Course Title :ENGINEERING ECONOMICS AND ACCOUNTANCY

Unit 1

Introduction to Economics :

i) Definition of Economics, its utility and scope of study

ii) Definition of Engineering Economics ii) Meaning and concepts of Utility, Consumption,
Value, Price, Goods and National Income, inflation

iii) Wants – Definition and characteristics

iv) Wealth& Welfare

unit 2

Demand and Supply :

i) Meaning and types of Demand ii) The Law of Demand, its limitations iii) Preparation of
Demand Schedule iv) Meaning of Supply ii) The Law of Supply, its limitations iii) Preparation
of Supply Schedule

unit 3

Production :

i) Meaning and factors of production ii)Factors determining efficiency of labour iii) Savings,
investment and capital formation iv)Meaning of production function

unit 4

Money:

i) Meaning of money ii) Types of money iii) Functions of money

unit 5

Banking Organisation :

Unit 6

Prricing

i) Central Bank – its functions ii) Commercial banks – its functions

unit Pricing i) Objectives of pricing policy ii) price determinants iii) Price discrimination
 Unit 1

Meaning and definition of economics:

Before knowing the term economics, we should know about economic activities, because
economics is related with economic activities done by the human being. Human activities i.e the
activities done by human being are divided into two groups- 1) Economic activities and 2) Non-
Economic activities

Economic activities are those activities which are done for earning money for eg- Doctors
treatment to his patients, mother cooking for the restaurant, teachers teaching in the college etc.
Non-economic activities are those activities which are done not for earnig money, but due to
love, sympathy etc. for eg- Mother cooking for the family, doctor’s treatment to his wife etc.

The word economics is derived from Latin word “Oikonomia” which means “household
management”. The word economics means some rules for conducting human life with special
reference to production and consumption of wealth.

Definition of Economics:

The analysis of economic environment requires the knowledge of economic decision making and
hence the study of ―Economics is significant. There are 4 definitions of Economics.

(i) Wealth Definition:

Adam Smith defined ―Economics as a science which inquired into the nature and cause of
wealth of Nations.

According to this definition —

a) Economics is a science of study of wealth only;

b) It deals with production, distribution and consumption;

c) This wealth centered definition deals with the causes behind the creation of wealth, and

d) It only considers material wealth.

Criticisms of this definition:

(a) Wealth is of no use unless it satisfies human wants.

(b) This definition is not of much importance to man and welfare.

(ii) Welfare definition:

According to Alfred Marshall ―Economics is the study of man in the ordinary business of life.
It examines how a person gets his income and how he invests it. Thus on one side it is a study of
wealth and on the other most important side, it is a study of well being.

Features:

(a) Economics is a study of those activities that are concerned with material welfare of man.

(b) Economics deals with the study of man in ordinary business of life. The study enquires how
an individual gets his income and how he uses it.

(c) Economics is the study of personal and social activities concerned with material aspects of
well being.

(d) Marshall emphasized on definition of material welfare. Herein lies the distinction with Adam
Smith‘s definition, which is wealth centric.

(iii) Scarcity definition:

This definition was put forward by Robbins. According to him, Economics is a science which
studies human behavior as a relationship between ends and scarce means which have alternative
uses.

Features:

a) human wants are unlimited

b) alternative use of scarce resources

c) efficient use of scarce resources

d) need for optimization

(iv) Growth Oriented definition:

This definition was introduced by Paul. A. Samuelson.

According to the definition ―Economics is the study of how man and society choose with or
without the use of money to employ the scarce productive resources, which have alternative uses,
to produce various commodities over time and distributing them for consumption, how or in the
future among various person or groups in society. It analyses costs and benefits of improving
patters of resource allocation.

Scope of Economics:

Economics is best described as the study of humans behaving in response to having only limited
resources to fulfill unlimited wants and needs. Scarcity refers to the limited resources in
aneconomy. Macroeconomics is the study of the economy as a whole. Microeconomics analyzes
the individual people and companies that make up the greater economy.The subject matter of
economics is presently divided into two major branches i.e.Micro Economic and Macro
Economics. These two terms have now become of general use in economics.

