ENGINEERING

ECONOMICS &
MANAGEMENT
 INTRODUCTION:
• Engineering economics is a subcategory of economics
for application to engineering projects.
•Every Engineer seeks the solutions to every problem,
and the economic practicability of each prospective
solution is generally measured along by the technical
features.
•Engineering economic analysis is regularly applied to
various potential designs for an engineering project in
order to select the optimum design, thereby taking into
account the both technical and economic viability.
•The term 'engineering economic decision' defined as any
investment decision associated with an engineering
project.
• The aspect of an economic decision that is of
most interest from an engineer’s perception is
the evaluation of benefits and costs associated
with making a capital investment.
• These decisions are to be made by the
Engineers considering all the factors such as
cash flows, time of occurrence, interest.
• The decision affects what will be done and the
numbers used in this analysis are the best
estimates of what is expected to occur in the
future.
• ECONOMICS MEANING:
• The word ‘Economics’ originates from the Greek work
‘Oikonomikos’ which can be divided into two parts
• (a) ‘Oikos’, which means ‘Home’, and
• (b) ‘Nomos’, which means ‘Management’.
• Thus, Economics means ‘Home Management’.
• The head of a family faces the problem of managing the unlimited
wants of the family members within the limited income of the
family.
• In fact, the same is true for a society also.
• If we consider the whole society as a ‘family’, then the society
also faces the problem of tackling unlimited wants of the members
of the society with the limited resources available in that society.
• . Thus, Economics means the study of the way in
which mankind organizes itself to tackle the basic
problems of scarcity.
• All society have more wants than resources.
Hence, a system must be devised to allocate these
resource between competing ends.
• DEFINITIONS OF ECONOMICS
• Adam Smith’s Definition -1
• Adam Smith, considered to be the founding
father of modern Economics, defined Economics
as of the nature and causes of nations’ wealth or
simply as the study of wealth.
• Alfred Marshall’s Definition
• He wrote: “Economics is a study of man in the
ordinary business of life. It enquires how he gets
his income and how he uses it. Thus, it is on the
one side, the study of wealth and on the other and
more important side, a part of the study of man”.
• The next important definition of Economics was due
to Prof. Lionel Robbins. In his book‘
• According to Robbins, “Economics is a science
which studies human behavior as a relationship
between ends and scarce means which have
alternative uses”.
• Modern Growth-Oriented Definition of
Samuelson
•  Thus, Professor Samuelson writes, “Economics
is the study of how people and society end up
choosing, with or without the use of money, to
employ scarce productive resources that could
have alternative uses to produce various
commodities over time and distributing them for
consumption, now or in the future, among
various persons or groups in society.
• It analyses costs and benefits of improving
patterns of resource allocation”.
 Scope of Economics:
• Our economy is dynamic in nature which means as
economy develops, the nature
of problems keeps on changing.!
• In order to understand economics model building
approach is used which assumes whole economy as
a small model!
• The knowledge of economics can be used for the
benefit of the society by-
(a) increasing collective welfare
(b) accelerating rate of economic growth
(c) reducing fluctuations in income and employment.
 Micro and Macro Economics
• The terms micro and macro were first used by
the Swedish economist Rognar Frisch in 1920.
• It represented the level of aggregation of
economic variables.
• Micro means small and macro means large.
 Micro Economics:
• (a) Under this variables are not integrated but
pertain to individual units.
• (b) It studies the behavior of individual
economic units.
• (c) In this we use “bit by bit” approach which
means breaking a big problem into
• small parts and then study one bit at a time.
• (d) It deals with the problem of allocation of
resources.
• (e) It is also known as the price theory.
• Some of the components of micro economics
are-
• theory of consumer behavior
• theory of a firm
• theory of an industry
• theory of production
• theory of product pricing
• theory of pricing of factors of production
• theory of welfare of individuals as compared
with each other.
 Macro Economics:
