First Mid Term course is upto 5th chapter in Lesson Plan or 7 Lectures

BM 270 for B.Tech IV & BM 402 B.Tech VIII
Prof.Sushil J.Lalwani,UGC Emeritus Fellow,Dean School of
Management,SPSU

ECONOMICS FOR ENGINEERS
WHY ENGINEERING STUDENTS NEED to read ECONOMICS
Engineers ,in future, undertake projects.All projects are timebound and
money to be spent on those projects is also LIMITED.Not only money but
TIME is also limited.People may have plenty of wealth but they have limited
time of 24 hours.On the other hand people may have plenty of time but
have limited wealth.
An efficient engineer will always wish to bring a project to a praiseworthy
completiton with excellent quality work.When
money,time,resources,manpower at their disposal are limited then following
situation arises:
Engineers have unlimited assignments/work/objectives or tasks of project
Engineers have limited resources-Money or Time
Engineers have to complete the task within those limited resources which
Is not possible because one cannot fulfil all demands of a project.
Hence Engineers have to lay down priorities:which task is to be performed
First and which on later.It means that they have to think of Alternatives
Give priorities and then select the best alternative to complete task.
For example an engineer is to complete a flyover then a decision has to be
taken that labour will be cheaper as compared to capital(Capital refers to
machines)Think of alternatives and select the best alternative under given

situations.This gives rise to a problem of choice.This is economic problem
of unlimited wants-limited resources-problem of choice-think of alternatives
and choose the best alternative.
Economics teaches this chain and problem of choice.An engineer will be an
efficient engineer if he/she follows this chain of action and a task will be
completed with minimum cost and maximum profits.
An Engineer-turned Entrepreneur can follow principles of Economics and in
an era of globalization and competition at global level,may keep in mind:
1.That in global competition one can survive only by a lower price of
product which can be sought by research,innovations,new
inventions,efficiency,reduce wastage.
2.That Engineer-entrepreneur has to minimise cost of production to
maximise profits of that company.For this purpose optimum use of
resources will be important,namely,Land,Labour,Capital,Organization .Use
these resources with optimum combination,with greater productivity and at
minimum cost.Then only you can do wonders and stay in competition.
Fields of Economics
In every country every engineer will come across five fields of Economics:
1.Consumption:This is related to day to day use of commodities which are
essential for life.Human body is a machine and one has to provide fuel to
this machine by using various goods.Use of goods with satisfaction is
consumption .
2.Production:Creation of utility,changing shape of rawmaterial,creating
finished goods,making a commodity usable is called production.
3.Exchange:At domestic or International level we may have to exchange
goods .We sacrifice some goods and in lieu of those goods we accept
other types of goods.In other words surplus stock is bartered against other
goods which are needed by us.

DEFINITION OF ECONOMICS Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods.Public Finance:It is related with Government. There are two main types of economics:macroeconomics andmicroeconomics.Government revenue and expenditure and all economic policies related to this process is called Public Finance.For example pay rent for use of Land.defence. the outcome of investing in industries or financial .4.Entrepreneur must get his/her remuneration as profit because he works for his own organization. borrowers and lenders.pay salary to organization for the services they render to the organization. on the other hand. Economics explains how people interact within markets to get what they want or accomplish certain goals. Since economics is a driving force of human interaction.infrastructure is a benefit for the public.pay interest for use of capital.Such sacrifice should be equal to benefit for a maximum social advantage. such as how a country uses its resources. like the dynamics between buyers and sellers. how much time laborers devote to work and leisure. A study of economics can describe all aspects of a country’s economy. takes a much broader view by analyzing the economic activity of an entire country or the international marketplace.To run a Government money is required which comes through taxes.With this money budget is prepared and then Government will spend for welfare of public. studying it often reveals why people and governments behave in particular ways. Macroeconomics.Government revenue through direct and indirect tax is a sacrifice for the public.Distribution:When engineers employ various factors of production then they have to pay remuneration to all of them. 5.On the other hand Government expenditure on public for welfare projects.pay wages for use of Labour.Microecon omics focuses on the actions of individuals and industries.

