ECONOMICS FOR ENGINEERS

UNIT I: ENGINEERING ECONOMICS: Economics definition - Functions & Scope of

Engineering economics - Basic economic problem - Relationship between Science -
Engineering - Technology - Economics. Firms objective: Theories of Maximization - Profit
Maximization - Wealth Maximization - Growth Maximization - Sales Revenue Maximization -
Utility Maximization.

UNIT II: THEORY OF DEMAND: Demand Definition - Nature and Characteristics of Demand
- Demand Schedule Law of demand - Limitations to the law of demand - Various concepts of
Demand Elasticity – Price Elasticity - Income Elasticity - Cross elasticity - Demand
Forecasting definition - Factors determining Demand Forecasting - Methods of Demand
forecasting.

UNIT III: COST CONCEPTS: Introduction - Types of costs - Fixed cost - Variable cost -
Average cost – Marginal cost - Real cost - Opportunity cost - Accounting cost - Economic
cost - Break - Even analysis.

UNIT IV: INDIAN ECONOMY: An Overview: Nature and characteristics of Indian economy –
Banking -Structure of Indian Banking- RBI functions - Functions of Commercial banks - Merits
and Demerits of Liberalization - Privatization - Globalization(LPG)- Elementary concepts of
WTO - GATT- GATS - TRIPs - TRIMs - Monetary Policy - Fiscal Policy.

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 UNIT – I
Economics: - Economics is the study of production and consumption of goods and the
transfer of wealth to produce and obtain those goods. It explains how people interact with in
markets to get what they want or accomplish certain goals. It was during the 18 th century
Adam Smith , the father of economics defined it as “the study of nature and uses of national
wealth.”
Def: - “How society chooses to allocate its scarce resources among competing demands to
best satisfy human wants” – Hedricks.
Types: -
1. Micro – Economics: - It is the study of decisions made by people and businesses
regarding the allocation of resources, and prices at which they trade goods and services. It
focuses on supply and demand and other forces that determine the price levels seen in the
economy.
2. Macro – Economics: - It is the field of economics that studies the behaviour of the
economy as a whole and not just on specific companies, but entire industries and economies.
This looks at economy – wide phenomenon such as Gross National Product (GNP) and how
it is affected by changes in unemployment, national income, rate of growth and price levels.
Engineering Economics: - Engineering economics, previously known as engineering
economy, is a subset of economics for application to engineering projects. Engineers seek
solutions to the problems and the economic viability of each potential solution is normally
considered along with the technical aspects. Fundamentally engineering economics involves
formulating, estimating and evaluating the economic outcomes when alternatives to
accomplish a defined purpose are available.
Functions: -
1. Develop the alternatives.
2. Focus on the differences of the alternatives.
3. Use a consistent view point for all the alternatives.
4. Use a common unit of measurement for comparison among alternatives.
5. Consider all relevant criteria.
6. Make uncertainty explicit.
7. Review your decisions.

Scope: -

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1. Comparision of alternative proposals.
a. Defective machine should be replaced or maintained.
b. Sick business should be continued or closed down.
c. Product should be manufactured inside or should be subcontracted.
2. When investment is required, time value must be considered.
3. When machinery and plant are required, the depreciation must be considered.
4. When material is required, procurement policy and market analysis must be considered.
5. Most of the proposals involve organised effort, in such cases labour costs must be
considered.
6. When accepted proposal becomes successful, a net income is generated and in such
cases accounting and income tax are considered.
Basic Economic Problems: -
1. What to produce?
2. How to produce?
3. For whom to produce?
4. What provisions should be made for economic growth?
Science - Engineering - Technology – Economics: -
Science: - It is the intellectual and practical activity encompassing the systematic study of
the structure and behaviour of the physical and natural world through observation and
experiment.
Engineering: - It is the branch of science and technology concerned with the design, building
and use of engines, machines and structures or a field of study or activity concerned with
modification or development in a particular area.
Technology: - It is the application of scientific knowledge for practical purposes especially
in industry.
Economics or Economic Development: - Economics is the study of production and
consumption of goods and the transfer of wealth to produce and obtain those goods. A
country’s economic development is usually indicated by an increase in citizen’s quality of life.
Quality of life is often measured using the human development index, which is an economic
model that considers intrinsic personal factors not considered in economic growth such as
literacy rates, life expectancy and poverty rates.

Relationship between Science - Engineering - Technology – Economics: -

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Let’s go back in time to 1950’s when radios were the entire thing. Radio was fun and
engaging, they were popular and advertisers poured money and it was a good business.
Then however people wanted more imagining watching the sports game rather than hearing
the commentary and the idea seemed big.
Science: - So now people wanted to see the match in addition to hearing about it. The
technology behind television is based on solid principles of physics. How light behaves, how
photons behave when scattered across a medium and so on. This is where our plain – jane
research scientists worked together to come up with innovative techniques to harness the
power of physics into something which can be used by engineers for building the fabulous
television.
Engineering: - So now the science guys have established theories and come out with some
cool new technology. The engineers now work on that to bring it to life. This involves applying
the theory of light and related knowledge to build something practical. This involves building
the CRT tube, adding speakers and so on.
Technology: - So now the initial Television is built and is working. The next task is agreeing
on a broadcast standard adding useful features like picture adjustment, way of tuning
channels and so on. This is where the technology aspect comes in.
Economics or Economic Development: - Once the Television is built it needs to be
manufactured in large numbers, marketed and actually make it available to end users for
purchase. This is where economics and market plays a role. Manufacturers start flooding the
markets with Televisions, advertising about it and so on.
Theories of Maximization: -
1. Profit Maximization: - Profit maximization refers to the sales level where profits are
highest. One might assume that the higher the sales level, the higher the profits but that is
not always true. The calculation for profit maximization is the number of units where MR =
MC.
y
PM MC

MR
x
a. Profit: - The money left over once we pay all our bills out of funds that come in from our
customers.

