EFE Unit 3

Economics for Engineers
V
SEMESTE
R HS-301
1 Department of Electrical and Electronics Engineering, BVCOE, New
Delhi Subject: Economics for Engineers, Instructor: Dr. Sandeep
Sharma
Economics for
Engineers Course

Objectives
To explain the basic micro and macro economics concepts.
 To analyze the theories of production, cost, profit and break
even analysis.
 To evaluate the different market structures and their implication
for the behavior of the firm.
 To apply the basics of rational income accounting and business
cycles
to Indian economy.
Department of Electrical and Electronics Engineering, BVCOE, New

2 Delhi
Subject: Economics for Engineers, Instructor: Dr. Sandeep Sharma
Economics for
Engineers Course
 CO1: AnalyzeOutcomes
the theories of demand,(CO)
supply, elasticity and consumer choice
in the market.
 CO2: Analyze the theories of production, cost, profit and break even
analysis.
 CO3: Evaluate the different market structures and their implication for the
behavior of the firm.
 CO4: apply the basics of rational income accounting and business cycles to
Indian economy.

3 Delhi
Economics for
Engineers Course
Outcomes (CO)
Course Outcomes (CO to Programme Outcomes (PO) Mapping (scale 1: low, 2: Medium,
3: High
CO/PO PO01 PO02 PO03 PO04 PO05 PO06 PO07 PO08 PO09 PO10 PO11 PO12
-
CO1 1 2 1 2 1 - 1 1 1 3 1
-
CO2 1 2 1 2 1 - 1 1 1 3 1
-
CO3 1 2 1 2 1 - 1 1 1 3 1
CO4 1 2 1 2 1 - 1 - 1 1 3 1

4 Delhi
Cost Theory and Analysis
Nature and types of cost: The concept of cost is a key concept
in Economics. It refers to the amount of payment made to acquire any
goods and services. In a simpler way, the concept of cost is a financial
valuation of resources, materials, risks, time and utilities consumed to
purchase goods and services. From an economist's point of view, the cost
of manufacturing any goods and services is often said to be the concept of
opportunity cost. With heightened competition in today's world,
companies are urged to make maximum profits. The company's decision
to maximize earnings relies on the behavior of its costs and revenues.
Besides the concept of opportunity cost, there are several other concepts
of cost namely fixed costs, explicit costs, social costs, implicit costs,
social costs, and replacement costs.
5 Department of Electrical and Electronics Engineering, BVCOE New Delhi

Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
Nature and types of cost: The idea behind the concept of
opportunity cost is that the cost of one item is the lost opportunity to do something
else. For example, by being married to a person, one could lose the opportunity to
marry some other person or by investing more capital in video games, one might
lose the opportunity in watching movies.
The concept of cost can be effortlessly comprehended by classifying the costs. The
process of grouping costs is based on similarities or common characteristics. A
well-defined classification of costs is certainly essential to mention the costs of
cost centers. The different types of cost concepts are:
Outlay costs and Opportunity costs
Accounting costs and Economic costs
Direct/Traceable costs and Indirect/Untraceable costs
Incremental costs and Sunk costs
Private costs and social costs
Fixed costs and Variable costs
Nature and types of cost:
Based on the Nature of Expenses
On the basis of nature, the following are the two types of cost:
Outlay Costs
The authentic payments undergone by an entrepreneur in employing input
are known as outlay costs. It includes costs on payments of fuel, rent,
electricity, etc.
Concept of Opportunity Cost
It is the value of the next best thing you give up whenever a decision is
made by you.

Classification in Terms of Traceability
On the basis of traceability, the types of costs are:
Direct Costs
A direct cost is a cost that is related to the production method of a good or
service. It is the opposite of an indirect cost.
These costs are related to a certain product or a process. They are also
known as traceable costs as they could be traced to a specific activity. It is
the opposite of an indirect cost.
Indirect Costs
Indirect costs are expenses that could not be traced back to a single cost
object or cost source. They are also known as untraceable costs. However,
they are extremely important as they affect the total profitability.

Concept of Costs in Terms of Treatment
Accounting Costs
Accounting costs are direct costs. They are also known as hard costs. The
entrepreneur pays the cash directly for obtaining resources for production.
It includes the cost of prices that are paid for the machines and raw
materials, electricity bills, etc. These costs are treated as expenses.
Economic Costs
The economic cost is the combination of gains and losses of the products.
This cost is mainly used by economists to compare one with another.

