Application of the Theories of

Managerial Economics: A Case Study

on Sunray Textiles

Term Paper on

Application of the Theories of Managerial Economics:

A Case Study on Sunray Textiles

Submitted to:
Professor Dr.A.K.M Saiful Majid
Senior Fulbright Fellow
Course: Managerial Economics (E 501)

Submitted by:
Jahniar Alam (Roll-01, MBA 49D)
Nirjhor Barua (Roll-04, MBA 49D)
Golam Saroare Shakil (Roll-08, MBA 49D)
Ifaz Khorshed Hasan (Roll-, MBA 49D)
Ekramul Islam(Roll-109 , MBA 45D)

Institute of Business Administration

University of Dhaka
26th May 2014.

Letter of Transmittal

May 26, 2014

Dr. A.K.M Saiful Majid
Professor,
Institute of Business Administration,
University of Dhaka.
Subject: Report Submission on Application of the Theories of Managerial Economics: A
Case Study on Sunray Textiles.
Respected Sir,
We are pleased to submit the following report of the study on Sunray Textiles which has been
assigned to us as a component of this intuitive course.
After interviewing key personnel of Sunray Textiles, we came to know about their existing plans,
actions & marketing strategy of their products in both domestic and foreign market. We are
indebted to Mr. Mohammad Noor Islam, Chairman, Sunray Textiles for being a great help
throughout our study. We are extremely grateful to Sunray Textiles for accommodating us in the
midst of their busy schedule.
We appreciate this opportunity given to us by you. The research was both interesting and
informative. It enabled us to link theory with the practical world and helped us in understanding
how business entities function in reality.
Sincerely yours,
Jahniar Alam (Roll: 1, 49D):

__________________________________

Nirjhor Barua (Roll: 4, 49D):

__________________________________

Golam Saroare Shakil (Roll: 8, 49D): __________________________________

Ifaz Khorshed Hassan (Roll: 55, 49D): __________________________________
Ekramul Islam (Roll: 109, 45D):

__________________________________

Acknowledgment

We have put in our efforts for this term paper; however, it would not have been possible without
the kind support and help of many individuals and the organization concerned. I would like to
extend my sincere thanks to all of them.
We are highly indebted to Professor Dr. A.K.M Saiful Majid for his guidance and constant
supervision as well as for providing all the necessary information regarding this term paper. We
are extremely thankful to our honorable Professor for giving us this opportunity to realize how
business entities perform their activities. It helped us understand and link the economic theories.
We would like to express our special gratitude and thanks to Mr. Mohammad Noor Islam for
giving us such attention and time. It would have been impossible to complete the term paper
without the kind co-operation and encouragement of our parents and family members. Our
heartfelt gratitude goes out for their unvarying support during our difficult times.

Executive Summary
This report provides an analysis of Sunray Textiles in light of numerous economic theories to get
an insight on how business entities operate in the economic environment. The textile industry of
Bangladesh has experienced enormous growth despite the termination of several privileges by
both USA and the European Union. Sunray Textiles is operating in this industry since its
inception in 1995 and has created a niche market in this competitive arena. The study is based on
staff interviews of Sunray Textiles and secondary source of data.
The report includes brief overviews of the company and also the textile market. Seven of the ten
principles of economics have been used to explain the business activities of Sunray Textiles.
Market structure of Sunray Textiles has been examined by using Porters Five Forces Model
which gives an idea that the company operates in a monopolistically competitive market with
many sellers selling differentiated products. Market forces of demand and supply has been
discussed to understand the demand and supply situation of such fabric products. After a
comprehensive study, both demand and supply of Sunray Textiles has been found to be elastic.
Production theory has also been discussed to get a lucid picture of Sunrays cost patterns. Data
collected from the staffs has assisted to derive various cost curves of the company. The
government of Bangladesh has enacted quite a few policies to boost trade in the textile sector.
Rapid increase of RMG sector over the last decade has created a demand-supply gap with fabric
producers lagging behind.
Based on thorough research, it can be concluded that the economic theories conferred can all be
linked to a functioning business entity in the real world.

Table of Contents
Letter of Transmittal ...................................................................................................................3
Acknowledgment ........................................................................................................................4
Executive Summary ....................................................................................................................5
List of Tables ..............................................................................................................................7
Table of Figures ..........................................................................................................................7
I. Introduction .............................................................................................................................8
A. Objectives of the study .......................................................................................................8
B. Scope of the study...............................................................................................................8
C. Limitations .........................................................................................................................8
II. Research Methodology ...........................................................................................................9
A. Design ................................................................................................................................9
B. Formulation of Objectives...................................................................................................9
C. Sources of Data...................................................................................................................9
D. Data Analysis .....................................................................................................................9
1. Qualitative Analysis ........................................................................................................9
2. Quantitative Analysis ......................................................................................................9
III. Overview............................................................................................................................. 10
A. Market Overview .............................................................................................................. 10
B. Company Overview .......................................................................................................... 11
IV. Market Structure & Porters Five Forces Model ................................................................... 12
V. Principles of Economics ....................................................................................................... 14
VI. Market Forces of Demand and Supply Analysis .................................................................. 16
A. Demand ............................................................................................................................ 16
1. Law of Demand ............................................................................................................. 16
2. Demand Function and Demand Curve ........................................................................... 16
3. Factors of demand ......................................................................................................... 17
B. Supply .............................................................................................................................. 18
1. Law of Supply ............................................................................................................... 18
2. Supply Schedule and Supply Curve ............................................................................... 18
3. Factors Affecting Supply ............................................................................................... 19
6

