Sie sind auf Seite 1von 91

Term Paper

ECONOMIC CONCEPTS, TOOLS AND TECHNIQUES USED IN BANGLADESH TEA


INDUSTRY

ECONOMIC CONCEPTS, TOOLS AND TECHNIQUES USED


IN BANGLADESH TEA INDUSTRY

Submitted to:
Professor Dr. A.K.M. Saiful Majid
Institute of Business Administration
University of Dhaka

Submitted by:
Shamsil Arefin (ID No-01, 51D)
Datta Sree Rajib Kumar (ID No-05, 51D)
Ariful Hossain Tuhin (ID No-29, 51D)
Md. Rashedul Islam (ID No-51, 51D)

May 02, 2015

May 02, 2015


Dr. A. K.M. Saiful Majid
Professor
Institute of Business Administration
University of Dhaka
Subject: Submission of the term paper on economic concepts, tools and techniques
used in Bangladesh tea industry.
Dear Sir,
Please accept this term paper that you have assigned for the course Managerial
Economics. The study will involve investigating and relating different economic
concepts to the activities of tea markets of Bangladesh. Through this study, we will
able to obtain a deeper insight and perform real-world application of the various
concepts that you have taught us in the class.
Lastly, I would be thankful once again if you please give your judicious advice on our
effort.
Sincerely yours

Shamsil Arefin (ID No-01, 51D)

Datta Sree Rajib Kumar (ID No-05, 51D)

Ariful Hossain Tuhin (ID No-29, 51D)

Md. Rashedul Islam (ID No-51, 51D)


i

Executive Summary:
This report was commissioned to identify economic concepts, tools and techniques
used in Bangladesh tea industry as a partial requirement for the completion of
Managerial Economics Course. The research draws attention to the fact that in 1991,
total tea production in Bangladesh was 18.36 million kg. Total consumption of tea was
14.21 million. In 2000, total tea production in Bangladesh was 47.67 million kg, Total
consumption of tea was 38.79 million and in 2013 total tea production in Bangladesh
was 66.26 million kg., total consumption of tea was 64 million. These data are used to
determine the production function. We found the industry input-output relationship
is constant return to scale.
Historical data of quantity demanded and supplied in tea market from 1991 to 2013 is
also obtained from the website of Bangladesh Tea Board to identify demand and
supply trend throughout this time. However, there has been very few researches on
tea industry of Bangladesh before and data on prices of tea products is not available.
As a result, it is not possible to determine the demand function and supply function.
A small scale survey is conducted to find out the market structure. We have found
that, the market is monopolistic in nature. From the survey result, it is clear that the
market consists of many buyers and many sellers and the products in the market are
slightly differentiated.

ii

Table of Contents
Chapter 1.................................................................................................................................... 1
1.0 Introduction ......................................................................................................................... 1
1.1 Objectives: ........................................................................................................................ 2
1.2 Scope: ............................................................................................................................... 2
1.3 Industry Overview: ........................................................................................................... 2
1.4 History: ............................................................................................................................. 3
1.4.1 Tea gardens: .............................................................................................................. 4
1.4.2 Tea trade .................................................................................................................... 5
1.4.3 Volume share of four tea brands............................................................................... 6
1.5 About Ispahani Mirzapore Tea ......................................................................................... 7
1.5.1 Organization Structure .............................................................................................. 9
1.5.2 Products Mix .............................................................................................................. 9
1.5.3 Company Performance Review ............................................................................... 10
1.5.4 Prospects of Ispahani Mirzapore Tea ...................................................................... 11
1.6 About Duncan Brothers Bangladesh limited .................................................................. 13
1.6.1 Organization Structure ............................................................................................ 14
1.6.2 Products Mix ............................................................................................................ 14
1.6.3 Company Performance Review ............................................................................... 15
1.6.4 Prospects of Duncan Brothers Ltd. .......................................................................... 15
1.7 About Kazi & Kazi Tea Estate Ltd .................................................................................... 16
1.7.1 Organization Structure ............................................................................................ 17
1.7.2 Products Mix ............................................................................................................ 17
1.7.3 Company Performance Review ............................................................................... 18
1.7.4 Prospects of Kazi & Kazi Tea .................................................................................... 19
1.7.5 Marketing strategy of Kazi & Kazi Tea ..................................................................... 19
1.8 National Tea Company Limited ...................................................................................... 20
1.8.1 Organization Structure ............................................................................................ 20
1.8.2 Products Mix ............................................................................................................ 21
1.8.3 Company Performance Review ............................................................................... 21
1.8.4 Prospects of National Tea Company Limited .......................................................... 21
1.9 Limitations ...................................................................................................................... 21
Chapter 2.................................................................................................................................. 22
2.0 Literature review................................................................................................................ 22
iii

Chapter 3.................................................................................................................................. 24
3.0: Methodology..................................................................................................................... 24
3.1 Conceptual framework ................................................................................................... 24
3.2 Formulation of objectives .............................................................................................. 24
3.3 Data collection................................................................................................................ 25
3.3.1 Primary data source................................................................................................. 25
3.3.2 Secondary data source ............................................................................................ 25
3.4 Data analysis................................................................................................................... 26
3.4.1 Qualitative analysis .................................................................................................. 26
3.4.2 Quantitative analysis ............................................................................................... 26
3.4.3 Sources of required data ......................................................................................... 27
3.5 Data Analysis & Findings ................................................................................................ 27
3.5.1 Availability of Different Brands ............................................................................... 27
3.5.2 Weekly Sales of Different Brands ............................................................................ 28
Chapter 4.................................................................................................................................. 30
4.0 Ten principles of economics (regarding four tea brands).................................................. 30
Chapter 5.................................................................................................................................. 36
5.0

Circular Flow Diagram ................................................................................................... 36

Chapter 6.................................................................................................................................. 40
6.0 Demand analysis ................................................................................................................ 40
6.1 Demand .......................................................................................................................... 40
6.2 Tea consumption/demand of tea in Bangladesh ........................................................... 40
6.3 The annual demand trend of tea in Bangladesh ............................................................ 43
6.4 Factors affecting the demand of tea .............................................................................. 44
6.5 Development of demand function ................................................................................. 45
6.6 Demand of tea in market ............................................................................................... 46
6.7 Shift in demand curve .................................................................................................... 47
Chapter 7.................................................................................................................................. 49
7.0 Supply analysis ................................................................................................................... 49
7.1 Supply ............................................................................................................................. 49
7.2 Factors affecting supply ................................................................................................. 49
7.3 Supply trend ................................................................................................................... 50
7.4 Shift in supply curve ....................................................................................................... 50
7.5 Equilibrium Point ............................................................................................................ 52
iv

Chapter 8.................................................................................................................................. 53
8.0 Elasticity ............................................................................................................................. 53
8.1 Elasticity.......................................................................................................................... 53
8.2 The price elasticity of demand ....................................................................................... 54
8.3 Are tea brands inelastic or elastic? ................................................................................ 55
8.4 The price elasticity of supply .......................................................................................... 55
Chapter 9.................................................................................................................................. 56
9.0 Production function ........................................................................................................... 56
9.1 Input- Output ................................................................................................................. 56
Chapter 10................................................................................................................................ 58
10.0: Market structure ............................................................................................................. 58
10.1 Many sellers ................................................................................................................. 58
10.1.1 Sterling companies ................................................................................................ 59
10.1.2 Bangladesh tea brand ............................................................................................ 60
10.1.3 Bangladesh private limited companies ................................................................. 60
10.1.4 Bangladeshi proprietors ........................................................................................ 60
10.1.5 Government........................................................................................................... 61
10.1.6 Brokers ................................................................................................................... 61
10.1.7 Banks...................................................................................................................... 61
10.1.8 Exporters and internal buyers ............................................................................... 62
10.2 Monopolistic Competition for Tea Market .................................................................. 62
10.3 Barriers to entry ........................................................................................................... 62
10.4 Dependency of Suppliers on Buyers ............................................................................ 62
10.5 Vertical Integration ...................................................................................................... 63
10.6 Rivalry among established companies ......................................................................... 63
10.7 Competitive structure .................................................................................................. 63
10.7.1 Low switching cost ................................................................................................. 65
10.7.2 Product differentiation .......................................................................................... 65
10.8 Exit barriers .................................................................................................................. 65
10.9 The bargaining power of buyers .................................................................................. 66
10.9.1 Purchase volume of buyers ................................................................................... 66
10.10 The bargaining power of suppliers............................................................................. 66
10.10.1 Number of suppliers ............................................................................................ 67
10.10.2 Differentiated product and switching cost.......................................................... 67
v

10.11 Threat of substitute product ...................................................................................... 67


10.11.1 Low switching cost............................................................................................... 68
10.11.2 Customers loyalty ................................................................................................ 68
10.11.3 Income level of customers .................................................................................. 68
10.11.4 Taste and preferences ......................................................................................... 68
10.11.5 Frequency of consumption.................................................................................. 69
Chapter 11................................................................................................................................ 70
11.0 Government Policies for Tea Industry ............................................................................. 70
11.1 Bangladesh Tea Board: ................................................................................................. 70
11.2 Bangladesh Tea Research Institute .............................................................................. 71
11.3 Price Control: ................................................................................................................ 71
11.4 Tax ................................................................................................................................ 72
11.5 Government incentives ................................................................................................ 72
Chapter 12................................................................................................................................ 73
12.0 Production Cost................................................................................................................ 73
Chapter 13................................................................................................................................ 75
13.0 Game theory .................................................................................................................... 75
Chapter 14................................................................................................................................ 77
14.0 Contribution of tea industry on national economy ......................................................... 77
Chapter 15................................................................................................................................ 78
15.0 Conclusion ........................................................................................................................ 78
Bibliography: ............................................................................................................................ 80
Appendices............................................................................................................................... 81
A.1: ....................................................................................................................................... 81
A.2 ........................................................................................................................................ 82
A.3 ........................................................................................................................................ 83

vi

Chapter 1
1.0 Introduction
Tea is the most popular drink in Bangladesh. It is also one of the major exportable
commodities of the country. In the form of employment generation, earning foreign
exchange and balancing trade deficit it plays an important role in the economy. The
industry employs about 1, 50,000 ethnic people (with about 500000 dependents) living
in far flung areas of the country. A total of 163 teagardens produce approximately 60
million kilograms of tea annually (Bangladesh tea Board). Roughly about 25% all tea
produced in the country are exported annually to countries like Pakistan, UAE,
Kazakhstan, Uzbekistan, India, Poland, Russia, Iran, and UK, while the rest are sold in
the local market. The total export earning is around 20million US dollars. While the
share of total foreign currency earnings from tea has dropped substantially in recent
years, the demand forte in the local market has gone up significantly in the same time
period. In last 10 years demand of tea had been increased quite sharply in local market
taking the tea consumption to 48 million kipper year. On an average per capita
consumption of tea in Bangladeshis about 390gms.
The major players in the production and marketing process of tea are the Producing
firms (gardeners), the tea brokers and organized buyers like, tea traders and exporters
who buy tea in the form of an industrial good. Tea is plucked from the gardens and
processed in the manufacturers' factories. Chests and packages of tea are then sent to
the brokers who then use their in-house tea tasters to grade the tea, determine its
quality and set a base price. Brokers also arrange to send tea leaf samples to potential
buyers to help them determine their bidding price. The actual buying and selling takes
place at an auction arranged by the brokers typically once in a week beginning early
May of every year and spanning until the March of the following year by which the
entire crop is disposed of. Tea brokers charges 1% of the sale price as brokerage and
also an additional 1% as levied by the Bangladesh Tea Board on all producers.

In view of the upward trend in demand of tea in international as well as domestic


market, one can reasonably expect tea industry to be a prospective area of
investment. However, the attractiveness of the industry not only includes the demand
of the product. It also comprises the strength of the competition, suppliers power,
investment warranted etc.

1.1 Objectives:
Depicting the present condition of Bangladesh tea industry and its impact on
macro economy (GDP, inflation, employment rate etc).
Understanding and addressing the importance and implementation of various
managerial economic theories in Tea industry.
Analyzing Production factors, Market structures and government policies from
the perspective of tea industry from economic perspective
Illustrating and relating different economic theories such as demand-supply,
Elasticity, Game theory, etc. with Ispahani Mirzapore concern companies M.M
Ispahani Ltd., Kazi & Kazi Tea, National Tea Company Limited, Duncan brothers
(Bangladesh) limited.

1.2 Scope:
The scope of this arrangement includes an analysis of the tea Industry of Bangladesh,
particularly identifying firms within tea industry and their economic activities inside
Bangladesh and finally relate their economic practices with Managerial Economics
cIspahani Mirzaporese. This arrangement also includes an assessment of the current
competitive landscape in Bangladesh tea industry. Additionally, the project team will
investigate what market structure does the industry follows. The arrangement
concludes with the deliverance of a viable model for tea industry as a means of better
understanding of Managerial Economics cIspahani Mirzaporese.

1.3 Industry Overview:


Tea has developed in Bangladesh as an agro-based, labor intensive, importsubstitution and export-oriented industry over the last 150 years. The country
2

produced 66.26 million Kg of tea from 58,719 hectare of land (1250 Kg/ha) and
consumed 64.00 million Kg of tea in 2013. It provides direct employment to about one
lakh tIspahani Mirzaporenty three thousand people. 50% of whom are women. The
needs of the permanent workers and about 4 lakh of their dependents are being
looked after by the industry
The internal consumption of tea has been increasing rapidly in last era. In 2001,
internal consumption was 36.95 million kg and in 2013, it is increased to 64.00 million
kg. Now the number of tea garden is 166, area under tea is 58719 hectare, production
is 66.26 million kg and yield per hectare increased to 1320 kg. At present Small Holding
Tea Sub-sector has newly emerged in northern districts and Chittagong Hill tracts.

