ENGINEERING

ECONOMICS &
MANAGEMENT
Instructor: Engr.Syed Kazim Ali
Syed Kazim Ali

Why Economics?
There are four main reasons to study economics:
To learn a way of thinking.
To understand society.
To understand global affairs.
And to be an informed citizen.

What is the motive of studying Engineering

Economics & Management?
Engineers seek solution to problems which leads to ????
Challenges of present day engineers.

Competition in the market?

What is Economics?
Economics is not a natural science, i.e. it is not
concerned with studying the physical world like
chemistry, biology.
Social sciences are connected with the study of
people and society. It is not possible to conduct
laboratory experiments, nor is it possible to fully
unravel the process of human decision-making.
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What is Economics?
Economics is the study of individuals and
societies choose to use the scarce resources that
nature and previous generations have provided.
Economics is a behavioral, or social, science. In
large measure, it is the study of how people make
choices. The choices that people make, when
added up, translate into societal choices.
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What is the motive of studying

Engineering Economics &
Management?
Engineers seek solution to problems which leads to ????
Challenges of present day engineers.
Competition in the market?

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Types of
Economics
Macroeconomics

Microeconomics
It deals with the functioning of
individual
firms
and
the
behavior
of
individual
economic decision making
units: business firms and house
hold.

It examines the economic

behavior
of
aggregates(collections) on a
national scale.

Microeconomics looks at the individual unitthe household, the firm, the

industry. It sees and examines the trees. Macroeconomics looks at the
whole, the aggregate. It sees and analyzes the forest.
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Syed Kazim Ali

Function of Economic System

All societies must answer three basic questions:
What gets produced?
How is it produced?
Who gets what is produced?

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Technical Terms

We the people: includes firms, household and the

government.
Goods: are the things which are produced to sell.
Services: involve doing something
customers but not producing goods.

for

the

Production: The process that transforms scarce

resources into useful goods and services.
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Technical Terms
Inputs or Resources: Anything provided by
nature or previous generations that can be
used directly or indirectly to satisfy human
wants.
Outputs: Goods and services of value to
households.

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Technical
Terms
Factors of production: are the inputs into the production
process. They are the resources needed to produce
goods and services. The factors of production are:
Land: includes the land used for agriculture or industrial
purposes as well as natural resources taken from above
or below the soil.
Capital: consists of durable producer goods (machine,
plant, etc.) that are in turn used for production of other
goods.
OR
Things that are produced and then used in the
production of other goods and services.
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Technical Terms

Labor: consists of the manpower used in the process of

production.
Entrepreneurship: includes the managerial abilities that
a person brings to the organization. Entrepreneurs can
be owners or managers of firms.

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TEN PRINCIPLES OF
ECONOMICS
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Principle #1: People Face Tradeoffs.

There is no such thing as a free lunch!

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Principle #1: People Face Tradeoffs.

To get one thing, we usually have to give up another
thing.
Guns v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity

Making decisions requires trading

off one goal against another.
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Principle #1: People Face Tradeoffs

Efficiency v. Equity
Efficiency means society gets the most that it can from its
scarce resources.
Equity means the benefits of those resources are distributed
fairly among the members of society.

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Scarcity
Scarcity-does not mean that a
good is rare; scarcity exists
because economic resources
are unable to supply all the
goods demanded.

Scarcity forces
choices.

us

to

make

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Scarcity leads to Choice

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Choice
Choice consists of the mental process of judging
the merits of multiple options and selecting one or
more of them.

Economic or rational choice is deciding between

different uses of scarce resources based on pure
reasons without surrendering to ones emotion.
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Choice about Leisure & Work

Leisure is an activity of an individual, which does
not increase the amount of goods and services
the individual can consume.
Work is an activity of an individual which
increases the amount of goods and services the
individual can consume.

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Choice: What to Produce & What to

Consume
Lets say Tom decided to work 8 hours.

Then, he has to decide what particularly he wants to

produce: food, water, clothing or shelter.
A decision to gather more water is equivalent to a decision
to have less food, shelter etc.
One cannot produce or consume all goods at the same
time.

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Choice: Present V/S Future

Consumption
A question arises now,

How much of what he has already gathered

Should he consume it now?
Or should he save it for the rainy day?

Thus comes the concept of Saving.

Saving occurs when individuals choose to consume
less then produce.
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Choice: Present V/S Future

Consumption (Cont.)
However, the consumption can be increased tomorrow if
you decrease your consumption today.
Time can be used to construct the tools instead of
producing things.
Tools of this sort are called Capital and Investment.
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Choice: Present V/S Future

Consumption (Cont.)
Capital goods: anything that is produced and then used
to produce other valuable goods or services over time.
Consumer goods: goods for present consumption.
Investment: is the production of new capital.

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Principle #2: The Cost of Something Is What You

Give Up to Get It.
Decisions require comparing costs and benefits of
alternatives.
Whether to go to college or to work?
Whether to study or go out on a date?
Whether to go to class or sleep in?

The opportunity cost of an item is what you give up

to obtain that item.

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Opportunity Cost
Opportunity cost: that which we give up when we make a
choice or decision. For e.g. one has to give up time &
resources to make a choice where as time and resources
are considered as opportunity cost.

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Opportunity Cost
For example:
The opportunity cost of going to college is the money & experience
you would have earned if you worked instead.

On the one hand, you lose degree & knowledge while working at

xyz company.

