TMA NO: 01

Economics and Marketing for

Engineers
COURSE CODE: AGM4307

NAME : K.M.WICKRAMANAYAKE
REGISTRATION NUMBER : 620268626
1. Define “Economics and explain why economics is important for engineers.

1.Economics is a social science that studies how individuals, businesses, and societies allocate
scarce resources to satisfy unlimited wants and needs. It analyzes the production, distribution,
and consumption of goods and services, as well as the behavior and interactions of economic
agents such as consumers, producers, and governments.

Economics is important for engineers for several reasons:

1. Resource allocation: Engineers are involved in designing and developing products, systems,
and infrastructure. Understanding economics helps them make informed decisions about the
allocation of resources, such as materials, labor, and capital, to maximize efficiency and
minimize waste.

2. Cost-benefit analysis: Engineers often need to evaluate the costs and benefits of different
design options or projects. Economics provides tools and frameworks, such as cost-benefit
analysis, to assess the economic viability and potential returns of engineering projects. This
helps engineers make rational decisions based on economic considerations.

3. Market dynamics: Engineers work in a market-driven economy where supply and demand
play a crucial role. Understanding economic principles, such as market equilibrium, price
determination, and market competition, helps engineers anticipate market trends, adapt to
changing conditions, and design products that meet consumer demands.

4. Risk assessment: Economics helps engineers assess and manage risks associated with their
projects. Economic analysis can identify potential risks, estimate their impact on costs and
revenues, and guide engineers in implementing risk mitigation strategies. This is particularly
important in large-scale engineering projects with significant financial implications.

5. Sustainability and environmental impact: Economics provides insights into the trade-offs
between economic growth, environmental sustainability, and social welfare. Engineers need to
consider the economic implications of their designs, such as the costs of pollution, energy
consumption, and waste management. By incorporating economic principles, engineers can
develop sustainable solutions that balance economic efficiency with environmental and social
considerations.

In summary, economics is important for engineers as it equips them with the knowledge and
tools to make informed decisions, optimize resource allocation, evaluate costs and benefits,
understand market dynamics, manage risks, and contribute to sustainable development. By
integrating economic principles into their work, engineers can enhance the efficiency,
effectiveness, and long-term viability of their projects.
2. Write short notes on the following

a) Opportunity cost
Opportunity cost refers to the value of the next best alternative that is forgone when making a
decision. In engineering economics, opportunity cost plays a crucial role in decision-making
processes. When engineers are faced with multiple options or projects, they must consider the
opportunity cost of choosing one over the others.

For example, if an engineer has to decide between two projects, Project A and Project B, and
they choose Project A, the opportunity cost would be the value or benefits that could have been
gained from Project B. It could be the potential revenue, savings, or other advantages that
would have been obtained if Project B was chosen instead.

Opportunity cost is important in engineering economics because it helps engineers assess the
trade-offs and make rational decisions. By considering the opportunity cost, engineers can
evaluate the benefits and drawbacks of different options and choose the one that maximizes
their objectives or goals.

Moreover, opportunity cost is not limited to financial aspects. It can also include factors such as
time, resources, and effort. Engineers need to consider the opportunity cost of utilizing their time
and resources on a particular project, as it may limit their ability to pursue other projects or
opportunities.

In summary, opportunity cost in engineering economics refers to the value of the next best
alternative that is sacrificed when making a decision. It helps engineers assess trade-offs, make
rational decisions, and allocate resources efficiently. By considering the opportunity cost,
engineers can optimize their choices and maximize their outcomes.

b)Microeconomics and Macroeconomics

Microeconomics:
Microeconomics is a branch of economics that focuses on the behavior and decision-making of
individual economic agents, such as consumers, firms, and households. It examines how these
agents allocate their limited resources to satisfy their wants and needs. Microeconomics
analyzes the interactions between buyers and sellers in specific markets, the determination of
prices and quantities, and the factors influencing individual economic choices. It explores
concepts such as supply and demand, market equilibrium, consumer behavior, production
theory, and market structures. Microeconomics provides insights into the functioning of
individual markets and helps understand the behavior of economic agents in response to
changes in prices, incomes, and other factors.

Macroeconomics:
Macroeconomics is a branch of economics that studies the behavior and performance of an
entire economy as a whole. It focuses on aggregate variables such as national income,
unemployment, inflation, and economic growth. Macroeconomics examines the
interrelationships between different sectors of the economy, such as households, businesses,
and governments. It analyzes the factors influencing the overall level of economic activity,
including fiscal and monetary policies, international trade, and financial markets.
Macroeconomics also explores the causes and consequences of business cycles, recessions,
and economic fluctuations. It provides insights into the factors that determine the overall health
and stability of an economy and helps policymakers formulate appropriate economic policies.

In summary, microeconomics focuses on the behavior and decision-making of individual

economic agents and specific markets, while macroeconomics studies the behavior and
performance of an entire economy. Both branches of economics are essential for understanding
and analyzing different aspects of economic systems, from individual choices and market
interactions to overall economic performance and policy implications.

c. Fundamental questions in economics

The fundamental questions in economics refer to the key inquiries that economics seeks to
answer:
What to produce: This question revolves around the allocation of resources and the selection of
goods and services to be produced in an economy. It involves decisions about the types of
products, technologies, and industries that should receive resources and be prioritized.