He believed that governments should not restrict or interfere in markets because they could regulate themselves and. Through economics. It protected the existance of economics with the help of this book. wealth is for man but man is not for wealth.D. the effect of taxes on a population. Smith said that Economics is a science of wealth. Alfred Marshall punlished his book entitled. the most important part is the study of mankind. Thus. Thus."Principles of Economics". known as the Father of Economics. Because buying and selling are activities vital to survival and success. In other words it has been secondary place.products. and maintain financial stability. Marshall showed that human welfare is more important than wealth. Adam Smith. create wealth. it required a great social important because the promotion of human welfare . According to him. people and countries become wealthy. in 1776. As one can see. Wealth is not considered of primary importance. established the first modern economic theory. It inquires how a man earns income and how he uses it. industries. By the definition of Marshall."Economics is the study of mankind in the ordinary business of life. economics could no longer to be considered to a science of selfishness of a 'dismal science'." It is a quite clear that. the first place being given to man. studying economics can help one understand human thought and behavior. economists have different theories as to how people and governments should behave within markets. produce wealth at maximum efficiency. Classical theory forms the basis of capitalism and is still prominent today.. Economists seek to answer important questions about how people. thereby. In 1890 A. Because the study of economics encompasses many factors that interact in complex ways. although economics still studies wealth. and countries can maximize their productivity. People who study economics are called economists. it is on the one side the study of wealth and on the other. economics shapes the world.He believed that people who acted in their own self-interest produced goods and wealth that benefited all of society. called the Classical School. and why businesses succeed or fail. Rather.

But most of the economists agree with the view that defining economics is must. On the basis of these economist. the definition of economics is divided into four parts such as: Wealth definition given by “ADAM SMITH”  Welfare definition given by” MARSHALL”  Scarcity definition given by “ROBBINS”  Growth-oriented definition given by “SAMUELSON”  These definitions of various economists are explained with the help of features. Some say that there is no requirement of definition of economics this is because economics growing continuously. Wealth is sought only for promotion of human welfare.  Economics deals with human activities related to material welfare. merits and demerits as given under: Wealth Definition by Adam Smith  . Logical Explaination Marshall shifted the focus of economics from wealth to welfare at the end of the 19th century. Marshall laid the foundation of welfare economics. In General way. distribution and consumption of goods and services. No doubt. he assigned secondary importance to wealth the primary importance to individual and social welfare. economics is a social science which deals with the production. Main Ideas:  Economics doesnot regard wealth as the be-all and end-all of economic activities. he considered wealth as an important aspect of economic studies. There are a large number of economist give their different definitions. But.  Economics is a social science as it deals with the behaviour of ordinary people in the society. In this way.become its chief aim.

His tools were the London School of Economics and a famous 1932 essay on economic methodology. on26 July 1842. it examines that part of individual and social action which is most closely connected with the attainment and with the use of material requited for well being. and Penson etc. Professor of Political Economy at the University of Cambridge from 1885 to 1908. in fact. In the other words economics is the study of economic welfare. the first comprehensive effort to study the nature of capital. This was. being described as that part of social welfare. he was the founder of ·the Cambridge School of Economics which rose to great eminence in the 1920s and 1930s. who are also shifted the emphasis of economics from wealth to welfare. They also tell us that wealth is for human and human are not for wealth. Beveridge. the development of industry and the effects of large-scale commerce in Europe. Some other neoclassical economist such as Cannan. Welfare Definition by Alfred Marshall Alfred Marshall was born in London. the Principles of Economics was published in 1890. It was his 1932 Essay on the Nature and Significance of Economic Science where Robbins made his Continental credentials clear. They tell about that economics is the study of human welfare.Adam Smith was an important Scottish political philosopher and economist whose famous work Wealth of Nations (1776) set the tone for work on politics and economics for many people even through today. He redefines the scope of economics to be “the science . Alfred Marshall’s magnum opus. Definitions  Some definitions of different economists related to Economics given as under: Marshall-Economics is the study of mankind in the ordinary business of life. which can be brought directly or indirectly into relation with the measuring rod of money. Marshall relates the definition of economics with material welfare.  Scarcity Definition by Lionel Robbins Lionel Robbins was a peculiar Englishman in the economics world of the 1920s.

Samuelson was one of the progenitors of microeconomics and the Nee-Keynesian Synthesis in macroeconomics during the post-war period. “Foundations of Economic Analysis” (1947). Paul Samuelson has not been unjustly considered the incarnation of the economics ‘establishment’. it produce various commodities over time and distributes them for consumption. They point out some criticism in the welfare definition that’s why they give there scarcity definition. has been both lauded and vilified for virtually everything right and wrong about it. Paul Samuelson’s most famous piece of work. Samuelson has personified mainstream economics in the second half of the twentieth century. now or in the future.which studies human behavior as a relationship between scarce means which have alternative uses.” Some other economists like Scitovosky. . Stonier and Hague also gives scarcity definition of economics.and as a result. Definitions  Some definitions of different economists related to Economics given as under: Prof. Samuelson-Economics is study of how people and society end up choosing with or without the use of money. one of the grand tomes that helped revive neoclassical economics and launched the era of the mathematization of economics. Harvey.” Definitions  Some definitions of different economists related to Economics given as under: Lionel Robbins-Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. In other words they say. Growth Oriented Definition by Samuelson  Paul A. among various persons and groups in society. “Economics is the study of those principles on which the resources of a community should be so regulated and administered as to secure communal ends without waste. to employ scarce productive resources that could have alternative uses. It analyses cost and benefits of improving patterns of resource allocation.

