ENGINEERING ECONOMICS

An Introduction to the Course: COURSE CODE : HU 411 CREDIT HOURS : 2-0 COURSE CONSISTS OF THE FOLLOWING MAIN TOPICS:
1. 2. 3. 4. 5. Introduction to Economics/ Fundamental Economics Concepts/ Supply & Demand Accounting/ Cost Benefit Ratios/ Interpretation of Financial Statements Types of Markets and Forecasting Industrial Organization Site Selection and Factory Layout

ASSESMENT OF SESSION WORK:

1. 2. 3. 4. Quizzes Assignments OHT END TERM : : : : 68 2 2 1

INTRODUCTION TO ECONOMICS
-WHAT IS ECONOMICS? -WHAT ARE WE TALKING ABOUT WHEN WE SAY ECONOMICS? -WHAT COMES TO MIND WHEN YOU THINK OF ECONOMICS? -WHAT DOES ECONOMICS DEAL WITH?

WHAT IS ECONOMICS ALL ABOUT? WHAT DOES IT DEAL WITH?

Act of earning money and at the same time producing goods and services required by others is called an Economic Activity. Sum total of economic activity is an ECONOMIC SYSTEM, which is important to understand as it effects our material life, i.e.,
How we regulate our spending Organization involved in manufacture of goods we purchase Principles that govern the pricing of goods we purchase, etc.

Also TIME & MONEY are limited, we try to spend them in such a way so as to get maximum satisfaction/ benefit --- i.e. we have to choose the best solution --- we are therefore constantly economizing on time and money. Ultimate objective of Economics is to make a feasible decision which solves the problem of limited resources to meet the need of humans. ECONOMICS is the study of making choices. It is concerned with HOW people make decisions in a world of scarcity.
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NOW LETS LOOK AT SOME OF THE DEFINITIONS OF ECONOMICS

DIFFERENT WRITERS HAVE GIVEN DIFFERENT DEFINITIONS OF THE SUBJECT OF ECONOMICS: 1. 2. 3. Economics is some times defined as a science of wealth. Some define it as the science which deals with the nature, production and distribution of wealth. Another definition given to Economics is Economics is a science which studies human behavior as a relationship between ends and scarce means, with alternate uses. The Economists Dictionary of Economics defines Economics as the study of the production, distribution and consumption of wealth in the human society.
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SCARCITY
1. The concept of scarcity is important to the definition of ECONOMICS because scarcity forces people to choose how they will use their limited resources in an attempt to satisfy their unlimited wants and desires.
ECONOMICS is sometimes called the study of scarcity because an economic activity would not exist if scarcity did not force people to make choices.

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Scarcity means that there are not enough, or there can never be enough goods, and services to satisfy the needs of individuals, families and societies.
Scarcity requires choice. People must choose what they desire for; they will either be satisfied or otherwise. A decision of consuming more of a good or service will lessen the consumption of others because of limited resources. 5

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LAWS OF ECONOMICS
HOW ARE THE MADE? When the working of ECONOMIC SYSTEM shows uniformities of behavior or action, the Economist is able to formulate Economic Laws, which are statements that, given certain causes in the economic sphere, certain effects are likely to follow.
ARE THEY EXACT OR PRECISE LAWS? Since Economics is considered a social science, and involves complex Relationships and human behavior, these laws are less precise or exact than the physical sciences. Thus, the first principle to understand is that ECONOMIC LAWS can not be rigid or permanent. Economic Laws hold good on the average and NOT in every particular case. THUS, ECONOMICS IS NOT AN EXACT SCIENCE. Very accurate looking economic laws are still only approximate, not exact.
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WHY DO WE STUDY ECONOMICS ? WHAT ARE ITS USES?

1. The ECONOMIC SYSTEM is important to understand as it effects

our material life, i.e. - How we regulate our spending - Organization involved in manufacture of goods we purchase - Principles that govern the prices of goods we buy.

2. Gives us insight into forces underlying the working of an economic system. This helps us in framing policies needed for the welfare of the people, firms, etc.
3. Enables consumers, workers, capitalists etc to make their decisions more wisely/ intelligently 4. Study of economics helps us to decide which of the several alternatives to choose; choose wisely and avoid many pitfalls in arranging our economic affairs.
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TYPES OF ECONOMICS
MICROCECONOMIC MACROECONOMICS

DIFFERENCE BETWEEN THE TWO?

TYPES OF ECONOMICS
MICROECONOMICS 1. It is the study of individual decision-making units and markets within the economy It looks at decision making and how it influences the behavior of individual in business and households It focuses on the specific expenditure and decisions of individual consumers and the forces (taste, prices, income) that influence these decisions. Microeconomics is the components of the larger economy the details of macroeconomics.
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MACROECONOMICS 1. It is the study of the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general price level. It is concerned with the economy as a whole. It is the branch of economics that studies the overall level of prices, output and employment in the economy.

