ENGINEERING ECONOMICS AND ACCOUNTANCY

UNIT-I: Introduction to Economics & Managerial Economics

By
Dr Gampala Prabhakar
MBA, M.Com, UGC JRF&NET(Management), UGC NET (Commerce), PhD

Assistant Professor
H&S Department
VNR VJIET, Hyderabad
https://sites.google.com/view/dr-gampala-prabhakar/home
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COURSE OBJECTIVES
 To explain the basic nature of pure economics and to analyse certain
concepts of both Micro & Macro Economics and to know the role of
managerial economics in solving problems of business enterprises
 To understand different forms of organizing private-sector and public-
sector business enterprises and problems which have been encountered
by public enterprises in India
 To describe each stage of product life cycle with the help different
costs and their role in maintaining optimum cost of production and
overall profitability by considering different market competitions
 To analyse the process involved in preparation of project proposals, to
estimate capital required to commence and carry on business projects,
to know the various sources of mobilizing required amount of capital
and to evaluate investment opportunities
 To apply the basic accounting concepts & conventions and to analyse
financial position of business enterprise
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COURSE OUTCOMES
 CO-1: Perform decision making function effectively in an uncertain
framework by applying the concepts of economics, manage demand
efficiently and plan future course of action
 CO-2: Select suitable form of business organization which meets the
requirements of business
 CO-3: Fix the right price which can best meet the pre-determined
objectives of the business under different market conditions
 CO-4: Identify the best source of mobilising capital, select most
profitable investment opportunity, carry out & evaluate benefit/cost,
life-cycle and Break-even analysis on one or more economic
alternatives
 CO-5: Prepare book of accounts and understand overall position of the
business enterprise, therefore, take appropriate measures to improve
the situation
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 UNIT - I
 Introduction to Economics:
 Definition, nature, scope and types of Economics.
 Concepts of Macro-Economics: Gross Domestic Product (GDP), Gross
National Product (GNP), National Income (NI) & Rate of Inflation.
 Managerial Economics:
 Definition, nature, scope & significance.
 Elements of Managerial Economics: Demand Analysis, Law of
Demand, Elasticity of Demand and Demand Forecasting.

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ECONOMICS

Adam Smith is termed as the father of modern

economics, proposed the definition of Economics as the
‘study of wealth’ in his famous book, “The Wealth of
Nations”. He said that Economics is a science of wealth that
studies the process of production, consumption, and
accumulation of wealth.
Alfred Marshall defined Economics as “It is the study
of mankind in the ordinary business of life. It examines that
part of the individual and social activities that are closely
related to the attainment of material resources, to welfare, and
its utilization”.

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NATURE AND SCOPE OF ECONOMICS
 Nature of Economics:
 Economics – as a Science and as an Art
 (i) Economics as a Science: A subject is considered science if:
– It is a systematised body of knowledge which studies the relationship
between cause and effect.
– It is capable of measurement.
– It has its own methodological apparatus.
– It should have the ability to forecast.
– If we analyse economics, we find that it has all the features of science
 (ii) Economics as an Art: A discipline of study is termed an art if it
tells us how to do a thing that is to achieve an end (objective). It is
noteworthy that the final justification for studying economics lies in
the possibility of our ability to use it for solving economic problems
faced by us. Prof. J. M. Keynes says that “An art is a system of rules for
the achievement of a given end.”

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  Economics as Positive Science and Economics as Normative Science
(i) Positive Science: A positive or pure science analyses cause and effect
relationship between variables but it does not pass value judgment.
(ii) Normative Science: As normative science, economics involves value
judgments. It is prescriptive in nature and described ‘what ought to
be’ or ‘what should be the things’. ’. For example, the questions like
what should be the level of national income, what should be the
wage rate etc.,.
SCOPE OF ECONOMICS

(i) Micro Economics

(ii) Macro Economics

(iii) International Economics

(iv) Public Finance

(v) Development Economics

(vi) Health Economics

(vii) Environmental Economics

(viii) Urban and Rural Economics

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 Economics is divided into two Types:
microeconomics and macroeconomics.

