Economics & Principles of

Management

Unit I
Definition of Economics
Alfred Marshall
enquires
How he gets income
How he spends it
and
Study of wealth and
Study of man


Definition of Economics
Lionel Robbins

Study of
Means resources

And

Study of ends short in supply in relation to
demand
Engineering economy
Engineering economy
concerned
evaluations of
Costs and benefits
leading to
Technical and business
for
Projects and ventures


Techniques of Engineering
Economy
Principle 1 Choice among alternative


Principle 2 Comparison

Principle 3 View

Techniques of Engineering
Economy
Principle 4 Common unit of Measurement
eg Rs


Principle 5 Criterion relates to the long
term financial interests

Techniques of Engineering
Economy
Principle 6 Uncertainty


Principle 7 Compare projected outcomes
with actual results
Application of Engineering
Economy
1) Functional activity


2) Types of Decision
Functional activity

1) Planning
2) Production
3) Material Management
4) Plant Engineering
5) Transport
6) Action management

Types of Decision

1) Capital budget

2) Make or buy decisions

3) Replacement

4) Project Evaluation
Basic economic concepts
1) Utility
2) Goods
3) Wealth
4) Classification of wealth
5) Services
6) Income


Utility

Usefulness

Goods

1) Free goods
Air, sunshine, seawater
2) Economic goods
a) Consumables
Milk,LPG
b) Capital
Machines
3) Public goods
Roads,bridges,hospitals ,schools

Wealth

Characteristics

Scarcity

Transportability

Utility

Classification of wealth
1) Personal / Individual wealth

2) Collective owned wealth
Municipal, Governments , coal mines,
Laboures, Public building

3) National wealth
Services

Services
Lawyer, Doctor
Characteristics of wants
Unlimited
Each being satisfied
Recurrent
Necessaries
Comforts
luxuries


Income

Remuneration


Personal services


ownership
DEMAND
Desire to buy

Willingness to pay

Ability to pay

Effective Demand = willingness to buy + ability to pay
Law of Demand
Higher the price Lower the demand
Lower the price Higher the demand
If remaining constant

income
consumers taste
consumers preference
substitutes price
advertising expenditure
Other things
Law of Demand
Commodity price increase Quantity
demanded decrease

Commodity price decrease Quantity
demanded increase
Q = f ( P )
Quantity
Price
Characteristics of Law of Demand
1) Inverse relationship Price & Quantity
demanded opposite


2a) Price an independent variable
2b) Demand a dependent variable
Exceptions of Law of Demand
1) Conspicuous consumption of goods


2) Speculative Market


3) Giffen effect
Conspicuous consumption of
goods
Price increases demand increases


Price decreases demand decreases

Demand pearl

Speculative Market

Increase in price of shares



Price falls wait
Giffen effect

Increase on price of potatoes reduce the



consumption of meat
Types of Demands
1) Individual Demand & Market Demand

2) Autonomous Demand & Derived Demand

3) Demand for Durable & Perishable Goods

4) Industry Demand & Company Demand

5) Total Market & Market Segment
Individual Demand & Market
Demand

Price of the
product Rs
Demand
A
Demand
B
Demand
C
TOTAL
12 5 6 7 18
10 6 7 8 21
8 7 8 9 24
Individual
demand
Total demand
Autonomous Demand & Derived
Demand

Autonomous Demand
Does not depend on demand on the product
eg sugar , milk
Derived Demand
Arises because of the other commodity
eg cotton, bricks, cement, petrol, battery
Complementary commodities
Power regulator for refrigerator, TV set
Demand for Durable & Perishable
Goods

Demand for Durable Goods demand
changes over a
long period
1) Consumer durable
Clothes, shoes, furniture, TV, scooters

2) Producer durable
Like fixed assets building, plant, machinery,
office furniture
Demand for Durable & Perishable
Goods

Perishable Goods demand depends on
current prices
1)Consumer goods
All food items, drinks, soaps, fruits

2)Producer goods
Raw materials, fuel, power, packing items

Industry Demand & Company
Demand

Company Demand
1) Maruti
2) Hidustan Motors
3) Standard Motors
4) Hyundai
5) BMW
6) Premier Automobiles
Industry Demand Total of the all automobile
industries
Total Market & Market Segment

