C CONCEPTS, TOOLS AND TECHNIQ

TERM PAPER ON
APPLICATION OF ECONOMIC CONCEPTS, TOOLS AND
TECHNIQUES IN EASTERN BANK LIMITED
Course Name: Managerial Economics

Submitted to:
Professor Dr. A. K. M. Saiful Majid
Ph. D, Senior Fulbright Fellow (USA)
Director, Institute of Business Administration
University of Dhaka

Submitted by:
Foysal Bin Omar
Roll: ZR - 21
Batch: MBA 53D

Institute of Business Administration

May 18, 2016

Letter of Transmittal
May 18, 2016
Professor Dr. A. K. M. Saiful Majid
Ph. D, Senior Fulbright Fellow (USA)
Director, Institute of Business Administration
University of Dhaka
Subject: Submission of Term Paper on Application of Economic Concepts, Tools and
Techniques in Eastern Bank Limited
Dear Sir,
With due respect, I am submitting my individual term paper on Application of Economic
Concepts, Tools and Techniques in Eastern Bank Limited for the Managerial Economics
course instructed by you. As a requirement for the partial fulfillment of the course, I have
analyzed the different economic aspects of this bank and compiled this report. The report was
interesting to work on, as it gave me the opportunity to have a detailed insight of the economic
factors in real life application.
I have given my best efforts in following your instructions while preparing this report and have
collected what I believe to be the most important data in order to make it as informative as well
as precise. I am thankful for the opportunity provided to us and hope you will look kindly on any
errors that may have occurred.
Sincerely,
Foysal Bin Omar
Roll: ZR-21
Batch: MBA 53D

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Acknowledgement
I am thankful to Almighty Allah who has enabled me to accomplish this task with due care.
I am especially thankful to our honorable course instructor Professor Dr. A. K. M. Saiful Majid,
Senior Fulbright Fellow (USA), Director, Institute of Business Administration, University
of Dhaka, who provided me guidance whenever I felt some difficulty. His knowledge,
approach and professionalism have always inspired me and helped me understand, analyze
and solve problems in a practical manner. This unique experience was possible for his
willingness to add newer dimensions to the class and to introduce the students with the
practical world. His supervision and valuable feedback has helped me tremendously to
improve this report.
Furthermore, I am thankful to the employees of Eastern Bank Limited for providing us their
valuable

time

and

information

about

their

organization

to

prepare

this

report.

I am also thankful to the various authors, researchers and publishers whose books,
articles and writings have provided guidelines to complete our study.

Table of Contents
List of Figures ........................................................................................................................................ vi
List of Acronyms.................................................................................................................................... vi
Executive Summary ...............................................................................................................................vii
A. Introduction .........................................................................................................................................1
A.1 Objective ....................................................................................................................................... 2
A.1.1 Broad Objective ..................................................................................................................... 2
A.1.2 Specific Objectives .................................................................................................................2
A.2 Scope............................................................................................................................................ ..2
A.3 Limitations..................................................................................................................................2
B. Literature Review .........................................................................................................................3
C. Methodology..................................................................................................................................4
C.1 Research Design......................................................................................................................... 4
C.2 Research method(s) ....................................................................................................................4
C.2.1
Data
........................................................................................................................4

sources

C.3 Instruments of data collection ....................................................................................................5

C.4 Sample Design ...........................................................................................................................5
C.3.1
Sampling
..........................................................................................................5
C.3.2
5

Techniques

Sample Size ........................................................................................................................

D. Company Overview ...................................................................................................................... 5

D.1 EBL at a Glance ......................................................................................................................... 6
D.2 Mission ,Vision and Values of EBL .........................................................................................6
E. Basic Concepts of Economics .......................................................................................................7
E.1 Microeconomic and Macroeconomic Factors Affecting EBL ...................................................7
E.2 Application of Mankiws 10 Principles ................................................................................... 11
E.3 Application of Invisible Hand..15
E.4 Circular Flow Diagram for EBL....17
F. The Elements of Demand & Supply ........................................................................18
F.1 Market and Competition ...........................................................................................................18
F.2 Demand and Supply.................................................................................................................. 18

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F.3 Market Demand vs. Individual Demand .................................................................................. 18

F.4 Factors affecting the shift of Demand Curve............................................................................ 18
F.5 Factors affecting the shift of Supply Curve...21
F.6 Equilibrium point...24
G. Elasticity & its Application ........................................................................................................ 25
G.1 Price Elasticity of Demand ..................................................................................................... 25
G.2 Determinants of Price Elasticity of Demand ........................................................................... 25
G.3 Price Elasticity of Supply ........................................................................................................ 27
G.4 Determinants of Price Elasticity of Supply...27
H. Effects of Government Policies ...................................................................................... ...28
I.

Conclusion ..................................................................................................................................29

Appendix ........................................................................................................................................... 30
Bibliography ...................................................................................................................................... 30
Data Retrieved From ......................................................................................................................30

List of Figures

Figure 1: Circular Flow Diagram

17

Figure 2: Shift of Demand Curve

20

Figure 3: Shift of Supply Curve

23

Figure 4: Equilibrium Point

24

Figure 5: Price Elasticity of Demand

27

Figure 6: Price Elasticity of Supply

28

List of Acronyms
EBL:

Eastern Bank Ltd.

