ENGINEERING & MANAGERIAL
ECONOMICS
UNIT-I
Definition
• Wealth Definition-Prof.Adam Smith
“Economics is a science that inquiry into the nature and
causes of wealth of a nations”.
• Welfare Definition-Prof. Marshall
“Economics is a study of man’s actions in the ordinary
business of life. It enquires how man gets his income
and how he spends it.”
Definition
• Scarcity Definition-Prof.Robbins
“Economics is the science which studies the human behavior
as a relationship between ends and scarce means which
have alternative uses.”
• Growth Definition-Prof.Samuelson
“Economics is the study of how men and society choose, with
or without the use of money, to employ scarce productive
resources which could have alternative uses, to produce
commodities over time, and distribute them for
consumption now and in future among various people and
groups of society.”
Why Study Managerial Economics?
• An important reason for studying
economics is to learn a way of thinking.
• Three fundamental concepts:
– Opportunity cost
– Marginalism, and
– Efficient markets
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Opportunity Cost
• Opportunity cost is the best alternative that
we forgo, or give up, when we make a
choice or a decision.
• Nearly all decisions involve trade-offs.
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Marginalism
• In weighing the costs and benefits of a
decision, it is important to weigh only the
costs and benefits that arise from the
decision.
• For example, when a firm decides whether to
produce additional output, it considers only
the additional (or marginal cost), not the
sunk cost.
– Sunk costs are costs that cannot be avoided,
regardless of what is done in the future, because
they have already been incurred.
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Efficient Markets
• An efficient market is one in which profit
opportunities are eliminated almost
instantaneously.
• There is no free lunch! Profit opportunities
are rare because, at any one time, there are
many people searching for them.
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More Reasons to Study M.E.
• The study of economics is an essential part
of the study of society.
• Economic decisions often have enormous
consequences.
– During the Industrial Revolution, new
manufacturing technologies and improved
transportation gave rise to the modern factory
system.
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More Reasons to Study M.E.
• An understanding of economics is essential
to an understanding of global affairs.
• Voting decisions also require a basic
understanding of economics.
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Nature of Economics
Science is a systematic body of knowledge
based on facts, having cause and effect
relationship, can be experimented to produce
generalized true principles.
Economics is Science:
 In economics there is a systematized collection, classification and analysis of
economic facts.
 In the case of economic experiment, there is no need of laboratory and we
treat the whole social and national system as laboratory.
 The laws of economics have the universal validity like the laws of science.
 Like science, economics is self corrective in nature.
Nature………………….
Art is a body of knowledge towards the pre defined
goal applying different sciences simultaneously
Economics is Art:
 Economics solves the fundamental problems of an economy like allocation of scarce
resources in satisfying the different wants.
 All the economic policies either to explore or to resolve the economic problem
 All the policies supported by different principles of different sciences.
Economics is theorytically a science while
practically an art.
The Scope of Economics
• Microeconomics is the branch of economics
that examines the behavior of individual
decision-making units—that is, business firms
and households.
MICRO ECONOMICS
PRODUCTION
FUNCTION
THEORY OF
DEMAND
THEORY OF
PRICING
DETERMINATION
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THEORY OF
SUPPLY
OPTIMUM
ALLOCATION OF
RESOURCES
WELFARE
ECONOMICS
FACTOR PRICING
WAGES
INTEREST
RENT
PROFIT
The Scope of Economics
• Macroeconomics is the branch of economics that
examines the behavior of economic
aggregates— income, output, employment, and
so on—on a national scale.
MACROECONOMICS
Theory of national
income
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Theory of
employment
Theory of general
price level &
inflation
Theory of
economic growth
Theory of
International
trade
Macro theory of
distribution
The Scope of Economics
Examples of microeconomic and macroeconomic concerns
Microeconomics
Macroeconomics
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Production
Prices
Income
Employment
Production/Output
in Individual
Industries and
Businesses
Price of Individual
Goods and
Services
Distribution of
Income and Wealth
Wages in the auto
industry
Minimum wages
Executive salaries
Poverty
Employment by
Individual
Businesses &
Industries
Jobs in the steel
industry
Number of
employees in a firm
National Income
Total wages and
salaries
Employment and
Unemployment in
the Economy
Total corporate
profits
Total number of
jobs
Unemployment
rate
How much steel
How many offices
How many cars
Price of medical
care
Price of gasoline
Food prices
Apartment rents
National
Production/Output
Aggregate Price
Level
Total Industrial
Output
Gross Domestic
Product
Growth of Output
Consumer prices
Producer Prices
Rate of Inflation
The Method of Economics
• Positive economics studies economic behavior
without making judgments. It describes what
exists and how it works.
• Normative economics, also called policy
economics, analyzes outcomes of economic
behavior, evaluates them as good or bad, and
may prescribe courses of action.
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The Method of Economics
managerial economics is a science which is
concerned with those aspects of economic theory
and its applications that are directly relevant to
the managerial practice in the decision- making
process of a business firm.
• According to Milton H. Spencer and Louis
Siegelman, “Managerial economics is the
integration of economic theory with business
practice for the purpose of facilitating decisionmaking and forward planning by management.”
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Nature of Managerial Economics
•
•
•
•
•
•
Pragmatic in nature
Micro –economic in nature
Normative in nature
Goal-oriented
Tool in the different fields
Macro-economic in nature
Scope of Managerial Economics
Scope of Mnagerial
Econmics
Demand /Supply
Internal or
Operational Issues
External or
Environment Issues
Production/Cost
Economy/Business
Cycle /Trends &
Policies
Profit/Investment
Internal or Operational Issues
– Demand analysis and forecasting
– Production analysis
– Pricing and cost analysis
– Profit and investment analysis
– Strategic or long term planning
External or Environmental Issues
– Nature of the economic system existing in the country.
– Business cycle phases through which each firm has to
undergo.
– Working pattern of the financial institutions like
banks, insurance companies, share market etc in the
country.
– Trends in the foreign trade.
– Trends in the labour and capital markets in the
country.
– Policies of the government related to industries,
monetary policy, fiscal policy and pricing policy, etc.
Science, Engineering and Technology
& Managerial Economics
• Science is a systematic body of knowledge based on facts,
having cause and effect relationship, can be experimented
to produce generalized true principles.
• Engineering can be defined as the application of scientific
and mathematical principles used for practical purpose like
design, manufacture, and operation of efficient and
economical structures, machines, processes, and systems.
• Technology can be broadly defined as the entities, both
material and immaterial, created by the application of
mental and physical effort in order to achieve some value.
Role of M.E. to……Technology
• It has wide scope in manufacturing, construction, mining and other
engineering industries. Examples of economic application are as follows:
– Selection of location and site for a new plant.
– Production planning and control.
– Selection of equipment and their replacement analysis.
– Selection of a material handling system.
• Better decision making on the part of engineers.
• Efficient use of resources results in better output and economic
development.
• Cost of production can be reduced.
• Alternative courses of action using economic principles may result in
reduction of prices of goods and services.
• Elimination of waste can result in application of engineering economics.
• More capital will be made available for investment and growth.
• Improves the standard of living with the result of better products, more
wages, and salaries, more output etc. from the firm applying engineering
economics.
Role of Science, Technology…….to
M.E.
• Economic Growth
• Increase in Efficiency
• Increase in Production
• Better Standard of living
• Faster Means of Communication
• Global Competitiveness