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1.Why should engineers learn economics? Fundamentally, engineers are builders, designers and creators. Most of whatever they design and fabricate is to be sold to the public. The goods (products) and services that are provided are governed by the market (economy). Therefore, having a sound understanding of how the economy works is critical to the success of an engineer and the company he/she works for. As an engineer climbs the corporate ladder, there will be a greater exposure to managing money and resources. Economics is all about the wise allocation and spending of essential resources (especially money) and how and why they are affected over time. For example, a CEO of a company needs to ensure that money spent (or invested) on a certain project does not get wasted on something that will be of scant use.
Applicability of engineering economics:-
- Engineering Economics is closely aligned with Conventional
Micro-Economics.
- Engineering Economics is devoted to the problem solving and
decision making at the operations level.
- Engineering Economics can lead to sub-optimisation of
conditions in which a solution satisfies tactical objectives at the
expense of strategic effectiveness.
- Engineering Economics is useful to identify alternative uses of
limited resources and to select the preferred course of action.
Define law of demand:-
In microeconomics, the law of demand states that, "conditional on all else being equal, as the price of a good increases (↑) , quantity demanded decreases (↓) ; conversely, as the price of a good decreases (↓) , quantity demanded increases (↑) ". [1]^ In other words, the law of demand describes an inverse relationship between price and quantity demanded of a good. Alternatively, other things being constant, quantity demanded of a commodity is inversely related to the price of the commodity. Exceptions:- There are two excep�ons to the Law of Demand. Giffen and Veblen goods are excep�ons to the Law of Demand. A Giffen good is considered to be an excep�on to the Law of Demand. The unique features of a Giffen good results in quan�ty demanded increasing when there is an increase in price. As stated earlier, the Law of Demand states that the quan�ty demanded should decrease with an increase in price (the inverse rela�onship). Veblen goods are generally more visible in society than Giffen goods. For example, economists o�en view diamonds as a Veblen good because of the higher pres�ge value of a diamond; the higher is the desirability. Some people will also buy fewer diamonds when the price falls.
Price elasticity of demand ( PED or Ed ) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to increase in its price when nothing but the price changes. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price.
Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic ) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic ) when its PED is greater than one.
Factors:
1. Nature of commodity:
Elasticity of demand of a commodity is influenced by its nature. A
commodity for a person may be a necessity, a comfort or a luxury.
2. Availability of substitutes:
Demand for a commodity with large number of substitutes will be more
elastic. The reason is that even a small rise in its prices will induce the
buyers to go for its substitutes. For example, a rise in the price of Pepsi
encourages buyers to buy Coke and vice-versa.
3. Level of price:
Level of price also affects the price elasticity of demand. Costly goods like
laptop, Plasma TV, etc. have highly elastic demand as their demand is very
sensitive to changes in their prices.
4. Income Level:
Elasticity of demand for any commodity is generally less for higher income
level groups in comparison to people with low incomes. It happens because
rich people are not influenced much by changes in the price of goods. But,
poor people are highly affected by increase or decrease in the price of
goods. As a result, demand for lower income group is highly elastic.
- Other factors are Postponement of Consumption, Number of Uses, Share in Total Expenditure, Time Period etc.
Price elasticity of supply (PES) measures the relationship between change in quantity supplied following a change in price
- If supply is elastic (i.e. PES > 1), then producers can increase output without a rise in cost or a time delay
- If supply is inelastic (i.e. PES <1), then firms find it hard to change production in a given time period. What is the formula for calculating price elasticity of supply?
The formula for price elasticity of supply is:
Percentage change in quantity supplied divided by the percentage change in price
- When Pes > 1, then supply is price elastic
FV = PV x [ 1 + (i / n) ] (n x t)
Break - even analysis :- Break - even analysis seeks to investigate the interrelationships among a firm's sales revenue or total turnover, cost, and profits as they relate to alternate levels of output. A profit-maximizing firm's initial objective is to cover all costs, and thus to reach the break - even point , and make net profit thereafter.
"The nature of break - even analysis means techniques used to determine the cost-volume relationship and also helps to find out the point where the revenue and costs agree with each other. It represents the level of operation whether it is loss or profit.