BB:

Bangladesh Bank

R & D:

Research & Development

MDGs
ATM:

Millennium
Development
Goals
Automated Teller Machine

LTR:

Letter of Trust Receipt

LC:

Letter of Credit

PPF:
FD:

production
frontier
Fixed deposit

IR:

Interest Rate

NPL:

Nonperforming Loan

PED:

Price Elasticity of Demand

ADB:

Asian Development Bank

FDR:

Fixed Deposit Receipt

possibilities

6|Page

Executive Summary
Eastern Bank limited is one of the fastest growing banks in Bangladesh. The report provides a
detailed discussion about Application of Economic Concepts, Tools and Techniques in
Eastern Bank Limited.
This report focuses on the use and implementation of the basic concepts, theories and principles
of managerial economics to analyze the different practical economic aspects of EBL. The main
purpose is to relate banking practice of this particular bank to our theoretical learning of
economics and develop a combination of theory and practice for our better understanding.
Though the primary stage of the research design was exploratory, he second phase of the report
was descriptive in nature. Primary data were collected by personal interviews using
questionnaire. Company websites, government websites and other relevant journals, papers and
newspapers acted as the source of secondary data. These mostly qualitative and some
quantitative data were analyzed to determine the findings.
The theoretical and practical relationship of ten principles of economics, the circular flow,
demand, supply, factors affecting demand and supply, market equilibrium, shifting of demand
and supply curve, elasticity etc. regarding the banking practices of EBL is analyzed and
described in this report.

A. Introduction
For a country, the banks are the heart and soul of the financial system. Therefore, the sound
and efficient performance of the banks are very much essential for the sustenance of the
financial system or economy of the country. Like other organizations, banks are also dependent
upon the consumers for their survival in the market.
Modern banks play vital role in promoting economic development of a country. Banks provide
necessary funds for executing various programs underway in the process of economic
development. They collect savings of large masses of people scattered throughout the country,
which in the absence of banks would have remained idle and unproductive. These scattered
amounts are collected, pooled together and made available to commerce and industry for
meeting the requirements.
The commercial banking sector of Bangladesh comprises a number of banks in various
categories. Considering ownership, the sector can be classified in to four major categories such as
Nationalized Commercial Banks (NCBs),
Specialized Banks (SPBs),
Private Commercial Banks (PCBs) and
Trans-National Banks (TNBs).
With such a great role played by the commercial banking industry in the economic
development of Bangladesh, it is important to study the different aspects of a bank along
with the various factors that affect it. This paper is an intensive study of the application of
economic concepts, tools and techniques in commercial Eastern Bank Limited.

A.1 Objective
A.1.1 Broad Objective
To relate the theoretical part of Economics taught to us to the practices and functions of EBL.

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A.1.2 Specific Objectives

To show how the principles of Economics relate to banking practices of EBL

To point up the factors causing the shifts of demand and supply curve

A.2 Scope
The scope of this term paper will incorporate the followings:

This paper has covered Eastern Bank Ltd only.

The main purpose was to relate banking practice of this particular bank to our theoretical
learning of economics and develop a combination of theory and practice for our better
understanding.

This paper has covered up only those economic matters that will be taught by our
honorable course instructor during the set period.

A.3 Limitations
The common limitations that I may face in preparation of a term paper where data is highly
essential include:

Data confidentiality

Limited scope of the paper

Time constraints

B. Literature Review
Over course of time, extensive studies have been done on the commercial banking industry in
general. But majority of these references to banks in the microeconomics literature have not
looked at banking at the industry level. The literatures related to bank management has
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considered the management problems faced by individual bankers. On the other hand, the
macroeconomics literature has focused on banks' effects on the macro-economy, with emphasis
given mainly on their role in determining the money supply. The involvement of the banking
industry in the money supply process is obviously an important consideration in bank
regulatory policy. A different literature focuses directly on the banking industry and, in
particular, on the services provided by banks. There have been many studies undertaken by
foreign and Bangladeshi nationals which deal with the performance of commercial banks of
Bangladesh. Some of the notable ones are: Ahmed and Jamsheduzzaman (1985), Swamy and
Vasudevan (1985), Hossain and Bhuiyan (1990), Bhatt and Ghosh (1992), Avkiran (1997),
AlShamrnari and Salirni (1998), Siddique and Islam (2001), Chowdhury (2002), Bhattacharya
(2007), Chowdhury and Islam (2007) and Jahangir, Shill and Haque (2007). Most of these
studies were endeavors to find out the determinants of the economic performance of
commercial banks. To measure the performance level of a bank, Swamy and Vasudevan (1985)
used per employee deposits, advances, profits, etc. and found them to be significant. However,
Hossain and Bhuiyan (1990) stated that there is no universally accepted operational definition
of performance measures, but in broad sense performance level of an enterprise can be
measured by the extent to which its work is carried out within established specifications for
goods and services produced, to the general satisfaction of the clientele served, within given
cost and time constraints, and in such a manner as to support or contribute to the achievement
of the organization objectives. Bhatt and Ghosh (1992) observed that the profitability of
commercial banks depend on endogenous factors like control of expenditure, expansion of
banking business, timely recovery of loans and productivity, and exogenous factors consisting
of direct investments such as SLR (Statutory Liquidity Ratio), CRR (Cash Reserve Ratio) and
directed credit programs. Avkiran (1997) used a complex process whereby multivariate
interdisciplinary measures of potential to perform are integrated with performance measures to
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develop models of retail performance for bank branches. But according to Al-Shamrnari and
Salirni (1998), profitability ratios, especially return on equity (ROE), signals the earning
capability of the organization.

