MUM MINERAL WATER:

ECONOMIC CONCEPTS AND THEIR APPLICATIONS

Submitted to:

Professor Dr. A.K.M. Saiful Majid

Institute of Business Administration

University of Dhaka

Submitted by:

Md. Rashedul Islam (ID No-49,51D)

May 24, 2015

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May 24, 2015

Dr. A. K.M. Saiful Majid

Professor

Institute of Business Administration

University of Dhaka

Subject: Submission of individual term paper

Dear Sir,

Please accept this term paper that you have assigned me for the course Managerial Economics. The

study involves investigating and relating different economic concepts to the activities of MUM

Mineral Water Through this study, Ive tried to obtain a deeper insight and perform real-world

application of the various concepts that you have taught me in the class.

Lastly, I would be thankful once again if you please give your judicious advice on my effort.

Sincerely yours

Md.Rashedul Islam (ID No-49,51D)

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Executive Summary:

The following report is on the analysis of Mum Mineral water on the basis of economics

principles. I focus on the industry, the other competitive goods (substitutes), their retail

price, Cost of production, Purification process and other features that might be important in

an economic perspective. Study of different factors to determine the absolute and

comparative advantage has also been performed. I asked different questions to local

retailers to find out the quantity demanded and quantity supplied of Mum. The supply of

Mum was found to be slightly surplus. No shortage of any kind was found in any region.

With the information of supply and demand the elasticity of Mum was determined and

found to be elastic because with the increase of price of Mum people can change to drinking

other water from other companies or boil supplied Non-revenue water. The different

economic models were used to discuss the market of Bottled drinking water. Relating

different Economic principles to the real world case tells different factors associated with

supply, demand, cost, forecasting. Game theory is discussed to analyze strategic decision

making regarding pricing, level of production, research and development spending.

However, due to lack of information available, it was not possible to conduct the objective

study. So I had to rely on subjective study and some factors are assumed which may be

slightly deviated in the real world.

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Table of Contents 1 Introduction .................................................................................................................................... 1

1.1 Origin of Report ...................................................................................................................... 1

1.2 Objective ................................................................................................................................. 1

1.2.1 Broad Objective ............................................................................................................... 1

1.2.2 Specific Objectives .......................................................................................................... 1

1.3 Scope of the Report: ............................................................................................................... 1

1.4 Limitations............................................................................................................................... 2

2 Product Overview ........................................................................................................................... 3

2.1 About the Product ................................................................................................................... 3

2.2 Study of the Supply Chain ....................................................................................................... 3

3 Methodology ................................................................................................................................... 4

3.1 Choosing the product .............................................................................................................. 4

3.2 Collecting data ........................................................................................................................ 4

3.3 Processing Data ....................................................................................................................... 4

3.4 Analyzing Data and Reaching Conclusion ............................................................................... 4

4 Analysis and Application of Economic Theories and Principles ...................................................... 5

4.1 Relating to the Basic Economic Principles: ............................................................................. 5

4.1.1 People Face Tradeoffs: .................................................................................................... 5

4.1.2 The Cost of Something is what you give up to get it: ..................................................... 5

4.1.3 Rational People Think at the Margin: ............................................................................. 5

4.1.4 People Respond to Incentives: ........................................................................................ 6

4.1.5 Trade Can Make Everyone Better Off. ............................................................................ 6

4.1.6 Markets Are Usually a Good Way to Organize Economic Activity. ................................. 6

4.1.7 Governments Can Sometimes Improve Market Outcomes. ........................................... 6

4.1.8 A Country's Standard of Living Depends on Its Ability to Produce Goods and Services. 6

4.1.9 Prices Rise When the Government Prints Too Much Money. ........................................ 6

4.1.10 Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. ................ 7

4.2 Market structure and Analysis with Economic Models .......................................................... 7

4.2.1 Positive Analysis of the Market ....................................................................................... 7

4.2.2 Market structure ............................................................................................................. 7

4.3 Circular Flow Diagram ............................................................................................................. 8

4.4 Absolute and comparative advantages................................................................................... 9

4.4.1 Absolute Advantage: ..................................................................................................... 10

4.4.2 Opportunity Cost and Comparative Advantage ............................................................ 10

4.5 Shift and movement of the supply & demand curve ............................................................ 11

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4.5.1 Factors affecting shift of demand ................................................................................. 11

4.5.2 Factors affecting Shift of the Supply Curve ................................................................... 12

4.6 Elasticity ................................................................................................................................ 15

4.6.1 Price Elasticity of Demand ............................................................................................ 15

4.6.2 Price Elasticity of Supply ............................................................................................... 16

4.6.3 Income Elasticity of Demand ........................................................................................ 16

