B. E.

MECHANICAL ENGINEERING
Choice Based Credit System (CBCS) and
Outcome Based Education (OBE)
SEMESTER - V

MANAGEMENT AND ECONOMICS -18ME51

Module-3

Presented by
Mr.Hemanth kumar C B
Assistant Professor
Department of Mechanical Engineering
BIT, Bengalure-04
 MANAGEMENT AND ECONOMICS -18ME51
SYLLABUS
Module-1 :Management and Planning
Module-2 : Organizing and Staffing
Directing & Controlling
Module-3 : Introduction to Economics
Interest and interest factors
Module-4 : Present, future and annual worth and
rate of returns
Module-5 : Costing and Depreciation
 TEXT BOOKS

1.Principles of Management by Tripathy and Reddy

Tata McGraw Hill , 3rd edition 2006
2. Mechanical estimation and costing, T.R. Banga &
S.C. Sharma, Khanna Publishers ,17th edition 2015
3. Engineering Economy, Riggs J.L. McGraw Hill, 2002
4. Engineering Economy, Thuesen H.G. PHI , 2002

Note: “Interest factor Table” required for Module-3&4

Author: R.Paneerselvam, PHI publication
 REFERENCE BOOKS
1. Management Fundamentals- Concepts, Application, Skill
Development - RobersLusier – Thomson
2. Basics of Engineering Economy, Leland Blank & Anthony
Tarquin, McGraw Hill Publication (India) Private Limited
3. Engineering Economics, R.Paneerselvam, PHI publication
4. Fundamentals of Management: Essential Concepts and
Applications, Pearson Education, Robbins S.P. and Decenzo
David A.
5. Economics: Principles of Economics, N Gregory Mankiw,
Cengage Learning
6. Modern Economic Theory, By Dr. K. K. Dewett & M. H.
Navalur, S. Chand Publications
 MODULE-3
Introduction to Economics
• Engineering and Economics
• Problem solving and Decision Making
• Law of Demand and Supply
• Difference b/w Microeconomics and Macroeconomics
• Equilibrium between demand and supply.
• Elasticity of demand
• Price elasticity
• Income elasticity
• Law of Returns
 MEANING OF ECONOMICS
• The science or principle of production
distribution and consumption of goods
especially with respect to cost.
• Avoidance of Waste
i.e Time, Money, strength, resources etc.

• Economical efficiency= Worth/Cost.

MEANING OF ENGINEERING
• Creativity

• Innovative

• Functionality

• Performance

• Efficiency=output/input.
 MEANING OF ENGINEERING ECONOMICS
• The Mathematical Techniques to compare the
Engineering projects from an economic point of view

• It is the application of economic techniques to the

evaluation of design and engineering alternatives.

• It focuses on economical and financial aspects, which

affects the decision making capacity of the engineer.
 MEANING OF ENGINEERING ECONOMICS

• It involves decision making for engineering system.

.
• It involves the financial and economical evaluation of
Manufacturing projects

• It is the study of Industrial economics and economics

and financial factors which influence the industry.

• The method of evaluating worth of creations by

comparing the alternatives with costs.
 The Role of an Engineer and challenges
with respect to economics
Following are the roles and challenges with respect
to economics
Role of Engineering economist:
1. Accumulate the knowledge of engineering and
economics
2. Select preferred course of action
3. Find the alternative uses of limited resources
4. Focus on depleting resources welds engineering
to economics etc.
 Challenges of an engineering economist