Cost functions‐ short run and long run:
What is Short Run Costs?
It is the cost incurred in production during a fixed period of time when all
the factors and inputs vary, except one. Assessing the short run costs of an
organization or an economy helps us to study how it behaves in response
to sudden environmental changes.
What is Long Run Cost?
Long Run Cost is the minimum cost at which a certain level of output can
be achieved in the long run when all factors of production are variable.
These costs enable a business to understand its asset value and make
necessary improvements in the production cycle. As a result, this helps
organizations analyze their factors of production and expand or reduce
their operational costs accordingly.

Short Run Cost Long Run Cost
In the long run, all inputs can be adjusted,
In the short run, a firm is constrained by
and a firm has more flexibility to
at least one fixed input, such as a factory
optimize its production process for
or specialized labor.
maximum efficiency.
A firm’s costs are partially fixed and In the long run, a firm’s costs are entirely
partially variable. variable
The firm can adjust all inputs, including
Fixed costs cannot be changed in the
land, labor, capital, and raw materials, to
short run, while variable costs can be
minimize its costs and maximize its
adjusted to some extent
output.

Types of Short Run Costs
There are primarily three types of short run costs. It should be kept in
mind that these costs are crucial to determine the long run costs of a
company.
1. Short Run Total Cost (STC)
Short run total cost is a company’s total cost of production for a given
output. It is further divided into two types which are total fixed and
variable costs. The total sum of these two elements determines the STC.
Total variable costs (TVC) are costs that change when the output changes
in the short run, like cost of raw materials.
Total fixed costs (TFC) are costs that remain the same with an increase in
production in the short run, like the cost of machinery.

2. Short Run Average Cost (SAC)
SAC is the average cost of a given production of a company in the short
run. It is the average cost per unit when all inputs are variable except one.
Short run total cost divided by output equals SAC.
3. Short Run Marginal Cost (SMC)
It is the additional cost incurred to produce a certain output. SMC is
incurred when there is a change in total cost due to a change in production
input costs. It is calculated by dividing the total cost by the change in total
output.

Types of Long Run Costs
Long Run Cost (LRC) can be divided into three primary types:
1. Long Run Total Cost (LTC)
The minimum cost required to produce a particular quantity of commodity
with variable factors of production is LTC.
2. Long Run Average Cost (LAC)
LAC can be described as the average cost to produce a particular quantity
of commodity when all factors of production are variable. It is the LTC
divided by the output level, which derives a per-piece cost of the total
output. 3. Long Run Marginal Cost (LMC)
It depicts the additional costs a company incurs to expand its factors of
production when all units are variable. LMC is the extra cost of expanding
a plant or facility.
Economies and diseconomies of scale:
Economies of scale may be defined as the cost advantages that can be
achieved by an organization by the expansion of their production in the
long run. Therefore, the advantages of large scale expansion are known as
Economies of Scale. The lower average cost per unit achieves the
advantage in cost.
Economies of Scale are a long term concept that is achieved when there is
an increase in the sales of an organization. Due to the lowering of
production cost, the organization can save more and invest it in buying a
bulk of raw materials which can again be obtained at a discount.
These are the benefits of Economies of Scale. When there is a massive
expansion in an organization, the cost per unit may increase with the
increase in output. Diseconomies of Scale may arise due to internal issues
resulting from technical, organizational, or resource constraints.
Economies and diseconomies of scale: Types of
Economies of Scale
The Economies of Scale may be divided into two categories-
1) Internal Economies
2) External Economies.
Internal Economies: Internal Economies are the real economies that arise
from the expansion of the organization. These economies are the result of
the growth of the organization itself.
External Economics: External Economics are the economies that
originate from factors outside the organization. These economies result in
the increase in the main organization by the increase in the quality of
factors outside the organization like better transportation, better labor,
infrastructure, etc. Due to the betterment of these external factors, the cost
of production per unit of an item in the organization decreases.
Economies and diseconomies of scale:
Types of Diseconomies of Scale
Similar to the Economies of Scale, Diseconomies of Scale is of two types-
Internal Diseconomies of Scale and External Diseconomies of Scale.
Internal Diseconomies of Scale: Internal Diseconomies of Scale are the
Diseconomies resulting from the internal difficulties within the
organization. The Internal Diseconomies are the factors that raise the cost
of production of an organization like lack of supervision, lack of
management and technical difficulties.
External Diseconomies of Scale: External Diseconomies of Scale are the
external factors that result in the increase in the production per unit of a
product within an organization. The external factors that act as a restrain
to expansion may include the cost of production per unit, scarcity of raw
materials, and low availability of skilled labors.
Market Structure
Market structure and degree of competition
Perfect competition: Market structures, or industrial
organization, describe the extent to which markets are competitive. At one
extreme, pure monopoly means that there is only one firm in an industry.
At the other extreme, economists describe a theoretical possibility termed
perfect competition. In between are the market structures found most often
in the real world, which are oligopoly and monopolistic competition.