C. Methodology
C.1 Research Design

The conducted study has been done in two stages. The primary stage was exploratory in nature.
First, I have reviewed Eastern bank from their website and the published report. Secondly I have
talked to the manager and some other employees of Eastern Bank Ltd. The second phase of the
report was descriptive, also known as statistical research that describes data and characteristics
about the population or phenomenon being studied, in nature. Here I have tried to relate the
theoretical matters with the current practice of Eastern bank. Here, firstly, fixed alternative
questionnaire was developed based of the exploratory research done earlier. Secondly, a depth
interview was conducted with the respective respondents to get a clear picture of the study.
Thirdly, data was gathered and analyzed. And finally, report has been compiled and completed.

C.2 Research method(s)

C.2.1 Data sources
Primary sources

Depth interview

Secondary Sources

Newspaper article

Published report of Bangladesh bank

Published report of Eastern bank

Magazine articles
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Previous research work

BIBM Bank Review Series

Training Manual of EBL

C.3 Instruments of data collection

The major instrument for data collection was the questionnaire. Moreover explorative study on
published reports has also been used to gather data. The major instruments are:

Newspaper article

Published report of Bangladesh bank

Published report of Eastern bank

Magazine articles

Previous research work

C.4 Sample Design

C.3.1 Sampling Techniques
The sampling technique was convenience sampling. The reason behind this is that the data had to
be collected from some selected employees of Eastern bank who have access and full
understanding of banking function of EBL. So I can only get that relative information from the
convenient sample.

C.3.2 Sample Size

The sample size was very low as I had very little or no opportunity of getting data from the
customers.

D. Organizational Overview
D.1 EBL at a Glance
With a vision to become the bank of choice and to be the most valuable financial brand in
Bangladesh, Eastern Bank Ltd. (EBL) began its journey in 1992. Over the years EBL has
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established itself as a leading private commercial bank in the country with undisputed leadership
in Corporate Banking and a strong Consumer and SME growth engines. EBL's ambition is to be
the number one financial services provider, creating lasting value for its clientele, shareholder, and
employees and above all for the community it operates in.
Bangladesh Banking Sector has grown from strength to strength over the past one decade and is
fiercely competitive, especially in the Consumer Banking segment. EBL offers a wide range of
depository, loan and card products to cater virtually for every customer segment. From Student
Banking to Priority Banking to Platinum card EBL has almost all banking products in its
repertoire. The product basket is rich in content featuring different types of Savings and Current
Accounts, Personal Loans, Debit Cards, Credit Cards, Pre-paid Cards, Internet Banking, Corporate
Banking, SME Banking, Investment Banking, Treasury & Syndication services. The customers are
served through a network of 67 Branches, 160 ATMs and 40 Kiosks countrywide. EBL has its
presence in 11 major cities/towns in the country including Dhaka, Chittagong, Sylhet, Khulna,
Rajshahi & Coxs Bazar.

EBL is also the first bank to introduce Priority Banking in Bangladesh. In priority segment, EBL
offers high quality products and services and dedicated Relationship Managers is committed to
help manage financial health, preserve lifestyle and maintain priorities of the customers wherever
life takes them.
EBL is known for its product innovation in the market. During the past five years, EBL introduced
12 new-to-Bangladesh financial products and services. EBL Matribhumi the bundle product for
expatriate Bangladeshis, insurance covered monthly savings scheme, VISA corporate cards,
remittance card and mobilebased remittance solution are just a few of them. On the SME banking
window EBL offered customerfriendly and groundbreaking products like EBL Uddom and EBL
Mukti. At present, EBL Consumer, SME and Corporate Banking units are capable of handling
every kind of customer financial needs.

D.2 Mission , Vision and Values of EBL

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Vision
To become the most valuable brand in the financial services in Bangladesh creating long-lasting
value for our stakeholders and above all for the community we operate in by transforming the way
we do business and by delivering sustainable growth. Mission

We will deliver service excellence to all our customers, both internal and external

We will ensure to maximize shareholders' value.

We will constantly challenge our systems, procedures and training to maintain a cohesive
and professional team in order to achieve service excellence.

We will create an enabling environment and embrace a team based culture where people
will excel.

Values
Service excellence, openness, trust, commitment, integrity, responsible corporate citizen are the
major values maintained by EBL.

E. Basic Concepts of Economics

E.1 Microeconomic and Macroeconomic Factors Affecting
EBL
Demand and Supply
The demand and supply are two principal factors that affect the working of EBL. The demand is
the will and ability of consumers to purchase a particular service, while supply is the ability of
the EBL to provide for the demand of consumers. Suppose, a new service infused with flexible
opportunity is introduced in the market, it will have a higher price because of its demand in the
market. Its prices will continue to increase if the supply does not meet the demand.