4.7 Government Policy: ............................................................................................................... 16

4.8 Cost Principle ........................................................................................................................ 17

4.8.1 Isoquant principle ......................................................................................................... 17

4.8.2 Isocost. .......................................................................................................................... 17

4.8.3 Combination of Isoquant and Isocost ........................................................................... 17

4.9 Pricing strategy: .................................................................................................................... 18

4.10 Forecasting ............................................................................................................................ 18

4.11 Value chain management ..................................................................................................... 18

4.12 Game theory ......................................................................................................................... 19

5 Conclusion ..................................................................................................................................... 20

Bibliography 21

List of figure:

Figure 2-1: Supply Chain ......................................................................................................................... 3

Figure 3-1: Methodology ........................................................................................................................ 4

Figure 4-1: Market Structure .................................................................................................................. 7

Figure 4-2: Circular Flow Diagram Model ............................................................................................... 8

Figure 4-3: Shift of the Demand Curve ................................................................................................. 11

Figure 4-4: Shift of the Supply Curve .................................................................................................... 13

Figure 4-5: Market Equilibrium ............................................................................................................. 14

Figure 4-6: Price Elasticity of Supply ..................................................................................................... 16

Figure 4-7: Income Elasticity of Demand .............................................................................................. 16

Figure 4-8: Isoquant .............................................................................................................................. 17

Figure 4-9: Isocost ................................................................................................................................. 17

Figure 4-10: Combination of Isoquant and Isocost ............................................................................... 17

Figure 4-11: Value chain management ................................................................................................. 18

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1 Introduction

1.1 Origin of Report This report is conducted according to the instructions of our honorable Dr. A. K. M Saiful

Majid sir, as a part of the E-501 Managerial Economics.

1.2 Objective These objectives in this study are categorized in two broad categories: Broad Objectives and

Specific Objectives. These are as follows:

1.2.1 Broad Objective

The broad objective of this paper is to carry out an intensive study of MUM Mineral Water.

Our objective is to gather relevant data regarding this sector in Bangladesh and relate the

practical scenario to the concepts of Economics learned in Managerial Economics course.

1.2.2 Specific Objectives

To understand the principles of economics and their application in the mineral water

sector.

Absolute and competitive advantage of mineral water in the sector.

To observe the demand and supply dynamics, market equilibrium, income and

substitution effects.

To analyze price elasticity of demand and supply works in this sector.

Consequences of Govt.s regulation and taxation and Inflationary effects on the

market situation of mineral water industry.

To provide recommendations that will be helpful for further growth.

1.3 Scope of the Report: The scope of this arrangement includes an analysis of the Mum Mineral Water and their

economic activities inside Bangladesh and finally relates their economic practices with

Managerial Economics. This arrangement also includes an assessment of the current

competitive landscape in Bangladesh Mineral water industry. To understand the demand of

mineral water, the greater insight of the consumers is focused. As the mineral water

consumers are highly flexible and dynamic, understanding about the reference groups

influence on purchase decision making will help the organizations to take the right strategy

compatible in the market. To understand the existing competition in the market, market

scenario of several other competitor industries and their market share has also been

analyzed. The geographic range of this research is limited within Dhaka city. For the demand

side of the study, information has been drawn from sales people and existing and potential

buyers within Dhaka city. For the information on supply side, information from the dealers

and secondary data sources have been used.

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1.4 Limitations Due to relatively small window of submission, some points may not have been

portrayed perfectly.

This report was done with minimal background in Economics.

Time constraints.

Unavailability of information due to company policy.

Collected data are inconsistent and approximate.

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2 Product Overview

2.1 About the Product Partex Group is among the large Bangladesh private sector

manufacturing and service based enterprises, owning and

operating over twenty units giving value for money to all

customers.

The group started modestly in 1959 in tobacco trading and

with prudent entrepreneurship of our Founder Chairman Mr.

M.A. Hashem today they have a stake in tobacco, food, water,

soft drinks, steel container, edible oil, wooden board,

furniture, cotton yarn and the IT sector.

They started supplying MUM drinking water to the market in

the late nineties with the motto of serving crystal clear,

natural drinking water. It keeps body hydrated with the

tagline, It comes naturally.

2.2 Study of the Supply Chain Supply Chain consists of all parties involved, directly or indirectly, in moving a product or

service from supplier to customer. After an analysis of the supply chain of MUM drinking

water, it has been found that it has a supply chain consisting four levels. MUM receives

supplies of plastic bottles and caps from external suppliers. Water is collected from a natural

resource, which is ground water in this case, and goes under purification processes at the

plants. After the purification processes, water is bottled then packaged and ready for

distribution.

