UCHUT346

ECONOMICS FOR
ENGINEERS
MODULE 1

• Basic Economics Concepts - Basic economic

problems – Production Possibility Curve – Utility –
Law of diminishing marginal utility – Law of Demand -
Law of supply – Elasticity- measurement of elasticity
and its applications – Equilibrium. Changes in
demand and supply and its effects Production
function - Law of variable proportion – Economies of
Scale – Internal and External Economies – Cobb-
Douglas Production Function
ECONOMICS

• Economics originated from the Greek

word ‘IOKONOMIA’ which means Household
Management

• Adam Smith ( Father of Economics) - 1776 -

‘Wealth of Nations’

• Economics studies how the society and individuals

use the limited resources to satisfy the
unlimited wants.
ECONOMICS
• Industrial Economics, also called Managerial Economics,
is the application of economic theory and methodology to
business. Business involves decision making. Decision
making means the process of selecting one out of two or
more alternative courses of action.

• The question of choice arises because the basic

resources such as capital, land, labor and management
are limited and can be employed in alternative uses. The
decision-making function thus becomes one of making
choice and taking decisions that will provide the most
efficient means of attaining a desired end, say, profit
maximization.
ECONOMIC RESOURCES OR
FACTORS OF PRODUCTION

In Economics , resources are classified into 4

1. Land (La) : Surface soil + Natural resources

2. Labour (L) : Mentally and Physically fit for work

3. Capital (K) : All Man made aids to production

[Link] / Entrepreneurship : Combines all

factors of production
BASIC ECONOMIC PROBLEMS /
CENTRAL PROBLEMS IN AN ECONOMY

• Basic concern : Scarcity of Resources ( Limited

Resources and Unlimited Wants)

• Basic Economic Problems or Central Problems

Economy as follows :

[Link] Problem of Allocation of Resources.

[Link] Problem of Fuller Utilization of Resources.
[Link] Problem of Growth of Resources.
[Link] Problem of Efficiency.
THE PROBLEM OF ALLOCATION OF
RESOURCES

The major concern pertains to

[Link] to Produce ? ( Produce according to the current

needs of an economy)

[Link] to Produce ? ( L or K, Depends on Price and

Availability)

[Link] whom to Produce ? ( For society and household)

THE PROBLEM OF FULLER UTILIZATION
OF RESOURCES

• Optimum usage of limited resources

• No wastage

• Best efficient usage of scarce resources to tap

maximum productive capacity
THE GROWTH OF RESOURCES
• To improve the standard of living

• To achieve economic growth of an economy

• It is through Technological Advancement where an

economy increase the resourse limit

• Technology Advancement > More Growth for an

economy

THE PROBLEM OF EFFICIENCY

• Efficient usage of resources
SCARCITY AND CHOICE

• Scarcity meansthat resources are not

available in the required quantity to satisfy all
the wants and needs. Since we face Scarcity, people
have to make choice between goods and services.

• In 1932, Lionnel Robinson (‘Nature and significance

of Economics’) defined economics as a
“science which studies the human behaviour in
relationship with given ends and scarce means“
PRODUCTION POSSIBILITY CURVE (PPC)
OR PRODUCTION POSSIBILITY FRONTIER
(PPF)

• PPC or PPF shows the various combinations

of two commodities that can be produced
with latest technology available and within
given resources utilised fully and efficiently.
Assumptions

➢ Only 2 commodities

➢ Latest technology

➢ Fuller utilisation of resources

CONTD…

• Any point on PPC shows fuller utilisation of

resources
• Any point above or beyond PPC shows point
cannot be attained, beyond the scope
• Any point below the PPC shows the under
utilisation of resources
• PPC is downward slopping curve and concave in
shape shows resources are transferred from one
use to other use, that’s why it is known as
transformation curve.
• It is also known as production boundary or
production frontier
FEATURES OF PRODUCTION
POSSIBILITY CURVE

• PPC slopes downward: Production of one good

can be increased only after sacrificing
production of some quantity of the other good.

• PPC is concave to the origin: A production possibility

curve is concave to the point of origin
because of increasing marginal rate of
transformation (MRT) or increasing marginal
opportunity cost (MOC).
CONTD…

• Marginal opportunity cost is opportunity cost of

good X gained in terms of good Y given
up. It is also called Marginal Rate of
Transformation (MRT).

• Concave shape of PPC means that slope of PPC

increase which implies that MRT increases.

• It means that for producing an additional unit of a

good, sacrifice of units of other good (i.e.
opportunity cost) goes on increasing.
CONTD…

Slope of PPC is defined as the quantity of good Y

given up in exchange for additional unit of good X
SHIFT IN PPC

• Shift in PPC shows technological growth in the

economy
CONTD…

• With discovery of new stock of resources or

an advancement in technology, the productive
capacity of an economy increases.