• Under this variables are aggregated and relate
to large groups of economic units
• It studies economy as a whole
• Macro economics is also known as income
theory or aggregative economics
 wants
• Man is a bundle of desires.
• His wants are infinite in variety and number.
Some wants are natural, for example foods,
air, clothing and shelter without which
existence of man’s life is not possible.
• Similarly wants vary from individual to
individual and they multiply with civilization.
• Human Wants are Unlimited:
• There is no end the human wants.
• When one want is satisfied, another crops up to
take its place.
• The never-ending cycle of wants goes on and on.
• Man’s mind is so made that he is never
completely satisfied.
• He always hankers after more and more goods
and services.
• There is no limit to his wants so long as he
breathes. Human wants keep on multiplying
 Any Particular want is Satiable:
• Although wants in the aggregate are
unlimited, yet it is possible to satisfy a
particular want, provided one has the means.
• If, for instance, a man wants a car he can have
it and be satisfied.
• If he is hungry, he takes food and the want is
satisfied.
• Thus a particular want can be satisfied, if one
has money enough for the purpose
 Wants are Complementary:
• Very seldom does one commodity by itself Satisfy a human
want.
• Usually it calls for something else in audition. It we want to
write a letter, we must buy a pen as well as ink and paper.
• The pen alone is not enough It is a common experience
that we want things in groups.
• A single article out of a group cannot satisfy our wants by
itself.
• It needs other things to complete its use.
• Thus, a motor-car needs petrol and mobiles oil before it
starts working; shoes need laces, and so on. Thus wants are
complementary.
 Wants are Competitive:
• Not only are our wants complementary, they are also
competitive.
• One commodity competes with another for our
choice.
• We all have a limited amount of money at our
disposal, whereas we want so many things at the
same time.
• We cannot buy them all. We must, therefore, choose
between them by accepting some and rejecting
others.
• Thus, there is competi­tion between the various things
that we could buy.
 Some Wants are Both Complementary and
Competitive:
• Machinery com­petes with labour.
• A manufacturer can, to some extent,
substitute one for the other.
• But they also go together. Both of them are
used in factories.
• Thus, human wants not only compete, they
also complement each other.
 Wants are Alternative:
• There are several ways of satisfying a
particular want.
• If we feel thirsty, we can have soda, ‘sharbat’
or ‘lassi’ in summer, and tea, coffee or hot
milk in winter.
• There are different alternatives open to us.
The final choice depends on their relative
prices and the money at our disposal.
 Wants Vary with Time, Place and Person:
• Wants are not always the same, nor the same
with everyone.
• Different people want different things and the
same man wants different things at different
times and in different places.
Wants Vary in Urgency and Intensity:
• All wants are not equally urgent and intense.
Some wants are more urgent and intense than
others. These are generally satisfied first,
while others are postponed.
 Wants Multiply with Civilization:
• As civilization spreads among peoples, their
wants also go on increasing.
• That is why people living in urban areas have
more wants than people inhabiting villages. This
largely explains why the wants of European and
American peoples are generally more numerous
than those of the African people.
• With the advance of civilisation, the demand for
radio, cinema, television, motor cars and other
modern amenities goes on increasing.
 Wants Recur:
• Most of the human wants are of a recurring nature.
• This applies to most of our routine expenditure,
especially on food.
• From day to day and month to month, these wants
arise again and again and clamour for satisfaction.
Wants Change into Habits:
• If a particular want is regularly satisfied, a person
becomes used to it and it grows into a habit.
• He must then use that particular commodity regularly.
• That is how young lads often become confirmed
smokers and drug addicts.
• Wants are influenced by Income,
Salesmanship and Advertisement:
• It is obvious that if income is higher, more
wants can be satisfied, and a poor man cannot
simply afford to have many wants.
• Besides, we do not always buy the things we
need.
• We are often induced to buy particular brands
by persuasive salesmen or clever
advertisement even though better alternatives
