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| Economics Introduction | Economics for Engineers | IndianTechnoEra |
Economics for engineers
Economics for engineers is typically a course that focuses on the basic economic principles that engineers need to know in order to make decisions about the design and operation of engineering systems.
It involves the analysis of economic principles, the application of engineering principles, and the evaluation of economic decisions.
Topics covered in economics for engineers typically include demand analysis, market structures, pricing methods, cost-benefit analysis, and regulatory policy.
The course also typically covers topics such as cost-effectiveness analysis, risk analysis, and project management.
What is economics?
The word Economics is the combination of two Greek words. OIKOS which means HOUSE and NOMOS which means MANAGEMENT. So, "Economics is the practical science of production and distribution of wealth".
In other word, Economics is the study of social science that explain how to solve problem of scarcity with alternative use.
Basic Points
1.Goods: It means physical, tangible objects used to satisfy people’s wants and needs.
2.Services: It means the intangible satisfaction of wants and needs.
3.Individual: It means an individual decision making unit, it can be a person or a group like a household, a firm etc.
4.Resource: It means those goods and services which are used to produce other goods and services. For instance, land, labour, tools and machinery.
Concept of Scarcity
Scarcity exists because individuals want more than can be produced. It implies that there are not enough resources to satisfy human wants.
The condition in which our wants are greater than the resources available to satisfy them.
Scarcity means making choices when wants are unlimited and resources are limited. Therefore, scarcity exists, and people must make choices.
What are the main features of scarcity?
1. Limited Resources: Scarcity occurs when resources are limited, or when resources are insufficient to meet the needs of an entire population.
2. Unlimited Wants: Scarcity is caused by unlimited human wants, which are impossible to satisfy due to the limited resources available.
3. Opportunity Cost: Scarcity requires people to make choices, as resources must be allocated among competing ends. This is known as opportunity cost, or the economic cost of a decision.
4. Trade-Offs: The decisions made in the face of scarcity involve trade-offs, or the sacrifice one must make in order to obtain something else.
5. Inefficiency: Scarcity entails inefficiency, as the allocation of resources is rarely ideal or optimal.
what are the demerit of scarcity?
1. Inequality: Scarcity leads to unequal access to resources, as some individuals and groups are able to outbid or out-compete for scarce resources. This can lead to a widening of the wealth gap and increased social tension.
2. Lack of Choice: When resources are scarce, consumers can often find that they have limited choice in the products and services they can access. This can lead to dissatisfaction and feelings of helplessness.
3. Poor Quality: If resources are scarce, producers may be forced to produce low-quality goods in order to meet consumer demand. This can lead to a lower standard of living and a decrease in consumer satisfaction.
4. Inflation: When resources are scarce, the demand for them increases, leading to an increase in prices. This can lead to a decrease in the purchasing power of consumers, as their money buys less.
5. Conflict: When resources are scarce, it can often lead to conflict as different groups scramble to acquire them. This can lead to violence and instability, as well as economic and social disruption.
Wants VS Needs
Wants are desires that can be satisfied by consuming a good or service.
Needs are things, such as food, clothing, and shelter, that are necessary for survival.
Necessities are few but our wants are endless.
Meaning of economics
According to J.S. Mill Economics is “The practical science of production and distribution of wealth.” ‘It is the study of How people produce and spend income.’
Economics is concerned with the study of economic problems that arise because human wants are unlimited and resources to satisfy those wants and limited or scarce and these scarce resources have alternative uses.
Economics focuses on the rational management of scarce resources in order to maximize economic welfare. Hence, economics is about making choices in the backdrop of scarcity.
DEFINITIONS OF ECONOMICS
According to Adam Smith : Economics is a science of wealth
According to Marshall : Economics is a science of material welfare
According to Robbins : Economics is science of scarcity & choice
Economy / Economic Activities
A system in which people get a living to satisfy their wants through the processes of Production, Consumption, Investment and Exchange. It has four components:
1. Production: It is defined as ‘creation of utility’. It is process in which inputs are transformed to goods or services.
2. Consumption: It is a process by which a good or a service is completely used up.
3. Investment: Part of production which is committed for earning future income.
4.Exchange: It means the process by which ownership is transferred from seller to buyer for a consideration.
What are the characteristic of economy?
1. Supply and Demand: The law of supply and demand is a fundamental characteristic of a market economy. It states that as the price of a good or service rises, the demand for the good or service will decrease, and as the price of a good or service falls, the demand for the good or service will increase.
2. Rational Self-Interest: This is a key characteristic of market economies. It states that individuals will act in their own self-interest when making economic decisions.
