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Economics

Economics is the social science that deals with the production, distribution, and
consumption of goods and services. It also deals with the theory and
management of economies or economic systems.

Economic environment
The economical environment refers to the factors that affect consumer
purchasing power and expending pattern. Economical environment is one of the
important environment forces that have an impact on business like other macro
environmental forces; this force is largely beyond the control of the firm. This
means that manager must anticipate and react to change the economy. But they
have little control to control them.
Sometimes various economic forces threaten the probability of the business. At
other times they present with the unique opportunities. In either case, the
challenge facing the business manager is identifying the threat and opportunities
and take action to deal with them. In the following, we describe each of the
economical forces and give examples of how it can help and hurt a business.

Business and Economics


The Economic Environment of Business introduces the essential principles of
economics from the perspective of business.
No business operates in a vacuum, so it's crucial to understand how economic
trends and political policies can affect organization. Economic Environment
explores key economic factors such as supply and demand and inflation and
considers the impact that they can have on business.

Economic forces
Economic forces include
Macro economic forces
Macro economic forces

MACRO ECONOMIC FORCE


Macroeconomic studies the entire economy of a nation. Macroeconomics deals
with the
Gross domestic product (gdp)
Economic growth
Inflation
Interest rate
Unemployment
Monetary and fiscal policy and
Business cycles.
These factors affects business in general. So a particular business will discuss
the major macro economic factors that affect business.
Gross Domestic Product (GDP)
Gross domestic product is the market value of all goods and service produced in
a country in a given year. Gross Domestic Product (GDP) is the most commonly
used indicator of national income. It attempts to measure the sum of incomes
received by the various wealth creating sectors of the economy: manufacturing,
agriculture, service industries.
The figures are 'gross' because GDP does not allow for the depreciation of
physical capital - wear and tear on factory machines, office equipment becoming
outdated etc.
When the value of income from abroad is included - what domestic companies
earn abroad minus what foreign companies earn here and expatriate - then the
GDP becomes the Gross National Product (GNP).

GDP consists of the follow in four parts:

Personal consumption and expenditure


Gross private domestic investment
Govt. consumption, expenditures and gross investment
Net export of goods and services( The value of export the value
of import)

Increase and decrease in any one of these variables directly affects the overall
GDP. For example when govt. increases the expanding, GDP increases when the

private business sector increases its investment expenditures. GDP also


increases.
However in addition to the direct impacts of each the four variables, economist
suggest that the variable interact and, as a result, have further effects on
business. For example, a fall in investment would cause a subsequently decline
in consumption. These would result a farther decline in GDP.
Year

1995-96

1996-97

1997-98

1998-99

Growth
rate(%)

11.22

7.72

10.36

12.23

19992000
8.23

2000-01
9.42

ECONOMIC GROWTH

Economic growth refers to increase in the national incomes of a country: in


other words it refers to an increase on total spending in the economy. Actually,
economic growth means more sales for the average business. It means that the
firm can produce more ,provide more profits to owner and employ more
workers.
Year
1997-98
1998-99
1999-2000
2000-01

Per capita GNP at Per capita real GNP (TK)


current price (in US $)
359
15053
369
15617
377
16371
389
17142
[ Source : Bangladesh Bureau of Statistics ]

INFLATION

Inflation in general, is understood as a phenomenon/ situation when price rise but


economist say that rising price is not the symptom of inflation but is the effect of
it. Inflation takes place when money flows in the market become expansive in
relation to the physical volume of business, According to the data of Bangladesh
Bureau of Statistics (BBS) the rate of inflation of Bangladesh2000-01 is 2.17%.
The impact of inflation on business can be severe. As inflation increases more
money is required for consumer to purchase the same amount of goods. This
can lead to a general decline in consumer expanding, which affects the sales of a
business. Inflation also means higher cost of doing business, which affects the
general price level, another problem of inflation is that it causes uncertainity,
espatially in inflation rates are high. Because prices are increasing rapidly,
managers do not know how to react.