Market segments
Geographical area
Distribution channels
Customer sizes
Domestic
Foreign
Total market sum of all the market segments
Demand Determinants or Factors
of Demand
1) Price of the product &its demands
2) Price of the substitutes & complementary goods
3) Consumers Income
4) Consumers Tastes & Preferences
5) Number of Consumers & their Distribution
6) Amount spent on Advertisement
7) Consumers expectations
8) Demonstration effect
9) Consumer Credit facility
10) Population of the country

Price of the product &its demands

1) Law of Demand
2) Demand Schedule



3) Demand curve Draw curve for the above
data
Price (Rs) Quantity demanded (units)
100 20,000
40 40,000
10 65,000
Price of the substitutes &
complementary goods

Substitutes
Tea and coffee

Complementary goods
Petrol car & scotter
Butter &jam bread

Consumers Income

By demand analysis
1)Essential consumer goods
Feed grains, salt, cooking fuel, housing
2)Inferior goods
Bajra ( wheat & rice )
Kerosene stove ( gas stove )
3)Ordinary normal goods
Cloth
4)Luxury goods
Precious materials , TV sets


Consumers Tastes & Preferences

1)Consumers Tastes
Depends on social customs, habits, life style ,
age ,sex

2)Consumers Preferences
producers advertisement to change
preferences


Number of Consumers & their
Distribution

The larger

the number of customers ,

the greater

the demand & vice versa
Amount spent on Advertisement

Incurred

in addition to

manufacturing cost

for promoting sales
Consumers expectations
On account of
1) Increase in
DA
Bonus
Pay scales
2) Fall in
Production
stock
Demand
Demonstration effect
When new models appear in the market ,


rich people buy first


color TV
Consumer Credit facility

1) Bank loans


2) Credit cards


3) Availability of credit from the sellers

Population of the country

The larger

the population,

the larger

the demand

Demand function

Linear demand function


Non linear demand function
Linear demand function

Price Vs Quantity demanded

When the slope of the demand curve remains


constant throughout its length.
Non linear demand function

Price Vs Quantity demanded

Slope of the demand curve changes all along
the demand curve

demand function yields a demand curve instead
of a demand line
Demand forecasting
For arranging

1) Raw materials
2) Equipments
3) Machine accessories
4) Labour
5) Buildings

Types of Demand Forecasting
1) Short term forecasting purpose < an year



2) Long term forecasting purpose
Short term forecasting purpose <
an year


To avoid over production & under production

Reducing purchase of raw materials & inventory

To determine pricing policy

Setting sales targets
Long term forecasting purpose


Planning a new unit or expansion of existing unit

Long term financial requirements

Planning manpower
Methods of Demand or Sale
Forecasting
1) Survey of buyers intentions
2) Collective opinion
3) Trend projections
4) Economic Indicators
5) Historic Estimate
6) Market survey or Market Research Techniques
7) Delphi method
8) Judgmental Techniques
9) Prior knowledge
10) Forecasting by past average


Survey of buyers intentions

Ask customers

called

opinion surveys
Collective opinion

Sales man expected sales

Revised estimates by

Production manager
Sales manager &
Top executives


Trend projections

1) Data arranged chronologically


2) Apply statistical techniques like method of
least squares

3) Extrapolation


Economic Indicators

1) Agricultural income

2) Personal income

3) Construction contracts sanctioned

4) Automobile registration
Historic Estimate

What had happened in the past


will happen


in the future
Market survey or Market Research
Techniques
When a company


introduces


a new product
Delphi method

A panel of experts

interrogated by
sequence of questionnaires

response produces next questionnaire

Judgmental Techniques

Opinion of

1) Customers

2) Retailers & wholesalers

3) Area sales manager

Prior knowledge

Larger organization

Ancillary units
Forecasting by past average


Average sales

of


the previous years
Correlation Analysis
Relationship between
1) sales and


2) economic and non economic phenomena like
a) national income b) defense expenditure c)
population growth
Elasticity's of Demand
Kinds of Demand Elasticity's

1)Price elasticity of Demand
2)Income Elasticity
3)Cross Elasticity
4)Advertising elasticity

Definition Price Elasticity of
Demand
Price Elasticity of Demand defined as degree

of responsiveness to a change in price of

quantity demanded
Definition Price Elasticity of
Demand - ep



proportionate change in quantity demanded
ep =
proportionate change in price
Perfectly inelastic demand





