Lecture : 1

Basic Concepts – Definition of Economics,

Engineering Economics, and Managerial
Economics, The objectives of Managerial
Economics, Define Positive Economics and
Normative Economics, Main tools of
Economic Policy, Relation to other
branches.

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 Definition of Economics
Economics is the branch of social
science which concerned with the
proper uses and allocation of limited
or scarce resources for the
achievement and maintenance of
growth and development with stability.

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 Engineering economics,

• Engineering economics is a subcategory

of economics for application to
engineering projects. Every Engineer
seeks the solutions to every problem, and
the economic practicability of each
prospective solution is generally measured
along by the technical features.

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 Engineering economics
• It is the application of economic
techniques to the evaluation of design and
engineering substitutes. The prominent
role of engineering economics is to assess
the appropriateness of a given project also
with estimate its value and justify it from
an engineering position. Engineering
Economics is the study of how to make
economic decisions in engineering
projects.
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 Principles of Engineering Economy:

The four fundamental principles that must be

applied in all engineering economic
decisions are:

1. A nearby penny is worth a distant dollar

2. All that counts are the differences

among substitutes.
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 Principles of Engineering Economy

3. Additional risk is not taken without the

expected additional return.

4. Marginal revenue must exceed the

marginal cost.

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 Engineering economic decisions

The five main types of engineering

economic decisions are
• (1) Selection of equipment or process
• (2) Replacement of equipment
• (3) New product or product expansion
• (4) Reduction of cost
• (5) Improvement in quality or service.

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Definition of Managerial Economics:

Managerial Economics is a branch of

Economics which is applied in Decision
Making. It is a special branch of Economics
bridging the gap between Abstract Theory
and Managerial Practices. It stress is on the
use of the tools of Economic Analysis in
clarifying problems, in organizing and
evaluating information and comparing
alternative courses of action.
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Introductory Issues on Managerial Economics : The
Economics is divided into Two broad categories, i.e.,
Microeconomics and Macroeconomics.

Microeconomics focuses on the behaviour of the

individual actors on the economics stage, i.e., firms and
individuals and their interaction in the markets.

Macroeconomics is the study of Economics as a whole,

i.e., National Income, Unemployment and Inflation etc.

Managerial Economics should be thought of as Applied

Microeconomics. It is bridging the gap between Abstract
Theory and Managerial Practices, i.e., It is demonstrate
how application of Economic Theory can improve
Decision Making.

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 Functions of Manager
There are four functions of a manager ;
These are -
PLANNING, or decision upon business goals and the
methods to achieve them;
ORGANIZING, or determining the best allocation of
people and resources;
DIRECTING, or motivating, instructing, and supervising
workers assigned to the activity;
CONTROLING, or analyzing metrics during business
activities to ensure completion of tasks and identify
areas for improvement.

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While Managerial Economics is sometimes
known as Business Economics, it
encompasses methods and a point of view
applicable both in Business and in other
Institutions faced with optimization in decision
making.

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Economics is sometimes defined as the
study of the allocation of scarce social
resources among unlimited ends. It follows
that Managerial Economics is the study of
allocation of the resources available to a
firm or other unit of management among the
activities of that unit. Such a definition
implies that managerial Economics is
concerned with choice – with the selection
among alternatives.

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Managerial Economics is concerned with
analytical tools that are useful, that have
proven themselves in practice, or that
promise to improve decision making in the
future.

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Define Positive Economics and
Normative Economics :
Positive economics is concerned with
those statements which relate to the
actual observations of economic
phenomena in the real world. On the
other hand, Normative economics is
concerned with what ought to be in the
economy. It involves value judgments
and individual’s likings and disliking;
consciously or unconsciously; creep in.
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Examples : Any economist will predict that if the
government imposes a tax on a good, the prices of that
good will rise. Say, if the government was to impose a
tax on patrol or octane, the prices of those goods would
rise, which the example of positive economics is.
Government try to establishes income tax systems that
take relatively more from the rich than from the poor,
recommendations to subsidize the high price of
gasoline to avoid a large burden on the poor and
recommendations to cut taxes on the rich to achieve
faster economic growth. In each instance the economist
looks at a particular goal that he favours on the basis of
personal preferences.
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Discuss the main tools of Economic Policy :

Governments have some instruments that they

can use to affects macroeconomics activity. A
policy instrument is an economic variable under
the control of government that can affect one or
more of the macroeconomic goals. That is, by
changing monetary and fiscal and other policies,
government can avoid the worst excesses of the
business cycle and can increase the growth rate
of potential output. The two major instruments of
macroeconomic policy are discussed below :
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Fiscal Policy : The first instrument of macroeconomic
policy is fiscal policy, which denotes the use of taxes and
government expenditures. Government expenditures come
in two distinct forms. First, there are government
purchases, i.e., purchases of tanks, construction of roads,
salaries for employees, and so forth. Another is government
transfer payments, which boost the incomes of targeted
groups such as, the elderly or the unemployed. The other
part of fiscal policy, taxation, affects the overall economy in
two ways, i.e., taxes affect people’s incomes, taxes tend to
affect the amount people spend on goods and services as
well as the amount of private saving; taxes affect the prices
of goods and factors of production and thereby affect
incentives and behaviour.

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Monetary Policy : The second major instrument of
macroeconomic policy is monetary policy, which
conducts through the management of the nation’s
money, credit, and banking system. The exact nature of
monetary policy is, the way in which the central bank
controls the money supply and the relationship among
money, output, and inflation – is one of the most
fascinating, important, and controversial areas of
macroeconomics. Changes in the money supply move
interest rates up or down and affect spending in sectors
such as business investment, housing, and net exports.
Monetary policy has an important effect on both actual
and potential Gross Domestic Product (GDP).

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 Differences between Managerial
Economics and Traditional Economics
1) Managerial Economics is micro in character
Pure Economics is both micro and macro in
character

2) Managerial Economics study only practical

application of the Economic principle to the
problem of a firm
Pure Economics deals with the study of principles
itself.

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3) Managerial Economics deals with the Economic
problems of the firm.

while Pure Economics deals with Economic problems of

both firm and individuals.

4) Managerial Economics deals with profit theory only.

Pure Economics deals with all distribution theories like rent,

wages, interests, and profits.

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