There are 16 distributors of MUM products which participate in the distribution. The

distributors collect the products from MUM storage and supply to the retail stores and

restaurants.

Figure 2-1: Supply Chain

Collection from natural resources

Purification Packaging Distribution

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3 Methodology The study has been conducted on two sets of population, one representing the demand side

and the other the supply side of the mineral water sector. On the demand side, the

population consists of existing and potential consumers, and the supply side consists of

interview with employees of the organizations. The basic methodology can be summarized

as follows.

3.1 Choosing the product The product chosen was MUM Mineral Water. There are some reason behind choosing this

product. As we know, people are becoming very health conscious and pure drinking water

is one of the main component to remain healthy and sound. Moreover, MUM has a strong

position in the mineral water industry which I feel is just right for the report, given the need

for relating with economic concepts and market situation.

3.2 Collecting data To complete the report, we decided to collect data from three sources:

From the company, about their sales and supply

From the consumers, about how they view the product and its market

From the vendors, about the demand and supply

At first, we collected the necessary information from PartexBevegages Ltd. Data was also

collected from retailers by going shop-to-shop about the elasticity in demand and supply

with time.

3.3 Processing Data The data processing was subjective. the different data obtained from different sources are

processed in such a way so that I could relate them with the basic principles of economics.

3.4 Analyzing Data and Reaching Conclusion the findings were analyzed using some of the basic economic tools covered in the course

curriculum so far i.e. Production Possibility Frontier, Circular Flow Diagram model, Demand

Curve, Supply Curve . Thus, we related the real world and theoretical economy through the

results we found. Once we had all necessary items for the report, we compiled and

submitted it.

Figure 3-1: Methodology

Collecting data Processing DataAnalyzing Data and

Reaching Conclusion

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4 Analysis and Application of Economic Theories and Principles

4.1 Relating to the Basic Economic Principles: When approaching economics, it is incredibly important to understand that the first step is

to know what to look for- natural laws guiding human behavior, societys production,

individual trade, and wealth building itself. So economists study How People Make

Decisions, how people interact with each other, the forces and trends that affect the

economy as a whole. Now I try to relate the real world situations to the basic principles as

follows-

How people make decisions

4.1.1 People Face Tradeoffs:

The first principle states that people face tradeoffs. For PARTEX this tradeoff includes

striking a balance between MUM and its other products. For instance we may consider its

main beverage product, the Royal Crown Cola. Now the tradeoff implies that if PARTEX is to

produce more of its bottled drinking water it must revert some of its resources from the

production of RC cola. Thus an increased production of MUM drinking water means a

decreased production of RC cola.

To get one thing, one has to give up something else. MUM Mineral Water faces trade-off

while deciding to spend money in research and development for producing more improved

quality of mineral water. This money could be spent by the company in the field of

marketing and advertising to increase market share. This is called opportunity of cost of the

company for spending in research and development.

4.1.2 The Cost of Something is what you give up to get it:

Decision-makers have to consider both the obvious and implicit costs of their actions. For

example, MUM Mineral Water spends Tk. 100000 in general office management. It could

also spend the same amount of money in buying machineries for its plant. If the company

wants to spend only Tk. 100000 it has to either spend in general office management or can

spend by buying machineries. Again, from the consumers view, When someone buys a liter

bottle of MUM he loses the chance to buy something else for that price, say half a liter of

soft drinks that costs roughly the same. The opportunity cost will be further discussed in a

later chapter.

4.1.3 Rational People Think at the Margin:

A rational decision-maker takes action if and only if the marginal benefit of the action

exceeds the marginal cost. When there are more bottles of water left for selling to a specific

group of consumer than it was budgeted and a consumer group is willing to pay more than

the marginal costs but not the whole rate, the company should take that opportunity as the

marginal benefit is higher than the marginal cost. This is why, Sometimes MUM provides a

lot of bottles of water at a relatively less cost to a festival or any conventions arranged by

some specific consumer groups.

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4.1.4 People Respond to Incentives:

Behavior changes when costs or benefits change. According to the fourth principle, people

respond to incentives offered. Suppose the price of MUM bottled water goes down for

some reason. The buyers will be more inclined to buy more water due to this reduced price.

At the same time, the sellers will look to increase supply and sell more to meet this

increased quantity demanded. So incentives can influence people.

How the Economy Works as a Whole

4.1.5 Trade Can Make Everyone Better Off.

Trade allows each person to specialize in the activities he or she does best. By trading with

others, people can buy a greater variety of goods or services. The fifth principle implies that

trade can work to everyones advantage. For example, the producers of MUM, the PARTEX

group have specialized in producing bottled drinking water. So they are more efficiently and

cost effectively bringing it to the market. This allows producers of other goods at a better

price. At the same time this gives them the scope to specialize in something else,

subsequently bringing its price down. So the producers of MUM can get those goods at a

better price. Thus this tradeoff is good for all parties concerned.