C. Market Equilibrium .......................................................................................................... 20

VII. Elasticity ............................................................................................................................ 21
A. Price Elasticity of Demand ............................................................................................... 21
Determinants of price elasticity of demand ........................................................................ 22
B. Price Elasticity of Supply .................................................................................................. 23
Determinants of price elasticity of supply .......................................................................... 23
VIII. Theory of Production ........................................................................................................ 24
A. Total Cost Curve .............................................................................................................. 25
B. Short-run Average Cost Curve .......................................................................................... 25
C. Marginal Cost ................................................................................................................... 26
D. Average Fixed Cost Curve ................................................................................................ 27
E. Average Variable Cost Curve ............................................................................................ 28
IX. Impact of Government Policies ........................................................................................... 28
X. Conclusion ........................................................................................................................... 31
XI. Bibliography ....................................................................................................................... 32
XII. Appendix ........................................................................................................................... 33

List of Tables
Table 1: Porters Five Forces Model ........................................................................................... 12
Table 2: Demand Schedule for Sunray ...................................................................................... 16
Table 3: Supply Schedule for Sunray Textiles ........................................................................... 18
Table 4 : Demand & Supply Schedule ....................................................................................... 20

Table of Figures
Figure 1: Demand Curve of Sunray ........................................................................................... 17
Figure 2: Supply Curve of Sunray Textiles ................................................................................ 19
Figure 3: Market for Fabric Pleating .......................................................................................... 21
Figure 4: Total Cost Curve ........................................................................................................ 25
Figure 5: Average Total Cost Curve .......................................................................................... 26
Figure 6: Marginal Cost Curve .................................................................................................. 27
Figure 7: Average Fixed Cost Curve ......................................................................................... 27
Figure 8: Average Variable Cost Curve ..................................................................................... 28
7

I. Introduction
Economics is the social science that studies the behavior of individuals, households and
organizations when they manage or use scarce resources. It also focuses on how economies work
leading to two distinguished branches: microeconomics and macroeconomics. The study centers
around the functions of Sunray Textiles, a business entity engaged in textile trading.
Microeconomics examines how entities, forming a market structure, interact within a market to
create a market system. These entities typically operate under scarcity of tradeable units and
government regulation.

A. Objectives of the study

The broad objective of this study is to link different theories of managerial economics in terms of
a business entity, Sunray Textiles, operating in the textile industry of Bangladesh.
Specific objectives are:

Relate the 10 principles of economics on Sunray Textiles

Analyze the demand and supply situation of Sunray Textiles

Understand the price elasticity of demand and supply of Sunray

Impact of government policies on the textile industry

Identify the market structure of the textile industry

B. Scope of the study

The study focuses on the economic activities of the textile industry. Outcomes of the study are
based on a single business entity, Sunray Textiles, to present a lucid suggestion about the
industry. Domestic market analysis of Sunray Textiles has been carried out since it caters to the
local demand only. Various economic theories have been examined in terms of their business
and the findings have been used to illustrate industry performance.

C. Limitations

A single company is not representative of the entire industry.

Lack of time and expertise may not depict the actual representation.

Lack of secondary information.

Certain information was not disclosed by the organization.

8

II. Research Methodology

A. Design
Type of research conducted was exploratory. The methods of this research were survey of executives
and managers of Sunray Textiles. Interviews were conducted numerous times to get a clear
perception about the companys overall condition and how their activities are an apparent
representation of economic theories.

B. Formulation of Objectives
Objectives of a research should portray specific issues posed by the problem statement and
therefore provide suitable answers to the questions raised. Broad objectives have been
formulated followed by subsequent specific objectives to give a clear depiction of the study.

C. Sources of Data
The study is based on both primary and secondary data. Primary data has been collected from senior
executives and managers of Sunray Textiles. The methods for collecting information were personal
interview and conversation. Secondary data were collected through different reports on Sunray
textiles, relevant articles from dailies, journals and online resources.