Year

Rate
of
National(CPI)
General
6.6
2.5
7.0
8.9
3.4

Inflation

Rate of Inflation (GDP)

Food
7.0
1.4
7.1
11.8
3.9

Non - Food
5.8
4.9
6.7
4.0
2.6

1996
1997
1998
1999
2000
2001
[Source: Bangladesh Bureau of Statistics]

4.23
2.5
5.28
4.65
1.86
2.65

Since inflation can affect both sales and cost and cost of doing business. An
efficient manager will watch inflation data closely and be prepared to react when
necessary to offset inflationary cost increase.
UNEMPLOYMENT
Unemployment means waiting to work but not having job. Unemployment is
usually measures by the unemployment rate. This is the ratio of people classified
as unemployed to the total labor force. According to the BBS publication in 199596 the unemployment rate in Bangladesh is:
Unemployment rates by level of education and sex (1995-96)
Level
of Bangladesh
Urban
Both
Both
Education
Male
Female
Male
Female
Sex

Both Sex

Male

Female

4.3
1.6
5.0

2.1
0.6
2.6

2.2
0.5
2.4

1.9
0.7
3.0

8.8
15.3

11.8
12.7

10.9
12.7

15.0
15.4

Sex

Total
2.5
2.7
2.2
4.4
4.4
No Education
0.7
0.6
0.8
1.5
1.5
Below class (1- 3.0
2.9
3.3
4.6
4.5
X)0
SSC - HSC
10.3
9.7
12.9
7.9
7.8
Degree above
9.2
8.4
15.2
7.3
6.6
[Source: Bangladesh Bureau of Statistics]

Rural

There are several types of unemployment such as:


I. Frictional unemployment: This refers to people who are looking for work and
will eventually find it because there are jobs available for which they are
qualified
II. Structural Unemployment: this refers to people who cannot find work
because the skill they possess are no appropriate for the available job.

III. Seasonal unemployment: This refers to situations where the is available


only at certain season of the year. And employee in a construction form or
an agricultural laborer would be an example of seasonal unemployment.
IV. Cyclical unemployment: This refers to people who can not find jobs because
a decline in the economy has caused employment to cut back or hiring.
The impacts of the rising unemployment on business are many. Increase in
unemployment result in reduced unemployed, and that means smaller sales for
the business that has served them. However the positive side of the business is
that business can take advantage of higher employment rates because many
people are looking for work and this gives the business managers an opportunity
to select more qualified people with lower pay. Therefore-business managers
should carefully monitor the unemployment rate to see how it will affect both
demand for the firms product and the firms ability to recruit qualified workers.

Interest rate: Interest is the price paid by the individuals or business to


borrow money. Interest rates affect business in three significant ways, such as:

Rising interest rates increase the total price consumers pay who uses
credit for products and services. So, as interest rate rise. The demand for
product will likely decrease.
Higher interest rates mean higher cost of doing business. Therefore,
managers must either rise the prices of either products to cover this cost
of doing business or accept lower profit.
The another important effect of interest rate is on the expansion of a
business. Since the firm must sometime borrow money of finance new
equipment. The interest rate is of great concern to the manager. Lower
interest rate may means that it is a good time for the business to borrow to
invest in an expansion.

Monetary and fiscal policy: Every govt. establishes monetary


and fiscal polices to promote economic growth ,reduce unemployment, control
inflation and adjust interest rates.
Monetary policy is a package of measures of the central bank to control money
supply in the economy. On the other hand fiscal policy prefers to govt. measures
controlling public expenditure, revenue generating activities and public
borrowing.
Monetary and fiscal policies are important consideration of the macro economic
environment in which business operates. Business managers must learn to
anticipate the monetary and fiscal polices govt. will establish. This will help them
for possible period of rapid growth, recession, inflation in interest rate.

Business Cycle: Business cycle refers to a somewhat regular pattern of ups and
downs in aggregate production. As measured by the fluctuations in real GDP. The
business cycle has four parts:
First Stage: First stage is recession. This is the time period during which GDP is
falling.
Second stage: Eventually the declining in GDP stops. At that point the business
cycle entries the new stage, which is called the trough. This is usually very shot
stage.

Peak

GDP

Expansion
Recession
Trough

Year
Third Stage: The trough stage is followed by a period of years during which GDP
rise. This period of economic growth is called an expansion.
Fourth Stage: Sooner or later the growth stops. And GDP entries the pick levels.
This is usually a very short stage and is followed again by a recession that marks
the beginning of a new business cycle.
Therefore it is important for the business managers to understand the concept of
business cycle. Knowledge of the cycle can help a business to take actions to
minimize the damage done by recession or inflation. Such knowledge can also
be used pro active to take advantage of expansion, Inflation and sometimes a
recession.