1.4 History:
History of Bangladesh Tea Industry dates back to 1840 when a pioneer tea garden was
established on the slopes of the hills in Chittagong where the Chittagong Club now
stands. First commercial tea garden was established in 1857 at Mulnichera in Sylhet.
During the partition in 1947, Bangladesh (the then East Pakistan) owned 103 tea
estates, covering 26,734 hectares of tea plantation with annual production of 18.36
M.Kg. with a yield of about 639 Kg. per ha. Home consumption was around 13.64 M.
Kg. up to 1955. After that home consumption Ispahani Mirzaporent up rapidly and
Government imposed 3% mandatory extension of tea area per year in 1961. Ten years
later by 1970, tea area was extended to 42,658 hectares and production was increased
to 31.38 M.Kg. Tea is an important export item in Bangladesh. Bangladesh ranks tenth
among the ten largest tea-producing and exporting countries in the world. In the year
2000, the countrys tea production was 1.80% of the 2,939.91 million kg produced
worldwide.
During liberation war in 1971, Ispahani Mirzapore tea industry suffered colossal
damages which resulted in poor management, high vacancies, insufficient inputs,
dilapidated factory machinery, inadequate maintenance etc. leading to low Ispahani
Mirzaporer yield and poor quality of tea. But the industry soon got a big push on behalf
3

of the government through a massive development program (BTRP-1980-92) with the


financial and technical assistance of the British ODA and EEC and production increased
to 65.84 million kg. With per/ha. Yield of 1255kg. in 2013.

1.4.1 Tea gardens:


Most of the 163 tea estates in Bangladesh are located in the North-eastern region of
Bangladesh-Maulvi Bazar, Hobiganj, Sylhet, Brahmanbaria districts. There are a few
number of tea estates in Panchagar District and in Chittagong, a South-eastern district.
Owners of tea gardens include both foreign and local companies. While fIspahani
Mirzapore Sterling companies own 27 estate, Bangladeshi companies and individuals
own the rest of the tea gardens. The fIspahani Mirzapore foreign companies are James
Finlay, Duncan Brothers, Deundi Tea Company and The New Sylhet Tea Estate.
All the 163 tea estates are managed by five different categories of management:
1. Sterling companies
2. National Tea company
3. Bangladesh Tea Board
4. Bangladeshi Private Limited Companies
5. Bangladeshi Proprietors
The estates are categorized into three according to their production capacities. They
are:
Category A: All the A category estates that have the highest productivity belong to
the British companies (fully or partially).
Category B: The Bangladeshi government, Bangladeshi tea companies or Bangladeshi
individuals own this category of estates.
Category C: The family owned small and low productive estates belong to this
category. Wages and working conditions are at their worst in the tea estates under
this category.
4

1.4.2 Tea trade


Marketing of tea is the process of selling
manufactured tea in bulk from tea estates to the
buyers through Chittagong Auction who sell it in
the local market or export it to other countries
either in bulk or in packets. Some of the teas are
also sold at estate level with prior permission of
Bangladesh Tea Board either directly to overseas
buyers or to the internal traders. Tea Auction is
held on usually every Tuesday at Chittagong, a major port city with sufficient
warehouse and port facilities and Ispahani Mirzaporell connected by road, railways
and air. Tea Traders Association of Bangladesh organizes the Ispahani Mirzaporeekly
tea auction in Chittagong through the appointed tea brokers of Bangladesh Tea Board.
In retailer market tea is sold in two forms i.e. as tea bag and as regular tea. Majore
players in retail tea markets are
1. Ispahani Tea
2. Duncan
3. Finlay
4. HRC
5. Lipton Taaza (UniLever)

1.4.3 Volume share of four tea brands


Figure 1: Relative Market Share
HRC Tea
Duncan Tea 5%

Others
4%

5%
Lipton Taza
8%

Cylon Tea
10%
Ispahani Mirzapur
Tea
68%

Ispahani Mirzapur Tea

Cylon Tea

Lipton Taza

Duncan Tea

HRC Tea

Others

According to a rough estimation by Bangladesh Tea Board (BTB) Ispahani is the largest
tea trading company in the country and dominates the domestic tea market, capturing
approximately 68% of the national branded tea market and 80% of the branded teabag market. Ispahani Tea is renowned all over Bangladesh and its bestselling brands
such as Mirzapore Best Leaf and Mirzapore Double Chamber Tea Bags are household
names. Cylon tea holds another 10% share in the tea market. Lipton Taza holds the
third place in the market with 8% market share.

1.5 About Ispahani Mirzapore Tea


The Ispahanis have been involved in
business in South Asia since 1820. Mirza
Mohammed

Ispahani

established

the

Calcutta office of M.M. Ispahani & Sons in


1900. Mirza Mohammed Ispahanis eldest
son, Mirza Ahmed Ispahani, joined the
partnership in 1918 and, with his younger
brothers, Mirza Abol Hassan Ispahani and
Mirza Mahmood Ispahani, established the
private limited company, M.M. Ispahani
Limited, in 1934. In 1947 the corporate
Head Office was moved to Chittagong,
where it stands today. With corporate offices in Chittagong, Dhaka and Khulna and,
through its tea, textile, jute, property, poultry and shipping divisions, the Group
employs approximately 10,000 people.
Corporate and Social responsibility form a large part of the Ispahani philosophy.
Throughout Ispahani Mirzapore history Ispahani Mirzapore have endeavIspahani
Mirzaporeed to support and advance worthwhile causes. Ispahani Mirzapore have
established schools and colleges in Bangladesh as Ispahani Mirzaporell as the
renowned Islamia Eye Hospital.

The latter is a centre of excellence for providing modern, efficient and cost-effective
eye care. With a specialist line up of up to 40 doctors, 35 surgeons, trained nurses,
paramedics and other staff, Islamia Eye Hospital has been looking after the eye care
needs of thousands of Bangladeshis since its inception in 1960. Furthermore, the
Group sponsors various cricket, football, golf and tennis tIspahani Mirzaporenaments
as Ispahani Mirzaporell as the National Cricket League.
Today, after decades of business in South Asia, the Ispahani Group is still dedicated to
providing high quality goods and services as Ispahani Mirzaporell as having a positive
impact on the community at large.
8

1.5.1 Organization Structure


Blessed with a 184-year-old heritage, the House of Ispahani is one of the most
respected business concerns in the entire subcontinent today. The company's
historical roots can be traced way back to 1820 when its founder Haji Mohammed
Hashem moved from Isfahan, Persia to Bombay and started a business that soon
expanded phenomenally in both scale and coverage. In Bangladesh, the first branch
office was opened in Dhaka in 1888; after 1947, the corporate headquarters of M. M.
Ispahani Ltd. was shifted from Calcutta to Chittagong. Today, the company -- still
continuing in its private limited structure -- is involved in numerous sectors as
diversified as textiles and tea, real estate and poultry, shipping and internet services.
It has corporate offices in Chittagong, Dhaka and Khulna employing more than 20,000
people in its various concerns. The founding family is still very much hands-on involved
in existing and new businesses. Three brothers -- Ali Behrouze, Salman, and Shakir -are now at the helm, but over time, the owners have also been able to instill
professional and structured management across the businesses at different levels so
that processes are self-sustaining.

1.5.2 Products Mix

Acknowledged as a pioneer in the marketing of tea, Ispahani Mirzapore introduced to


the Bangladesh tea market the laminated pouch, the double chamber tea bag, the
stand up pouch, the food grade jar, the three layer pouch, the 10 gms easy pack and
the bag-in-bag packet.
9

Ispahani Mirzapore Tea Department selects, blends and packs the finest tea for both
the local and international markets. It prides itself on quality and achieves a very high
degree of customer satisfaction. Best-selling brands such as Mirzapore Best Leaf,
Mirzapore Double Chamber Tea Bags, Blenders Choice and Zareen are market leaders
and household names in Bangladesh.

1.5.3 Company Performance Review


The Ispahani Group is a pioneer in many fields and remains one of the most successful
and respected business houses in Bangladesh. It is the largest tea trading company in
the country and dominates the domestic tea market, capturing approximately 50% of
the national branded tea market and 80% of the branded tea-bag market. Ispahani Tea
is renowned all over Bangladesh and its best-selling brands such as Mirzapore Best
Leaf and Mirzapore Double Chamber Tea Bags are household names. The company
has an unrivalled distribution network of over 490 sales centres under 20 zonal offices
in Chittagong, Dhaka, Dhaka North, Bogra, Barisal, Comilla, Khulna, Kushtia,
Mymensingh, Rangpur, Dinajpur, Sylhet, Dhaka South, Dhaka East, Kishorganj,
Chittagong South, Chittagong North, Jessor, Rajshahi and Faridpur. It also owns
fIspahani Mirzapore of the finest tea gardens in Bangladesh: Ghazipore, Mirzapore,
Zarreen and Neptune, all of which are equipped with state-of-the-art tea
manufacturing machinery.
The Ispahani group has been the forerunner in numerous fields and has achieved
noteworthy success in its many endeavours. Ispahani Tea is a household name and is
the largest tea trading company in the country. It dominates the domestic tea market
by capturing about 50 percent of the national branded tea market and 80 percent of
the branded tea-bag segment. Particularly, the Mirzapore brand is a widely popular
name distribution partners often identify the entire company as the "Mirzapore Tea"
company. Pahartali Textile and Hosiery Mills (PTHM), established in 1954 with 18,000
spindles, is one of the pioneers in local textile manufacturing. The shipping division has
been representing many world-renowned shipping lines and non-vessel operating
common carriers in Bangladesh for the last 50 years. M.M. Ispahani Ltd. was again a
10

pioneer in private sector power generation in 1951 at Pahartali. Turnover of the core
group of companies amounted to more than Tk 200 crore in 2003; its export figures
are also impressive. Tea and cotton yarns exported in 2003 were worth Tk 82.7 crore
bringing the cumulative total amount exported in the last five years to about Tk 263.8
crore.
For export, Ispahani offers tea of Bangladesh origin
To all destinations in loose and packet form
In original or in blended form
Ispahani has an unrivaled distribution network of sales centers and divisional offices
spread all over the country.
At the Tea Blending & Packeting Factory, Ispahani Mirzapore use a hygienic state-ofthe-art blending system, where tea is cleaned and blended automatically. Most
modern packing machines are used to pack tea with Ispahani Mirzaporeight checking
and rejection system so as to ensure the desired quantity with minimum tolerance in
each packet. All European origin machines are used to make best quality tea-bags in
Ispahani Mirzapore country.
Ispahani achieved ISO 9001:2008 certification for its quality management system.

1.5.4 Prospects of Ispahani Mirzapore Tea


Why is the company involved in such a diverse range of activities? Mirza Salman
Ispahani, managing director of the group, replied, "Different businesses emerged
because of different reasons -- we entered the travel and ISP sectors by spinning of
internal departments which were doing a good job. The foods segment was an
attractive idea considering the distribution synergies with the existing tea business".
Salman feels the name Ispahani represents something of value to the average person
today -- it stands for dependability and quality product, a perception that has been
possible only after years of consistent performance. Other strengths of the company
include continuous investment in infrastructure to ensure quality production,
11

investment in human resources training, price competitiveness which comes from


economies of scale in purchasing and marketing, ability to respond quickly to market
changes, and established goodwill in the market.
Challenges facing this generation of Ispahanis are different from those handled by
predecessors. The overall market is now more competitive, quality and productivity
are more critical factors today than ever before. Management, however, considers the
future to be promising for both tea and textiles -- the primary revenue-generating
sectors of the group. Tea has increasingly become less vulnerable to volatility in
international markets since 80 percent of local production is now consumed
domestically. Forecasts for textiles are also optimistic since competitiveness and short
lead times in the future will have to mean local sourcing. In that scenario, anyone
offering quality products at competitive prices -- while managing cost efficiencies,
productivity, and up-to-date learning -- should be able to survive the post-MFA (multi
fibre arrangement) challenges. Future plans of the company include expansion of tea,
textiles, and ISP and poultry divisions of the group. Up until now, the group's financing
strategies have remained outside the realm of the public stock market but the owners
may consider it as an option for new businesses. Salman explained the reason, "Since
our initial equity was invested in 1934 -- which has grown manifolds over the years -a public offering at this point of time will result in huge capital gains tax. But it is a plan
for smaller and new investments".
Ever heedful of its social responsibilities, the Ispahani family has spent huge amounts,
over the years, to support and advance worthwhile causes. Family members have
established numerous schools and colleges in both Dhaka and Chittagong; Ispahani
Mirzapore Tea has been sponsoring the National Cricket League for the last three
years. Furthermore, the Ispahani group often sponsors various cricket, football, golf
and tennis tournaments in Chittagong. The Islamia Eye Hospital was founded in Dhaka
in 1960 as a charitable dispensary and has now been upgraded to a 200-bed state-ofthe-art eye hospital. Supported by a specialist lineup of 75 surgeons and doctors, this

12

one-of-a-kind institution has played an outstanding role in meeting the eye care needs
of this country.
Since the theme of the Bangladesh Business Awards is "Bringing Global Corporate
Standards to Bangladesh", we asked what global standards Ispahani has succeeded in
implementing locally. Salman's answer was, "Exposure to international benchmarks.
We send managers from the tea and textiles divisions abroad regularly to attend
training sessions and trade fairs so that they can keep abreast of what's happening in
their fields". Today, after centuries of business in the subcontinent, the House of
Ispahani is still dedicated to its mission of excellence in providing high quality goods
and services, making a positive impact on the overall community, and attaining
leadership positions in all its operating sectors.

1.6 About Duncan Brothers Bangladesh limited


Duncan Brothers is a Camellia Plc group company, which in addition to Bangladesh has
investments in the UK, India, Brazil, South Africa, Kenya, Malawi, Switzerland, the US,
the Netherlands and Bermuda. The investments are diversified, however agriculture
and horticulture is Camellias core business. Camellia produces nearly 80 million kgs of
tea which makes it one of the world's largest and the most geographically diversified
producers of tea in the private sector.
"Camellia sinensis", the tea plant, is of major commercial importance as tea is made
from its leaves. It is an exquisite name, for a remarkable gift of nature, both in terms
of aesthetic beauty and the multiple benefits derived from the bush. The name in
essence also reflects the Groups philosophy and objectives where humane
considerations are equally important as its business. This is what makes the Group
unique with a long history of 150 years in the subcontinent. The primary and overall
strategic direction of the Group has always been to be an asset based agricultural
company with a focus on the long term.