D. Data Analysis
Data collected from various sources is classified into two broad categories: Qualitative and
Quantitative data respectively.
1. Qualitative Analysis

Market Structure

Porters Five Forces Model

Principles of Economics

Government Policies

Game Theory

2. Quantitative Analysis

Demand and Supply Trend Analysis

Elasticity

III. Overview
A. Market Overview
Textiles have been an extremely important part of Bangladesh's economy for a very long time for
a number of reasons. The textile industry is concerned with meeting the demand for clothing,
which is a basic necessity of life. It is an industry that is more labor intensive than any other in
Bangladesh, and thus plays a critical role in providing employment for people. In 2012, the
textile industry accounted for 45% of all industrial employment in the country and contributed
5% of the total national income.
Bangladesh, being a labor abundant country, started the process of industrialization by
concentrating on labor-intensive products such as textile and clothing. But in recent years,
clothing industry has grown by leaps and bounds. Textile and clothing account for about 85% of
total export earnings of Bangladesh. It is second only to China, the world's second-largest
apparel exporter of western brands. Sixty percent of the export contracts of western brands are
with European buyers and about forty percent with American buyers. Only 5% of textile
factories are owned by foreign investors, with most of the production being controlled by local
investors.
The textile industry in Bangladesh has grown in an unplanned manner and a critical demandsupply gap has arisen for both yarn and fabric. The crisis will naturally deepen unless appropriate
backward linkages, the incorporation of the fundamental steps in the textile industry all through
to the RMG industry, can be built to meet the rapidly approaching challenges in the global textile
market. As the population is growing and the standard of living is increasing in Bangladesh, the
demand for textiles is increasing rapidly. This presents an urgent need to dramatically increase
capacities in spinning, weaving, knitting, and dyeing, printing, and finishing sub-sectors. This
will require the adoption of the most modern and appropriate technology to ensure quality
products at competitive prices.

10

The textile industry employed about 2.7 million women workers out of 3 million workers by
2001.The structure of gender participation underwent a major shift with the rise of the readymade garment industry in Bangladesh. Another major cause to settle the issue into balance was
the social awareness about cheap labor price for the women. It has been a major source of
employment for rural population migrating to metropolitans. Reputation of the textile industry
was tarnished due its notorious employment of a huge number of wage earning children. Yet, the
industry retrieved its image fairly by eliminating this practice of hiring children.

B. Company Overview
The organization that we have chosen here is known as the Sunray Textiles. Primarily, it
manufactures and supplies various types of fabric products. It was established in 1995 with a
vision to provide high quality and exclusively designed fabrics for its customers.
The main types of organization that we are concerned with examining are business organizations,
consisting of corporations, partnerships and sole proprietorships. Sunray Textiles is a sole
proprietorship. A transaction refers to an exchange of goods or services. Transactions can be
performed in the following three ways: trading in spot markets, long-term contracts, internalizing
the transaction within the firm. Sunray Textiles trades in local spot market. The agent-principal
relationship is not relevant in this case because of the ownership structure. Property right belongs
mostly to the owner and partly to different lenders.
Over the years, Sunray Textiles has carried out its business in the local market only. Raw
materials used in production are sourced from local importers and the final products are also sold
to domestic wholesalers. However, it has plans of exporting to foreign markets in the near future.
Sunray Textiles is a small and medium enterprise and employs 50 people altogether. Sunray has
a fully functional factory located in the Shyampur area of Old Dhaka and is equipped with all the
necessary facilities. The production process is supervised by a team of experienced professionals
to ensure quality.
In this competitive textile market, Sunray textiles have gained a competitive advantage through
unique designs and customization according to client demands.
At the moment, Sunray produces six types of fabrics:

11

1. Box Pleated Fabric

2. Jacquard Pleated Fabric
3. Crushed Fabric
4. Spangle on Fabrics
5. Bubble Fabric
6. Embossed Fabric

IV. Market Structure & Porters Five Forces Model

A market can be defined as a group of economic agents, usually firms and individuals, who
interact in order to facilitate economic transaction. It is vital to understand the market of Sunray
Textiles to figure out in which form of market that they are operating.
Economists usually classify market structures into four main types: perfect competition,
monopoly, monopolistic competition and oligopoly. The structure of a market refers the number
and characteristics of the firms in it. The following table shows us the different types of market
and their characteristics:
Market
structure

Number
of sellers

Type
product

of Barriers
to entry

Power to Non-price
affect
competition
price

Many
Perfect
competition
Monopolistic Many
competition

Standardized

None

None

None

Differentiated

Few

Low

Advertising and
product
differentiation

Oligopoly

Few

Standardized or
Differentiated

High

Medium

Heavy
advertising and
product
differentiation

Monopoly

One

Single product

Very High

High

Advertising

Table 1: Porters Five Forces Model

Textile industry of Bangladesh comprises of numerous sellers and buyers and the products are in
the differentiated form. According to Department of Textiles, GOB, the number of textile and
12