• PPC will shift to the right when:

(a) new stock of resources is discovered.
(b) There is advancement in technology.

• PPC will shift to the left when

a) Resources are destroyed because of national
calamity like earthquake, fire, war, etc.
b) There is use of outdated technology.
LAW OF DIMINISHING MARGINAL
UTILITY
Basic Concepts
• Utility
The want satisfying capacity of a commodity is known
as utility. It is expressed in Utils. Utility is a cardinal
concept i.e., it can be measured. Benham formulated
the unit of measurement of utility as utils.
• Total Utility ( TU)
TU refers to the total satisfaction derived by the
consumer from the consumption of a given quantity of a
commodity.

• TUn = MU1 + MU2 + .....+ Mun

CONTD…

• Marginal Utility (MU)

• MU refers to the additional utility derived by the

consumer from the consumption of an additional
unit of a commodity

• MU = TU n – TU n-1

• MU = d(TU)/d(Q)
LAW OF DIMINISHING MARGINAL UTILITY
THEORY (DMU) / THEORY OF CONSUMER
BEHAVIOUR

Theory has been developed by [Link] Marshall

Assumptions of the Theory

• Rationality
• Commodities should be homogenous and normal
• No time gap between the consumption of goods
• No change in taste and preferences
• No change in price of the commodity
CONTD…

Statement of Theory:

As the consumer consumes more and more units of a

same good, the additional utility (MU) from each
additional units goes on decreasing.
CONTD…
CONTD…
CONTD…
CONTD…
STAGE 1 > Increasing Returns
• TU , MU increases at an increasing rate

Stage 2 > Diminishing Returns

• MU starts falling
• TU increases at a diminishing rate
•At the end of second stage , MU reaches zero
and TU reaches at its maximum (Point M )

Stage 3 > Negative Returns

• After point M, MU becomes negative
• TU starts falling
NOTE : TU moves according to MU
CONSUMER EQUILIBRIUM

According to DMU ,the consumer reaches equilibrium when MU of

last unit is equal to price of the commodity

➢When he consumes only one commodity

MU = PRICE

➢When he consumes more than one commodity ( Consumes

Goods X , Y , Z) – Law of Equi-Marginal Utility

MUx = MUy = MUz ……….

MUn PxPy Pz Pn
DEMAND

• Demand is the desire backed by the ability and

willingness to pay for a commodity.

• Price is the value of a thing expressed in terms of

money.

• Demand for a commodity : it refers to the qty

of a commodity demanded in the market in a
given period of time at a given price.
DETERMINANTS OF DEMAND /
FACTORS AFFECTING DEMAND
• Price of the commodity ( P rises, DD falls and vice versa
)

❖Exceptional cases: Giffen goods (Essential) and Veblen goods

(Luxury)

• Income of the consumer (Y)

❖ Y rises, DD rises and vice versa (Normal Goods)

❖ Y rises ,DD decreases (Inferior Goods)

❖Y increases or decreases , DD remains constant (Exceptional

goods)
CONTD…

• Taste and preferences of

consumer

• Price of other commodity

• Substitute goods
• Complementary goods

• Consumer Expectations

• Size of population
DEMAND FUNCTION

• It shows the functional relationship between the

demand for a commodity and factors affecting
demand is called demand function.

• Dn = f( Pn, P1…Pn-1, Y , T , E , H , G …. U)
LAW OF DEMAND

• Statement of Law:

The law of demand states that if remaining

things are constant then as price of a commodity
increases demand for the commodity decreases and
as price of a commodity decreases demand for the
commodity increases.
DEMAND SCHEDULE
• It is the table that shows different quantities of a
commodity that would be demanded at different
prices.
DEMAND CURVE
EXCEPTIONS TO LAW OF
DEMAND
• Inferior Goods

• Luxury Goods

• Life saving Goods

• Basic Necessities
CHANGES IN DEMAND
• Two types of changes in demand

• Change in demand due to change in price –

Expansion and Contraction of Demand – Movement
along demand curve

• Change in demand due to factors other than price

Increase and Decrease in demand – Shift in
demand curve
CHANGE IN DEMAND DUE
TO CHANGE IN PRICE
• Price changes and other factors remains constant
CHANGE IN DEMAND DUE TO FACTORS
OTHER THAN PRICE

• Other factors changes and price remains

constant
ELASTICITY OF DEMAND
• It refers to the degree of responsiveness change
in quantity demanded of a commodity due to
change in price or any other factors.
• It was put forward by Alfred Marshall

• 3 Types of elasticity of demand

• Price Elasticity

• Income Elasticity

• Cross Elasticity
PRICE ELASTICITY OF DEMAND:
MEASUREMENT USING PERCENTAGE METHOD

• Percentage method is also called proportionate

method. The absolute value of the
coefficient of elasticity of demand ranges
from zero to infinity.
PRICE ELASTICITY OF
DEMAND (EP)
• It refers to the degree of responsiveness change in
qty demanded of a commodity due to change in price.