tangible or intangible. It is a convenient measure of cost: all the resources have readily available prices. labor. used to produce a good or a service.COST ANALYSIS What are Costs? Costs are the values of all the resources (e.. all necessary interventions cannot be implemented. When decisionmakers choose to . Economists think of costs as consequences of choices. and supplies). Because resources are limited. buildings. equipment. The "price tag" is what we refer to at the store.g. resources are scarce. and exchanges are based on monetary value. In the real world. In everyday life we generally think of the financial or monetary cost of goods and services we consume.

and retirement fund contributions). It is also the value of benefits that would have been derived if the resources had been allocated to their next best use. the decision to allocate funds for a public health program renders these funds unavailable for education. Why is Cost Analysis Important? Cost analysis is an important component of all economic evaluation techniques.  Transportation costs should include maintenance. If the cost analysis is conducted from a societal perspective. and insurance. It is a useful tool for planning and self-assessment. and maintenance costs.  Whether or not sales taxes are included in the cost of a resource varies. depending on the study perspective. taxes are considered a resource transfer and should not be included in the cost. the resources expended will not be available for other possible uses.implement a program... because they are part of the price paid to secure the use of that resource. gasoline. paid vacations. the use of a car). sales taxes should be included. Regardless of the nature of the resource or the method that is used to assess its value. installation. the true cost of a program is not just the amount of funds spent on it. housing. and perquisites (e. be conscious of and consider all aspects of the true cost of a resource. For instance. Economists call it the opportunity cost of a resource or program.  Supplies and equipment costs should include shipping charges. or defense spending. If the cost analysis is conducted from any other perspective. bonuses. Cost analysis is particularly useful for the following purposes: . health insurance.g.g. For example:  Labor costs should include wages or salaries as well as benefits (e. Therefore.

Marginal product of an input is the extra product or output produced when 1 extra unit of that input is added while other inputs are held constant at any given set of inputs.. Returns to scale Returns to scale reflect the responsiveness of total product when all the inputs are increased proportionately. .. holding all other inputs constant. decreasing returns.Planning and Cost Projections Cost analysis can be used as a tool for  developing and justifying budgets. Assessing Efficiency A program is considered efficient when the maximum amount of output (i. resources). It can be calculated for each input separately also. Average and Marginal Products Total product or output is the total output produced in physical units by using a set of inputs.e. The scale effect can be constant returns.and increasing returns. and  determining the level of funding changes necessary to achieve a desired change in disease prevalence/incidence. cases treated or persons screened) is produced from the given level of inputs (i.e. Total. Average output is total output divided by total units of input. It is given by the product function directly. Law of diminishing marginal returns It holds that the marginal product of each unit of input will decline as the amount of that input increases.

Every dollar of cost reduces the firm's profit. Time Horizon of Analysis Three different time periods are used to develop theories of production and production costs Momentary run: The period of time is so short that no change in production can take place. Analysis of Production Costs The content above focused on theory of production quantity. but all inputs cannot be changed simultaneously. Production cost is another important attribute of firm. equipment and machinery cannot be fully modified or increased. Increasing returns to scale means if inputs are doubled. In all the . The deeper reason to study costs by an economist is that supply of an item depends upon incremental or marginal cost when the price is constant. Long run: All fixed and variable factors employed by the firm can be changed. Short run: The period of time in which labor and material can be changed.Constant returns to scale means. Especially. if inputs are doubled output also will double. Otherwise it depends on marginal cost as well as marginal price or revenue. Technology change Technology change is said to occur when more output can be produced from the same inputs. output is getting more than double. Costs are important in production and supply decision making by entrepreneurs. Decreasing returns to scale means if inputs are doubled output is not doubling.