clothing mills in Bangladesh in 2001 was 4734. Each firm produces a slightly differentiated
product. Sunray Textile gives emphasis on products like pleating on fabrics, box pleating,
crushed Fabric, spangle on fabrics, jacquard Pleating, bubbles, emboss printing. All of these
products are standardized but slightly differentiated to gain competitive advantage.
So a single enterprise would have very little effect in the determination of price. All firms in the
industry have similar cost and demand functions and firms do not take into account competitors
behavior in determining price and output. Since the market is large enough to offset any outside
advantage that an enterprise can take so the cost function for the firms should be identical. The
firms cannot decide price on the basis of the competitor behavior due to the low cost - low price
strategy of the textile enterprises. Sunray textiles production volume relies on the optimal level
of output that the organization can produce following a cost effective process. Therefore, the
demand function of the organization should be similar to the industry demand function as well.
Even though textile industry has significant setup costs, government subsidies and bank loans try
to make it easier for new entrants. That is, it has few barriers to entry. Unlike pharmaceutical and
similar sort of industry, licensing and patent problems are not very blatant in textile industry.
Government of Bangladesh is always concerned over the monopolistic behavior of any market.
This is why many licensing procedures are made lenient by the government and textile industry
can take some sort of favor for that. Sunk cost includes the cost of advertising costs to create
brand awareness, market research costs and loss on the resale of assets. Other than the loss due to
the resale of the assets these costs are not related to the textile industry of Bangladesh. So there is
a low barrier to exit the market as well because sunk costs of the entrants are comparatively low.
Non-price competition indicates an objective of producing a diverse product to boost sales. If
non-price competitions exist then those are determined by standardization of the products. After
a comprehensive analysis, it can be deduced that Sunray Textiles operate is a monopolistically
competitive market.

13

V. Principles of Economics
1. People face Tradeoffs: It is impossible for Sunray to maximize profit and maintain high
quality safety standards at the workplace. With the company being relative small, it has to
give up the high standards of workplace environment in order to get a high return. Sunray
Textiles faces such numerous tradeoffs in their course of business. Moreover, to earn
revenues the firm has to give up the fabric produced.

2. The Cost of something is What You Give Up to Get It: Sunray facing trade off comes to
decisions of best two options. The opportunity cost is calculated. As in the opportunity
cost of making the Box pleated fabric is said to be what the firm loses by not making
some other fabric. In other words the firm weighs out its revenues lost and cost incurred
of either making one of the two products. The option with the less opportunity cost is
selected.
3. Rational people think at the Margin: If Sunrays was making X quantity of Box pleated
fabric with a cost of Y, it could make some more quantity without change in the cost
incurred, then Sunrays would go and make the extra fabric, if it can also sell that extra
quantity in the market. This happens as there is a demand of box pleated fabric in the
market. This way the firm earns extra revenue, by thinking at the margin. It is also that
the firm wants to produce the level of output that maximizes their profit. Also that the
consumers and buyers of Sunrays product also want the best quality and satisfaction from
the products they purchase, with the price they purchase it.

4. People respond to incentives: Sunray Textiles produces fabrics because it earns a profit in
return, which is an incentive to carry out production. The firm continues to produce
hoping for a greater incentive in the future. Foray into the foreign market in coming years
is an added incentive for Sunray to make efficient use of scarce resources.

14

5. Trade can make everyone better off: By trading the firm not only benefits itself, by
earning, but also benefit customers who might specialize in selling or making clothes out
that fabric. Because the firm trades the fabric, everyone that is involved can be benefited.
The workers who trade labour for wages are benefited, the suppliers who supply the tread
are benefited, and the buyers who hope to make clothes out of the fabric are also
benefited.

6. Markets are usually a good way to organise economic activity: The market for textile
products determines the price of product in contrast to its demand and supply. If demand
increases manufacturers will have incentives to making that fabric, with the hope that
their revenue would increase. If the market is left to determine price, demand and supply,
then efficiency will be met as the market would try to fulfil demand with supply and
come to a equilibrium price. Outside intervention, such as government control might
hamper efficiency and hamper shortage of fabric, labor etc.

7. Government can sometime improve market outcome: There are several scenarios when
government can intervene, first of which is when one supplier of a thread becomes
powerful with great influence in price, which affects firms like Sunrays, by increasing
costs or providing low quality thread. A sole provider of one kind of very demanding
thread could give rise to a monopoly situation were price increases of the thread and costs
of producing a unit of fabric increase, thus affecting everyone. The government can step
in and do price control. Such measures have been discussed later in details.

The last three principles, as listed below, deals with the economy as a whole and is not
relevant to a single business entity within the economic system.
8. A countrys standard of living depends on its ability to produce goods and services.
9. Prices rise when government prints too much money
10. Society faces a short run tradeoff between inflation and unemployment.

15

VI. Market Forces of Demand and Supply Analysis

A. Demand
1. Law of Demand
Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or
service. Demand refers to how much (quantity) of a product or service is desired by buyers at
various prices. The quantity demanded is the amount of a product people are willing to buy at a
certain price; the relationship between price and quantity demanded is known as the demand.
2. Demand Function and Demand Curve
A demand schedule is a table which contains values for the price of a good and the quantity that
would be demanded at that price.
Three customers of Sunray Textiles were requested to fill out a form where they highlighted their
willingness to buy at different price levels. The table below shows the summary of findings:
Price per unit, Px(tk)

Quantity Demanded, Qsx ( in 000 meters)

28

235

29

220

30

200

31

190

32

170

34

150

35

130
Table 2: Demand Schedule for Sunray

A demand curve shows the relationship between the price of an item and the quantity demanded
over a period of time. There are two reasons why more is demanded as price falls:
The Income Effect: There is an income effect when the price of a good falls because the
consumer can maintain the same consumption for less expenditure. Provided that the good is
normal, some of the resulting increase in real income is used to buy more of this product.

