ECONOMTCS FOR ENGINEERS (ucHUr346)

SYLLABUS

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Basic economic problems - Production Possibility Curve - Utility Law of

- diminishing marginal
utility -Demand: Factors determining demand - Law of Demand - Demand curve- price
elasticty of
demand- nleasurement ofprice elasticity and its applications Supply: factors
- determining supply -
Law of supply - Supply curve- Equilibrium price determination- Changes in
demand ana suppiy ina
its effects on equilibrium price and quantity Production: Production function - Law
of variable
proportion -Returns to scale- cobb-Douglas production Function

cost: cost concepts - Private cost and social cost - Sunl< cost opportunity cost -Explicit
-
implicit cost -Short run cost curves -Long run average cost curve -Revenue concepts
and
point Market: Perfect Competition - Monopoly - Monopolistic Competition - Break-even

equilibrium of a firm) - oligopoly - Features - Kinked demand model. [features and

National income: Concepts (GDP, GNP and NNP)- Final goods and Intermediate goods -
Methods of
Estimation -output method - expenditure method-- Difficulties in the measurement
of national
income. Inflation: Causes and Effects - Measures to Control Inflation - Monetary
and Fiscal policies
- Repo and reverse repo rate

DU LE-4

Value Analysis and value Engineering: Cost Value, Exchange Value, Use
Value, Esteem Value - Aims,
Advantages and Application areas of Value Engineering - vilue procedure.
Engineering
Capital Budgeting:Time value of money - Net Presenivalr" Method - Benefit
Rate ofReturn -- Payback - Accounting Rate ofReturn.
Cost Ratio - Internal
 Economics is the study about the efficient utilization of limited resources to produce
goods and services to satisfy unlimited wants of the people. There are two broad
branches
in economics' Micro economics and Macro economics. Micro economics is the study of
individual economic units. That is the study of individual consumer, firm, price of particular
commodity etc. Macro economics is the study of the economy as a whole. That is aggregate
demand, aggregate supply, general price level, national income etc.

Engineering economics is a specialized field that applies economic principles to

engineering design and decision-making. It helps engineers evaluate the financial viability
of projects, optimize resource allocation, and make informed choices that maximize value
while considering factors like time value of money, costs, benefits, and risk.

Economic problems arise in an economy because of the unlimited wants of human

being,
limited or scarce resources and alternative use of resources. Economics is concerned with the
efficient allocation of scarce resources. An Individual, organization or nation has to
make three
fundamental types of choices about how to allocate the scarce resources available
to it. Three
questions arise from this which is considered as the problems of economy are
discussed below.

[1) what to produce and how much to produce: since resources are scarce, an economy cannot
provide everything to its people. A number of choices are available in an
economy.
Therefore it has to decide what types of goods are to be produced, that is more
consumer
goods or capital goods, necessary items or luxury items. Once the types
of goods are decided
then their quantities are also to be decided. : .

[2) How to produce: Having decided what to produce and how much to produce, the next
decision relates to how to produce. It deals with the production technique. given
A good can
be produced by different techniques mainly with the help of labour intensive
technique or
Capital intensive technique.
Eg: Cloth can be weaved in power looms or hand looms. one is labour
intensive and the
other is capital intensive. Both the techniques have its own merits and demerits.
Labour
intensive techniques create more employment opportunities and Capital
intensive
techniques foster economic growth.
[3) For whom to produce: It is related to distribution of goods produced. The problem is related
to the manner in which the product will be distributed among different individuals.
The
methods adopted by the capitalist countries are entirely different from
socialist countries.
Under Capitalism, it is based on the ability to pay, ie the people having
enough income only
 3

can purchase goods. Where as in the socialism, decisions of goods and services are taken
on

the basis of requirement of the individual.

The central problems of an economy can be analyzed by a geometrical tool

called PPC Curve'

ppC curve shows various combinations of two commodities that can be produced with available
on the basis of
technology and given resources which are fully and efficiently employed. It is drawn
three assumPtions.