1. Deals with the choice of among alternatives

2. With limited capital available ,how it can be
distributed
3. Would it be preferable to follow safer course
of action or riskier that offers high returns
4. Different cash flow patterns
 IMPORTANCE OF ENGINEERING ECONOMICS
(Engineering and Economics)
• At every level of engineering work in an
organization
• Raw material Evaluation.
• Capital intensive
• Depreciation
• Costing(accounting practices)
• Stock valuation and stock level cntrol
• Taxes levied on companies
• Sensitive analysis-inflation and deflation
Problem solving and Decision making
• The fundamental approach to solve problems
in economics is Scientific methods.
• But Scientific methods use both theoretical
and practical knowledge to solve the problem.
• In other words, it takes both the real world of
facts and figures and the Symbolic world of
theories and hypothesis to solve problem
through an iterative process
Problem solving and Decision making
 The following steps gives a general problem solving
process involving both worlds
1. Problems in Engg. and Managerial economy
originate in the real world of economic
planning, Management and control.
2. The problem is defined and clarified by data
from the real world
3. This information is subjected to analysis
based on scientific principles to formulate a
hypothesis in symbolic terms
 The following steps gives a general problem solving
process involving both worlds

4. By manipulating and experimenting, an

analyst can simulate project reality in
multiple configurations so as to understand all
outcomes. Imagine a CAD software which
can alter product design in many ways.
5. From these activities, usually a prediction(or
a forecast ) emerges. This can be considered a
possible solution to the decision.
6. This prediction is subjected to verification in
the real world for its practical usage. If it
gives desired results, then the problem is
solved.
7. If not, the cycle is repeated with valuable
feedback from previous approach adding to
data.
 Microeconomics and Macroeconomics

• Microeconomics is the study of particular

markets, and segments of the economy. It looks at
issues such as consumer behaviour, individual
labour markets, and the theory of firms.

• Macro economics is the study of the whole

economy. It looks at ‘aggregate’ variables, such as
aggregate demand, national output and inflation.
Microeconomics and Macroeconomics
Micro economics involves
• Supply and demand in individual markets.
• Individual consumer behaviour. e.g. Consumer choice theory
• Individual labour markets – e.g. demand for labour, wage
determination.
• Externalities arising from production and consumption.
e.g. Externalities
Macro economics involves
• Monetary / fiscal policy. e.g. what effect does interest rates have on the
whole economy?
• Reasons for inflation and unemployment.
• Economic growth
• International trade and globalisation
• Reasons for differences in living standards and economic growth
between countries.
• Government borrowing
 Microeconomics
• Deals with an individual firms and the activities
lies within.
• Deals with consuming units or individual
producing units.
• It considers first, the individual firm and then its
surrounding market to determine the resources,
revenues cost, employment and so on.
• Determining the demand of theory and theory of
production.
 Microeconomics

• Price is the main determining factor here.

• Consumer and company equilibrium is

established.

• Example: Small firms and economic units.

 Macroeconomics
• Considers the social and economic conditions
of larger systems and firm.
• Deals with the bigger picture and not just one
single module or unit.
• Businessman has to know the present situation
trends like gross national product, changes in
consumption and investment patterns,etc.
• Determining aggregate demand and supply of
economy.
 Macroeconomics

• Income is the main determining factor here.

• Equilibrium between the income and

employment of the economy is established.

• Example: International organisations need to

understand the cashflow, money exchange
follow macroeconomics principles.
 Law of demand and supply
• An interesting aspect of
the economy is that the
demand and supply of a
product are
interdependent and
they are sensitive with
respect to the price of
that product.
• The interrelationships
between them are
shown in Fig.
 Law of demand and supply
• It is clear that when there is a decrease in the price of a
product, the demand for the product increases and its supply
decreases. Also, the product is more in demand and hence
the demand of the product increases.
• At the same time, lowering of the price of the product
makes the producers restrain from releasing more quantities
of the product in the market.
• Hence, the supply of the product is decreased. The point of
intersection of the supply curve and the demand curve is
known as the equilibrium point. (E)
• At the price corresponding to this point, the quantity of
supply is equal to the quantity of demand. Hence, this point
is called the equilibrium price.
 Law of demand
• It states that “ a rise in price of a commodity or
service is followed by a reduction in demand
and a fall in price is followed by an increase in
demand. If the conditions of demand remains
constant”