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b. Marginal Revenue: - It means the per – unit selling price of the item. It is often true that
to sell more units you have to reduce the price, so marginal revenue appears as a line sloping
down to the right on a graph.
c. Marginal Cost: - It means the per unit cost of item. It is always shown as a line that slopes
downward and then comes back. This is based on the fact6 that per unit costs will decrease
to a certain point as we increase the number of units produced at plant, then once we reach
capacity, our costs will increase as we either open a new plant or outsource production to
the other companies.
2. Wealth Maximization: - Wealth maximization is a modern approach to financial
management. Wealth or value of a business is defined as the market price of the capital
invested by shareholders. Wealth maximization simply means maximization of shareholders
wealth. A wealth of a shareholder maximizes when the net worth of a company maximizes.
Wealth = Present value of cash inflows – Cost
3. Growth Maximization: - Managers may decide to adopt a longer - term standpoint and
focus on growth maximization rather than maximizing the short – run revenues. Growth is
usually measured in terms of growth of sales revenue but can be to measure the capital value
of a firm. A firm looking to maximize growth should be clear about the period that this will be
delivered over. Growth for an organization can come with different set of ways but the main
models in it are,
a. Growth by internal expansion.
b. Growth through vertical integration.
c. Growth through diversification.
d. Growth by mergers.
e. Growth through acquisitions.
4. Sales Maximization: - Sales maximization is another possible goal and occurs when the
firm sells as much as possible without making a loss. Non profit organizations may choose
to operate at this level of output, as may profit making firms faced with certain situations or
employing certain strategies. An example of this would be predatory pricing where, as long
as costs are covered a firm may reduce price to drive rivals out of the market.

5. Revenue Maximization: - Revenue is essentially another word for sales or how much of
the good or service that our business produces is sold to customers. Revenue does not take
in to consideration the costs necessary to produce or market our business product, so it does

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not reflect what the owners ultimately receive. A revenue maximization strategy dictates that
a business should do whatever is required to sell as much of its product as possible.
6. Utility Maximization: - A customer when making a purchase decision, attempts to get the
greatest value possible from expenditure of least amount of money. His / her objective is to
maximize then total value derived from the available money. The utility maximization rule
states that customers decide to allocate their money incomes so that the last rupee spent
also yields the same amount of extra marginal utility.
UNIT – II
Demand: - Demand in common nature means the desire for an object. But in economics
demand means desire for an object, willingness to pay for it and the ability to pay for it.
Determinants: -
1. Price of the commodity.
2. Income of the consumer.
3. Prices of related goods.
4. Tastes of the consumers.
5. Population.
6. Expectations regarding future.
7. Advertisement expenditure.
8. Demonstration effect.
9. Climate and weather.
Nature and Characteristics of Demand: -
1. Willingness and ability to pay: - Demand is the amount of a commodity for which a
consumer has the willingness and also the ability to buy.
2. Demand is always at a price: - If we talk of demand without reference to price, it will be
meaningless. The consumer must know both the price and the commodity. He will then be
able to tell the quantity demanded by him.
3. Demand is always per unit of time: - The time may be a day, a week, a month, or a
year.

Demand Schedule: - In economics, a demand schedule is a table that shows the quantity
demanded of a good or service at different price levels. A demand schedule most commonly
consists of two columns. The first column lists a price for a product in ascending or

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descending order. The second column lists the quantity of the product desired or demanded
at that price. As the price rises, the quantity demanded tends to reduce.
Price Quantity Demanded

5 1

4 2

3 3

2 4

1 5

Law of demand: - Law of demand shows the relationship b/w price and quantity demanded
of a commodity in the market. Generally, a person demands more at a lower price and less
at a higher price. In the words of Marshall “demand increases with fall in price and demand
decreases with rise in price”. The demand curve slopes downward from left to right showing
that more quantities are demanded at lower prices.
Price of Apple Quantity Demanded

10 1

8 2

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 6 3

4 4

2 5

Reasons: -
1. Substitution Effect: - The Substitution effect is seen when the quantity demanded for one
commodity changes due to the change in the price of other closely related commodity. Such
as, if the price of the commodity decreases while the price of the other is assumed to remain
the same, then the latter becomes dearer and the demand for the cheaper commodity
increases.
For example, suppose the price of tea decreases while the price of coffee remains
unchanged, then the tea will be substituted for coffee and thus the demand for tea increases.
This effect of increase in the demand for tea is called as the substitution effect.
2. Income Effect: - The income effect explains the change in demand due to the change in
the real income of the consumer as a result of the change in the price of the given commodity.
Such as, with the fall in the price of a commodity, the real income (purchasing power) of the
consumer increases since the consumer can now purchase more units of the commodity with
the same amount of money income. Thus, the increase in demand due to the increase in the
real income is called as the income effect.
For example, Suppose a boy purchases 5 ice-creams for Rs 50, and if the price of ice-cream
falls to Rs 8, now he can purchase 6 ice-creams with the same amount of money income or
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may decide to buy the same quantity and save the rest of the money, as he is required to
spend less.
3. Utility-Maximizing Behavior: - The consumer theory posits that the consumer buys
goods and services to maximize his total utility (satisfaction). We know, that the marginal
utility decreases with each additional unit of the commodity and thus, this is one of the
reasons for the downward slope of the demand curve, which shows that the demand for the
normal goods increases with the fall in the prices.
A person exchanges his money income for the purchase of the commodity so as to maximize
his satisfaction. He continues to buy the commodity as long as the marginal utility of money
(MUm) is less than the marginal utility of the commodity (MU x).
4. Large Number of Consumers: - The effect on demand due to the change in the number
of consumers as a result of a change in the price also causes the demand curve to slope
downwards. Such as, if the price of the commodity falls, then many new consumers who
were earlier not able to afford the commodity due to its high price, starts purchasing it. And
as a result, the demand for the commodity increases. On the other hand, if the price rises,
then few rich people can buy it, and many consumers will withdraw themselves from the
market. And as a result, the demand for the commodity decreases.
5. Varied Uses of the Product: - This is one of the important reasons for the law of demand,
which explains that the product has several uses and can be utilized for different purposes.
When the price of the commodity rises, then the consumer restricts its usage for the most
important purpose. On the other hand, if the commodity becomes cheap then it can be utilized
for all kinds of purposes, whether important or not.
For example, if the price of coal increases, then it will be more used in the industries where
it is an essential raw material, whereas its demand for less important use such as in
household (bonfire) gets reduced.
Limitations or exceptions to the law of demand: -
1. Giffen goods: - Giffen good is a commodity that is unexpectedly consumed more as its
price increases. Thus, it is an exception to the law of demand. In the case of Giffen goods,
the income effect dominates over the substitution effect. After the Irish Famine (1845) the
potato crop failed due to plant disease which destroyed both the leaves and the edible roots
or tubers of potato plant. Due to this the price of potatoes increased tremendously. Despite