(aJ Only two goods are produced in the economy ( Good 'X' and Good' Y').
[b) The resources are fully employed.
[c) The technology remains constant'
[d) The time Period is short.
Based on these assumptions, the various combinations of two commodities that
can be

Produced are given below,

Good Good v url attai nable

Possibilities (xl- (Yj- pothon
Rice Wheat fr
W1
A 0 15 t- {ull ernPlorlment oF
s 'Wautces
B 1 74 (/
C 2 12 L)ndut ULilisah'ort
D 3 9 3
E 4 5
o f' aes o Lfi aQs

F 5 0

Rrce
x
"Y". In
The table represents different production possibilities between Good "X" and Good
"F" the
possibility ,A' all resources are used for the production of Good 'Y' alone. In possibility
resources are utilized for the production of Good 'X' alone. Between these two extremes
the
economy can produce various combinations of two goods as shown in possibilities'B','C',"D'
and'E'.

I.t5e figure, the production of Rice is shown on the 0X axis and production of Wheat
on the OY axis. Joining the combinations we get a production possibility curve'

of wheat is
The figure shows that to increase in the production of Rice from F1 to F2 the production
to be reduced from w1 to w2. This is trade off. That is more of one commodity can be produced
only by reducing the production of other commodity'
that
The ppC is a concave to the origin because it shows the rate of transformation of commodity
is rate of sacrifice ol one commodity leads to the production of extra unit o[ another
commodity'
 4

Points on the curve [A, B, C, D, E&F) represent a combination of Rice and Wheat and this shows full
employment of resources. The point inside the curve indicates that the resources
are not fully
utilized which shows under utilization of resources. The point outside the
curve shows beyond
tlre capacity olthe firm, it is unattainable portion. This is maybe due
to the scarcity of resources,

Opportunity-eo-st: It is the value of the next best alternative foregone when the best one is chosen.
Suppose a farmer can cultivate either wheat or rice in his farm. If he decides
to produce rice, the
value of wheat given up is the opportunity cost of rice production. When a decision
is made on the
basis of opportunity cost, resources allocation becomes optimum and efficient.

,Ar

o\-\g$
uuuly
Utility may be defined as the power , ?olffi
"f from person [z human wants. It resides in
the mind of a consumer and it differs to person. Demand for a commodity
depends on its utility. It is a subjective concept and cannot be exactly
measured. It can be
measured indirectly in terms of money or with an imaginary unit called
utils.
TOTAT UTILITY fTU)

It is the total satisfaction derived from the consumption of different units of a

commodity.
suppose a consumer consumes 'n' units of a commodity, his total utility
from this .n, unit
equal to Tun = U1+U2+U3+...,.....Un

MARGINAL UTITITY (MU) r

It is the addition to total utility by the consumption of an additional unit. It is the utility
:"
derived from the Iast unit consumed.
Mu = Tu(n)-Tu(n-1)
MU = Marginal Utility
Tun= Total utility of n units
Tun-1"=Total utility of [n-1J units.

This Law was developed by the Neo economist Alfred Marshall.

The Iaw states that as a
consumer consumes more and more units of a commodity; the
marginal utility goes on
diminishing.
 5

Assumptions

[a) All units of the commodity consumed should be homogenous.

[b) Successive units should be consumed without any time lag.
[c) Tastes and Preferences of the consumer should remain constant.
[d) Prices of related commodities should remain constant.

- The law can be explained with the help of a table and a diagram.
Y
AO
No.of
Anoles TU MU
\ 10 10
oa TLI 2 18 8
s 3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
1
c ,.io,o i ,n ftu -alprg It can be
ML'
seen that consumes more and more
apples TU increases but at dirninishing rate. This is because MU is decreasing with each
additional unit of consumption. That is the consumption of second apple will give less
satisfaction as compared to the first one. When consumption is 6 units MU is zero. Further
increase in consumption may cause discomfort to the consumer and hence TU decreases. In
other words MU becomes negative.