13

1.6.1 Organization Structure


Camellia Plc is incorporated in the UK and has interests in a wide range of activities in
different countries of the world. Its major interests are in the U.K., India, Bangladesh,
East and Central Africa, the USA, Switzerland, Brazil, Bermuda and the Netherlands.
In the U.K., the Groups portfolio includes investments in property, engineering, cold
storage, warehousing and distribution. It also owns a private bank Duncan Lawrie.
Camellia has investments in general farming and forestry in Brazil, catalysts in
Switzerland, fish products in the Netherlands, citrus and edible nuts in the U.S. and a
winery in South Africa.
In India, Bangladesh, Kenya and Malawi the Groups interests are mainly in tea, with
interests also in Macademia nuts, rubber, forestry, avocados, pineapples and cattle.
The total Camellia tea crop is nearly 80 million kgs which makes it one of the largest
non-governmental producers of tea in the world.
Duncan Products Ltd. (DPL), an associate company of Duncan Brothers (BD) Ltd. and
Camellia Plc, has been producing and marketing Natural Mineral Water in bottles and
jars since 1994. DPL has two plants, one at Dhaka and the other at Chittagong where
water is drawn from the company's own sources, purified and bottled in
internationally acceptable hygienic condition. Quality of the bottled water meets the
requirements of WHO (World Health Organisation), BSTI (Bangladesh Standards and
Testing Institution) and IBWA (International Bottled Water Association). Bottled water
samples are regularly tested in the companys own laboratory and at the ICDDR,B
(International Centre for Diarrhoeal Disease Research, Bangladesh) every week. In
addition, tests of samples are also carried out in London. The company operates has
ISO:22000 Certification and is the only company in Bangladesh which is a member of
IBWA.

1.6.2 Products Mix


Tea remains Duncan Brothers' core business although it diversified into various other
businesses from the mid-eighties. Duncans had 10 gardens in its agency Amo, Nalua
14

(Amo Tea Company), Chandpore (Chandpore Tea Company), Mazdehee (Mazdehee


Tea

Company),

Allynugger,

Chatlapore

(Allynugger

Tea

Company)

and

Shumshernugger, Lungla, Etah, Karimpore (Lungla Sylhet Tea Company). The recovery
in tea began in the late seventies following the improvement in prices from 1976. The
Group focused on increasing tea production and modernising its factories to improve
the quality of tea. Under the Bangladesh Tea Rehabilitation Project (BTRP) aided by
the Overseas Development Agency (ODA) of the U. K. the recovery gained momentum
from the early eighties. By 1990, the gardens had been restored to a satisfactory level
and the Group decided to increase its investments in tea. The Surma Valley Tea
Company with its three gardens, Luskerpore, Silloah and Rajkie was acquired in 1992.
Hingajea and Pallakandi followed and finally Chaklapunji in 2001. The Group now owns
16 gardens with a total grant area of 18,500 hectares.

1.6.3 Company Performance Review


Duncan Brothers is a commercial organisation, however people and the environment
play a significant role in its corporate policy. Duncan Brothers endeavours to improve
the quality of its products and productivity and be cost efficient, combined with a focus
on our employees and their welfare. Welfare of our own employees is very important
to the Group as is the welfare of the society in general, the local communities where
we do business and the environment in which the Group operates also forms an
integral part of corporate policy. The Group has established the Camellia Duncan
Foundation, setting aside funds from its operational income, to manage its welfare
initiatives.

1.6.4 Prospects of Duncan Brothers Ltd.


The Group is aware of its responsibilities to the society and the country in which it
operates. In addition to its own social initiatives the Group also contributes generously
to a number of philanthropic organisations working for the welfare of society. The
Group plays a significant role in patronising and collecting art works of both young and
established artists, giving them exposure locally and internationally. Camellia House
15

has come to be known as an art gallery with the largest private collection of art in
Bangladesh.
The Group is actively connected with the promotion of chess in this country. United
Insurance and United Leasing have regularly sponsored Grand Masters Chess
Tournament and International Masters Tournament participation for players from
home and abroad. These tournaments have helped popularise chess in Bangladesh
and have given local players much needed exposure to improve their skill and
experience. Bangladesh can now boast of having 5 Chess Grand Masters and 12
International Masters and the Group is proud to be associated with helping achieve
this. The Group has also provided support to Bangladeshs participation in the Beijing
Paralympics, the world Olympics held in September 2008 for disabled athletes.

1.7 About Kazi & Kazi Tea Estate Ltd

Kazi & Kazi Tea, the first organic tea garden in Bangladesh, located in Panchagarh, are
the untouched lands of Tetulia. Kazi & Kazi Tea Estate (KKTE) acquired this beautiful,
scenic garden in 2000, & introduced a forefront concept that was transforming the
way tea was perceived. They launched an organic farming methodology - the first in
the nation.

16

1.7.1 Organization Structure


The family-owned enterprise, which was founded by Kazi Shahid
Ahmed, fused the old, tea-producing traditions with the new &
created a process that although unexplored, was nonetheless
beneficial for both the company and the community. The family,
who believes in a natural and holistic form of living, situated this
as their foundation. Dr. Kazi Anis Ahmed, son of Kazi Shahid Ahmed, said, We dont
see that theres an alternative! As the only organic tea producer in Bangladesh, the
company now manufactures bio-fertilizers and bio-pesticides on-site, a practice that
various tea associations, including the Bangladesh Tea Board, recognize as the
healthiest and safest option.
In a country inundated with over 150 tea gardens, Kazi & Kazi Tea realized their
commitment & vision needed to establish a new, useful concept; one that not only
served the companys purpose, but also benefited the community. Having the
resources and ambition, the company now needed to determine their framework, and
how they wanted to function.

1.7.2 Products Mix


Aligned with their aspirations and future is Kazi & Kazi Teas product line, which is the
final point & determinant of the companys efforts. Meena Tea, which was introduced
in 2003 as the first organic tea produced in Bangladesh. The liquors golden color and
strength in flavor are the distinguished characteristics of the tea. In following suite
with this successful brand, the company is looking to launch a small quantity of tea in
packet loose leaf and tea bags, which will be sold though their affiliated organic outlet
Meena Bazaar in Dhaka City, and other outlets or retailers. We are also in the process
of installing machines to produce organic green tea by early next year. These branded
packets will be the first single-estate, pure organic tea marketed in the country, since
their economy does not support such practices that wish to reduce the use of poly or
17

plastic materials. Kazi & Kazi Tea is trying to package their products using jute bags and
hand-made rough-hewn tea chests. All of this is a unique and unprecedented effort
in this market.

1.7.3 Company Performance Review


Many of the social services created by the company, which include cattle rearing,
organic farming awareness, safe hygiene distribution, health and recreation & adult
education, are geared to raise the awareness and participation of organic farming
among farmers, sellers, and consumers, & to alleviate poverty levels. These programs
provide a healthy and progressive environment for all those involved. Kazi & Kazi Tea
went as far as to recruit a batch of management trainees and offer them the option of
becoming stakeholders. The laborers worked not only for a fixed salary or wage, but
with the ability to take over small plots in which they could cultivate and experiment.
Dr. Ahmed has high expectations, stating, In the long run, we would be happy to try
to extend similar stake holding to our workers, & become the first tea garden, or
18

perhaps company in Bangladesh to have such a widely shared stake in an enterprise.


The project is still relatively young to pinpoint its success, but the outlook is promising.

1.7.4 Prospects of Kazi & Kazi Tea


Progress of Kazi & Kazi can be measured in many ways; the most definite way is
through their research and the methods they use to implement their learning. With
Kazi & Kazi Tea, this means their ability to apply their knowledge in new, unique ways.
Once they have created the necessary programs, the results need to be reviewed and
improved upon. It is not enough to simply provide the assistance, the company needs
to respond and elevate the working conditions.
According to Dr. Ahmed, the company is in the process of developing their own
research center based on their own findings and practices. We are now setting up a
small research center called the Institute of Sustainable Development (ISD) in
association with another affiliate, the University of Liberal Arts Bangladesh, to do
original research not only on organic farming, but alternative, holistic models of living
and development. The company hopes that ISD will link them to international
scholars and scientists to attend a broader perspective.

1.7.5 Marketing strategy of Kazi & Kazi Tea


The companys objective goes hand in hand with their actions, and they are dedicated
to maintaining high standards and ensuring superior quality. They are very hopeful
about their future, and with their successful venture into organic tea, they have every
reason to be. Please remember, that while our vision is large and optimistic, we are
a very, very young garden - only five years - and some goals are necessarily far off, but
we are so energized, that much of it is already initiated, said Dr. Ahmed. Although the
company is not doing any direct exports yet, they were able to sell their tea at Harrods
in London in 2004, which has shown interest in continuing to carry the product for
later 2005.

19

1.8 National Tea Company Limited


National Tea Company Limited is a Public Limited Company formed in the year 1978.
Government and its financial organizations hold major shares of the company. It has
12 (Twelve) Tea Estates having 10,949.58 hectares of land, out of which more than
50% area is under tea plantation. NTC is one of the major tea producing company in
Bangladesh, annual average production of tea is about 5.20 million kgs. Teas are being
sold through Chittagong Auction Market. There are about 12,500 permanent labours,
400 subordinate staffs and 60 executives are working in the company.

1.8.1 Organization Structure


National Tea Company Ltd. has been formed in the year 1978 under the Companies
Act, 1913, as a Public Limited Company. It is a Joint venture of the Government and
the General Public. Thus it occupies a unique position of being the first in the field of
joint ownership of Public and Private Interest in Tea sector. (Government and its
financial organization holds 51% of shares and rest 49% by the General Public)The
Company started with 9(nine) A-class tea estates all of which are situated in the
Sylhet

division.

Madanmohanpur,

The

tea

estates

Madabpur,

are:

Jagadishpur,

Patrakhola,
Teliapara,

Kurmah,

Champarai,

Chundeecherra

and

Lackatoorah. After the war of Liberation, ownership of these estates was vested in the
Government and their management and the operation were entrusted to erstwhile
Bangladesh Tea Industry Management Committee, by the Chairman of Tea Board
being ex-officio Chairman of that Committee.
In pursuance of the government decision 3(three) other Tea Estates namely: Parkul,
Premnagar & Bejoya were taken over by the Company in the month of September
1982.
NTCL is a listed Company since 1978 and its shares are being traded at both Dhaka and
Chittagong Stock Exchanges.

20

1.8.2 Products Mix


The finest grade of teas are collected from all the gardens of the company and blended
together to enrich the quality and then packed in airtight packet to maintain freshness.
The brand name of the Company is NATIONAL TEA. NTCL started Local Marketing of
tea in a small scale through its dealers in the year 2001. NTCL has a Sales Center in its
Registered Office, which is open for all the interested consumers.

1.8.3 Company Performance Review


The NTCL carries on the business of plantation, cultivation, manufacturing and selling
of tea and rubber. Companys annual average production is about 5.20 million kg.
Major portion of tea are being sold through Chittagong Auction Market. In the year
2000 NTCL started Local Marketing of tea in a small scale through its dealers. NTCL has
a Sales Center in its Registered Office, which is open for all the interested consumers.

1.8.4 Prospects of National Tea Company Limited


National Tea Company Limited is the largest government sponsored Tea Company in
Bangladesh. The Company produces CTC black tea and annual average production is
about 5.20 million kgs . Significant quantities of teas are being exported to different
countries of the world. NTCL export good liquoring bulk tea and own brand tea.

1.9 Limitations
Whilst the findings of the study could be applied in most instances, there were some
important exceptions.
Firstly, access to people, organizations, information or documents may be denied or
limited in some way.
Secondly, Lack of public data or reliable data may limit the scope of analysis. Thus,
information generated from our research may not reflect accurate result.
Thirdly, Time constraint and lack of previous experience may lead to some
unintentional mistakes.
21

Chapter 2
2.0 Literature review
There has not been enough research on economic aspects of Tea industry in
Bangladesh. Dr. Kazi Muzafar Ahammed, Deputy Director (Planning), Bangladesh Tea
Board, in his research -Investment for Sustainable Development of Bangladesh Tea
Industry - An Empirical Study(2012), stated that, the internal consumers of the
country are presently consuming about 98% of its produce. In Bangladesh, tea has
emerged as a common man's beverage. Even in remotest village markets and shopping
centers, it is a usual sight to see farmers sipping tea quite frequently. It is a common
belief in Bangladesh that, tea boosts physical strength while it eases stresses and
strains. No wonder, the Bangladeshis consume most of the tea the country produces
these days. Tea is the most popular refreshing drink irrespective of age, gender and
race. Serving a guest with tea is an inalienable part of long-standing Bangladeshi
tradition. Bangladesh being a small Tea-producing country shares 2% of the worlds
total Tea production. Tea is an agro-based, labor-intensive and export- oriented sector
and plays an important role in the national economy through export earnings, trade
balancing and employment generation. Tea industry of Bangladesh dates back to 1857
A C when the first Tea garden was established at Malinichera in Sylhet District. Today
a total of 163 Tea gardens with an area of 1, 15,757.41 hectors of which 52,317.21
hectors or 45% is under cultivation (Bangladesh Tea board, 2009).
The domestic consumption of tea in Bangladesh has been enhancing proportionately
with demographic growth, which leads to gradual shrinking of our exportable surplus
as it eats up the current flow of our tea production. To meet this swelling internal
demand and to export tea to earn foreign exchange we must maintain at least a 60:40
(Export: Internal consumption) rate to have effective increment in tea production. The
low turnover of the existing rate of tea production in Bangladesh may be attributed to
the reason of technical, financial and management problems (Bangladesh Tea Board
2009).
22

According to a research study conducted by BIISS (Bangladesh Institute of


International and Strategic Studies), domestic consumption is increasing at a rate of
5.6 per cent, while production is increasing at a marginal level. According to ministry
sources, internal tea consumption is rising every year by 12.69 per cent due to the rise
in population and urbanization. The sharp increase in internal consumption of tea with
tight supply has resulted in an extraordinary demand for tea in Bangladesh.

