*Chapter Two

**
Understanding
How
Economics
Affects
Business

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
 *
The MAJOR BRANCHES of What Is
Economics?
ECONOMICS
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• Economics -- The study of how society chooses to
employs resources to produce goods and services and
distribute them for consumption among various
competing groups and individuals.
 There are two major branches of economics:
 Macroeconomics -- Concentrates on the
operation of a nation’s economy as a whole
(the whole Bangladesh). Example: GDP, int rate
 Microeconomics -- Concentrates on the
behavior of people and organizations in
markets for particular products or services.
Example: Consumer Behavior, Supply &
Demand 2-2
 *
What Is
RESOURCE DEVELOPMENT Economics?

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Resource Development -- The study of how to
increase resources (say, by getting oil and gas from
shale and tar sands) and to create the conditions that
will make better use of those resources (like recycling
and conservation).

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 *
ADAM SMITH the Adam Smith &
the Creation of
FATHER of ECONOMICS Wealth
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Smith believed that:
• Freedom was vital to any
economy’s survival.
• Freedom to own land or
property and the right to
keep the profits of a
business is essential.
• People will work hard if they
believe they will be
rewarded.
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 *
How Businesses
The INVISIBLE HAND THEORY Benefit the
Community
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• As people improve their own situation in life,

they help the economy prosper through the
production of goods, services and ideas.
• Invisible Hand -- When self-directed gain leads to
social and economic benefits for the whole
community.

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 *
THE INVISIBLE HAND THEORY How Businesses
Benefit the
(CONT'D) Community
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How do people working in their own self-interest
produce goods, services, and wealth for others?
Answer: The only way farmers can become wealthy is
to sell some of their crops to others. To become even
wealthier, they have to hire workers to produce more
food. So the farmers’ self-centered efforts to become
wealthy lead to jobs for some and food for almost all.
Think about that process for a minute, because it is
critical to understanding economic growth in the United
States and other free countries. The same principles
apply to everything from clothing to houses to iPhones.

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 *Understanding
CAPITALISM Free-Market
Capitalism
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• Capitalism -- All or most of the land, factories and
stores are owned by individuals, not the government,
and operated for profit.
• Countries with capitalist foundations:
- United States
- England
- Australia
- Canada
 Is Bangladesh capitalist?
- At least as far as public opinion is concerned, the
People's Republic of Bangladesh is a capitalist haven.
Source: forbes.com 2-7
 *
CAPITALISM’S The Foundations
of Capitalism
FOUR BASIC RIGHTS
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1. The right to own private property.
2. The right to own a business and keep all that
business’ profits.
3. The right to freedom of competition.
4. The right to freedom of choice.

2-8
 *
ROOSEVELT’S FOUR The Foundations
of Capitalism
ADDITIONAL RIGHTS LG2
*
1. Freedom of speech and
expression.
2. Freedom to worship in your
own way.
3. Freedom from want.
4. Freedom from fear.

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 *
FREE MARKETS How Free
Markets Work

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 Free Market -- Decisions about what and how much
to produce are made by the market - by buyers and
sellers negotiating prices for goods and services.

• Consumers send signals about what they like and

how they like it.

• Price tells companies how much of a product

they should produce. If something is wanted but
hard to get, the price will rise until more products
are available.
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 *
CIRCULAR FLOW MODEL How Free
Markets Work

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2-11
 *
PRICING How Prices are
Determined

 In a free market, prices are not

determined by sellers; they are
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determined by buyers and sellers
negotiating in the marketplace.
• A seller may want to sell shirts
for $50, but only a few people
may buy them at that price.
• If the seller lowers the price to
$30, more people buy the
shirts.
• The seller establishes a price
of $30 based on what
consumers are willing to pay.
2-12
 *The Economic
SUPPLY CURVES Concept of
Supply
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 Supply -- The quantities of products businesses are
willing to sell at different prices at a specific time.
• the amount supplied will increase as the price
increases, because sellers can make more money
with a higher price.