3. Private Property Rights: Private property rights are essential for a market economy. They provide individuals with the legal right to own and control their own property.
4. Competition: Competition is an important characteristic of a market economy. It encourages companies to produce better products at lower prices.
5. Specialization: Specialization occurs when individuals or companies specialize in producing a certain good or service. This is important for a market economy as it allows for increased efficiency and productivity.
6. Profit Motive: The profit motive is another key characteristic of a market economy. It encourages firms to produce more and better products by offering incentives such as profits.
7. Price System: The price system is a key characteristic of a market economy. It allows buyers and sellers to interact and set prices for goods and services.
microeconomics and macroeconomics
What is microeconomics?
Micro comes from Greek word mikros, meaning “small”. Study of behavior of individual households, firms, and governments Choices they make Interaction in specific markets Focuses on individual parts of an economy, rather than the whole.
Microeconomics studies
Buying decisions of the individual
Consumers’ satisfaction
Buying and selling decisions of the firm
The determination of prices and in markets
The quantity, quality and variety of products
Profits
What is macroeconomics?
Macro comes from Greek word, makros, meaning “large”. Macroeconomics Study of the economy as a whole and Focuses on big picture and ignores fine details.
Macroeconomics studies
Economic growth
Unemployment and inflation
Aggregate demand and aggregate supply
Economic policies – fiscal and monetary
International trade – exports and imports
Money supply
Why Study Economics
To understand the world better
You’ll begin to understand the cause of many of the things that affect your life
To gain self-confidence
You’ll lose that feeling that mysterious, inexplicable forces are shaping your life for you
To achieve social change
You’ll gain tools to understand origins of social problems and design more effective solutions
To help prepare for other careers
You’ll discover that a wide range of careers deal with economic issues on many levels
To become an economist
You’ll begin to develop a body of knowledge that could lead you to become an economist in the future
SCOPE OF ECONOMICS
Subject matter of economics.
Economics is a science or as an art.
Economics as a positive or normative science.
Economics as social science.
SUBJECT MATTER OF ECONOMICS:
The subject matter of economics is also not free from controversy
How ever today economists consider the subject matter of economics as: “All those human being economic activities made for making choices among scare resources to allocate them for present & future aiming all maximizing the gain possible are the subject matter of economics”
ECONOMICS AS SCIENCE
It is science in the sense, it is a systematic knowledge derived from scientific study, observation & experiments based on scientific methods.
ECONOMICS AS AN ART
Economics is an art too because an art is a system of rules for the attainment of given end. There are several branches of economics which provide practical guidance in the solution of economic problem.
Its is a science in its methodology and an art in its application.
Positive and Normative Economics
What is positive economics?
Positive economics is an economic theory that focuses on the objective analysis and description of how the economy works. I
t is based on facts and evidence, rather than opinion or value judgments. Positive economics attempts to explain economic behavior and to predict how economic outcomes will change in response to new policies, institutions, or other changes in the environment. Positive economics is also known as descriptive economics or scientific economics.
Study of how economy works Statements about how the economy works are positive statements, whether they are true or not
Accuracy of positive statements can be tested by looking at the facts—and just the facts
What is normative economics?
Normative economics is a branch of economics that uses value judgments to make predictions or recommendations about economic policies. It is concerned with making judgments about what the economy should be like, as opposed to positive economics which is concerned with what the economy actually is like.
Normative economics is sometimes referred to as "value economics" due to its focus on values and ethics in economic decision making.
Study of what should be Used to make value judgments, identify problems, and prescribe solutions
Statements that suggest what we should do about economic facts, are normative statements those are based on values
Normative statements cannot be proved or disproved by the facts alone
BASIC CONCEPTS RELATED TO NATIONAL INCOME
Gross Domestic product at market price: It is the money value of all final goods and services produced during an accounting year with in the domestic territory of a country.
Gross National product at market price: It is a money value of all final goods and services produced by a country during an accounting year including net factor income from abroad.
Net factor income from abroad: Difference between the factor incomes earned by our residents from abroad and factor income earned by non-residents within our country
Net National Product FC: It is the sum total of factor income earned by normal residents of a country during the accounting year.
Formulas:
- NNP MP = GNP mp - depreciation
- NDP MP = GDPMP- depreciation
- NDP FC = NDP MP – Net indirect taxes (indirect tax – subsidies)
- GDP FC = NDP FC + depreciation
- NNP FC= GDP MP- depreciation + Net factor income from abroad – Net indirect taxes
- NNP FC = NDP FC + Net factor income from abroad
National product & Domestic product
What is domestic product?
Domestic product concept is based on the production units located within domestic (economic) territory, operated both by residents and non-residents.
What is national product?