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the fact that the price increase made people to find substitutes for potatoes, they moved
away from luxury products so that their overall consumption of potatoes increased.
2. Articles of distinction goods: - Named after economist, Thorstein Veblen, these
commodities satisfy the desires of the upper-class people in society. Veblen goods include
those commodities whose demand is proportional to their price and thus, they are exceptions
to the law of demand. These articles are purchased only by a few rich people to feel superior
to the rest. For example, diamonds, rare paintings, vintage cars, and antique goods are
examples of Veblen goods.
3. Consumers ignorance: - Consumer ignorance is another factor that motivates people to
purchase a commodity at a higher price, which violates the law of demand. This results out
of the consumer biases that a high-priced commodity is better in quality than a low-priced
commodity.
4. Situations of crisis: - Crisis such as war and famine negate the law of demand. During
crisis, consumers tend to purchase in larger quantities with the purpose of stocking, which
further accentuates the prices of commodities in the market. They fear that goods would not
be available in the future. On the other hand, at the time of depression, a fall in the price of
commodities does not induce consumers to demand more.
5. Future price expectations: - When consumers expect a rise in the prices of commodities,
they tend to purchase commodities at existing high prices. For example, speculation of
market strategists on an increase in gold prices in the future induces consumers to purchase
higher quantities in order to stock gold. On the contrary, if consumers expect a fall in the
price of a commodity, they postpone the purchase for the future.
Elasticity of Demand: - Elasticity of demand explains the relationship b/w a change in price
and consequent change in amount demanded. Marshall introduced the concept of elasticity
of demand. It shows the extent of change in quantity demanded to a change in price.
Elasticity = Proportionate change in quantity demand / Proportionate change in factors
Elastic Demand: - If a small change in price may lead to a great change in quantity
demanded then the demand is elastic.
In - elastic Demand: - If a big change in price may lead to a small change in quantity
demanded then the demand is in - elastic.
Factors influencing: -
1. Nature of commodity.
2. Availability of substitutes.

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3. Variety of uses.
4. Amount of money spent.
5. Time.
6. Range of prices.
Importance: -
1. Price fixation.
2. Production.
3. Distribution.
4. International trade.
5. Nationalization.
6. Forecasting demand.
7. Tax fixation.
Types: -
I. Price Elasticity of Demand: - Price elasticity of demand shows the functional relationship
b/w price and quantity demanded at a particular point of time. Price elasticity is measured as
percentage change in quantity demanded divided by percentage change in price or
proportionate change in quantity demanded divided by the proportionate change in price.
The following are the different types of price elasticity of demand. They are,
1. Perfectly Elastic Demand: - A small or no change in price leads to an infinite change in
quantity demanded, it is known as perfectly elastic demand.

2. Perfectly Inelastic Demand: - A change in price leads to no change in quantity

demanded, it is known as perfectly inelastic demand.

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3. Relatively Elastic Demand: - A change in demand is greater than change in price, it is
known as relatively elastic demand.

4. Relatively Inelastic Demand: - A change in demand is less than change in price, it is

known as relatively inelastic demand.

5. Unitary Elastic Demand: - A change in demand is equal to change in price, it is known

as unitary elastic demand.

II. Income Elasticity of Demand: - Income elasticity of demand shows the functional
relationship b/w income and quantity demanded at a particular point of time. Income elasticity
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is measured as percentage change in quantity demanded divided by percentage change in
income or proportionate change in quantity demanded divided by the proportionate change
in income of the people. The following are the different types of income elasticity of demand.
They are,
1. Zero Income Elasticity: - When a change in income cause no change in demand, it is
known as zero income elasticity.

2. Negative Income Elasticity: - When income increases, quantity demanded falls, in this
case income elasticity of demand is negative.

3. Unit Income or Positive Elasticity: - When an increase in income brings proportionate

increase in quantity demanded, then it is known as unit income or positive elasticity.

4. Income Elasticity less than Unity: - When a change in demand is less than the change
in income, then it is known as income elasticity less than unity or low income elasticity.

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5. Income Elasticity greater than Unity: - When a change in demand is more than the
change in income, then it is known as income elasticity greater than unity or high income
elasticity.

III. Cross elasticity of Demand: - It is an economic concept that measures the

responsiveness in the quantity demanded of one good when a change in price takes place
in another good. It is measured as proportionate change in quantity demanded for a product
x divided by proportionate change in price of product y. For substitute goods the cross
elasticity will be positive and for complimentary goods the cross elasticity will be negative.
Coffee & Tea are the examples of substitutes and coffee & coffee stir sticks are the examples
of complementary goods.
y
D

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Demand Forecasting: - Demand forecasting is predicting future for the product. In other
words, it refers to the prediction of probable demand for a product or a service on the basis
of the past events and prevailing trends in the present.
Types: -
1. Active and Passive forecasting.
2. Short run and long run forecasting.
3. Company and industry forecasting.
4. Micro level and macro level forecasting.
Factors determining Demand Forecasting: -
1. Types of goods.
2. Competition level.
3. Price of goods.
4. Level of technology.
5. Time period of forecasts.
a. Short period forecasts.
b. Long period forecasts.
c. Very long period forecasts.
6. Level of forecasts.
a. Micro level.
b. Firm level.
c. Industry level.
7. Nature of forecasts.
Methods of Demand forecasting: -
1. Survey of Buyer’s Choice: - When the demand needs to be forecasted in the short run,
say a year, then the most feasible method is to ask the customers directly that what are they
intending to buy in the forthcoming time period. Thus, under this method, potential customers
are directly interviewed. This survey can be done in any of the following ways:
a. Complete Enumeration Method: - Under this method, nearly all the potential buyers are
asked about their future purchase plans.
b. Sample Survey Method: - Under this method, a sample of potential buyers are chosen
scientifically and only those chosen are interviewed.
c. End-use Method: - It is especially used for forecasting the demand of the inputs. Under
this method, the final users i.e. the consuming industries and other sectors are identified. The

