Eefa Unit -1 Revised

ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING

UNIT -1

INTRODUCTION TO ECONOMICS AND

MANAGERIAL ECONOMICS

IFETCE/IT/V sem/2012-13/MG2452/EEFA/Ver 1.0

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


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.


MICRO ECONOMICS

• Micro economics: It analyzes the behaviour of individual components like industries ,firms and households


THEMES OF ECONOMICS

• The TWIN THEMES of economics. SCARCITY EFFICIENCY


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.


EFFICIENCY

• Efficiency means absence of waste,or using the economy’s resources as effectively as possible to satisfy people needs and desires.


THREE FUNDAMENTAL ECONOMIC PROBLEMS

• Every society must solve three fundamental problems.

What How For Whom


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.


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.


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.


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


• Economic efficiency is further described under the following two categories

• Static Efficiency

• Allocative Efficiency


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.


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.


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


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 .


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.


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


EXTERNALITIES

• Externalities (or spillover effects) occur when firms or people impose costs or benefits on others outside the market place.

EXTERNALITIESEXTERNALITIESEXTERNALITIESEXTERNALITIES

POSITIVE EXTERNALITIES



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.



• 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.


INTRODUCTION TO MANAGERIAL

ECONOMICS

PROF. V. R . KISHORE KUMAR,

M.A(Q.E.)(MPhil.)IFETCE/IT/V

sem/2012-13/MG2452/EEFA/Ver 1.0

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


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.


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

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


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


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.


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


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

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


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

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

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

account the present and future economic, political and

social IFETCE/IT/V

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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


BASIC ECONOMIC PROBLEMS

• WHAT TO PRODUCE ?

• WHERE TO PRODUCE ?

• HOW TO PRODUCE ?

• WHOM TO PRODUCE ?


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?

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

FIRMS,INPUTS AND OUTPUTS


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

concerned industryIFETCE/IT/V

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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

DEMAND FORECASTING


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

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.


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.


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

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

Eefa Unit -1 Revised

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