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Marginal and Total Utility

Utility is the amount of satisfaction that is derived by consumers from the consumption of goods.
It so happens that after continuous and successive consumption of units of the same goods, the
satisfaction that is experienced by a consumer starts decreasing. This often results in short-term
or long-term fall in sales. Some organizations prepare for the launch of another brand, before the
fall in utility and sales is experienced. The launch of new brand ensures that the revenue trend of
the business does not fall. Diminishing utility is among the external factors affecting business.
Money and Banking
Banking facilitates monetary and fiscal policies that affect business and also the customers of the
business. Money in circulation dictates the purchasing power or rather the demand of the
consumers. On the other hand, the banking facility dictates the borrowing capacity of individuals
as well as the business. The banking policies play a decisive role in affecting the prices of goods
and interest rates along with investment and asset prices. The monetary policies of countries also
influence the economic activities and inflation. This whole dynamic process is also known as
monetary policy transmission mechanism.
Economic Growth and Development
Economic growth dictates the amount of finances that the society at large is earning and
development indicates the volume of money that is being invested into channels of long-term up
gradation. Among all the economic factors, development is the most important one, as a business
has to cater to the demands of an economically dynamic society. For example, the luxury brands
perform well during an economic upturn, much more than the companies which produce
essential offerings.
Income and Employment
Other important aspects of the economy that affects a EBLs operation, are the employment
density and rate of income. The per capita income and density of employment determines the rate
of demand, density of demand, and also the purchasing power of the people. For example, during
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an economic upturn, there are employment opportunities which generate income that enables
people to possess a stronger purchasing power. On the contrary, as the employment density and
income rate go down during recession period, the purchasing power of the people also
diminishes.
General Price Level
Another very important aspect of the economy that plays a part in the growth of business is the
general price levels of commodities. Costs of raw materials, paying power of people, cost of
production, and cost of transportation are some of the most important components that determine
the general price levels and in turn, lower the profit margin of a business.
Trade Cycles
A trade cycle plays a part in fluctuating the costs of goods and commodities in an economy.
Prosperity, recession, depression, and recovery are the phases of a business cycle that affect the
demand and supply of all goods. Also, trade cycles often affect the general price levels of
essential and non-essential commodities.
Inflation
Inflation is a phenomenon that occurs when there is too much supply of money in the economy
that is not supported by the output of goods and services. As there is a lot of money floating
around, the prices of goods also increase in order to sustain the businesses, resulting in the
increase of costs of raw materials which are needed for production. A hike in the prices of raw
materials, thus, also increases the cost of a product.
In simple words, the buying capacity of people decreases, when their incomes remain constant
but the prices of products and services increase. This affects the demand for the goods. For
example, in 2008, Zimbabwe faced the worst case of inflation, which proved disastrous for its
economy and led to the abandonment of its currency.

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Recession
During recession, companies face a decrease in sales revenues and profits. To curtail cost, they
resort to cutting back on hiring new employees, making capital expenditure, marketing and
advertising expenditures, research and development activities, etc. This not only affects large
organizations, but also the small ones which act as vendors to these big companies. Smaller
organizations may find it difficult to survive in recession due to lack of financial funds or
availability of loans. Also, people may shift their preferences to slightly affordable products
during recession or may not spend on luxury items at all. This will also have a negative impact
on the demand for these products. Factors like falling stocks, lack of dividends, below par
quality, employee lay-offs, bankruptcy, etc. during recession may also affect the business
adversely. For example, in 2007, when the banking industry was unable to face the meltdown of
the mortgage market, it inadvertently led to a free fall of the stock market and a decrease in
consumer spending. It also set into motion a chain of events that resulted into a global recession
within a year.
Exchange Rate
When a company buys certain goods from a US-based organization, it will have to convert its
currency into US dollars for making the payment. If the currency of the buyer is stronger than the
US dollar, it will be beneficial for the company. However, if it is weak, the company will have to
shell out more money. This was an example of an export business. A similar logic will also be
applicable to the import business. Moreover, price competition in the international market often
leads to fluctuating prices.
Rate of Interest

The rate of interest has a direct impact on the loans that business take to sustain or propel their
growth. The higher the interest rates, businesses find it difficult to commit to projects that require
investment. On the contrary, lower rates make it easier for people to borrow money in order to
buy cars and houses. Low loan rates also provide an opportunity to people to spend more on
other things, thus creating a demand for various goods and services, and thereby spurring the
growth of economy.
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Government Regulations
There are several government agencies that regulate businesses for the safety of humans,
animals, and environment. Some industries are heavily regulated and introduction of new laws
discourage uncontrolled growth of factories and plants. For example, a coal-powered power plant
may be asked to be shut down because of an environmental threat it poses. This may affect a
business drastically.
Every changing factor in an economy affects the working of businesses. Hence, companies need
to have a foolproof strategy and contingency revenue reserves to cope with such dynamic
changes. It is best to take calculated risks and expand a business when the rates of interest are
low and the demand is high.

E.2 Application of Mankiws 10 Principles

Economic Principles, referring to the idea of "principles of economic life". Mankiw's list of 10
principles is a good example of this notion. These are principles of how the economy works (or
should work), hence, they refer to the economy or economic actors. They are thought to parallel
the principles or laws in natural science.
Principle 1: People face tradeoffs
There is no such thing as a free lunch. To get one thing that we like, we usually have to give up
another thing that we like. Making decisions requires trading one goal for another. This refers to
the concept of making compromises. A person may have to give something up to get something
else they want more. For example, if EBL decides to open a new branch at say Khulna,
it might have to forego the opportunity to open a branch at some other district. Similarly,
approving a loan to a client may limit the capacity of the bank to approve another loan.
Equality vs Efficiency: Automation and employment trends can also pose significant tradeoffs
for banks. Automationlimits the employment opportunity of the banks reduces costs and
increases efficiency.
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Principle 2: The cost of something is what you give up to get it

The second economic principle emphasizes the cost of whatever it is we gave up. Because people
face trade off, making decisions requires comparing the costs and benefits of alternative courses
of action. The cost of one option is not how much it will cost in dollar terms, but rather the value
of our second best alternative. Decision-makers have to consider both the obvious and implicit
costs of their actions. When EBL takes deposit to disburse loan it cannot use the whole
money to do so. It has to keep some percentage of that money for liquidity purpose. But the
bank pays interest for that money too. Again when EBL changes address or logo, it pays not
only the changing cost but it also incur the cost of the goodwill related with the previous names.

