Engineering Economics

Nature and significance:

Economics is defined as the social science that deals with the production, distribution, and
consumption of goods and services
The nature and scope of economics depend upon the interaction of economic agents and
how economies work

Anything, commodity or service, which gives satisfaction to human beings on consumption is called
good

All the goods, which have exchange value, are called economic goods

VARIOUS CONCEPTS USED IN ECONOMIC ANALYSIS

(i) Assumption

Economic analysis explains economic behaviour of a human being, which depends on several factors.
These factors are highly unpredictable and uncertain. Thus, each individual behaves and responds
differently under particular circumstances

For example, if income of the household increases, demand for a particular product increases even if
its price also increases. Similarly, during winter season, demand for woollen clothes increases even if
its price also increases

(ii) Stock Dimension and Flow Dimension of an Economic Variable

In case of stock dimension, value of a variable has no time dimension. Physical quantities, which
exist at any point of time, are measured through stock dimension. Some of the examples of stock
dimensions are stock of finished product of a firm, and stock of raw material with a firm. On the
contrary, value of variable, which has time dimension, is considered under flow dimension. It is
discussed in reference of time, generally a year. Requirement of raw material per year by a firm or
national income of a country during a year are some of the examples.

(iii) Equilibrium: Statics and Dynamics

Equilibrium refers to a market condition where demand of and supply for the product are same.
Once the equilibrium is achieved by a firm or an industry, it tends to persist. On the other hand,
dynamics deal with the time path and the process of adjustment in course of achieving equilibrium.

(iv) Model

Model in economics may be a representation of a theory or a part of a theory with the application of
statistical and mathematical techniques. It is used to gain an understanding in cause and effect
relationship between variables and to measure the phenomena more accurately
ROLE OF SCIENCE, ENGINEERING AND TECHNOLOGY IN ECONOMIC
DEVELOPMENT

MANAGERIAL ECONOMICS: NATURE, DEFINITION AND ITS SCOPE

Managerial Economics is a branch of Economics, which uses tools of Economics to organize and
evaluate various alternative courses of action available. It is the science to manage scarce resources
cost-effectively

Generally, the following aspects are discussed in Managerial Economics:

(i) Demand Analysis and Forecasting

(ii) Decision Theory under Conditions of Risk and Uncertainty
(iii) Capital Budgeting and Investment Decision
(iv) Cost Analysis
(v) Pricing Policies and Practices
(vi) Production Management
(vii) Profit Management

END

GOODS:
Anything, commodity or service, which gives satisfaction to human beings on consumption is called
good

1) Free Goods and Economic Goods

Free goods do not bear a price because their supply is more than the demand
Sand is a free good near river beach but becomes an economic good near construction site

2) Capital Goods and Consumer Goods

Those goods, which help in the production of other goods, are termed capital goods. For
example, machine and raw materials

Consumer goods are directly consumed by human beings. For example, bread and milk
Consumer goods can be further divided as perishable goods and non-perishable goods
3) Transferable Goods and Non-transferable Goods
Land or building of an individual, which can be transferred to another person, are
transferable goods and a person's qualities such as beauty of a model, knowledge of a
teacher and technical skills of an engineer are non-transferable goods.

4) Complimentary Goods and Substitute Goods

When two or more goods are required together to satisfy a single want, they are known as
complementary goods. For example, ink and ink pen.

However, when two or more goods satisfy similar wants and they can be used in each
other’s place, they are known as substitute goods. For example, tea and coffee or wheat and
rice
5) Material Goods and Non-material Goods
All those goods like land, water, agricultural products, mining and fishing or goods like
building, machinery and implements which are tangible and has physical existence are called
material goods

On the other hand, goods which are intangible as one?s own qualities and abilities; are
called non-material goods. Non-material goods may be internal such as muscular strength,
business ability

6) Normal Goods, Inferior Goods and Giffen Goods

Demand for normal goods increases with the increase in income. For example, clothes, pens
and pencils.
However, demand for inferior goods decreases with increase in income. For example,
commodities used by poor households.
One of the examples is millet, which is an inferior type of cereal which is consumed by poor
households.

