ARS Final UnitI

8/12/2019 ARS Final UnitI

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Economics & Principles of

Management

Unit I


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Definition of Economics

Alfred Marshall

enquires

How he gets incomeHow he spends it

and

Study of wealth andStudy of man


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Definition of Economics

Lionel Robbins

Study of

Means resources

And

Study of endsshort in supply in relation to

demand


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Engineering economy

Engineering economy

concerned

evaluations ofCosts and benefits

leading to

Technical and businessfor

Projects and ventures


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Techniques of Engineering

Economy

Principle 1 Choice among alternative

Principle 2 Comparison

Principle 3 View


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Economy

Principle 4 Common unit of Measurement

eg Rs

Principle 5 Criterion relates to the long

term financial interests


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Economy

Principle 6Uncertainty

Principle 7 Compare projected outcomes

with actual results


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Application of Engineering

Economy

1) Functional activity

2) Types of Decision


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Functional activity

1) Planning

2) Production

3) Material Management4) Plant Engineering

5) Transport

6) Action management


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Types of Decision

1) Capital budget

2) Make or buy decisions

3) Replacement

4) Project Evaluation


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Basic economic concepts

1) Utility

2) Goods

3) Wealth4) Classification of wealth

5) Services

6) Income


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Utility

Usefulness


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Goods

1) Free goods

Air, sunshine, seawater

2) Economic goods

a) ConsumablesMilk,LPG

b) Capital

Machines

3) Public goods

Roads,bridges,hospitals ,schools


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Wealth

Characteristics

Scarcity

Transportability

Utility


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Classification of wealth

1) Personal / Individual wealth

2) Collective owned wealthMunicipal, Governments , coal mines,

Laboures, Public building

3) National wealth


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Services

ServicesLawyer, Doctor

Characteristics of wants

UnlimitedEach being satisfied

Recurrent

Necessaries

Comforts

luxuries


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Income

Remuneration

Personal services

ownership


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Law of Demand

Higher the price Lower the demand

Lower the price Higher the demand

If remaining constant

income

consumers tasteconsumers preference

substitutes price

advertising expenditure

Other things


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Law of Demand

Commodity price increase Quantity

demanded decrease

Commodity price decrease Quantity

demanded increase

Q = f ( P )

Quantity

Price


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Characteristics of Law of Demand

1) Inverse relationshipPrice & Quantity

demanded opposite

2a) Price an independent variable

2b) Demand a dependent variable


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Exceptions of Law of Demand

1) Conspicuous consumption of goods

2) Speculative Market

3) Giffen effect


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Conspicuous consumption of

goods

Price increases demand increases

Price decreases demand decreases

Demand pearl


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Speculative Market

Increase in price of shares

Price falls wait


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n v ua eman ar e


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n v ua eman ar eDemand

Price of the

product Rs

Demand

A

Demand

B

Demand

C

TOTAL

12 5 6 7 18

10 6 7 8 21

8 7 8 9 24

Individual

demand

Total demand

Autonomous Deman Der ve


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Autonomous Deman Der veDemand

Autonomous Demand

Does not depend on demand on the product

eg sugar , milk

Derived Demand

Arises because of the other commodity

eg cotton, bricks, cement, petrol, battery Complementary commodities

Power regulator for refrigerator, TV set

Deman or Dura e Per s a e


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Deman or Dura e Per s a eGoods

Demand for Durable Goods demand

changes over a

long period

1) Consumer durable

Clothes, shoes, furniture, TV, scooters

2) Producer durable

Like fixed assets building, plant, machinery,

office furniture

Deman or Dura e Per s a e


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Deman or Dura e Per s a eGoods

Perishable Goodsdemand depends on

current prices

1)Consumer goods

All food items, drinks, soaps, fruits

2)Producer goodsRaw materials, fuel, power, packing items

In ustry Deman Company


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In ustry Deman CompanyDemand

Company Demand1) Maruti

2) Hidustan Motors

3) Standard Motors4) Hyundai

5) BMW

6) Premier Automobiles

Industry Demand Total of the all automobile

industries


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Total Market & Market Segment