23

Chapter 3
3.0: Methodology
3.1 Conceptual framework
In our study, we will try to find out the ongoing economic activities in tea industry of
Bangladesh and relate them with the topics covered by Dr. A. K. M. Saiful Majid in
managerial economics course. So in this sense it is an exploratory research.
Exploratory research is an important part of any marketing or business strategy. Its
focus is on the discovery of ideas and insights as opposed to collecting statistically
accurate data. That is why exploratory research is best suited to collect information on
economic activities in tea market.

3.2 Formulation of objectives


Followings are the factors from which we formulated the objectives.
Identifying ten principles of economics in tea industry regarding four tea
brands.
Assessing the demand, factors affecting the demand and overall demand trend
using historical data collected from various secondary sources.
Identifying market supply, factors affecting the supply and overall supply trend
using historical data collected from various secondary sources.
Determining the equilibrium point of quantity demanded and supplied using
historical data from secondary sources.
Determining how change in price affects quantity demanded and supplied in
the tea market.
Identifying the production function in tea industry.
Determining the production cost of tea industry.
Identifying government policies and determining their effect on tea market.
Determining the market structure of Bangladesh tea industry.
Analyzing the market competition using the concept game theory.
24

Determining the contribution on GDP, GNP and national income.

3.3 Data collection


The data Collection methods that we followed are1. Observation: Observation is a method of collecting data in which members of
research teams observe and record behaviors. We have collected data on
economic activities of tea industry from numerous secondary sources and
analyzed those data to interpret economic activities in Bangladesh tea industry.
2. Self-report: Self-report is a type of research design in which participants give
their responses to a given set of questions. The most common types of selfreport are interviews or questionnaires. We have conducted a limited census
using a set of questions for the better understanding of price elasticity of
demand.

3.3.1 Primary data source


The report is based on primary and mainly secondary data and sources.
Primary data will be collected by:
Informal interview with the executives, employees and customers.
Some information of our report will be collected by conducting survey.

3.3.2 Secondary data source


The whole research is mainly based on secondary data. Data has been collected from:
Companys internal data
Companys official website
Observing daily activities of activation and brand managers

25

3.4 Data analysis


Data analysis was done only to interpret economic activities and trends using the
concepts we have learned in Managerial Economics course in tea market. Both
quantitative and qualitative analysis of collected data was done while doing the report.

3.4.1 Qualitative analysis


Qualitative research is one of the two major approaches to research methodology in
social sciences. Qualitative research involves an in-depth understanding of human
behavior and the reasons that govern human behavior. Unlike quantitative research,
qualitative research relies on reasons behind various aspects of behavior. Simply put,
it investigates the why and how of decision making, as compared to what, where, and
when of quantitative research. Hence, the need is for smaller but focused samples
rather than large random samples, which qualitative research categorizes data into
patterns as the primary basis for organizing and reporting results. Unlike quantitative
research, which relies exclusively on the analysis of numerical or quantifiable data,
data for qualitative research comes in many mediums, including text, sound, still
images, and moving images. Throughout this report, we collected data from various
secondary sources to identify different economic activities and relate them with
Managerial Economics course.

3.4.2 Quantitative analysis


It is a systematic approach to investigations during which numerical data is collected.
It often describes a situation or event, answering the 'what' and 'how many' questions
you may have about something. This is research which involves measuring or counting
attributes. We conducted a small scale survey on 100 shops in North Dhaka to get an
idea of current market size in North-Dhaka, competition and market structure. The
Study was carried out among the wholesalers and the retailers. The purpose of this
survey is to get an idea about the market condition only and understand the broad
picture of ongoing economic activities in the market.

26

3.4.3 Sources of required data


Types of Data

Wholesale

Retailer

Competitors Report

Market Size

Market Share

Distribution Coverage

Frequency of Distribution

Table 1: Sources of required data


To bring accuracy in data collection, Dhaka-North was divided into ten sectors and
each sector covers ten (10) outlets, which were selected randomly to enable unbiased
response. The sample size is One hundred (100) in number.

3.5 Data Analysis & Findings


Primary and secondary data were collected as per schedule planed earlier and
tabulated for analysis accordingly.
The deviation and variation in data were well found depending on the different market
characteristics. The collected data are according to the view about the overall tea
sector of the country might vary. In the research questionnaire, the main
concentration was paid on the information needed for the study. The response was
great. All retailers tried to answer the questions except the distributors price. So it is
not included in the paper.
Number of respondents: 100
Gender of the respondents: 100% of the respondents are male.

3.5.1 Availability of Different Brands


In order to make the data available 100 shops in Chittagong have been covered in this
research process through a careful scrutiny and screening, and direct visit to the same.

27

Available brands in different stores are as follows:


BRAND

Percentage

Duncan

6%

Finlay

64%

HRC

20%

Ispahani

97%

Ispahani Zareen

92%

Lipton Taaza (UniLever)

96%

Lipton Yellow Label (UniLever)

68%

Table 2: Available brands in different stores


From above table, it is clear that, Ispahani Mirzapore (the Brand of Ispahani) is the
most available tea in our country followed by UniLever Bangladesh, the main
competitor of Ispahani is also at the second position by covering 96% of the stores.

Figure 2: Availability of Different Brands


Lipton Yellow Label (UniLever)
Lipton Taaza (UniLever)
Ispahani Zareen
Ispahani
HRC
Finlay
Duncan
0%

20%

40%

60%

80%

100%

120%

3.5.2 Weekly Sales of Different Brands


The data have been gathered through an interview on the weekly sales of some
selected products of the sample 100 shop owners.
28

Table of per week sales at retail storesBRAND

Sell (in kg)

Percentage

Finlay

50.9

6.20%

Ispahani

285.9

34.70%

Lipton Taaza

212.85

25.70%

Others

178

21.20%

Zareen

170

20.20%

Table 3: Per week sales at retail stores


From the survey, we found the presence of many sellers and many buyers. There are
a large numbers of independent firms competing in the market and their products are
differentiated. So, In Bangladesh Tea market, tea is marketed internally with the
multiplicity of band names in monopolistic competition with slightly differentiated
products. Therefore, tea industry has such a market structure that falls between
perfect competition and pure monopoly. Prices of teas in the auctions vary according
to the appearance and liquor quality of teas

Figure 3: Weekly sales


Zareen
Others

Lipton Taaza
Ispahani
Finlay
0

50

100

150

Percentage

200

250

300

350

Sell (in kg)

29

Chapter 4
4.0 Ten principles of economics (regarding four tea brands)
PRINCIPLE #1: PEOPLE FACE TRADEOFFS
This is one of the principles of economics that deals with the situation of what any
person goes through when taking any decision and is closely tied to the saying that
there is no such thing as a free lunch. Whenever any person tries to do something
at any given time, he or she has to give up the opportunity of doing something else
during that instance. Same thing happens when people take decisions among many
alternatives. This holds true for every situation in our lives.
Now thinking about how this principle works with the topic of this report, let us
consider the situation of the tea consumers when they face similar tradeoffs regarding
the purchase of tea for consumption. At first, they need to decide whether to buy Tea
or other available alternatives such as Coffee. After deciding to buy tea, when they go
the market for spending a portion of their income to buy tea, they face a tradeoff
again. This time they can either choose to buy nonbranded Tea of branded Tea and if
they decide to buy branded Tea, which brand to choose for is the next question that
they face. And finally when they decide to buy Ispahani tea for consumption, they are
conforming to this principle by choosing to spend an extra taka on Ispahani tea which
they could have spent on some other good.
Similarly, the phenomenon of facing tradeoffs happens to the management of M. M.
ISPAHANI LTD. when they decide to achieve leadership in the tea market. In this case
the tradeoff is achieving leadership between quality and cost. Producing premium
quality tea involves high cost of production. As a result the firm usually ends up
charging higher prices for which the firm then loses the opportunity of achieving cost
leadership.

30

PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT


This principle is directly related to the concept of opportunity cost that people face
while taking any decision. As we can define the opportunity cost of something as the
potential benefit foregone from an alternative given up. The basic principle is If we
do one thing then we have to give up something else up. As people face tradeoffs, it
requires the comparison of the costs and benefits of alternative choices to make
decisions.
Now thinking about how this principle works with the topic of this report, let us
consider the decision whether to buy tea. The benefits include mood stimulating
effects, taste reception and some health benefits. And the cost includes both money
and time spent on buying tea. Now the best alternative here would be, in most cases,
to buy coffee that provides similar benefits but it costs usually a bit higher than that
of tea. So when a consumer buys a regular packet of tea to consume for a specific
period of time that person gives up the opportunity cost of time and money spent with
which he or she could have bought coffee in order to consume for that specific period
of time.
Similar thing happens for the management of M. M. ISPAHANI LTD. while deciding
whether to invest for meeting the demand of foreign tea market or local tea market
for a specific period of time or a specific season. The benefits of exporting tea to the
foreign market includes high profit margin, reasonable business growth but it usually
requires high costs in order to produce premium quality tea. On the other hand, the
benefits of focusing on the production of tea for local market mainly involves
reasonable market share and it involves low production costs as compared to the case
of producing tea for the foreign market. Now, when management decides to invest its
resources heavily on the production of tea for the foreign market for a specific period
of time, the firm loses the potential benefits that could have been earned if they would
have invested heavily on the production of tea for the local tea market of Bangladesh
during that period.
PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN
31

This principle indicates how rational decision maker think when they take decisions.
Here, the word rational implies to those persons who systematically and purposefully
works the best they can and choose the best alternative to achieve their objective.
And margin means an addition to a plan of action. So this principle implies that a
rational decision maker compares the marginal benefit and the marginal cost of an
action and goes for the best alternative in which the marginal benefit exceeds the
marginal cost.
For instance, let us assume that there is a promotional offer in the tea market that if
someone buys two 250 gm packs of Ispahani tea it will cost a total of 100 tk whereas
the price of single purchase of 250 gm Ispahani tea pack is 60 tk. Under such
promotional period, when a tea consumer would go the market in order to buy one
250 gm pack of Ispahani tea, he or she may think rationally about the promotional
offer of buying the additional 250 gm pack of Ispahani tea pack. In this case the
marginal cost would be 40 taka whereas the marginal benefit would consist of money,
time and transport cost saving. So by thinking at the margin in a rational way that
person would take the promotional offer by buying the additional 250 gm pack of
Ispahani tea.
PRINCIPLE #4: PEOPLE RESPOND TO INCENTIVES
This is another principle of economics that is directly related to individual decision
making regarding their response to incentives. Here the terms incentive is meant to
be any reward or punishment to which a person shows either a positive or a negative
response. As discussed earlier people take decisions by comparing costs and benefits.
So a change in the costs and benefits might in turn change the corresponding
economic behavior of the people. Now thinking about how this principle works for the
tea consumers in Bangladesh let us assume that the price per 250 gm tea rises above
the price of 250 gm coffee during a particular point of time. So in such case people
would decide to consume more units of coffee than that of tea. This is because the
cost of buying one packet of tea would be higher in such situation. At the same time
tea producers would decide to employ more workers and product more tea, because
32

the benefit of selling tea would be higher and such response would generate higher
profit to the tea producers as it would be an like an incentive to them. Another
example could be the change in consumer buying behavior to tea purchase due to
promotional offers. Sometimes tea companies are found to offer special promotions
offering different gifts with a specific quantity of tea pack. For instance a tea company
might offer one tea spoon with the purchase of one kg tea pack. In such instances the
consumers are usually found to grab such offer in a positive way indicating their
positive response to the incentive offered to them.
PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF
This principle relates to the concept of trade which is one of the fundamental themes
of economics as it relates to the concept of market. People as well as nations benefit
from the occurrences of trade between one another. For instance, when a consumer
tends to buy a regular pack of Ispahani tea, that consumer actually trades with the tea
manufacturing company. In this case, that consumer is actually paying a certain sum
of money in exchange for the tea purchased. If there would not have been any trade
then that consumer would have to produce tea on his/her own. So trade allows every
person to specialize in what he or she does best and let the person enjoy a variety of
goods and services. In this way trade makes everyone better off.
PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC
ACTIVITY
This principle is indicates the necessity of markets to organize economic activity which
is defined as an economy that allocates scarce resources are allocated through the
decentralized decisions of millions of households and firms as they interact in markets
for goods and services. Such an example is the tea market of Bangladesh. An important
thing to mention here is the concept of invisible hand which can be described as the
ability of the free market to lead people to desirable market outcomes. According to
the invisible hand theory, the firms and individuals in the tea market are motivated by
self-interests and they interact in the marketplace where self-interests and prices
guide their decision.
33

Here, the invisible hand works through the price system of the marketplace in order
to direct economic activity. When individual consumers of tea go to the market they
look at the price of tea in order to decide how much they would demand. Similarly,
the producers of tea look at the price of the market in order to decide how much to
supply. As a result, the market price of tea reflects both the value of tea to society and
the cost to society of producing tea. In this way, market prices guide reflect individual
consumers and tea producers to reach outcomes that maximize the well-being of the
society.
PRINCIPLE #7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES
This principle indicates the role of governments in improving market outcomes. In
order for the invisible hand to work properly certain rules and regulations are needed
to be enforced as well as certain institutions are needed to be maintained by the
government. Say for example, if there would be no system to enforce property rights
then the tea producers would not be motivated to produce tea. This is because they
would fear that, the tea produced would be stolen. This is why the government needs
to enforce different rules and maintain different institutions in order to enforce
property rights so that individuals can own and control scarce resources.
Nonetheless, there could be situations when the market may fail to allocate resources
in an efficient way. For instance, in the tea market, a market failure may be the inability
of the free market to allocate tea among the consumers in an efficient way. This may
be due to the effect of externality or development of market power. Firstly, externality
is a case when a persons actions have an impact on the wellbeing of a bystander. In
case of tea market, an example of externality is pollution. Due to pollution the
appropriate weather necessary for tea production gets hampered and so the
production of tea gets reduced. As a consequence there might be an occurrence of tea
market failure. Secondly, market power refers to the ability of a single person or a
small group to have an excessive influence in the market price. For instance if there is
many tea consumers but only one supplier of tea in the tea market, there would be
the occurrence of development of market power. However, in both cases the
34

government can intervene the economy and change the way resources are allocated
in order to promote efficiency or to promote equality.
Principle 8-10 of economics are related to macro-economics and thus these are not
related with tea industry

35

Chapter 5
5.0 Circular Flow Diagram

Revenue of the
Industry

Market for buying


and selling Tea

Tea
Sold

Consumer
spends money

Tea bought and


consumed

Tea Consumersand
labors

Tea Industry

Factors of
Production moved
to Ispahani Group

Tea Consumers
provide the market
population and
labors provide the
hard work.

