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Note for Engineering Economics - EE by Ayush Agrawal

  • Engineering Economics - EE
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  • Biju Patnaik University of Technology BPUT - BPUT
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HSSM3204: Engineering Economics & Costing Module-I: (12 hours) Engineering Economics – Nature and scope, General concepts on micro & macro economics. Theory of demand, Demand function, Law of demand and its exceptions, Elasticity of demand, Law of supply and elasticity of supply. Determination of equilibrium price under perfect competition (Simple numerical problems to be solved). Theory of production, Law of variable proportion, Law of returns to scale. Module-II: (12 hours) Time value of money – Simple and compound interest, Cash flow diagram, Principle of economic equivalence. Evaluation of engineering projects – Present worth method, Future worth method, Annual worth method, internal rate of return method, Cost-benefit analysis in public projects. Depreciation policy, Depreciation of capital assets, Causes of depreciation, Straight line method and declining balance method. Module-III: (12 hours) Cost concepts, Elements of costs, Preparation of cost sheet, Segregation of costs into fixed and variable costs. Break-even analysis - Linear approach (Simple numerical problems to be solved). Banking: Meaning and functions of commercial banks; functions of Reserve Bank of India. Overview of Indian Financial system. Text Books: 1. Riggs, Bedworth and Randhwa, “Engineering Economics”, McGraw Hill Education India. 2. D. M. Mithani, Principles of Economics. Reference Books: 1. Sasmita Mishra, “Engineering Economics & Costing“, PHI 2. Sullivan and Wicks, “Engineering Economics”, Pearson 3. R.Paneerselvam, “Engineering Economics”, PHI 4. Gupta, “Managerial Economics”, TMH 5. Lal and Srivastav, “Cost Accounting”, TM

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Introduction to Engineering Economics Economics: Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek word oikonomia, ("management of households”) from (oikos, "house") + (nomos, “Custom” or "law"). Thus, it refers to managing a household with limited funds. All economic activities start from the existence of human wants. With the help of resources a person fulfils his wants and gets satisfaction. Thus, economics is the study of wants, efforts and satisfaction. In modern economy, wants, efforts and satisfaction are linked through money. Economics is growing very rapidly as the years pass. As new ideas are being discovered and the old theories are being revised, it is not possible to give a definition of economics which has a general acceptance. The set of definitions given by various economists are generally classified under four heads: • Economics as a science of wealth. • Economics as a science of material welfare. • Economics as a science of scarcity and choice. • Economics as a science of growth and efficiency. Economics as a Science of Wealth/Classical View: Adam Smith, the founder of economics, described Economics as a body of knowledge which relates to wealth. Accordingly to him if a nation has larger amount of wealth, it can help in achieving its betterment. He defined economics as “The study of nature and causes of generating wealth of a nation”. He emphasized the production and expansion of wealth as the subject matter of economics. Criticisms: ✓ The definitions give primary importance to wealth and secondary importance to man. The fact is that the study of man is more important than the study of wealth. ✓ The word ‘wealth’ in the definitions means only material goods such as chair, book, pen, etc. These do not include services of doctors, nurses, soldiers etc. In modern economics, the word ‘wealth’ includes material as well as non-material goods. ✓ According to the definitions, man works only for his self-interest and social interest is ignored. ✓ The definitions ignore the importance of man’s welfare. Wealth is not be all and the end of all human activities. ✓ The definitions lay emphasis on the earning of wealth as an end in itself. They ignore the means which are scare for the earning of wealth.

