Department

Deaprtment
of Economics, SBE

Example Pool for ECO 101

In the Context of Bangladesh
Contributed by the ECO 101 faculty

2019

North South University

 Example Pool for ECO 101 in the Context of Bangladesh

This document contains examples used by the faculty members teaching ECO 101 in their classes. Most
of the examples are related to our everyday experiences in Bangladesh. It is expected that this document
will work as a ready reference for the faculty members when they are searching for Bangladesh related
examples. The examples are not copyright material, and all the contributors understand that their
colleagues are going to use these examples in their lectures. However, it is a good practice to often quote
the contributors.
This document is going to be available in soft and hard format. The hard format will be kept in the
department office whereas the soft format is going to be available to all the faculty members. This is a
living document that needs to be updated on a regular basis. All the faculty members are invited to
contribute as and when they come across new examples. The examples may come in the form of
newspaper reports, videos, stories and other forms. At some point we may reorganize this document year-
wise and/or topic wise. If you find any mistakes in this document, please feel free to make corrections and
notify others. Also please make suggestions to improve the document.
Thanks to all the contributors for their selfless effort in making this document possible in the shortest
possible time. Their commitment and dedication are exemplary.

Dr. Ahmed Tazmeen

Chair, Department of Economics
SBE, NSU
11/11/2019

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 Example Pool for ECO 101 in the Context of Bangladesh

Trading
(Contributor: Dr. Syed Mortuza Asif Ehsan)
Bangladesh has comparative advantage in producing ready-made garments (RMG) products, whereas,
Japan has comparative advantage in producing automobiles. If Bangladesh starts to produce automobiles
and Japan specializes in RMG products, neither of automobiles nor the RMG products will be produced
to the full potential.

Supply and Demand Applications

(Contributor: Dr. Syed Mortuza Asif Ehsan)
1. Shift of supply:
In May 2019, paddy price in Bangladesh at the farmers’ level hit 3-year low. Main reason behind this
was an extremely good harvest. The average retail price of coarse rice was Tk 33/kg, which last year
was Tk 44/kg. Usually, paddy price drops during the harvesting seasons. Such impacts in the rice
market can be shown with a shift of the supply curve.

2. Shift of supply and demand simultaneously:

Due to recent decision by Indian government of banning export of onion, onion price in Bangladesh
rose from Tk 40-50 to Tk 110-120. Among others one important reason is seller started to store
onions for the future, shifting the supply curve to the left. In the wake of this shortfall, GoB has
decided to import onions from Egypt and China.

3. Price ceiling:

GoB decided to set up 35 selling points, where onion will be sold at subsidized price of Tk 45/ kg.
This might cause a shortage, and eventually a black market, if the supply of onion does not match the
market demand.

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 Elasticity
(Contributors: Ms. Mahnaz Aftabi, Ms. Raisa Afsana, Dr. Syed Mortuza Asif Ehsan, Mr. Nabeel Iqbal)

1. Currently a VAT of 15% is applied on all tobacco products. Over 43% of adults in Bangladesh
consume cigarettes. Cigarette being a necessary product, an increase in tax on cigarette seller will
be ultimately incurred by the consumers. This way a significant amount of revenue can be
generated by the GoB from cigarette tax.

2. Price Elasticity of Demand: Elastic – Pizza, burger, cheese-cakes

Income Elasticity of Demand:
Cross Elasticity of Demand:
Inelastic – Rice, water, electricity
Elastic – Air travel (normal good); Local bus (inferior good)
Inelastic – Medicines (normal good); lentils (inferior good)
Substitutes – Elastic: Coke and Pepsi, Inelastic: Tea and Coffee
Complements – Elastic: Car and Petrol, Inelastic: Tea and Sugar

During Ramadan, Demand for products like dates, chhola, onions etc. becomes price inelastic.

Demand for Medicine such as insulin is perfectly price inelastic. If price of insulin falls the
patient is will still be needing the prescribed amount of doses.

