ENGINEERING AND MANAGERIAL ECONOMICS

MODULE I

CHAPTER 1: INTRODUCTION AND BASIC CONCEPTS

Economics is a social science that studies the behaviour patterns of human beings.
The basic function of economics is to study how individuals, households, organizations, and
nations utilize their limited resources to achieve maximum profit.
Therefore, for simplifying the concept, economics is defined by taking four viewpoints,
which are explained as follows:

1. Wealth Viewpoint:
Economics is a science of wealth.
Adam Smith is regarded as the father of economics, he stated that the main purpose of all
economic activities is to gain maximum wealth as possible therefore; he advocated that
economics is mainly concerned with the production and expansion of wealth.

2. Welfare Viewpoint:
Economics is a science of welfare.
Economics is a study of mankind in the ordinary business of life; it examines that part of
individual and social action which you most closely connected with the attainment/profit.

3. Scarcity Viewpoint:
Economics as a science of scarcity.

“Economics is the science which studies human behaviour as a relationship between ends and
scarce means which have alternative uses.
The definition provides three basic features of existence of human beings, namely unlimited
wants, limited resources, and alternative uses of limited resources.
According to Robbins, an economic problem arises because of unlimited human wants and
limited resources.

4. Growth Viewpoint:
Indicates the modern perspective of economics.

According to Paul Samuelson, “Economics is a study of how men and society choose with or
without the use of money, to employ scarce productive uses resource which could have
alternative uses, to produce various commodities over time and distribute them for
consumption, now and in the future among the various people and groups of society.”

Importance of economics
Dealing with a shortage of raw materials. Economics provides a mechanism for looking at
possible consequences as we run short of raw materials such as gas and oil.
How to distribute resources in society. To what extent should we redistribute income in
society? Is inequality necessary to create economic incentives or does inequality create more
economic problems?
The principle of opportunity cost. Politicians win elections by promising more
spending and cutting taxes. This is because lower taxes and more spending is what voters
want to hear. However, an economist will be aware that everything has an opportunity cost
 Knowledge and understanding. One of the principal jobs for economists is to
understand what is happening in the economy and investigate reasons for poverty,
unemployment and low economic growth.

Economic studies can try to examine the economic effects of immigration. This can help
people make a decision about political issues.

Forecasts. Economic forecasts are more difficult than understanding the current situation.
However, although forecasts are not always reliable, they can help give decision makers an
idea of possible outcomes.

Evaluation. Economics is not a definitive science like Maths. Because of many unknown
variables, it is impossible to be definitive about outcomes, but a good economist will be
aware the result depends on different variables, and there are different potential outcomes.
This should help avoid an overly ideological approach.

Applying economics in everyday life. Modern economists have examined economic forces
behind everyday social issues

Economics as a Science and an Art

Economics as a Science:

Science is a systematic study of knowledge and fact which develops the correlation-ship
between cause and effect. Science is not only the collection of facts, according to Prof.
Poincare, in reality, all the facts must be systematically collected, classified and analyzed.
There are following characteristics of any science subject, such as;
(i) It is based on systematic study of knowledge or facts;
(ii) It develops correlation-ship between cause and effect
(iii)All the laws are universally accepted
(iv) All the laws are tested and based on experiments;
(v) It can make future predictions;
(vi) It has a scale of measurement.
However, the most important question is whether economics is a positive science or a
normative science?

Positive science deals with all the real things or activities. It gives the solution what is? What
was? What will be? It deals with all the practical things.

For example, poverty and unemployment are the biggest problems in India. The life
expectancy of birth in India is gradually rising. All these above statements are known as
positive statements. These statements are all concerned with real facts and information.
On the contrary, normative science offers suggestions to the problems. The statements
dealing with these suggestions are coming under normative statements. These statements give
the ideas about both good and bad effects of any particular problem or policy.
For example, illiteracy is a curse for Indian economy. The backwardness of Indian economy
is due to ‘population explosion’.

Economics and Positive Science:

The following statements can ensure economics as a positive science, such as;
(i) Logically based:
The ideas of economics are based on absolute logical clarifications and moreover, it develops
relationship between cause and effect.
(ii) Labour Specialisation:
Labour law is an important topic of economics. It is based on the law of specialisation of
labour Economists must concern with the causes and effects of labour-division.
(iii) Not Neutral:
Economics is not a neutral between positive and normative sciences. According to most
economists, economics is merely positive science rather than normative science.
Economics and Normative Science:

The following statements can ensure economics as a normative science, such as,

(i) Emotional View: A rational human being has not only logical view but also has
sentimental attachments and emotional views regarding any activity. These emotional
attachments are all coming under normative statements. Hence, economics is a normative
science.
(ii) Welfare Activity: Economics is a science of human welfare, All the economic
forwarded their theories for the development of human standard of living Hence, all the
economic statements have their respective normative views.
(iii) Economic Planning: Economic planning is one of the main instruments of economic
development. Several economists have given their personal views for the successful
implementation of economic plan. Hence, economics is coming under normative science.
All these lead us to the conclusion that ‘Economics’ is both positive and normative science. It
does not only tell us why certain things happen however, it also gives idea whether it is right
thing to happen.
Economics as an Art:
‘Knowledge is science, action is art.’
In other way, art is the practical application of knowledge for achieving particular goals.
Science gives us principles of any discipline however, art turns all these principles into
reality. Therefore, considering the activities in economics, it can claimed as an art also,
because it gives guidance to the solutions of all the economic problem

SCOPE / BRANCHES OF ECONOMICS

(1) Microeconomics
(2) Macroeconomic
Engineering

What is engineering?