Micro Economics

 Micro economics studies the economic behaviour of individual economic units.

 The study of economic behaviour of the households, firms and industries form the
subject-matter of micro economics.
 It examines whether resources are efficiently allocated and spells out the conditions for
the optimal allocation of resources so as to maximize the output and social welfare.
 For example, micro economics is concerned with how the individual consumer distributes
his income among various products and services so as to maximize utility.
 Thus, micro-economics is concerned with the theories of product pricing, factor pricing
and economic welfare.

Macro Economics

 Macro economics deals with the functioning of the economy as a whole.

 For example, macro economics seeks to explain how the economy‘s total output of goods
and services and total employment of resources are determined and what explains the
fluctuation in the level of output and employment.
 It deals with the broad economic issues, such as full employment or unemployment,
capacity or under capacity production, a low or high rate of growth, inflation or deflation.
 It is the theory of national income, employment, aggregate consumption, savings and
investment, general price level and economic growth.

Nature of Economics :

Nature of economics refers to whether economics is a science or art or both, and if it is a

science, whether it is positive science or normative science or both.

Economics as a Science

 We have often stated that economics is a social science.

 Economics as a social science studies economic activities of the people.
  Economics is a systematic body of knowledge as it explains cause and effect relationship
between various variables such as price, demand, supply, money supply, production,
national income, employment, etc.
 Economic laws, like other scientific laws, state what takes place when certain conditions
(assumptions) are fulfilled.
 This is the traditional Deduction Method where economic theories are deduced by
logical reasoning.
 The law of demand in economics states that a fall in the price of commodity leads to a
large quantity being demanded ̳given other things‘, such as income of the consumer,
prices of other commodities, etc., remaining the same.
 In economics we collect data, classify and analyse these facts and formulate theories or
economic laws.
 The truth and applicability of economic theories can be supported or challenged by
confronting them to the observations of the real world.
 If the predictions of the theory are refuted by the real-world observations, the theory
stands rejected.
 If the predictions of the theory are supported by the real-world events, then the theory is
formulated.
 The laws of economics or economic theories are conditional subject to the condition that
other things are equal.
 Economic theories are seldom precise and are never final; they are not as exact and
definite as laws of physical and natural sciences.
 The laws of physical and natural sciences have universal applicability, but economic laws
are not of universally applicable.
 The laws of physical and natural sciences are exact, but economic laws are not that exact
and definite.
Economics as an Art —
 Various branches of economics, like consumption, production, distribution, money and
banking, public finance, etc., provide us basic rules and guidelines which can be used to
solve various economic problems of the society.
 The theory of demand guides the consumer to obtain maximum satisfaction with given
income.
 Theory of production guides the producer to equate marginal cost with marginal revenue
while using resources for production.
 The knowledge of economic laws helps us in solving practical economic problems in
everyday life.
Economics as a Positive Science —
 A positive science is that science in which analysis is confined to cause and effect
relationship.
 Positive economics is concerned with the facts about the economy.
 It studies the economic phenomena as they exist.
  It finds out the common characteristics of economic events.
 It specifies cause and effect relationship between them.
 It generalizes their relationship by formulating economic theories and makes predictions
about future course of these economic events.
Economics as a Normative Science —
 The objective of Economics is to examine real economic events from moral and ethical
angles and to judge whether certain economic events are desirable or undesirable.
 Normative economics involves value judgment.
 It deals primarily with economic goals of a society and policies to achieve these goals.
 It also prescribes the methods to correct undesirable economic happenings.