Microeconomics deals with the behavior of

individual economic units. These units include
consumers, workers, investors, owners of land,
business firms—in fact, any individual or entity that
plays a role in the functioning of our economy
By contrast, Macroeconomics deals with
aggregate economic quantities, such as the level and
growth rate of national output, interest rates,
unemployment, and inflation.
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 CONCEPTS OF MACRO-ECONOMICS
 There are various concepts of National Income. The main concepts of
NI are: GDP, GNP, NNP, NI, PI, DI, and PCI. These different concepts
explain about the phenomenon of economic activities of the various
sectors of the economy.
 1. Gross Domestic Product (GDP)
 GDP = C + I + G + NX
 The GDP equation shows us that GDP is equal to consumption
expenditure (C) plus investment expenditure (I) plus government
expenditure (G) plus net exports (NX = Exports - Imports).
 2. Gross National Product (GNP)
 GNP=GDP+NFIA (Net Factor Income from Abroad)
 NFIA = Income earned by Indians in abroad through jobs or
businesses – Income earned by foreigners in India by jobs or
businesses.
 3. Net National Product (NNP)
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 4. National Income (NI)
 National Income is also known as National Income at factor cost.
National income at factor cost means the sum of all incomes earned
by resources suppliers for their contribution of land, labor, capital
and organizational ability which go into the years net production.
Hence, the sum of the income received by factors of production in
the form of rent, wages, interest and profit is called National
Income. Symbolically,
 NI=NNP + Subsidies given by Govt. - Indirect Taxes
 5. Personal Income (PI): It is the total money income received by
individuals and households of a country from all possible sources
before direct taxes. Therefore, personal income can be expressed as
follows: PI=NI-Corporate Income Taxes-Undistributed Corporate
Profits-Social Security Contribution + Transfer Payments
 6. Disposable Income (DI) =PI-Direct Taxes
 7. Per Capita Income (PCI) = Total National Income/Total National
Population 10
INFLATION
 Inflation is defined as a sustained increase in the general
level of prices for goods and services in a country, and is
measured as an annual percentage change. Under conditions
of inflation, the prices of things rise over time. Put
differently, as inflation rises, every rupee you own buys a
smaller percentage of a good or service. When prices rise,
and alternatively when the value of money falls you have
inflation.
 The value of a rupee (or any unit of money) is expressed in
terms of its purchasing power, which is the amount of real,
tangible goods or actual services that money can buy at a
moment in time. When inflation goes up, there is a decline
in the purchasing power of money. For example, if the
inflation rate is 2% annually, then theoretically a Rs.1
chocolate will cost Rs.1.02 in a year. After inflation, your
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rupee does not go as far as it did in the past.
 TYPES OF INFLATION
 1. Creeping Inflation: When the rate of inflation is less than 10 per
cent annually, or it is a single digit inflation rate, it is considered to
be a moderate inflation. This is also known as mild inflation or
moderate inflation.
 2. Galloping Inflation: If mild inflation is not checked and if it is
uncontrollable, it may assume the character of galloping inflation.
Inflation in the double or triple digit range of 20, 100 or 200 percent
a year is called galloping inflation .
 3. Hyperinflation: It is a stage of very high rate of inflation. While
economies seem to survive under galloping inflation, a third and
deadly strain takes hold when the cancer of hyperinflation strikes.
 4. Stagflation: It is an economic situation in which unemployment
increases along with rising inflation causing demand to remain
stagnant in a given period.
 5. Deflation: Deflation is the reverse of inflation. It refers to a
sustained decline in the price level of goods and services. 12
Managerial Economics
 Managerial economics, also called Business Economics, is essentially
applied economics in the field of business management. It is the
economics of business or managerial decisions. It pertains to all
economic aspects of managerial decision making.
 Managerial economics is an evolutionary science, it is a journey with
continuing understanding and application of economic knowledge —
theories, models, concepts and categories in dealing with the emerging