4.1.6 Markets Are Usually a Good Way to Organize Economic Activity.

Households and firms that interact in market economies act as if they are guided by an

"invisible hand" that leads the market to allocate resources efficiently. In this mineral water

market, the interaction of consumers and mineral water companies determine price. Price

guide self-interested retailers to make decisions that, in many cases, maximize societys

economic well-being. Moreover, the economy of Bangladesh is a market economy. This

enables competition of price and quality among firms and sellers, and ultimately helps keep

the economy stable. The huge number of buyers and sellers means that externality and

market power is largely reduced.

4.1.7 Governments Can Sometimes Improve Market Outcomes.

When a market fails to allocate resources efficiently, the government can change the

outcome through public policy. Examples are regulations against monopolies and

contaminated sources of water. The marketing of all mineral water production is controlled

by the government BSTI to ensure quality and availability.

How People Interact

4.1.8 A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.

Countries whose workers produce a large quantity of goods and services per unit of time

enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its

average income. With the improving standard of living, people are becoming more sensitive

to the health issues and awareness towards the pure drinking water increases.

4.1.9 Prices Rise When the Government Prints Too Much Money.

When a government creates large quantities of the nation's money, the value of the money

falls. As a result, prices increase, requiring more of the same money to buy mineral water

reducing the purchasing power of money.

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4.1.10 Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.

Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial

for understanding the short-run effects of changes in taxes, government spending and

monetary policy. Higher demand may over time causes the mineral water companies to

raise their prices, but in meantime, it also encourages to hire more workers and render

more services. And this hiring more workers lowers unemployment. Thus society faces a

short-run tradeoff between inflation and unemployment.

4.2 Market structure and Analysis with Economic Models

4.2.1 Positive Analysis of the Market

MUM is a product of Partex Beverages Ltd Bangladesh having a brand image of a safe,

hygienic and reliable pure drinking water. MUM introduced its products in the market

during the late 90s being one of the first bottled drinking water suppliers in the market.

Over the years MUM has constantly developed and controlled its quality which contributed

developing its current brand image. The economy that MUM drinking water operates in is a

market economy. Although MUM operates in an oligopolistic market, it holds a relatively

higher market share despite the slight price difference with other bottled drinking water.

The other observed competitors are Fresh, Acme, pran, Jibon, Yes,Safi,Dunkan.

4.2.2 Market structure

MUM is the market leader, with some of the mineral water industries emerging as

competitor. However, it enjoys a brand value and positive perception in the industry. The

market structure is closely related with oligopolistic market as there are not so many

competitors in the market and the market is limited to some mineral water companies.

Figure 4-1: Market Structure

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4.3 Circular Flow Diagram

Market for buying and selling

Water

Market for factor of Bottled

water Production

Mineral water consumer &

labor

Mineral water Industry

Consumer

spends money

Revenue of the

Industry

Consumers provide

market population

and labors provide

the hard work.

Factors of

Production moved

To Partex Group

Bottle

Sold Water bought

and consumed

Spends Money to buy

materials, pay wages and other expenses

Labors earn

Their income

Figure 4-2: Circular Flow Diagram Model

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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 Mineral water industry is producing goods i.e bottled water 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

MUM mineral water 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.

The household part in this particular diagram interacts with business firm i.e. INDUSTRY in

two distinct ways:

1. Households supply economic resources, such as labor to businesses in exchange for

income, and

2. 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

mineral water industry, the households or the consumers of MUM buy mineral water 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. The money that flows from mineral water consumer to industry is consumption

spending from the perspective of households and is revenue from the perspective of MUM.

The product mineral water that flows 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 used as

factors of production.

4.4 Absolute and comparative advantages The production possibility frontier shows the different combination of outputs for PARTEX

group and subsequently demonstrates the highest possible production of its goods. In this

case we can put the production of MUM bottled drinking water against one of their other

product, the Royal Crown Cola. For simplification of calculations, let us assume that at any

time, PARTEX can produce a maximum of 3000 litres of RC Cola as opposed to a maximum

of 6000 litres of bottled drinking water.

If PARTEX decides to reduce production of RC Cola by 500 litres, they can use the spare

resources to produce 1000 more litres of MUM drinking water. On the other hand, if they

decrease production of bottled water by 2000, they can produce 1000 more litres of RC

Cola. Any point outside this frontier is not feasible. Selecting a point on the frontier will

maximize output and provide a convenient combination of the different goods.