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desirable norms of consumption of the product are fixed, the targeted output levels are
estimated and these norms are applied to forecast the future demand of the inputs.
2. Collective Opinion Method: - Under this method, the salesperson of a firm predicts the
estimated future sales in their region. The individual estimates are aggregated to calculate the
total estimated future sales. These estimates are reviewed in the light of factors like future
changes in the selling price, product designs, changes in competition, advertisement
campaigns, the purchasing power of the consumers, employment opportunities, population, etc.
The principle underlying this method is that as the salesmen are closest to the consumers they
are more likely to understand the changes in their needs and demands. They can also easily
find out the reasons behind the change in their tastes.
3. Barometric Method: - This method is based on the past demands of the product and tries
to project the past into the future. The economic indicators are used to predict the future trends
of the business. Based on future trends, the demand for the product is forecasted. An index of
economic indicators is formed. There are three types of economic indicators, viz. leading
indicators, lagging indicators, and coincidental indicators. The leading indicators are those that
move up or down ahead of some other series. The lagging indicators are those that follow a
change after some time lag. The coincidental indicators are those that move up and down
simultaneously with the level of economic activities.
4. Market Experiment Method: - Another one of the methods of demand forecasting is the
market experiment method. Under this method, the demand is forecasted by conducting market
studies and experiments on consumer behavior under actual but controlled, market conditions.
Certain determinants of demand that can be varied are changed and the experiments are done
keeping other factors constant.
5. Expert Opinion Method: - Usually, market experts have explicit knowledge about the
factors affecting demand. Their opinion can help in demand forecasting. The Delphi technique,
developed by Olaf Helmer is one such method. Under this method, experts are given a series
of carefully designed questionnaires and are asked to forecast the demand. They are also
required to give the suitable reasons. The opinions are shared with the experts to arrive at a
conclusion. This is a fast and cheap technique.
6. Statistical Methods: - The statistical method is one of the important methods of demand
forecasting. Statistical methods are scientific, reliable and free from biases. The major statistical
methods used for demand forecasting are:

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a. Trend Projection Method: - This method is useful where the organization has a sufficient
amount of accumulated past data of the sales. This date is arranged chronologically to obtain
a time series. Thus, the time series depicts the past trend and on the basis of it, the future
market trend can be predicted. It is assumed that the past trend will continue in the future.
Thus, on the basis of the predicted future trend, the demand for a product or service is
forecasted.
b. Regression Analysis: - This method establishes a relationship between the dependent
variable and the independent variables. In our case, the quantity demanded is the dependent
variable and income, the price of goods, the price of related goods, the price of substitute
goods, etc. are independent variables. The regression equation is derived assuming the
relationship to be linear. Regression Equation: Y = a + bX. where Y is the forecasted demand
for a product or service.
UNIT – III
Costs: - Costs are the expenses incurred for producing goods and services. Understanding
costs and analysing the cost behaviour is one of the most complex exercise for a business
decision maker. Costs are important as they have wide range implications on pricing policies,
revenue yields, profits, wages and so on.
Types of costs: -
1. Fixed costs: - Fixed costs are the wages payable to the permanent labourers, rents on
buildings and interest payable on borrowed capital, minimum power and water charges,
insurance premium etc. These costs remain absolutely fixed irrespective of the volume of
output. In the short – run fixed costs can’t be increased or decreased. Even if the output is
zero fixed costs will be positive. Fixed costs are also known as historical costs or sunk costs.

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2. Variable costs: - Variable costs include wages payable to the temporary labourers, raw
material charges, transportation costs, power, water charges etc. Variable costs change with
output. If the output is zero variable costs are zero and as the output increases variable costs
also increase. Variable costs are also known as direct costs, prime costs and special costs.

3. Total Fixed cost: - The total fixed cost is positive even when the output is zero and
remains fixed irrespective of the volume of output. When this data is plotted on a graph the
total fixed cost curve runs parallel to horizontal axis.

4. Total Variable cost: - The total variable cost is zero when output level is zero. As the
output increases the total variable cost is increasing at a decreasing rate initially and at an
increasing rate afterwards. The total variable cost curve starts from the origin point.

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5. Total Cost: - The total cost is the sum of total fixed cost and total variable cost. Since the
total fixed cost remains constant the constant the total cost increases at the same rate at
which the total variable cost changes.

6. Average Fixed Cost: - It will be obtained by dividing total fixed cost with total output. The
average fixed cost keeps on decreasing as the output increases, it will never increase. In the
initial stages the average fixed cost falls rapidly but as the output increases it falls slowly.

7. Average Variable Cost: - The average variable cost is obtained by dividing the total
variable cost with output. In the initial stage it declines and afterwards it increases.

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8. Average cost: - The average cost will be obtained by adding up average fixed cost and
average variable cost. In the starting stages it will always decrease and after few years only
it will try to have an increase.

1 2 3 4=2+3 5=2/1 6=3/1 7=5+6

OUTPUT TFC TVC TC AFC AVC AC

0 30 0 30 0 0 0

1 30 10 40 30 10 40

2 30 18 48 15 9 24

3 30 24 54 10 8 18

4 30 30 60 7.5 7.5 15

5 30 38 68 6 7.6 13.6

6 30 48 78 5 8 13

7 30 60 90 4.3 8.6 12.9

8 30 75 105 3.8 9.4 13.2

9 30 95 125 3.3 10.5 13.8

10 30 120 150 3 12 15

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9. Marginal cost: - Marginal cost is the addition made to the total cost for producing an
additional unit. In the initial stages it decreases and then starts increasing as the output
increases. It is obtained by dividing total cost present value less past value divided by output
present value less past value.

10. Real costs: - It refers to all those efforts and sacrifices undergone by various members
of the society to produce a commodity. It means the trouble, sacrifice of factors in producing
a product. Though this concept gained importance for some time, it has been rejected in
modern times due to its impracticability.
11. Opportunity costs: - The concept of opportunity cost was first developed by Austrian
School of Economics. Later on, it was popularised by American economist named Davenport.
It is the cost incurred for selecting the next best alternative.

12. Accounting costs: - These are the amounts that a firm actually pays out to other people
in the process of producing the product. These are also called as explicit costs. Examples of
this are advertising and the amount spend to sell the product in the market.
13. Economic cost: - These are also called implicit costs and they will be just like opportunity
costs. Examples of this are getting wages or salaries instead of opening the business.

