Economics for Engineers
V SEMESTER HS-301
Department of Electrical and Electronics Engineering, BVCOE, New Delhi Subject: Economics for Engineers, Instructor: Dr. Sandeep Sharma
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Economics for Engineers Course Objectives
to Indian economy.
Department of Electrical and Electronics Engineering, BVCOE, New Delhi
Subject: Economics for Engineers, Instructor: Dr. Sandeep Sharma
2
Economics for Engineers Course Outcomes (CO)
behavior of the firm.
Department of Electrical and Electronics Engineering, BVCOE, New Delhi
Subject: Economics for Engineers, Instructor: Dr. Sandeep Sharma
3
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 |
Department of Electrical and Electronics Engineering, BVCOE, New Delhi
Subject: Economics for Engineers, Instructor: Dr. Sandeep Sharma
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Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
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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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
6
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
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
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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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
8
Nature and types of cost:
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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
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Nature and types of cost:
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 Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
10
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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
11
Cost functions‐ short run and long run:
Short Run Cost | Long Run Cost |
In the short run, a firm is constrained by at least one fixed input, such as a factory or specialized labor. | In the long run, all inputs can be adjusted, and a firm has more flexibility to optimize its production process for maximum efficiency. |
A firm’s costs are partially fixed and partially variable. | In the long run, a firm’s costs are entirely variable |
Fixed costs cannot be changed in the short run, while variable costs can be adjusted to some extent | The firm can adjust all inputs, including land, labor, capital, and raw materials, to minimize its costs and maximize its output. |
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
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Cost functions‐ short run and long run:
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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
13
Cost functions‐ short run and long run:
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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
14
Cost functions‐ short run and long run:
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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
15
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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
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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.
Cost Theory and Analysis
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
17
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
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
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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
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
19
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
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
20
Monopoly, Monopolistic competition, Oligopoly:
Market Structure
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
21
Monopoly, Monopolistic competition, Oligopoly:
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
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
22
Monopoly, Monopolistic competition, Oligopoly:
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
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
23
Monopoly, Monopolistic competition, Oligopoly:
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
Department of Electrical and Electronics Engineering, BVCOE New Delhi
Subject: Economics for Engineers , Instructor: SANDEEP SHARMA
24
Monopoly, Monopolistic competition, Oligopoly:
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
Department of Electrical and Electronics Engineering, BVCOE New Delhi Subject: SUBJECT NAME , Instructor: INSTRUCTOR NAME
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