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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.
Economic forces
Economic forces include
Macro economic forces
Macro economic forces
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
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
INFLATION
Year
Rate
of
National(CPI)
General
6.6
2.5
7.0
8.9
3.4
Inflation
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
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.
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 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
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.
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.