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ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING

UNIT -1
INTRODUCTION TO ECONOMICS AND MANAGERIAL ECONOMICS

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DEFINITION OF ECONOMICS
It is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

MACRO ECONOMICS

ECONOMICS
MICRO ECONOMICS

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MACRO ECONOMICS
Macro economics: It studies the functioning of economy as a whole. It examines how the level and growth of output are determined ,analyzes inflation & unemployment asks about the total money supply and investigates why some nations thrive while others stagnate.

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MICRO ECONOMICS
Micro economics: It analyzes the behaviour of individual components like industries ,firms and households

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THEMES OF ECONOMICS
The TWIN THEMES of economics. SCARCITY EFFICIENCY

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scarcity
Goods available in quantities that are too small to meet the demand for it LAW OF SCARCITY: It states that goods are scarce because there are not enough resources to produce all the goods that people want to consume.

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EFFICIENCY
Efficiency means absence of waste,or using the economys resources as effectively as possible to satisfy people needs and desires.

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THREE FUNDAMENTAL ECONOMIC PROBLEMS


Every society must solve three fundamental problems. What How For Whom

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3 fundamental problems
what commodities are to be produced and in what quantities. How shall goods be produced and by whom. For whom shall goods be produced.

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WAYS TO MEET THIS PROBLEMS


MARKET COMMAND FOR WHOM MARKET: Individual and private firms make the major decisions. COMMAND: Government makes all the decisions. MIXED ECONOMICS:Decisions are taken by individuals and firms but the government sets rules that regulate economic life.
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PRODUCTIVE EFFICIENCY
Productive efficiency occurs when society cannot increase the output of one good without cutting back on another good. An efficient economy is on its production possibility frontier.

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ECONOMIC EFFICIENCY
There are several meanings of the term - but they generally relate to how well an economy allocates scarce resources to meets the needs and wants of consumers

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Economic efficiency is further described under the following two categories Static Efficiency
Allocative Efficiency

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ROLE OF MARKETS AND GOVERNMENT


MARKET: Market is a place where goods are bought and sold. MARTKET MECHANISM:Its a mechanism by which buyers and sellers of a commodity interact to determine its price and quantity.

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What does price do in market mechanism


Prices co ordinate the decisions of producers & consumers in a market. Higher prices tends to reduce consumer purchases and encourage production Lower prices encourage consumption and discourage production. Prices are balance wheel in the market mechanism.

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MARKET EQUILIBRIUM
It represents a balance among all the different buyers and sellers. How a market solves the three economic problems. WHAT HOW FOR WHOM
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WHO GOVERNS THE MARKET


Who is incharge of a market economy? Do monopolistic firms are responsible or consumers. The answer is ,we see a dual monarchy shared by consumers and technology. Business cost and supply decisions,along with consumer and demand ,help to determine what is produced .

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THREE FUNCTIONS OF A GOVERNMENT


As a general govt sets the rules of the road,writing laws and enforcing contracts and property rights.

What are govt economy functions? They are to promote efficiency,to promote equity and to foster macroeconomic growth and stability.
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ACTIONS TAKEN BY GOVT


Govt attempts to correct market failures like monopoly and pollution to encourage efficiency. Govt programs to promote equity use taxes and spending to redistribute income towards particular group. Govt rely upon taxes,expenditures and monetary regulation to foster macroeconomic growth and stability to reduc e unemployment and inflation while encouraging economic growth.

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EXTERNALITIES
Externalities occur when firms or people impose costs or benefits on others outside the market place.

It is divided into two types


POSITIVE EXTERNALITIES

EXTERNALITIES
NEGATIVE EXTERNALITIES

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EXTERNALITIES
Externalities (or spillover effects) occur when firms or people impose costs or benefits on others outside the market place.
POSITIVE EXTERNALITIES EXTERNALITIES EXTERNALITIES

NEGATIVE EXTERNALITIES

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POSITIVE EXTERNALITIES
There are many occasions when the production and/or consumption of a good or a service creates external benefits which boost social welfare. In this note we consider the idea of positive externalities and the market failure that can result if the market under-consumes or under-provides these sorts of products. EX :PUBLIC GOODS- Commodities which can be enjoyed by everyone.
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NEGATIVE EXTERNALITIES
Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. Some examples are given below, many of them are environmental.

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INTRODUCTION TO MANAGERIAL ECONOMICS

PROF. V. R . KISHORE KUMAR,


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M.A(Q.E.)(MPhil.)

