EHU-501 : Engineering & Managerial

Economics

Syllabus:
Unit-I
Introduction : Meaning, Nature and Scope of
Economics, Meaning of Science, Engineering and
Technology. Managerial Economics and its scope in
engineering perspective.
Unit-II
Basic Concepts
Demand Analysis, Law of Demand, Determinates
of Demand, Elasticity of Demand-Price, Income
and cross Elasticity. Uses of concept of elasticity of
demand in managerial decision.

 Unit-III
Demand forecasting
Meaning, significance and methods of
demand forecasting, production function,
Laws of returns to scale & Law of Diminishing
returns scale. An overview of Short and Long
run cost curves fixed cost, variable cost,
average cost, marginal cost, Opportunity cost.

 Unit-IV
Market Structure
Perfect Competition, Imperfect competition Monopolistic,
Oligopoly, duopoly sorbent features of price determination and
various market conditions.
Unit-V
National Income, Inflation and Business Cycles
Concept of N.I. and Measurement. Meaning of Inflation, Type
causes & prevention methods, Phases of business cycle.
Reference Books
Managerial Economics : M. L. Jhingan

Managerial Economics for Engineering : Prof. D.N. Kakkar

Managerial Economics : D.N. Dwivedi
Managerial Economics : Maheshwari.

Introduction
The word Economics is derived from
the Greek word OKIOS NEMEIN
meaning household management
Man is a bundle of desires. Goods
and services satisfy these wants. But
almost all the goods are scares.
To produce goods factors of
production are needed and these are
also scarce.

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The Study of Economics

Economics is the study of how
individuals and societies choose to use
the scarce resources that nature and
previous generations have provided.
It is the study of economic problems.
Wants are motive for economic
activity. Wants leads to efforts and
which lead to satisfaction
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Economic Definitions

Adam Smith gave the Wealth Definition

Alfred Marshall gave the Welfare Definition
Lionel Ribbons gave the Scarcity Definition
Paul Samuelson gave the Growth Definition

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 Why Engineers need to study Managerial economics :

Natural resources (from which we must build things) are becoming
more scarce and more expensive. We are much more aware of
negative side-effects of engineering innovations (such as air pollution
from automobiles) than ever before.
For these reasons, engineers are tasked more and more to place their
project ideas within the larger framework of the environment within
a specific planet, country, or region.

Engineers must ask themselves if a particular project will offer some

net benefit to the people who will be affected by the project, after
considering its inherent benefits, plus any negative side-effects
(externalities), plus the cost of consuming natural resources, both in
the price that must be paid for them and the realization that once
they are used for that project, they will no longer be available for any
other project(s).

Simply put, engineers must decide if the benefits of a project exceed

its costs or not.

Who is a Manager ?
A manager is a simple lay man person who manages
things around.
A manager has to manage :
Ideas ( i.e., objectives, plans and policies )
Things (i.e., capital, machinery, materials and other
physical resources) ;
People (i.e., human resources) .
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Questions that managers must answer :

Objectives of a firm?
Economic Objectives (profit maximisation, sales
maximisation, Techniques of production, market share, etc.)
Non Economic Objectives (a good place for the employees
to work, provide good products and better services to the
customers, act as a good citizen .
What to produce? (demand analysis and forecasting)
Make or buy?
How to produce? (production technology).
Cost of producing commodity?
Price and quantity of output to be produced?
Profit?
Investment?
Product policy, sales promotion and market strategy?
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Introduction of Managerial Economics

Economics is the study of the behaviour of human beings in
producing, distributing and consuming material goods and
services in the world of scarce resources.
Management is the discipline of organizing and allocating
firms scarce resources to achieve its desired objectives.
We combine the two terms Economics & Management and
define Managerial Economics as,
the use of economic analysis to make business decisions
involving the best use of an organizations scarce resources.

Managerial Economics can be defined as amalgamation of

economic theory with business practices so as to ease decisionmaking and future planning by management.
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DEFINITIONS OF MANAGERIAL ECONOMICS

McGuigan and Moyer: Managerial economics is the
application of economic theory and methodology to
decision-making problems faced by both public and
private institutions.
McNair and Meriam: Managerial economics consists
of the use of economic modes of thought to analyse
business situations.
Spencer and Siegelman: Managerial economics is the
integration of economic theory with business practice
for the purpose of facilitating decision-making and
forward planning by management.

 Importance of managerial economics:

Spencer and Siegelman have described the importance

of managerial economics in a business and industrial
enterprise as follows:
1. Accommodating traditional theoretical concepts to the
actual business behaviour and conditions
2. Estimating economic relationships: Managerial
economics estimates economic relationships between
different business factors such as income, elasticity of
demand, cost volume, profit analysis etc.
3. Predicting relevant economic quantities: Managerial
economics assists the management in predicting various
economic quantities such as cost, profit, demand, capital,
production, price etc.
4. Understanding significant external forces:
5. Basis of business policies:

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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 CHARACTERISTICS OF MANAGERIAL ECONOMICS

1. Microeconomic in nature: It studies the problems and

principles of an individual business firm or an individual
industry.
2. Normative economics: It is concerned with varied
corrective measures that a management undertakes under
various circumstances.
3. Future planning, policy-making, decision-making and
optimal utilisation of available resources, come under the
banner of managerial economics.
4. Pragmatic:
5. Uses theory of firm: Managerial economics employs
economic concepts and principles, which are known as the
theory of Firm or 'Economics of the Firm'.
6. Takes the help of macroeconomics:
7. Aims at helping the management: Managerial economics
aims at supporting the management in taking corrective
decisions and charting plans and policies for future.
8. A scientific art: Science is a system of rules and principles .

