eefa unit -1 revised
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Engg EconomicsTRANSCRIPT
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ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING
UNIT -1
INTRODUCTION TO ECONOMICS AND
MANAGERIAL ECONOMICS
IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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DEFINITION OF ECONOMICSIt is the study of how societies use scarce
resources to produce valuable commodities and distribute them among different people.
ECONOMICS
MACRO ECONOMICS
MICRO ECONOMICS
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MACRO ECONOMICS
• Macro economics: It studies the functioning of economy as a whole.
• It examines how the level and growth of output are determined ,analyzes inflation & unemployment asks about the total money supply and investigates why some nations thrive while others stagnate.
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MICRO ECONOMICS
• Micro economics: It analyzes the behaviour of individual components like industries ,firms and households
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THEMES OF ECONOMICS
• The TWIN THEMES of economics. SCARCITY EFFICIENCY
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scarcity• Goods available in quantities that are too
small to meet the demand for it
LAW OF SCARCITY:It states that goods are scarce because there
are not enough resources to produce all the goods that people want to consume.
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EFFICIENCY
• Efficiency means absence of waste,or using the economy’s resources as effectively as possible to satisfy people needs and desires.
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THREE FUNDAMENTAL ECONOMIC PROBLEMS
• Every society must solve three fundamental problems.
What How For Whom
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3 fundamental problems• what commodities are to be produced and in
what quantities.
• How shall goods be produced and by whom.
• For whom shall goods be produced.
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WAYS TO MEET THIS PROBLEMS• MARKET• COMMAND• FOR WHOMMARKET: Individual and private firms make
the major decisions.COMMAND: Government makes all the
decisions.MIXED ECONOMICS:Decisions are taken by
individuals and firms but the government sets rules that regulate economic life.
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PRODUCTIVE EFFICIENCY
• Productive efficiency occurs when society cannot increase the output of one good without cutting back on another good. An efficient economy is on its production possibility frontier.
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ECONOMIC EFFICIENCY
• There are several meanings of the term - but they generally relate to how well an economy allocates scarce resources to meets the needs and wants of consumers
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• Economic efficiency is further described under the following two categories
• Static Efficiency
• Allocative Efficiency
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ROLE OF MARKETS AND GOVERNMENT
MARKET: Market is a place where goods are bought and
sold.
MARTKET MECHANISM:It’s a mechanism by which buyer’s and seller’s of a commodity interact to determine it’s price and quantity.
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What does price do in market mechanism
Prices co ordinate the decisions of producers & consumers in a market.
Higher prices tends to reduce consumer purchases and encourage production
Lower prices encourage consumption and discourage production.
Prices are balance wheel in the market mechanism.
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MARKET EQUILIBRIUM
• It represents a balance among all the different buyers and sellers.
• How a market solves the three economic problems.
WHAT HOW FOR WHOM
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WHO GOVERNS THE MARKET
• Who is incharge of a market economy? Do monopolistic firms are responsible or consumers.
The answer is ,we see a dual monarchy shared by consumers and technology.
Business cost and supply decisions,along with consumer and demand ,help to determine what is produced .
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THREE FUNCTIONS OF A GOVERNMENT
• As a general govt sets the rules of the road,writing laws and enforcing contracts and property rights.
What are govt economy functions? They are to promote efficiency,to promote
equity and to foster macroeconomic growth and stability.
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ACTIONS TAKEN BY GOVT• Govt attempts to correct market failures like monopoly and
pollution to encourage efficiency.
• Govt programs to promote equity use taxes and spending to redistribute income towards particular group.
• Govt rely upon taxes,expenditures and monetary regulation to foster macroeconomic growth and stability to reduc e unemployment and inflation while encouraging economic growth.
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EXTERNALITIES
Externalities occur when firms or people impose costs or benefits on others outside the market place.
It is divided into two types
EXTERNALITIES
POSITIVE EXTERNALITIES
NEGATIVE EXTERNALITIES
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EXTERNALITIES
• Externalities (or spillover effects) occur when firms or people impose costs or benefits on others outside the market place.
EXTERNALITIESEXTERNALITIESEXTERNALITIESEXTERNALITIES
POSITIVE EXTERNALITIES
NEGATIVE EXTERNALITIES
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POSITIVE EXTERNALITIES• There are many occasions when the
production and/or consumption of a good or a service creates external benefits which boost social welfare. In this note we consider the idea of positive externalities and the market failure that can result if the market under-consumes or under-provides these sorts of products.
• EX :PUBLIC GOODS- Commodities which can be enjoyed by everyone.