Relation between MU and TU

L. When MU is positive, TU increases but at a diminishing rate.

2. When MU=O, TU maximum
3. When MU is negative, TU decreases.

DEMAND: Demand is the desire backed by the abiiity and wiliingness to pay for a
commodity. Desire or want become demand oniy we are ready to spend money for the
product. Thus demand comprises of three elements such as:

(a) The desire to bu5, the product

(b) Ability to pay for the product
(c) WiUingness to pay for the desired product.

DEMAND FOR A COMMODIry

It
is the quantity of that commodity a consumer is wiliing to buy at a given price in a
given period of time.
 ETEBMINING DEMAND
(t) PLice of the product: The
first demand determinant of a product is its own price.
There is an inverse relation between price and quantity demanded
for a product.
when price rises demand falls and when price falls d.emand is rises.
(z) Income of the House : For normal goods there is a direct
relationship between
income of the consumer and demand for a commodity. trn case
of normal goods
income increases demand also increases and income decreases demand
also
decreases. Eg: Laptop, TV, Name brand clothing etc.

In Inferior goods there is an inverse.relationship between income of

case of
the consumer and demand for a comurodity. In case of inferior goods
income
increases demand decreases and income decreases demand
incr'eases. Eg: tapioca,
low priced clothing etc. tr

(g) Taste and Preferenc*: Changes in taste and preferences

also affect demand of a
product. If the change is favorable to a procluct its demand
increases, (Eg: Change of
Fashion)
(a) Adtrerdserneat: Advertisement is an important
factor which determines the demand
for a product when advertisement increases demand for a product
also increases.
(r) Chmatic cqnditiom: If change in climate is favorable to a product
its demand will
increases. For example during rainy season demand for umbrella,s
wili increases.
(a) Expeelations: If the consumer expects a further increase
in price of a product he will
purchase a large quantity today even at a higher price.
(z) PoBulatioq: When population increases number of buyers
also increases and hence
the market demand increases

LAWOF DEMAND

Law of Demand expresses the relation between price and quantity

derqanded.
The law states that' other things remaining the same', the quantity
demanded of a
commodity increases with fall in price and decreases with
a rice in price. Other
things include other factors determining demand like income
of the consumer, prices
ofrelated goods, taste and preferences ofthe consumer etc.

The Law of demand can be explained with the help of

demand schedule and
demand curve.
Price per Quantity
D unit demanded
50 1
40 2

?R\ce 30 3
20 4
\ 10 5
*

DerYlE NJ)
 It
is the graphical representation of a demand schedule. To draw
demand
curve price is measured along the Y axis and quantity
demanded along the X axis.
In the figure 'DD'is the demand curve which is downwards from
left to right indicating the
negative relationship between price and quantitv demanded.

Price elasticity of demand measures the extent to

which demand changes when
there is a change in price.

a' PercentaEe Method: In this method Price elasticity

of demand is measured
as the ratio of percentage.change in quantity demanded
to the percentage
change in price.

Price elasticity of demand is denoted by ,ep,

u?= Percentage change in quanti"ty d.emand.ed. of prod.uct

X
Percentage change in piiiiJ p/iiict x
€?= L X Z\+ Aq=q-t-q.
% Ay A?= 7- P
=Fino[-d-arnard -.JniLi&
dgm@d
cconetrieue-thoo: Under this method elasticity ,f p>ice - 1n\tiaQ, ?*;ca-
Fi.,o{ glrl:e,,-*Jrlitir*"
d.ill#
following equation.
ep= lower segment of demancl curve
Upper segment of demand curve
c' Expenaiture tvtetnoa: In this method total expenditure
of a commodity before and
after price change is compared to find elasticity of demand.

1" lt is useful to the government in fixing the tax on a product

2, It is useful to the producers in fixing the price of a product
3. It is useful to the policy makers
 8

_SUPPLY:-Supply of a commodity refers to the quantity of the commodity offered for sale
at a particular price during given period of time. Supply increases price of a commodity rise
and when price falis supply also falls.