Principle 3: Rational People Think at the Margin

People make decisions by comparing the marginal benefit with the marginal cost. Economists
generally assume that people are rational. Definition of rational people means systematically and
purposefully doing the best one can to achieve ones objectives. Consumers want to purchase the
bundle of goods and services that allows them the greatest level of satisfaction given their
incomes and the prices they face. Firms want to produce the level of output that maximizes the
profits they earn. A rational decision-maker takes action if and only if the marginal benefit of the
action exceeds the marginal cost.
EBL as an organization is rational in its decision making and as such always think for
marginal cost against marginal benefit received. This happens whenever it goes to establish a
new branch which requires a lot of fixed and variable cost. So EBL calculate the margin that
can be achieved by the new branch to match that cost
Principle 4: People respond to incentives
People respond to different incentives in good or bad ways, but the point is that we respond. A
bar might offer buy one, get one free drinks. Incentive means something that induces a person to
act. Because rational people make decisions by weighing costs and benefits, their decisions may
change in response to incentives. Behavior changes when costs or benefits change. For example,
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if our hourly wage increases then we are likely to work more (unless of course your income is
already too high).
EBL also provides incentives to their chief executive officer or other top management so that
they may perform better

Principle 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. Trade is not like a sports
competition, where one side gains and the other side lose. It is important to clarify that trades
include using money to pay for something.
In our analysis we see that the entrepreneur has better ideas to invest in but they dont have the
sufficient funds required. But EBL has sufficient funds but doesnt have the ideas to invest in.
even if it has the ideas, investing in separate businesses is not the core activities of bank. So we
can conclude that EBL is specialized at collecting funds and distributing those funds to
borrowers. On the other hand entrepreneurs are specialized at earning money by investing in
productive sectors. So the both parties can trade off which will make them better and the country
as a whole. In any country, trade allows individuals, families, organizations to specialize in what
they can do the best and to enjoy a greater variety of goods or services. Although competition
exists, an entity cannot be better off isolating itself from other entities.
Principle 6: Markets are usually a good way to organize economic activity
Markets are defined simply as a place where people make an agreement, settle on a price and
then communicate that to the world at large. Individuals and firms that operate in a market
economy respond to prices and thereby act as if guided by an invisible hand which leads the
market to allocate resources efficiently. Many countries that once had centrally planned
economies have abandoned this system and are trying to develop market economies. Market
economy means an economy that allocates resources through the decentralized decisions of
many firms and households as they interact in markets for goods and services.
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Market prices reflect both the value of a product to consumers and the cost of the resources used
to produce it.
Principle 7: Governments Can Sometimes Improve Market Outcomes
Sometimes a market may fail to allocate resources efficiently, and government regulation can be
used to improve the outcome. Market failures can occur due to the existence of public goods,
monopolies and externalities. 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. The
opposite of this is economic activity that is organized by a central planner within the government.
EBL operates in the financial market of the country. Here surplus money is deposited and its give
those deposits as loans. Deficit budget units pay interest to EBL and EBL pay interest to the
surplus budget unit.

Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and
Services
Simply put, this principle is productivity. The richer the country, the higher the level of
productivity is. A country whose workers produce a large number of goods and services per unit
of time will enjoy a high standard of living. Similarly, as a nation's productivity grows, so does
its average income. Differences in living standards from one country to another are quite large.
Changes in living standards over time are also quite large. The explanation for differences in
living standards lies in differences in productivity. Productivity means the quantity of goods and
services produced from each hour of a workers time. High productivity implies a high standard
of living. Thus, policymakers must understand the impact of any policy on our ability to produce
goods and services. To boost living standards the policy makers need to raise productivity by
ensuring that workers are well educated, have the tools needed to produce goods and services,
and have access to the best available technology.

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Principle 9: Prices Rise When the Government Prints Too Much Money
This principle refers to inflation. Prices go up to reflect the amount of money being printed.
While the more money makes people think they're wealthier, inflation causes prices to go up and
that money loses some of its value. 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 goods and services. Inflation means an increase in the overall level of prices in the
economy. When the government prints a large amount of money, the value of the money falls.
This principle depicts that if the lending of money is too much then it will have little value to the
borrower. So the borrower can do little with the large amount of money. The overall price level
increases for all. Thus it may create a drastic situation in the economy. So, Bangladesh bank
interfere the activities of the commercial banks to keep everything under control.

Principle 10: Society Faces a Short-run Tradeoff between Inflation and Unemployment.
Also referred to as the Phillips Curve, this principle says that you can't keep unemployment low
and inflation under control at the same time and, therefore, create a tradeoff. Reducing inflation
often causes a temporary rise in unemployment. This tradeoff is the key to understanding the
short-run effects of changes in taxes, government spending and monetary policy. An increase in
the amount of money in the economy stimulates spending and increases the demand of goods and
services in the economy. Higher demand may overtime cause firms to raise their prices but in the
meantime, it also encourages them to increase the quantity of goods and services they produce
and to hire more workers to produce those goods and services. More hiring means lower
unemployment.

E.3 Application of Invisible hand

In 1776, Adam Smith in his book named "An Inquiry into the Nature and Causes of the Wealth
of Nations" set out the mechanism by which he felt economic society operated. Each individual
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strives to become wealthy "intending only his own gain" but to this end he must exchange what
he owns or produces with others who sufficiently value what he has to offer; in this way, by
division

of

labor

and

free

market,

public

interest

is

advanced.