Market for factor of


Tea Production
Labors earn
their income

Spends Money to buy


materials, pay wages
and other expenses
Fig 4: Circular flow diagram

36

The two types of economic agents in a simple market economy are households and
business firms. A household is a social unit comprised of those living together in the
same dwelling. Here tea industry is producing goods i.e tea that cater to different
segments of customers in an effort to make profit. The profits they are generating are
the revenues minus expenses. Revenues are the monetary income received from the
sales of teas and expenses are the total costs of the production that encompasses raw
materials purchase, labor expenses, employee salary, utility, miscellaneous expenses,
taxes, interest expense, administrative expenses, maintenance and so forth.
1. The household part in this particular diagram interacts with business firm i.e.
INDUSTRY in two distinct ways:
2. Households supply economic resources, such as labor to businesses in exchange
for income, and
They use their incomes to buy goods produced and sold by business firm. The first type
of interaction occurs in markets for resources. The second type of interaction occurs
in markets for products.
The bottom half of the circular-flow diagram, which represents product markets,
shows those households give money to businesses in exchange for goods and services.
Money flows clockwise, while the goods and services flow counter-clockwise. In the
context of tea industry, the households or the tea consumers buy tea in exchange of
money and in turn inject the amount to the companys coffer. In markets for products,
the companies are usually the suppliers and households usually are the demanders
being no exception to the case of British American Tobacco here. The money that flows
from tea consumer to industry is consumption spending from the perspective of
households and is revenue from the perspective of producer firm. The products that
flow from business firms to households are sales by the business firms and purchases
by household consumers.
The top half of the circular-flow diagram, which represents resource markets, shows
those businesses provide money to households in exchange for economic resources
37

used as factors of production. For example, Labor is an economic resource that every
adult household can potentially supply in the markets for resources. Wages are the
payments made to workers in exchange for labor, typically based upon the amount of
time worked or amount of output produced. A salary is a fixed payment made regularly
to a worker in exchange for labor. Blue-collar workers typically receive wages in
exchange of their physical labor. White collar workers are typically paid salaries. In the
diagram, this process is illustrated by the counterclockwise flow of money and the
clockwise flow of economic resources. Besides, if households own natural resources,
such as land, they can supply them to businesses in exchange for rent payments. The
company has set up distribution houses at different locations all over the country
owned by households and thereby attributing them for another factor of production,
Land.

Hence we can clearly observe that, in markets for economic resources,

households are usually the suppliers and the firms are usually are the demanders. The
money that is flowing from the company to households are expenditures from the
perspective of INDUSTRY and incomes from the perspective of workers, employees,
managers and land owners. Conversely, the labor, capital, and natural resources that
are flowing from households

to the business are sources of income from the

perspective of households and inputs from the perspective of businesses.


When workers receive more income than they spend on the purchases of goods and
services, they are able to create savings. Savings are the portion of a persons income
that is retained or invested for use in the future. Household savings can become
financial capital if the money is borrowed by a business firm. For example, money that
is deposited by households in a bank savings account might be lent by the bank to the
company in order to purchase machinery, equipment or to meet short term liabilities.
When this occurs, the business firm pays interest to the bank for the borrowed funds.
Interest is a rate of return that represents compensation from the borrower or
receiver of funds to the lender or depositor of the funds. The bank, in turn, pays
interest to the householders for the funds deposited in the savings accounts.

38

Consequently, other transactions that occur in resource markets are the supply of
financial capital by households in exchange for interest income.

39

Chapter 6
6.0 Demand analysis
6.1 Demand
Demand is the quantity of a good or service that customers are willing and able to
purchase during a specified period under a given set of economic conditions.
The law of demand states that, when price of a good or service increases, then demand
for that particular good or service decreases and vice versa given that all other factors
remain unchanged.
The quantity of a well-defined good or service that:
People are willing and able to buy.
During a particular period of time.
Decreases/increases as the price of that good or service rises/falls
All other factors remain constant.

6.2 Tea consumption/demand of tea in Bangladesh


According to experts, the demand is on the rise every day, but production of tea has
not increased proportionately. In 2013, some 62 million kgs of tea was produced in the
country, registering a decline of 3.22 per cent compared to that in the 2012. The
amount was 64 kgs in 2012. Production faced a downward trend in 2013 mainly due
to inclement weather, garden owners said.
The production of tea also saw huge fluctuation between 2003 and 2012, and
increased by nearly 23.75 million kgs during the period. The consumption of the cash
crop, however, increased more rapidly as the local demand of tea soared up to 61.19
million kgs in 2012 from 37.44 million kgs in 2003.
According to a research study conducted by BIISS (Bangladesh Institute of
International and Strategic Studies), domestic consumption is increasing at a rate of
5.6 per cent, while production is increasing at a marginal level.
40

According to ministry sources, internal tea consumption is rising every year by 12.69
per cent due to the rise in population and urbanization. Tea export is decreasing
annually by 8.77 per cent due to increasing internal consumption.
The countrys tea production has increased by 5.9 per cent over the last 13 years,
while domestic consumption has increased by 102 per cent and export decreased by
93.38 per cent during the period, cited the study.
According to sources, the country earned foreign exchange worth about Tk 22.23 crore
by exporting 1.5 million kg of tea in 2012. But the amount of export came down to
0.54 million kgs in 2013. The country earned Tk 89.90 crore by exporting 10.56 million
kg of tea in 2007.
The countrys tea sector has been experiencing a drastic downward trend in export for
the last six consecutive years due to poor amount of production against the growing
consumption of the cash crop over the period, industry insiders say.
The Bangladesh Tea Board (BTB) study shows that from the year 2003 to 2006, tea
export dropped by a huge margin, from 12.18 million kgs to 4.79 million kgs. Though
the export volume rose by almost 2.2 times the very next year, it again started
declining alarmingly in the following years in a row.
In the last 10 years (2003-12), some 83.40 per cent of tea produced in the country was
used for internal consumption, while 11.07 per cent was exported abroad. At present,
Bangladesh exports tea to countries such as Pakistan, Afghanistan, Russia, Saudi
Arabia, Turkey, Ukraine and the UK after meeting internal demand.
The country is gradually becoming more import-dependent to meet its local Demand,
and if the situation continues, experts said, Bangladesh, once was known as a major
tea exporting country, will have to completely depend on import within the next ten
years. The country imported a meagre amount of tea five years back, but the import
volume has spiralled manifold at present, said tea traders.

41

According to data of the National Board of Revenue, 4.76 million kgs of tea was
imported in last three years. Despite being a tea exporting country, Bangladesh
imported 1.9 million kg of tea in 2012 to meet local demand.
Showing frustration over the situation, Nasir Uddin Bahadur, ex-president of
Bangladesh Tea Sangshad, a platform of local tea garden owners, said that
encouraging import was hampering the overall development of the industry.
"The crux of the problem of the tea sub-sector is slow growth of production that has
been caused mainly due to lack of investment. Presently, the tea industry has been
suffering from an acute crisis of funds for investment," said BTB chairman Maj Gen
Abdus Salam at a seminar last year. He said the gestation period is about 5-7 years,
due to which private entrepreneurs are reluctant to invest in the sub-sector.
About 16.51 per cent of tea plantation land has become old and uneconomic, dragging
the national average tea production, he said. Ownership of land, lack of gas,
inconsistent power supply and high vacancies in the existing tea plantation area put
hindrances between the development and the industry.
To face the challenge, Bangladesh Tea Board has taken up 10 projects of 12-year
duration to produce 100 million kg of tea annually by 2021. The projects include
bringing about 6,440 hectares of fallow land in six districts - Moulvibazar, Habiganj,
Sylhet, Chittagong, Rangamati and Panchagarh -- under tea farming by June 2019 in
order to increase tea production. Some 19,000 people will also get employment under
the projects that will cost about Tk 205 crore.
Experts and entrepreneurs identified a number of reasons for this sorry state of the
countrys tea industry. Firstly, they identified the standard of leaf plucking, which they
said was not satisfactory. To increase production, the producers resort to rough
plucking. Another one is the age-old orthodox method of processing in the outmodelled factories and machines. Besides, the presence of high vacancies, poor quality
plants, unchecked propagation of pests and diseases in the tea bushes, absence of
shade trees are some other constraints to the yield of quality tea in Bangladesh.
42

They also identified too much fallow land in the tea estates. According to them, even
half of the potentiality of the land under tea cultivation has not been exploited.
According to statistics, there are 166 tea gardens in the country. Of the total 114,912
hectares of land in the 166 tea gardens, only 52,201 hectares are now under tea
cultivation while the rest remain fallow. There are a total of 166 tea gardens across
the country. Of them, 90 gardens are in Moulvibazar, 23 in Hobiganj, 22 in Chittagong,
20 in Sylhet, nine in Panchagarh and one each in Brahmanbaria and Rangamati.
Tea cultivation was started in this part of the subcontinent as early as 1840 at about
the same time as in other parts of the then India. Though comparatively slower due to
many reasons and constraints, it has been confidently progressing.

6.3 The annual demand trend of tea in Bangladesh


Demand for tea has been increasing in Bangladesh since its independence due to
increased tea drinking habit, higher income, population growth and rapid
urbanization. Trend of internal consumption has been shown in figure-. Production of
tea has been increasing at a rate of 1.03% per year, while the demand for has been
increasing at a rate of 4.10% per annum over the last 10 years (2002 to 2011). Due to
low level of production and higher rate of internal consumption for tea supply in the
market could not keep pace with the demand. As a result prices of teas have been
increasing. Lower level of production reduces exportable surplus of tea.
Years

1990

Demand (m. 14.21

1995

2000

2005

2010

2011

2012

2013

22

38.79

43.3

57.63

58.5

61.19

64

KG)

Table 4: Year wise internal demand trend in Bangladesh

43

70
60

Internal Supply

50
40
30
20
10
0
1985

1990

1995

2000

2005

2010

2015

Year

Figure 5: Year wise internal demand trend in Bangladesh

6.4 Factors affecting the demand of tea


The demand for tea depends on various factors. These factors include:
Price: Tea is a convenience product. Convenience products are inexpensive, purchased
frequently and there is little effort needed to purchase them. Demand of tea is fairly
inelastic with response to change in price in short period. But in the long run the
demand for tea changes inversely with a corresponding change in price.
Demographic Profile of Consumer: Demographic profile of consumer affects the
demand for tea significantly. Tea is relatively more popular among the older age group.
Again, people who are health conscious prefer tea over other non-beverage drinks.
Price of Complementary Goods: A complementary good is a good with a negative
cross elasticity of demand. This means a good's demand is increased when the price
of another good is decreased Sugar, Milk, and Lemon are complementary to Tea. That
means when the price of these goods increases it affects the demand of tea negatively.
Price of Substitute Goods: A substitute good is a good with a positive cross elasticity
of demand. This means a good's demand is increased when the price of another good
is increased. Coffee and soft drinks are substitute goods of tea. That means an increase
in the price of these goods tend to increase the demand of tea.
44

Population: Population is another important factor that influences the demand of tea.
Here Population refers to the number of people consuming tea. As the population
increases the demand of tea also tend to increase.
Season: Although tea is consumed all around the year, the demand of tea in winter
season is usually higher than that of tea in summer.

6.5 Development of demand function


In the present context if demand for tea during the last 21 years are plotted against
prices (1991 - 2011), demands curve will be upward sloping as in the following figure:

Figure 6: Demand for Bangladesh Tea


Reasons for having an upward sloping demand curve:
1. Tea sector is unable to supply enough tea for internal consumption as well as for
export market due to slow growth.
2. Basic requirement of tea of the consumers has not yet been fulfilled in this country.
3. Only 30% of the people of Bangladesh consume tea, which has been increasing

45

4. If 50% of the total population consumes tea, huge quantity of tea will have to be
imported now.
5. Price of tea in Bangladesh is high due to protection. For example, nominal protection
coefficient on tradable output in Bangladesh tea is 1.32 that implies the producers are
getting 32 percent more in the internal market than what it would be in the world
market. Nominal protection coefficient on tradable inputs in Bangladesh tea is 0.96,
which implies that the producers pay for tradable inputs 96 percent of the world prices
or opportunity costs of the inputs due to protection. Effective protection coefficient in
Bangladesh tea is 1.50, which implies that protection of domestic market helps the
traders to get 50 percent more value added in the internal market that what it would
be in the world market. However, domestic resource cost ratio in Bangladesh tea is
0.78 > 1 that implies comparative advantage is available in this sector.
6. Finally once basic requirement for tea is met and then demand for tea will be
lower than the present rate in this country.

6.6 Demand of tea in market


In general, the quantity demanded of tea is the function of all the factors affecting the
demand of tea.
Thus, the demand function of tea is:
Q (Tea) = f (Price, Consumer Demography, Price of Complementary Goods, Price of
Substitute
Goods, Population, Season)
Based on the factors affecting demand the demand function can be expressed more
specifically as follows:
Quantity demanded of tea, Q (Tea) = a1P + a2CG + a3SG + a4 POP + a5S
Where
P= Price of Tea
46

I= Income
CG= Price of Complementary Goods
SG= Price of Substitute Goods
POP= Population
S= Season
The terms a1, a2, a3, a4, a5 are called parameters of demand function. a1, a2, a3, a4
represent price elasticity of demand, cross price elasticity of complementary goods
and cross price elasticity of substitute goods respectively.

