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8/12/2019 ARS Final UnitI
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Economics & Principles of
Management
Unit I
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Definition of Economics
Alfred Marshall
enquires
How he gets incomeHow he spends it
and
Study of wealth andStudy of man
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Definition of Economics
Lionel Robbins
Study of
Means resources
And
Study of endsshort in supply in relation to
demand
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Engineering economy
Engineering economy
concerned
evaluations ofCosts and benefits
leading to
Technical and businessfor
Projects and ventures
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Techniques of Engineering
Economy
Principle 1 Choice among alternative
Principle 2 Comparison
Principle 3 View
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Techniques of Engineering
Economy
Principle 4 Common unit of Measurement
eg Rs
Principle 5 Criterion relates to the long
term financial interests
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Techniques of Engineering
Economy
Principle 6Uncertainty
Principle 7 Compare projected outcomes
with actual results
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Application of Engineering
Economy
1) Functional activity
2) Types of Decision
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Functional activity
1) Planning
2) Production
3) Material Management4) Plant Engineering
5) Transport
6) Action management
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Types of Decision
1) Capital budget
2) Make or buy decisions
3) Replacement
4) Project Evaluation
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Basic economic concepts
1) Utility
2) Goods
3) Wealth4) Classification of wealth
5) Services
6) Income
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Utility
Usefulness
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Goods
1) Free goods
Air, sunshine, seawater
2) Economic goods
a) ConsumablesMilk,LPG
b) Capital
Machines
3) Public goods
Roads,bridges,hospitals ,schools
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Wealth
Characteristics
Scarcity
Transportability
Utility
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Classification of wealth
1) Personal / Individual wealth
2) Collective owned wealthMunicipal, Governments , coal mines,
Laboures, Public building
3) National wealth
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Services
ServicesLawyer, Doctor
Characteristics of wants
UnlimitedEach being satisfied
Recurrent
Necessaries
Comforts
luxuries
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Income
Remuneration
Personal services
ownership
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Law of Demand
Higher the price Lower the demand
Lower the price Higher the demand
If remaining constant
income
consumers tasteconsumers preference
substitutes price
advertising expenditure
Other things
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Law of Demand
Commodity price increase Quantity
demanded decrease
Commodity price decrease Quantity
demanded increase
Q = f ( P )
Quantity
Price
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Characteristics of Law of Demand
1) Inverse relationshipPrice & Quantity
demanded opposite
2a) Price an independent variable
2b) Demand a dependent variable
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Exceptions of Law of Demand
1) Conspicuous consumption of goods
2) Speculative Market
3) Giffen effect
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Conspicuous consumption of
goods
Price increases demand increases
Price decreases demand decreases
Demand pearl
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Speculative Market
Increase in price of shares
Price falls wait
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n v ua eman ar e
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n v ua eman ar eDemand
Price of the
product Rs
Demand
A
Demand
B
Demand
C
TOTAL
12 5 6 7 18
10 6 7 8 21
8 7 8 9 24
Individual
demand
Total demand
Autonomous Deman Der ve
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Autonomous Deman Der veDemand
Autonomous Demand
Does not depend on demand on the product
eg sugar , milk
Derived Demand
Arises because of the other commodity
eg cotton, bricks, cement, petrol, battery Complementary commodities
Power regulator for refrigerator, TV set
Deman or Dura e Per s a e
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Deman or Dura e Per s a eGoods
Demand for Durable Goods demand
changes over a
long period
1) Consumer durable
Clothes, shoes, furniture, TV, scooters
2) Producer durable
Like fixed assets building, plant, machinery,
office furniture
Deman or Dura e Per s a e
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Deman or Dura e Per s a eGoods
Perishable Goodsdemand depends on
current prices
1)Consumer goods
All food items, drinks, soaps, fruits
2)Producer goodsRaw materials, fuel, power, packing items
In ustry Deman Company
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In ustry Deman CompanyDemand
Company Demand1) Maruti
2) Hidustan Motors
3) Standard Motors4) Hyundai
5) BMW
6) Premier Automobiles
Industry Demand Total of the all automobile
industries
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Total Market & Market Segment
Market segments
Geographical area
Distribution channels
Customer sizes
Domestic
ForeignTotal marketsum of all the market segments
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Price of the product &its demands
1) Law of Demand
2) Demand Schedule
3) Demand curveDraw curve for the abovedata
Price (Rs) Quantity demanded (units)
