Note for Engineering Economics - EE By Ktu Topper

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EJAZ ALI HAROON MEA Engg. College Module – 1:-Business Economics and its role in managerial decision making-meaning-scope-relevanceeconomic problems-scarcity Vs choice - Basic concepts in economics-scarcity, choice, resource allocationTrade-off-opportunity cost-marginal analysis- marginal utility theory, Law of diminishing marginal utility -production possibility curve. Economics  If I have Rs.100 in my hand, should I have a chicken biriyani or use it to have a hair cut?  If the government wishes to start a new project with certain crores of rupees, should they invest in road development or in poverty eradication programs?  What are the different methods by which a person, family, society and a nation acquire wealth and how do they spend them in different areas like food, shelter, entertainment etc? Economics is a social science that tries to deal with these kinds of problems. We have got a fixed amount of resources in our hand and how we can efficiently use these resources to gain maximum is the basic problem in many aspects of life. Economics studies these problems. Definitions given by various economists are:--Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. --An enquiry into the nature and causes of wealth of nations. Business Economics Faris is appointed as the manager of a smartphone company. As the manager, Faris has to come across different problems like:a) How many number of smartphones should be produced in an year? b) How many quantities in different versions of the smartphone should be produced? c) In what proportion, the total available capital has to be distributed to manufacture different versions of the product? d) How many employees have to be employed in different divisions of the company to fasten the production process and gain maximum profit? Maximizing gain from the given resources like capital, labour, land, technology, time, skills etc is the main objective of a business firm. So inorder to maximize the gain and to address the problems as mentioned above, a manager has to make use of economic theories and analytical tools in decision making process. Business economics is the branch of economics that deals with the application of economic theories, principles, analytical tools etc to the decision making process within a business unit, thereby to attain the desired economic goals. 1

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Microeconomics: It deals with economic matters within a business unit like revenue, cost, savings of workers etc Economics Macro economics: It deals with economic matters that can affect a business, but determined by outside environment. Eg:- national income, inflation rate, govt.policies etc Human wants, desires and aspirations are limitless + Resources (land, capital, labour, technology, time, skill etc) to satisfy these needs are scarce. = People need to make choices between their desires Economic problems in a business unit You are appointed as the manager of a business unit, say a mobile phone company. The company has to acquire certain number of employees, electronic equipments, technology etc to manufacture and distribute mobile phones into the market. There are 3 basic problems that we have to face as a decision maker. The economic problem – sometimes called the basic or central economic problem – asserts that an economy's finite resources are insufficient to satisfy all human wants and needs. It assumes that human wants are unlimited, but the means to satisfy human wants are scarce. Three questions arise from this:  What to produce? This question deals with selecting the type of supply and the quantity of the supplyof products. Eg:-What type of smartphones should the company produce? How many smartphones should be produced in a year?  How to produce? This question deals with procedures and methods used while making the product. Eg. "Should the company use more workers, or should theyinvest in more machinery?"  For whom to produce? This question deals with distributing goods that have been produced, focusing on efficiency and equity. We have to identify those people for whom the products are to produced and it should be distributed to them. 2

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Scope of business economics in managerial decision making As a manager, imagine in what all areas should we use business economics in a business organization? Scope identifies those areas where the theories of business economics can be used. It includes: Demand Analysis and Forecasting: - It is the process of identifying how many units of products of our company will be demanded by the customers in a certain period of time. Accurate estimates of demand is necessary for proper business planning. If forecasting is not done properly, the company may ether produce excess or fewer numbers of smartphones which may result in profit loss. A demand forecast can serve as a guide to management for maintaining and strengthening market position and enlarging profits.  Cost and production Analysis: - To minimize the expenses while manufacturing smartphones, the company should analyse those areas where costs are incurred. A study of economic costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates which are useful for management decisions. Cost analysis helps in profit planning, cost control and pricing policies. Production analysis and production function analyse various inputs (capital, raw material, labour etc) and outputs( no.of units produced).  Pricing Decisions, policies and practices. ----Should we sell our smartphones for rs.5000 or Rs.7000 or Rs.10000 or for any other amount? Pricing is an important area of business economic. Revenue of a firm depends a lot upon the price at which the commodities are sold in the market.Economic principles play a part while deciding the price of the commodity, pricing Method, price forecasting etc.  Profit Management:- Business firms are generally organised for purpose of making profits and in the long run profits earned are taken as an important measure of the firms success. If knowledge about the future were perfect, profit analysis would have been a very easy task. However, in a world of uncertainty, expectations are not always realised so that profit planning and measurement constitute a difficult area of business economic. The important aspects covered under this area are : Nature and Measurement of profit, Profit policies and Technique of Profit Planning like Break-Even Analysis.  Capital Management: - We need to find huge capital investments for the smooth running of our firm. We will have many options like investing from the owner’s account, issuing shares, opting for bank loans etc. But which one should the management choose at a certain point of time? For what all purposes should the company use this capital? Capital management implies planning and control of capital expenditure. The main topics dealt with are: Cost of capital, Rate of Return and Selection of Projects. 3

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Significance of Business Economics :  Business economics is concerned with those aspects of traditional economics which are relevant for business decision making in real life.  It also incorporates useful ideas from other disciplines such as psychology, sociology, etc, if they are found relevant to decision making.  Business economics helps in reaching a variety of business decisions in acomplicated environment. Certain examples are : o What products and services should be produced? o What input and production technique should be used? o How much output should be produced and at what prices it should be sold? o What are the best sizes and locations of new plants? o When should equipment be replaced? o How should the available capital be allocated?  Business economics makes a manager a more competent model builder.  At the level of the firm where its operations are conducted though functional areas, such as finance, marketing, personnel and production, business economics serves as an integrating agent by coordinating the activities in these different areas.  Business economics analyses the interaction between the firm and society, and accomplishes the key role of an agent in achieving its social and economic welfare goals. Scarcity Scarcity is the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. Scarcity refers to shortage of resources. It states that society has insufficient productive resources to fulfill all human wants and needs. We may wish to have heavy meals on every day, but our income may not be sufficient enough for that. - Thus there is a scarcity or shortage of resource (here income/salary) which forces us to resort to normal meals on some days. Scarcity leads to another concept in economics called choice. Choice ---A person liked 4 shirts displayed in a textile shop. He wished to buy all the four, but he had only Rs.2000 in his hand. Thus, he had to select only two out of them. Here the person has made a choice out of the four alternatives. ---A company wishes to invest in project A and project B and each one costs Rs.30,000. But the company has got only Rs. 40,000 as cash. Thus a choice has to be made between Project A and Project B. 4