Engineering Economics and Management Ch- 1 Introduction to economics Krishna Doctor

Meaning Economics is a study of the economic activities of men. Economic activities are those activities which are undertaken with the expectation of some money return, reward or gain. All activities of an individual aimed at income earning and income spending are known as economic activities. Krishna Doctor

Why economic activity arise? Wants, efforts and satisfaction are at the core of all human activities. Efforts satisfaction wants Krishna Doctor

Definition According to Adim Smith, economics is a study of factors which determine the wealth of a country and its growth. As he put it, the great object of political economy of every country is to increase the riches and power of the country. Krishna Doctor

Nature of economics Economics as Science:- A science is a systematic body of knowledge discover by observation and experience. It is a body of principles theories and laws which find the relationship between cause and effects. Economics also forecast future market condition with the help of various statistical tools. Economics deals with human behaviour which is highly unpredictable. Krishna Doctor

Contd. Economics as an art: Art means practical application of knowledge. A science teaches us to know while an art teaches us to do. Science may study the cause and effect of a variable or an art shows solution to the various problem. Economic have every reason to claim itself as an art. There are many branches of economy that give practical solution to economy. Krishna Doctor

Scope of economics Micro economics: it deals with the small part of the economy. Micro economics study the economic behaviour of individual unit, may be a person, a particular house hold, firm or a industry. Macro economics: it is concerned with the analysis of entire economic system. It defined as that branch of economics which studies the behaviour not of one particular economic unit but of all the units taken study together. It’s the study of overall conditions of an economy like total consumption, total production, aggregate savings, total investment, total employment, etc. so, in macro economic we analyse the behaviour of economic aggregates like national income, level of employment, general price level. Krishna Doctor

Theory of Demand Meaning: in ordinary usage, the term demand means desire for a thing, but in economics, demand for the product implies following: Desire of the consumer to buy the product. Adequate purchasing power to buy the product, that is, the capacity to buy. Willingness to buy the product. Besides the term demand for the product has always a reference to its quantity, price, period of time and place. Krishna Doctor

Contd. Individual demand: Market demand: priceQty. demanded by an individual 105 units 87 units 710 units 515 units 218 units Krishna Doctor

Law of demand The law of demand states functional relationship between the price of the product and its demand, and this relationship is inverse in nature. The law states that, “other things being equal, at any given time, the amount demanded increases with a fall in price and diminishes with a rise in price”. In simple term, a rise in the price of a product leads to a fall in its demand and a fall in price leads to rise in its demand. Krishna Doctor

Contd. Demand schedule: Demand curve: Price of product XDemand of product X Krishna Doctor

Exceptions to law of demand Expectations regarding price variations: Articles of prestige value: goods are purchased mainly for their snob appeal or because they have a status symbol The Giffen goods: Illusion: high price having a better quaality When the commodity goes out of fashion: Krishna Doctor

Determinants of demand Price of the product: Income of the consumer: it is basic determinants of the demand for the product since it indicates purchasing power of the consumer. As income increases, other things remaining constant, demand also increases and vice-versa. Essential consumer goods: these goods are generally consumed by all sections of the society and include such items as food grains, clothing, cooking oil, housing. The qty demand of such goods increases with an increase in the income of consumers, but up to a certain point. Krishna Doctor

Contd. Inferior goods: a commodity is said to be inferior if its demand falls with a rise in income of the consumer. Normal goods: these are goods whose demand increases with increase in consumer’s income and decrease with fall in income. E.g. better clothing, furniture, etc fall under this category. Krishna Doctor

Contd. Luxury goods: these goods are consumed by the richer section of the society and includes items like precious ornaments, jewellery, diamonds, costly furnishing, electrical gadgets, etc. demand for such goods arises only after a certain level of consumers’ income. Prices of substitutes and complementary goods: demand for a product also affected by changes in the prices of its substitutes or complementary goods. Krishna Doctor

Contd. E.g. tea and coffee are substitutes for each other. A rise in the price of tea will lead to fall in its demand and a rise in the demand for coffee. The relationship between the demand for a product and the price of its substitute is positive in nature. Likewise, two products are said to be complementary to each other, if a change in the price of one affects the demand for other in different direction, that is an increase in the price of one causes a decrease in the demand for the others. This effect is negative in nature. Krishna Doctor

Contd. Consumer’s taste and preference: Consumer’s expectation: Availability of consumer credit facility: Krishna Doctor

Theory of supply Meaning: in ordinary sense, the term supply is taken to mean as the total output of a commodity available with a producer or seller. But in economics, the term supply means the quantity of product which a producer or a seller is able and willing to offer for sale in the market at a given price and during a given period of time. Krishna Doctor