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Break - Even Analysis: - Break – Even Analysis involves the study of revenues and costs
of a firm in relation to its volume of sales. It specifically involves determination of that volume
at which the firm’s costs and revenues will be equal.
Break - Even Point: - Break – Even Point (BEP) is defined as that point of activity (sales
volume) at which the total revenues equals the total cost and the net income is zero. It is also
known as no profit, no loss point. It is the point of zero profit.
Determination of Break - Even Point: - The Break – Even Point can be determined either
in terms of physical units (products) to be produced or in terms of money (sales value in
rupees). It will be represented with the following symbols.
Q = Physical output of the firm
QBEP = Output at BEP
BEP = Break – Even Point
P = Price per unit or average revenue
TR = Total Revenue = P x Q

TFC = Total Fixed Cost

TVC = Total Variable Cost = Q x AVC
TC = Total Cost = TFC + TVC
AFC = Average Fixed Cost
AVC = Average Variable Cost
AC = Average Cost = AFC + AVC

Importance: -
1. To understand the break – even quantity.
2. To know the impact of increase and decrease of fixed costs on the BEQ and profits.
3. To know the impact of change in variable costs on production and profits.
4. To get target profits.
5. To understand the margin of safety.
6. To initiate changes in prices.
7. To understand the plant capacity utilization.
8. To choose the appropriate technique.
9. To take add or drop decision.
10. To take produce or lease decision.

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Assumptions: -
1. It assumes that the costs are classified as fixed cost and variable cost, thus ignoring the
semi – variable cost.
2. All revenues are perfectly variable with the physical volume of production.
3. The sales price of a product is assumed to be constant.
4. It assumes constant rate of increase in variable cost.
5. There will be no improvement in technology and efficiency.
6. The volume of sales and the volume of production are equal.
7. There is no change in the input price.
8. In case of a multi – product firm, the product – mix should be stable.
9. Productivity of the worker will remain unchanged.
Limitations: -
1. It assumes price to remain constant.
2. It has limited use in case of multi – product firms.
3. No change in government policies cannot be there.
4. Availability of Cost – Volume – Profit data.
5. It does not take care of improved managerial efficiency and its impact on production.
Break - Even Chart: -

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Formulas: -
1. BEP (Units) = Total Fixed Cost

Selling Price p/u – Variable Cost p/u

2. BEP (Sales) = Total Fixed Cost

X Selling Price p/u
Selling Price p/u – Variable Cost p/u

3. BEP (Sales) = Fixed Cost

Profit Volume ratio

4. Margin of Safety = Actual sales – BEP at units

5. Margin of Safety = Net Profit

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 Profit Volume ratio

6. Profit Volume ratio = Contribution

Sales

7. Contribution = Sales – Variable Cost

8. Net Profit = Contribution – Fixed Cost

1. A firm has a fixed cost of Rs 10,000, selling price p/u is 5 rupees and variable cost p/u is
3 rupees.
a. Calculate BEP in units and sales.
b. Calculate MOS considering actual sales is 8,000 units.
BEP (Units) = Total Fixed Cost

Selling Price p/u – Variable Cost p/u

= 10,000 / 5 – 3
= 10,000 / 2
= 5,000 units.
BEP (Sales) = Total Fixed Cost
X Selling Price p/u
Selling Price p/u – Variable Cost p/u
= 10,000
X5
5–3
= 10,000
X5
2
= 5,000 x 5
= 25,000 Rs
Margin of Safety = Actual sales – BEP at units
= 8,000 units – 5,000 units
= 3,000 units.

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2. Srikanth Enterprises deals with the supply of hardware parts of computer. The following
cost data is available for two successive periods.
Particulars Year I Year II
Sales 50,000 1,20,000
Fixed Cost 10,000 20,000
Variable Cost 30,000 60,000
Determine BEP & MOS.
Year I
BEP (Sales) = Fixed Cost

Profit Volume ratio

= 10,000

Contribution / Sales
= 10,000

Sales – Variable Cost / Sales

= 10,000

50,000 – 30,000 / 50,000

= 10,000

20,000 / 50,000
= 10,000

0.4
= 25,000 Rs
Year II
BEP (Sales) = Fixed Cost

Profit Volume ratio

= 20,000

Contribution / Sales
= 20,000

Sales – Variable Cost / Sales

= 20,000

1,20,000 – 60,000 / 1,20,000

= 20,000

60,000 / 1,20,000
= 20,000

0.5
= 40,000 Rs

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 Year I

Margin of Safety = Net Profit

Profit Volume ratio

= Contribution – Fixed Cost

0.4
= (Sales – Variable cost) – Fixed Cost

0.4
= (50,000 – 30,000) – 10,000

0.4
= 20,000 – 10,000

0.4
= 10,000

0.4
= 25,000 Rs.
Year II

Margin of Safety = Net Profit

Profit Volume ratio

= Contribution – Fixed Cost

0.5
= (Sales – Variable cost) – Fixed Cost

0.5
= (1,20,000 – 60,000) – 20,000

0.5
= 60,000 – 20,000

0.5
= 40,000

0.5
= 80,000 Rs.

3. A firm has a fixed cost of Rs 50,000. Selling price per unit is Rs 50 & variable cost per unit
is Rs 25. Present sales or production is 3,500 units. Calculate,
a. BEP in units and sales.
b. Margin of Safety.

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c. Observe what is the change in BEP units, sales and Margin of Safety if fixed cost increases
from Rs 50,000 to Rs 60,000.
BEP (Units) = Total Fixed Cost

Selling Price p/u – Variable Cost p/u

= 50,000 / 50 – 25
= 50,000 / 25
= 2,000 units.
BEP (Sales) = Total Fixed Cost
X Selling Price p/u
Selling Price p/u – Variable Cost p/u
= 50,000
X 50
50 – 25
= 50,000
X 50
25
= 2,000 x 50
= 1,00,000 Rs

Margin of Safety = Actual sales – BEP at units

= 3,500 units – 2,000 units
= 1,500 units.
If fixed cost increases from Rs 50,000 to Rs 60,000
BEP (Units) = Total Fixed Cost

Selling Price p/u – Variable Cost p/u

= 60,000 / 50 – 25
= 60,000 / 25
= 2,400 units.
BEP (Sales) = Total Fixed Cost
X Selling Price p/u
Selling Price p/u – Variable Cost p/u
= 60,000
X 50
50 – 25
= 60,000
X 50
25
= 2,400 x 50
= 1,20,000 Rs

Margin of Safety = Actual sales – BEP at units

= 3,500 units – 2,400 units
= 1,100 units.