Market segments

Geographical area

Distribution channels

Customer sizes

Domestic

ForeignTotal marketsum of all the market segments


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Price of the product &its demands

1) Law of Demand

2) Demand Schedule

3) Demand curveDraw curve for the abovedata

Price (Rs) Quantity demanded (units)

100 20,000

40 40,000

10 65,000

Pr ce o t e su st tutes


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Pr ce o t e su st tutescomplementary goods

Substitutes

Tea and coffee

Complementary goods

Petrol car & scotter

Butter &jam bread


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Consumers Income

By demand analysis

1)Essential consumer goods

Feed grains, salt, cooking fuel, housing

2)Inferior goods

Bajra ( wheat & rice )

Kerosene stove ( gas stove )

3)Ordinary normal goodsCloth

4)Luxury goods

Precious materials , TV sets


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Consumers Tastes & Preferences

1)Consumers Tastes

Depends on social customs, habits, life style ,

age ,sex

2)Consumers Preferences

producers advertisement to change

preferences

Num er o Consumers t e r


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Num er o Consumers t e rDistribution

The larger

the number of customers ,

the greater

the demand & vice versa


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Amount spent on Advertisement

Incurred

in addition to

manufacturing cost

for promoting sales


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Consumers expectationsOn account of

1) Increase in

DA

BonusPay scales

2) Fall in

Production

stock

Demand


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Demonstration effect

When new models appear in the market ,

rich people buy first

color TV


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P l i f h


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Population of the country

The larger

the population,

the larger

the demand

D d f i


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Demand function

Linear demand function

Non linear demand function

Li d d f i


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Linear demand function

Price Vs Quantity demanded

When the slope of the demand curve remains

constant throughout its length.

N li d d f ti


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Non linear demand function

Price Vs Quantity demanded

Slope of the demand curve changes all along

the demand curve

demand function yields a demand curve insteadof a demand line


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Demand forecasting

For arranging

1) Raw materials

2) Equipments

3) Machine accessories

4) Labour5) Buildings


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Types of Demand Forecasting

1) Short term forecasting purpose < an year

2) Long term forecasting purpose


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L t f ti


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Long term forecasting purpose

Planning a new unit or expansion of existing unit

Long term financial requirements

Planning manpower

Methods of Demand or Sale


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Methods of Demand or SaleForecasting

1) Survey of buyers intentions2) Collective opinion

3) Trend projections

4) Economic Indicators

5) Historic Estimate

6) Market survey or Market Research Techniques

7) Delphi method

8) Judgmental Techniques

9) Prior knowledge

10) Forecasting by past average

S f b i t ti


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Survey of buyers intentions

Ask customers

called

opinion surveys

Collecti e opinion


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Collective opinion

Sales man expected sales

Revised estimates by

Production manager

Sales manager &Top executives


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Economic Indicators


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Economic Indicators

1) Agricultural income

2) Personal income

3) Construction contracts sanctioned

4) Automobile registration

Historic Estimate


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Historic Estimate

What had happened in the past

will happen

in the future

Market survey or Market Research


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Market survey or Market Research

Techniques

When a company

introduces

a new product

Delphi method


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Delphi method

A panel of experts

interrogated by

sequence of questionnaires

response produces next questionnaire

Judgmental Techniques


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Judgmental Techniques

Opinion of

1) Customers

2) Retailers & wholesalers

3) Area sales manager

Prior knowledge


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Prior knowledge

Larger organization

Ancillary units


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Correlation Analysis

Relationship between

1) sales and

2) economic and non economic phenomena like

a) national income b) defense expenditure c)

population growth


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Elasticity's of Demand

Kinds of Demand Elasticity's

1)Price elasticity of Demand

2)Income Elasticity

3)Cross Elasticity

4)Advertising elasticity

Definition Price Elasticity of


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Demand

Price Elasticity of Demand defined as degree

of responsiveness to a change in price of

quantity demanded



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Demand - ep

proportionate change in quantity demanded

ep =

proportionate change in price


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Perfectly elastic demand
http://en.wikipedia.org/wiki/File:Elasticity-elastic.png