Fixed Cost Fixed and variable cost are categorized based on a period. A total cost schedule shows the total cost for various output amounts. . Such committed capacity costs are termed fixed cost for a period. Fixed Cost. The firm's managers have to make efforts and make sure that they are paying the least possible prices for necessary materials and supplies. Countless other decisions are to be made in most economical fashion. it will be the lowest cost for that output. Variable Cost Marginal Cost Average or Unit Cost. Also various engineering techniques are to be utilized in equipment purchase decisions.market structures marginal cost is key concept for understanding a firm's production quantity behavior. Variable Cost Variable cost is incurred when production is there and it varies with the level of output. Firms have to commit costs for production capacity at the start of a period and they have to incur these costs irrespective of the production output. The wages are to be fixed or bargained so that neither they are high to raise the firms production costs nor they are so low that sufficient labor is not there to produce as per market requirement. factory layout and production processes. Average Variable Cost. Concepts Related to Cost Total Cost. The total cost schedule is derived from the production function of the product for a firm. As per definition of production function and assumption of a businessman's behavior (operating at maximum efficiency and lowest cost). Average Fixed Cost. Minimum Average Cost Opportunity Cost U-Shaped Cost Curves Total Cost Total cost is the cost incurred to produce a quantity of output. But Samuelson clearly highlighted that there is hard work of the businessman involved to attain this lowest level of costs.

as fixed cost is constant for the two levels.Marginal Cost At each output level or at any output level. The difference in variable cost of two adjacent output levels also gives marginal cost. reaches a lowest point and then starts rising. Marginal cost is a central economic concept with a crucial important role to play in resource allocation decisions by organizations. capital. marginal cost of production is the additional cost incurred in producing one extra unit of output. Hence average cost curves have 'U' shape. It keeps on decreasing as output increases. land. Marginal cost can be calculated as the difference between the total costs or producing two adjacent output levels. energy. Choice of Inputs by the Firm Every firm or entrepreneur has to decide how much of each input it should employ: how much labor. various materials and services. Hence on this curve there is a minimum average cost point or output level. Average variable cost is total variable cost divided by number of units produced. it is normally seen that average cost initially comes down (as average fixed cost comes down) as output increases. Average Costs or Units Costs Average cost or unit cost is the total cost divided by number of units produced. Average fixed cost is total fixed cost divided by number of units produced. Minimum Average Cost In the average cost curve. Firms are assumed to choose their combination of inputs . The fundamental assumption that economists make in this context is that of cost minimization.

The changes in costs at different levels of production will help us to determine whether in our production there are economies or diseconomies of scale. Thus the firm will choose a factor combination or resource combination that minimizes the total cost of production. This implies that Marginal product of labor/price of labor = Marginal Product of Capital Equipment/Price of capital equipment = . Economies of scale are the reduction in the amount of cost of production as the level of production increases. a firm will hire factors until it has equalized the marginal product per dollar spent on each factor of production.. This way the large companies can sell their product at cheaper prices driving the small firms out of the market to create a monopoly. When considering the changes in costs due to changes in the amount or level of production we have to consider opportunity cost. Opportunity cost is the value of the foregone activity in order to produce the commodity that we are producing.. Least-cost Rule: To produce a given level of output at least cost. Economies of scale help the big companies to compete with the small company or create monopoly in the market.so as to minimize the total cost of production. The large company can produce most of their product in the market at a cheaper cost than the small company that do not enjoy the cost of production. The topic that is most discussed in the cost analysis is how revenue and costs changes with changes in the amount of input. Total Cost can be divided into two the variable cost and the fixed costs. Total cost is the sum of the variable costs and fixed costs. Diseconomies of scale are the increase in the amount of costs as the level of production increases. The other topic on cost that is of important in understanding the whole cost of production concept is evaluating how cost will changes at different levels of production. The variable cost can be varied in the process of production while the fixed .

It is the overall cost of production in a firm.6 20 18 38 4 4 5 6 11 20 24 44 6 . Total variable cost is the total cost of input in the production process.costs cannot be varied in production in the short run but can be varied in the long run when the company expands its capacity.6 6 12. This implies that the average cost is the cost of producing one unit of a commodity. average total costs and the marginal total costs.The fixed cost is not variable during the production process and will continue to be incurred even when production is not taking place. Average variable cost is given by the total variable costs divided by the total output. The average variable costs are the costs per unit input in the production process. and the average variable costs. The total costs can be grouped into total cost. The total fixed cost is the total cost incurred to employ fixed inputs. The total marginal cost is the additional costs incurred due to addition of one unit of input. The variable inputs are grouped into the total variable cost. The average total cost is the total cost divided by the total number of units being produced. The average fixed cost is the fixed cost in production of one unit output Cost table Units AFC AVC AC TFC TVC TC MC 0 0 0 0 20 0 20 0 1 20 8 28 20 8 28 8 2 10 7 17 20 14 34 6 3 6. Marginal variable cost. Total cost is the total variable cost plus the total variable cost. The variable cost is the cost that changes with the total input added to the production process.