Market Structure
Market structure and degree of competition
Perfect competition: Perfect competition is a hypothetical market
structure in which there are very many firms, each of which represents an
infinitesimal share of the market. In a perfectly competitive market, if any
firm is able to earn an economic profit, other firms will immediately enter
the market, driving economic profit to zero.
In a perfectly competitive market, each firm is a price taker, meaning that
it has no control over the price. If it tries to raise its price, it loses all its
consumers to other firms. If it lowers its price, it can sell as much as it
wishes to, but it does not cover its costs. In a perfectly competitive
market, price is driven to the point where it is equal to the marginal cost
where marginal cost meets average cost. If the firm produces less output,
then its average cost goes up. If it produces more output, then its average
cost goes up. Thus, it produces at the point of minimum average cost.
Market Structure
Monopoly, Monopolistic competition, Oligopoly :

Market Structure
A pure monopolist is a hypothetical market structure in which a firm faces
no competition and is able to earn a significant economic profit. If other
firms could enter the market, then they would do so, attracted by the profit
opportunity. Therefore, a profitable monopoly could only exist if there
were barriers to entry. For example, a patent can give the patent owner a
legal monopoly on the production of the patented product.
One barrier to entry is high fixed costs. If it takes a large investment to
enter a market, new firms may be deterred from making the attempt. High
fixed costs thus can create a natural monopoly.

Market Structure
The monopolist faces the entire demand curve. To sell an additional unit
of output, the monopolist must lower its price. It would prefer to lower its
price only to the next customer, keeping its price high for existing
customers. If it can price discriminate in this way, it earns a higher profit.
Oddly enough, this would enhance economic efficiency, by increasing
output to the point where price is equal to marginal cost.
If the monopolist is unable to price discriminate, then it will hesitate to try
to get an existing customer by lowering its price. That is because it would
lower its revenue from existing customers by giving them the lower price.
Without price discrimination, the monopolist will restrict output. Relative
to the efficient outcome, the monopolist will produce too little and charge
too much.

Market Structure
In the real world, pure monopoly is rare and perfectly competitive
markets are almost nonexistent. The most common types of market
structures are oligopoly and monopolistic competition.
In an oligopoly, there are a few firms, and each one knows who its rivals
are. Examples of oligopolistic industries include airlines and automobile
manufacturers.
When choosing a strategy, an oligopolist must anticipate the response of
its rivals. If it raises its price and its rivals do not follow, it may lose a lot of
customers. If it lowers its price in order to gain market share, perhaps its
rivals will also lower their prices, foiling the attempt.

Market Structure
Economists often use simple game theory to describe how oligopolists
might arrive at their decisions. But in contrast to the other market
structures, there is no precise mathematical solution to the problem of how
much output to produce and what price to charge. In monopolistic
competition, there are many firms, each selling slightly differentiated
products that are not perfect substitutes for one another. One difference
might be location—the drug store that is five blocks away from you is not
a perfect substitute for the drug store that is ten miles down the road.
Unlike a perfectly competitive firm, a monopolistically competitive firm
can raise its price without driving away every customer. But unlike a
monopolist, it does not benefit from barriers to entry. Because other firms
can come into the market, profits are limited.
Restaurants are a good example of monopolistic competition.
Key points to note by student
20 Department of Electrical and Electronics Engineering, BVCOE New

Delhi Subject: SUBJECT NAME , Instructor: INSTRUCTOR

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Economics for Engineers

Department of Electrical and Electronics Engineering, BVCOE, New

Department of Electrical and Electronics Engineering, BVCOE, New

Department of Electrical and Electronics Engineering, BVCOE, New

5 Department of Electrical and Electronics Engineering, BVCOE New Delhi

7 Department of Electrical and Electronics Engineering, BVCOE New Delhi

8 Department of Electrical and Electronics Engineering, BVCOE New Delhi

9 Department of Electrical and Electronics Engineering, BVCOE New Delhi

10 Department of Electrical and Electronics Engineering, BVCOE New Delhi

11 Department of Electrical and Electronics Engineering, BVCOE New Delhi

12 Department of Electrical and Electronics Engineering, BVCOE New Delhi

13 Department of Electrical and Electronics Engineering, BVCOE New Delhi

18 Department of Electrical and Electronics Engineering, BVCOE New Delhi

20 Department of Electrical and Electronics Engineering, BVCOE New Delhi

21 Department of Electrical and Electronics Engineering, BVCOE New Delhi

22 Department of Electrical and Electronics Engineering, BVCOE New Delhi

23 Department of Electrical and Electronics Engineering, BVCOE New Delhi

20 Department of Electrical and Electronics Engineering, BVCOE New

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