Contd. Supply of a commodity connotes both the ability to sell on the part of producer or seller which, however depends on the stock of the commodity and his willingness to sell which depends on the market price. Krishna Doctor

Law of supply The law states that other things being equal, the amount of a commodity supplied increases with the every increase in its price and decrease with every fall in its price. More quantity of a commodity supplied at a higher price and less quantity at a lower price. price of product Xqty of the supply Krishna Doctor

Elasticity of demand Meaning: PRICE ELASTICITY OF DEMAND: The change in quantity demanded of a product due to change in its price is also known as price elasticity of demand. Thus, the sensitiveness of a demand due to change in price is called as an elasticity of demand. In short, price elasticity of demand is a device to measure the rate of change in the quantity of a product demanded in response to change in its price. Krishna Doctor

KINDS OF PRICE ELASTICTY OF DEMAND Broadly speaking, there are 5 types of price elasticity of demand: 1.Perfectly elastic demand: When the demand for a product changes- increases or decreases even when there is no change in price, it is known as perfectly elastic demand. The demand curve here is a straight line parallel to x-axis, which indicates that demand changes even through the price remain unchanged. Krishna Doctor

Contd. Krishna Doctor

(2) Relatively elastic demand Krishna Doctor

3) Elasticity of demand equal to unity Krishna Doctor

4) Relatively inelastic demand Krishna Doctor

5) Perfectly inelastic demand Krishna Doctor

Income elasticity of demand Income elasticity of demand means the degree or changes in quantity of a product demanded as a result of a change in consumer’s income. It expresses a ratio between the income of the consumer and his demand. The rate at which demand changes consumer’s income changes is known that income elasticity of demand. Types of income elasticity of demand: Income elasticity of demand is mainly of three types: Krishna Doctor

1.Positive income elasticity of demand when an increases in income leads to an increase in the quantity demanded, it is known as positive income elasticity of demand. For most goods, the income elasticity of demand is positive, that is, when income rises, demand also rises. Such good are usually normal good and superior good. (a). Income elasticity greater than unity or one: when the proportionate change in the quantity demanded is greater than the proportionate changes in income, we say that income elasticity of demand is greater than unity. Thus, a 10% changes in incomne if it lead to 15 % changes in demand, income elasticity of demandes will be said to be greater than unity. Krishna Doctor

Contd. (b). Income elascticity equal to unity or one: when the proportionate change in the quantity demanded is more than the proportionate change in income, we say that income elasticity of demand is grater than unity. Thus a 10 % percent in income if it laeds to 10% changes in income if it leads to 15 percentage change in demanded, income elasticity of demand will be said to be great than unity (c). Income elasticity less than unity or one: when the proportionate change in the quantity demanded is less than the proportionate changes in income, we say that income elasticity of demand is less than unity. Thus, a 10% changes in incomne if it lead to 7 % changes in demand, income elasticity of demandes will be said to be less than unity Krishna Doctor

2. Negative income elasticity of demand When an increase in income leads to a fall in the quantity demanded of a project, it is known as negative income elasticity of demand. In this case of giffen goods or inferior goods, income elasticity is negative, indicating that as income increase demand for such goods fails. Krishna Doctor

3. Zero income elasticity of demand When there is no changes in demand inspite of rise or fall in the income of the consumer, its is known as zero income elasticity of demand The shape of such a demand curve is a straight lines parallel to vertical y-axis indicating that inspite of a change in income, the demand remains stable. Eg. Matchbox, needle. Krishna Doctor

Cross Elasticity of Demand The concept of elasticity of demand can be applied in a situation where two product are related to each other. These two products may be substitutes or complementary to each other. Thus, for example, tea and coffee or popcorn and cinema ticket are substitutes of each other, while fountain pen and ink or transistor and battery cells are complementary products of each other. Now, a change in the price of any one these products brings about a change not only in its own demand but also in the demand for its substitutes or complementary products, For instance, a rise in the price of tea will lead to a fall in its demand, but it will also lead to a rise in the demand for coffee. Krishna Doctor

ADVERTISING ELASTICITY OF DEMAND We know that in modern times advertisements plays an important part in increasing the sales of a firm. In fact advertising outlay is an important factor which affects the demand for a product. The expansion of demand by means of advertisement and other promotional efforts is measured by advertising elasticity of demand which is also known as promotional elasticity of demand, Advertising elasticity of demand is the measure of the rate of change in demand due to change in advertising expenditure. Krishna Doctor