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Economics as a Science of Material Welfare/Neo-Classical View: Alfred Marshall in his book, 'Principles of Economics' defined Economics as: “Study of mankind in the ordinary business of life. It examines that part of individual and social actions which is closely connected with the attainment and with the use of material requisites of well being”. This definition clearly states that Economics is on the one side a study of wealth and on the other and more important side a part of the study of man. Robbins's Criticisms: ✓ The word “Material” in the definitions considerably narrows down the scope of economics. There are many things in the world which are not material but they are very useful for promoting human welfare e.g., the services of doctors, lawyers, teachers, engineers, professors, etc., satisfy our wants and are scarce in supply. ✓ There are many activities which do not promote human welfare, but they are regarded economic activities, e.g., the manufacturing and sale of alcohol goods or opium, etc. Here Robbins says, “Why talk of welfare at all? Why not throw away the mask altogether”? ✓ In his opinion welfare is a vague concept as it is purely subjective. Moreover, he says what is the use of a concept which can’t be quantitatively measured and on which two persons can’t agree as to what is conducive to welfare and what is not e.g., manufacturing of guns, tanks and other war heads, production of opium, liquor etc., are not conducive to welfare but these are all economic activities. ✓ The definition of welfare is of theoretical nature. It is not possible in practice to divide man’s activities into material and non-material. ✓ The word ‘Welfare' in the definition involves value judgment and the economists according to Robbins, are forbidden to pass any verdict. Economics as a Science of Scarcity and Choice: Lionel Robbins in his book ‘Nature and Significance of Economics Science' defined Economics as "A science which studies human behavior as a relationship between ends and scarce means which have alternative uses". Main Pillars of Robbins's Definition: ❖ Human wants referred to as ends by Robbins are unlimited. They increase in quantity and quality over a period of time. They vary among individuals and over time for the same individual. It is not possible to find a person who will say that his wants for goods and services have been completely satisfied. This is because of the fact that when one want is satisfied, it is replaced by another and there is then no end to it. ❖ The ends or wants are of varying importance. They are ranked in order of importance as: (a) necessaries (b) comforts and (c) luxuries. Man generally satisfies his urgent wants first and less urgent afterwards in order of their importance. ❖ The resources (Land, labor, capital and entrepreneurship) at the disposal of man are scarce. They are not found in as much quantity as we need them. Scarcity means that we do not and cannot have enough income or wealth to satisfy our every desire. Scarcity exists because human wants always exceed what can be produced with limited resources and time that Nature makes available to man at any one time.

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❖ The scarce resources available to satisfy human wants have alternative uses. They can be put to one use at one time e.g., if a piece of land is used for the production of sugarcane, it cannot be utilized for the growth of another crop at the same time. Man, therefore, has to choose the best way of utilizing the scarce resources which have alternative uses. The scarce resources and choices are the key problems confronting every society. Criticisms on Robbins Definition: ✓ Robbins’s definition restricts the scope of economics by treating it as a positive Science only while in reality it is both a positive and a normative science. ✓ It has widened the scope of economics by covering the whole of economic life, while it is concerned with that part of human life which is connected with the market price. ✓ Robbins made economics colorless, impersonal and abstract. It is in fact a definition of economics for economist only. ✓ The study of economic growth process remains outside the scope of economics while it is through economic growth that living standards improve. Economics as a Science of Growth and Efficiency: If we define Economics as a science of administration of scare resources, then its scope becomes too wide and includes the whole of economics life and not merely that part of it which is connected with the market price. The modern economists define economics as "A science of growth and efficiency". According to Samuelson, "Economics is the study of how people and society end up closing, with or without the use of money, to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them for consumption now or in the future among various persons and groups in society". It analyses the cost and benefits of improving patterns of resource allocation. Efficiency here implies technical efficiency and economic efficiency in the use of scarce resources for producing a given level of output. The term efficiency also relates to the efficiency of whole economics system. If one section of the society is made better off without making the other section worse off, we can say the economic system is operating efficiently". Thus, Economics can be defined as “A social science which is concerned with the proper use and allocation of resources for the achievement and maintenance of growth with stability and efficiency”. Scope of Economics: The scope of economics is the area or boundary of the study of economics. In scope of economics we answer and analyze the following questions: • What is the subject matter of economics? • What is the nature of economics?

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