Perfectly elastic demand

Point elasticities of demand

Types of Price Elasticity
Type Numerical
expression
Description Shape of the curve
Perfectly elastic
demand
e = infinite horizontal
Perfectly inelastic
demand

e = 0 zero vertical
Unit elasticity e = 1 one Rectangular
hyperbola
Relatively elastic
demand

e = > 1 Greater than one Flat
Relatively inelastic
demand

e = < 1 Less than one steep
Factors determining price elasticity
Nature of the product
Extent use or multiple users
Range of substitutes
Income level
Proportion of income spend on the
commodity
Durability of the demand
Purchase frequency of a product
Change in demand & Elasticity of demand
Nature of the product

Demand of the basic needs inelastic
eg wheat , matchbox


Demand for luxuries elastic
eg TV , refrigerator, washing machine

Extent use or multiple users

Variety of uses elastic demand
eg electricity lighting, cooking, washing etc


Limited use inelastic demand
Range of substitutes




Elastic demand tea for coffee



Income level

For rich inelastic



For poor elastic

Proportion of income spend on the
commodity


Only a small portion of income spent on

matchbox, salt demand inelastic

Durability of the demand



Commodity durable or repairable eg shoe

demand elastic
Purchase frequency of a product



High frequency purchase of a product

demand elastic
Change in demand & Elasticity of
demand


Demand changes due to other factors ie
income etc


Demand changes due to price only
Income Elasticity of Demand



Quantity demanded
ep =
proportionate change in income

Types of income elasticity
1) Zero income elasticity

2) Negative income elasticity

3) Positive income elasticity
Zero income elasticity

Income has no effect

Eg ink, salt etc
Negative income elasticity

Increase income reduction in quantities
demanded inferior goods

Bidies to cigareetes
Positive income elasticity




Income rises demand rises for smaller goods
Positive income elasticity
1) Unit elasticity


2) Less than unit elasticity


3) More than unit elasticity


Unit elasticity




Increase in income leads to proportionate

change in the quantities demanded
Less than unit elasticity



Increase in income leads to a less than

proportionate change in the quantities

demanded eg wheat ,rice

More than unit elasticity



Increase in income leads to more than

proportionate change in the quantities

demanded eg luxury items

Economics & Principles of
Management

Production
Analysis
Production Function
Land
Labor
Capital
Raw materials
Time
space


Production Function
For Coal Mining firm

Q = f ( K , L )
Q quantity of coal produced per unit time
K Capital
L Labor
Laws of Production
1 ) The Laws of Variable Proportions



2) Laws of Returns to Scale
Production Analysis Short Run
Laws of Diminishing Returns


Laws of Diminishing Returns

If more and more units of a variable

applied to a fixed input, the output may

initially increase , but beyond a certain

output , the rate of increase in output

diminishes
Laws of Diminishing Returns
Fixed factor capital


Variable factor labor
Laws of Diminishing Returns
Assumptions
1) technology remains unchanged

2) input prices remain unchanged

3) variable factors - homogenous
Production Analysis : Long -Run
Both the inputs capital and labor


variable factors


Isoquant Curves

I = 150
I = 100
LABOR
C
A
P
I
T
A
L
Isoquant Curves - properties
1) negative slope

2) convex to origin

3) can not intersect
Laws of Returns to Scale
How a simultaneous and proportionate

increase in all the inputs affects the total

output at its various levels
Laws of Returns to Scale
1) Increasing Returns to Scale

2) Constant Returns to Scale

3) Decreasing Returns to Scale

Increasing Returns to Scale

Labor
C
a
p
i
t
a
l
Q= 10
Q= 25
Increasing Returns to Scale
A proportionate change in both the
inputs K & L lead to more than
proportionate change in output

When the input doubled , the output
Increases from 10 t0 25 instead of 20



Causes Increasing Returns to Scale
1) technological & managerial indivisibilities

2) higher degree of specialization

3) dimensional relation
Constant Returns to Scale

Labor
C
a
p
I
T
A
l
Q= 10
Q= 20
Constant Returns to Scale

If quantities of both the inputs K & L

doubled & returns also doubled called

constant returns to scale

Decreasing Returns to Scale

Labor
C
a
P
I
T
A
l
Q= 10
Q= 18
Decreasing Returns to Scale

A proportionate change in both the
inputs K & L lead to less than
proportionate change in the output


When the input doubled , the output
Increases from 10 t0 18 instead of 20




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