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4.4.1 Absolute Advantage:

The absolute advantage is the comparison among producers in terms of productivity. The

comparison here is between the market of MUM and that of the other mineral water

suppliers. Since Mum and Fresh are the market leaders of the oligopoly, we will be

comparing the cost-revenue analysis of these two. To compare them in turns of productivity

we will have to have a deeper view into the purification process of both.

MUM: The source of water plays a key role in the quantity and quality of water one wants

to produce, as well as to remain profitable. About a quarter of all bottled water comes from

municipal supplies, with the rest coming from natural sources like springs and wells. But,

regardless of where the water is flowing from, is privy to all the testing from the agencies.

One thing to take into consideration is what and organic and inorganic compounds are

present at the source, and if it is practical or not to invest in equipment to remove them.

However, the common elements that are found in the water of the country are Mg, Al, Ca,

V, Cr, Mn, Co, Ni, Cu, Zn, As, Rb, Sr, Mo, Ag, Cd. These are not that expensive to be removed.

Here are the steps that are undergone in the process of purification.

Membrane Filtration: It removes organic impurities, metal and other ions.

Ozonization: It breaks down organic constituents and reduces their odor potential while

also sanitizing to minimize further microbial contamination.

It costs around 14 BDT to purify and bottle per liter of water and is sold at 22 BDT. And more

than that, the companies are also using water supplies from WASA which is partially

subsidized by the government.

FRESH: Fresh has almost the same purification process. The Cost per liter of purification and

bottling is around 15 BDT and the water is sold in the market at a rate of 18 BDT per liter.

From the aforementioned study of the cost and revenue per liter of both the companies it

can be clearly stated that MUM has absolute advantage over Fresh.

4.4.2 Opportunity Cost and Comparative Advantage

We have already studied the absolute advantage of Mum. Comparative Advantage is the

comparison between two goods in terms of opportunity cost and opportunity cost is what

we give up to obtain that specific good. Even in this case we would be comparing Mum and

fresh since these are the major two Bottled water seller in the country. For Mum, it costs

around 14 BDT to purify and bottle 1 liter of water and they sell it at 24 BDT. On the other

hand, for Fresh Drinking water it costs around 15 BDT and they sell the same at 18 BDT per

liter. So, the opportunity cost for Mum is greater than that of fresh because to buy Mum

one has to give up 24 BDT per liter compared to Freshs 18 BDT per liter. Thus it can be

inferred that Fresh has comparative advantage over Mum but due to TQM and other

specific qualities the market is more inclined towards buying Mum than Fresh.

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4.5 Shift and movement of the supply & demand curve

Figure 4-3: Shift of the Demand Curve

4.5.1 Factors affecting shift of demand

4.5.1.1 Income:

The income of the general population plays a key role in the shift of the demand curve. For

instance, currently the majority of the population in Dhaka city relies on the water supplied

by WASA. Since this water is not hygienic in many places, the reason consumers dont

switch to bottled drinking water is affordability. Since this is a normal good, a raise in

income might allow the general population to spend more on bottled drinking water and

thus cause a positive shift in the demand curve. Likewise, a decrease in income will make

people spend less on this, thereby causing a negative shift in the curve.

4.5.1.2 Price of substitutes:

The goods that can be considered as valid substitutes for bottled drinking water are soft

drinks- carbonated beverages and fruit juices as well as water supplied by WASA. If the price

of these rise, then the general population will surely be encouraged to buy bottled water,

causing a positive shift in the demand curve. If the prices of these substitutes fall, then they

could be a more popular choice over bottled water, which would decrease demand and

cause a negative shift.

4.5.1.3 Price of Complements:

We can consider goods that require the subsequent consumption of water, such as fast

food, to be complements of bottled drinking water. So if the price of fast food is reduced,

for some reason or another, the consumption of fast food would likely increase. Therefore

the consumption of bottled drinking water will also increase, thereby making a positive shift

in the curve. On the other hand, the increase of prices and subsequent decreasing of

demand for fast food could likely cause a negative shift in the demand curve.

4.5.1.4 Weather:

In the perspective of Bangladesh, weather is a crucial determinant of demand of bottled

water. In summer time the temperature rises and the heat becomes unbearable, which

results in significant consumption of bottled water around the country. So during summer

time the demand of bottled drinking water rises substantially and thus the demand curve

shifts to the right.

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But during the times of monsoon and winter, the temperature becomes tolerable as the

heat soothes down, the consumption of bottled water decreases a bit along with its demand

which makes the demand curve shift to the left.