A Giffen good is one which people paradoxically consume more as the price rises, violating
the law of demand.
In case of normal good, price elasticity of demand is negative but in case of both inferior
goods and Giffen goods, it is positive
However, in case of inferior goods, substitution effect is more prominent while in case of
Giffen goods, income effect is more prominent.

7) Public Goods and Private Goods

Examples of public goods include air, road, river, etc.
Examples of private goods Food, house, property
UTILITY:
may be defined as the power of a commodity or a service to satisfy human need.

Utility may be enhanced by changing form of the product

For example, students can sit on wooden log in the classroom but it would be more comfortable and
convenient, if wooden bench and desk are made out of wooden log.

1) Place Utility
Utility of a good can be enhanced by transporting it from a place where it is in surplus to a
place where is in short supply. For example, bringing agricultural crops fromrural areas to
the urban areas.

2) Time Utility
Utility of a good may be enhanced by storing a product when it is surplus for the time it will
be needed and valued more. For example, vegetables and fruits are stored in cold storage
when they are in surplus and are sold when they are in demand during the lean season.

3) Possession Utility
Utility can also be enhanced by transferring or changing ownership of a good from a person
who has little use for it to a person who has more use for the same. For example, selling a
table by a carpenter to a person working in an office. Carpenter has little use for the table.
But when it is transferred to a person working in an office, its utility increases.

4) Service Utility
Abilities of doctors and teachers is more for patients and students respectively than any
body else. They provide services to their respective clients.

5) Marginal Utility
Marginal utility is the utility derived from the last unit consumed. Mathematically:

MU= d(TU)/dx

(Differentiation of total utility with respect to number of units consumed)

where TU = total utility
x= number of units consumed

A person likes to consume all those goods which yield him utility. However, intensity of
utility of a good decrease as he consumes successive units of the product

LAW OF DIMINISHING MARGINAL UTILITY:

LAW OF EQUI-MARGINAL UTILITY (CONSUMER'S EQUILIBRIUM)

LAW OF DEMAND:
When price of a product increases demand for that product decreases and vice versa. But if price of
a product as well as income of the household also increases, the household may or may not demand
more or less of the good

In normal circumstances, when price of a good increases, demand for the product decreases and
vice versa when other things remain the same.

// from pg.50

Microeconomics
Microeconomics examines individual economic activity, industries, and
their interaction

It has the following characteristics:

 Elasticity: It determines the ratio of change in the proportion of one

variable to another variable. For example- the income elasticity of
demand, the price elasticity of demand, the price elasticity of supply,
etc.
 Theory of Production: It involves an efficient conversion of input into
output. For example- packaging, shipping, storing, and manufacturing.
 Cost of Production: With the help of this theory, the object price is
evaluated by the price of resources.
 Monopoly: Under this theory, the dominance of a single entity is
studied in a particular field.
 Oligopoly: It corresponds to the dominance of small entities in a
market.
Macroeconomics
It is the study of an economy as a whole. It explains broad aggregates and
their interactions “top down.”

Macroeconomics has the following characteristics:

 Growth: It studies the factors which explain economic growth such

as the increase in output per capita of a country over a long period of
time.
 Business Cycle: This theory emerged after the Great Depression of the
1930s. It advocates the involvement of the central bank and the
government to formulate monetary and fiscal policies to monitor the
output over the business cycle.
 Unemployment: It is measured by the unemployment rate. It is
caused by various factors like rising in wages, a shortfall in vacancies,
and more.
 Inflation and Deflation: Inflation corresponds to an increase in the
price of a commodity, while deflation corresponds to a decrease in the
price of a commodity. These indicators are valuable to evaluate the
status of the economy of a country