LECTURE : 02

Definition & types of economics.

Definition , nature and scope of engineering economics.
Basic economic problems of society

Nazrul Islam
Lecturer, Dept. of Humanities
Rajshahi University of Engineering & Technology

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 Definition & types of economics.

 What is economics?
 The term economics comes from the Greek word ‘OIKOS’ meaning
‘house’ and ‘NOMOS’ meaning ‘Custom’ or ‘Law’. Then economics
indicates ‘rules of the house’ or ‘good management of household’.

 Economics is a social science concerned with the factors that determine

the production, distribution and consumption of goods and services.

 In a word we can say economics deals with optimization of resources.

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 Definition & types of economics(contd.)

 Views of the economists about economics.

 Adam Smith, considered to be the founding father of
modern Economics, defined Economics as the study of the nature and
causes of nations' wealth or simply as the study of wealth. The central
point in Smith's definition is wealth creation.

 Marshall, in his famous book 'Principle of Economics' published in 1890,

defines economics as follows: "Political Economy or Economics is a study
of mankind in the ordinary business of life.”

 Robbins is famous for his definition of economics: "Economics is the

science which studies human behavior as a relationship between ends and
scarce means which have alternative uses."

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 Definition & types of economics (contd.)

 Types of economics: Economics can be divided into two types.

I. Microeconomics:
 The Greek prefix ‘Mikro’ means small. It is a branch of economics that studies
the behavior of individuals and firms in making decisions regarding the
allocation of limited resources.
 It is an analysis of the behaviour of small decision-making unit, such as a firm,
or an industry, or a consumer, etc. It studies only the employment in a firm or
in an industry.
 It also studies the flow of economic resources or factors of production from
the resource owners to business firms and the flow of goods and services
from the business firms to households. It studies the composition of such
flows and how the prices of goods and services in the flow are determined.

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 Definition & types of economics (contd.)

II. Macroeconomics:
 The Greek prefix ‘Macro’ means ‘Large’. It is a branch of economics
dealing with the performance, structure, behavior and decision making of
an economy as a whole rather than individual market/level.

 Macroeconomics looks to the nation's total economic activity to

determine economic policy and promote economic progress.

 Example-national income, gross domestic product, total employment,

total output, total consumption, aggregate demand, aggregate supply
etc.

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 Definition & types of economics(contd.)

Microeconomics
 Microeconomics deals with the
economic decision making of individual
economic agents such as the producer,
the consumer.
Macroeconomics
 Macroeconomics deals with aggregates
and averages of the macroeconomic
variable.

 It takes into account small components

 It considers the economy as a whole.
of the whole economy.

 It deals with the process of price

determination in case of individual  It deals with general price level in any
products and factors of production. economy.

 It is concerned with the optimization  It is concerned with the optimization of

goals of individual consumer and the growth process of the entire economy.
producer.

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 Definition & types of economics(contd.)

Microeconomics
 It studies the flow of economic
resources or factor of production
from any individual owner of such
resources to any individual user
of these resources.
Microeconomics
 It studies the circular flow of income
and expenditure between different
sector of the economy.(say between
the firm sector and the household
sector)

 Microeconomic theories help us  Macroeconomic theories help us in

in formulating appropriate formulating appropriate policies for
policies for resource allocation at controlling macroeconomic variables.
the firm level. (say, rising price level leading to
lower unemployment rate)

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 Concept of engineering economics

 Engineering economics:
 Engineering is the application of science. It establishes varied application systems based
on different scientific principles.

 Economics deals with optimization of resources in order to produce various

commodities and to distribute them for consumption, now or in the future.

 Price has a major role in deciding the demand and supply of a product.

 Hence , from the organization’s point of view, efficient and effective functioning of the
organization would certainly help it to provide goods/services at a lower cost which in
turn will enable it to fix a lower price for its goods or services.

 In the process of managing organizations, the managers at different levels should take
appropriate economic decisions which will help in minimizing investment, operating
and maintenance expenditures besides increasing the revenue, savings and other
related gains of the organization.

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 Concept of engineering economics(contd.)

 Definition of engineering economics:

 Engineering economics is a subset of economics concerned with the use and
application of economic principles in the analysis of engineering decisions.
 Engineering economics deals with the methods that enable one to take economic
decisions towards minimizing costs and/or maximizing benefits to business
organizations.

