ENGINEERING & MANAGERIAL ECONOMICS UNIT-I

Definition Wealth Definition-Prof.Adam Smith “Economics is a science that inquiry into the nature and causes of wealth of a nations”. Welfare Definition-Prof. Marshall “Economics is a study of man’s actions in the ordinary business of life. It enquires how man gets his income and how he spends it.”

Definition Scarcity Definition-Prof.Robbins “Economics is the science which studies the human behavior as a relationship between ends and scarce means which have alternative uses.” Growth Definition-Prof.Samuelson “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce commodities over time, and distribute them for consumption now and in future among various people and groups of society.”

4 of 33 Why Study Managerial Economics? An important reason for studying economics is to learn a way of thinking. Three fundamental concepts: – Opportunity cost – Marginalism, and – Efficient markets

5 of 33 Opportunity Cost Opportunity cost is the best alternative that we forgo, or give up, when we make a choice or a decision. Nearly all decisions involve trade-offs.

6 of 33 Marginalism In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision. For example, when a firm decides whether to produce additional output, it considers only the additional (or marginal cost), not the sunk cost. – Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

7 of 33 Efficient Markets An efficient market is one in which profit opportunities are eliminated almost instantaneously. There is no free lunch! Profit opportunities are rare because, at any one time, there are many people searching for them.

8 of 33 More Reasons to Study M.E. The study of economics is an essential part of the study of society. Economic decisions often have enormous consequences. – During the Industrial Revolution, new manufacturing technologies and improved transportation gave rise to the modern factory system.

9 of 33 More Reasons to Study M.E. An understanding of economics is essential to an understanding of global affairs. Voting decisions also require a basic understanding of economics.

Nature of Economics Science is a systematic body of knowledge based on facts, having cause and effect relationship, can be experimented to produce generalized true principles. Economics is Science: In economics there is a systematized collection, classification and analysis of economic facts. In the case of economic experiment, there is no need of laboratory and we treat the whole social and national system as laboratory. The laws of economics have the universal validity like the laws of science. Like science, economics is self corrective in nature.

Nature…………………. Art is a body of knowledge towards the pre defined goal applying different sciences simultaneously Economics is Art: Economics solves the fundamental problems of an economy like allocation of scarce resources in satisfying the different wants. All the economic policies either to explore or to resolve the economic problem All the policies supported by different principles of different sciences. Economics is theorytically a science while practically an art.

12 of 33 The Scope of Economics Microeconomics is the branch of economics that examines the behavior of individual decision-making units—that is, business firms and households. MICRO ECONOMICS PRODUCTION FUNCTION THEORY OF DEMAND THEORY OF SUPPLY THEORY OF PRICING DETERMINATION OPTIMUM ALLOCATION OF RESOURCES FACTOR PRICING WAGES RENT INTERESTPROFIT WELFARE ECONOMICS

13 of 33 The Scope of Economics Macroeconomics is the branch of economics that examines the behavior of economic aggregates— income, output, employment, and so on—on a national scale. MACROECONOMICS Theory of national income Theory of employment Theory of general price level & inflation Theory of economic growth Theory of International trade Macro theory of distribution

14 of 33 The Scope of Economics Examples of microeconomic and macroeconomic concerns ProductionPricesIncomeEmployment MicroeconomicsProduction/Output in Individual Industries and Businesses How much steel How many offices How many cars Price of Individual Goods and Services Price of medical care Price of gasoline Food prices Apartment rents Distribution of Income and Wealth Wages in the auto industry Minimum wages Executive salaries Poverty Employment by Individual Businesses & Industries Jobs in the steel industry Number of employees in a firm MacroeconomicsNational Production/Output Total Industrial Output Gross Domestic Product Growth of Output Aggregate Price Level Consumer prices Producer Prices Rate of Inflation National Income Total wages and salaries Total corporate profits Employment and Unemployment in the Economy Total number of jobs Unemployment rate

15 of 33 The Method of Economics Positive economics studies economic behavior without making judgments. It describes what exists and how it works. Normative economics, also called policy economics, analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action.

16 of 33 The Method of Economics managerial economics is a science which is concerned with those aspects of economic theory and its applications that are directly relevant to the managerial practice in the decision- making process of a business firm. According to Milton H. Spencer and Louis Siegelman, “Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision- making and forward planning by management.”

Nature of Managerial Economics Pragmatic in nature Micro –economic in nature Normative in nature Goal-oriented Tool in the different fields Macro-economic in nature

Scope of Managerial Economics Scope of Mnagerial Econmics Internal or Operational Issues Demand /SupplyProduction/CostProfit/Investment External or Environment Issues Economy/Business Cycle /Trends & Policies

Internal or Operational Issues – Demand analysis and forecasting – Production analysis – Pricing and cost analysis – Profit and investment analysis – Strategic or long term planning

External or Environmental Issues – Nature of the economic system existing in the country. – Business cycle phases through which each firm has to undergo. – Working pattern of the financial institutions like banks, insurance companies, share market etc in the country. – Trends in the foreign trade. – Trends in the labour and capital markets in the country. – Policies of the government related to industries, monetary policy, fiscal policy and pricing policy, etc.

Science, Engineering and Technology & Managerial Economics Science is a systematic body of knowledge based on facts, having cause and effect relationship, can be experimented to produce generalized true principles. Engineering can be defined as the application of scientific and mathematical principles used for practical purpose like design, manufacture, and operation of efficient and economical structures, machines, processes, and systems. Technology can be broadly defined as the entities, both material and immaterial, created by the application of mental and physical effort in order to achieve some value.

Role of M.E. to……Technology It has wide scope in manufacturing, construction, mining and other engineering industries. Examples of economic application are as follows: – Selection of location and site for a new plant. – Production planning and control. – Selection of equipment and their replacement analysis. – Selection of a material handling system. Better decision making on the part of engineers. Efficient use of resources results in better output and economic development. Cost of production can be reduced. Alternative courses of action using economic principles may result in reduction of prices of goods and services. Elimination of waste can result in application of engineering economics. More capital will be made available for investment and growth. Improves the standard of living with the result of better products, more wages, and salaries, more output etc. from the firm applying engineering economics.

Role of Science, Technology…….to M.E. Economic Growth Increase in Efficiency Increase in Production Better Standard of living Faster Means of Communication Global Competitiveness