Types of price elasticities of Demand

[Link] elastic demand

[Link] inelastic demand
[Link] elastic demand / Unitary elastic demand
[Link] demand / More elastic demand
[Link] demand / Less elastic demand
PERFECTLY ELASTIC DEMAND

• With a small change in price there would be an

infinite change in qty demanded.
• It is an ideal and imaginary situation.
• Demand curve would be a horizontal straight line
parallel to x - axis
• In this case price elasticity would be infinity
PERFECTLY INELASTIC
DEMAND
• With a small change in price there would be no
change in qty demanded. It exists in case of
essentials like life saving drugs.
• Demand curve would be a vertical straight line
parallel to Y – axis
• In this case price elasticity would be Zero
UNIT ELASTIC DEMAND/UNITARY
ELASTIC DEMAND

• With a given change in price there would be an

equal and proportionate change in qty demanded
for the commodity. It exists in case of normal goods.

• ep = 1
MORE ELASTIC DEMAND/
ELASTIC DEMAND

• With a given change in price there would be a

more than proportionate change in qty demanded
of the commodity. It exists in case of luxuries.

• Ep > 1
INELASTIC DEMAND /LESS ELASTIC DEMAND

• With a given change in price there would a

less than proportionate change in qty demanded
of the commodity. It exists in case of
necessities like food, fuel, etc.

• Ep < 1
SUPPLY
• Supply refers to the quantities of a commodity
which a seller offers for sale at a particular price
in a given period of time.

• It refers to the desired qty of commodity that the

seller offer for sale in the market.
FACTORS AFFECTING
SUPPLY
• Price of the commodity ( P rises S rises)
• Goals of the firm
• Price of other commodities
• Price of factors of production
• State of technology
• Government Taxation
SUPPLY FUNCTION
• It shows the functional relationship
between supply and factors affecting the supply

• Sn = f(Pn, Pn...Pn-1, Gf, T, E, Gt, N….U)

LAW OF SUPPLY
• Other things constant, the
remains increases with rise quantity in of the
supplied
commodity and quantity supplied price decreases
with fall in the price of the commodity
SUPPLY SCHEDULE

It is a table shows the amounts of a commodity

supplied at a given period of time at various prices
SUPPLY CURVE
CHANGES IN SUPPLY

Two types of changes in Supply

•Change in supply due to change in price –

Expansion and Contraction of supply – Movement
along supply curve

•Change in supply due to factors other than price –

Increase and Decrease in supply – Shift in supply
curve
CHANGE IN SUPPLY DUE TO CHANGE IN
PRICE

• Price changes other factors remains the same

CHANGE IN SUPPLY DUE TO FACTORS
OTHER THAN PRICE

• Other factors changes and price remains

the same
ELASTICITY OF SUPPLY
(ES)
• It refers to the degree of responsiveness change
in qty supplied of a commodity due to change in
price or any other factors.
CONTD…

•We have only price elasticity under Elasticity of

Supply ( Es)

1. Perfectly elastic supply

2. Perfectly inelastic supply
3. Unit elastic supply / Unitary elastic supply
4. Elastic supply / More elastic supply
5. Inelastic supply / Less elastic supply
PERFECTLY ELASTIC
SUPPLY
• With a small change in price there would be an
infinite change in qty supplied.
• Supply curve would be a horizontal straight line
parallel to x – axis
• In this case price elasticity would be infinity
PERFECTLY INELASTIC
SUPPLY
• With a small change in price there would be no
change in qty supplied.
• Supply curve would be a vertical straight line
parallel to Y - axis
• In this case price elasticity would be Zero
UNIT ELASTIC SUPPLY /
UNITARY ELASTIC SUPPLY

• With a given change in price there would be an

equal and proportionate change in qty supplied for
the commodity
• es = 1
ELASTIC SUPPLY / MORE
ELASTIC SUPPLY
• With a given change in price there would be a
more than proportionate change in qty supplied of
the commodity.
• Es > 1
INELASTIC SUPPLY / LESS
ELASTIC SUPPLY

• With a given change in price there would a less

than proportionate change in qty supplied of the
commodity.
• Es < 1
EQUILIBRIUM PRICE & QUANTITY

• Equilibrium is a position or situation from which

there is no tendency to change. It is a state of
balance or rest.