may be available.
• Wants are the Result of Custom or
Convention:
• Custom still rules the world. All of us, whether
living in villages or towns, are slaves of
custom, more or less.
• Many of our wants are conventional. They are
dictated to us by society.
• Whether we like it or not, we have to spend a
lot of money on social ceremonies
 Present Wants are more important than Future
Wants:
• It is a human instinct to regard the present wants
as being more important than the future wants.
• The proverb “A bird in hand is better than two in
the bush” is based on this universal
phenomenon.
• Future is uncertain and unpredictable. Man is,
therefore, more concerned with the satisfaction
of his present wants rather than being worried
about his future wants.
 Classification of Wants:
• The commodities and services that we want
are generally classified as necessaries,
comforts and luxuries. Let us consider them
one by one.
• Necessaries:
• Necessaries may be further sub-divided as:
• (a) Necessaries of Existence: These are the
things without which we cannot exist, e.g., a
minimum of food, clothing and shelter.
• (b) Necessaries of Efficiency:
• Some goods may not be necessary to enable us to
live, but necessary to make us efficient workers.
• A table and a chair are necessaries of efficiency for
a student. Having these he will be able to read and
write better.
• (c) Conventional Necessaries:
• These are the things which we are forced to use
either by social custom or because the people
around us expect us to do so.
• It is clear that we cannot dress ourselves in a
strange fashion.
• We must dress according to our station in life
and in a manner acceptable to the people.
• The term conventional necessaries are also
applied to consumption of things like tobacco
and wine to which people sometimes get
addicted.
 Comforts:
• Having satisfied our wants for the necessaries of
life, we desire to have some comforts too.
• For a student, a book is a necessity, a table and a
chair are necessaries of efficiency; but cushioned
chair is a comfort.
• Comforts make for a fuller life. In order to
distinguish between a comfort and a necessary
of efficiency we may say that the benefit from
the former is less than the money spent on it,
whereas the benefit in health and efficiency from
the latter is greater.
• By way of illustration, we may say that while
an electric fan for a college student in summer
may be regarded as a necessary of efficiency,
an air-conditioner is a comfort and even a
luxury.
 Luxuries:
• Man does not stop even at comforts. After
comforts have been provided, he wants luxuries
too.
• ‘Luxury’ has been defined as a superfluous
consumption, something we could easily do
without.
• Costly furniture, luxurious car shower baths, silk
clothes, jewellery, a house fitted with
refrigerators, electric cookers, washing machines,
cushioned beds and meals consisting of a large
number of costly dishes-are all luxuries.
• They are unnecessary and one can lead a
healthy and useful life even without them.
Money spent on comforts brings some
compensation, while the expenditure on
luxuries brings negligible return. On the
contrary, there may be a positive loss or harm
• UTILITY
• Meaning of Utility:
• The simple meaning of ‘utility’ is ‘usefulness’.
In economics utility is the capacity of a
commodity to satisfy human wants.
• Utility is the quality in goods to satisfy human
wants. Thus, it is said that “Wants satisfying
capacity of goods or services is called Utility.”
• 1. According to Prof. Waugh:
• “Utility is the power of commodity to satisfy
human wants.”
• 2. According to Fraser:
• “On the whole in recent years the wider
definition is preferred and utility is identified,
with desireness rather than with
satisfyingness.”
• Characteristics of Utility:
• The following are the important
characteristic features of utility:
• Utility has no Ethical or Moral Significance:
• A commodity which satisfies any type of want,
whether moral or immoral, socially desirable
or undesirable, has utility, i.e., a knife has
utility as a household appliance to a
housewife, but it has also a utility to a killer for
stabbing some body.
 Utility is Psychological:
• Utility of a commodity depends on a
consumer’s mental attitude and assessment
regarding its power to satisfy his particular
want. Thus, utility of a commodity may differ
from person to person. Psychologically, every
consumer has his likes and dislikes and
everyone determines his own level of
satisfaction.
• For instance:A consumer who is fond of apples may find
a high utility in apples in comparison to the consumer
