unit-1 EECA

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UCE-THIRUKKUVALAI www.vidyarthiplus.com

UNIVERSITY COLLEGE OF ENGINEERING

THIRUKKUVALAI.(A Constituent College of Anna University :: Chennai)

NAGAPATTINAM- 610 204.

DEPARTMENT OF CIVIL ENGINEERING

GE1451 ENGINEERING ECONOMICS AND COST ANALYSIS

IMPORTANT QUESTION WITN ANSWER

VOLUME-I

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UNIT-I

Part-A

1. Definition of economicsEconomics as a science of wealth, it is both a theoretical and practical science it

provides not only theoretical knowledge but also helps to solve many day to day problems

facing the humanity.

2.

State the importance of engineering economics.Increasing productivity and production

Reducing human effort in the increase of wealth

Scanning of external factors such as firms environment

Scanning of internal factors such firms operational decisions

3. What do you mean by factors of production?

They are land, labour, capital and organization. The demand for a factor of production is

not a direct demand. It is an indirect or derived demand; it is derived from the demand for the

products that factors produce

4. Explain the relationship between economic decision and technical decision. Economicdecision- it is focus on the maximum profit on minimum cost and then to achieve the socio

economic goal.

Technical decision- it is to achieve the company goals to determine the feedback system basis

to change the objective of company goals.

5. Draw the break even chart.

A break even chart is a graphical representation of marginal costing. It is also indicates

the estimated profit or loss at various levels of output. It is a graph showing he amounts of

fixed variable costs and the sales revenue at different volumes of operation.

6. Why does the demand curve slope down wards?

When price falls, the marginal utility of the commodity in relation to money also falls,and so the quantity demanded increases. The income effect induces the consumer to purchase

more. A fall in the price of a commodity makes it cheaper in relation to other commodities.

7. What do you mean by break even analysis?

It is a tool for analyzing the financial aspect whereby the impact on profit of the changes

in volume price costs and sales mix can be estimated with higher level accuracy.

8. Define margin of safety.

Margin safety may be defined as the excess of actual sales or production at the selected activity

over break even sales or production. Simply margin of sales is excess sales over the break even

sales .it is abbreviated as mos.

9. What is p/v ratio?

It is an important tool in decision making. It is used for the calculation of BEP and in problems

regarding profit and sales relationship. A higher P/V ratio indicates the greater profitability and

vice versa. So the organization makes necessary effort to obtain higher p/v ratio.

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10. Write the merits and demerits on break even chart.

Assumption- all costs are segregated into fixed and variable cost. Total fixed costs are constant at all

levels of output, production and sales figures are same variable costs vary proportionately with thelevel of volume of output.

Merits- preparation of flexible budget, formulation of price policy, it provides guidance for cost

control, total profit could be calculated accurately.

Demerits- fixed cost does not always remain constant, it ignores economies of scale in production,and variable cost does not always vary proportionately.

Part-B

1. Determine the scope of economics, IS economics science of wealth?

Traditional economics have classified the entire subject matter of economics into four major

divisions namely consumption, production, exchange and distribution.

Consumption- all economics activities are directed towards satisfying human wants. This section

deals at length with human wants and their characteristic features, consumer behavior, law of

diminishing marginal utility etc.

Production- it refers to the process through which goods and services needed for satisfying human

wants are produced. The four factors of production namely land, labour , capital and organization

their features.

Exchange it deals with markets and their nature, types of markets, price output determination in

various kinds of markets etc.

Distribution- this section gives a detailed account of how the income and wealth produced in the

community is distributed among the four factors of production; it deals with rent theories, wage

theories, interest theories, profit theories and other related aspects.

Modern economics- two more sections namely international trade and public finance.

International trade- it deals with the basis of international trade, types of trade, their relative

advantages exchanges rates and their determination, international financial institutions like world

bank, international development association etc.

Public finance- it is source which deals with the income and expenditure of all types ofgovernments it provides a detailed study of public expenditure.

Is economic is a science of wealth.

Wealth- a stock of goods existing at a given time that have money value.

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Features of wealth- wealth in economics refers to all those goods and services which have thefollowing features. It must possess utility, it must be limited in supply or there must be scarcity. It

must have exchange value.

2. Explain the economics of large and small scale run.

Short Run

A time period when at least one input, such as plant size, cannot be changed

Plant Size

The physical size of the factories that a firm owns and operates to produce its

output

Managers take account of both the short-run and long-run consequences of their

behavior.

