Independent University of Bangladesh

Master of Business Administration : MBA 505

Managerial Economics

Lecture Summary 14 November 2012

[Warning: Do not copy from this notes. Rather prepare your own notes based on this.]

What is social business

The concept of "Social Business" was developed by Nobel Laureate and founder of
Grameen Bank Prof. Muhammad Yunus. The purpose of a social business is to achieve a
maximum of social benefit through the production of affordable but high-quality products and
services adapted to the low purchasing power of poor people. Essentially, a social business
is a non-loss, non-dividend company with a social objective. All the net profits remain
within the company for further expansion and reach. The investor will get the principal
amount back, but no more beyond that. Unlike traditional business, social
business operates for the benefit of addressing social needs that enable societies to
function more efficiently. Social business provides a necessary framework for tackling
social issues by combining business know-how with the desire to improve quality of life.
Therefore instead of being self-focused, social business is all about others.

The 7 principles of Social Business are as follows:

1. Business objective will be to overcome poverty, or one or more problems (such as

education, health, technology access, and environment) which threaten people and
society; not profit maximization.

2. Financial and economic sustainability.

3. Investors get back their investment amount only. No dividend is given beyond
investment money.

4. When investment amount is paid back, company profit stays with the company for
expansion and improvement.

5. Environmentally conscious.

6. Workforce gets market wage with better working conditions.

7. Do it with joy.

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The first social businesses has been Shakti doi, the fortified yogurt, which has a direct
social impact since it fights malnutrition. Please gather more information about the Shakti
Doi project from the Internet.

The case of Shakti Doi operating in a monopoly market

Although set up as a social business, Shakti Doi is a monopoly because there is no other
firm that manufactures yogurt in Bangladesh. Therefore the firm is in a position to choose the
price of the good as well as the quantity produced.

Let us examine the pricing strategies available to Shakti Doi. Since it operates in a monopoly
market, it can choose profit maximizing price and output typical of a monopoly.

Graph-1 : Pricing for a Social Business in Monopoly

The profit maximizing condition for a monopoly is :

Marginal cost (MC) = Marginal revenue (MR).

This means monopoly firm’s total profit (TR –TC) will be maximized when its MC will be
equal to MR. In the above figure, this condition is met where the MC curve intersects the MR
curve at point E. (Note: Please observe that point E is missing form above graph. Add it,
and then take a print-out.) This point E defines the monopoly output Qm on the horizontal
axis (Quantity axis). The output Qm corresponds to point A on the demand curve D. The
corresponding point on the vertical axis indicates that profit maximizing price Pm.

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The other pricing option is to charge the break-even price Cm which corresponds to point B
on the ATC curve. Remember that ATC = Average Total Cost or generally, Average Cost
(i.e. TC / Q). If Shakti Doi is sold at a price of Cm, no profit at will be made by the firm. Also,
the firm will never operate under Cm because the company will not survive by making loss.
(Note: Observe that Shakti Doi is sold at monopoly price, Total Profit is given by the purple
area: A.B.Cm.Pm . Here, unit profit is Pm - Cm, and quantity produced/sold is Qm ).

So, Shakti Doi has the option of charging the highest price Pm and the lowest price Cm.
However, if it chooses Cm, it is rendered an NGO which a social business cannot be. An
NGO is a non-profit organization, a social business is a fro-profit organization. On the other
hand, an affordable price is expected from a social business even when it operates in a
monopoly situation. Therefore, a point anywhere in-between Pm and Cm, is the real option
for Shakti Doi.

In consideration of the social motive of Shakti Doi, one can recommend a price lower than
Pm and slightly above Cm.

A social business will be more social, if it is closer to the break-even price. So one can
suggest a price just above the break-even price (Cm).

One can emphasize the need for expansion and therefore, the need for generation and
accumulation of re-ingestible surplus. In such a case, one can suggest a price half-way
between Pm and Cm,

Exercise: Choose your price between Pm and Cm, and determine the output that will be
produced/sold at that price.

Questions: (Write here questions you’ll ask your instructor)