3 20 48 68 13 Readers Question Economists describe both short run and long run average cost curves as u shaped. as you employ more workers the Marginal Cost increases. then average cost starts to rise. In the short run capital is fixed. After a certain point. . Initially average costs fall. when marginal cost is above the average cost. Therefore. Short Run Cost curves are U shaped because of diminishing returns. increasing extra workers leads to declining productivity.3 8 11.5 4 7 11 20 35 55 11 6 3. Diagram of Marginal Cost Because the short run Marginal cost curve is sloped like this. But. mathematically the average cost curve will be U shaped. Provide a brief explanation why each of these curves might be considered u shaped.

Marginal cost always passes through the lowest point of the average cost curve. Average Cost Curves  ATC (Average Total Cost) = Total Cost / quantity .

200 (therefore the increase (MC) is 200)  For the second unit. However. TC increases from 1. It is due to economies of scale and diseconomies of scale. the lower the average fixed costs will be.200 to 1.  For example. Therefore the more you produce. you just see how much TC has increased by. the first unit sees TC increase from 1. a firm may experience diseconomies of scale.  AVC (Average Variable Cost) = Variable cost / Quantity AFC (Average Fixed Cost) = Fixed cost / Quantity Costs  Note FC (fixed costs) remain constant. increasing output will lead to lower average costs. in a big firm it is more difficult to communicate and coordinate workers. This occurs where increased output leads to higher average costs.000 to 1.  To work out Marginal cost. For example. Diagram for Economies and Diseconomies of Scale . If a firm has high fixed costs. after a certain output.300 (therefore the increase MC is 100) Long Run Cost Curves The long run cost curves are u shaped for different reasons.

It is possible the LRAC could just be downward sloping. If LRAC is falling when output is increasing then the firm is experiencing economies of scale. and. not all firms will experience diseconomies of scale. When LRAC eventually starts to rise then the firm experiences diseconomies of scale. For example a doubling of factor inputs might lead to a more than doubling of output. then the firm is experiencing constant returns to scale .Note however. If LRAC is constant. The points of tangency between LRAC and SRAC curves do not occur at the minimum points of the SRAC curves except at the point where the minimum efficient scale (MES) is achieved. Conversely. Long Run Average Cost Curve The long run average cost curve (LRAC) is known as the ‘envelope curve’ and is usually drawn on the assumption of their being an infinite number of plant sizes – hence its smooth appearance in the next diagram below.

goods will be sold in market. All units of product Sold in the market X Price = Revenue Revenue Depends on types of market.The working assumption is that a business will choose the least-cost method of production in the long run.domestic competition. REVENUE ANALYSIS After production.The income by selling these production is called revenue.international competition.Price and revenue will be low where there is more of . Moving down the LRAC means there are cost advantages from a bigger scale of operations.

20 20 Rs.20 Rs.20 2 Rs.In such markets price keeps on changing.competition.Hence Price=AR=MR On the other hand there may be an Imperfect competition which includes Monopolistic competition.20 4 Rs.20 Rs. Revenue can be divided into three components: Average Revenue(AR)=TR/Units Marginal Revenue(MR)=Change in TR with next unit produced Total Revenue(TR)=Units X Price Units Price of Wheat Total Revenue Marginal Revenue Average Revenue 1 Rs.20 40 Rs.it is monopoly and therefore producers may make more income and profits.20 3 Rs.If competition is missing.If .20 80 Rs.more price can be charged and therefore revenue will be more. If an engineer is innovator or has a new invention with patent right.20 Rs.Like wheat or rice where price through out India is almost constant.20 5 Rs.20 100 Rs.20 Rs.Monopoly.Duopoly and Oligopoly.20 60 Rs.Change means price may increase or decrease.20 HERE PRICE =AR=MR REVENUE DEPENDS ON MARKETS There may be a Perfect Competition where price of a product will be constant.20 Rs.

Units Price of Wheat Total Revenue Marginal Revenue Average Revenue 1 20 20 20 20 2 18 36 16 18 3 16 48 12 16 4 14 56 8 14 5 12 60 4 12 6 10 60 0 10 7 8 56 -4 8 PRICE = AR ALWAYS .price of product is changing then AR will start falling and MR will fall at a fast rate.

BM 270/402 .