100 20,000
40 40,000
10 65,000
Pr ce o t e su st tutes
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Pr ce o t e su st tutescomplementary goods
Substitutes
Tea and coffee
Complementary goods
Petrol car & scotter
Butter &jam bread
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Consumers Income
By demand analysis
1)Essential consumer goods
Feed grains, salt, cooking fuel, housing
2)Inferior goods
Bajra ( wheat & rice )
Kerosene stove ( gas stove )
3)Ordinary normal goodsCloth
4)Luxury goods
Precious materials , TV sets
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Consumers Tastes & Preferences
1)Consumers Tastes
Depends on social customs, habits, life style ,
age ,sex
2)Consumers Preferences
producers advertisement to change
preferences
Num er o Consumers t e r
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Num er o Consumers t e rDistribution
The larger
the number of customers ,
the greater
the demand & vice versa
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Amount spent on Advertisement
Incurred
in addition to
manufacturing cost
for promoting sales
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Consumers expectationsOn account of
1) Increase in
DA
BonusPay scales
2) Fall in
Production
stock
Demand
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Demonstration effect
When new models appear in the market ,
rich people buy first
color TV
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P l i f h
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Population of the country
The larger
the population,
the larger
the demand
D d f i
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Demand function
Linear demand function
Non linear demand function
Li d d f i
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Linear demand function
Price Vs Quantity demanded
When the slope of the demand curve remains
constant throughout its length.
N li d d f ti
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Non linear demand function
Price Vs Quantity demanded
Slope of the demand curve changes all along
the demand curve
demand function yields a demand curve insteadof a demand line
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Demand forecasting
For arranging
1) Raw materials
2) Equipments
3) Machine accessories
4) Labour5) Buildings
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Types of Demand Forecasting
1) Short term forecasting purpose < an year
2) Long term forecasting purpose
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L t f ti
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Long term forecasting purpose
Planning a new unit or expansion of existing unit
Long term financial requirements
Planning manpower
Methods of Demand or Sale
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Methods of Demand or SaleForecasting
1) Survey of buyers intentions2) Collective opinion
3) Trend projections
4) Economic Indicators
5) Historic Estimate
6) Market survey or Market Research Techniques
7) Delphi method
8) Judgmental Techniques
9) Prior knowledge
10) Forecasting by past average
S f b i t ti
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Survey of buyers intentions
Ask customers
called
opinion surveys
Collecti e opinion
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Collective opinion
Sales man expected sales
Revised estimates by
Production manager
Sales manager &Top executives
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Economic Indicators
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Economic Indicators
1) Agricultural income
2) Personal income
3) Construction contracts sanctioned
4) Automobile registration
Historic Estimate
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Historic Estimate
What had happened in the past
will happen
in the future
Market survey or Market Research
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Market survey or Market Research
Techniques
When a company
introduces
a new product
Delphi method
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Delphi method
A panel of experts
interrogated by
sequence of questionnaires
response produces next questionnaire
Judgmental Techniques
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Judgmental Techniques
Opinion of
1) Customers
2) Retailers & wholesalers
3) Area sales manager
Prior knowledge
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Prior knowledge
Larger organization
Ancillary units
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Correlation Analysis
Relationship between
1) sales and
2) economic and non economic phenomena like
a) national income b) defense expenditure c)
population growth
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Elasticity's of Demand
Kinds of Demand Elasticity's
1)Price elasticity of Demand
2)Income Elasticity
3)Cross Elasticity
4)Advertising elasticity
Definition Price Elasticity of
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Definition Price Elasticity of
Demand
Price Elasticity of Demand defined as degree
of responsiveness to a change in price of
quantity demanded
Definition Price Elasticity of
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Definition Price Elasticity of
Demand - ep
proportionate change in quantity demanded
ep =
proportionate change in price
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Perfectly elastic demand
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Pointelasticities of demand
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Types of Price Elasticity
Type Numericalexpression
Description Shape of the curve
Perfectly elastic
demand
e = infinite horizontal
Perfectly inelastic
demand
e = 0 zero vertical
Unit elasticity e = 1 one Rectangular