Basically, to put it into simple terms, engineering is where you solve problems. To add a
bit more to it, engineers use technical, as well as scientific knowledge in order to make
judgments. By using their imaginations, they come up with solutions to problems either
new or old. According to the Accreditation Board for Engineering and Technology
(ABET):
“Engineering is the profession in which a knowledge of the mathematical and natural
sciences gained by study, experience, and practice is applied with judgment to develop
ways to utilize economically the materials and forces of nature for the benefit of
mankind.”
Role of Engineering in Economic Development

There is a great reliance on technology to solve environmental problems and economic

development around the world today. Engineering plays an important role in economic
development by: (1) mechanization of the production process, and (2) development of
infrastructure

Technology

What Is Technology?
Technology is the making, usage and knowledge of tools, techniques, crafts, systems or
methods of organization in order to solve a problem or serve some purpose. The word
technology comes from Greek technología; from téchnē, meaning "art, skill, craft", and -
logía, meaning "study of-". The term can either be applied generally or to specific areas:
examples include construction technology,medical technology, and information technology.

MANAGERIAL ECONOMICS: Managerial economics helps in decision-making as it involves

logical thinking. Moreover, by studying simple models, managers can deal with more complex and
practical situations.

CHARACTERISTICS OF MANAGERIAL ECONOMICS

 Managerial Economics is micro-economic in character.

 Managerial Economics largely uses that body of economic concepts and principles, which
is known as 'Theory of the firm' or 'Economics of the firm'.
 Managerial Economics is pragmatic.
 Managerial Economics belongs to normative economics rather than positive economics
(also sometimes known as Descriptive Economics).

MANAGERIAL ECONOMICS AND OTHER SUBJECTS

Managerial Economics and Economics: A survey in the U.K has shown that business economists
have found the following economic concepts quite useful and of frequent application:-

i. Price elasticity of demand, vi. Marginal revenue product,

ii. Income elasticity of demand, vii. Speculative motive,
iii. Opportunity cost, viii. Production function,
iv. The multiplier, ix. Balanced growth, and
v. Propensity to consume, x. Liquidity preference.
 Business economics have also found the following main areas of economics as useful in their
work:-

i. Demand theory, v. Money and banking,

ii. Theory of the firm-price, output and vi. National income and social accounting,
investment decisions, vii. Theory of international trade, and
iii. Business financing, viii. Economics of developing countries.
Public finance and fiscal policy,

ROLE OF MANAGERIAL ECONOMIST:

1. Environmental Studies
2. Business Operations
3. Specific Functions:
a) Sales forecasting.
b) Industrial market research.
c) Economic analysis of competing companies.
d) Pricing problems of industry.
e) Capital projects.
f) Production programs.
g) Security/investment analysis and forecasts.
h) Advice on trade and public relations.
i) Advice on primary commodities.
j) Advice on foreign exchange.
k) Economic analysis of agriculture.
l) Analysis of underdeveloped economics.
m) Environmental forecasting

PRINCIPLE/TOOLS OF MANAGERIAL ECONOMICS: It is useful and essential for

better results to identify and understand the basic concepts. These concepts or principles constitute the
most significant contribution of economics to managerial economics. The basic concepts or principles
are as under:

1. Opportunity cost: Opportunity cost of a decision is the sacrifice of alternatives

required by that decision. Opportunity cost represents the benefits or revenue forgone by
pursuing one course of action rather than another.
The concept of opportunity cost implies three things:

 The calculation of opportunity cost involves the measurement of sacrifices.

 Sacrifices may be monetary or real.
 The opportunity cost is termed as the cost of sacrificed alternatives. The economic
Significance of opportunity cost is as follows:
 It helps in determining relative prices of different goods.
 It helps in determining normal remuneration to a factor of production.
 It helps in proper allocation of factor resources.
2. Discounting principle: This principle talks about comparison of the money value
between present and future time.
The formula used to find the discount factor is PV =

Future Value / (1+i) n

PV =present value, i= interest on the account & n= no. of years

3. Equi-marginal principle: Marginal Utility is the utility derived from the additional
unit of a commodity consumed. The laws of equi-marginal utility states that a consumer will
reach the stage of equilibrium when the marginal utilities of various commodities he
consumes are equal.
According to the modern economists, this law has been formulated in form of law of
proportional marginal utility. It states that the consumer will spend his money-income on
different goods in such a way that the marginal utility of each good is proportional to its
price, i.e.
MUx / Px = MUy / Py = MUz / Pz

Where, MU represents marginal utility and P is the price of good.

4. Marginal Analysis: Marginal analysis is a management strategy that involves

evaluating the costs and benefits of undertaking additional activities in an effort to maximize
company profits.
Decision-makers take into consideration cost and production variables, such as the units
produced, to determine how the firm’s profitability changes based on incremental changes in
these variables.
Managers use marginal analysis as a profit-maximization tool that performs a cost-benefit
analysis of a marginal change in the production of a good or a service, seeking to determine
how an incremental change in production volume can affect the business operations.

5. Incremental Cost: Incremental cost or differential cost is a business planning analysis

that looks at the additional cost to the company if a particular action is taken.

In other words, if a company decides to take action on a new project, what extra expenses
will the new project create?
Incremental analysis differs from marginal analysis only in that it analysis the change in the
firm's performance for a given managerial decision, whereas marginal analysis often is
generated by a change in outputs or inputs.

Incremental analysis is generalization of marginal concept. It refers to changes in cost and

revenue due to a policy change.