2-13
 *The Economic
DEMAND CURVES Concept of
Demand
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 Demand -- The quantities of products consumers are
willing to buy at different prices at a specific time.
• the quantity demanded will increase as the price
decreases.

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 *The Equilibrium
EQUILIBRIUM Point or Market
Price
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• Market Price (Equilibrium Point) -- Determined by
supply and demand, this is the negotiated price.
• In the long run, Equilibrium price will
become the market price (determined by
supply and demand).

 If quantity supplied exceeds quantity demanded,

the resulting surplus signals sellers to lower the
price.
 If shortages develop because the quantity
supplied is less than quantity demanded, it
signals sellers to increase the price.
2-15
 *The Equilibrium
EQUILIBRIUM (CONT'D) Point or Market
Price
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*

• In countries without a free market (Government

decides), there is no mechanism to reveal to
businesses (via price) what to produce and in what
amounts, so there are often shortages (not enough
products) or surpluses (too many products). 2-16
 *Competition
FOUR DEGREES Within Free
of COMPETITION Markets
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1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly

2-17
 FOUR DEGREES * Competition
Within Free
Markets
of COMPETITION
1. Perfect Competition: The degree of competition in
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which there are many sellers in a market and none is
large enough to dictate the price of a product. Example –
agricultural products.

2. Monopolistic Competition: The degree of competition

in which a large number of sellers produce very similar
products that buyers nevertheless perceive as different.
Example – T-shirts, fast food etc.
 Product differentiation—the attempt to make buyers
think similar products are different in some way—is a
key to success. Through advertising, branding, and
packaging, sellers try to convince buyers that their
products are different from competitors’, though they
may be very similar or even interchangeable
2-18
 FOUR DEGREES * Competition
Within Free
Markets
of COMPETITION (CONT'D)
3. Oligopoly: A degree of competition in which just a
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*
few sellers dominate the market. Example – mobile
operators, aircraft, automobiles etc.
 One reason some industries remain in the hands of a few
sellers is that the initial investment required to enter
the business often is tremendous.
 In an oligopoly, products from different companies tend to
be priced about the same. The reason is simple: Intense
price competition would lower profits for everyone.

4. Monopoly: A degree of competition in which only

one seller controls the total supply of a product or
service, and sets the price. Example – Gas supply.
 In the United States, laws prohibit the creation of
monopolies.
2-19
 *Benefits and
FREE MARKET BENEFITS and Limitations of
LIMITATIONS Free Markets
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Benefits:
• It allows for open competition among companies.
• Provides opportunities for poor people to work their
way out of poverty.
• Free Market Capitalism also encourages businesses
to be more efficient so they can successfully
compete on price and quality.
• Free Market Capitalism brought prosperity.

Limitations:
• People may start to let greed drive them.
• Free Market Capitalism brought inequality as well. 2-20
 *
SOCIALISM Understanding
Socialism

LG3
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Socialism -- An economic system based on the premise
that some basic businesses, like utilities, should be
owned by the government in order to more evenly
distribute profits among the people. Some of the most
socialistic nations in the world today: China, Denmark,
Finland, Netherlands etc.

•Entrepreneurs run smaller businesses

•Citizens are highly taxed (US - 39.6% and
Socialist country - 75%)
•Government is more involved in protecting the
environment and the poor
2-21
 *
SOCIALISM BENEFITS The Benefits of
Socialism

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• Social equality
• Free education
• Free healthcare
• Free childcare
• Longer vacations
• Work fewer hours per week
• More employee benefits (e.g., generous sick
leave)

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 *The Negative
The NEGATIVES of SOCIALISM Consequences
of Socialism
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• Few incentives for businesspeople to take risks.

• Brain Drain: Some of a countries best and brightest

workers (i.e. doctors, lawyers and business owners)
move to capitalistic countries.

• Fewer inventions and innovations because the

reward is not as great as in capitalistic countries.