4.5.1.5 The Quality of the Water Supplied by Dhaka WASA:

Since majority of the population in Dhaka city relies on Dhaka WASA for their water supply,

it has great influence over the demand of bottled drinking water. For example, over the

years the quality and hygiene factors of the water supplied by Dhaka WASA have declined.

So the demand for bottled drinking water has undergone a positive shift. Because people

consider WASA to be unreliable they switch to bottled water, thereby increasing overall

demand for the good.

4.5.1.6 Number of Buyers:

The number of buyers may positively or negatively affect the demand of MUM drinking

water. If the number of individual buyers increase then the sum, or the market demand will

also increase. For instance, if more people switch over from other brands or from Dhaka

WASA water supply, then the demand curve will shift to the right. If a lot of buyers stop

buying MUM then the demand curve will shift negatively and more to the left.

4.5.1.7 Movements along the Demand Curve:

A movement refers to a change along the curve. On the demand curve, a movement along

the curve occurs due to a change in the two variables denoted in the two axis- price and the

quantity demanded. Since the quantity demanded is mostly dependent on the price, we can

say that movement is usually the result of movement along the curve.

Suppose the suppliers or sellers decide to increase profit by increasing price. In that case,

the quantity demanded will shift according to the demand curve and decrease

proportionately.

4.5.1.8 Market demand versus individual demand:

The demand of the market is the sum of the demands of all individual buyers. In the bottled

drinking water industry, for Dhaka city, the buyers consist mainly of consumption at

restaurants and individual consumption. The buyers at restaurants buy at a much higher

price than individual buyers. The market demand curve represents the sum of all these

individual demands.

4.5.2 Factors affecting Shift of the Supply Curve

The supply of MUM drinking water is subject to various shifts and changes. The quantity

supplied in the market varies from time to time. During the summer times, the demand of

bottled drinking water rises substantially so MUM increases the supply of its products in the

market. And during the times of monsoon and winter, as the demand for bottled drinking

water falls, MUM supplies fewer products in the market. The supply of MUM drinking water

also increases in special situations such as- shortage in Dhaka WASAs supply.

13

Figure 4-4: Shift of the Supply Curve

4.5.2.1 Input Prices:

MUM uses groundwater as their raw material, so a groundwater extraction unit is an input.

There are also several inputs such as- machines for water purification, bottling and

packaging machines, the labor of workers to operate the machines, power to run the plants,

transports, etc. If the price of one or more of these inputs rises, production of bottled water

is less profitable and MUM is likely to supply fewer products in the market. If the price of

the inputs rises substantially MUM might shut down the supply of one or more products. On

the other hand, if the input prices fall, production of bottled water is more profitable and

MUM is likely to supply more products in the market. So if the input prices increase then

the supply curve will shift to the left and it will shift to the right when the input prices

decrease.

4.5.2.2 Cost of Plastic Bottles:

Plastic bottles are necessary for the manufacture of the bottled waters as every bottled

waters come in plastic bottles. So if the price of plastic increases, then the bottle

manufacturers will increase the price of bottles which will result in a higher cost of

production for MUM.

4.5.2.3 Expectations:

The expectations of suppliers play an important role in determining the quantity supplied in

the market. In Bangladesh, the demand of bottled water has been established quite firmly in

the market as it is the only safe source of pure drinking water outside residences and

workplaces. Over the years MUM has developed quite a brand image in the market as a safe

and reliable drinking water so MUM can easily expect to grow its demand more in the

future.

4.5.2.4 Technology:

Technology used for production of bottled water is another determinant of supply. MUM

uses modern technologies in the production which ensures quality as well as reduces the

firms cost. Over the years, the advanced technology usage raised MUMs supply in the

market and shifted the supply curve to the right.

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4.5.2.5 Number of Sellers:

Besides other factors, the number of sellers in the market is also a determinant of supply. If

the number of individual suppliers increases, market supply will also increase. And the

supply curve will shift to the right.

More and more convenient stores, shops, food courts, restaurants, etc. are emerging every

day in Dhaka city and also throughout the country. And because of MUMs image and

quality, its demand is also increasing which is very unlikely to fall substantially. So judging

from the market scenario, it can be easily determined that the number of sellers will

increase in the future.

4.5.2.6 Movement along the Supply Curve

On the supply curve, a movement denotes a change in both price and quantity supplied

from one point to another on the curve. The movement implies that the demand

relationship remains consistent. Therefore, a movement along the demand curve will occur

when the price of the good changes and the quantity demanded changes in accordance to

the original demand relationship.

MUM can increase the price of its products because of increased production cost,

transportation cost, taxation, etc. or even for earning greater profits. And due to the

increase in the price of its products, suppliers will increase the quantity supplied in the

market for earning more profit.