INDEX
Introduction Definition of Economics and Managerial Economics Scope of Managerial Economics Basic Economic Problems The Firm Role of a Managerial Economist Decision making areas Steps in decision making References
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INTRODUCTION
Emergence of managerial economics as a separate curse of management studies can be attributed to at least three factors a) Growing complexity of business decision making process due to changing market conditions and business

environment
b) The increasing use of economic logic, conceptual theories and tools of economic analysis in the process of business decision making process c) Rapid increase in demand for professionally trained
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managerial manpower

DFINITIONS OF ECONOMICS AND

MANAGERIAL ECONOMICS
ECONOMICS: Economics is a social science . Its basic function is to study how people individual house holds, firms and nations maximizing their gains from their limited resources and opportunities.

In economic terminology it is called as maximizing behaviour or more approximately optimizing behaviour .


Optimization means selecting best out of available resources with the objective of maximizing gains from IFETCE/IT/V sem/2012given resources. 13/MG2452/EEFA/Ver 1.0

Economics is thus a social science, which studies human behaviour in relation to optimizing

allocation of available resources to achieve the


given goals. Eg : individual household behaviour, firm, industry and nation Economics is also a study of choice-making behaviour of the people.
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The origin of the subject could be traced from the works of the Greek philosopher Aristotle who confined the study of economics to household management and acquiring, guarding and making proper use of wealth. The term economics is derived from two Greek words OIKOS(a house) and NEMEIN(to manage).

Prof. Samuleson remarks economics as the oldest of arts and


newest of science, indeed the queen of the social science.
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Definitions of Economics:
Wealth Definition- Adam Smith, J.B.Say, J.S.Mill etc.(Classical definition) Welfare Definition- Marshall, A.C.Pigue etc.(Neoclassical definition) Scarcity definition- Robbins Growth Definition- Paul A Samuelson Moderndefinition

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Managerial Economics
Managerial economics can be broadly defined as
the study of economic theories, logic and tools

of economic analysis that are used in the


process of decision making. Economic theories

and techniques of economic analysis are applied


to analyze business problems, evaluate business

options and opportunities with a view to arriving


at an appropriate business decision.
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Douglas : Managerial economics is concerned with the application of economic principles and

methodologies to the decision making process


within the firm or organization. It seeks to

establish rules and principles to facilitate the


attainment of the desired economic goals of the

management.
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Mansfield : He defines that managerial economics


is concerned with the application of economic concepts and economic tools to the problems of formulating rational decision making. Spencer and Seigleman : It is the integration of economic theory with business practice for the

purpose of facilitating decision making and


forward planning by management
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Economic Theory and Managerial Theory


Economic Theory Managerial Theory 1. It deals with the application of certain principles to solve the problem of a firm

1.
2.

It deals with the body principles


It has the characteristics of both micro and macro economics

3.

It

deals

with

study

of

2. 3.

It has only micro characteristics It deals with the study of only profit theories

individual firm and individual consumer

4.
5.

It based on certain assumptions


It studies economic aspects of the problem

4.

In managerial theory assumptions disappear due to practical situations

5.

It studies both economic and noneconomic concepts.

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Scope of Managerial Economics

Economics has two major branches

1. Micro Economics
2. Macro Economics The term Micro means small and Macro means big. Both are applied to business directly or indirectly. managerial economics comprises both micro and macro economic theories. The parts of micro and macro economics that constitute managerial economics depend on the purpose of analysis.
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The scope of M.E. comprises all the economic concepts, theories and tools of analysis which can be used for analyse the issues related to demand , production and cost, market structure etc.,
In other words managerial economics is economics applied to analysis of business problems and decision making . Broadly it is applied economics
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Micro-economics applied to internal issues : Operational issues are of internal nature. Internal issues include all those problems which arise within the business organization and fall within purview and control of the management . Some of the basic internal issues are : What to produce

How much to produce


Choice of technology i.e. choosing of the factor combination Choice of price i.e. how to price the commodity How to promote sales How to face the price competition
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How to decide on new investments How to manage capital and profit How to manage inventory i.e. stock of both finished goods and raw material Most of the micro economic problems deals with most of these questions.

The Law Demand


The Theory of Production

Analysis of Market Structure and Pricing


Theory
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Profit analysis and management


It guide firms in the measurement and management of profit , in making new allowances for the risk premium, in calculating the pure return on capital and pure profit and also for future planning.

Theory of Capital and Investment Decisions


Knowledge of capital theory can contribute a

great deal in investment-decision making, choice of


projects, maintaining the capital, capital budjeting etc.
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Macro-economics deals with external issues : The type of economic system in the country General trends in N.I., employment, prices, savings and investments Structural change in the working financial institutions viz., banks, insurance companies etc Magnitude of and trends in foreign trade

Trends in labour supply and strength of capital market


Governments economic policies i.e., industrial, monetary, fiscal, price and foreign etc.
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Social factors viz., value system of the society, property rights, customs and habits etc., Political environment i.e., democratic, authoritarian,

socialist political systems, or state attitude towards


private business man etc.