business/managerial situations and problems in a dynamic economy.
 Managerial economics is defined as the branch of economics which
deals with the application of various concepts, theories, and
methodologies of economics to solve practical problems in business
management.
 “Managerial economics is concerned with the application of economic
concepts and economic analysis to the problems of formulating
rational managerial decisions.” - Edwin Mansfield, Economics
Professor, University of Pennsylvania 13
 According to E. F. Brigham and J. L. Pappas, "Managerial
Economics is the application of Economic theory and
methodology to business administration practice.“
 According to McNair and Meriam, "Managerial Economics
consists of the use of Economic modes of thought to analyse
business situations.“
 According to M. H. Spencer and L. Siegelman, "Managerial
Economics is the integration of economic theory with business
practice for the purpose of facilitating decision making and
forward planning.“
 According to Hauge, "Managerial Economics is concerned with
using logic of economics, mathematics & statistics to provide
effective ways of thinking about business decision problems.“
 According to Joel Dean, "The purpose of Managerial Economics
is to show how economic analysis can be used in formulating
business policies." 14
Nature of Managerial Economics:
• Microeconomics: It solves microeconomic problems faced by a
particular firm—does not focus on the entire economy.
• Pragmatic: Managerial economics is a practical approach—it
applies economic principles in decision-making and problem-
solving.
• Multidisciplinary: This approach aggregates multiple streams—
business, management, accounting, statistics, finance, and
mathematics.
• Application of Macro Economics: Every firm operates in an
external environment—influenced by legal, political, global,
social, economic, technological, competitive, and demographic
factors. Macroeconomics deals with all these threats.
• Management Oriented: It educates leaders and managers on
how to make crucial decisions in critical situations.
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Significance
• The companies use managerial economics for forecasting
demand. Based on demand projections, long-term business
policies are formulated.
• The external environment poses various challenges and
uncertainties. This discipline creates an estimate of those threats;
as a result, firms can prepare themselves for damage limitation
strategies.
• Inventory management is crucial for business. By employing
demand analysis, firms can plan inventory beforehand.
• It facilitates the determination of the future cost of the business.
Scarce resources can be utilized efficiently; this way total cost of
production and sales can be mitigated.
• This study aids top-level management in making critical capital
management decisions—investing in the right venture.
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Fundamental Concepts
 Wants
 Scarcity
 Scale of preference
 Choice
 Utility – “Utility is the power of a good or service to satisfy human
needs”
 Value – Value designate the worth that a person attaches to an object
or service
 Consumer and Producer Goods
 Economy of Exchange – Economy of exchange occurs when utilities
are exchanged by two or more people.
 Classification of Cost
 Supply and Demand
 The Interest Rate
 The Time Value of Money (TVM)
 Equivalency
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 DEMAND
 Demand is an economic principle referring to a
consumer's desire to purchase goods and services
and willingness to pay a price for a specific good or
service.
 Every want supported by the willingness and ability
to buy constitutes demand for particular product or
Service.
 Desire on part of the buyer to buy
 Willingness to pay for it
 Ability to pay the specific price for it
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Demand Determinants
 Price of the product (P)
 Income Level of the consumer (I)
 Tastes and preferences of the consumer (T)
 Price of related goods (PR)
 Substitutes
 Complementary
 Expectations about the future prices (EP)
 Expectations about the future income (EI)
 Size of population (Sp)
 Distribution of consumers over different regions (DC)
 Advertising efforts (A)
 Other Factors (O)
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 Demand function : it is described as the relationship
between quantities of the commodity which
consumers demand during a specific period and the
factors which influences its demand, it expressed as