6.7 Shift in demand curve


The demand curve is a graphical representation of an economic agent's willingness
to purchase a given quantity of a good or service at a specific price based on
preferences, income, and other prevailing factors at a given point in time. Demand
curves in combination with supply curves, which depict the price to quantity
relationship of producers, are a representation of the goods and services market.
Where the two curves intersect is market equilibrium, the price to quantity
relationship where demand and supply are equal.
Movements in demand are specific to either movements along a given demand curve
or shifts of the entire demand curve. Movements along the demand curve are due to
a change in the price of a good, holding constant other variables, such as the price of
a substitute. If the price of a good or service changes the consumer will adjust the
quantity demanded based on the preferences, income and prices of other factors
embedded within a given curve for the time period under consideration.
Shifts in the demand curve are related to non-price events that include income,
preferences and the price of substitutes and complements. An increase in income will
cause an outward shift in demand (to the right) if the good or service assessed is a
normal good or a good that is desirable and is therefore positively correlated with
47

income. Alternatively, an increase in income could result in an inward shift of demand


(to the left) if the good or service assessed is an inferior good or a good that is not
desirable but is acceptable when the consumer is constrained by income. As a result
the demand curve of tea will shift to the right.

D2

Price

D1
D3

Quantity Demanded

Figure 7: Shift in Demand Curve of Tea

48

Chapter 7
7.0 Supply analysis
7.1 Supply
In economics, supply is the amounts of some product producers are willing and able
to sell at a given price all other factors being held constant. Usually, supply is plotted
as a supply curve showing the relationship of price to the amount of product
businesses are willing to sell.

7.2 Factors affecting supply


The supply of tea depends on the factors described below:
Price: The supply of tea is inelastic with response change in price in the short- run since
its not possible for the producer to change the production capacity overnight. But in
the long-run, the supply of tea changes positively with a given change in price.
Price of Input Factors: Price of input factors of tea production such as land, labor,
capital, fertilizer etc. are negatively related with supply of tea. If the prices of input
factor increase, the cost of tea production will increase and producers will realize less
profit. Hence supply of tea will decrease.
Technology: Technology is positive related with supply of tea. If an advance
technology is employed for tea production that reduces dependency on labor or
reduces the cost of tea production in any other way, the supply of tea will increase.
Expectations: If tea producers expect that the price of tea will increase in near future,
they may hold some of their current production into storage and supply less to the
market today. Thus expectation of price increase and supply of tea are inversely
related.
Weather: If the weather remains favorable for tea production the supply of tea will
increase and vice-versa.

49

Number of suppliers: The market supply curve is the horizontal summation of the
individual supply curves. As more tea selling companies enter the industry the market
supply curve will shift out driving down prices.

7.3 Supply trend


Tea production in Bangladesh maintained an upward trend with an annual average
rate of increase of 1.03% and on an average product 57.75 million Kg of tea.
Year

1990

1995

2000

2005

2010

2011

2012

2013

Supply (m.

18.36

31.38

47.67

60.14

60.04

59.13

62.52

66.26

KG)

Table 5: Year wise internal supply trend in Bangladesh


80
70

Internal Supply

60
50
40
30
20
10
0
1985

1990

1995

2000

2005

2010

2015

Years

Table 8: Year wise internal supply trend in Bangladesh

7.4 Shift in supply curve


If production costs increase, the supplier will face increasing costs for each quantity
level. Holding all else the same, the supply curve would shift inward (to the left),
reflecting the increased cost of production. The supplier will supply less at each
quantity level.

50

If production costs declined, the opposite would be true. Lower costs would result in
an increase in output, shifting the supply curve outward (to the right) and the supplier
will be willing sell a larger quantity at each price level. The supply curve will shift in
relation to technological improvements and expectations of market behavior in very
much the same way described for production costs.
Technological improvements that result in an increase in production for a set amount
of inputs would result in an outward shift in supply. Supply will shift outward in
response to indications of heightened consumer enthusiasm or preference and will
respond by shifting inward if there is an assessment of a negative impact to production
costs or demand.
Supply curve shifts when any factor, except price that affect the supply changes. In our
case, the prices of input factors of tea increase, the cost of tea production will increase
as a result the supply of tea will decrease and vice-versa.
Therefore, the supply curve of tea will shift to the right.

S1
Price

S2

Quantity of
tea

Figure 9: Shift in supply curve

51

7.5 Equilibrium Point


The price of tea is determined by the market forces of demand and supply. Price of tea
refers to the equilibrium point where the demand curve and supply curve intersect
each other.
An equilibrium point refers to a point where the quantity demanded is matched by the
quantity supplied at a given price. When the demand or supply or both change, the
equilibrium point also changes. If the proportionate change in demand is more than
the proportionate change in supply the equilibrium point shift to the upper right
direction and vice-versa.

52

Chapter 8
8.0 Elasticity
8.1 Elasticity
In economics, elasticity is the measurement of how changing one economic variable
affects others. For example:
"If I lower the price of my product, how much more will I sell?"
"If I raise the price, how much less will I sell?"
"If we learn that a resource is becoming scarce, will people scramble to acquire
it?"
In more technical terms, it is the ratio of the percentage change in one variable to the
percentage change in another variable. It is a tool for measuring the responsiveness of
a function to changes in parameters in a unit less way. Frequently used elasticity
include price elasticity of demand, price elasticity of supply, income elasticity of
demand, elasticity of substitution between factors of production and elasticity of
substitution.
Elasticity is one of the most important concepts in neoclassical economic theory. It is
useful in understanding the incidence of indirect taxation, marginal concepts as they
relate to the theory of the firm, and distribution of wealth and different types of goods
as they relate to the theory of consumer choice. Elasticity is also crucially important in
any discussion of welfare distribution, in particular consumer surplus, producer
surplus, or government surplus.
In empirical work an elasticity is the estimated coefficient in a linear regression
equation where both the dependent variable and the independent variable are in
natural logs. Elasticity is a popular tool among empiricists because it is independent of
units and thus simplifies data analysis. Generally, an elastic variable is one which
responds a lot to small changes in other parameters. Similarly, an inelastic variable
53

describes one which does not change much in response to changes in other
parameters.

8.2 The price elasticity of demand


The price elasticity of demand is a measure of how much the quantity demanded of a
good responds to a change in the price of the good, computed as the percentage
change in quantity demanded divided by the percentage change in price. Price
elasticity of demand depends on a number of factors. These factors, along with their
applications on the tea industry are discussed below:
Availability of close substitutes: Tea, as a beverage, has a close substitute in the form
of coffee. In the present time, tea is cheaper than coffee in Bangladesh, as a cup of tea
costs less than a cup of coffee. Moreover, consumption of tea or coffee is a matter of
personal preference. Even then, significant increase in the price of tea would drive
consumers away from tea and to coffee. In this regard, demand for tea is moderately
elastic.
Switching from tea to coffee for would involve higher monetary cost and thus the
threat of substitution is limited. From the survey, it is known that people frequently
buy 100 gm package of team. Now a comparison between price of 100 gm tea and
coffee is given in the box:
100 gm Ispahani Mirzapore tea

100 gm Nescafe coffee

135 Tk

490 taka

Necessities vs Luxuries: Tea can be classified as a necessity for some people, while it's
a luxury for others. For examples, a lot of drivers take tea during nightlong drives to
keep them awake. On the other hand, for some poorer households, tea is bought or
served only on occasions. In this regard, demand for tea is neither fully elastic like that
of luxury goods, nor totally inelastic like that of necessary goods. In this regard, thee
demand is somewhat moderately elastic.
54

Definition of the market: Tea has a level of elasticity due to that fact that it is a
narrowly defined market. Within the beverage industry, tea can be easily replaced by
carbonated beverages, juices etc. This is one of the main factors behind the price
elasticity of tea.
Time horizon: If we consider a long time horizon, before the introduction of coffee
and carbonated beverages, demand for tea was fairly inelastic, as it did not have many
close substitutes, besides homemade lemonades. However, with the recent increase
in the popularity of other beverages, elasticity in the demand of tea is bound to
increase.

8.3 Are tea brands inelastic or elastic?


The tea industry itself is price elastic.

8.4 The price elasticity of supply


On the other hand, price elasticity of supply, measured as the percent change in
quantity supplied divided by the percent change in price, depends on the following
factors:
Flexibility of seller: In case of tea, the production capacity of sellers are quite limited,
as there is no way to quickly increase the production capacity of a tea garden. Thus
this factor has minimal impact on the price elasticity of tea supply.
Time Horizon: However, with time, new tea gardens can be cultivated, as has been the
case with new gardens being grown on the panchgar region. Thus in the long run,
sellers have introduces some price elasticity in supply.

55

Chapter 9
9.0 Production function
The production function is a mathematical representation of the various technological
recipes from which a firm can choose to configure its production process. In particular,
the production function tells us the maximum quantity of output the firm can produce
given the quantities of the inputs that it might employ.

9.1 Input- Output


Inputs are resources, such as labor, capital equipment, and raw materials that are
combined to produce finished goods. Output is the amount of a good or service
produced by a firm. The relationship between Area and Yield can be determined from
the historical data below collected from Bangladesh Tea Board (BTB).
Year

Area Under

Pluckable

Production

Yield

Tea (ha)

Area (ha)

(In m. kg)

(Kg/ha)

1947

28,734

28,734

18.36

639

1950

31,890

28,734

23.77

827

1955

30,274

28,734

23.87

831

1960

31,418

30,744

19.01

618

1965

36,500

32,335

27.13

839

1970

42,685

39,308

31.38

798

1975

42,685

39,308

29.09

740

1980

43,528

43,201

40.04

927

1985

44,609

44,330

43.29

976

1990

47,385

44,759

46.16

1,031

1995

47,938

43,998

47.67

1,084

2000

50,470

46,344

53.15

1,147

2002

50,226

44,717

53.62

1,199

2003

50,896

44,916

58.3

1,298
56

2004

51,264

45,083

56

1,242

2005

52,317

45,366

60.14

1,326

2006

52,407

45,505

53.41

1,174

2007

53,368

46,926

58.19

1,240

2008

54,106

47,377

58.66

1,238

2009

55,857

48,163

59.99

1,245

2010

56,807

49,058

60.04

1,224

2011

57,212

49,153

59.13

1,203

2012

58,098

49,954

62.52

1,250

2013

58,719

50,203

66.26

1,320

Table 5: Area of cultivation vs. production


Taking area of tea cultivation land and production as variables, we found out the
relationship between input-output factors are constant return to scale.
70

Production (m. KG)

60
50
40

30
20
10
0
0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Area Under Tea (hactor)

Figure 10: Input-output relationship between area cultivated and production

57

Chapter 10
10.0: Market structure
Teas are marketed internally with the multiplicity of band names in monopolistic
competition with slightly differentiated products. Therefore, tea industry has such a
market structure that falls between perfect competition and pure monopoly. Prices of
teas in the auctions vary according to the appearance and liquor quality of teas. Tea
estates having well equipped factory, sound financial footing and efficient
management can produce quality teas at optimum rate of output at lower cost which
in turn brings more profits for the owner of the estates. The small estates produce tea
at high costs. In addition, the quantity of their products is not good enough to fetch
remunerative prices. Thus efficient producers of tea can minimize the cost of
production and earn more profits like as in other monopolistic markets.
Monopolistic competition has some definite attributes as follows:
Many sellers.
Product differentiation.
Free entry and exit.

10.1 Many sellers


Most of the 163 tea estates in Bangladesh are located in the North-eastern region of
Bangladesh-Maulvi Bazar, Hobiganj, Sylhet, Brahmanbaria districts. There are a few
number of tea estates in Panchagar District and in Chittagong, a South-eastern district.
Owners of tea gardens include both foreign and local companies. While fIspahani
Mirzapore Sterling companies own 27 estate, Bangladeshi companies and individuals
own the rest of the tea gardens. The fIspahani Mirzapore foreign companies are James
Finlay, Duncan Brothers, Deundi Tea Company and The New Sylhet Tea Estate.
All the 163 tea estates are managed by five different categories of management:
1. Sterling companies
58

2. National Tea company


3. Bangladesh Tea Board
4. Bangladeshi Private Limited Companies
5. Bangladeshi Proprietors
The estates are categorized into three according to their production capacities. They
are:
Category A: All the A category estates that have the highest productivity belong to
the British companies (fully or partially).
Category B: The Bangladeshi government, Bangladeshi tea companies or Bangladeshi
individuals own this category of estates.
Category C: The family owned small and low productive estates belong to this
category. Wages and working conditions are at their worst in the tea estates under
this category.

10.1.1 Sterling companies


Sterling companies refer to the companies those are owned by foreign investors. In
early 1990s, a total of 12 sterling companies were in tea business. They owned 26
gardens, all located in Maulvibazar and Habiganj district. At present four sterling
companies own 27 estates and account for 45% of the total tea production. The four
foreign companies are James Finlay, Duncan Brothers, Deundi Tea Company and New
Sylhet Tea Estate.National Tea Company:
National Tea Company Ltd. has been formed in the year 1978 under the Companies
Act , 1913, as a Public Limited Company. It is a Joint venture of the Government and
the General Public.The Company started with 9(nine) A-class tea estates all of which
are situated in the Sylhet division.The tea estates are: Patrakhola, Kurmah, Champarai,
Madanmohanpur,

Madabpur,

Jagadishpur,

Teliapara,

Chundeecherra

and

Lackatoorah. At present it owns 13 tea estates and accounts for 8% of the total tea
production.
59

10.1.2 Bangladesh tea brand


Bangladesh Tea Board owns and operates three estates .These estates produce 3% of
the total tea production in Bangladesh.