While making decisions about what

to do today, tomorrow, and next weekthey keep an eye on the long-run benefits Long run-Planning Horizon

The long run, during which all inputs

are variable

The locus of points representing the minimum unit cost of producing any given rateof output, given current technology and resource prices

Why long run cost curve is U shaped

Economies of scale

Constant returns to scale

Diseconomies of scale

Economies of Scale

Decreases in long-run average costs resulting from increases in output

These economies of scale do not persist indefinitely, however.

Once long-run average costs rise, the curve begins to slope upwards.

Reasons for economies of scale

Specialization

Division of tasks or operations

Dimensional factor

Improved productive equipment

3. Explain the nature and scope of managerial economics.

Managerial economics- it is a subject dealing with the application of economic theory the businessmanagement.

Managerial economics is also called

Business economics

Economics of the firm

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Economics of business management etc.

Nature

1.

Micro economics in character- it is concerned with problems of individual firms. It does not

deal with entire economy.

2. Theory of the firm- it is largely uses the body of economics concepts and principles.

3. It is pragmatic- it is considered the particular environment decision making.

4. Normative science- it is belongs to the normative sciences. It is prescriptive rather than

descriptive.

5. Macro economics and managerial economics- it is used economic concept like trade cycle,

national income accounting and foreign trade.

6. It is a scientific art- it helps the management in the best and efficient utilization of scarce

resource.

Scope of managerial economics

1. Demand analysis and forecasting

2. Cost and production analysis

3. Pricing decisions policies and practices

4. Profit management

5. Capital management

6. Production policy, sales promotion and market strategy

Demand analysis and forecasting- it helps in identifying the various factors influencing the

demand for a firms product.

Cost and production analysis- in a business for efficient project planning there needs cost and

production analysis, it helps a firm to identify economic cost and minimum cost.

Pricing decision policies and practices- price determination in various markets pricing methods

differential pricing and price forecasting are some of important topics.

Profit management- it deals with profit policies and techniques of profit planning like break even

analysis.est planning and effective control of capital expenditure. Under this topic are cost of

capital, rate of return, and selection of projects etc.

Production policy- sales promotion and market strategy

The consumer wants new products and services. Business should have a policy for promoting its

products.

Capital management- it requires best planning and effective control of capital expenditure. 4.

Write short notes on monopoly, perfect competition, and monopolistic competition.

1)Pure monopoly exists when a single firm is the sole producer of a product for which there are

no close substitutes. Examples are public utilities and professional sports leagues.

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Characteristics

x A single seller: the firm and industry are synonymous.x Unique product: no close substitutes for the firms product.

x The firm is the price maker: the firm has considerable control over the price becauseit can control the quantity supplied.

x Entry or exit is blocked.

2)Monopolistic competition refers to a market situation with a relatively large number of sellersoffering similar but not identical products. Examples are fast food restaurants and clothing stores.

Characteristics

xA lot of firms: each has a small percentage of the total market.

xDifferentiated products: variety of the product makes this model different from pure

competition model. Product differentiated in style, brand name, location,

advertisement, packaging, pricing strategies, etc.

xEasy entry or exit.

3)Pure or perfect competition is rare in the real world, but the model is important because it helps

analyze industries with characteristics similar to pure competition. This model provides a contextin which to apply revenue and cost concepts developed in the previous lecture. Examples of this

model are stock market and agricultural industries.

Characteristics

xMany sellers: there are enough so that a single sellers decision has no impact on

market price.

xHomogenous or standardized products: each sellers product is identical to itscompetitors.

xFirms are price takers: individual firms must accept the market price and can exert

no influence on price.

xFree entry and exit: no significant barriers prevent firms from entering or leaving

the industry.

5. Write short notes on

a)

Utility-itmeans usefulness, the power to satisfy a human wants. Which can satisfy a humanwant is said to possess utility. The amount of satisfaction which is obtained by consuming goods at a

certain point of time is called its utility. if the form of a commodity is changed its utility may

increases. If a commodity is transported from one place to another its utility may increase. If a

commodity is saved to use in future its utility may increase..

b) Goods-goods can be divided into commodities and services. Which can be seen felt andtouched are called material goods or visible goods.(rice goods), immaterial goods( copy

right).goods can be further classified into free goods(air), economic goods(all goods which have

a price, consumer goods(fish), producer goods(machines)

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c) Wealth- a stock of goods existing at a given time that have money value. It should betransferable. It must have exchange value.

d) Margin- it is important economic analysis. Marginal utility is the addition made to total

utility by the purchase of one more unit of the commodity.

e) Contribution

Contribution is the total revenue variable costs

It measures how much is being contributed the fixed costs by the units that have been sold

Contribution Fixed costs = Profit

Can calculate contribution per unit or contribution for all units of output

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