Lecture notes for Business Economics
(BUS-704) - 1
- Dr. Mirza Azizul Islam
Introduction:
Definition and scope of economics:
Not easy to define – can be too narrow or too broad – deals
with determination of product and factor prices and how
these prices determine allocation of resources – financial
markets – distribution of income – impact of government
spending, taxes, budget deficit on growth, income
distribution – swings in business cycles – trade among
nations, growth among developing countries etc.
Introduction:
Underlying all these are two key ideas in Economics –
scarcity and efficiency (most effective use of resources to
satisfy people’s needs)
Divided into two major branches – Microeconomics deals
with individual entities such as markets, firms and
households and macroeconomics deals with overall
performance such as growth, employment, balance of
payment, inflation and related policies (monetary, fiscal,
exchange rate, trade etc)
Three key problems of Economic
Organization
Ref: Chapter 1 Section B
What – investment goods or consumption goods – guns vs
butter – Recent purchase contract for Russian Weapons –
Hatirjheel beautification scheme vs transportation
improvement – and of course how much.
How – production techniques – capital intensive vs Labour
intensive – (agriculture) – electricity (which fuel)
For whom – who gets the fruits of growth – market
determined income distribution – minimal consumption for
the poor
CH.2 Markets and Government in a
modern economy
The mixed economy
19th century dominated by “Laissez faire” or market
mechanism.
Emergence of expanded role of the Govt. in the 20th century –
welfare state – Russian revolution of 1917.
Late 20th century (1980s) – reduction of the role of the Govt.
– privatization, deregulation, tax reduction – breakdown of
communist system in Russia and Eastern Europe.
Some rethinking – Wall street movement – 99% vs 1%
Section A: What is market?
“Amarket is a mechanism through which buyers
and sellers interact to determine prices and
quantities of goods and services”
May or may not have a physical location
“Market equilibrium” determination of prices for
which buyers desire to buy exactly the quantity that
sellers desire to sell” – yield an equilibrium of
demand and supply – Auction
How markets solve the three economic
problems (Fig: 2.1)
What – consumers/and producers of goods and
services through a system of expenditure, prices and
profits.
How – cost minimization – technology and factor
prices.
For whom – Income from factor prices (wages, rent,
interests, profits etc)- other accidental factors
Government as provider, regulator and facilitator
Section C. The Economic Role of the
Government
Government as provider, regulator and facilitator.
Imperfect competition – higher prices and lower output
Externalities – involuntary imposition of costs and benefit on
others outside the market place – noise, water pollution,
deforestation (negative externalities) – Positive (e.g. Rural
roads, discovery of life – saving drugs, primary education)
A polar case of positive externality is public goods – Non-
rivalries in consumption, non-excludability, zero marginal cost.
Section C. The Economic Role of the
Government (continued)
Equity – poverty alleviation
Macroeconomic growth and stability
Inabilityof the private sector – imperfections in the
capital market
Types of economic system:
Market, command and mixed economies
Market economy – individuals and private firms through a
system of markets, prices, profits and losses determine what,
how and for whom – Firms produce commodities that yield
profits (what) using techniques that give minimum cost (how)
and consumption decided by individuals decisions about how
to spend their income (for whom) derived for their ownership
of land, labour, capital
Types of economic system:
Command or centrally planned economy
Mixed economy
Tendency towards a declining role of the government.
Recent changes
The economic role of the Government:
Failure of the market Government Current examples of
economy intervention govt. policy from
Bangladesh
Inefficiency:
Monopoly/ Imperfect Encourage competition Competition law(?)/
competition direct provision
Externalities, Specially Intervene in markets, Anti-pollution, anti drug
negative regulate laws
Public goods Encourage/provide Undertake/Subsidize
Non-rivalries in beneficial activities research
consumption Defence/Highways
Non excludability;
MC =0
Merit goods As above Subsidy for higher
education
The economic role of the Government:
(continued)
Failure of the Government Current examples of govt.
market economy intervention policy from Bangladesh
Inequality
Unacceptable Redistribute income Progressive income taxes,
inequalities of Exemption of food items from
income wealth VAT; VGD, VGF, Employment
generation schemes
Macroeconomic problems
Business cycle Stabilize through macro Monetary/ Fiscal policies
policies
Slow economic Stimulate growth Invest in health, education,
growth infrastructure, Tax holiday etc.
Government failures
Roleof private sector executives: what and how
directly; for whom indirectly
Roleof government executives: policy decisions
with regard to the above and implementation
SELECTED ASIAN COUNTRIES: PERCENTILE RANK IN GOVERNANCE INDICATORS, 2017
Political Stability
Control of Government Regulatory Voice and
Country Rule of Law and absence of
Corruption Effectiveness Quality Accountability
violence
Bangladesh 28.37 19.23 22.12 20.67 30.05 10.48
China 44.71 46.63 68.27 48.56 7.88 36.67
Cambodia 13.46 -- 25.48 32.21 -- 52.86
India 52.88 48.56 56.73 42.31 60.10 17.14
Indonesia 40.87 48.08 54.81 51.92 50.74 29.05
Korea 85.58 67.79 82.21 82.21 71.43 58.87
Laos 18.27 15.87 38.46 25.48 4.43 63.33
Malaysia 64.90 58.17 76.44 74.52 34.48 52.38
Nepal 27.40 23.56 18.75 25.96 38.92 22.38
Pakistan 24.04 22.60 31.25 29.33 28.08 1.90
37.02 39.90 51.92 55.77 48.77 10.95
Philippines
Sri Lanka -- 41.35 48.08 50.48 43.35 42.38
Thailand 54.81 42.79 66.83 59.62 21.18 19.05
Vietnam 55.77 31.73 52.88 36.54 10.84 59.52
EASE OF DOING BUSINESS INDICATOR
This is a composite indicator based on 11 sub indicators
which are:
1) Starting a business
2) Dealing with construction permits
3) Getting electricity
4) Registering property
5) Getting credit
6) Protecting minority interest
7) Paying taxes
8) Trading across borders
9) Enforcing contracts
10) Resolving insolvency
11) Labor market regulation
SELECTED ASIAN COUNTRIES: EASE OF
DOING BUSINESS RANK, 2017
Country Rank
Bangladesh 177
China 78
Cambodia 135
India 100
Indonesia 72
Korea 4
Laos 141
Malaysia 24
Nepal 105
Pakistan 147
Philippines 113
Sri Lanka 111
Thailand 26
Vietnam 68