To calculate a break - even point based on units: Divide fixed costs by the revenue per unit minus the variable cost per unit. The fixed costs are those that do not change no matter how many units are sold. The revenue is the price for which you're selling the product minus the variable costs, like labor and materials.
What Is Inflation?
Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over a period of time. It is the constant rise
in the general level of prices where a unit of currency buys less than it did in prior periods. Often
expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s
currency.
Causes of Inflation Rising prices are the root of inflation, though this can be attributed to different factors. In the context of causes, inflation is classified into three types: Demand- Pull inflation, Cost-Push inflation, and Built-In inflation.
Demand-Pull Effect
Demand-pull inflation occurs when the overall demand for goods and services in an economy increases more rapidly than the economy's production capacity. It creates a demand-supply gap with higher demand and lower supply, which results in higher prices. For instance, when the oil producing nations decide to cut down on oil production, the supply diminishes. It leads to higher demand, which results in price rises and contributes to inflation. Additionally, an increase in money supply in an economy also leads to inflation. With more money available to individuals, positive consumer sentiment leads to higher spending. This increases demand and leads to price rises. Money supply can be increased by the monetary authorities either by printing and giving away more money to the individuals, or by devaluing (reducing the value of) the
currency. In all such cases of demand increase, the money loses its purchasing power.
Cost-Push Effect
Cost-push inflation is a result of the increase in the prices of production process inputs. Examples include an increase in labor costs to manufacture a good or offer a service or increase in the cost of raw material. These developments lead to higher cost for the finished product or service and contribute to inflation.
Built-In Inflation
Built-in inflation is the third cause that links to adaptive expectations. As the price of goods and services rises, labor expects and demands more costs/wages to maintain their cost of living. Their increased wages result in higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.
Theoretically, monetarism establishes the relation between inflation and money supply of an economy. For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and especially silver flowed into the Spanish and other European economies. Since the money supply had rapidly increased, prices spiked and the value of money fell, contributing to economic collapse.
Types of Inflation Indexes
Depending upon the selected set of goods and services used, multiple types of inflation values are calculated and tracked as inflation indexes. Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
The Consumer Price Index
The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food and medical care. CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by the individual citizens. Changes in the CPI are used to assess price changes associated with the cost of living, making it one of the most frequently used statistics for identifying periods of inflation or deflation. The U.S. Bureau of Labor Statistics reports the CPI on a monthly basis and has calculated it as far back as 1913.
The Wholesale Price Index
The WPI is another popular measure of inflation, which measures and tracks the changes in the price of goods in the stages before the retail level. While WPI items vary from one country to other, they mostly include items at the producer or wholesale level. For example, it includes cotton prices for raw cotton, cotton
and what is the economic advantage of the best alternative?
Solution
Operating cost of lathe including labour = Rs. 200 per hr
Operating cost of grinder including labour = Rs. 150 per hr (a) Cost of design A
No. of hours of lathe time per 1,000 units = 16 hr No. of hours of grinder time per 1,000 units = 4.5 hr
Total cost of design A/1,000 units
= Cost of lathe operation per 1,000 units
- Cost of grinder operation per 1,000 units
= 16 _ 200 + 4.5 _ 150
= Rs. 3,
Total cost of design A/1,00,000 units = 3,875 _ 1,00,000/1,
= Rs. 3,87, (b) Cost of design B
No. of hours of lathe time per 1,000 units = 7 hr
No. of hours of grinder time per 1,000 units = 12 hr Total cost of design B/1,000 units
= Cost of lathe operation/1,000 units
- Cost of grinder operation/1,000 units
= 7 ∗ 200 + 12 ∗ 150
= Rs. 3,
Total cost of design B/1,00,000 units = 3,200 ∗ 1,00,000/1,
= Rs. 3,20,
DECISION The total cost/1,00,000 units of design B is less than that of design A. Hence, design B is recommended for making the tapered fastening pin.
Economic advantage of the design B over design A per 1,00,000 units = Rs. 3,87,500 – Rs. 3,20,
= Rs. 67,500.
Price Index:-
A price index is a normalized average of price relatives for a given class of goods or services in a given region, during a given interval of time. It is a statistic designed to help to compare how these price relatives, taken as a whole, differ between time periods or geographical locations.
