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Note for Engineering Economics - EE by shweta sharma

  • Engineering Economics - EE
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  • Dr. A.P.J. Abdul Kalam Technical University - AKTU
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September 2013 IENGINEERS- CONSULTANTS LECTURE NOTES SERIES ENGINEERING AND MANAGERIAL ECONOMICS V SEM BTECH UNIT1 UNIT-1 MEANING OF ECONOMICS: Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek word oikonomia, which means "management of a household, administration" (from oikos, "house" + nomos, "custom" or "law", hence "rules of the household"). Current economic models emerged from the broader field of political economy in the late 19th century. A primary stimulus for the development of modern economics was the desire to use an empirical approach more akin to the physical sciences. Wealth and Welfare Definition: The Classical View: The classical economists beginning with Adam Smith defined economics as science of wealth. Adam Smith defined it as the “nature and cause of wealth of nations,” whereby it “proposes to enrich both the people and sovereign.” His follower J.B. Say in France defined economics as “the study of the laws which governs wealth.” Other followers of classical view like Nassau Senior, F.A. Walker, J.S. Mill, and J.E. Cairnes also defined economics as a matter of wealth. The Neo-Classical View: Marshall’s Definition: Alfred Marshall laid emphasized on man and his welfare. Wealth was regarded as the source of human welfare, not an end in itself but a means to an end. According to Marshall in his book entitled ‘Principles of Economics, “Political Economy or Economics is the study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with attainment and with the use of material requisites of well being. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.” Scarcity Definition of Robbins: In the publication “Nature and Significance of Economic Science” in 1932 Robbins defined, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” This definition is based on the following related postulates: i. ii. iii. iv. v. Economics is related to one aspect of human behavior, of maximizing satisfaction from scarce resources. Ends and wants are scarce. When a particular want is satisfied other crop up to take place. The obvious reason for the non satisfaction of unlimited wants is the scarcity of means of the disposal of mankind. The time and means available for satisfying these ends are scarce or limited. The scarce means are capable of alternative use. At a time, the use of a scarce resource for one end prevents its use for any other purpose. Economics is related to all kinds of behavior that involve the problem of choice. Growth oriented Definition: Prof. Samuelson’s View: Modern age is age of economic growth. Its main objective is to increase social welfare and improve the standard of living of the people by removing poverty, unemployment, inequality of income and wealth etc. of nation. Prof. Samuelson has given a definition of economics based on growth aspects. According to him: “Economics is the study of how people and society end up choosing, with or without the using of money, to employ scarce productive resources that could have alternative uses to produce various commodities, over time and distribute Engineering and Managerial Economics UNIT-1 By: Mayank Pandey 1

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September 2013 IENGINEERS- CONSULTANTS LECTURE NOTES SERIES ENGINEERING AND MANAGERIAL ECONOMICS V SEM BTECH UNIT1 them for consumption, now or in the future, among various persons or groups in society. Economics analyses the costs and the benefits of improving patterns of resource use.” SCOPE OF ECONOMICS A discussion about the true scope of economics includes the subject matter of economics, whether economics is a science or an art, or is a positive or a normative science. ECONOMICS AS A SCIENCE: A science is a systematized body of knowledge ascertainable by observation and experimentation. It is body of generalizations, principles, theories or laws which traces out a causal relationship between cause and effects. For any discipline to be a science (a) it must be systematized bodies of knowledge; (b) have its own laws or theories; (c) which can be tasted by observation and experimentation; (d)can make predictions; (e) be self-corrective; (f) have universal validity. If these features of a science are applied to economics, it can be said that economics is a science. Economics is also a science because its laws possess universal validity such as the law of diminishing returns, the law of diminishing marginal utility, the law of demand etc. Again economics is a science because of its self-corrective nature. It goes on revising its conclusions in the light of new facts based on observations. ECONOMICS AS AN ART: Art is the practical application of scientific principles. Science lays down certain principles while art puts these principles into practical use. To analyze the causes and effects of poverty falls within the purview of science and to lay down principles for the removal of poverty is art. Art facilitates the verification of economic theories. Economics is thus both a science and an art in this sense. ECONOMICS AS A POSITIVE SCIENCE: A positive science may be defined as “a body of systematized knowledge concerning what is.” Thus positive economics is concern with “what is”. ECONOMICS AS A NORMATIVE SCIENCE: Engineering and Managerial Economics UNIT-1 By: Mayank Pandey 2

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September 2013 IENGINEERS- CONSULTANTS LECTURE NOTES SERIES ENGINEERING AND MANAGERIAL ECONOMICS V SEM BTECH UNIT1 Economics is a normative science of “what ought to be.” As a normative science, economics is concerned with the evaluation of economic events from the ethical viewpoint. Marshall, Pigou and few other economists do not agree that economics is only a positive science. They argue that economics is a social science which involves value judgments and value judgments cannot be verified to be true or false. It is not an objective science like natural sciences. MICROECONOMICS: Microeconomics is the study of the economic actions of individuals and small groups of individuals. This includes the study of particular firms, particular households, individual prices, wages, income, individual industries and particular commodities. SCOPE OF MICROECONOMICS Importance / Advantages of Microeconomics: 1. 2. 3. 4. 5. 6. 7. 8. Individual Behaviour Analysis Resource Allocation Price Mechanization Helps in Economic Policy formulation Free Enterprise Economy Helpful in Public Finance management Helpful in Foreign Trade Social Welfare Disadvantages / Limitations of Microeconomics: Engineering and Managerial Economics UNIT-1 By: Mayank Pandey 3

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September 2013 IENGINEERS- CONSULTANTS LECTURE NOTES SERIES ENGINEERING AND MANAGERIAL ECONOMICS V SEM BTECH UNIT1 1. Unrealistic Assumptions 2. Inadequate Data 3. Ceteris Paribus MACROECONOMICS: Macroeconomics is that branch of economic theory which deals with the study of the economy in the aggregates with specific focus on unemployment, inflation, unemployment, business cycles, growth, monetary and physical policies. Definition: In the words of Boulding. “Macroeconomics deals not with individual quantities such as, but with aggregate of these quantities, not with individual income but with national income, not with the individual output but with national output.” In the words of Shapiro. “Macroeconomics deals with the functioning of the economy as awhole.” Scope of Macroeconomics: 1. 2. 3. 4. 5. 6. 7. 8. Theory of National Income Theory of Employments Theory of Money Theory of General Price Level Theory of Economic Growth Theory of International Trade Macro Theory of Distribution Theory of Trade Cycles Importance / Advantages of Microeconomics: 1. 2. 3. 4. 5. 6. To understand the working of economy Helpful in formulation of economic policies Helpful in controlling economic fluctuations Helpful in international comparisons National Income Helpful in Understanding the Functioning of the Economy Disadvantages / Limitations of Macroeconomics: 1. 2. 3. 4. 5. Dependence on the Individual Units Heterogeneous Units Misleading Aggregates The Aggregates which Compose a System may not be Significant Micro Changes Sometimes are More Important than Macro Changes DISTINCTION BETWEEN MICROECONOMICS AND MACROECONOMICS Engineering and Managerial Economics UNIT-1 By: Mayank Pandey 4

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