who has no liking for apples. Similarly a strictly
vegetarian person has no utility for mutton or chicken.
Utility is always Individual and Relative:
• Utility of a commodity varies in different situations in
relation to time and place.
• Even the same consumer may derive a higher or lower
utility for the same commodity at different times and
different places.
• For example—a person may find more utility in woolen
clothes during the winter than in summer or at Kashmir
than at Mumbai.
• . Utility is not Necessarily Equated with
Usefulness:
• Utility simply means the ability to satisfy a want.
A commodity may have utility but it may not be
useful to the consumer. For instance—A cigarette
has utility to the smoker but it is injurious to his
health. However, demand for a commodity
depends on its utility rather than its usefulness.
Thus many commodities like opium liquor,
cigarettes etc. have demand because of utility,
even though, they are harmful to human beings.
 Utility cannot be Measured Objectively
• Utility being a subjective phenomenon or
feeling of a consumer cannot be expressed in
numerical terms.
• So utility cannot be measured cardinally or
numerically. It cannot be measured directly in
a precise manner.
• Professor Marshall has however, unrealistically
assumed cardinal measurement of utility in his
analysis of demand.
 Utility Depends on the Intensity of Want:
• Utility is the function of intensity of want. A want
which is unsatisfied and greatly intense will imply a
high utility for the commodity concerned to a person.
But when a wan is satisfied in the process of
consumption it tends to experience a lesser utility of
the commodity than before.
• Such an experience is very common and it is
described as a tendency of diminishing utility
experienced with an increase in consumption of a
commodity.
• In other words, the more of a thing we have, the less
we want it.
 Utility is Different from Pleasure:
• A commodity may have utility but its consump­
tion may not give any pleasure to the
consumer, e.g., medicine or an injection. An
injection or medicinal tablet gives no pleasure,
but it is necessary for the patient.
Utility is also Distinct from Satisfaction:
• Utility and satisfaction, both are though inter-
related but they have not been considered as
the same in a strict sense.
 Different Types of Utility:
• In economics, production refers to the
creation of utilities in several ways.
• Thus, there are following types of utility:
• Form Utility: This utility is created by changing
the form or shape of the materials. For
example—A cabinet turned out from steel
furniture made of wood and so on.
• Basically, from utility is created by the
manufacturing of goods.
• Transport services are basically involved in the
creation of place utility.
• In retail trade or distribution services too,
place utility is created.
• Similarly, fisheries and mining also imply the
creation of place utility.
• Place utility of a commodity is always more in
an area of scarcity than in an area of
abundance e.g., Kashmir apples are more
popular and fetch higher prices in Pune than
in Srinagar on account of such place utility
 Time Utility:
• Storing, hoarding and preserving certain goods over
a period of time may lead to the creation of time
utility for such goods e.g., by hoarding or storing
food-grains at the time of a bumper harvest and
releasing their stocks for sale at the time of scarcity,
traders derive the advantage of time utility and
thereby fetch higher prices for food-grains.
• Utility of a commodity is always more at the time of
scarcity.
• Trading essentially involves the creation of time
utility.
 Service Utility:
• This utility is created in rendering personal
services to the customers by various
professionals, such as lawyers, doctors,
teachers, bankers, actors etc.
 Place Utility:
• This utility is created by transporting goods
from one place to another. Thus, in marketing
goods from the factory to the market place,
place utility is created. Similarly, when food-
grains are shifted from farms to the city
market by the grain merchants, place utility is
created.
 Wealth 
• In ordinary speech, when we refer to wealth, we
mean money. But in economics, it has a special
meaning. It refers to those scarce goods which
satisfy our wants and which have money value.
• We may consider anything that has money value
as wealth in economics.
• All economic goods have value-in-exchange. So
wealth includes all economic goods.
• Wealth has been defined as 'stock of goods
existing at a given time that have money value'.
 Characteristics of Wealth 