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NEGATIVE EXTERNALITIES
• Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. Some examples are given below, many of them are environmental.
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INTRODUCTION TO MANAGERIAL
ECONOMICS
PROF. V. R . KISHORE KUMAR,
M.A(Q.E.)(MPhil.)IFETCE/IT/V
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INDEX• Introduction
• Definition of Economics and Managerial Economics
• Scope of Managerial Economics
• Basic Economic Problems
• The Firm
• Role of a Managerial Economist
• Decision making areas
• Steps in decision making
• References IFETCE/IT/V
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Emergence of managerial economics as a separate curse of
management studies can be attributed to at least three factors
a)Growing complexity of business decision making process
due to changing market conditions and business environment
b)The increasing use of economic logic, conceptual theories
and tools of economic analysis in the process of business
decision making process
c)Rapid increase in demand for professionally trained
managerial manpower
INTRODUCTION
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DFINITIONS OF ECONOMICS AND
MANAGERIAL ECONOMICSECONOMICS: Economics is a social science . Its basic
function is to study how people – individual house holds, firms and nations maximizing their gains from their limited resources and opportunities.
• In economic terminology it is called as “maximizing behaviour” or more approximately “optimizing behaviour” .
• Optimization means selecting best out of available resources with the objective of maximizing gains from given resources. IFETCE/IT/V
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• Economics is thus a social science, which studies
human behaviour in relation to optimizing
allocation of available resources to achieve the
given goals.
Eg : individual household behaviour, firm, industry
and nation
Economics is also a study of choice-making
behaviour of the people.
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The origin of the subject could be traced from the works of the
Greek philosopher Aristotle who confined the study of
economics to household management and acquiring, guarding
and making proper use of wealth.
The term economics is derived from two Greek words
“OIKOS”(a house) and “NEMEIN”(to manage).
Prof. Samuleson remarks economics as “the oldest of arts and
newest of science, indeed the queen of the social science.IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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Definitions of Economics:
Wealth Definition- Adam Smith, J.B.Say, J.S.Mill etc.
(Classical definition)
Welfare Definition- Marshall, A.C.Pigue etc.(Neoclassical
definition)
Scarcity definition- Robbins
Growth Definition- Paul A Samuelson Moderndefinition
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Managerial economics can be broadly defined as
the study of economic theories, logic and tools
of economic analysis that are used in the
process of decision making. Economic theories
and techniques of economic analysis are applied
to analyze business problems, evaluate business
options and opportunities with a view to arriving
at an appropriate business decision.
Managerial Economics
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Douglas : Managerial economics is concerned
with the application of economic principles and
methodologies to the decision making process
within the firm or organization. It seeks to
establish rules and principles to facilitate the
attainment of the desired economic goals of the
management.
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Mansfield : He defines that managerial economics
is concerned with the application of economic
concepts and economic tools to the problems of
formulating rational decision making.
Spencer and Seigleman : It is the integration of
economic theory with business practice for the
purpose of facilitating decision making and
forward planning by management
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Economic Theory and Managerial Theory
Economic Theory
1. It deals with the body principles
2. It has the characteristics of both
micro and macro economics
3. It deals with a study of
individual firm and individual
consumer
4. It based on certain assumptions
5. It studies economic aspects of
the problem
Managerial Theory
1. It deals with the application of
certain principles to solve the
problem of a firm
2. It has only micro characteristics
3. It deals with the study of only profit
theories
4. In managerial theory assumptions
disappear due to practical situations
5. It studies both economic and non-
economic concepts. IFETCE/IT/V
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Scope of Managerial Economics
Economics has two major branches
1. Micro Economics
2. Macro Economics
The term Micro means small and Macro means big.
Both are applied to business directly or indirectly.
managerial economics comprises both micro and
macro economic theories. The parts of micro and
macro economics that constitute managerial
economics depend on the purpose of analysis. IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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The scope of M.E. comprises all the economic concepts, theories and tools of analysis which can be used for analyse the issues related to demand , production and cost, market structure etc.,
In other words managerial economics is economics applied to analysis of business problems and decision making . Broadly it is applied economics
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Micro-economics applied to internal issues :
Operational issues are of internal nature. Internal issues include
all those problems which arise within the business organization
and fall within purview and control of the management .
Some of the basic internal issues are :
What to produce
How much to produce
Choice of technology i.e. choosing of the factor –combination
Choice of price i.e. how to price the commodity
How to promote sales
How to face the price competitionIFETCE/IT/V
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How to decide on new investments
How to manage capital and profit
How to manage inventory i.e. stock of both
finished goods and raw material
Most of the micro economic problems deals with
most of these questions.