These Environmental factors have a far-reaching


bearing upon the functioning and performance of the firms. Therefore, decision makers have to take in to account the present and future economic, political and social
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Conditions in the country and give due consideration


to the environmental factors in the process of decision

making.
Eg : SEZ in the Nandigram, Tatas small car in Singur district in West Bengal

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BASIC ECONOMIC PROBLEMS


WHAT TO PRODUCE ? WHERE TO PRODUCE ? HOW TO PRODUCE ?

WHOM TO PRODUCE ?
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GOAL OF A FIRM
It says about a)What is to be done? b)Where is the primary emphasis to be placed? c)What is to be accomplished by the various types of plans?

THE FIRM
Meaning : The basic unit for obtaining production which performs crucial role of linking product, factor and money markets. It is an administrative organization, utilising a pool of resources. A business organization under a single management with one or more establishments. IFETCE/IT/V sem/201213/MG2452/EEFA/Ver 1.0

FIRMS,INPUTS AND OUTPUTS


HUMAN RESOURCE

LABOUR
ENTERPRENURES HIP NATURAL (LAND)

F.O.P
CAPITAL RESOURCE S

HANDMADE(STRUC TURES, EQUPMENTS AND INVENTORIES)

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Role of a managerial economist in the firm


Demand estimation and forecasting Preparation of business /sales forecasts Analysis of market survey to determine the nature and extent of competition Analyzing the issues and problems of concerned industry
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Assisting the business planning process of the


firm

Discovering new possible fields of business


endeavor and its cost-benefit analysis Advising on prices, investment and capital budgeting policies Evaluation of capital budgeting etc.
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DECISION MAKING AREAS


Business decision making is influenced not only by

economic considerations, but also by human


behavioral, technological and environmental factors due to growing public awareness. Decision making and processing information are two important tasks of managers In order to make good decisions managers must be able to obtain, process and use sem/2012IFETCE/IT/V information.
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Decision Making Areas

Demand forecastin g

Producti on planning and cost revenue decision

Study of econo mic environ ment


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Pricing and related decision s

Invest ment decisio ns

DEMAND FORECASTING
QUALITATIVE CONSUMER SURVEY JURY OF EXPERT OPINION SALESFORCE COMPOSITE METHOD DELPHI METHOD

QUANTITATIVE

TIMESERIES METHODS

CAUSAL METHODS

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PRODUCTION PLANNING AND COST REVENUE DECISIONS Production Function : The production function is a technological relationship between output and various inputs used

in production viz., land, labour, capital and


technology.

The output depends on the increasing function of


all the factor inputs Q=f(S,L,K,T) IFETCE/IT/V sem/201213/MG2452/EEFA/Ver 1.0

The following types of cost are useful in the


decision areas

Average, Marginal and Total Costs


Fixed and Variable Cost

Direct and Indirect Cost


Replacement and Original Cost

Opportunity and Industrial Cost


Sunk Cost and Outlay Cost
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STUDY OF ECONOMIC ENVIORNMENT


Economic environment is the most significant component of the business environment. It affects the survival and success of a business organization.

Economic environment
Stage of supply of resources of production

General conditions

Industrial conditions
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PRICING AND RELATED DECISIONS


The Price-output decisions are taken under various market structures. The structure of the market refers to the degree of competition in the market for the firms goods and services.

Perfect competition Monopoly market

Market
Monopolistic market

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Oligopoly market

INVESTMENT DECISION
Business firms invest large money in their

projects. Therefore, capital expenditure for


different project proposals compete within

themselves for their claim on scarce resources.


Generally , in business sector itself, individual

firms compete against access to financial


resources and scares .
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The investment decisions are important as Not easily reversible Generally involves large sums of money Highly futuristic and future is full of uncertainty Long gestation periods

Thus, careful financial appraisal of each project


involves larger investments. Due to above reasons, capital decisions fall in the category of investment and known as capital budgeting decisions made by highest level of management. sem/2012IFETCE/IT/V
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STEPS IN DECISION MAKING


Managerial economics is concerned with decision making at the level of firm. These decisions have far reaching effects on the firm. Delay in taking decisions

or implementing decisions might turn in to losses.


Various steps in the decision making by a business firm are as fallows :
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Defining business problem

Determining objective

Exploring available alternatives Assessing consequences of various alternatives Choosing best alternative

Performing sensitive analysis


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