16

The Substitution Effect: There is a substitution effect when the price of a good falls because the
product is now relatively cheaper than an alternative item and some consumers switch their
spending from the alternative good or service.

Demand Curve of Sunray Textiles

250

Price in BDT

200

150
100
50
0
28

29

30

31

32

34

Figure 1: Demand Curve of Sunray

3. Factors of demand
Price: The most important factor that affects demand. Products have different sensitivity
to changes in price.

Income Levels: Product of Sunray goes into the fashion market, income plays an
important determinant. When an individuals income goes up, their ability to afford such
fashion cloting increases and this causes demand to increase.

Consumer Tastes and Preferences: Consumer taste and preference is also an important
factor for Sunray. Fashion changes and that significantly affect the demand of pleating in
the market. However, Sunray found that the fashion has a recurring cycle.

Competition: Competitors are always looking to take a bigger share of the market,
perhaps by cutting their prices or by introducing a new or better version of the product.

Seasonal Changes: Supply of manufactured goods and services is hardly affected by

seasonal factors. But demand for such goods is subject to seasonal fluctuations. In case of
Sunray, it experience very high demand for 4 months in a year. Demand during this peak
period almost doubles. Sunray claims that the seasonality variation, although still
imminent, is smoothing out over the years.
17

B. Supply
1. Law of Supply
Supply refers to the amount of a product that producers and firms are willing to sell at a given
price all other factors being held constant. A fundamental principle that an increase in price
results in an increase in quantity supplied or vice versa, is the law of supply. The quantity
supplied of any good or service is the amount that the seller is willing and able to sell. The
quantity supplied by Sunray Textiles is 200,000 meter per month on an average.
2. Supply Schedule and Supply Curve
The table showing the relationship between the price and the quantity supplied is called Supply
Schedule. The relationship between the price of a good and the quantity supplied can be
graphically represented by Supply Curve. For Sunray Textiles, the Supply Schedule and the
Supply Curve are as follows:
Price per unit,

QuantitySupplied,

Px(tk)

Qsx ( in 000 meters)

28

160

29

180

30

200

31

250

32

350

34

420

35

500
Table 3: Supply Schedule for Sunray Textiles

18

Supply Curve of Sunray Textiles

600

Price in BDT

500
400
300
200
100
0
28

29

30

31

32

34

35

Figure 2: Supply Curve of Sunray Textiles

It slopes upward because of the profit maximization motive of the suppliers.

3. Factors Affecting Supply
There are several variables that can shift the supply curve. Some of the important factors are
given below:

Input Prices: To produce their output of fabric, Sunrays Textiles use various inputs, such
as the raw materials for producing fabric, the building in which the fabric is made, and
the labor of workers. When the price of one or more of these inputs rises, production is
less profitable and the organization supplies less product. Thus, the supply is negatively
related to the price of the inputs.

Technology: The technology is another determinant of supply. The use of Fabric Pleating
Machine imported from Korea has reduced the amount of labor. By reducing firms costs,
this advance in technology raised the supply.

Price Expectations: The quantity supplied by Sunray Textiles sometimes depends on its
expectations about the future. When the firm expects the price to rise in the future, it puts
some of its current production into storage and supplies less to the market.

Seasons, Festivals: During Ramadan, before Eid Festival, Sunray Textiles supplies an
increased quantity of about 400,000 to 450,000 meter per month with an increase in
market price of 35 taka per meter.
19

C. Market Equilibrium
Equilibrium means a state of equality between demand and supply. Without a shift in demand
and/or supply there will be no change in market price.
The market equilibrium of Sunray is at BDT 30 per meter for a monthly quantity of 200,000
meter. This can be identified through the demand and supply schedule.
Price per unit,

Quantity Demanded, Qsx

Quantity Supplied,

Px(tk)

(in 000 meters)

Qsx (in 000 meters)

28

235

160

29

220

180

30

200

200

31

190

250

32

170

350

34

150

420

35

130

500

Table 4 : Demand & Supply Schedule

The graph illustrates that the current market equilibrium occurs where demand and supply cut
each other.

Market equilibrium price: BDT 30 per meter

Market equilibrium monthly quantity: 200,000 meter

20

Market for Fabric Pleating (Sunray Textiles)

600

Price in BDT

500
400
300

Quantity Demanded, Qsx ( in

000 meters)

200

Quantity Supplied, Qsx ( in 000

meters)

100
0
28

29

30

31

32

34

35

Figure 3: Market for Fabric Pleating

VII. Elasticity
A. Price Elasticity of Demand
Price elasticity of demand measures the responsiveness of demand after a change in price.
The formula for calculating the co-efficient of elasticity of demand is,
=

Price elasticity of demand for Sunray = ((170-200)/200)*100)/ ((32-30)/30))*100) = -2.25

Therefore Sunray has elastic demand. That is, demand responds more than proportionately to a
change in price.

If PED is 0 demand is perfectly inelastic - demand does not change at all when the price
changes the demand curve will be vertical.

If PED is between 0 and 1, then demand is inelastic.

21

If PED is 1 then demand is unit elastic. A 15% rise in price would lead to a 15%
contraction in demand leaving total spending the same at each price level.