3. Let us assume, a student has two options when coming to NSU: Bus and Pathao (Uber Moto). If
the bus fare increases and Pathao fare decreases then the student will consume less bus rides and
more Pathao rides.

If the bus fare increases by 10% and the number of bus rides the student takes decreases by 2%,
%∆𝑄𝑑 −2
the price elasticity of demand can be calculated as: |𝐸𝑑 | = = = | − 0.5 | = 0.5
%∆𝑃 10

Interpretation: If the bus fare increases by 1% then the quantity demanded of bus rides decrease
by 0.5%.

Due to the increase in bus fare (X), if the number of Pathao rides (Y) the student takes increase by
%∆𝑄𝑑𝑌 10
10%, then we may calculate the cross price elasticity as: 𝐸𝑐 = = =1
%∆𝑃𝑋 10

Interpretation: If the bus fare increases by 1% then Pathao rides increase by 1%. Hence, bus rides
and Pathao rides are substitutes of each other.

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 Now, if the income (pocket money) of the student increases, let’s assume by 20%, then it is likely
the student will take less bus rides and more Pathao rides. If the bus rides decrease by 10% and
the Pathao rides increase by 40%, then we may calculate the income elasticities as follows:

%∆𝑄𝑑 10
Income elasticity of bus ride: 𝐸𝑌 = %∆𝑌
= − 20 = −0.5

Interpretation: If income increases by 1% then the bus rides decrease by 0.5%. This shows bus
rides are an inferior good.

%∆𝑄𝑑 40
Income elasticity of Pathao ride: 𝐸𝑌 = %∆𝑌
= 20 = 2

Interpretation: If income increases by 1% then the Pathao rides increase by 2%. This shows
Pathao rides are normal goods.

Another Perspective:

Once the Dhaka Metro Rail is completed, a third option will be available to the students (i.e.
number of substitutes available to the student increases). Therefore, the price elasticity of demand
of bus rides and Pathao rides is likely to increase in the future once the Dhaka Metro Rail is
completed.

Why? Think about it. If the bus fare increases, the student now has the option of Metro Rail as
well as Pathao, so the number of bus rides (percentage of bus rides) is likely to decrease more (as
compared to the last scenario), and hence the 𝐸𝑑 is likely to be greater.

4. Relation between price elasticity and TR:

Products that have many substitutes have higher price elasticity. Therefore, a restaurant that has
many competitors selling similar types of food nearby, will earn higher total revenue if it
decreases price but if they increase price customers will go to other restaurants and total revenue
will fall. On the other hand restaurants with less/zero competitors can increase revenue by
increasing price as customers have no option of choosing other restaurants. (e.g Kashundi
restaurant at NSU canteen)

5. Income elasticity
• Inferior good – Bad quality rice. If a rickshaw puller wins a lottery, he will probably switch to
better quality rice.
• Normal good – eating out with friends

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 6. Cross price elasticity
• Coca cola and Pepsi (substitutes)
• Lamp and light bulb (complementary goods)
7. Elasticity and Tax
• VAT protests by private university students
• As demand for courses is inelastic, VAT can be completely transferred to consumers (students)

Consumer Behavior
(Contributors: Ms. Mahnaz Aftabi, Ms. Raisa Afsana, Mr. Nabeel Iqbal)

Law of diminishing MU – burger eating contests with friends, Unlimited pizza, iftaar offers during

Ramadan time.

Let us assume:

1) During lunch in NSU cafeteria a student has only two options: 1) Soup at BDT 100 or 2) Rice at BDT
100.

2) The budget (for lunch) of the student is BDT 100 per day.

3) The student has 3 consecutive days of classes per week.

For the first bowl, the soup gives the student 100 utils and the rice 200 utils. Since, the objective of the
student is to maximize utility (total utils), the student will have the rice.

But as the student consumes more and more rice in the coming consecutive days, (s)he is likely to get
bored of rice. Hence, the utils from the second bowl of rice is 150 utils, third bowl of rice 75 utils... This
phenomenon is called the law of diminishing marginal utility.