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Therefore change in BEP units is 400 units increased, change in BEP sales is 20,000 Rs
increased and change in Margin of Safety is 400 units decreased.
UNIT – IV
Indian Economy: - Indian Economy is the third largest economy terms of purchasing power
just after US & Japan.
History: - The history of Indian economy can be broadly divided in to three phases.
1. Pre – Colonial: - The economy history of India since Indus Valley Civilization to 1700 AD
can be categorised under this phase. During this phase Indian economy was well developed.
It has good trade relations with other parts of world.
2. Colonial: - The arrival of East India Company in India caused a huge strain to the Indian
economy and there was a two way depletion of resources. The British would buy raw
materials from India at cheaper rates and finished goods were sold higher than normal price.
3. Post – Colonial: - After India got independence from colonial rule in 1947, the process of
rebuilding started with various policies and schemes formulation. The 1 st five years pln came
in to implementation in 1952.
Sectors of the Indian Economy: -
1. Primary sector: -
a. Agriculture.
b. Fishing.
c. Mining.
d. Oil & Gas.
2. Secondary sector: -
a. Manufacturing.
3. Territory sector: -
a. Intangible goods like services.
b. Financial services.
4. Other sectors: -
a. Public sector.
b. Private sector.
Nature or characteristics: -
1. Low per capital income
2. Heavy population pressure.
3. Pre – dominance of agriculture.

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4. Unemployment.
5. Poor technology.
6. Underutilization of resources.
Strengths: -
1. India is well placed to benefit from globalization & outsourcing.
2. There is much scope for increase in efficiency.
3. Demographics of India are favourable.
Weaknesses: -
1. Inflation.
2. Poor educational standard.
3. Poor infrastructure facilities.
4. High level of debt.
5. Rigid labour laws.
Banking: - A bank is a financial institution licensed to receive deposits and make loans.
Banks may also provide financial services such as wealth management, currency exchange,
and safe deposit boxes. There are several different kinds of banks including retail banks,
commercial or corporate banks, and investment banks. In most countries, banks are
regulated by the national government or central bank. Banking in India in the modern sense,
originated in the last decades of the 18th century. The 1st bank was bank of Hindustan, which
was established in 177 and the General Bank of India was established in 1786.
Structure of Indian Banking: -

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Reserve Bank of India (RBI): - The Reserve Bank of India is India’s central banking
institution which controls the monetary policy of the Indian rupee. It commenced its
operations on 1st April 1935 during the British rule in accordance with the provisions of the
RBI Act, 1934. RBI was nationalized in 1st January 1949. The general superintendence and
direction of the RBI is entrusted with 21 members i.e. Governor, 4 Deputy Governors, 2
Finance Ministry Representatives, 10 Government nominated directors to represent
important elements from India’s economy and 4 directors to represent local board’s i.e.
headquarters at Mumbai, Kolkata, Chennai & Delhi.
Functions: -
1. Issue of bank notes that is the currency.
2. Banker to Government – Maintains governments deposit accounts.
3. Custodian of cash reserves of commercial banks.
4. Custodian of country’s foreign currency reserves.
5. Lender of last resort – Helps at the time of emergency to banks.
6. Central clearance and accounts settlement.

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Commercial bank: - It is a financial institution that provides services such as accepting
deposits, making business loans and offering basic investment products. Commercial bank
can also refer to a bank which deals with business activities.
Functions: -
I. Primary functions: -
1. Collection of deposits: -
a. Current a/c’s - To make payments.
b. Savings a/c’s – To save money.
c. Fixed or term deposits – For specific time period.
2. Loans and advances: -
a. Loan to a person.
b. Overdraft facilities.
II. Secondary functions: -
1. Agency services: -
a. Payment of rent, telephone bills, instalments etc.
b. Collects cheques & bills on behalf of the customer.
c. Exchange domestic currency for foreign currency.
d. Execute the will after death of customer.
2. General utility Services: -
a. Safeguarding money and valuables.
b. Transferring money.
c. Automated Teller Machine (ATM).
d. Traveller’s cheque.
e. Credit cards.
Liberalization: - Liberalization, the loosening of government controls. Although sometimes
associated with the relaxation of laws relating to social matters such as abortion and
divorce, liberalization is most often used as an economic term. In particular, it refers to
reductions in restrictions on international trade and capital.
Merits: -
1. Di-licensing of industries: - Di-licensing of industries means the government removed
the excessive restriction in rules, and licenses of industries. Liberalization removed the
lengthy process of obtaining a license, it helps people to open a new business in that industry
easily, further, this helps the economy to increase competition and the nation’s performance.

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2. Increase in FDI: - Removing this act, also helps Indian businesses to take investment
freely and quickly from foreign investors which helps to expand the business. Foreign people
can also invest without any permission from the government. In the current, situation foreign
investors can invest up to 49% as the company’s ownership should remain with hands-on
Indian.
3. Increasing in foreign technology: - This results in effects to increase in import of foreign
technology to use advanced levels of technology so business can run effectively as well as
efficiently.
4. Industrial location: - As removing unwanted rules, now the company can set up an
industrial location where the business can run effectively. As before it takes a huge time to
take permission from the government to set up industry in different locations.
5. Faster growth and poverty reduction: - Due to the rise in export and import, it also helps
the country to grow fast, Increase employment, which results in a reduction in poverty.
Demerits: -
1. Increase Dependency: - As a result of the increase in foreign trade, the nation goes
dependent on other nations’ technology, Material, etc. If any failure happened it can cause a
huge loss to the business and nation.
2. Loss in domestic unit: - As a result of an increase in foreign trade, the nation goes
dependent on raw material, technology as it is very cheap from foreign countries like China,
etc. It causes loss to the domestic unit as nobody wants to buy domestic products.
3. Unbalanced Economy: - Liberalization makes the economy the unbalanced economy as
it makes it dependent on other countries if any fluctuation happens in the foreign economy it
also makes fluctuation in the economy.