4.5.2.7 Market Supply vs Individual Supply

By summing up al the sellers supply, we can determine the market supply of bottled

drinking water of Dhaka city. In Dhaka city, street shops and departmental stores sell MUM

drinking water at their retail prices such as- a bottle of 500ml costs 15TK. But restaurants

sell the same product in a much higher price costing around 30TK (varies from around 20TK

to 40TK).

The quantity supplied in a market is the sum of the quantities supplied by all the sellers at

each price. Thus, The Market Supply Curve is found by adding horizontally the individual

supply curves.

4.5.3 Market Equilibrium:

Figure 4-5: Market Equilibrium

15

The market achieves an equilibrium state when the market demand and market supply exist

in a balanced state. At the equilibrium price, quantity supplied equals the quantity

demanded. The equilibrium is found where the supply and demand curves intersect.

In case of MUM, the price elasticity of Demand has calculated as 2.90. Alongside, the change

in supply was not apparent in the market for MUM. This scenario suggests that even though

the demand for MUM is elastic, the supply has not been elastic. So, we get three different

demand-supply state. The three cases of Supply-Demand curve is being described below.

The first case is that the demand in market is highly covered by MUM and the supply is

more than the quantity demanded. These provides with a slight surplus of MUM in the

market as opposite to the shortage.

The second case would be where the demand of MUM would get down due to winter or

some other reasons and as being found out in the survey the supply is as it was before, then

the amount of surplus will increase.

The third case is where the demand will increase than it was before which results in the

demand and supply move more towards the equilibrium state.

4.6 Elasticity

4.6.1 Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of demand to changes in price for a

particular good. In the shorter range of price difference, demand is inelastic as people

perceive MUM relatively quality product. But for a more difference in prices, price elasticity

of demand becomes elastic as there are many substitutes available in the market. So Mum

cant increase their price after a certain limit. If it does so, it will have to lose its revenue as

quantity demanded decreases more rapidly compared to the increase of prices.

Let us see an example:

Between the one year from November13 to November13 price has risen from tk. 13 per

bottle to tk. 15 per bottle (from tk.260 per case to tk. 300). In the meantime, the demand

has fallen from 1.76 cases per month to 1.34 cases per month.

Midpoint:

Price=280

Quantity=1.55

Price elasticity of demand===2.27

The negative price elasticity relates to an elastic demand, because the price increase (15.6%)

is less than the decrease in quantity demanded 23.8%). This displays that Mum Drinking

Water is a product that has a fairly loyal customer bunch. They are prepared to pay the

higher price for the superior quality that Mum Drinking Water offers.

Total Revenue

16

On November10, the total revenue received by an average retailer was= (1.76X260) =

tk.457.6

After one year, the total revenue received by an average retailer is= (1.34X300) = tk. 428.8

The revenue earned has decreased despite the slight increase in price. Because of the fact

that Mum Drinking Water is an elastic product, the increase in price causes the decrease of

quantity. However, due to their brand loyalty, they are increasing a slightly higher price up

to a limit.

4.6.2 Price Elasticity of Supply

As stated above, the demand has decreased because

of the increase in price. and demand increases

continuously if we dont interrupt prices beyond the

limit. To ensure that maximum benefit would be

derived from the stability in price, the supply would

be increased.

4.6.3 Income Elasticity of Demand

When the income increases, the demand of MUM

Drinking Water will increase because MUM is

positioned in the higher price section of the mineral

water market. So, with the increase of income,

people would prefer the higher quality MUM. When

income decreases, the demand would fall at a high

pace for the similar reasons. So the nature of the

income elasticity of demand is of the elastic nature.

So ,as MUM is a product between normal necessity

and luxury (for certain range of people) range, with

the increase in income, quantity demanded is

elastic.

4.7 Government Policy: All the products sold in Bangladesh has to be

authorized under BSTI. MUM has been authorized

by BSTI before being introduced in the market.

BSTI sends quality surveying team every year or so

and could never bring any complaints against

MUM. The Patron of MUM drinking water Partex

has also been paying the organizational income tax

since its inception.

Figure 4-6: Price Elasticity of Supply

Figure 4-7: Income Elasticity of Demand

17

4.8 Cost Principle

4.8.1 Isoquant principle

An isoquant is a line drawn through the set of points at which the same quantity of output is

produced while changing the quantities of two or more inputs.MUM can change its inputs like

capital and labor in a manner such that if it increases one, the other will decrease.

Figure 4-8: Isoquant

4.8.2 Isocost.

In economics an isocost line shows all combinations of inputs which cost the same total amount. The

input can be labor or capital or other random variables for which cost is defined. . In case of MUM, it

faces a tradeoff between different inputs. For example, it can increase its technical expertise by

investing in this sector; or this investment can be used to increase the marketing activities. It decides

what to choose, improving the quality, or marketing promotion.