Economics as a Science and an Art —

 Being a systematized body of knowledge and establishing the cause and effect
relationship of a phenomenon, Economics is a scientific study.
 The laws of economics are conditional.
 Economics cannot predict with so much certainty and accuracy as the subject deals with
the behaviour of human beings as such controlled experiment is not possible.
 Some economists prefer to treat economics as an art.
 Every science has an art or a practical side.
 Every art has a scientific side which is theoretical.
 Economics deals with both theoretical aspects as well as practical side of many economic
problems we face in our daily life.
 Thus, Economics is both science as well as an art.

Meaning of utility:

We know that every goods or services have the quality of satisfying human wants. This wants
satisfying quality in a good is called utility. Utility means the power of a commodity or
services to satisfying human wants. Like-foods, cloths, house etc. satisfy human want and as
such they possess utility. Any commodity or any service, whether useless or harmful, which is
desired by human being is considered to have utility of its own even if the desire is illegal or
unethical.

Kinds of utility: There are four types of utility.

These are-
1) Form utility: By changing the form of an article we can get form utility. For eg.log of wood
to furniture, sugarcane to sugar, milk to sweets, paneer etc.

2) Place utility: By transporting the goods from one place to another we can get place utility.
For e.g.in case of online shopping goods come from outside with the help of transportation,
purchasing a machine and bring it to home etc.
3) Time utility: By storing a commodity and selling it at a time of scarcity, we can give it
greater utility. This is time utility. For e.g. storing the goods in warehouse, godown etc.

4) Possession utility: By transferring the ownership of a commodity from one person to

another we can get possession utility. For e.g. the ultimate sale of the goods.

Law of Diminishing Marginal Utility:

 The Law states that as a man gets more and more units of a commodity, marginal utility
from each successive unit will go on falling till it becomes zero or negative.
 Marginal utility means the additional utility obtained from one particular unit of a
commodity. Although human wants are unlimited in number yet a particular one can be
fulfilled.
This law will be clear from the following table.

Units of oranges consumed Marginal utility Total utility

1 10 10
2 8 18
3 6 24
4 4 28
5 2 30
6 0 30
7 -2 28

In the above example, when a consumer consuming more and more oranges his marginal utility
goes on decreasing, and it becomes zero at 6th unit of consumption and when he consumes the
7th unit the marginal utility becomes negatives i.e. dissatisfaction. But the total utility
gradually increases up to 5th unit after that it becomes diminishing.

Consumption:
Consumption means the satisfaction of our wants by the use of commodities and services.
Consumption means using up of utilities. Consumption has also been defined asdestruction of
utility, here destruction means not to destroy the things , it means use the things to the fullest.
When we take some food, it means we consume the food. While sitting on the chairs in the
class room the students are consuming the chairs.
Value:
In the ordinary sense value is used in the sense of usefulness, which is value in use. But in
economics value means value in exchange, it indicates the rate of exchange between one
commodity and another. The value of a commodity means the commodities or services that we
can get in return for it. Only economic goods can have value in the economic sense.
There are three attributes or characteristics of value in economics, these are-
1) It must possess utility
2) It must be scarce
3) It must be transferable or marketable

Difference between value-in-use and value-in-exchange:

1) Value-in use means usefulness of goods. But value-in-exchange means the rate of exchange
between one commodity and another.
2) Free goods have value-in-use,But economic goods have both value-in-use and value-in-
exchange
3) Value-in-use have only one attribute i.e. Utility But value-in-exchange have three attributes
i.e. utility, scarcity and marketable

Price:
Value is not the same thing as price. When value is expressed in terms of money, it is called
price. In pre-historic time, people did not know the use of money. They exchanged goods for
other goods which is known as barter system. Now a day’s goods are exchanged for money.
Thus price of a commodity means its money-value. Thus in order to buy a commodity,
whatever money is paid in exchange of a commodity is called the price of that commodity.

Goods:
In ordinary sense goods means tangible and material things which is used by human being like-
land, furniture, car etc. But in economics goods have a unique meaning. In economics goods
are anything which is capable of satisfying a human wants. It may be intangible also, such as-
air, sunshine, furniture, car etc.
Kinds of goods:
1) Free goods and economic goods: free goods are those goods which are freely available in
nature, and they are easily available to man without any price. They are God made, like- air,
sunshine, sea water etc.
Economic goods are those goods which are scarce and can be had only on payment.They are
man-made. They are not freely available to man, like- car, furniture, cloth etc.