Adam Smith used the metaphor of the invisible hand to refer to the guidance and benefit society
receives when individuals act in their own self-interest when trying to make money. According
to Smith, when consumers are left to freely choose what they want to buy, and businesses are
left to freely decide what they want to sell, the self-interest of both will lead to decisions that
result in good prices and the right products in the economy and marketplace. As a result, Smith
argued that no government intervention is needed.
We simply have the invisible hand of economic self-interest to guide us. Let's explore the
theory more to help it all make sense. This is also true for the Banking Industry as well.
Though invisible hand should have been enough to control the market we always see
government intervention in the market. However invisible hand can be seen in the current
banking industry in a very low capacity. If it did not exist banking industry would have crashed
as all the banks would have offered loan at highest possible rate and have took deposits at
lowest possible rate.
In a free market scenario where there are no regulations or restrictions imposed by the
government, if someone charges less, the customer will buy from him. Therefore, you have to
lower your price or offer something better than your competitor. Whenever enough people
demand something, it will be supplied by the market and everyone will be happy. The seller
end up getting the price and the buyer will get better goods at the desired price.
The single most important proposition in economic theory is that, by and large, competitive
markets that are relatively, but generally not completely, free of government guidance do a
better job allocating resources than occurs when governments play a dominant role. Except for
some extreme supporters of free markets, today the preference for private markets is not an
absolute. Almost everyone acknowledges that some functions, such as contract enforcement,
cannot readily be delegated to market participants. The question is when and to what extent
not whetherprivate markets fail and therefore must be supplanted or regulated by
government.
The discussion of self-interest and competition usually results in a discussion of the proper role
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of government regulation. Some see a market economy as largely self-regulating, assuming

there are enough firms competing in the market to be a check on self-interest. Others point to
examples of fraud where competition has failed to be an adequate check on self-interest - they
argue that government must take a more active role regulating economic activity. In fact, much
of the fighting among political groups has to do with the question of how much government
control is needed to regulate the economy.
To recap, self-interest and competition are very important economic forces. Self-interest is the
motivator of economic activity. Competition is the regulator of economic activity. Together
they form what Adam Smith called the invisible hand, which guides resources to their most
valued use.

E.4 Circular Flow Diagram for EBL

The circular flow of income is a neoclassical economic model depicting how money flows
through the economy. In the simplest version, the economy is modeled as consisting only of
households and firms. Money flows to workers in the form of wages, and money flows back to
firms in exchange for products. Like every other economic entity EBL also go through circular
flow diagram.

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F. The Elements of Demand & Supply

F.1 Market and competition
In case of this term, paper market means the group of borrowers and lenders in money market.
We know a market in which there are many buyers and many sellers so that each has a negligible
impact on the market price. As money market is growing steadily most of the banks have already
opened new section to distribute loan.

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F.2 Demand
The quantity demanded is the amount of loan that borrowers are willing to borrow and able to
borrow.

F.3 Market demand vs. individual demand

The individual demand curve shows only the demand of an individual at various prices. The
market demand refers to the sum of all individual demands for a particular goods or services.

F.4 Factors affecting the shift of Demand Curve

Because the market demand curve holds other things constant, it need not be stable over time. If
something happens to alter the quantity demanded at any given price, the demand curve shifts.
Any change that increases the quantity demanded at every price, shifts the demand curve to the
right and is called increase in demand. Any change that reduces the quantity demanded at every
price shifts the demand curve to the left and is called a decrease in demand. Here we find that
although the interest rate changes from 12% to 14% the demand of loan increased. So there must
have the influences of other factors that cause the shift of the demand curve. During the primary
interview to collect data, The respondent of EBL referred some factors of increasing demand.
There are many variables that can shift the demand curve. Here are the most important:
Income opportunity
If the income opportunity from doing business increases, the demand for loan increases. For
example the entrepreneurs are assuming that a particular product of their making has very high
demand in the market. So they will borrow more from the banking sector as the return from the
investment they made will be higher than the cost of interest rate.

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Liquidity crisis
In the year 2012 govt borrowing from the commercial banks was very high which caused the
liquidity crisis. This shortage of liquidity increases the cost of borrowing fund of any type. For
this reason the interest rate increased and demand also increased.

Future expectations
The expectation about the future may affect the demand for loan. If the entrepreneur expects that
the demand for his/her product will increase in the coming month, s/he will be eager to bowwow
more to increase production. If s/he expects sluggish demand in the coming month then the
demand will fall.

Number of buyers (borrowers)

In addition to the preceding factors, which influence the behavior of the individual borrowers,
market demand depends on the number of these buyers.if the number of borrowers increases the
demand will be high. Moreover the number of borrower is also increasing because of the low
interest rate of borrowing fund mandated by central bank. (Bangladesh Bank) Expectations
Consumer and corporate expectations of key economic factors such as inflation or expected
future income can cause the aggregate demand curve to shift. Unknowns about an individual's or
company's economic future can spur higher saving and low spending, which would decrease the
amount of demand and thus shift the curve. On the other hand, higher anticipated profits or
paychecks can increase spending and boost the aggregate demand curve. Consumer confidence
and expectations are an important indicator as to whether the demand curve will shift and in what
way.
Government Spending
When government spending or fiscal policies change, the aggregate demand curve is impacted.
Changes in government spending that shift the demand curve include increased or decreased
taxation, social service benefits, government debt, military spending or overall spending. For
example, how much the government taxes your income could affect how much disposable
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income you have to spend, and will therefore either spur or reduce consumer consumption and
shift the curve.
Interest Rates
A high or low interest rate can shift the aggregate demand curve. For example, if banks lower
interest rates on credit cards and various types of loans, consumers and corporations are "more
likely to borrow money. This increases the amount of investment and spending that will take
place, which shifts the demand curve. The inverse can happen with higher interest rates in that if
rates rise, spending and investment falls, which also shifts the demand curve.
Fluctuating Economies
Economies and variances in economic stability can shift the aggregate demand curve. These
variances can include the strength or weakness of a certain currency, the exchange rate across
currencies, the foreign income of specific countries, and an increase or decrease in international
demand of a good or service.