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Principle #2: The Cost of Something Is What You

Give Up to Get It.
LA Laker basketball star Kobe
Bryant chose to skip college and
go straight from high school to the
pros where he has earned millions
of dollars.

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Problem
Describe some of the opportunity costs when
you decide to do the following.
Attend college instead of taking a job.
Watch a movie instead of studying for an exam.

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Principle #3: Rational People Think at the Margin.

Marginal changes are small, incremental adjustments to an
existing plan of action.
A rational decision maker takes an action if and only if the
marginal benefit of the action exceeds marginal cost.

People make decisions by comparing

costs and benefits at the margin.

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Principle #4: People Respond to Incentives.

Marginal changes in costs or benefits motivate
people to respond.
The decision to choose one alternative over
another occurs when that alternatives marginal
benefits exceed its marginal costs!

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Principle #5: Trade Can Make Everyone Better Off.

People gain from their ability to trade with one
another.
Competition results in gains from trading.
Trade allows people to specialize in what they
do best.

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Market:
Market:
An institution through which
buyers and sellers interact and
engage in exchange.

OR
A group of buyers and sellers of a
particular good or service.

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Circular-Flow diagram
The circular-flow diagram is a visual model of the
economy that shows how dollars flow through markets
among households and firms.

Economic System
An economic system is a system of production,
resource allocation, and distribution of goods
and services in a society or a given geographic
area.

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Types of Economic Systems

Command Economy:
An economy in which a central authority or agency draws up a
plan that establishes what will be produced and when, sets
production goals and makes rules for distribution.
Supplies are sold at prices set by the government.
Adjustment in the plans are made with the help of demand and
supply curve.

As of 2014 include the former Soviet Union, China, North Korea

and Cuba.

Command Economy
What to produce is answered by government planners,
they make assumptions about consumers` needs and the
mix of goods and services.
How to produce is answered by the government planners
according the input-output analysis.
For whom to produce for consumers through state
outlets. Prices cant change without state instructions.
(Restrictions)

Types of Economic Systems

Laissez-Faire

Economies:

The

Free

Market.
An economy in which individual people and firms pursue
their own self-interests without any central direction and
regulation.
The sum total of millions individual decision finally controls all
basic economic outcomes.
The central institution is the MARKET.
According to a study in 2007, the most economically free
countries in the world are Hong Kong, Singapore, Australia
and the United States.

Laissez-Faire Economies: The Free

Market.
What to produce is answered by consumers
according their demand for goods & services.
How to produce is answered by the businessmen.
They will choose the production method, which
reduces their costs to reach the higher profit.
For whom to produce firms produce goods &
services which consumers are willing and able to
buy.

Types of Economic Systems

Mixed Economy:
A system in which command economies and Lassiez-faire
economies both exist is known as mixed system or mixed
economies.
Government role: public and social goods.
Unemployment.
Stabilization.
Inflation & Taxes.

Principle #6: Markets Are Usually a Good Way to

Organize Economic Activity.
A market economy is an economy that allocates
resources through the decentralized decisions of
many firms and households as they interact in
markets for goods and services.
Households decide what to buy and who to work for.
Firms decide who to hire and what to produce.

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Principle #6: Markets Are Usually a Good Way to

Organize Economic Activity.
Adam Smith made the observation that households
and firms interacting in markets act as if guided by
an invisible hand.
Because households and firms look at prices when
deciding what to buy and sell, they unknowingly take into
account the social costs of their actions.
As a result, prices guide decision makers to reach
outcomes that tend to maximize the welfare of society as
a whole.
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Principle #7: Governments Can Sometimes

Improve Market Outcomes.
Market failure occurs when the market fails to
allocate resources efficiently.
When the market fails (breaks down) government
can intervene to promote efficiency and equity.

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Principle #7: Governments Can Sometimes

Improve Market Outcomes.
Market failure may be caused by
an externality, which is the impact of one person or firms
actions on the well-being of a bystander.
market power, which is the ability of a single person or firm
to unduly influence market prices.

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Principle #8: The Standard of Living Depends on a

Countrys Production.
Standard of living may be measured in different ways:
By comparing personal incomes.
By comparing the total market value of a nations production.

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Principle #8: The Standard of Living Depends on a

Countrys Production.
Almost all variations in living standards are explained by
differences in countries productivities.

Productivity is the amount of goods and services produced

from each hour of a workers time.

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Principle #9: Prices Rise When the Government

Prints Too Much Money.
Inflation is an increase in the overall level of prices in the
economy.
One cause of inflation is the growth in the quantity of money.
When the government creates large quantities of money, the
value of the money falls.

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Principle #10: Society Faces a Short-run Tradeoff

Between Inflation and Unemployment.
The Phillips Curve illustrates the tradeoff between
inflation and unemployment:

Inflation Unemployment
Its a short-run tradeoff!

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Summary
When individuals make decisions, they face tradeoffs among alternative goals.
The cost of any action is measured in terms of foregone opportunities.
Rational people make decisions by comparing marginal costs and marginal benefits.

People change their behavior in response to the incentives they face.

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Summary
Trade can be mutually beneficial.
Markets are usually a good way of coordinating trade among people.
Government can potentially improve market outcomes if there is some market failure
or if the market outcome is inequitable.

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Summary
Productivity is the ultimate source of living standards.
Money growth is the ultimate source of inflation.
Society faces a short-run tradeoff between inflation and unemployment.

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