UNIT-1

INTRODUCTION TO ECONOMICS
• ECONOMICS
– Prof. Lionel robins defines economics as a
“Science which studies human behavior as a
relationship between ends and scare means which
have alternative uses”.
– Economics is a study of how limited resources are
used to satisfy unlimited human wants.
– It studies how wealth is produced with limited
resources in order to satisfy human wants.
 RESOURCES
• LAND
Land means all gifts of nature , such as water, air,
minerals. Sunshine, plant and tree growth, as well as
the land itself which is applied to the production
process.
• LABOUR
Labour means the effects, skills and knowledge of
people which are applied to the production process.
• CAPITAL
• Real capital cost
• Financial capital
• Human capital
 MICRO ECONOMICS
• Micro- economics is the study of particular
firms, particular house holds, individual prices,
wages, incomes, individual industries,
particular commodities.
• The fields covered by micro economics are as
follows:-
– Theory of product pricing
– Theory of factor pricing
– Theory of economic are as follows
 MACRO-ECONOMICS
• Macro economics deals not with individual
quantities as such, but with aggregate of these
quantities, not with individual incomes but with
national income, not with individual prices but
with the price level, not with individual outputs
but with the national output.
• The areas covered by Macro economics
– Theory of income, output and employment
– Theory of prices
– Theory of economy growth
– Macro theory of distribution
 OBJECTIVES OF ECONOMICS

• Generating a high level employment

• Stabilizing the prize levels
• Economic efficiency
• Equitable distribution of income
• Economic growth
 FLOW IN AN ECONOMY
• The circular flow of income or circular flow is a
model of the economy in which the major exchanges
are represented as flows of money, goods and
services, etc between economic agents.
 THE LAW OF DEMAND
•The law of demand states that, if all other factors
remain equal, the higher the price of a good, the less
people will demand that good. In other words, the
higher the price, the lower the quantity demanded.

•The amount of a good that buyers purchase at a higher

price is less because as the price of a good goes up, so
does the opportunity cost of buying that good.
Continue..
• As a result, people will naturally avoid buying
a product that will force them to forgo the
consumption of something else they value
more. The chart below shows that the curve is
a downward slope.
 THE LAW OF SUPPLY
•Like the law of demand, the law of supply
demonstrates the quantities that will be sold at a certain
price. But unlike the law of demand, the supply
relationship shows an upward slope.
• This means that the higher the price, the higher the
quantity supplied. Producers supply more at a higher
price because selling a higher quantity at a higher price
increases revenue.
 DEMAND
Elastic demand:-
A demand for the goods is elastic when the
quality demanded responds greatly to price
changes.
Inelastic demand:-
the demand is inelastic when its quantity
demanded responds very little to changes in its
price.
 ENGINEERING ECONOMICS

• It is defined as a set of principles, concepts,

techniques and methods by which alternatives
within a project can be compared and
evaluated for the best monetary return.
 BENEFITS
Since engineering is an important part of
the manufacturing sector of the economy, engineering
industrial economics is an important part of industrial or
business economics. Major topics in engineering
industrial economics are:
• The economics of the management, operation, and
growth and profitability of engineering firms;
• Macro-level engineering economic trends and issues;
• Engineering product markets and demand influences;
and
• The development, marketing, and financing of new
engineering technologies and products.
• Benefit–cost ratio
 PRINCIPLES OF ENGINEERING
ECONOMICS
• Develop the alternatives
• Focus on the difference
• Use a consistent viewpoint
• Use a common unit of measure
• Consider all relevant criteria
• Make uncertainty explicit
• Revisit your decisions
 ENGINEERING ECONOMIC ANALYSIS
PROCEDURE

