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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)
2)
3)
4)
5)
6)
Planning
Production
Material Management
Plant Engineering
Transport
Action management
Types of Decision
1) Capital budget
2) Make or buy decisions
3) Replacement
4) Project Evaluation
Basic economic concepts
1)
2)
3)
4)
5)
6)
Utility
Goods
Wealth
Classification of wealth
Services
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
Other things
 income
 consumers taste
 consumers preference
 substitutes price
 advertising expenditure
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
Total 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
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) Consumer’s Income
4) Consumer’s 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
Price (Rs)
Quantity demanded (units)
100
20,000
40
40,000
10
65,000
3) Demand curve  Draw curve for the above
data
Price of the substitutes &
complementary goods
Substitutes
Tea and coffee
Complementary goods
Petrol
 car & scotter
Butter &jam  bread
Consumer’s 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
Consumer’s Tastes & Preferences
1)Consumer’s Tastes
Depends on social customs, habits, life style ,
age ,sex
2)Consumer’s 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 it’s 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)
2)
3)
4)
5)
Raw materials
Equipments
Machine accessories
Labour
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 buyer’s 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 buyer’s 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 –
• Laws of Diminishing Returns
Short Run
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
C
A
P
I
T
A
L
I = 150
I = 100
LABOR
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
C
a
p
i
t
a
l
Q= 25
Q= 10
Labor
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
C
a
p
I
T
A
l
Q= 20
Q= 10
Labor
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
C
a
P
I
T
A
l
Q= 18
Q= 10
Labor
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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