2) Consumer goods and producer goods:

Consumer goods are those goods which are directly used by the consumers, like-cloths, sugar,
rice, chocolate etc.
Producer goods are those which are used by the producer for further production, like-
machinery, equipment etc.

3) Tangible goods and intangible goods:

Tangible goods are those which can be touch, like – car, furniture, chocolate etc.
Intangible goods are those which cannot be touch, like- air, sunshine etc.

4) Durable and non-durable goods:

Durable goods are those which do not wear out easily and therefore they can be used for long
period time, such as car, books, T.V etc.
Non-durable goods are those which wear out easily and therefore they can be used
short period of time, such as- petrol, cosmetics items, soaps etc.

Types of Goods - Related to Income:

Inferior good: Goods for which demand decreases as consumer income rises. Thus, it‘s
―income.Elasticity will be negative. Example: Inter-city bus service and inexpensive foods
such asbologna, hamburger, and frozen dinners.
Normal good: Goods for which demand increases as consumer income rises. Thus, it‘s
―income
elasticitywill be positive. Most goods are normal goods, hence the name ―normal.
Superior good: Goods that will tend to make up a larger proportion of consumption as income
rises. As such, they are an extreme form of normal good. Thus, a superior good‘s ―income
elasticity will be both positive and greater than 1. A superior good might be a luxury good that
is not purchased at all below a certain level of income, such as a luxury car.
Luxury good: a more colloquial term that is synonymous with ―superior good.

Types of Goods - Related to Price:

Ordinary good: goods for which quantity demanded increases as the price for the good
drops;conversely, quantity demanded decreases as the price for the good increases, ceteris
paribus (allother things being equal).
Giffen good: a good that will experience an increase in quantity demanded in response to an
increase in price. In order to be a true Giffen good, price must be the only thing that changes to
prompt a change in quantity demand. Conspicuous consumption (such as found with Veblen
goods) is not a factor. The classic example is of inferior staple foods, whose demand is driven
by poverty that makes their purchasers unable to afford superior foodstuffs. As the price of the
cheap staple rises, consumers can no longer afford to supplement their diet with superior foods,
and must consume more of the staple food.

Veblen good (aka ostentatious goods): often confused with Giffen goods, Veblen goods are
goods for which increased prices will increase quantity demanded. However, this is not
because the consumers are forced into buying more of the good due to budgetary constraints
(as in Giffen goods). Rather, Veblen goods are high-status goods such as expensive wines,
automobiles, watches, or perfumes. The utility of such goods is associated with their ability to
denote status. Decreasing their price decreases the quantity demanded because their
statusdenoting utility becomes compromised.
Types of Goods - Related to Consumption Ability:
Rival good (aka rivalrous good): goods whose consumption by one consumer prevents
simultaneous consumption by other consumers. For example, food, cars, and clothing.
Non-rival good: goods that may be consumed by one consumer without preventing
simultaneous consumption by others. Most examples of nonrival goods are intangible goods.
For example, television and radio are nonrival goods.
Excludable good: goods or service that enable a seller to prevent non-paying customers from
enjoying the benefits of it. Market allocation of such goods is feasible. Examples: public
transportation, haircuts, movie theatre, food, clothing, housing, rental accommodations.

Non-excludable good: goods or service whereby it is impossible to prevent an individual who

does not pay for that thing from enjoying the benefits of it. Market allocation of such goods is
not feasible. Examples: beautiful scenery, fresh air.
Public good: goods those are non-excludable as well as non-rival. This means it is not possible
to exclude individuals from the good's consumption. Fresh air may be considered a public good
as it is not generally possible to prevent people from breathing it. However, technically
speaking such goods should be called pure public goods.
Private good: goods those are both excludable and rival. Example: bread (eaten by a given
person cannot be consumed by another [rival], and a baker can refuse to sell [excludable]).