Macro Economic Force

Macro economic studies the behavior of individual peoples and firms in particular
markets. Actually, macro economic studies how markets operate. The following
discussion includes how major micro economic forces affect business.
Supply Demand and Market Price: A business earns revenue when customers
pay for the goods or services the business provides. Thus.. a business firms
revenue determine by 2 factor.
1. The price customer pay and
2. The total amount of goods and services that customer purchase

This important relationship can be explained as follows:


P*Q = TR
WhereP = Price
Q = Quantity sold
TQ = Total revenue
However the price and the quantity sold are determined by bargaining that takes
place between buyers and sellers in the market. Buyers are usually willing to buy
more of sellers goods and services if the price is higher.
Economist explains the relationship between buyers and sellers by drawing
demand and supply schedule (as shown in the following figure). The DD curve is
called the demand curve. It shows how much of goods or services buyer will
purchase at each possible price. Assuming other factor such as tastes, Income
etc remain the same. The SS curve called the supply curve. Its shows the
amount of goods or service that the business will offer at each possible price
assuming other factors such as input prices, technology etc remain unchanged.
The point where the demand curve intercepts the supply curve is called the
equilibrium point.

P
R
I
C
E

S`
E

D`
S
Quantity

At this equilibrium point (E) quantity demanded and quantity supply both are
equal. This equilibrium price is a valuable concept of the businessmen because it
tell them where the price is heading and where it will settle. However, The
marketer rarely arrives at equilibrium position because demand and supply are
constantly shifting.

Proportional changes in quantity purchased

ED=
Proportional change in price
Price Elasticity of Demand: The concept that explains the relationships among
price, quantity and the revenue is the price elasticity of demand. Economists
measure it by dividing the percentage change in the quantity of products or
services demanded by the percentage change in its price. * In order to achieve

business goals, managers must constantly be thinking about price changes and
their impact on the firms future revenue.
Competition: Computer another macro economic force affecting business. The
company may have a number of competitors: Some are more aggressive and
some are less aggressive. Economists classify competition into following
categories:

Pure competition: Pure competition is a situation where all the firm sale
identical products and no one firm can influence the price. In the price In
the pure competitive market sellers are simply the price takes. Agriculture
product is a good example of a purely competitive product.
Monopolist Competition: Monopolistic is a Competition is a situation
where there are many firms but each has a slightly different product! Each
firm can influence its price by following effective marketing strategies
independently.
Oligopoly: An oligopoly is a situation where a few firms. With or without
differentiated product dominate the market. The still and automobiles
industries are good example of oligopolies
Monopoly: A monopoly is a situation where there is only one firm selling a
product or services. Many monopoly are regulated by the govt. electricity:
water supply authorities have traditionally been good example of
monopoly business.

To be successful. it is important for business managers to know what type of


competition they are facing. Because principles for successful competition
differ from one categories to the next. For example in purely competitive
industries, the firm has to be competing strictly in terms of cost. Management
must concentrate on lowering cost so that the firm can maximize profit at the
existing market price in oligopoly situations, management competes by
differentiating the product, perhaps through advertising and new product
development.
ANALYSIS OF COLNDITION / TRENDS/ ENVIRONMENT
Market consists of buying power as well as people. Total buying power.
However, depends on current income, price and savings and credit
availability. Business should be aware of major trends in the economic
environment.
1. Changing Income: In Bangladesh, real per capita income declined
during the 1980s to 2000 as inflation. High unemployment and
increased taxes and thus, reduced the amount of money people had
to spend. As a result many consumers turned to more cautious buying.
Some consumers postponed purchase of luxurious goods and fell that

those rare beyond there reach. Therefore, marketers should pay


attention to income distribution as well as average income.
2. Changing consumer spending pattern: Consumption expenditure in
major goods and services have been changing over the year as a
result of increase in income however, customers at different income
levels have different expending patterns. The prominent economist
Earnest Engle shows that how people shift there expenditure as their
income rose. The Engles law indicates that, as family income rises
the percentage spend on food declines. The percentages spend on
housing and household operations remains constant, and the
percentage spend of other categories (clothing, transportation,
reception, health and education) and the percentage put into saving
increase.
3. Lower savings and credit availability: Consumer expenditures are
again affected by consumers savings and credit patterns. If
consumers are willing to save more, undoubtedly.
Changes in such major economic variables as money income, cost of
living, saving and credit patterns have an immediate impact on market
place. Business managers watch these variables using economic
forecasting. With educate forecasting business managers can take the
necessary steps to alter the products, reduce their cost and take the
market opportunities form the changing situation of the economic
environment.