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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 • THANK YOU