• Thus Demand is inversely proportional to the

price .
 Factors influencing Demand
• Income of the consumer
• Price of the product
• Price of the substitute product
• Price of the complementary product
• Change in policy
• Taste and preferences of the consumers
• Existing wealth of the consumer and population of country
• Special influence or climatic and demographic condition
• Expectation regarding future price changes
• Ease of availablity, Ads/publicity etc. given to the product
 Law of supply
• It states that “the supply of a commodity
increases when its price increases and vice-
versa, all other things remaining the same”
• When we observe the supply curve ,it is clear
that as price increases, supply also increases.
Conversely for the same curve, we can
understand that as price falls, the supply also
falls.
• Thus supply is directly proportional to price.
 Factors influencing supply
• Price of the product
• Availabilities and prices of raw materials that go into
production
• Production technology
• Company’s expectation about future prospects for
prices, costs, sales and the state of the economy in
general
• Goals, objectives and policies of the company
• Weather, strikes and other forces which affects
production and distribution
• Number of competitive firms in industry
 Elasticity of demand
• It is the measure of responsiveness of demand to changing
prices
• It is the rate at which the quantity demanded varies with a
change in price.
• Mathematically, it is by
E=% change in demand / % change in price
E= ∆Q/Q / ∆P/P
E=∆Q/∆P x P/Q
Let P=Original price of a product,
Q= Original Demand for the product
∆Q= change in Demand for the product
∆P= change in price of the product
 Conditions:
• When E>1. the demand for the product is said to
be “elastic”. Which means that for a small fall in
price, there is a large increase in demand.
• When E<1. the demand is said to be “inelastic”.
Which means that for any fall in price, there is
only a marginal increase in demand.
• When E=1. the demand has unit elasticity being
neither elastic nor inelastic which means that
demand has grown or fallen proportionate to its
price.
 Problem
• When the price of a pen was priced at Rs.12/-
It sold 220 units, when the company cut the
price of the pen to Rs10/- sales jumped to the
280 units.
1. Determine whether the demand was elastic
or inelastic
2. At what quantity of sales would you say that
the demand was neither elastic or inelastic
 Solution:
Given: P=Rs.12/-, Q=220 units, ∆P=12-10 =2
∆Q=280-220=60 units, E=?
1) E=∆Q/∆P x P/Q=60/2 x 12/220
E=1.636
When E>1,demand is said to be very elastic
2) When E=1,Q=?
E=∆Q/∆P x P/Q
1=60/2 x 12/Q
Q=720/2=360
 Types of Demand Elasticities
• Price elasticity of demand

• Income elasticity of demand

• Cross elasticity of demand

• Promotional elasticity of demand

• Price elasticity of demand
This is a measure of responsiveness of
demand for a product with respect to variation
in its own price
• Income elasticity of demand
This is a measure of responsiveness of
demand for a product with respect to variation
in consumer income
• Cross elasticity of demand
This is a measure of responsiveness of
demand for a product with respect to variation
in the price of another related product
• Promotional elasticity of demand
This is a measure of responsiveness of
demand for a product with respect to variation
in advertisement budget for the product
Law of Returns
 Law of Returns
• Cultivators, Manufacturers, other business,
increases the quantity of various factors of
production used in their business in order to
increase their output.
• The returns due to these additional quantities
of productive resources are always fixed.
• The law of returns relates the behavior of
output as a response to changes in inputs, i.e
the relationship between the various factors of
production with the output quantity
 Law of Variable Returns
a) Law of Increasing returns: Here the total
output may increase more than proportionately
to the input
b) Law of Constant returns: Here the total
output may increase proportionately to the
input.
c) Law of Decreasing returns: Here the total
output may less than proportionately to the
input
• Most of the production systems show normally a
sequence of increasing returns first followed by
constant returns and diminishing returns as shown in
fig. Here I phase of the graph shows increasing
returns, II phase constant returns and third phase
Diminishing returns.
• Example: When a former cultivates fresh farm land,
normally the gets a high yield for his first crop
average yield for his second crop and lower yield for
his third crop.