National income:
By the term national income, we mean aggregate income of a country during a definite period,
usually a year. Thus the national income is the measure of aggregate money value of all goods
and services produced by the nation in any time period, usually a year. Prof Alfred marshall in
his book “principles” defines national income as “The labour and capital of the country, acting
on its natural resources produce annually a certain net aggregate of commodities, material and
immaterial, including services of all kinds. The word net is needed for the deduction of half-
finished goods and depreciation charges.”
Following are the concept of national income-
1) Gross national product (G.N.P.)
2) Net national product. (N.N.P)
3) Gross domestic product (G.D.P.)
4) Personal income (P.I.)
5) Disposable income (D.I.)
6) Per capita income (P.C.I.)

Distinction between Gross National Product and Gross Domestic Product –

Gross National Product (GNP) is different from Gross Domestic Product (GDP) in following
respects:
(a) GNP refers to the total market value of all the final goods and services produced in a
country during a given year, plus net factor income from abroad. But GDP refers to the total
market value of all the goods and services produced in the given year within the domestic
territory of the country.

(b) GNP includes all income earned by the country in abroad (including foreign
investments).But GDP does not include the income earned by the country from abroad.

Savings:
Savings is the portion of income not spent on current expenditure. Because a person does not
know what will happen in the future, money should be saved for the future for the unexpected
events or emergencies. Without savings, unexpected can become large financial burdens.
Therefore, savings helps an individual or family become financially secure. Savings is the
process of setting aside a portion of current income for future use, or the flow of resources
accumulated in this way over a given period of time. Saving may take the form of increases in
bank deposits, purchases of securities, or increased cash holding.

Investment:
An investment is an asset or item that is purchased with the hope that it will generate income or
will appreciate in the future. In an economic sense, an investment is the purchase of goods that
are not consumed today but are used in the future to create wealth. In finance, an investment is
a monetary asset purchased with the idea that the asset will provide income I the future or will
be sold at a higher price for a profit.

E-Commerce:
By the term e-commerce we mean electronic commerce. E-commerce has been considered as a
new and improved method of conducting traditional commerce. Accordingly, e-commerce
automatics the manual process and thereby transforms the business organizations into a fully
electronic environment and also change the operation of business completely. E-commerce is
the buying and selling of goods and services, or the transmitting of funds or data, over an
electronic network, primarily the internet. This is an online system of purchase and sale of
goods through the route of the internet. In this system of business, there is no need to visit the
shop physically either to purchase or sale the commodity.
System of e-commerce: Following are some of the established system of E-commerce
1) B 2 C (Business to consumer)
2) B 2 B (Business to business)
3) B 2 B 2 C (Business to business and to consumer)
4) G 2 B and G 2 C (Government providing services to Business as well as Consumers)

Wants: Meaning and its characteristics:

Meaning of want:
Wants in economics means human wants. Desire of human being to consume a good or service
is known as want. Goods possessing utility can satisfy human wants. All people do not have
the same wants. Wants are varying from individual to individual, place to place and time to
time. Human wants are unlimited in nature. As goods and services are not freely available we
must engage ourselves in various economic activities for earning money so as to satisfy our
wants.
Characteristics of human wants:
1) Human wants are unlimited:
Human wants are unlimited in nature. There is no end to human wants. Human being are never
satisfied. When one want is satisfied, another takes its place.
2) Any particular want is limited or satiable:
Wants in aggregate are unlimited, but a particular want can be satisfied by one means. For e.g.
a man wants a car, he can have it and be satisfied, if we fell hungry, after taking food we are
satisfied.
3)Wants are complementary:
Very seldom does one commodity by itself satisfy a human want. If we want to write a letter,
we must buy a pen as well as ink and paper. The pen alone is not enough.
4) Wants are competitive:
Wants are competitive in nature. We all have a limited amount of money where as we want so
many things at the same time. We cannot buy them all, so we must therefore choose between
the goods.