National product concept based on resident and includes their contribution to production both within and outside the economic territory.
National Product = Domestic product + Residents contribution to production outside the economic territory (Factor income from abroad) -Non- resident contribution to production inside the economic territory (Factor income to abroad)
NATIONAL INCOME AND ITS CONCEPTS
Aim
Meaning of Term National income
Basic concepts of National income
Open and Closed economy
Meaning of term National income
National income is the money value of all the final goods and services produced by a country during a period of one year.
National income consists of a collection of different types of goods and services of different types.
Since these goods are measured in different physical units it is not possible to add them together. Thus we cannot state national income is so many millions of meters of cloth.
Therefore, there is no way except to reduce them to a common measure. This common measure is money.
Five concepts in National Income
1. Gross National Product
2.Net National Product
3.National Income
4.Personal Income
5.Disposal Income
Basic Concepts In National Income
GNP : The total market value of final goods and services produced in a year. The money value of only final goods to be considered not the value of intermediate goods.
GDP : aggregate values of output of goods and services produced in a country without adding net factor incomes received from abroad.
GDP = GNP - Income received from abroad.
NNP : The market value of all final goods and services after providing for depreciations.
Gross Domestic Product
Gross domestic product is the money value of all final services goods and produced in the domestic territory of a country during an accounting year.
Gross Domestic Product at Constant price and Current price
GDP can be estimated at current prices and at constant prices. If the domestic product is estimated on the basis of the prevailing prices it is called gross domestic product at current prices.
If GDP is measured on the basis of some fixed price, that is price prevailing at a point of time or in some base year it is known as GDP at constant price or real gross domestic product.
What is net national product or NNP ?
The market value of all final goods and services produced in a year is considered.
It means that in the production of goods & services, there is the consumption of capital goods such as equipment & machinery.
To get NNP the value of depreciation has to be reduced from GNP.
Hence NNP=GNP-Depreciation
What is Depreciation in national income?
Depreciation is the decrease in the value of an asset caused by wear and tear, obsolescence, or economic conditions.
In national income accounting, depreciation is the portion of a nation’s gross domestic product (GDP) that accounts for the decrease in the value of capital goods, such as buildings, machinery, and equipment, over time.
It is also referred to as capital consumption allowance and is a non-cash expense.
What is national income or NI?
National income is the total value of goods and services produced within a country in a given period of time, usually a year. It is also referred to as Gross Domestic Product (GDP).
It is measured by adding up the income earned by all citizens of the country for goods and services produced within the nation’s borders. National income is used to measure the overall economic performance of a country.
National income at factor cost.
shows how much it costs to society in terms of economic resources for their contribution of land, labour , capital and entrepreneurial ability which go into the year’s net production.
Formulas:
NI at factor cost=NI at market prices–taxes-depreciation + subsidies
NI at market price= NI at factor cost +taxes – subsidies +depreciation
What is personal income or PI?
It is that income actually received by the individuals or households in a country during the year, from all sources.
What is disposable income or DI?
It is that part of income which is left behind after the payment of direct taxes is called Disposable Personal Income. Disposable income can either be consumed or saved.
Therefore
Disposable Personal Income =Consumption +Savings
DPI = PI - TAXES
closed economy and open economy.
What is closed economy?
A country which has no economic relations with other countries. All other countries (except the one under consideration) are grouped into one category “rest of the world”.
What is open economy?
A country having economic relations with the rest of the world.
Example:
Selling goods and services to foreigners (exports).
Purchasing goods and services from the rest of the world (imports)
Selling shares, bonds, debentures to foreigners
Lending and borrowing
Sending gifts to foreigners and receiving gifts from them
Normal resident going to foreign countries to work there, and foreign residents coming and working in the domestic territory of the country.
Roll of economics in engineering
Why do engineers need to learn about economics?
The role of economics can be explained as follows:
Profit maximization
Analysis of problem.
Long term interest.
Risk and uncertainty.
Optimum utilization of resources.
Economic development.
Decision making.
Determining cost.
Answer to different questions.
Societal aspects and
others.
Relationship between engineering and economics.
Here are the following points that connect to engineering, to the economics.
1. Engineering, science and technology helps in economic development.
2. Economics helps in the development of engineering.
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Key: Economics: Nature and Scope of Micro and Macroeconomics Basic “Macro-economic concepts (including GDP/GNP/NI/Disposable Income), Disposable income, Economics in Engineering. Demand: Concept and determinants of demand; Law of demand, Elasticity of demand: its types, measurement of price elasticity of demand, Factors determining Price, the elasticity of demand. Supply: Concept, Law of Supply, Elasticity of supply, Interaction of Demand and Supply.