• Qd = Qs

• It is the price at which qty demanded of a

commodity equals to the quantity supplied of the
commodity. Thus demand and supply is known
as Invisible hands of the market
DETERMINATION OF
EQUILIBRIUM PRICE AND
QUANTITY
CONTD…
EFFECTS OF CHANGES IN DEMAND AND
SUPPLY ON EQUILIBRIUM PRICE

• Increase in Demand

• Decrease in Demand.

• Increase in Supply

• Decrease in supply
EFFECTS OF CHANGES IN DEMAND AND
SUPPLY ON EQUILIBRIUM PRICE

• From figure, quantity demanded and supplied is

measured on the x-axis and price on the yaxis.
the

• DD is the downward sloping demand curve and SS is

the upward sloping supply curve.

• Both these curves intersect each other at point E which

is the equilibrium point and it implies that at price
of 6, demand is for 3000 units and supply is also of
3000 units.

• Thus, equilibrium price is 6.

CONTD…

• If price is 4, there will be an excess demand of 4000

units.

• There will be competition among buyers. It will

push up the price.

• Rise in price will result in fall in market demand and

rise in market supply.

• This reduces the excess demand. The changes

continue till price settles at equilibrium level.
PRODUCTION

•It is the process of transformation of inputs into

output.

•Input > Factors of

production Production

Function
It is defined as the technical relationship which shows
maximum level of output producible from given input

Q = f ( La, L , K , O )
TYPES OF PRODUCTION FUNCTION

Based on the availability of inputs production function

has been classified into two

1) Variable Proportion production function ( Short Run)

2) Fixed Proportion production function (Long Run)

CONTD…

Variable Proportion
It is the arrangement where the quantity of a
single input varies, keeping the quantities of other
inputs constant . It happens in short run due to
unavailability of all inputs.

Fixed Proportion
It is the arrangement where the quantities of all inputs
are varied in the same and equal proportion. It
happens in long run.
BASIC PRODUCTION CONCEPTS

Total Product (TP) / Total Physical Product (TPP)

• It refers to the total amount of a commodity produced
during given period of time with each set of inputs. It is
also known as Total Returns.

Average Product (AP)

• It is the output produced using per unit of the variable
factor input.
• AP = TP / L OR Q / L
• ( L is the variable factor in most of the cases )
CONTD…

Marginal Product (MP)

•It is the addition to the total product from the use of
an additional unit of variable factor input

• MP = TP n – TP n-1

• MP = d (TP)/ d(L)
THE LAW OF VARIABLE PROPORTION

• It is also known as Law of Diminishing

Returns, Returns to Factor , Short run Production
Function

• The law examines the short run relationship

between one variable input and output produced,
while keeping all other factor inputs constant
CONTD…

Statement of Law:

The law of variable proportion states that as more and

more units of a variable factor are applied to a given
quantity of a fixed factor , the total product increase at an
increasing rate initially and then at a diminishing rate
and eventually decreases, provided there is no change
in technology.
CONTD…
CONTD…
CONTD…

STAGE 1 : Increasing Returns to Factor (IRF)

• TP , AP , MP increases at an increasing rate in

the initial stage of production .

• This is due to fuller utilization of fixed factors

and division of labour
CONTD…

STAGE 2 : Diminishing Returns to Factor (DRF)

• Most relevant stage in production

• MP falls and TP increases at a diminishing rate

• At the end of second stage , TP reaches max and

MP reaches zero

• AP also falls
CONTD…

STAGE 3 : Negative Returns to Factor (NRF)

• MP becomes negative ,TP falls but remains

positive.

• AP remains falling
CONTD…

Observations

• When MP > AP , AP Rises

• When MP = AP , AP remains
constant

• When MP < AP , AP falls

ECONOMIES OF SCALE

•It means advantages of large scale production

which help in reducing the average cost of
production.

• It can be broadly classified into two:

1. Internal Economies
2. External Economies
INTERNAL ECONOMIES

• Labour Economies

• Technical Economies

• Managerial Economies

• Marketing Economies
EXTERNAL ECONOMIES

• Economies of localization

• Economies of Information

• Economies of vertical disintegration

• Economies of by - product
COBB – DOUGLAS
PRODUCTION FUNCTION
• It was proposed by Wickseed for the first time

• It was statistically tested by Charles .W. Cobb

and Paul. H. Douglas in 1928

• They used the data from manufacturing sector of

USA for the years 1899 to 1922
CONTD…

•Output elasticity measures the responsiveness of

output to a change in levels of either labor or
capital used in production.

•C - D Production function is a homogenous

production function

• C - D Production function always exhibits

constant returns to scale.
α+β=1