4. Technology Impact: - Due to fast or Rapid change in technology, Many enterprises and
small companies faces problem in adapting changes and in upgrading technology. New
technology also makes difficult for employees to understand.
Privatization: - Privatization is the process of transferring an enterprise or industry from the
public sector to the private sector. It is an ongoing trend in many parts of the developed and
developing world. It describes the process by which a piece of property or business goes
from being owned by the government to being privately owned. It generally helps
governments save money and increase efficiency, where private companies can move goods
quicker and more efficiently.

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Merits: -
1. Increase Performance Level: - The process of privatization enables companies to
perform more efficiently which results in better performance level. Private companies are
profit-incentivised unlike government companies that are politically motivated. Privatization
eliminates the unnecessary elements such as red-tape and overwhelming bureaucracy from
the enterprise. In addition to this, employees are accessed by private companies on the basis
of their performance which spur the overall organizational performance.
2. Better Customer Service: - Private Company’s offers better customer service in market
as they are profit driven. They operate in a competitive environment where their primary focus
is on grabbing more customers by providing quality services. However, this feature is lacked
by state-owned companies which are neither financially motivated nor faces any competition.
3. Rid Of Political Intervention: - The primary benefit provided by privatization process is
removal of governmental influence in business operations. Public companies are mostly
driven by political agenda which prevent company from taking any decisions bring economic
benefits to them. However, private companies are not influenced by any political factors and
driven by profitable decisions only.
4. Attraction of Investments: - Privately-run companies are more easily able to gain
investor confidence due to their financially and economically sound infrastructure. This
companies bolsters the economy via high inflow of investments both from national as well as
foreign level.
5. Increased Competition: - Companies which are owned and run by government enjoys
monopoly in market and remain uninterrupted by competition. However, the private firms
coming in market due to privatization engages more in more active manner and encourages
competition. It will turn accelerate the rate of economic as well as industrial growth and avoid
monopolistic sluggishness in the market.
6. Promotes Market Dynamism: - An economy is liberated from government control by the
process of privatization. The market operates in an organically manner in absence of
government regulations and dictating market progression. Lack of interference from
government enables market in following integral economic values of demand and supply and
make them more dynamic. Higher revenue and good customer response is attained by
market which are dynamic in nature and running organically.
7. Long-Term Goals and Ambitions: - Private sector companies have well established long-
term goals and ambitions which they follow by carrying out activities efficiently. On the other

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hand, state-run companies can at times only think about the upcoming elections. Their goals
may be of short-term which are focused towards gaining favours of voting public.
Demerits: -
1. Problem of Regulating Monopolies: - The private sector can exploit their monopoly and
ignore social costs. Privatization of certain state entities such as water and electricity
authorities may just create single monopolies.
2. Public Interest: - The industry which performs an important public service, e.g. health
care, education, and public transport. In these industries, profit should not be the primary
objective. For example, Scholars point out that the private sector in India has grown
independently without any major regulation; in Private health sector, some private
practitioners are not even registered doctors and are known as quacks.
3. Accountability: - The public does not have any control or oversight of private companies.
Privatization has a bad side of accountability because Investors has full authority to do
anything.
4. Concentration of Wealth: - Profits from successful enterprises end up in private, often
foreign hands instead of being available for the common good.
Globalization: - Globalization means the speedup of movements and exchanges (of human
beings, goods, and services, capital, technologies or cultural practices) all over the planet.
One of the effects of globalization is that it promotes and increases interactions between
different regions and populations around the globe. The term globalization is derived from
the word globalize, which refers to the emergence of an international network of economic
systems.
Merits: -
1. Increases economic growth: - By increasing the international exchange of goods,
technological advances, and information, globalization increases economic development for
any country participating in the global economy. An increase in economic growth means
better living standards, higher incomes, more wealth in a country, and, often, less poverty—
in short, the overall well-being of a country.
2. Makes production more affordable: - A global market allows businesses wider access
to production opportunities and consumers, meaning that there are more goods available at
a wider range of price points.

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3. Promotes working together: - When different countries come together to engage in trade
and investments in a global financial market, they become interdependent and often come
to rely on one another for certain goods and services.
4. Brings opportunities to poorer countries: - Globalization allows companies to move
their production from high-cost locations to lower-cost locations abroad—this means bringing
jobs, information technology, and other economic opportunities to countries with fewer
resources.
Demerits: -
1. Unequal economic growth: - While globalization tends to increase economic growth for
many countries, the growth isn’t equal—richer countries often benefit more than developing
countries.
2. Lack of local businesses: - The policies permitting globalization tend to advantage
companies that have the resources and infrastructure to operate their supply chains or
distribution in many different countries, which can hedge out small local businesses—for
instance, a local New York hamburger joint may struggle to compete with the prices of a
multinational burger-making corporation.
3. Increases potential global recessions: - When many nations’ economic systems
become interdependent, the likelihood of a global recession increases dramatically—
because if one country’s economy starts to struggle, this can set off a chain reaction that can
affect many other countries simultaneously, causing a worldwide financial crisis.
4. Exploits cheaper labour markets: - Globalization allows businesses to increase jobs and
economic opportunities in developing countries, where the cost of labour is often cheaper.
However, overall economic growth in these countries may be slow or stagnant.
5. Causes job displacement: - Globalization doesn’t result in an increased number of jobs;
rather, it redistributes jobs by moving production from high-cost countries to lower-cost ones.
This means that high-cost countries often lose jobs due to globalization, as production goes
overseas.
World Trade Organization (WTO): - The World Trade Organization (WTO) came in to being
on January 1st 1995. Its location is at Geneva, Switzerland. It has the membership of 162
countries since 30th November 2015.
Why WTO: -
1. To arrange the implementation, administration and operations of trade agreements.
2. Settlement of disputes.