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Pointelasticities of demand
http://localhost/var/www/apps/conversion/tmp/scratch_5//upload.wikimedia.org/wikipedia/commons/1/1c/Price_elasticity_of_demand_and_revenue.svg


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Types of Price Elasticity

Type Numericalexpression

Description Shape of the curve

Perfectly elastic

demand

e = infinite horizontal

Perfectly inelastic

demand

e = 0 zero vertical

Unit elasticity e = 1 one Rectangular

hyperbola

Relatively elastic

demand

e = > 1 Greater than one Flat

Relatively inelastic

demand

e = < 1 Less than one steep


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Factors determining price elasticity

Nature of the product Extent use or multiple users

Range of substitutes

Income level Proportion of income spend on the

commodity

Durability of the demand

Purchase frequency of a product

Change in demand & Elasticity of demand

Nature of the product


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Nature of the product

Demand of the basic needsinelastic

eg wheat , matchbox

Demand for luxuries elastic

eg TV , refrigerator, washing machine

Extent use or multiple users


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Extent use or multiple users

Variety of useselastic demand

eg electricitylighting, cooking, washing etc

Limited useinelastic demand



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Elastic demandtea for coffee


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Proportion of income spend on the


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Proportion of income spend on the

commodity

Only a small portion of income spent on

matchbox, salt demand inelastic



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Commodity durable or repairable eg shoe

demand elastic



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High frequency purchase of a product

demandelastic

C ange n eman E ast c ty o


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g ydemand

Demand changes due to other factors ie

income etc

Demand changes due to price only

l f d


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Income Elasticity of Demand

Quantity demanded

ep =

proportionate change in income


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Negative income elasticity


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Negative income elasticity

Increase income reduction in quantities

demanded inferior goods

Bidies to cigareetes

Positive income elasticity


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Income risesdemand rises for smaller goods

P i i i l i i


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1) Unit elasticity

2) Less than unit elasticity

3) More than unit elasticity


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Management

Production

Analysis

P d ti F ti


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Production Function

Land

Labor

Capital

Raw materials

Time

space


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L f P d ti


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Laws of Production

1 ) The Laws of Variable Proportions

2) Laws of Returns to Scale


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Laws of Diminishing Returns


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If more and more units of a variable

applied to a fixed input, the output may

initially increase , but beyond a certain

output , the rate of increase in output

diminishes


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Assumptions

1) technology remains unchanged

2) input prices remain unchanged

3) variable factors - homogenous

Production Analysis : Long Run


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Production Analysis : Long -Run

Both the inputs capital and labor

variable factors

Isoquant Curves


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Isoquant Curves

I = 150

I = 100

LABOR

C

AP

I

T

AL

Isoquant Curves properties


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Isoquant Curves - properties

1) negative slope

2) convex to origin

3) can not intersect

Laws of Returns to Scale


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How a simultaneous and proportionate

increase in all the inputs affects the total

output at its various levels



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1) Increasing Returns to Scale

2) Constant Returns to Scale

3) Decreasing Returns to Scale


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Increasing Returns to Scale


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Increasing Returns to Scale

A proportionate change in both the

inputs K & L lead to more than

proportionate change in output

When the input doubled , the output

Increases from 10 t0 25 instead of 20

Causes Increasing Returns to Scale


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Causes Increasing Returns to Scale

1) technological & managerial indivisibilities

2) higher degree of specialization

3) dimensional relation

Constant Returns to Scale


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Labor

C

a

p

I

T

A

l

Q= 10

Q= 20

Constant Returns to Scale


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If quantities of both the inputs K & L

doubled & returns also doubled called

constant returns to scale

Decreasing Returns to Scale


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Labor

C

a

P

I

T

A

l

Q= 10

Q= 18

Decreasing Returns to Scale


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A proportionate change in both the

inputs K & L lead to less than

proportionate change in the output

When the input doubled , the output

Increases from 10 t0 18 instead of 20


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THANK YOU

ARS Final UnitI

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