2-23
 *
COMMUNISM Understanding
Communism

• Communism -- An economic and political system

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in which the government makes almost all
economic decisions and owns almost all the major
factors of production.
• Some communist countries have not allowed
their citizens to practice certain religions,
change jobs, or move to the town of their
choice.
• One problem with communism is that the
government has no way of knowing what to
produce, because prices don’t reflect supply and
demand as they do in free markets.
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 *
COMMUNISM (CONT'D) Understanding
Communism

LG3
*
• Another problem is that communism doesn’t
inspire businesspeople to work hard because
the incentives are not there.
• Most communist countries today suffer severe
economic depression and citizens fear the
government.
• In North Korea, many people are starving. In Cuba,
people suffer a lack of goods and services readily
available in most other countries, and some fear the
government.
• Communism may be considered a more intensive version
of socialism
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 *
ANALYSIS OF ECONOMIC Understanding
Communism
CONDITIONS OF BANGLADESH
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Three major indicators of economic conditions are:

(1) the gross domestic product (GDP);

(2) the unemployment rate; and
(3) price indexes.

Another important statistic is the increase or

decrease in productivity.

2-26
 *
GROSS DOMESTIC PRODUCT Gross Domestic
Product

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• Gross Domestic Product (GDP) -- Total value
of final goods and services produced in a country in
a given year. As long as a company is within a
country’s border, their numbers go into the
country’s GDP (even if they are foreign-owned).

• The GDP has increased to $275 billion (Tk 2,238,498

crore) in the current fiscal year, from $249 billion
(Tk1,975,815.4 crore) in 2016-2017 fiscal year.
• In terms of GDP, Bangladesh is now the 43rd largest
economy in the world, as opposed to being the 58th
largest economy in 2010.
Source: www.dhakatribune.com
2-27
 *
GROSS DOMESTIC PRODUCT Gross Domestic
Product

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• BD will have the 20th largest GDP in the world by
2041
• The services sector is making the highest contribution
to the GDP growth, at 52.18%, the contribution of the
industrial sector is 33.71%, while that of agriculture is
14.10 percent.
• Current GDP growth rate is 7.86%
• In the last fiscal year (2016-2017), the GDP growth
rate was 7.28%
• Bangladesh's per capita income had increased to
$2,227 from $1,752 (2021) Source: https://
www.thedailystar.net/business/news/capita-income-bangladesh-rises-2227-2145696

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 *The
UNEMPLOYMENT Unemployment
Rate
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• Unemployment Rate -- The percentage of civilians at
least 16-years-old who are unemployed and tried to
find a job within the prior four weeks.
• Unemployment is defined as a situation where someone of
working age is not able to get a job but would like to be in
full-time employment.

• The unemployment rate in Bangladesh will remain static at 4.4

% in 2018 and 2019, according to ILO.
• It estimated that the unemployed people in Bangladesh in 2018
would increase to around 3.0 million from 2.9 million in 2017
• Unemployment rate at 3.5 % in India, 4.2 % in Pakistan
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 *
Inflation and
PRICE INDEX Price Indexes

LG5
*
• Consumer Price Index (CPI) -- Monthly statistics
that measure the pace of inflation (the general rise in the
prices of goods and services over time) or deflation
(prices are declining because too few dollars are
chasing too many goods)
https://www.investopedia.com/terms/d/deflation.asp
• The government computes the costs of goods and services
(housing, food, apparel, medical care, etc.) to see if they are going
up or down.
• Cost of living in Dhaka city revealed that the cost during
the last eight years in Dhaka city has increased by 71%
Inflation rate is 5.74%
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 *
Productivity in
PRODUCTIVITY the United States

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• Productivity in the service sector grows slowly
because of less new technology. Output/Input
• Productivity in the U.S has risen due to the
technological advances that have made
production faster and easier.

2-31
 *
PRODUCTIVITY in the Productivity in
the Service
SERVICE SECTOR Sector
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• The higher the productivity, the lower the costs of
producing goods and services. This helps lower
prices.
• New technology adds to the quality of the
services provided but not to the worker’s output.
• A new form of measurement needs to be created
to account for the quality as well as the quantity
of output.

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