• Problem recognition, formulation and evaluation

• Development of the feasible alternatives
• Development of the cash flows for each alternatives
• Selection of a criterion
• Analysis and comparison of the alternatives
• Selection of the preferred alternative
• Performance monitoring and post evaluation results
 EFFICIENCY
• It is commonly used to relate how much output can
be produced based on a certain amount of input.
• The ratio of the work done or energy developed by
the engines., to the supplied to it, usually expressed as
percentage.
 COST
• Cost is the amount, measured in money or cash
expended or other property transfer capital stock
issued, service performed, or liability incurred, in
consideration of goods or services received or to be
received
ELEMENTS OF COST
 COST BEHAVIORS
• Fixed Costs:
– Fixed costs are those which do not change with the
level of activity within the relevant range. These
costs will incur even if no units are produced. For
example rent expense, straight-line depreciation
expense, etc.
• Variable Costs:
– Variable costs change in direct proportion to the
level of production. This means that total variable
cost increase when more units are produced and
decreases when less units are produced. Although
variable in total, these costs are constant per unit.
• Mixed Costs:
– Mixed costs or semi-variable costs have properties
of both fixed and variable costs due to presence of
both variable and fixed components in them. An
example of mixed cost is telephone expense
because it usually consists of a fixed component
such as line rent and fixed subscription charges as
well as variable cost charged per minute cost.
Another example of mixed cost is delivery cost
which has a fixed component of depreciation cost
of trucks and a variable component of fuel
expense.
 Marginal cost
• Marginal cost as the added costs that would result from
increasing the rate of output by an single unit
• It defined as “the amount at any given volume of output
by which aggregate costs are changed, if the volume of
output is increased or decreased by one unit”
• Elements of costs:
– Direct materials
– Direct labor
– Other direct expanses
– Total variable overheads
Marginal cost = Total cost – Fixed cost
MARGINAL COST
EQUATION:
MARGINAL REVENUE
 SUNK COST
• In economics and business decision-making, sunk
cost refers to the cost that has already been
incurred and cannot be recovered. Sunk
costs (also known as retrospective costs) are
sometimes contrasted with prospective costs,
which are future costs that may be incurred or
changed if an action is taken.
• Example:-
– Once the company's money is spent, that money is
considered a sunk cost. Regardless of what money is
spent on, sunk costs are dollars already spent and
permanently lost. Sunk costs cannot be refunded or
recovered. For example, once rent is paid, that dollar
amount is no longer recoverable - it is 'sunk.
SUNK COST
OPPORTUNITY COST
 PROFIT/VOLUME RATIO
The Profit/volume ratio, which is also called the ‘contribution
ratio’ or ‘marginal income ratio and variable profit ratio
expresses the relation of contribution to sales and can be
expressed,
• Contribution = Sales – Variable Cost (C=S-V)
• Contribution = Fixed Cost + Profit (C=F+P)
• S-V=F+P
P/V ratio can also be expressed as:
• P/V Ratio = Contribution/Sales
• P/V Ratio = Sales – Variable cost/Sales i.e. S – V/S
• P/V Ratio = Fixed Cost + Profit/Sales i.e. F + P/S
• P/V Ratio = Change in profit or Contribution/Change in
Sales
• BEP=Fixed cost/PV ratio
 BREAK EVEN ANALYSIS
• Break-even analysis implies that the total revenue
equals the total cost at some point in the operations.
• A break-even analysis is a calculation of the point at
which revenues equal expenses. In securities trading,
the break-even point is the point at which gains
equal losses.
 BREAK EVEN POINT
• The break even point is , therefore, the volume of
output at which neither a profit is made nor a loss is
incurred.
• The break-even point (BEP) in economics, business
and specifically cost accounting is the point at which
total cost and total revenue are equal. There is no net
loss or gain, and one has "broken even," though
opportunity costs have been paid and capital has
received the risk-adjusted, expected return.
• A break even chart is a graphical representation of the
relationship between costs and revenue at a given time
• It is used to determine the break even point
• TC=Total cost
• FC=Fixed cost
• VC=Variable cost
• Q= Volume of production
• s = Selling price per unit
• v = Variable cost per unit
• Total cost= Fixed cost + Variable cost
• TC=FC+VC
• =FC+v*Q
 CONSUMER AND PRODUCER GOODS
Consumer goods are the goods and services
that directly satisfy human wants.
For example: TV, shoes, houses.

Producer goods are the goods and services

that satisfy human wants indirectly as a part of the
production or construction process.
For example: factory equipment, Industrial
chemicals and materials
 TIME VALUE OF MONEY
The value (or) purchasing power of a money at a
particular time is called time value of money
The notations which are used in various interest formulae are as follows:
P = Principal amount
n = No. of interest periods
i = Interest rate (It may be compounded monthly, quarterly,
semiannually or annually)
F = Future amount at the end of year n
A = Equal amount deposited at the end of every interest period
G = Uniform amount which will be added/subtracted period after
period to/ from the amount of deposit Al at the end of period 1
BREAKEVEN ANALYSIS
Breakeven analysis is used to determine when
your business will be able to cover all its expenses and
begin to make a profit. It is important to identify your
startup costs, which will help you determine your sales
revenue needed to pay ongoing business expenses
V RATIO
The surface-area-to-volume ratio, also called the
surface-to-volume ratio and variously denoted sa/vol or
SA:V, is the amount of surface area per unit volume of
an object or collection of objects.
MATERIAL SELECTION FOR PRODUCT DESIGN
PRODUCT DESIGN
STEPS IN PRODUCT DESIGN
PRODUCT DESIGN MODEL
PROCESS PLANNING