If PED greater than 1, then demand responds more than proportionately to a change in
price i.e. demand is elastic.

Determinants of price elasticity of demand

The number of close substitutes the more close substitutes there are in the market, the
more elastic is demand because consumers find it easy to switch

The cost of switching between products there may be costs involved in switching. In
this case, demand tends to be inelastic.

The degree of necessity or whether the good is a luxury necessities tend to have an
inelastic demand whereas luxuries tend to have a more elastic demand.

The proportion of a consumers income allocated to spending on the good products that
take up a high % of income will have a more elastic demand

The time period allowed following a price change demand is more price elastic, the
longer that consumers have to respond to a price change. They have more time to search
for cheaper substitutes and switch their spending.

Whether the good is subject to habitual consumption consumers become less sensitive
to the price of the good of they buy something out of habit (it has become the default
choice).

Peak and off-peak demand - demand is price inelastic at peak times and more elastic at
off-peak times this is particularly the case for transport services.

The breadth of definition of a good or service if a good is broadly defined, i.e. the
demand for petrol or meat, demand is often inelastic. But specific brands of petrol or beef
are likely to be more elastic following a price change.

22

B. Price Elasticity of Supply

The Price Elasticity of Supply is a measure of how much the quantity supplied of a good
responds to a change in the price of that good, computed as the percentage change in quantity
divided by the percentage change in price.

Supply of good is said to be elastic (E S>1), if the quantity supplied responds substantially to
changes in the price. Supply is said to be inelastic (E S<1), if the quantity supplied responds only
slightly to changes in the price.

When ES = 0, Perfectly Inelastic Supply

When ES = 1, Unit Elastic Supply

When ES = , Perfectly Elastic Supply

For Sunray Textiles,

Price Elasticity of Supply, ES = {(250,000-200,000)/ (31-30)} {(31+30) / (250,000+200,000)}
= 6.78
Therefore, it can be concluded that the Supply of Sunray Textiles is Elastic, since E S>1.
Also, from the supply curve, it can be seen that the curve tends to be flatter which indicates
elasticity of supply.
Determinants of price elasticity of supply

Availability of Raw Materials: Sunray sources their raw materials from the local market
and it is readily available.

Length and Complexity of Production: Textile production is relatively simple. The labor
is largely unskilled and production facilities are only buildings. That is why price
elasticity of supply is elastic.

Mobility of Factors: If the factors of production are easily available and if producers can
switch their resources, then price elasticity of supple is relatively elastic.
23

Time to Respond: The more time a producer has to respond to price changes the more
elastic the supply. Supply is normally elastic in the long run that in the short run for
produced goods since all factors of production can be utilised to increase supply in the
long run.

Inventories: When a producer has excess stock of goods or available storage capacity,
then it can quickly increase supply to market. Sunray Textiles does not hold on to excess
good to reduce inventory costs.

Excess Production Capacity: A producer with unused capacity can quickly respond to
changes in market assuming that variable factors are readily available. Sunray Textiles
prefers to employ greater number of workers and longer hours during peak demand
instead of maintaining an idle capacity.

VIII. Theory of Production

Factors of production are basically input or resources. The factors that cannot be changed in the
short run is called fixed factors. For Sunray Textiles, the fixed factors are land, equipment etc.
Factors that are changeable in the short run are called variable factors. Labor can be a prime
example of variable factor for textile industry. The short run period for Sunray Textile may be a
particular business cycle. There are also a term called very short run where all the factors are
fixed. Business operation for a particular season might be very short run period for the
organization. Determining long run period is difficult for Sunray Textiles because land seems to
be a factor which is not so easy to expand for a business organization like Sunray. Scale refers to
the maximum output that a firm can produce in short run. The scale should be low to moderate
considering the size of the human and equipment power that the organization poses. Efficiency
of an organization can be observed from two different points of view: technical efficiency and
economic efficiency. Technical efficiency refers to the maximum output from the given number
of inputs. Sunray Textile ensures technical efficiency by hiring skilled workers and installing
fairly modern equipment. Economic efficiency is producing output at the lowest cost. This is the
main competitive priority for the entire textile and clothing industry of Bangladesh and Sunray
Textile also follows that. .
24

A. Total Cost Curve

The total cost curve graphically represents the relation between total cost and the quantity of
production. This curve can be derived in two ways. One is to plot a schedule of numbers relating
output quantity and total cost. The other is to vertically add the total variable cost curve and the
total fixed cost curve. The slope of the total cost curve is marginal cost. When constructing this
curve, it is assumed that total cost changes as a result of changes in the quantity of output
produced, while other variables like technology and resource prices are held fixed.
Total Cost of Sunray = Fixed Costs (FC) + Variable Costs (VC). According to Sunrays data
(Appendix 1), the total cost can be derived as the following:

Cost in BDT

Total Cost
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-

100,000

200,000

300,000

400,000

500,000

600,000

Monthy quantity in metet

Figure 4: Total Cost Curve

B. Short-run Average Cost Curve

The average total cost curve is constructed to capture the relation between cost per unit of output
and the level of output, ceteris paribus. A perfectly competitive and productively efficient firm
organizes its factors of production in such a way that the average cost of production is at the
lowest point. In the short run, when at least one factor of production is fixed, this occurs at the
output level where it has enjoyed all possible average cost gains from increasing production.
This is at the minimum point in the diagram on the right.