Figure 4-9: Isocost

4.8.3 Combination of Isoquant and Isocost

The isocost line is combined with the

isoquant map to determine the optimal

production point at any given level of

output. Specifically, the point of tangency

between any isoquant and an isocost line

gives the lowest-cost combination of

inputs that can produce the level of

output associated with that isoquant.

Equivalently, it gives the maximum level of

output that can be produced for a given

Figure 4-10: Combination of Isoquant and Isocost

18

total cost of inputs. A line joining tangency points of isoquants and isocosts (with input prices held

constant) is called the expansion path.

4.9 Pricing strategy: Pricing is one of the four elements of the marketing

mix, along with product, place and promotion. Pricing

strategy is important for companies who wish to

achieve success by finding the price point where they

can maximize sales and profits. Companies may use a

variety of pricing strategies, depending on their own

unique marketing goals and objectives. It can also be

used to defend an existing market from new entrants,

to increase market share within a market or to enter a

new market. Businesses may benefit from lowering or

raising prices, depending on the needs and behaviors of

customers and clients in the particular market. Finding the right pricing strategy is an important

element in running a successful business. There are different types of strategy followed by the

companies based on their planning and market pattern. MUM is following perceived value pricing

strategy. Customer is willing to pay more for MUM as they have a perception that MUM is a

relatively more quality product. So, MUM can enjoy a slightly higher price compared to the other

competitors.

4.10 Forecasting Forecasting is the process of making predictions of the future based on past and present data and

analysis of trends. MUM forecasts their future demand and hence determine their supply in the

market. MUM estimates the quantity of a product or service that consumers will purchase through

both subjective and quantitative methods, such as the use of historical sales data or current data

from test markets. It is be used in making pricing decisions, in assessing future capacity

requirements.

4.11 Value chain management

Figure 4-11: Value chain management

19

Value chain analysis relies on the basic economic principle of advantage companies are

best served by operating in sectors where they have a relative productive advantage

compared to their competitors. Simultaneously, companies should ask themselves where

they can deliver the best value to their customers.

To conduct a value chain analysis, the company begins by identifying each part of its

production process and identifying where steps can be eliminated or improvements can be

made. These improvements can result in either cost savings or improved productive

capacity. The end result is that customers derive the most benefit from the product for the

cheapest cost, which improves the company's bottom line in the long run. MUM is focusing

now more on technological improvement to excel in the quality sector and to remain

convincing in the consumer perception.

4.12 Game theory John Nash earned the Nobel Prize in economics for his works in game theory; a method of

strategic thinking. Game theory is the study of strategic decision making. It 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. Game theory analysis has direct

relevance to the study of conduct and behavior of firms in oligopolistic market. As MUM is

in oligopolistic market, game theory is a prime concern in analyzing their strategy towards

their goals. The decisions MUM take about over pricing and level of production is influenced

by the game theory. The main competitor of MUM is fresh mineral water. So the price

increasing and any other offer by one is closely observed by the others.in case of pricing

pattern, generally one follows the other to avoid conflict and benefitted mutually. For

example, in February, 2014 Mum increase the price of its 1 liter bottle which was

immediately followed by other major competitors like Fresh, Acme. In case of the

production level, MUM wants to take the comparative advantage as it has efficient supply

chain management. Fresh is focusing more now on supply chain. Recently, some locally

produced mineral water companies are emerging which are offering a relatively lower price.

To confront them, mum is focusing on the advertising of nutrition issue of mineral water

and trying to convincing consumers by assuring the quality. Other major competitors are

also working on research and development spending.

20

5 Conclusion Finally it can be said that Bottled Drinking Water has a major demand in the market of

Bangladesh and a major portion of the demand is being met by Mum. Mum being a product

of one of the biggest group Partex has a good scope of spreading its business around border

of Bangladesh and since yet no news of any shortage have been noticed, the Supply and

Demand are well in equilibrium. Analysis of different economic theory tells that MUM has

an upper hand in the industry because of the brand value and a perception of quality among

the consumers. Although the market is oligopolistic even now, competition is increasing as

new mineral water companies are coming. This industry has a potential prospect as people

are getting more conscious regarding health issue. Game theory tells that decisions taken by

MUM is closely observed and followed by the other competitors in case of pricing strategy.

Last of all, there are many limitations because of shortage of time, unavailability of

information and lack of my knowledge in this sector. I am grateful to my honorable teacher

Dr. A. K.M. Saiful Majid sir for enlighten me with the deep insight of economics and their

application in the real world which is the backbone of my report.

21

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