MS3001D

ENGINEERING ECONOMICS
Gopika. P. G
Ad-hoc Faculty , SOMS,NITC
Email: gopikapg_adhoc@nitc.ac.in
 What is economics ?

“Economics is a science that studies human behavior as a relationship

between ends and scarce means which have alternative use .” _ Lionel
Robbins

Economics is the study of an economy .An economy consists of all the

production , transfer and consumption of goods and services in an
entity like a town or a country .
 Lecture - 1

Introduction to Engineering Economics

Course Outcomes:
CO1: Evaluate the economics of the management ,operation and growth and
profitability of engineering firms and analyze operations of markets under varying
competitive conditions .
CO2: Carry out benefit /cost , life cycle and breakeven analyses on one or more
economic alternatives CO3. Analyze cost/ revenue data and carry out make
economic analyses in the decision making process to justify or reject
alternatives/projects on an economic basis.
CO4: Assess a social problem constructively by drawing the importance of
environmental responsibility and demonstrate knowledge of global factors
influencing business and ethical issues.
CO5: Make use of models to describe economic phenomena ;analyze and make
predictions about the impact of government .
1 Introduction to Engineering General Foundations of Economics : scarcity of
Economics resources and opportunity cost .

2 Foundation of economics Circular flow of income, consumer choice , demand and

supply analysis, elasticity of demand .

3 Production and cost Production function, Short-run vs long-run , economic

scale

4 Market structure Structure , Conduct , Performance Competitive market ,

Market imperfections , equilibrium in the markets.

5 Pricing ,Oligopoly Price discrimination , degree of price discrimination ,

consumer surplus and deadweight loss.
6 Game Theory Prisoners Dilemma and Nash equilibrium

7 National income accounting and cost of Measurement of GDP ,Real Versus Nominal
living GDP, Limitations of GDP ,CPI, WPI ,Purchasing
Power Parity , Unemployment

8 Financial Market , Financial ratios Role of RBI , Monetary Policy Transmission,

Tackling Inflation , Financial institutions ,
Financial markets , Ratios , Depreciation
Basic Problems of an economy
• If there is a central economic problem that is present across all
countries , without any exception , then it is the problem of scarcity.
This problem arises because the resources of all types are limited and
have alternative uses. If the resources were unlimited or if a resource
only had one single use, then the economic problem would probably
not arise. This central gives rise to four basic problems of an economy.
The Four Basic Problems of an Economy
• What to produce ?
• How to produce ?
• For whom to produce ?
• What provision should be made for economic growth ?
1.What to produce ?
What does a society do when the resources are limited? It decides which
goods/service it wants to produce . Further , it also determine the quantity
required . For example , should we produce more guns or more butter ?Do
we opt for capital goods like machines ,equipment , etc ..or consumer goods
like cell phones, etc..?
2. How to produce?
The production of a good is possible by various methods. For example, you
can produce cotton cloth using handlooms , power looms or automatic
looms. While handlooms require more labour , automatic looms need higher
power and capital investment.
The choice between the techniques to produce the commodity depends on
the availability of different factors of production and their prices. Usually , a
society opts for a technique that optimally utilizes its available resources.
3. For whom to produce?

Think about it –can a society satisfy each and every human wants?
Certainly not . Therefore , it has to decide on who gets what share of the
output of goods and services produced. In other words, society decides on
the distribution of the goods and services among the members of society.
4. What provision should be made for economic growth?
Can a society use all its resource for current consumption? Yes, it can.
However ,it is not likely to do so . The reason is simple. If a society uses all
its resources for current consumption , then its production capacity would
never increase.
Therefore , the standard of living and the income of a member of the
society will remain constant. Hence , society must decide on the part of
the resources that it wants to save for future progress.
Other problems of an economy
Other problems facing an economy can be classified as follows:
The Problem of Economic Efficiency : Resources being scarce , it is desirable that they
should be most efficiently used. The production is said to be efficient if the productive
resources are utilized in such a way that through an re-allocation it is impossible to produce
more of one good without reducing the output of any other good.
The problem of full employment of resources : Whether all available resources of a society
are fully utilized is highly a significant question because answer to it would determine
whether or not there will exist involuntary unemployment of labor as well as of capital
stock. Because resources are scarce , an economy will try to use all the available resources to
achieve maximum possible satisfaction of the people .
The problem of economic growth: it is very important to know whether the productive
capacity of an economy is increasing . If the productive capacity of the economy is
growing ,it will be able to produce progressively more and more goods and services with the
result that the living standards of its people rise. The increase in the capacity to produce
goods over time called economic growth.
Production Possibility Frontier (PPC)
Meaning : The production possibility curve or transformation curve is the locus of
various combinations of the two goods that can be produced with given amount of
resources .
The various production possibilities available to the economy are shown in the table
given below
Production possibilities
Possibilities Commodity X Commodity Y
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
PPC
The quantity of commodity X is measured along the horizontal axis , the
quantity of commodity y along the vertical axis. Any point in the
diagram indicates some amount of each kind of goods produced. Thus,
A,B,C,D,E and F show six possible combinations of commodity ‘X’ and
‘Y’ which the economy can produce with given amount of resources. By
joining these points A,B,C,D,E and F we get a curve which is know as
the Production Possibility Curve (PPC).
Assumptions of PPC
1. There is a given amount of productive resources and they remain
fixed.
2. There is no change in the level of technology.
3. Given resources are being used fully and with utmost technical
efficiency.
4. All resources are not equally efficient in production of all goods.
Main features of PPC
1. The PPC slopes downward to right . This indicates that the economy
must give up some quantity of one good to obtain additional
quantity of the other good.
2. Production possibility curve is concave from the origin . A concave
shaped PPC indicates increasing opportunity cost.
 Opportunity Cost

Opportunity Cost is defined as the cost of the next best alternative

foregone. In other words , opportunity cost is a concept in economics
that quantifies the impact of selecting one option instead of another “
next best” alternative.

For example: You go to the store you can buy an iPod or bread .You buy
the bread. The opportunity cost is the iPod ., the thing you gave up and
did not buy ( opportunity lost).
This is an example of a need VS a want .
The bread is a need (food) – the iPod is a want .
Shift of the PPC

Over time ,if the technologies progress or if the resources available to

an economy grow, then the economy can produce more of both goods
i.e, the PPC can shift to the right .
Resources for the course
• Textbook for references :
• R.S. Pindyck , D. L. Rubinfield and P . L. Mehta, Microeconomics, Pearson
Education, 9th edition, 2018.
• P.A .Samuelson and W. D. Nordhaus , Economics ,Tata McGraw Hill, 19th ed.,2015.
• N.G .Mankiw , Principles of Microeconomics, Cengage Publications , 7th ed., 2014
• S.B. Gupta , Monetary Economic: Institutions , Theory and Policy , New Delhi :
S .Chand and Company Ltd.,2013
• K.E .Case,R.C .Fair and S.Oster, Principles of Economics , 10 th ed.,Prentince
Hall ,2011
 Water diamond paradox
• The water –diamond paradox is an early economic problem proposed
by Adam Smith. Adam Smith was Scottish philosopher and economist.
Many people consider him to be the father of modern economics . In
his works , Smith asked why diamonds were more valuable than water,
even though water is essential to life and diamonds are not . He
noticed an obvious discrepancy in value: even though one could not
live without water and diamonds are essentially just rocks, people
value diamonds more than water . This problem was later called the
‘paradox of value’ by economists. Smith proposed that this value
disparity was because diamonds are rarer than water and are more
difficult to obtain and sell. This determination is what is defined as the
water-diamond paradox.