Beruflich Dokumente
Kultur Dokumente
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)
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
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
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.
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.
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
Others
4%
5%
Lipton Taza
8%
Cylon Tea
10%
Ispahani Mirzapur
Tea
68%
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.
Ispahani
established
the
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
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.
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.
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.
13
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.
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.
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
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.
19
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
1.9 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
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.
25
26
Wholesale
Retailer
Competitors Report
Market Size
Market Share
Distribution Coverage
Frequency of Distribution
27
Percentage
Duncan
6%
Finlay
64%
HRC
20%
Ispahani
97%
Ispahani Zareen
92%
96%
68%
20%
40%
60%
80%
100%
120%
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%
Lipton Taaza
Ispahani
Finlay
0
50
100
150
Percentage
200
250
300
350
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
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
Tea
Sold
Consumer
spends money
Tea Consumersand
labors
Tea Industry
Factors of
Production moved
to Ispahani Group
Tea Consumers
provide the market
population and
labors provide the
hard work.
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.
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
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.
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.
1990
1995
2000
2005
2010
2011
2012
2013
22
38.79
43.3
57.63
58.5
61.19
64
KG)
43
70
60
Internal Supply
50
40
30
20
10
0
1985
1990
1995
2000
2005
2010
2015
Year
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.
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.
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.
D2
Price
D1
D3
Quantity Demanded
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.
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.
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)
Internal Supply
60
50
40
30
20
10
0
1985
1990
1995
2000
2005
2010
2015
Years
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
51
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.
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.
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.
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
60
50
40
30
20
10
0
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
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.
Madabpur,
Jagadishpur,
Teliapara,
Chundeecherra
and
Lackatoorah. At present it owns 13 tea estates and accounts for 8% of the total tea
production.
59
No. of Tea
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
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
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.
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)
(iii)
(iv)
(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
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
64
invested amounts. However, no investor is found to have interest about firms which
require extensive rehabilitation both in fields and factories.
67
business. (AICC, 2004). The following factors can influence the threat of substitute for
the tea industry:
68
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:
70
Functions
Comprising soil chemistry and biochemistry divisions.
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.
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
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