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FUNDAMENTAL ECONOMIC CONCEPTS/ TERMS: We need to understand

some of the fundamental concepts/ their meanings before proceeding further into the subject:

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HUMAN WANTS: These are the requirements/ needs of mankind. He lives, by the satisfaction of a large number of different wants. i.e. food, clothing, shelter are the BASIC WANTS, then comes medical, education, travel, recreation, etc. HUMAN WANTS have the following CHARACTERISTICS:

Human wants are unlimited one is satisfied, others appear Individually wants are satiable becomes less and less pressing as it is more and more satisfied. Wants can recur hunger, thirst, etc. Human Wants compete with each other A person satisfies the most pressing want first. Same want can have alternate method of satisfaction

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FUNDAMENTAL ECONOMIC CONCEPTS .. continued

2. GOODS AND SERVICES: Any thing that satisfies a Human want is a GOOD. i.e. food, shelter, clothing etc. - SERVICES also satisfy Human Want.
- GOODS are of two types:(a) CONSUMER GOODS: Satisfy want directly, i.e. food, clothing etc (b) PRODUCER GOODS or CAPITAL GOODS: Used for production of other goods, i.e. raw material etc. 3. UTILITY: The power of a good to satisfy a human want is called utility. - An item which does not have utility can not be called a good. - Value of utility is measured in some medium of exchange called price. i.e. Greatest utility, we are ready to pay the highest price. FREE GOODS AND ECONOMIC GOODS: - FREE GOODS: Goods that are not scarce. Plenty for every body, i.e. air, sunshine - ECONOMIC GOODS: All goods that possess utility and are also scarce, are called economic goods. (Scarce means not enough compared to the want it has to satisfy)
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FUNDAMENTAL ECONOMIC CONCEPTS .. continued

5. WEALTH: Economic goods are also called wealth - Under wealth we include all goods which possess utility and are also scarce. - Should be transferable also i.e. can change hands. KINDS OF WEALTH: (a) Individual Wealth: Belongs to an individual (b) Personal Wealth: Individuals capacity or skill to earn money. (c) Social Wealth: Also called Public wealth, owned by society, community, government etc., i.e. parks, state farms, roads, railways, etc. (d) National Wealth: Includes rivers, minerals, mountains, etc. (e) International Wealth: Available to whole world, i.e. seas, oceans, etc. VALUE AND PRICE: The power of a good to command other goods or services in exchange for it, is called its Value. - We can that free goods, possess only utility, while economic goods possess value. - To be of value, a good must be scarce and possess utility also. - When value is expressed in terms of money, it is called price.

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FUNDAMENTAL ECONOMIC CONCEPTS .. continued

6. INCOME AND TRANSFER PAYMENTS: INCOME: Only those payments are income which are received in return for services rendered. Could be rent of house, interest on deposits, etc. (a) GROSS INCOME: Total money received by the recipient of income. (b) NET INCOME: Income remaining after deducting from Gross Income various cost incurred in earning that income. TRANSFER PAYMENTS: Pensions, un-employments, etc benefits are not income in the actual sense. They come under Transfer Payments 7. CONSUMPTION: Consumption can be defined as incurring expenditure (or spending of of income) for the purchase of consumer goods - Once the goods have been purchase by the final consumer, it is regarded as having been consumed. SAVINGS: That part of income which is not spent on consumers good. INVESTMENT: In actual sense, INVESTMENT occurs when expenditure is done in producers goods, which are purchased for the first time, as only then PRODUCTION is stimulated. - Buying of shares in a newly floated company would be investment - Act of investment is which leads to the increase of capital of the country. - Similarly, when one purchases a new machine in the market or constructs a factory building, he is investing (increase of capital goods in a country). 13

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FUNDAMENTAL ECONOMIC CONCEPTS .. continued

10. MARGINAL: Terms like marginal utility or marginal consumption etc., are used to indicate the last or final unit where either UTILITY or CONSUMPTION or SALE ends.
MAGINAL UTILITY: The additional utility added to the total utility by the last item consumed/ purchase is called the Marginal Utility. - and the unit we buy at this stage is said to possess MARGINAL UTILITY. - the larger the supply of an item, the smaller is the increase in utility of each additional item. - This is the point where further consumption or sale ends, or the point where we buy our last unit of any commodity. - And this unit/ point where we buy our last item is called MARGINAL CONSUMPTION. MARGINAL REVENUE OR MARGINAL COST: Refers to additional revenue or costs, that will result from increasing the output of a system by one or more units. MARGINALCOST CONCEPT: - Marginal cost is one of the key concepts of economics. - Marginal cost denotes the extra or additional cost of producing an extra unit of output - A marginal cost could be quite low or quite high also, depending upon the type of service/ production it refers to.
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FUNDAMENTAL ECONOMIC CONCEPTS .. continued

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COMPETITION: Most economic principles are formed for situations where we have perfect competition
PERFECT COMPETETION occurs when any given product is supplied by a large

number of suppliers/ vendors, and there is no restriction against additional vendors entering the market. Freedom for both buyer and vendor. 12. MONOPOLY: It is the opposite of competition. A perfect monopoly exists when a UNIQUE product or service is available from only a single vendor and that vendor can prevent entry of other vendors into the market.

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End of this lecture

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