 Dx=f{P,I,T, PR,Ep,Ei,Sp,Dc , A,O } where

Dx= demand for good x

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Law of Demand
 “Other demand determining factors remaining the same , the
amount of quantity demanded raises with every fall in the
price and vice versa” called Law of Demand
 The Law of Demand states the relationship between price
and demand of a particular product or service.
 ASSUMPTIONS: (Following are should be constant for
applicability of the Law)
 Income level of the consumer
 Taste and preferences
 Price of related goods
 Etc.,

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Operation of the law of Demand

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Exceptions to Law of Demand

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Elasticity of Demand
 Elasticity = responsiveness of consumer due to the price
change of any commodity
 According to Alfred Marshall: "Elasticity of demand may
be defined as the percentage change in quantity demanded to
the percentage change in price.“
 If a small change in price is accompanied by a large change
in quantity demanded, the product is said to be elastic (or
responsive to price changes). The opposite also applies; a
product is inelastic if a large change in price is accompanied
by a small amount of change in demand.

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Types of Elasticity of Demand
 Price Elasticity of Demand
 Income Elasticity of Demand
 Cross Elasticity of Demand
 Advertising Elasticity of Demand

Price Elasticity of Demand :Price elasticity of demand is the ratio of percentage

change in the amount demanded to the percentage change in price of the
commodity." It is also known as the Percentage Method, Flux Method, Ratio
Method, and Arithmetic Method.

Edp = Proportionate change in Quantity Demanded

proportionate change in price

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 Income Elasticity of Demand : It is the ratio of percentage change in
the amount demanded to the percentage change in income of the
commodity.
Edi = Proportionate change in Quantity Demanded
proportionate change in income
 Cross Elasticity of Demand : It is the ratio of percentage change in
the amount demanded of product X to the percentage change in price
of the commodity Y.
Edc = Proportionate change in Quantity Demanded of product X
proportionate change in price of product Y
(Note: Product X and Y are related goods may be substitute or
complimentary)
 Advertising Elasticity of Demand : It is the ratio of percentage
change in the amount demanded to the percentage change in
advertisement cost.
Edi = Proportionate change in Quantity Demanded
proportionate change in advertisement cost
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Other types of Elasticity of Demand
 On the basis of the amount of fluctuation shown in the
quantity demanded of a good, it is termed
as ‘elastic’, ‘inelastic’, and ‘unitary’.
 We can further classify these elastic and inelastic types of
demand into five categories.
 Perfectly Elastic Demand
 Perfectly inelastic Demand
 Relatively Elastic Demand
a
 Relatively inelastic Demand
 Unity Elasticity

Perfectly Elastic Demand

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 Perfectly inelastic Demand
 Relatively Elastic Demand

Relatively Inelastic Demand

Unity Elasticity

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Demand Forecasting
 Forecasting is predicting or expecting the needs of the
consumers in the future. Forecasting the demand for its
products is the essential function of an organization
irrespective of its nature. Forecasting customer demand
for products and services is a proactive process of
determining what products are needed, where, when, and
in what quantities. So, demand forecasting is a customer-
focused activity. It supports other planning activities such
as capacity planning, inventory planning, and even
overall business planning. Many organizations follow it
as a custom to completely and accurately forecast the
demand for their products regularly.

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STEPS IN DEMAND FORECASTING
1. Determining the objectives
2. Period of forecasting
3. Scope of forecast
4. Sub-dividing
5. Identify the variables
6. Selecting the methods
7. Collection and analysis of data
8. Study of correlation between sales forecasts and sales
promotion plans
9. Competitors activities
10. Preparing final sales forecasts
11. Evaluation and adjustments

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Review Questions from Unit-I
1. Explain nature and scope of economics?
2. Define National Income. Explain the components of
National Income.
3. Define inflation. Explain different types of inflation.
4. Explain nature and scope of managerial economics?
5. Explain Law of Demand? List out the determinants of
demand.
6. Sketch and explain the law of demand with an example.
Discuss its exceptions also.
7. Discuss types of elasticity of demand with suitable
examples.
8. What is demand forecasting? Explain different methods of
demand forecasting in brief?
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End of UNIT – I

Thank You

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