DETERMINANTS OF SUP

l. Price of commodity: Price is the most important factor which determines the supply
of a commodity. A seller wiII be willing to seII a larger quantity only at a higher
price. Therefore price and quantity supplied are directly proportional
2, Price of factors of production: If the prices of factors of production increase, cost of
production of the commodity will increase. In such a situation the producer will tend
to reduce the production quantity.
3. Price expectations: If the seller expects a price rise he will hold back the goods and
the supply fails. And if he expects a price fall, he will increase the supply at the
same price
4. Transport and communication: If transport and communication facilities are
improved, supply will increase.
5. Natural Factois: It also contributes to the supply of commodities. In agriculture
rain fall increase supply and at the same time droughts and floods wili reduce the
supply.

LAW OF SUPPLY

The Law expresses the relationship between price and quantity supplied of a
commodity. The law states that other things remaining the same price and quantity
supplied of a commodity are directly proportional. When price of a commodity rises
supply also rises and when price faII supply also falls. The Law of supply can be
explained with the help of a table and curve.

Pdce Ouantitv Sunplied

10 1

2A 2

o
30 t)

4A 4

50 t)
 ?3\&

Itslopes upwards from left to right indicating positive relation between price
and
quantity supplied.

Eqtrilihrium price of a commodity is rletermined by the interaction of market demand

and
market supply. It is the point where market demand equals market supply. Market
demand is the quantity that the buyers are willing to buy and market
supply is the
quantity that the sellers are wiiling to sell. It can be explained with
the help of a demand
and supply schedule and diagram.

Price of Commodity Quantity Demanded Quantity

Supplied

100 500

40 200 400

JU 300 300

400 no
-
IU 500 100

x
DD is the market demand curve and SS is the market supply curve. At point
E quantity
demanded and quantity supplied are equal. Rs. 30 is the equilibrium price
and 300 is the
equilibrium quantity.

When there is a change in demand or supply or both, equilibrium price

as well
as equilibrium demand may change. Different situations can be explained.
 10

(i) Increase in Demand: When demand increases the dernand curve shifts
rightwards. In the figure new equilibrium point is E1. Thus when demand increases
equilibrium price as well as equilibrium demand increases. The new equilibrium
price is op1 and demand oql.
o

v*rdi
\

o '--t, Er' &-tY Y

and the
(2) Decrease in Supply: When supply d.ecreases s.,ppiy curve shifts leftwards
new equilibrium point is E. Here equilibrium price increases to op 1 and equilibrium
d"*und d"ecreases to oql. f P ,/q'-
ql-Y,7-
?pwp
4-i * e+Y
(3). Demand and SuPPIY increases eqttally: When there is an equal increase in
demand and supply there will not be any change in equilibrium price but equilibrium
demand increases. 9P\
' 6,gr

P
Ir.
\?
5/ o
)r
Eqtu@ %t
Production is the process by which inputs are transformed in to output. In otherwise
it is the creation of utility. When inputs are transformed in to finished pioducts which
satisfy human wants.

There are four major factors of production i.e. Iand, Iabour, capital and entrepreneurship.

Produetiou Fuaetion
It is the technological relationship that gives maximum output producible from various
combinations of inputs. It shows how and to what extend inputs are changed to output with
given technology. Production function is usually wr:itten as

Q=f (a,b,c... ... '.. . '. n)

Q is the quantity of outPut

 1.L

a,b,c... .....n are the inputs used to produce the outputs.

There are two types of production function.

1' The variable proportion production function (Short run production

function)
2' The fixed proportion production function (Long run production function)

In short run' some factors are fixed and some are variable. In short run certain
factors like machinery, building, capital etc. are considered as fixed.
Their
quantities cannot be changed in short run. on the other hand
labour, raw
materials etc. are considered as variable.
In short run production can be increased by increasing the quantities of these
variable factors"

-The Law describes the changes in output when more and more units of one variable factor
while keeping the quantities of other factors constant. This happens
in the short run. To
explain the law we must be famiiiar with the forlowing concepts.