10.1.3 Bangladesh private limited companies


Bangladesh Tea Board owns and operates three estates .These estates produce 3% of
the total tea production in Bangladesh.

10.1.4 Bangladeshi proprietors


Tea companies those are operated by Bangladeshi companies fall under this category.
These companies own and operate 61 tea estates and produce 30% of the total
production.
Management wise Land use & production (source Bangladesh Tea Board)
Category of

No. of Tea

Grant Area (ha.)

Management Estates

Tea Area

Production

Yield

(ha.)

(2008)

(Kg./ha.)

Sterling co.

28

39,386.02(34%)

20,247.04

26,520,787(45%)

1,310

BTB

2,559.39(2%)

1,435.07

1,632,764(3% )

1,138

NTC

13

11,279.95(10%)

5,599.80

4,424,755(8%)

790

Deshi co.

61

40,652.05(35%)

17,107.08

17,804,393(30%)

1,041

Propriety

58

21,656.00(19%)

9,430.33

8,074,997(13%)

856

Total

163

115,553.41(100%)

53,819.32

58,457,696

1,086

Table 6: Land use & production (source Bangladesh Tea Board)

60

10.1.5 Government
Government of Bangladesh is a key stakeholder in tea market. Government monitors
and (if necessary) regulates the tea market through the Bangladesh Tea Board (BTB).
The main functions of the Board are to monitor, control and promote the sale and
export of tea; to conduct scientific research through its research wing Bangladesh Tea
Research Institute (BTRI) in order enhance the quality and productivity of tea produced
in Bangladesh; to register tea estates and grant license to planters, manufacturers and
other dealers engaged in the business of tea and to take any necessary measure in the
best interest of the tea industry of Bangladesh.

10.1.6 Brokers
The auctioning company (i.e. The Broker) which is the pivot of the auction system
comprises professionals who combine multi-faceted talents such as Tea Tasters,
Valueproviders, Quality Controllers, Auctioneers act as independent arbitrators and
consultants between Buyers and Producers and in their relationship with a host of
ancillary service organizations such as Warehouses, Transport Carriers, Banks, Insurers
etc. At the beginning of each new season Producers nominate Brokers for the
disposal of their crops through Chittagong auctions. The Broker charges 1% of the
sale price as Brokerage and also collects an additional 1% as Tea Cess levied by the
Bangladesh Tea Board on all producers. Brokers facilitate the supply of tea and arrange
the sale of tea. They also prove after sales services such as ensuring the delivery of tea
to the exporters and internal buyers and also ensure realization and payment of sale
proceeds to Producers

10.1.7 Banks
Banks help tea exporters with advances against shipping documents. Banks also play
an important role in tea production by providing loan to tea producers for the smooth
operation of production process.

61

10.1.8 Exporters and internal buyers


Exporters sell the tea bought from auction center in the international tea market. On
the other hand, internal buyers or wholesalers sell tea in the domestic market through
retailers.

10.2 Monopolistic Competition for Tea Market


Teas are marketed internally with multiplicity of band names in monopolistic
competition with slightly differentiated products. Prices of teas in the auctions vary
according to the appearance and liquor quality of teas. Tea estates having well
equipped factory, sound financial footing and efficient management can produce
quality teas at optimum rate of output at lower cost which in turn brings more profits
for the owners of the estates. The small estates produce teas at high costs. In addition,
the quantity of their products is not good enough to fetch remunerative prices. Thus,
the efficient producers of tea can minimize the cost of production and earn more
profits like as in other monopolistic markets.

10.3 Barriers to entry


If the threat from new entrants into the product category is high, the attractiveness of
the industry diminishes. On the other hand, if the risk of new entry is low the firms in
the industry can take the advantage to raise price and earn greater profits. The
strength of the competitive force of potential rivals is largely a function of the height
of barriers to entry that make it costly for firms to enter an industry. High entry barriers
keep potential competitors out of an industry even when industry returns are high (Hill
& Jones, 2002). In case of tea industry of Bangladesh following factors can be
considered as the influential sources of barriers to entry.

10.4 Dependency of Suppliers on Buyers


When the suppliers depend on buyers for large percentage for its total orders buyers
have more bargaining power over suppliers. (Porter, 1990) In the tea industry,
producers sell tea through the brokers in auction. Tea brokers taste the tea and set
62

the prices based on the several factors such as quality, price received in previous
auction by the similar tea, demand condition, production in international market etc.
Buyers need to purchase tea based on their estimated demand in the local and
international market for which they need to bid higher than their competitors.
Increasing local and international demand indicate that buyers will buy more to meet
the increasing demand. So the suppliers are less vulnerable in terms of purchase
quantity of the buyers.

10.5 Vertical Integration


When the buyers can use the threat to supply their own needs through vertical
integration as a mechanism for forcing down prices then the buyers have more
bargaining power (Hill & Jones, 2002). Tea buyers are not in a position to threat to
vertical integration to force down prices due to the auction system. All companies have
to purchase tea from the auction. Even if any buyer has its own tea production, they
need to purchase from auction. Only James Finlay Bangladesh Ltd and Duncan
Brothers are allowed to collect their tea from their own gardens based on their local
and export demand the rest of the tea of their gardens are sent to the brokers to sell
through the auction.

10.6 Rivalry among established companies


Weak rivalry amongst the established firms offers an opportunity to raise prices and
earn greater profits. On the contrary, strong rivalry leads to price wars and higher cost
of doing business which ultimately limit the profitability and growth prospect of the
firm. The following factors are seemed to have contribution in determining the extent
of rivalry in Bangladesh Tea Industry.

10.7 Competitive structure


Competitive Structure refers to the number and size of distribution of companies in an
industry. Structure vary from fragmented to consolidated and have different
implications for rivalry. A fragmented industry consists of large number of small and
medium size firms -none of which is in a position to dominate the industry while a
63

consolidated industry consists of small number of large firms. Most commodity type
products which are hard to differentiate results in fragmented industries that
eventually depress industry profits due to price war among the rivals. (Hill & Jones,
2002). Bangladesh tea industry is a fragmented industry consists of five categories of
producers such as,
(i)

Sterling Companies,

(ii)

National Tea Company (NTC),

(iii)

Bangladesh Tea Board (BTB),

(iv)

Bangladeshi Private Limited Companies (BPLC) and

(v)

Bangladeshi Proprietors.

Following chart indicates the size of land and production volume of large, medium and
small size producers in the tea industry of Bangladesh.
Category of
Management

No. of
Tea
Estates

Grant Area (ha.)


Tea (ha.)

Tea Area
(ha.)

Land
Use
(%)

Production(2006)

Yield
(kg/ha.)

Sterling Co.

28

39386.02(34%)

20219.16

51%

24027525(45%)

1188

BTB

2559.39(2%)

1445.55

57%

1536480(3%)

1063

NTC

13

11279.95(10%)

5583.66

50%

4760300 (9%)

852

BPLC

61

40652.05(35%)

15716.65

39%

15815700(30%)

1006

Proprietary

58

21656.00(19%)

9345.85

43%

7205119(13%)

771

Total

163

115553.41(100%)

52310.87

45%

53345124

1020

*Source: Bangladesh Tea Board

Table 7: Ownership-wise Land and Yield


Based on the production and the size of the estates, Sterling Company gardens and
Private Limited Company gardens are the large gardens; Proprietary and National
Tea Company gardens are medium sized while North Bengal and Tea Boards gardens
are the small firms in Bangladesh tea industry.

64

10.7.1 Low switching cost


Low switching cost increases the rivalry in the industry as the buyers can switch
between the suppliers. Tea is difficult to differentiate which allows the buyers to
switch between producers at a low switching cost. However, sometimes switching
from the existing suppliers may tax the buyers in terms of problems in timely delivery,
payment etc. The reputed buyers like Unilever (Bangladesh) Ltd, M.M. Ispahani Ltd.
and HRC usually purchase the produce of Sterling Company gardens for their
appearance, liquor, and quality. If these companies want to switch between suppliers
they may have to compromise with the quality. However, the switching costs are very
fractional as the quality of packaged tea marketed by the buyers depends on the
blending of different types of tea from different gardens rather than the raw tea.

10.7.2 Product differentiation


Tea is a commodity type product which is difficult to differentiate. However, certain
gardens, particularly, the Sterling Companies could manage to differentiate their tea
in terms of quality, appearance and liquor owing to their state of the art technology,
better inputs, skilled workers and professional management. As a result, Sterling
gardens get higher prices for their produce in comparison to others.

10.8 Exit barriers


Exit barriers are economic, strategic and emotional factors that induce firms in an
industry to continue even in the face of low return. If exit barriers are high companies
may turn out to be locked into an unprofitable industry. (Hill & Jones, 2002). In the tea
industry of Bangladesh, high fixed cost or higher investment in plant, garden,
equipment etc. could constitute the barriers to exit for any firm. However, as there is
scarcity of land for tea production, companies are in a position to sell off their gardens
at a much higher rate than their investment. Increasing demand of tea both in local
market and international market attract the new investors to invest in tea industry and
acquire garden, which reduce the exit barriers to quit from the industry. In the period
of last two governments, many gardens were sold at rates more than double the
65

invested amounts. However, no investor is found to have interest about firms which
require extensive rehabilitation both in fields and factories.

10.9 The bargaining power of buyers


The buyers may be the customers, individual or organizations who ultimately consume
the products or they may also be the organizations that purchase for resell to the end
users. Buyers can be viewed as a competitive threat when they are in a position to
demand lower prices and/or better services which, in turn increase the costs of doing
business. On the other hand, when the buyers are weak, a firm can raise its prices and
earn greater profits, thus making the industry more attractive. (Porter, 1990) In case
of tea industry in Bangladesh, the companies that purchase tea from auctions to
market it either in local or export market can be considered as buyers. The following
factors can influence the bargaining power of buyers for the case of Bangladesh Tea
Industry.

10.9.1 Purchase volume of buyers


When the buyers purchase in large quantities in such circumstances buyers can use
their purchasing power as leverage to bargain for price reduction. (Hill & Jones, 2002)
Even though many different companies purchase tea from auctions in large volume to
meet their local and export demands, the auction system restricts the buyers from
using their purchasing power for price reduction. The following table indicates the
purchase volume of some large and small buyers in 2007-2008.

10.10 The bargaining power of suppliers


When the buyers purchase in large quantities in such circumstances buyers can use
their purchasing power as leverage to bargain for price reduction. (Hill & Jones, 2002)
Even though many different companies purchase tea from auctions in large volume to
meet their local and export demands, the auction system restricts the buyers from
using their purchasing power for price reduction. The following table indicates the
purchase volume of some large and small buyers in 2007-2008.
66

10.10.1 Number of suppliers


Suppliers can be viewed as threat when they are able to either force up the price that
a company must pay for its inputs or reduce the quality of the inputs they supply,
thereby diminish the firms profitability. On the other hand, when suppliers are weak,
the firm enjoys an opportunity to force down prices and demand higher input quality.
As with buyers, the ability of suppliers to make demands on a firm depends on their
power relative to that of the buyer. (Hill & Jones, 2002). The following factors affect
the bargaining power of suppliers.

10.10.2 Differentiated product and switching cost


Suppliers offering differentiated products point to high switching cost for buyers. In
such cases firms (buyers) depend on the suppliers and consequently suppliers have
the benefit of having more bargaining power over buyers. (Porter, 1990). Buyers in the
tea industry in Bangladesh can switch between suppliers easily as there are large
number of suppliers of inputs. The extent of differentiation is also limited. But there
are some suppliers of inputs such as fertilizers, insecticides, pesticides, and medicines
who could differentiate their products in terms of quality and brand image. Switching
from those suppliers to others involve high switching cost in the form of poorer quality
and inconsistency of delivery. These suppliers have more bargaining power over
buyers. Examples of these suppliers include Chattral Hardware Store, General
Hardware Stores, S.A. Enterprise, Hossain Enterprise (general hardware), KAFCO, Azim
and Co. (fertilizers), Syngenta Ltd (insecticides and pesticides), TSA Enterprise Ltd
(Machinery) etc.

10.11 Threat of substitute product


Products from one business can be replaced by products from another. If the firm
produces commodity product that cannot be differentiated easily, customers can
switch away to a competitors product with less consequences. On the contrary, there
may be a distinct penalty for switching if product is unique or essential for customers

67

business. (AICC, 2004). The following factors can influence the threat of substitute for
the tea industry:

10.11.1 Low switching cost


When it is easy for a customer to switch to a substitute product at a less or no switching
cost substitute product poses greater threat (ICMBA, 1999). However, tea is a low cost
product compared to potential substitutes like coffee and soft drinks. Switching from
tea to coffee for would involve higher monetary cost and thus the threat of
substitution is limited.

10.11.2 Customers loyalty


When customers have low level of loyalty and price is the primary motivator, the
threat of substitutes is greater (ICMBA, 1999). Being a traditional drink, loyalty of
consumers towards tea in comparison to other drinks is higher. Besides, if price is
considered as the primary motivator, consumers are likely to be more loyal to tea as
it is relatively cheaper.

10.11.3 Income level of customers


Consumers of all income groups cannot consume the other substitutes like coffee, soft
drinks etc. due to the higher monetary cost. Higher income segment of the market
may be habituated or loyal to other substitutes, but tea has its everlasting appeal to
the mass people.

10.11.4 Taste and preferences


Changing the taste and habit of customers is very difficult. Over time, the people of
Bangladesh became habituated to tea and for a large population it has become a
necessity. This is very difficult to change and hence the threat from substitutes is
lower.

68

10.11.5 Frequency of consumption


Frequency of tea consumption is also high among the consumers compared to other
substitutes. The higher cost and nature of other drinks make them expensive to be
consumed as frequently as tea is. This limits the threat of substitutes and creates
opportunities for the tea industry to earn greater revenue.