Instead of consuming the third rice, the student will consume the first cup of soup since (s)he gets more
utils for the same amount of money. Now, the second cup of soup if consumed will give the student 75
utils (due to the law of diminishing marginal utility) but so will the next (third) bow of rice. At this point,
the student does not have any incentive (reason) to change the pattern of consumption. The student
consumes 2 bowls of rice and 1 cup of soup over a period of 3 days. The student maximizes his total
utility (utils) by choosing this basket of good. Think about it.

Combination 1: 2 rice + 1 soup gives (200 + 150 + 100) = 450 utils

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Combination 2: 3 rice = 200 + 150 + 75 = 425 utils …. etc

There are not any other combination which gives the student greater total utility that than the first
combination.

Please note next week, after the weekend, the utilities of rice and soup return back to their original level.

Conclusion: During a period (e.g. a week) of given time consumers tend to consume a fixed basket of
good (e.g. 2 rice and 1 soup), assuming ceteris paribus. This fixed basket of good gives them the
maximum total utility from the given income.

Suppose I spend my entire income on two goods: apples and oranges. If price of apples increase, I will
buy less apples. As I buy less apples, my marginal utility of apples will increase.

As price of apples increase, oranges now become relatively cheaper compared to before. So I will buy
more oranges. As I buy more oranges, the marginal utility of oranges will decrease.

This readjustment process will continue until marginal utility per dollar becomes equal for both goods.

Production and Cost

(Contributors: Ms. Raisa Afsana, Mr. Nabeel Iqbal)

Right now in class (e.g. NAC 307), we are producing a service, that is, a lecture or education.

To produce this service we need inputs, for example, a class-room, markers, a lecturer, electricity for the
projector and AC etc.

Some of these inputs change or vary with production, e.g. if we increase the number of lectures per
semester, we will need more markers and electricity. Hence, these are variable inputs. The costs
associated with these variable inputs are called variable costs (e.g. electricity bill and cost of purchasing
markers). Note, as we increase the number of lectures per semester we need more markers and hence cost
of markers will increase; variable costs varies with production.

Some inputs do not vary with production. For example, whether we take the lecture or not, the classroom
(e.g. NAC 307) will remain as it is and will not increase or decrease in size or capacity. Hence, it is a
fixed input. The costs associated with fixed inputs are called fixed costs and they do not vary with
production. For example, whether we produce the service of a lecture in our class-room (NAC 307) or

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not, we still have to pay the rent of the room which is a fixed constant amount (let us assume NSU is
renting the room).

Cost of production is associated with the inputs. If inputs can be divided into two categories, then costs
can be divided into two categories as well. Hence, 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 = 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕 + 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕

If the rent of the lecture room is Tk 100 per semester (4 months), the variable cost (electricity, marker) is
Tk 200 per semester (24 lectures). Then, the total cost of producing 24 lectures = 𝟏𝟎𝟎 + 𝟐𝟎𝟎 = 𝑇𝑘 𝟑𝟎𝟎

Precisely, 𝑇𝑘300 is the total explicit cost; the cost which does not consider implicit cost. If, we use it to
calculate,𝒑𝒓𝒐𝒇𝒊𝒕 = 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 − 𝒆𝒙𝒑𝒍𝒊𝒄𝒊𝒕 𝒄𝒐𝒔𝒕, then we get the accounting profit. E.g., if the revenue
per semester from NAC 307 is Tk 400 then the accounting profit is,𝒑𝒓𝒐𝒇𝒊𝒕 = 𝟒𝟎𝟎 − 𝟑𝟎𝟎 = 𝑻𝒌𝟏𝟎𝟎.