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3. To provide a framework for implementing of the results arising out of discussions taken
place at ministerial conference level.
4. To manage effectively and efficiently the trade policy mechanism.
5. To create good relationships with all nations in respect of global economic.
Functions: -
1. Administering WTO trade agreements.
2. Forum for trade negotiations.
3. Handling trade disputes.
4. Monitoring national trade policies.
5. Technical assistance and training for developing countries.
6. Co – operation with other international organizations.
Principles: -
1. Trade without discrimination - all are equal.
2. Free trade – without restrictions.
3. Transparency.
4. Fair competition.
5. Encouraging development.
Importance: -
1. It promotes peace.
2. Settles disputes.
3. Allows free trade.
4. Income increases.
5. Encourages economic growth.
GATT: - General Agreement on Tariffs and Trade (GATT) was a multilateral agreement
regulating international trade. Its main purpose was reduction of tariffs and other trade
barriers on a mutually advantageous basis. GATT was signed by 23 nations in Geneva on
October 30th, 1947 and took effect on January 1st, 1948. It lasted until the signature by 123
nations in Marrakesh on April 14th, 1994 of the Uruguay Round Agreements which
established the WTO on January 1st, 1995.
Principles: -
1. No discriminatory trade among the member nations.
2. Tariff should be the only instrument to influence international trade.
3. Mutual consultations before any action by a nation that can effect trade of other nation.

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4. Arrangement for negotiation prior to reduction in tariffs.
Objectives: -
1. Improve standard of living in member countries.
2. Ensuring full employment and large growing volume of real income and effective demand.
3. Developing full use of resources of the world.
4. Expand world production and world trade.
Defects: -
1. GATT only prescribes and not enforces the rules.
2. It lacks membership from communist countries, hence it cannot be called as an
international body.
3. Negotiations are commodity based and not nation based.
4. GATT could not do much to improve economies of developing nations.
GATS: - General Agreement on Trade in Services (GATS) is a treaty of the World Trade
Organization (WTO) that entered into force in 1995 as a result of the Uruguay round
negotiation. The treaty was created to extend the multilateral trading system to service
sector.
Principles and Scope: -
1. GATS follow many main principles of the original GATT.
2. The aim is to ensure progressive market liberalization and non – discrimination between
members.
3. GATS cover almost all services in total 155 service sectors.
4. It does not cover services supplied in the exercise of government authority.
Modes of trade: -
The GATS distinguishes between four modes of supplying services: cross-border trade,
consumption abroad, commercial presence, and presence of natural persons.
1. Cross-border supply is defined to cover services flows from the territory of one member
into the territory of another member (e.g. banking or architectural services transmitted via
telecommunications or mail);
2. Consumption abroad refers to situations where a service consumer (e.g. tourist or
patient) moves into another member's territory to obtain a service;
3. Commercial presence implies that a service supplier of one member establishes a
territorial presence, including through ownership or lease of premises, in another member's

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territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or
hotel chains); and
4. Presence of natural persons consists of persons of one member entering the territory of
another member to supply a service (e.g. accountants, doctors or teachers). The Annex on
Movement of Natural Persons specifies, however, that members remain free to operate
measures regarding citizenship, residence or access to the employment market on a
permanent basis.
TRIP’s: - The agreement on Trade Related aspects of Intellectual Property Rights (TRIP’s)
is an international agreement administered by the WTO that sets down minimum standards
for many forms of intellectual property regulation as applied to nations of WTO.
Types of IP’s: -
1. Copy rights.
2. Patents.
3. Trademarks.
4. Industrial design.
5. Layout design & integrated circuits.
Principles: -
1. Part I – General provisions and basic principles.
2. Part II – Standards concerning the availability, scope and use of intellectual property rights.
3. Part III – Enforcement of intellectual property rights.
4. Part IV – Acquisition and maintenance of the IP rights and other related Inter – parties
procedure.
Defects: -
1. Central vigilance system.
2. No amendments.
3. Not a properly defined patent, copyright etc.
4. There is no proper implementation of Dispute Settlement Body (DSB) orders.
TRIM’s: - The objective of Trade – Related Investment Measures (TRIM’s) is to prevent
number countries from resorting to measures that violate non – differential treatment between
domestic and foreign investors and impose quantitative restrictions on imports and exports.
Towards this end, the WTO provisions explicitly prohibit the following trade restrictive and
distortive measures:
1. Local content requirement – Mandatory use of local outputs in production.

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2. Trade balancing requirement – Imports to be maintained at the specific proportion of
exports.
3. Foreign exchange balancing requirement – Forex made available for imports to equal a
certain proportion of value of forex from exports.
4. Exchange restrictions – Free access to forex curbed, resulting in import restrictions.
5. Export performance requirement – Certain proportion of production should be exported.
The agreement provides for transitional period for elimination of prohibited trims, wef.
January 1, 1995
1. 2 years For developed counTries.
2. 5 years For developing counTries, and
3. 7 years For Transitional and least developed countries.
Before 1991, India is used to have local content requirements in the form of the Phased
Manufacturing Program(PMP). This has been scrapped now.
Monetary Policy: - Monetary policy is the process by which the monetary authority of a
country controls the supply of money, often targeting an inflation rate or interest to ensure
price stability and general trust in the currency. According to Paul Einzig, an ideal monetary
policy may be defined as “the effort to reduce to a minimum the disadvantages and increase
the advantages, resulting from the existence and operation of a monetary system.”
General Objectives: -
1. Stability of exchange rates.
2. Price stability.
3. Neutrality of money.
4. Full employment.
5. Economic growth and stability.
Objectives in a developing economy: -
1. Encouraging savings.
2. Neutrality of money.
3. Price stability.
4. To make balance of payments favourable.
Limitations in a developing economy:
1. Underdeveloped monetary and capital market.
2. Lack of integrated structure of rate of interest.
3. Banking habits of the people.

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4. Lack of co – operation from the commercial banks.
5. Lack of co – operation from the financial institutions.
Fiscal Policy: - Fiscal policy refers to government spending, taxing, borrowing and debt
management. The government through its fiscal policy can influence the nature of economic
activities in a country. According to Arthur Smithies “Fiscal policy is a policy under which the
government uses its expenditure and revenue programmes to produce desirable effects and
avoid undesirable effects on national income, production and employment.”
Objectives in a developing economy: -
1. Mobilization of resources.
2. Speeding up of economic growth.
3. Minimizing the inequalities of income and growth.
4. Increasing employment opportunities and price stability.
Limitations in a developing economy:
1. The tax structure in the developing countries is rigid and narrow.
2. Small portions of developing countries not monitored and not taken in to consideration.
3. Lack of statistical information regarding income, expenditure, savings, investment etc.
4. Lack of co – operation of the people with government in implementation.
5. People not aware about their responsibilities and roles in the developmental programs.
6. Lack of efficient administrative machinery to formulate and to successfully implement
policy.

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