69

Chapter 11
11.0 Government Policies for Tea Industry
Bangladesh government has some policies for tea industry to keep the market price of
tea fair for the consumers and sellers. They have regulatory unit, research unit for new
methodologies to be implied and protection of tea industry. A short note on
government policies regarding tea industry is given here:

11.1 Bangladesh Tea Board:


Bangladesh government has set an independent governing body named Bangladesh
Tea Board (BTB) to govern the countrys tea industry. It is constituted under the tea
ordinance 1977 in order to regulate, control and promote the cultivation,
distribution and sale of tea throughout Bangladesh. Currently its head office is in
Chittagong.
The main functions of the board are as following:
To regulate, control and promote the cultivation, distribution, sale and export
of tea.
To control and improve the quality of tea.
To conduct comprehensive, scientific and technological research to raise
productivity of tea and improve its quality.
To register tea estates with the board and grant licenses to the planters,
manufacturers and other people engaged in the business of tea.
To assist establishing new tea gardens and improving productivity of existing
tea gardens.
To undertake welfare measures for tea garden laborers and employees.
To undertake, acquire and manage any concern regarding tea or to take
measures in the interest of the tea industry as directed by the Government,
from time to time.

70

11.2 Bangladesh Tea Research Institute


Bangladesh tea research institute (BTRI) is engaged in conducting comprehensive,
scientific, technological and economic research for the tea industry. It has provision
for 182 personnel including research and technical staffs. It has three major research
departments with six divisions as:
Name of Department
Department of Chemistry

Functions
Comprising soil chemistry and biochemistry divisions.

Department of Crop Production

Comprising Botany and Agronomy divisions.

Department of Pest Management

Comprising Entomology and Plant Pathology Divisions.

Table 7: Research Departments of BTRI


It has recently launched two more research divisions: Tea Technology Division and
Statistics-Economics Division.

11.3 Price Control:


Government of Bangladesh usually does not control the price of tea. The price is fixed
on the open market by the invisible hand concept of both sellers and buyers. But
Government has the power to control it as per the Tea (Control of prices, Distribution
and Movement) Ordinance of 1960. It states that:
The Chairman may, from time to time, by notification in the official gazette, fix the
maximum prices up to which any variety of tea may be sold by (a) a blender, (b) an
importer, (c) a wholesaler, (d) a retailer, or (e) any other person or class of persons,
and no person shall sell of resell tea at prices higher than the fixed price.
Therefore, if needed, the chairman of BTB can fix a ceiling price for wholesale price of
tea. Tea is sold at a weekly auction in the countrys sole auction center, in the main
port city of Chittagong, where most of it is picked up by the local buyers.

71

11.4 Tax
Bangladeshi Government has not implied any tax on the buyers who buy the tea
product from their local organization. But if someone wants to consume foreign
products, Government puts a tax fee on this consumption to protect the local tea
industry. As the consumer demand for foreign tea tends to be inelastic, consumer
has to bear the burden of the tax implied on the consumption.

11.5 Government incentives


Panchagarh is the new frontier for Bangladeshi tea industry. Many of Panchagarh
citizen are earning wages as plucking workers in the dozens of tea gardens at the
officially recognized tea zone of the country. Bangladesh Tea Board has been providing
necessary trainings to the selected farmers and per hectare subsidy of TK. 14000. Due
to this government incentive, the cultivation of tea is increased and the price gets
lowered.

72

Chapter 12
12.0 Production Cost
Tea industry a process-based industry, instead of having isolated departments the
industry has some support functions and some core functions. Typically the structure
of the organization can be explained through the supply chain.
The core functions are:

Leaf

Production

Brand Marketing

Trade Marketing

CORA

Along with the core functions there are some support functions such as

HR

IT

Finance

Fixed Costs
Land
Building
Chain link fencing
Salaries of Executives
Vehicle and Furniture cost
De
Machineries used in INDUSTRY Plant:
Counter Flow Classifier
Stem Tester
Thresher
73

Conditioning Machine for Lamina - [DCCC Direct Conditioning & Casing Cylinder
(DCCC)]
Lamina Line Cutter RC-4
Lamina Dryer-ITM (Imperial Tobacco Machineries) Drier
ADMOIST (stemline Conditioner)
KT-2 Cutter
Stem dryer-FBD
SILO
Protos (Filter Rod Maker)
Decoufle Nano 8 (Filter Tea Maker)
Focke (Packaging Machine)
Variable Costs:
Raw materials
Utilities ( Electricity, Fuel)
Wages of workers
Promotional expenses
Transportation cost
HR plan Structure:
CEO
Financial Manager
Marketing Manager
Operations Manager
HR Manager
Technician/Skilled labor
Semi-skilled labor
Peon
Security guard
74

Chapter 13
13.0 Game theory
Game theory is the study of the ways in which strategic interactions among economic
agents produce outcomes with respect to the preferences (or utilities) of those agents,
where the outcomes in question might have been intended by none of the agents.
Game theory is mainly used in economics, political science, and psychology, as well as
logic and biology. The subject first addressed zero-sum games, such that one
participant's gains exactly equal net losses of the other participant(s). Today, however,
game theory applies to a wide range of class relations, and has developed into an
umbrella term for the logical side of science, to include both human and nonhumans,
like computers. Classic uses include a sense of balance in numerous games, where
each person has found or developed a tactic that cannot successfully better his results,
given the other approach.
Profit maximization conditions: An oligopoly maximizes profits by producing where
marginal revenue equals marginal costs. Ability to set price: Oligopolies are price
setters rather than price takers. Entry and exit: Barriers to entry are high. The most
important barriers are economies of scale, patents, access to expensive and complex
technology, and strategic actions by incumbent firms designed to discourage or
destroy nascent firms. Additional sources of barriers to entry often result from
government regulation favoring existing firms making it difficult for new firms to enter
the market.
Number of firms: "Few" a "handful" of sellers. There are so few firms that the actions
of one firm can influence the actions of the other firms.
Long run profits: Oligopolies can retain long run abnormal profits. High barriers of
entry prevent sideline firms from entering market to capture excess profits.
Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of
various economic actors can be generally described as selective. Oligopolies have
75

perfect knowledge of their own cost and demand functions but their inter-firm
information may be incomplete. Buyers have only imperfect knowledge of price, cost
and product quality.
Taking all into accounts all the features of oligopoly market, it can be said that tea
market of Bangladesh is a perfect competition.
A huge market for loose tea also exists. There are some big manufacturers of tea in
Bangladesh tea industry. No single company is the price maker, but all the companies
are price takers. So, in the market, no game theory can be applied.

76

Chapter 14
14.0 Contribution of tea industry on national economy
Bangladesh has an insignificant role in the global tea sector. It can hardly export about
1 to 1.5 million kg of tea to the international market. The COP of Bangladesh tea is
lower than many other tea producing countries even with lower productivity per unit
area. The healthy local market has pushed the auction price higher as compared to the
major exporters. Pakistan, Egypt and other Middle Eastern countries find it more
convenient to buy tea from East African countries mainly due to a little lower auction
price and better shipping facilities as compared to Bangladesh. Though Bangladesh has
a lower cost of production yet due to strong internal demand, there has been
reduction in export of Bangladesh tea and if such strong internal demand continues
then Bangladesh will have to import tea by 2015.
In the industrial sector, tea occupied 3rd to 4th position in the national economy in
the 70s. Although with opening of RMG, leather, fish, handicrafts and manpower
sectors for Bangladeshi entrepreneurs, tea has lost its position as significant
contributor to the national economy, about 800000 people are living on tea industry
which is established on lands not suitable for any other agriculture particularly food
stuff. Tea industry, therefore, has its importance in utilizing the hilly land at its
optimum level and employment generation to a large number of people. Further with
rising income level, it is expected that tea will play an important role as an import
substitute industry in very near future.

77

Chapter 15
15.0 Conclusion
Bangladesh tea industry is a fragmented industry in which certain companies, most
notably the Sterling Companies, are in a position to dominate. Rivalries among the
companies are not that intense as the demand for tea is increasing. Tea is difficult to
differentiate, but there is some switching cost involved among some buyers if they
want to switch from Sterling Companies' tea to other companies by compromising on
quality. The Sterling gardens get higher prices for their crops compared to others.
Increasing tea consumption provides opportunity for the tea companies to earn
greater revenue without increasing the extent of rivalry. So rivalry among the
producers is not that intense.
Buyers are not in a position to dominate the tea industry as buyers need to compete
in the auction to purchase tea by bidding for higher price than their competitors. Due
to the auction system, buyers cannot use their purchasing power for price reduction.
The tea producers have less dependency on buyers for large percentage of total
orders. Even though, in auction, buyers can switch orders between firms (gardens) at
a low cost but they (buyers) cannot force down prices in every situation. Tea buyers
are also not in a position to threaten to supply their own needs through vertical
integration as a device for forcing down prices, since all firms must purchase tea from
the auction. Therefore, the bargaining power of buyers is limited.
Demand tea is elastic between different brands. Consumers have lots of available
options to switch between brands if the price of a particular brand goes up. However,
if we consider tea as a separate entity, then closest substitute of tea is coffee which is
very cost when compared to tea.
The tea producers have alternatives in selecting the suppliers, and the rivalry of the
supply industry limits the power of suppliers. As the buyers (tea gardeners) industry
is not that important customer for the suppliers, the buyers are, in a sense, incapable
of influencing them to reduce price - which results in suppliers having more power
78

over buyers. Switching cost is typically low for the buyers to switch between suppliers,
but there are some suppliers of inputs who have differentiated their products in terms
of quality and brand image. Suppliers of tea industry are not in a position to integrate
forward and compete with the firms that are involved in tea production which limits
the threat of forward integration by the suppliers. To switch from tea to coffee or any
other soft drinks involve higher monetary cost which confines threat of substitutes.
Degree of loyalty towards tea is higher than other substitutes because of its low cost,
and image of traditional drink of the region. The people of Bangladesh became
habituated to tea and for a large part of population it has become almost a necessity.
Frequency of tea drinking is also high among the consumers in comparison to other
substitutes. So threat from substitutes are also very limited.

79

Bibliography:
1. Mankiw, N. Gregory, 2012. Principles of Microeconomics. Sixth Edition. SouthWestern Cengage Learning
2. Samuelson and Nordhaus, 2005. Economics. Eighteenth edition, McGraw-Hill
international edition.
3. Khisa, P. and Iqbal, I. (2001). Tea manufacturing in Bangladesh: problems and
prospects. Proceedings of the international conference on mechanical engineering,
26-28. Department of mechanical engineering, Bangladesh University of science and
technology, Dhaka. Nasir T. and Shamsuddoha M. (2011). Tea Productions,
Consumptions and Exports: Bangladesh Perspective. Vol. 2. International Journal of
Education Research and Technology
4. BBS. (2008). Statistical year book of Bangladesh.
5. http://www.teaboard.gov.bd/index.php?option=historyteaarea.
6. http://www.studymode.com/essays/Milk-Tea-Consumers%27-Preference46025697.htmlITC. (2001). International tea committee report.
7. Ahmed, Kazi M. 1999. Problems & Prospects of Tea Industry in Bangladesh- an
Economic Study. Arthonity Journal, 1999. Volume IX. The Chittagong University
Economic Association, University of Chittagong, Chittagong, Bangladesh. Ahammed,
Dr. K Muzafar. (2012). 18th conference, Investment for Sustainable Development of
Bangladesh Tea Industry - An Empirical Study.
8. Bangladesh Economic Society Bangladesh Bureau of Statistics. 2001. Statistical Pocket
of Bangladesh, 2001. Dhaka, Bangladesh.
9. Bibliography: Teaboard.gov.bd, 'Bangladesh Tea Board'. N.p., 2015. Web. 2 May 2015.
10. Tea plantation workers in Bangladesh, 'Tea-The Industry'. N.p., 2008. Web. 2 May
2015.
11. Scribd.com, 'Tea'. N.p., 2015. Web. 2 May 2015.
12. Thefinancialexpress-bd.com, 'Both Quantity and Price of Tea down This Season'. N.p.,
2015. Web. 2 May 2015.

80

Appendices
A.1:
Area of total cultivated land and total production. Source- Bangladesh Tea Board.
Year

No. of Tea

Area Under

Pluckable

Production

Yield

Estates

Tea (ha)

Area (ha)

(In m. kg)

(Kg/ha)

1947

103

28,734

28,734

18.36

639

1950

103

31,890

28,734

23.77

827

1955

127

30,274

28,734

23.87

831

1960

127

31,418

30,744

19.01

618

1970

153

42,685

39,308

31.38

798

1980

153

43,528

43,201

40.04

927

1985

156

44,609

44,330

43.29

976

1990

158

47,385

44,759

46.16

1,031

1995

158

47,938

43,998

47.67

1,084

2000

160

50,470

46,344

53.15

1,147

2002

161

50,226

44,717

53.62

1,199

2003

162

50,896

44,916

58.3

1,298

2004

162

51,264

45,083

56

1,242

2005

163

52,317

45,366

60.14

1,326

2006

163

52,407

45,505

53.41

1,174

2007

163

53,368

46,926

58.19

1,240

2008

163

54,106

47,377

58.66

1,238

2009

163

55,857

48,163

59.99

1,245

2010

163

56,807

49,058

60.04

1,224

2011

163

57,212

49,153

59.13

1,203

2012

165

58,098

49,954

62.52

1,250

2013

166

58,719

50,203

66.26

1,320

81

A.2
Year-wise demand of internal market. Source - Bangladesh Tea Board.
Year

Internal consumption

1990

14.21

1995

22

2000

38.79

2001

36.95

2002

41.5

2003

37.44

2004

43.33

2005

43.3

2006

40.51

2007

46.27

2008

52.12

2009

53.74

2010

57.63

2011

58.5

2012

61.19

2013

64

82

A.3
Year-wise supply in the internal market. Source - Bangladesh Tea Board.
Year

Supply (m. KG)

1990

18.36

2000

47.67

2001

53.15

2002

53.62

2003

58.3

2004

56

2005

60.14

2006

53.41

2007

58.19

2008

58.66

2009

59.99

2010

60.04

2011

59.13

2012

62.52

2013

66.26

83