However, there are opportunity costs associated with the inputs. For example, instead of producing
lectures in the-classroom (NAC 307), NSU could have rented the room to IUB at Tk 100 per month and
this is the opportunity cost or implicit cost of using the class-room in the production process. If we
include the implicit cost when calculating profit, get the economic profit,

𝒆𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝒑𝒓𝒐𝒇𝒊𝒕 = 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 − (𝒆𝒙𝒑𝒍𝒊𝒄𝒊𝒕 𝒄𝒐𝒔𝒕 + 𝒊𝒎𝒑𝒍𝒊𝒄𝒊𝒕 𝒄𝒐𝒔𝒕)

ℎ𝑒𝑟𝑒, 𝒆𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝒑𝒓𝒐𝒇𝒊𝒕 = 𝟒𝟎𝟎 − (𝟑𝟎𝟎 + 𝟏𝟎𝟎) = 𝟎

We can make an interesting observation: The economic profit is always less than the accounting profit.

We can also reach the conclusion: An organization (here NSU) will continue production even when the
economic profit is zero. Why? Because they are making a positive accounting profit of Tk 100 which is
exactly equal to the rent they could have received by renting out the room. Hence, NSU cannot be better-
off by not producing and thus continues production.

Now, let us assume, NSU has 3 class rooms (capital) which is fixed for the semester1, 2 lecturers (labor),
and only one lecturer can use a particular classroom during a semester. If NSU employs one more
lecturer, then (s)he will be able to add 24 more lectures per semester; these additional lectures that the
third (new) lecturer adds to the production process of NSU is the marginal physical product (MPP) of the
third (new) lecturer. However, if NSU employs a fourth lecturer, (s)he will not be able to add any more
lectures to the production process, since there are not any available class-rooms. The MPP of the fourth
lecturer is zero.

1
The period during one of the inputs is fixed is called the short-run. Here, one semester is the short-run.

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Here, we can observe that, as more of a variable input (lecturers) is added to the fixed inputs (class-
rooms), the additional outputs (goods or services) obtained decreases; this is called the law of diminishing
marginal returns.

If we assume, the salary of a lecturer is Tk 24 per semester (24 lectures). Then to produce one additional
𝑇𝑘24
lecture (using unitary method) NSU needs 24
= 𝑇𝑘1. (Please note: the rent of three rooms are fixed and

will not change) Therefore, one additional dollar is needed to produce one additional lecture; this is the
marginal cost of production in this case. Generally, marginal cost is defined as the additional cost of
producing one additional output.

Now, let us assume, the semester has ended and we are on semester break. During this break, NSU can
construct new class-rooms and hire more faculties, that is, all the inputs are variable inputs during the
break. The period during which all the inputs are variable is called the long-run. In the long-run there are
mainly three possibilities when all the inputs are changed:

1) If the class-room and faculty number increase by a certain percent (let’s say, 10%) and the number of
lectures (outputs) increase by a greater percent (20%), then we have increasing returns to scale.

2) If the class-room and faculty number increase by 10% and the number of lectures increase by 10% as
well, then we have constant returns to scale.

3) If the inputs increase by 10% and the output increases by 5%, then we have decreasing returns to scale.

The following costs are related to rice production in Bangladesh:

Variable Costs: Human labor, power tiller, seed, fertilizer, irrigation, pesticide
Fixed Cost: Rent on land (if land not owned by farmer)

Market Structure (Perfect competition, Monopoly, Monopolistic competition)

(Contributors: Prof. Nazrul Islam2, Ms. Parisa Shakur)
1. Monopoly Market in Bangladesh:
Bangladesh Railway (BR) is the sole firm in the railway industry of Bangladesh with no competition
whatsoever accumulating the entire market share. The prices are set by the government instead of a
private sector firm. Entry is also restricted and is regulated by the government.

2
Please see the PDF document provided by him.

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2. Monopolistic Competition in Bangladesh:
The restaurant industry given the large number of them and the variety of cuisines it serves, make
them a monopolistic competition. It is the same market but with differentiated products. The
restaurant industry has no barriers to entry.
3. Perfect Competition in Bangladesh:
Street food in Bangladesh can be an example of perfect competition. Relatively few barriers to
entry/exit exist for street vendors. Furthermore, there are often numerous buyers and sellers of a given
street food, in addition to consumers/sellers possessing perfect information of the product in question.