25

Average total cost of Sunray (ATC) = Total Cost/ Quantity. From the data provided by Sunray
(Appendix 1), the average total cost curve is derived:

Average Total Cost

25

Cost in BDT

20
15
10
5
-

100,000

200,000

300,000

400,000

500,000

600,000

Monthy quantity in meter

Figure 5: Average Total Cost Curve

C. Marginal Cost
A short-run marginal cost curve graphically represents the relation between marginal (i.e.,
incremental) cost incurred by a firm in the short-run production of a good or service and the
quantity of output produced. This curve is constructed to capture the relation between marginal
cost and the level of output, holding other variables, like technology and resource prices,
constant. The marginal cost curve is usually U-shaped. Marginal cost is relatively high at small
quantities of output; then as production increases, marginal cost declines, reaches a minimum
value, then rises. The marginal cost is shown in relation to marginal revenue (MR), the
incremental amount of sales revenue that an additional unit of the product or service will bring to
the firm. This shape of the marginal cost curve is directly attributable to increasing, then
decreasing marginal returns (and the law of diminishing marginal returns).
Marginal Cost of Sunray (MC) = Change in cost/Change in quantity
According to Sunray data (Appendix 1), the marginal cost curve is derived:

26

Cost in BDT

Marginal Cost
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

100,000

200,000

300,000

400,000

500,000

600,000

Monthy quantity in meter

Figure 6: Marginal Cost Curve

D. Average Fixed Cost Curve

Average fixed cost (AFC) is the fixed costs of production (FC) divided by the quantity (Q) of
output produced. Average Fixed Cost of Sunray (AFC) = Fixed Cost/Quantity. The average
fixed cost curve has been derived based on the given data:

Average Fixed Cost

14

Cost in BDT

12
10
8
6
4
2
-

100,000

200,000

300,000

400,000

Monthy quantity in meter

Figure 7: Average Fixed Cost Curve

27

500,000

600,000

Average fixed cost is a per-unit-of-output measure of fixed costs. As the total number of units of
the good produced increases, the average fixed cost decreases because the same amount of fixed
costs is being spread over a larger number of units of output.

E. Average Variable Cost Curve

Average variable cost (AVC) is a firm's variable costs (labor, electricity, etc.) divided by the
quantity (Q) of output produced.
Average Variable Cost of Sunray (AVC) = Variable Cost/Quantity.
The figure below shows the average variable cost curve of Sunray Textiles:

Average variable cost

14

Cost in BDT

12
10
8
6
4
2
-

100,000

200,000

300,000

400,000

500,000

600,000

Monthy quantity in meter

Figure 8: Average Variable Cost Curve

IX. Impact of Government Policies

Until the liberation of Bangladesh in 1971, the textile sector was primarily part of the process of
import substitution industrialization (ISI) to replace imports. After liberation, Bangladesh
adopted export-oriented industrialization (EOI) by focusing on the textile and clothing industry,
particularly the readymade garments (RMG) sector. In the years after independence, tea and jute

28

dominated exports. But a persistent threat of flooding, declining jute fiber prices and substantial
decrease in world demand has reduced the contribution of jute to the Bangladesh economy.
In 1972, the government enacted the Bangladesh Industrial Enterprises (Nationalization) Order.
By doing so, it took over privately owned textile factories to create a state-owned enterprise
(SOE) named the Bangladesh Textile Mills Corporation (BTMC). The BTMC never managed to
fulfill the expectations and continued to lose money. Till the early 1980s, the state owned almost
all spinning mills in Bangladesh and 85 percent the textile industry's assets. Under the 1982 New
Industrial Policy, a large number of these assets including textile mills were privatized and
returned to their original owners.
Beginning in 1974 the Multi-Fibre Arrangement (MFA) in the North American market ensured
that trade in textiles and garments remained the most regulated in the world. Among other things
the MFA set quotas on garments exports from the developing countries of Asia. Entrepreneurs
from quota-restricted countries like South Korea began "quota hopping" seeking quota-free
countries that could become quota-free manufacturing sites. The export-oriented readymade
garment (RMG) industry emerged at this time. Daewoo of South Korea was an early entrant in
Bangladesh, when it established a joint venture in December 27, 1977 with Desh Garments Ltd.
making it the first export oriented ready-made garment industry in Bangladesh.
By 1981, 300 textile companies, many small ones had been denationalized with most being
returned to their original owners. From 1995 to 2005 the WTO Agreement on Textiles and
Clothing (ATC) was in effect, wherein more industrialized countries consented to export fewer
textiles while less industrialized countries enjoyed increased quotas for exporting their textiles.
Throughout the 10-year agreement, Bangladeshs economy benefited from quota-free access to
European markets and desirable quotas for the American and Canadian markets.
Even though IMF voiced concern that WTO's Multi Fibre Arrangement, Agreement on Textiles
and Clothing (ATC), would possibly shut down the textile and clothing industry, Bangladesh
textile sector in reality has grown tremendously after 2004. Bangladesh was expected to suffer
the most with the termination of MFA due to stiff competition, particularly from China.
However, Bangladesh gained comparative advantage over economic giants due to cheap labor.