The Law Demand
The Theory of Production
Analysis of Market Structure and Pricing
Theory IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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Profit analysis and management
It guide firms in the measurement and management
of profit , in making new allowances for the risk
premium, in calculating the pure return on capital
and pure profit and also for future planning.
Theory of Capital and Investment Decisions
Knowledge of capital theory can contribute a
great deal in investment-decision making, choice of
projects, maintaining the capital, capital budjeting
etc. IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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Macro-economics deals with external issues :
The type of economic system in the country
General trends in N.I., employment, prices, savings and
investments
Structural change in the working financial institutions
viz., banks, insurance companies etc
Magnitude of and trends in foreign trade
Trends in labour supply and strength of capital market
Government’s economic policies i.e., industrial,
monetary, fiscal, price and foreign etc.IFETCE/IT/V
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Social factors viz., value system of the society,
property rights, customs and habits etc.,
Political environment i.e., democratic, authoritarian,
socialist political systems, or state attitude towards
private business man etc.
These Environmental factors have a far-reaching
bearing upon the functioning and performance of the
firms. Therefore, decision makers have to take in to
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Conditions in the country and give due consideration
to the environmental factors in the process of decision
making.
Eg : SEZ in the Nandigram, Tata’s small car in Singur
district in West Bengal
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BASIC ECONOMIC PROBLEMS
• WHAT TO PRODUCE ?
• WHERE TO PRODUCE ?
• HOW TO PRODUCE ?
• WHOM TO PRODUCE ?
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GOAL OF A FIRMIt says about
a)What is to be done? b)Where is the primary emphasis to be placed? c)What is to be accomplished by the various types of
plans?
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THE FIRM
• Meaning :
The basic unit for obtaining production which
performs crucial role of linking product, factor and
money markets.
It is an administrative organization, utilising a pool
of resources.
A business organization under a single
management with one or more establishments.IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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FIRMS,INPUTS AND OUTPUTS
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Role of a managerial economist in the firm
Demand estimation and forecasting
Preparation of business /sales forecasts
Analysis of market survey to determine the
nature and extent of competition
Analyzing the issues and problems of
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Assisting the business planning process of the
firm
Discovering new possible fields of business
endeavor and its cost-benefit analysis
Advising on prices, investment and capital
budgeting policies
Evaluation of capital budgeting etc.IFETCE/IT/V
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DECISION MAKING AREAS
Business decision making is influenced not only by
economic considerations, but also by human
behavioral, technological and environmental factors
due to growing public awareness.
“Decision making and processing information are two
important tasks of managers”
In order to make good decisions managers must be able
to obtain, process and use information.IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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DEMAND FORECASTING
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PRODUCTION PLANNING AND COST REVENUE DECISIONS
Production Function :
The production function is a technological
relationship between output and various inputs used
in production viz., land, labour, capital and
technology.
The output depends on the increasing function of
all the factor inputs
Q=f(S,L,K,T)IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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The following types of cost are useful in the
decision areas
Average, Marginal and Total Costs
Fixed and Variable Cost
Direct and Indirect Cost
Replacement and Original Cost
Opportunity and Industrial Cost
Sunk Cost and Outlay CostIFETCE/IT/V
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STUDY OF ECONOMIC ENVIORNMENT
Economic environment is the most significant component of the business environment. It affects the survival and success of a business organization.
IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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PRICING AND RELATED DECISIONS
The Price-output decisions are taken under various market
structures. The structure of the market refers to the degree
of competition in the market for the firms goods and
services.
IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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INVESTMENT DECISION
Business firms invest large money in their
projects. Therefore, capital expenditure for
different project proposals compete within
themselves for their claim on scarce resources.
Generally , in business sector itself, individual
firms compete against access to financial
resources and scares .IFETCE/IT/V
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The investment decisions are important as
Not easily reversible
Generally involves large sums of money
Highly futuristic and future is full of uncertainty
Long gestation periods
Thus, careful financial appraisal of each project
involves larger investments. Due to above reasons,
capital decisions fall in the category of investment and
known as “capital budgeting decisions” made by
highest level of management.IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0
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STEPS IN DECISION MAKING
Managerial economics is concerned with decision
making at the level of firm. These decisions have far
reaching effects on the firm. Delay in taking
decisions or implementing decisions might turn in to
losses.
Various steps in the decision making by a business firm
are as fallows :IFETCE/IT/V
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IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver
1.0