5) Wants recur:
Most of the human wants are of a recurring in nature. same type of wants is frequently needed
for our day to day activities. For e.g. every day we need a cup of tea or coffee or milk at
morning.
6) Wants vary with time, place and person:
Wants are not always the same, wants are different from time to time, place to place and
individual to individual.
7) Wants change into habits:
If a particular want is regularly satisfied, a person becomes used to it and it grows into a habit.
For e.g. in case of alcoholic product it becomes habit of us.
8) Wants are alternative:
There are several ways to satisfying a particular want.i.e. we can have tea, coffee or hot milk in
winter, we can take ice-cream or cold-drinks in summer etc.

Types or kind of wants:

Following are the types of want.
1) Necessary
a) Necessary of existence: These are the things without which we can’t exist. i.e. food, shelter
and cloths
b) Necessary of efficiency: Some goods may not be necessary to live, but necessary tomake us
efficient workers. For e.g. a table and chair are necessary of efficiency for a student.
c) Conventional necessaries: These are the things which we are forced to use either by social
custom or because the people around us. For e.g. we must dress according to our society, in
performing the husori at bihu, we must wear dhoti, mekhela chadar and gamusha.
2) Comforts:
These are the things which are not necessary, but we use it to make comfort. For e.g. AC in the
class room, cushion on the chair etc.
3) Luxuries:
Man does not stop even at comforts. After comforts have been provided, he wants luxuries too.
It brings prestige or standard of living. For e.g. costly furniture, luxurious car, jewellery etc.

Wealth:
The term wealth causes a lot of confusion in the mind of the common people. This is due to the
fact that wealth in economics is used in a sense different from its use in the ordinary speech. In
ordinary sense or language wealth means prosperity and abundance, it means riches. A man of
wealth is one who is prosperous, but in economics every man even poorest of the poor possess
some wealth. In economics all the goods which are scarce in supply in relation to demand and
for which payment are made are called wealth.
Characteristics or attributes or qualities of wealth:
1) Utility: The first quality of wealth is utility. Wealth must have the power to satisfy human
wants. From this we cannot conclude any things that possess utility is called wealth. For e.g.
air, sunshine etc. have utility but these are not wealth.
2) Scarcity: Scarcity is another characteristics of wealth. The wealth must be limited in
relation to demand. For e.g. air, water etc. are all free goods as their supply is not scarce and
thus cannot be termed as wealth.
3)Transferability: Transferability is another important characteristics of wealth. In economics
transferability means transfer of ownership of goods. If a particular thing cannot be transferred
from one person to another then it cannot be used for the satisfaction of other person.
4)Externality: To be a wealth a commodity must have externality, i.e. it must have its external
shape and structure. Those things which are external to man can only be transferred.

Classification of wealth:
Wealth can be classified as follows:
1) Individual wealth: The wealth of an individual consists of-
a) Material property- like cash, land, building, live-stock, furniture and stocks and share.
b) Non-material property like goodwill of his business.

2) Personal wealth: Personal qualities like skill, ability and intelligence are not wealth
because they are not transferable or saleable. But they get the title of personal wealth.
3) Social or communal wealth: It consists of state and municipal property, such as- roads,
dams, canals, state railways, public parks and libraries, museums etc.

4) National wealth: The term national wealth may be used in the two senses, a narrow sense
and a wide sense. Narrowly speaking it consists of the aggregate wealth of all citizens. In wider
sense, wealth may also include rivers, mountains, a good climate, good government etc. they
are valuable national assets but such things cannot be called wealth in the economic sense.

5) Cosmopolitan wealth: It is the wealth of the whole world, a sum total of the wealth of all
the nation, it includes the wealth of all countries in narrow sense as well as wider sense.

6) Negative wealth: This refers to debts owned by individuals or states.