How to produce: This question pertains to the choice of production techniques and methods in
order to maximize efficiency and minimize costs. It considers factors such as the utilization of
labor, capital, and technology in the production process.
For whom to produce: This question relates to the distribution of goods and services among
individuals and groups in society. It examines how income and resources are allocated, and how
the benefits and costs of production are distributed among different segments of the population.

d. Circular flow of income in a simple economy

The circular flow of income is a model that represents the flow of money, goods, and services
between households and firms in an economy. In a simple economy, it includes the following
components:
Households: Households own factors of production (such as labor) and provide them to firms in
exchange for income. They consume goods and services produced by firms.
Firms: Firms use factors of production to produce goods and services, which they sell to
households in exchange for revenue. They also provide income to households in the form of
wages, salaries, and profits.
The circular flow illustrates the continuous flow of income from firms to households and back to
firms through the exchange of goods, services, and payments. It demonstrates how the actions
of households and firms are interdependent and mutually beneficial.
In a market economy, the allocation of resources and the production and distribution of goods
and services are primarily determined by market forces of supply and demand. Prices serve as
signals for producers and consumers, guiding their decisions. Market economies promote
competition, private ownership, and voluntary exchange. Examples of market economies
include the United States, Canada, and most Western economies.

3.a. State the “Law of Demand”

The law of demand is one of the most fundamental concepts in economics. It works with the law
of supply to explain how market economies allocate resources and determine the prices of
goods and services that we observe in everyday transactions.

The law of demand states that the quantity purchased varies inversely with price. In other
words, the higher the price, the lower the quantity demanded. This occurs because of
diminishing marginal utility. That is, consumers use the first units of an economic good they
purchase to serve their most urgent needs first, then they use each additional unit of the good to
serve successively lower-valued ends.

b. What is the difference between changes in demand and changes in quantity

demand?

A Change in Demand refers to an increase or decrease demand in demand that is brought

about by a change in the other factors, except price. Thus, a change in demand is a result of
non-price determinants coming into force too.
Demand
Demand Increased
Demand Decreased

Price
Changes in demand as result of non-price determinants are also termed as increase or
decrease in demand, as the case may be. The other factors are e income of consumers, prices
of other goods related to the good in concern, preferences and expectations of and number of
buyers. Essentially, the non-price determinants result in a change in the prevailing
circumstances which, in turn, lead to a shift in demand.
There is an increase in demand when the demand curve shifts from D to D1. On the other hand,
there is a decrease of demand curve when the demand curve shifts from D to D2.

A Change in Quantity Demand refers to the variation in consumer’s demand 0f a commodity

due to a change in its price, other factors remaining constant. Thus, the only factor that causes
a change in quantity demanded is price.
In case of change in quantity demanded there is upward or downward movement along the
same demand curve.
A change in quantity demanded of a good refers to a change of quantity demanded as a result
of price change of the good.
Graphically, the demand curve remains the same. The changes only shown by a “movement
along the demand curve”.

c. Explain what is illustrated by each graph below.

l. Market Equilibrium

• Market equilibrium refers to the interactions between demand and supply in the market,
causing the quantity demanded to become equal to the quantity supplied at a certain price. That
means the market clearing price has been achieved.
• The price at the point of equilibrium is known price, while the quantity at the point of
equilibrium is known as the equilibrium quantity. However, the point of equilibrium is not stable
or permanent.
• A market occurs where buyers and sellers meet to exchange money for goods.
• The price mechanism refers to how supply and demand interact to set the market price and
amount of goods sold.
• At the market equilibrium point, there is no shortage or surplus.

II. Shortage within a market

• Shortage occurs when demand is exceeding supply. This means that the price is lower than
the price is lower than the equilibrium price. Therefore, the quantity demanded is a lot bigger
than the quantity supplied, as producers are less willing to make more goods if they receive a
lower price. That means the suppliers are discourage to supply at this lower price.
• As a result, goods sell too quickly, which leaves some consumers disappointed. Suppliers will
increase the price to overcome this problem by reducing consumer demand and increase their
willingness to supply. After there has been a new price introduced, the market will return to a ne
equilibrium point.

4.Suppose there is a Call Centre with the following relationship between the number of
workers and the number of phone calls handled (per day).
​
Quantity of Variable Quantity of Output:
Calls Calls
0 0
1 100
2 180
3 240

a. Calculate Average production (AP) and Marginal production (MP) for each quantity of
output.

Quantity of Variable Quantity of Output: Average production (AP) Marginal production

(MP)input labour calls

0 0 0 0
1 100 100 100
2 180 90 80
3 240 80 60

​ . If the call center pays $ 80 per day for each worker, calculate the variable cost for each
b
output level.

Variable Cost = Quantity of Variable Input: Labour

* Wage Rate ($80)
Quantity of Variable Variable Cost for each
Input: Labour output level
0 $0
1 $80
2 $160
3 $240
c. Suppose the call center has a long-term lease for office space and telephones. The
lease costs $50 (per day). Calculate the fixed and the total cost of the call center at each
output level.
Total Cost = Fixed Cost ($50) + Variable Cost

Quantity of Variable Variable Cost for each Total cost

Input: Labour output level
0 $0 $50
1 $80 $130
2 $160 $210
3 $240 $290

d. At which point should a firm decide to stop its production? Explain using cost
curves

The firm should stop production when the marginal cost (MC) exceeds the marginal revenue
(MR), indicating that the cost of producing an additional unit is higher than the revenue
generated from that unit. This point is known as the shutdown point.

However, since the information about revenue or price is not provided, we cannot specifically
identify the shutdown point without additional data on revenue.