects arising from increase in interest rates Income effect –this is the change in consumption resulting from the movement to a different indifference curve. Given that the consumer is a lender, rather tan a borrower they are better off and end up on a higher indifference curve in period 1.income effect implies increases in cc and increases in cf Substitution effect-refers to a change in consumption resulting from the change in relative price of consumption in two periods. Given that r has increased then current consumption is relatively more expensive compared to future consumption? Substitution effect implies a fall in cc and an increase in cf. Overall .we know that cf increases but we cannot say for certain