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Figure 2: Shift of Demand Curve

F.5 Factors affecting the shift of Supply Curve

Because the market supply curve holds other things constant, the curve shifts when one of the
factors changes. Any change that raises the quantity supplied at every price shifts the supply
curve to the right and is called an increase in supply. Similarly, any change that reduces the
quantity supplied at every price shifts the curve to the left and is called a decrease in supply.
There are many variables that can shift the supply curve. Here are some important factors:
Input Costs
Input costs are a major factor that affects production costs and, therefore, supply. Input costs are
the price of the resources needed to produce a good or service. For example, an entrepreneur
makes nutrition bars that contain peanuts. If the price of peanuts increases, his costs increase. He
cannot afford to produce as many nutrition bars, and his supply curve shifts to the left. When the
price of peanuts decreases, his costs decrease. He is willing and able to increase the quantity he
can supply at every price, so he will borrow more, and the curve shifts to the right.

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Labor Productivity
Labor productivity is the amount of goods and services that a person can produce in a given time.
Increasing productivity decreases the costs of production and therefore increases supply. For
example, a specialized division of labor can allow a producer to make more goods at a lower
cost. If the productivity of the businessperson increases then s/he will be interested to borrow
more funds to increase the production opportunity, regardless of the cost of fund, if the income
offset the cost of funds. On the other hand decreased productivity will shrink borrowing and
leftward shift of supply curve.
Technology
One way that businesses improve their productivity and increase supply is through the use of
technology. Technology involves the application of scientific methods and discoveries to the
production process, resulting in new products or new manufacturing techniques. Influenced by the
profit motive, manufacturers have, throughout history, used technology to make goods more
efficiently. Increased automation, including the use of industrial robots, has led to increased supplies
of auto-mobiles, computers, and many other products. Improved technology helps farmers produce
more food per acre. It also allows oil refiners to get more gasoline out of every barrel of crude oil and
helps to get that gasoline to gas stations more quickly and more safely. In addition, technological
innovations, such as the personal computer, enable workers to be more productive. This, in turn,
helps businesses to increase the supply of their services, such as processing insurance claims or
selling airline tickets.

Government Action
Government actions can also affect the costs of production, both positively and negatively. An
excise tax is a tax on the production or sale of a specific good or service. Excise taxes are often
placed on items such as alcohol and tobacco things whose consumption the government is
interested in discouraging. The taxes increase producers costs and, therefore, reduce the
borrowing from banks, and decrease the supply of these items. Government regulation, the act of
controlling business behavior through a set of rules or laws, can also affect supply. Banning a
certain pesticide might decrease the supply of the crops that depend on the pesticide. Worker

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safety regulations might decrease supply by increasing a businesss production costs or increase
supply by reducing the amount of labor lost to on-the-job injuries.

Producer Expectations
If producers expect the price of their product to rise or fall in the future, it may affect how much
of that product they are willing and able to supply in the present which ultimately determine the
amount of fund required. Different kinds of producers may react to future price changes
differently. For example, if a farmer expects the price of corn to be higher in the future, he or she
may borrow to invest more, thereby increasing supply. A manufacturer who believes the price of
his or her product will rise may run the factory for an extra shift or invest in more equipment to
increase supply.
Number of Producers
When one company develops a successful new idea, whether its designer wedding gowns, the latest
generation of cell phones, or fast-food sushi, other producers soon enter the market and increase the
supply of the good or service. When the demand for a particular product or service increases the and
many new business person come to invest in it the supply of funds increases.

Figure F 3: Shift of Supply Curve

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F.6 Equilibrium point

The market equilibrium comes at that price and quantity where the forces of supply and demand
are in balance.

Figure 4: Equilibrium Point

The point, at which the market supply curve and the market demand curve meet together, is the
equilibrium point. The price at that intersection point is called equilibrium interest rate. The
dictionary defines the word equilibrium as a situation in which various forces are in balance-and
this also describes a markets equilibrium. At the equilibrium price, the amount of the fund that
borrowers are willing and able to borrow exactly the the quantity that lenders are willing and
able to lend.
From the figure it can be seen that in 2011 at 12% interest rate the demand for the funds is 10449
million taka indicated by D1. But in 2012 at 14% interest rate the demand is 13448 million taka
indicated by D2. Here the increased rate of interest increases the demand of funds, because, as
discussed other factors of ceteris paribus have been changed. In that time the supply curve S1.
Here the change is along the curve. So the equilibrium point shifts.

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G. Elasticity & its Application

G.1 Price Elasticity of Demand
Price elasticity of demand (PED or E d) is a measure used in economics to show the
responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its
price. More precisely, it gives the percentage change in quantity demanded in response to a one
percent change in price (ceteris paribus, i.e. holding constant all the other determinants of
demand, such as income). It was devised by Alfred Marshall.
Price elasticity is almost always negative, although analysts tend to ignore the sign even though
this can lead to ambiguity. Only goods which do not conform to the law of demand, have a
positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic)
when the PED is less than one (in absolute value): that is, changes in price have a relatively small
effect on the quantity of the good demanded. The demand for a good is said to be elastic (or
relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price
have a relatively large effect on the quantity of a good demanded.