hyperbola
Relatively elastic
demand
e = > 1 Greater than one Flat
Relatively inelastic
demand
e = < 1 Less than one steep
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Factors determining price elasticity
Nature of the product Extent use or multiple users
Range of substitutes
Income level Proportion of income spend on the
commodity
Durability of the demand
Purchase frequency of a product
Change in demand & Elasticity of demand
Nature of the product
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Nature of the product
Demand of the basic needsinelastic
eg wheat , matchbox
Demand for luxuries elastic
eg TV , refrigerator, washing machine
Extent use or multiple users
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Extent use or multiple users
Variety of useselastic demand
eg electricitylighting, cooking, washing etc
Limited useinelastic demand
Range of substitutes
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Range of substitutes
Elastic demandtea for coffee
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Proportion of income spend on the
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Proportion of income spend on the
commodity
Only a small portion of income spent on
matchbox, salt demand inelastic
Durability of the demand
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Durability of the demand
Commodity durable or repairable eg shoe
demand elastic
Purchase frequency of a product
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Purchase frequency of a product
High frequency purchase of a product
demandelastic
C ange n eman E ast c ty o
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g ydemand
Demand changes due to other factors ie
income etc
Demand changes due to price only
l f d
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Income Elasticity of Demand
Quantity demanded
ep =
proportionate change in income
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Negative income elasticity
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Negative income elasticity
Increase income reduction in quantities
demanded inferior goods
Bidies to cigareetes
Positive income elasticity
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Positive income elasticity
Income risesdemand rises for smaller goods
P i i i l i i
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Positive income elasticity
1) Unit elasticity
2) Less than unit elasticity
3) More than unit elasticity
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Economics & Principles of
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Economics & Principles of
Management
Production
Analysis
P d ti F ti
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Production Function
Land
Labor
Capital
Raw materials
Time
space
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L f P d ti
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Laws of Production
1 ) The Laws of Variable Proportions
2) Laws of Returns to Scale
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Laws of Diminishing Returns
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If more and more units of a variable
applied to a fixed input, the output may
initially increase , but beyond a certain
output , the rate of increase in output
diminishes
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Laws of Diminishing Returns
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Laws of Diminishing Returns
Assumptions
1) technology remains unchanged
2) input prices remain unchanged
3) variable factors - homogenous
Production Analysis : Long Run
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Production Analysis : Long -Run
Both the inputs capital and labor
variable factors
Isoquant Curves
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Isoquant Curves
I = 150
I = 100
LABOR
C
AP
I
T
AL
Isoquant Curves properties
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Isoquant Curves - properties
1) negative slope
2) convex to origin
3) can not intersect
Laws of Returns to Scale
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Laws of Returns to Scale
How a simultaneous and proportionate
increase in all the inputs affects the total
output at its various levels
Laws of Returns to Scale
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Laws of Returns to Scale
1) Increasing Returns to Scale
2) Constant Returns to Scale
3) Decreasing Returns to Scale
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Increasing Returns to Scale
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Increasing Returns to Scale
A proportionate change in both the
inputs K & L lead to more than
proportionate change in output
When the input doubled , the output
Increases from 10 t0 25 instead of 20
Causes Increasing Returns to Scale
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Causes Increasing Returns to Scale
1) technological & managerial indivisibilities
2) higher degree of specialization
3) dimensional relation
Constant Returns to Scale
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Labor
C
a
p
I
T
A
l
Q= 10
Q= 20
Constant Returns to Scale
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If quantities of both the inputs K & L
doubled & returns also doubled called
constant returns to scale
Decreasing Returns to Scale
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Labor
C
a
P
I
T
A
l
Q= 10
Q= 18
Decreasing Returns to Scale
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A proportionate change in both the
inputs K & L lead to less than
proportionate change in the output
When the input doubled , the output
Increases from 10 t0 18 instead of 20
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THANK YOU