@jproOuet Total product refers to the total output of a commodity produced

by
combination of fixed and variable factors. Suppose labour
and capital are the two factors
employed then the total product function is Tp=f (|.,9.

tVtareinal Product

It is the addition to total product through the employment of an additional unit

of input
Mp = Tp(n) - Tp (n-1)
Averagqfryluet
:
It is the output produced per unit of input. It is obtained by dividing the Tp by the number
of units. For example AP of labour can be written as Ap
G) =Tp/L
The law states that when more and more units of one variable
factor is
emploved with fixed quantities of other factors, initially
Mp increases, then it
decreases and finally it becomes negative. The law is
based on the following
assumptions

1. All units of the variabre factor employed are equaily efficient.

2. Technology remains constant.
3. The proportion ofinputs can be varied.
 12

The law can be explained with a schedule. Suppose a farmer has a fixed area of
land and land is considered as fixed factor. Labour is the variable factor and
farmer is employing more and more units of labour. The changes in TP, MP and
AP are given in the following schedule.

AP=
No.of MP=
TP TP/no.of
Units (Tp(n)-Tp(n-1)
units
1 8 8 8 Increasing
2 18 10 9 Return
t) 30 L2 10 (Stage-1)
4 40 10 10
5 45 5 I Decreasing
t) 48 ,) B Return
7 49 I 7 (Stage-2)
8 49 0 6.1
9 45 -4 5 Negative
Return
10 40 -5 4 (Staee-3)

It can be exp)ained with the help of following diagram

Stage I

Stage of increasing returns. Here average product and marginal product increases.
Total product increases. Total product increases at an increasing rate.

Stage II
Stage of diminishing returns AP & MP diminishes in this stage. TP continue to rise
but at a dirninishing rate.
 13

Stage III
Stage of negative returns, here TP starts at diminishing and MP becomes negative.

Relation b/w MP & TP

1. \Vhen MP increase TP increases at an increasing rate.

2. When MP decreases but remain negative TP increases at a decreasing rate.
3. When MP becomes negative TP declines.

Relation b/w MP & AP

1. When MP> AP, AP increases.

2. When MP=AP, AP is maximum
3. When NIP<AP, AP decreases

In long run all the

factors are variable. Therefore output can be increased by
increasing the quantities of all the factors in the same proportion and hence the long run
production function is also called fixed proportion. When all the inputs are increased in
the
same proportion the production capacity as well as the scale of production also increases.
Hence it is also known as returns to scale.

The long run production function describes the changes in output when all the inputs
are varied in same proportion. When all the inputs are varied in same proportion, initially
the producer get increasing returns to scale, then constant returns to scale and finally
decreasing returns to scale. That is when there is increasing return a LO% increase in input
leads to more than 10% increase in output. In the case of Constant returns 10% change in
input causes same 10% change in output. Decreasing returns to scale means Lf lO% change
occur in input less than 10% change in output

'=il
:::::: llr.::::::::::rrrrlr*::
:: l,:::::::+:'::.::=
tl
tix$ : :

':r, .,, iij,r'ii!::l:l:'ll

 1.4

COBB - DOUGLAS PDN. F

It u,idely used to represent the technological relationship between the amounts of
two inputs, particularly capital and labour and the amount of output can be
produced with the help these inputs. It was proposed by Charles Cobb and Paul
Douglus.

It is the most standard form for production of a single good with two factors, the
function is written as

@:A f r<P

The exponents o. and B shows the output elasticity of factors. Output elasticity of a
factor shows the percentage change in output with respect to percentage change in
quantity of a factor. Exponent 'B'gives the elasticity of output with respect to capital.
Exponent'o.' gives the elasticity of output with respect to labour.

The production function solved by Cobb-Douglus had., % contribution of labour and

B/a
of capital so that the production function is.
@= A 3 ,i4
Cobb Douglus production function is a homogenous production function. It means
that if any change occurs in Labour and Capital the same change wiil occur in the
output. So it is a homogenous production function.
:.

If o & B = 1, it
is the case of constant returns to scale ie if both inputs are increased
in same proportion the output is also increased in same proportion. If inputs are increased
by l0% the outputs are also increased by 70% so it's a linearly homogenous production
function. If cr & B > 1, it is the case of increasing returns to scale and If cr & B < 1, it is the
decreasing returns to scale.