• The following are the characteristics of wealth : 

• (1)    It must possess utility. It must have the power to satisfy a want. As Marshall

says 'they must be desirable'. 

• (2)    It must be limited in supply. For example, air and sunshine are essential for life. We

cannot live without them. But we do not consider them as wealth because they are

available in large quantities. Such goods are known as free goods. 

• (3)    Wealth should be transferable. That is, it should be possible for us to transfer the

ownership from one person to another. 

• (4)    It must have money value.

• (5)     It may be external. For example, the goodwill of a company is external wealth.

• Utility, scarcity and transferability are thus important characteristics of wealth.

 Classification of Wealth
• Wealth can be classified as
• personal wealth
• social wealth or collective wealth
• national wealth
• cosmopolitan wealth.
 Personal Wealth (Individual Wealth)
• The wealth of a person consists of both material
and non-material goods. Thus the wealth of the
person includes such material things as land,
houses, furniture, machinery and so on. Not only
that, if a person has some shares in companies or
bonds which require others to pay money to him,
they should be included in his personal wealth.
On the other hand, if he owes some debt to
others, it should be regarded as negative wealth
and so subtracted from his gross wealth. Then we
get the net wealth of a person.
 Social Wealth (Collective Wealth)
• Social wealth consists of all these goods that
can be enjoyed by all members of a society.
Social wealth includes public roads, public
parks, public schools, government hospitals,
public libraries, museums and so on. In short,
it includes all kinds of public property and
ownership.
• Most of these things are called collective
goods, i.e., goods that are not in private
ownership.
 National Wealth
• National wealth includes individual wealth as
well as the collective wealth of its members.
• That is, it includes besides individual wealth all
kinds of public property, such as roads and
canals, buildings and parks and water works.
• Some writers include even free goods in the
wealth of a nation.
• For example, Marshall considered that even the
rivers of a country should be taken into account
in considering national wealth.
• Suppose a person is running a firm. The good will of his
firm may be considered as his immaterial wealth.
• We have to remember one thing, namely that wealth is
external.
• The personal or internal qualities of a person should not
be considered as wealth.
• For example, a play-back singer may have an excellent
voice. It is a personal quality and internal to the person.
• The voice of the singer is not wealth because it is internal.
• It is not wealth but it may be the source of wealth to the
singer. Another example of internal quality is the ability of
a surgeon.
• The Thames river in England is a free gift of nature.
• But he says that we must consider the Thames a
part of England’s wealth. Some writers, however,
do not agree with this view. For instance,
according to Seligman, “rivers and climate do not
constitute wealth.
• They enable a country to acquire wealth, just as
intelligence or strength enables a man to acquire
wealth.
• They are the source of wealth but they are not
wealth”.
• Further, in calculating the national wealth of a country, one
should deduct the debts, which a nation owed to other
countries.
• Of course, we must add to the national wealth, the money
or goods that is due to us from other nations.
• The wealth of a nation can be increased by hard work of its
people, labor is an important source of wealth. That is why
Adam Smith believed that the wealth of a nation can be
increased by a proper division of labor.
• Japan, for instance, is an Asian country. Though most of the
countries of Asia are poor today, Japan is wealthy and
enjoys a high standard of living comparable to that of a
western country because its people work hard. They are
industrious and diligent.
 Cosmopolitan Wealth
• Cosmopolitan wealth is the wealth of the world.
• It belongs to no one nation in particular.
• A common example of cosmopolitan wealth is the
ocean.
• As Marshall put it, “Just as rivers are important
elements of national wealth, the ocean is one of the
most valuable properties of the world.”
• Again, scientific knowledge and mechanical
inventions may also be considered as cosmopolitan
wealth. For, scientific knowledge wherever
discovered, soon becomes the property of the world.
• So it is better to consider it as cosmopolitan
wealth rather than as national wealth.
• The same thing is true of mechanical
inventions, for example, the mechanical
inventions that were made in England during
the Industrial Revolutions soon became the
property of the world.
 VALUE
• Value means the utility of a commodity.
However, in economics, the term ‘value’ has a
quite different meaning.
• According to Adam Smith, the word value can
be used in two senses, i.e.,
• value-in-use
• value-in-exchange
 Value in use
• It is the want satisfying power of a commodity.
The satisfaction which one obtains from the
use of a commodity is known as the value-in-
use.
• For example water has immense use value,
because it quenches thirst and without it daily
life is just impossible.
• The quality of water is the value-in-use of
water.
 Value-in-exchange:
• It is the amount of goods and services which
we may obtain in the market in exchange of a
particular thing.
• In other words, it is the price of a particular
good which can be sold and bought in the
market.
• For instance, if one kg of rice can be obtained
in exchange of one dozen of banana, then we
may say that value of one kg of rice is equal to
one dozen of banana.
• The value-in-exchange depends on two things:
• (i) Time: Value-in-exchange depends on time
element.
• That is, with the change in time value- in-
exchange for a commodity in respect to other
commodity will vary.
• (ii) Place: Value-in-exchange also depends from
place to place. Value-in-exchange for a
particular commodity varies from one market
to other markets.
• Hence, it varies according to time and place.
• Again, one commodity may have immense use
value but no exchange value or vice versa.
• For example, water has immense use value
but not exchange value.
• On the contrary, diamond has huge exchange
value but no use value.
 Consumption
• The process in which the substance of a thing
is completely destroyed, used up, or
incorporated or transformed into something
else.
• Consumption of goods and services is the
amount of them used in a particular
time period.