Case study: How economics effect business For Ms. Mahtab Faruqui's class

1. Summer 2011
Introduction to Business
(BUS 101)

2. Case Study 01 by Group 02
June 6, 2011
Submitted to:
Mahtab Faruqui
Senior Lecturer, B.B.S.
Office: BU 0626
mfaruqui@bracu.ac.bd
Done By:
Group 2 of Section 06
Sl. No. Name I.D. no.
1. Pranto Bhowmick 10304056
2. Kazi Nikita Nur 10105008
3. Golam Asfia 11304057
4. Samiya Yesmin 11304043
5. Nikita Nandini
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3. Case Study 01 by Group 02
June 6, 2011
Assignment 01:
Case study: Katrina’s Aftermath
[From Page 57, Understanding Business, (8th
Edition), William G. Nickels, James M.
McHugh & Susan M. McHugh, McGraw-Hill, 2008]
Under Chapter 02:
How Economics affects Business:
The Creation and Distribution of Wealth
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4. Case Study 01 by Group 02
June 6, 2011
1. No economic system has been able to respond quickly to the devastation
caused by war or natural disasters. Why is the free market system more
likely to respond faster? What advantages does a socialist system have in
responding to the need of the poor?
ans: In a capitalist economy, it is the market that largely determines the goods and
services to be produced and at what price, according to the market’s demand and
supply quotients. Private entities have the complete freedom of trade. Therefore at
times of crisis a free market system is most likely to respond faster as they are able
to determine the requirements of supply through its demand and can divide and
help through all kinds of different ways possible. People have the freedom of
choice and ownership and with the minimum of government rules to wade through
helps further form such a quick response. As was seen while fighting the havoc
caused by hurricane Katrina, when a private company Acadian Ambulance setup
communication satellite system and helped coordinate rescue teams.
A socialist system is mostly owned by government, where profits are evenly
distributed among the people. Private businesses are highly taxed; this
redistribution of taxes in socialism gives privilege to the underprivileged. Socialist
government thus provides more free education, health care benefits, utilities etc.
for everyone, unlike any other economic system. Enabling it to be more beneficial
to the poor as it enforces equality and provides basic necessities of life.
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5. Case Study 01 by Group 02
June 6, 2011
2. What should the government do to better coordinate the efforts of
churches, other nonprofit organizations, government agencies, business &
individual citizens when emergency strikes? What factors have hindered
such coordination in the past?
ans: When an emergency strikes everything swirls off-balance chaos reigns in. The
problems that occur mostly during such times are rescue missions being delayed,
victims do not receive relief supplies for days, some affected areas get all the help
while others do not receive any, it is also seen that 75% of the relief fund does not
even reach the victims and are instead filling pockets of various corrupted people,
who were responsible for the fund and the biggest problem is victims who have
lost everything have a very hard time starting over as they no longer have anything
of their own.
To overcome all these hindrances government should make better organized
emergency plans which can be immediately effective for such times. In case of
natural disasters, weather forecast should be given high importance and fast
organized evacuation started. To avoid delay in rescue missions and to properly
deliver relief supplies organized coordination between the government and all sorts
of charitable NGOs is a necessity. Problem of government laws preventing outside
help to enter the affected country can be overcome by timely management or by
removal of such laws. Government could ensure total non-corruption by employing
strict laws and severe penalties against offenders and by employing officials who
will have the responsibility to ensure proper usage of funds. To help the victims
start over, government could put more money into their banks, to provide loans
with low interest rates. And with such team effort by the government and every
individual, we shall be able to help more victims during and after emergencies.
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6. Case Study 01 by Group 02
June 6, 2011
3. When disasters hit an area, the cost of everything seems to go up
immediately: food, water, housing, gas and so forth. Explain why this
phenomenon may be a good thing, using the laws of supply and demand to
explain your answer. What would happen if prices did not go up?
ans: In a free market economy, price mechanism determines the price, i.e. the
forces of demand and supply determines the price. When a disaster like Katrina
hits a place, the supply of basic necessities like food, water, gas etc. fall and as a
result price increases
It can be seen from the diagram below that as supply falls from S, to S2,
there is a contraction QN in the demand of these goods and services. A new
equilibrium point B is established. The price rises from OP to OP2.
The price increase is good because if the forces didn’t adjust the price there
would have been no fall in demand even if there was a fall in the supply of these
goods and services, resulting in demand exceeding supply and creating a shortage
of the goods and services. If the price mechanism doesn’t work, the shortage
created by excess demand will result higher afflictions for people because of lack
of availability of goods and service, and as a result standard of living falls. As the
price is higher, demand is limited causing people to buy only the most basic
amount needed preventing bulk buying. In addition, there will be an increase in
supply of these goods and services in the long run because of suppliers will be
attracted to the new increased price and profitability. Without a price rise
producers will not be motivated to produce more and hence the shortage will
persist. Hence a price rise in such situations ameliorates the situation.
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7. Case Study 01 by Group 02
June 6, 2011
3. When disasters hit an area, the cost of everything seems to go up
immediately: food, water, housing, gas and so forth. Explain why this
phenomenon may be a good thing, using the laws of supply and demand to
explain your answer. What would happen if prices did not go up?
ans: In a free market economy, price mechanism determines the price, i.e. the
forces of demand and supply determines the price. When a disaster like Katrina
hits a place, the supply of basic necessities like food, water, gas etc. fall and as a
result price increases
It can be seen from the diagram below that as supply falls from S, to S2,
there is a contraction QN in the demand of these goods and services. A new
equilibrium point B is established. The price rises from OP to OP2.
The price increase is good because if the forces didn’t adjust the price there
would have been no fall in demand even if there was a fall in the supply of these
goods and services, resulting in demand exceeding supply and creating a shortage
of the goods and services. If the price mechanism doesn’t work, the shortage
created by excess demand will result higher afflictions for people because of lack
of availability of goods and service, and as a result standard of living falls. As the
price is higher, demand is limited causing people to buy only the most basic
amount needed preventing bulk buying. In addition, there will be an increase in
supply of these goods and services in the long run because of suppliers will be
attracted to the new increased price and profitability. Without a price rise
producers will not be motivated to produce more and hence the shortage will
persist. Hence a price rise in such situations ameliorates the situation.
Page 6