G.2 Determinants of Price Elasticity of Demand

The law of demand states that a fall in the price of a good raises the quantity demanded. Thae
price elasticity of demand measures how much the quantity demanded responds to a change in
price. Demand for a good is said to be elastic if the quantity demanded responds substantially to
changes in the price. Demand is said to be inelastic if the quantity demanded responds only
slightly to changes in the price.
Availability of close substitutes
Availability of close substitutes affects price elasticity of demand. In general we will find
demand becomes more responsive as the number of substitutes increases. This would be where
we would see the influence of loyalty. When a firm successfully creates brand loyalty what it is
doing is effectively reducing the availability of substitutes in the minds of buyers. Because the
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buyers no longer believe the other products are close substitutes, the increase in price is less
likely to lower demand for the product.
In case of our analysis, there many close substitutes for loan, deposit or any other banking
service of EBL.

Necessities versus luxuries

Necessities tend to have inelastic demands, whereas luxuries have elastic demands. When the
price of a doctors visit increases, people will not dramatically reduce the number of times they
visit to the doctor, although they might go somewhat less often.
In our case service of EBL is either luxuries or necessities as it is a subjective matter.
Definitions of the market
The elasticity of demand in any market depends on how we draw the boundaries of the market.
Narrowly defined market tends to have more elastic demand than broadly defined markets
because it is easier to find close substitute for narrowly defined goods.

Time horizon
Time matters. If people are given longer to adjust their behavior, they will be able to make larger
adjustments. For example, if the price of gas rises rapidly then our initial reaction is likely to be
minimal. We will still buy the same amount of gas because our driving habits will not have
changed. If we are given a longer period to adjust, however, you may find that you buy a new,
more gas efficient car which will lower your demand for gas. The generalization to be drawn
from this is that elasticity increases with the time horizon.
In case of loan the entrepreneurs whose business is in the growth stage they change their habit of
borrowing slightly. But in the long run they may adjust their business by borrowing from another
low cost bank.

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Figure 5: Price Elasticity of Demand

G.3 Price Elasticity of Supply

Price elasticity of supply (PES or Es) is a measure used in economics to show the responsiveness,
or elasticity, of the quantity supplied of a good or service to a change in its price. Supply of a
good is said to be elastic if the quantity supplied responds substantially to changes in the price.
Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the
price. The price elasticity of supply depends on the flexibility of sellers to change the amount of
the good they produce.

G.4 Determinants of Price Elasticity of Supply:

The law of supply states that higher prices raise the quantity supplied. The price elasticity of
supply measures how much the quantity supplied responds to changes in the price. Supply of a
good is said to be elastic if the quantity supplied responds substantially to changes in the price.
Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price.
The price elasticity of supply depends on the flexibility of sellers to change the amount of the
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good they produce.

In most markets, a key determinant of the price elasticity of supply is the time period being
considered. Supply is usually more elastic in the long run than in the short run. Over short periods
of time, firms cannot easily change the size of their factories to make more or less of a good. Thus,
in the short run, the quantity supplied is not very responsive to the price. By contrast, over longer
periods, firms can build new factories or close old ones. In addition, new firms can enter amarket,
and old firms can shut down. Thus, in the long run, the quantity supplied can respond substantially
to price changes. This also applies to EBL.

Figure 6: Price Elasticity of Supply

H. Effects of Government Policies

Like Each and every bank of Bangladesh, EBL must conform to Government policies and
regulations. It is also closely regulated and monitored by Bangladesh Bank. Sometimes these
policies help EBL to operate more efficiently and effectively. However, sometimes its regulations
also hinders its growth.

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Conclusion

The economic analysis of the Eastern Bank limited reveals some real thing about how the
theoretical economic factors affect ways of doing business of Eastern Bank Limited. It analyze
the practices and functions of this organization from economic perspective. It also give a glimpse
of the banking sector of Bangladesh

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Appendix
Bibliography
Ayyagari, M., Beck, T., & Demirg-Kunt, A. (2003). Small and Medium Enterprises across the
Globe:. Marryland: World Bank.
Hirschey, M., & Pappas, J. A. (1996). Managerial Economics (18th ed.). (E. Barrosse, Ed.)
Florida: Harcourt Brace College.
Mankiw, N. G. (2012). Principles of Economics (6th ed.). Delhi, India: Cenage Learning.
Rahman, S. (2010). Annual Report 2010, Sustainable banking. Dhaka: Eastern Bank Ltd.
Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). New york, USA: Mc Graw
Hill.

Data Retrieved From

1. http://www.bangladeshbank.org.bd/index.php
2. http://www.ehow.com/info_7880863_explanation-ten-principles-economics.html
3. http://www.tomspencer.com.au/2011/11/23/mankiws-10-principles-of-economics/
4. http://en.wikiversity.org/wiki/10_Principles_of_Economics
5. http://www.slembeck.ch/principles.html
6. http://www.buzzle.com/articles/economic-factors-affecting-business.html
7. http://www.ehow.com/info_10056890_causes-aggregate-demand-curve-shift.html
8. http://www.manhattanreview.com/macro-micro-economics/
9. http://www.supportforstudentsuccess.org/home/CA49709536914667/.blogs/post18454/Chapt
er%205%20Section%203.pdf
10. (http://www.ebl.com.bd/home/EBL_Profile)
11. http://www.uri.edu/artsci/newecn/Classes/Art/INT1/Mic/Elast/elast1b.html

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