The scope of Managerial Economics

Economics is grouped under two broad categories:

Microeconomics is the branch of economics that

examines the functioning of individual industries and the

behavior of individual decision-making unitsthat is,
business firms and households.

Macroeconomics is the branch of economics that

examines the economic behavior of aggregates

income, output, employment, and so onon a national
scale. Ex: Total production, total consumption, total

savings and total investment.

The areas of business issues to which economic

theories can be directly applied may be divided into two
categories :
Operational or internal issues.
Environmental or external issues.
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The
following
are
Macroeconomics:

the

fields

covered

by

1. Theory of National Income, Output and Employment

with its two constituents, namely, the theory of
consumption function, the theory of investment
function .
2. Theory of general Price level with its constituents of
the theories of inflation, deflation .
3. Theory of Economic Growth dealing with the long-run
growth of income, output and employment.

The
following
are
Microeconomics:

the

fields

covered

by

1. Theory of Product pricing (Theory of Demand & Theory

of production and Cost)
2. Theory of Factor pricing. (Theory of DistributionWages, Rent, Interest, profits)
3. Theory of Economic Welfare.

 SCOPE OF MANAGERIAL ECONOMICS:

1. Theory of demand
Demand Analysis
Demand Theory (Consumer Behaviour)

2. Theory of production
Variable factor
Fixed Factor

3. Theory of exchange or price theory

4. Theory of profit

Demand of the product

Prices of the factors of production
Nature and degree of competition in the market
Price behaviour under changing conditions

5. Theory of capital and investment

Selection of a investment project
Efficient allocation of capital
Assessment of the efficiency of capital
Minimising the possibility of under capitalisation or
overcapitalisation.

Environmental issues

The type of economic system of the country

Social factors like value system of the society
Political system of the country
Business cycles
Monetary and fiscal policy of the country
General trends in :
economy concerning the production, employment,
income, prices, saving and investment etc.
The working of financial institutions in the country
Foreign trade of the country

General attitude and significance of social

organisations like trade unions, producers unions
and consumers cooperative societies etc.

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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Role of Science ,Engineering and Technology in

Economic Development
Science is the systemized body of knowledge (contains
concepts, theories and principles which are universal
and true) pertaining to a particular field of enquiry.
Science passes through 3 stages of growth before
coming to the level of production which results in
economic development. These stages are:
Stage 1: Formulation of the scientific principles
Stage 2: Application of the scientific principles( known
as innovation)
Stage 3: Development of the innovation to the point of
commercial exploitation e. g. (development of a Solar
Cooker)
(Cont.)

 Science as the prime driver for INVENTIONS :

An invention is a scientific discovery
Process invention
Product invention
Innovation is the practical application of an
invention. Innovation causes changes in the
following areas:
Increasing productivity
Increasing sell
Changing the combination of factors(input)
(Land, labour , Capital)

Engineering
Engineering is the profession in which knowledge of
the mathematical and natural sciences gained by study,
experience and practice are applied with judgment to develop
ways to utilize economically ,the material and forces of nature
for the benefit of mankind,.
Engineering facilitate Economic Development In two ways:
By Mechanization of production process
Large scale production
Time and efforts saving

Development of better infrastructure : It consist of

Better means of transport (Roads , Railway Tracks , engines,

aeroplane , ship, Rail etc.)
Better means of Energy (Electricity , power)
Better means of Communication (better connectivity , telephone,
fax, internet etc.)

Technology
Technology refers to the body of knowledge ,skills
and procedures for preparing , using and doing useful
things.
Technological development is a continuous process.
Types of technology:
1. Labour intensive technology
2. Capital intensive technology
3. Neutral Technology
4. Intermediate Technology
Technology leads to:
1. Greater output
2. Shorter working hours
3. Efficient use of Raw material

Managerial Economist and Business Decisions

Demand Decisions /Forecasting (Consumer

behavior, Preferences, price situation, changes in
employment and BOP)
Price-Output Decisions (it decide Quantity to
produce, Cost, revenue and profit)
Production Decisions (Technology , plant size,
product mix and capital mix etc.)
Investment Decisions (Production capacity
expansion , new product, new plant, Rate of
investment , )
Advertising Decisions
Profit Decisions

Application of Economic Concepts,

Tools and Techniques: In applying the
economic principle to solve the practical business
problem ,Economist has to use some basic economic
tools discussed below :

Scarcity Principle
Opportunity Cost principle
Incremental Principle or marginalism
Principle of time perspective
Discounting principle
Equi Marginal principle