29

While some smaller factories were documented making pay cuts and layoffs, most downsizing
was essentially speculative the orders for goods kept coming even after the MFA expired.
During the last decade or so, Bangladesh has substantially liberalized its trade regime, moving
away from costly protectionist policy toward a more export-friendly trade regime. The current
industrial policy (1999) and Export Policy (1997-2002) have identified the textile and clothing
sector as one of the "thrust" sectors in Bangladesh. The patterns of comparative advantage and
hence the structure of exports and imports involving textiles and clothing, as stated before,
depend on stages of economic development in Bangladesh and other countries. Formulation of
trade and industrial policy for the textiles and clothing sector must be based on a dynamic and
broader perspective covering all the major components of the "textile cluster." The components
are listed below.
1. Natural and synthetic fibres
2. Yarn
3. Grey fabrics
4. Finished fabrics
5. Garments and other made-up products
6. Textile machinery and parts
7. Chemicals for textiles
8. Marketing services
9. Research and training services
10. Financial, administrative, and physical Infrastructure
The Government declared the textile as a thrust sector that led to introduce a support system for
the textile industry. The support system included Fiscal Benefits, Financial Benefits and
Institutional Support.
The textile policy introduced a new tariff structure designed to stimulate the growth in Backward
Linkage Industry. Tariff in spinning sector is strikingly absent whereas imported yarns and
fabrics are heavily taxed to discourage imports and encourage local yarn producers.

30

X. Conclusion
Sunray Textiles has both elastic demand and supply. It operates in a monopolistically
competitive market where product differentiation is the key and Sunray Textiles has gained
comparative advantage through unique designs. In the course of a detailed study, the companys
activities have been explained by the principles of economics. Moreover, the textile industry of
Bangladesh is aided by government policies to boost trade in this sector. Imports have been taxed
higher to promote local producers.

31

XI. Bibliography
Wilkinson, Nick. Managerial economics: a problem-solving approach. Cambridge University
Press, 2005.
Islam, Md Mazedul, Adnan Maroof Khan, and Md Monirul Islam. "Textile Industries in
Bangladesh and Challenges of Growth." Research Journal of Engineering Sciences ISSN 2278
(2013): 9472.
Quasem, A.S.M,Backward Linkages In The Textile And Clothing Sector of Bangladesh, 2002.
"Textiles on the WTO Website". WTO Secretariat. Archived from the original on 3 November
2008. Retrieved 2008-10-29.
Paul, Ruma; Quadir, Serajul (4 May 2013). "Bangladesh urges no harsh EU measures over
factory deaths". Dhaka: Reuters.
"Garment industries in Bangladesh and Mexico face an uncertain future". Textiles Intelligence.
2003-10-15. Retrieved 2009-08-07.
Begum, N. (2001). "Enforcement of Safety Regulations in the Garment Sector of Bangladesh:
Growth of Garment Industry in Bangladesh, Economic and Social Dimension". Proceedings of a
National seminar on ready-made garment industry: 208226
Khosla, N. (2009). The ready-made garments industry in Bangladesh: A means to reducing
gender-based social exclusion of women?. Journal of International Women's Studies, 11(1)

32

XII. Appendix
Appendix 1: Total cost
Fixed Cost= BDT 600,000 / month
Quantity in meters/ month Total Cost in BDT
50,000
1,000,000
100,000
1,800,000
150,000
2,200,000
200,000
2,600,000
250,000
3,175,000
300,000
3,810,000
350,000
4,485,000
400,000
5,120,000
450,000
5,820,000
500,000
6,550,000
550,000
7,420,000
Appendix 2: Short-run Average Cost
Quantity in meters/ month

Total Cost in BDT

Average Cost

50,000

1,000,000

20

100,000

1,800,000

18

150,000

2,200,000

15

200,000

2,600,000

13

250,000

3,175,000

13

300,000

3,810,000

13

350,000

4,485,000

13

400,000

5,120,000

13

450,000

5,820,000

13

500,000

6,550,000

13

550,000

7,420,000

13

33

Appendix 3: Marginal Cost

Quantity in meters/ month Marginal Cost

50,000
100,000
4.00
150,000
2.67
200,000
2.00
250,000
2.30
300,000
2.70
350,000
3.10
400,000
3.30
450,000
3.60
500,000
3.90
550,000
4.40
Appendix 4: Average fixed Cost
Fixed Cost= BDT 600,000 / month
Quantity in meters/ month Average Fixed Cost
50,000
12.00
100,000
6.00
150,000
4.00
200,000
3.00
250,000
2.40
300,000
2.00
350,000
1.71
400,000
1.50
450,000
1.33
500,000
1.20
550,000
1.09

34

Appendix 5:

Appendix 6:

35