 Why should we study engineering economics?

 To have ideas about elementary economic analysis, cost, break-even analysis, cost-
benefit analysis, profit/volume ratio, material or design or building material
selection, interest formulas and their applications, time value of money, present
worth method of comparison, future worth method, annual equivalent method,
rate return method, replacement and maintenance analysis, depreciation,
evaluation of public alternatives, inflation adjusted decisions, inventory control,
make or buy decisions, project management, value analysis/value engineering,
linear programming.

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 Concept of engineering economics(contd.)

 Some other topics that may be addressed in engineering economics

are inflation, uncertainty, replacements, depreciation, resource
depletion, taxes, tax credits, accounting, cost estimations, or capital
financing. All these topics are primary skills and knowledge areas in the
field of cost engineering.

 The economics of the management, operation, growth and profitability of

engineering firms.

 Macro-level engineering economic trends and issues.

 Engineering product markets and demand influences the development,

marketing, and financing of new engineering technologies and products.

 Benefit–cost ratio.

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 Concept of engineering economics(contd.)

 In short, we study engineering economics

to have ideas about the following topics.
 Optimal cost-effectiveness
 Alternative possibilities
 Time value of money
 Estimation of cash flows
 Quantitative measurements
of profitability
 Systematic comparison
of alternatives

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 Economic problems

 Wants: Wants are often distinguished from needs. A need is something that is
necessary for survival (such as food and shelter), whereas a want is simply
something that a person would like to have. Actually wants are the unlimited
desires or wishes that people have for goods and services.

 Scarcity: Scarcity means that people want more than is available. scarcity is that
there is never enough (of something) to satisfy all conceivable human wants, even
at advanced states of human technology. Actually scarcity refers to limitations—
insufficient resources, goods, or abilities to achieve the desired ends.

 Choice: Scarcity requires choice. People must choose which of their desires they
will satisfy and which they will leave unsatisfied. When we, either as individuals or
as a society, choose more of something, scarcity forces us to take less of something
else. Economics is sometimes called the study of scarcity because economic
activity would not exist if scarcity did not force people to make choices.

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 Economic problems(contd.)

 What are the 3 basic economic problems?

 1. What to produce:
• Each and every economy must determine what products and services, and what
volume of each, to produce. In some way, these kinds of decisions should be
coordinated in every society. In a few, the govt decides. In others, consumers and
producers decisions act together to find out what the society’s scarce resources
will be utilized for. In a market economy, this ‘what to produce?’ choice is made
mainly by buyers, acting in their own interests to fulfill their needs. Their demands
are fulfilled by organizations looking for profits.
• For instance, if cellphones are in demand it will pay businesses to produce and sell
these. If no one desires to buy radio sets, it is not worth producing them.

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 Economic problems(contd.)

 2. How to produce ?
• This basic economic problem is with regards to the mix of resources to use to
create each good and service. These types of decisions are generally made by
companies which attempt to create their products at lowest cost. By way of
example, banking institutions have substituted the majority of their counter
service individuals with automatic teller machines, phone banking and Net
banking. These electronic ways of moving money, utilizing capital as opposed to
labour resources, have decreased the banks’ production costs.
• In the Nineteen fifties dams were being constructed in China by countless people
making use of containers and shovels. On the other hand dams were being
constructed in the united states by using huge earth moving devices.
• The initial approach to production, using a resource combination which includes a
small capital and much labour, is labour-intensive while the second, utilizing a little
labour and a lot of capital, is capital-intensive. Each one of these ‘how’ decisions
was made based on lowest cost and accessible modern technology.

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 Economic problems(contd.)

• 3. For whom to produce ?

• This basic economic question is focused on who receives what share of the
products and services which the economy produces. The portion of
production which each person and family can consume is determined by their
income. Income is distributed in line with the value of resources we have to
sell.

• As an example, a top cricket player will earn far more income than a professor.
A top cricket player has a resource to sell for which many people will pay a
high price. Professors are not so rare, and few people pay for their services.

• The for whom decision can even be dependent upon skills shortages, in which
case organizations will provide higher incomes to attract workers with rare
skills. In the same way, high wages may be required to attract employees to
rural locations.

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 Thank You!

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