lecture notes for engineering economics and cost analysis

lecture notes for engineering economics and financial accounting and engineering economics and management lecture notes
Dr.NeerajMittal Profile Pic
Dr.NeerajMittal,India,Teacher
Published Date:18-07-2017
Your Website URL(Optional)
Comment
Subject: Engineering Economics & Costing Subject Code: HSSM3204 Branch: B. Tech. all branches rd th Semester: (3 / 4 SEM) Lecture notes prepared by: i) Dr. Geetanjali Pradhan(Coordinator) Asst. Prof. Mathematics, Dept. of Mathematics and Humanities College Of Engineering and Technology, BBSR ,BPUT ii) Dr. S. Mishra Lecturer in Economics College Of Engineering and Technology, BBSR, BPUT Disclaimer: The lecture notes have been prepared by referring to many books and notes prepared by the teachers. This document does not claim any originality and cannot be used as a substitute for prescribed textbooks. The information presented here is merely a collection of materials by the committee members of the subject. This is just an additional tool for the teaching-learning process. The teachers, who teach in the class room, generally prepare lecture notes to give direction to the class. These notes are just a digital format of the same. These notes do not claim to be original and cannot be taken as a text book. These notes have been prepared to help the students of BPUT in their preparation for the examination. This is going to give them a broad idea about the curriculum. The ownership of the information lies with the respective authors or institutions. Further, this document is not intended to be used for commercial purpose and the committee faculty members are not accountable for any issues, legal or otherwise, arising out of use of this document. The committee faculty members make no representations or warranties with respect to the accuracy or completeness of the contents of this document and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. HSSM3204 Engineering Economics & Costing Module-I: (12 hours) Engineering Economics – Nature and scope, General concepts on micro & macro economics. The Theory of demand, Demand function, Law of demand and its exceptions, Elasticity of demand, Law of supply and elasticity of supply. Determination of equilibrium price under perfect competition (Simple numerical problems to be solved). Theory of production, Law of variable proportion, Law of returns to scale. Module-II: (12 hours) Time value of money – Simple and compound interest, Cash flow diagram, Principle of economic equivalence. Evaluation of engineering projects – Present worth method, Future worth method, Annual worth method, internal rate of return method, Cost-benefit analysis in public projects. Depreciation policy, Depreciation of capital assets, Causes of depreciation, Straight line method and declining balance method. Module-III: (12 hours) Cost concepts, Elements of costs, Preparation of cost sheet, Segregation of costs into fixed and variable costs. Break-even analysis-Linear approach. (Simple numerical problems to be solved) Banking: Meaning and functions of commercial banks; functions of Reserve Bank of India. Overview of Indian Financial system. Text Books: 1. Riggs, Bedworth and Randhwa, “Engineering Economics”, McGraw Hill Education India. 2. D.M. Mithani, Principles of Economics. Himalaya Publishing House Reference Books : 1. Sasmita Mishra, “Engineering Economics & Costing “, PHI 2. Sullivan and Wicks, “ Engineering Economy”, Pearson 3. R.Paneer Seelvan, “ Engineering Economics”, PHI 4. Gupta, “ Managerial Economics”, TMH 5. Lal and Srivastav, “ Cost Accounting”, TMH HSSM3204 Engineering Economics & Costing Module-I: (12 hours) Engineering Economics – Nature and scope, General concepts on micro & macro economics. The Theory of demand, Demand function, Law of demand and its exceptions, Elasticity of demand, Law of supply and elasticity of supply. Determination of equilibrium price under perfect competition (Simple numerical problems to be solved). Theory of production, Law of variable proportion, Law of returns to scale. Module-II: (12 hours) Time value of money – Simple and compound interest, Cash flow diagram, Principle of economic equivalence. Evaluation of engineering projects – Present worth method, Future worth method, Annual worth method, internal rate of return method, Cost-benefit analysis in public projects. Depreciation policy, Depreciation of capital assets, Causes of depreciation, Straight line method and declining balance method. Module-III: (12 hours) Cost concepts, Elements of costs, Preparation of cost sheet, Segregation of costs into fixed and variable costs. Break-even analysis-Linear approach. (Simple numerical problems to be solved) Banking: Meaning and functions of commercial banks; functions of Reserve Bank of India. Overview of Indian Financial system. Text Books: 1. Riggs, Bedworth and Randhwa, “Engineering Economics”, McGraw Hill Education India. 2. M.D. Mithani, Principles of Economics. Reference Books : 1. Sasmita Mishra, “Engineering Economics & Costing “, PHI 2. Sullivan and Wicks, “ Engineering Economy”, Pearson 3. R.Paneer Seelvan, “ Engineering Economics”, PHI 4. Gupta, “ Managerial Economics”, TMH 5. Lal and Srivastav, “ Cost Accounting”, TMH MODULE – 1 DEMAND AND LAW OF DEMAND Meaning of Demand The demand for any commodity, at a given price, is the quantity of it which will be bought per unit, of time at the price. From this definition of demand two things are quite clear: Firstly, demand always refers to demand at a price. If demand is not related to price, it conveys no sense. To say that the demand for mangoes is 100 kgs. fails to convey any sense. It should be always related to price. Again in the words of Shearman, “To speak of the demand of a commodity in the sense of the mere amount that will be purchased without reference to any price will be meaningless.” Secondly, demand always means demand per unit of time. The time may be a day, a week or a month, etc. Therefore, “the demand for any commodity or service is the amount that will be bought at any given price per unit of time.” —G. L. Thirkettle. There is a difference between ‘desire’ ‘need’ and ‘demand’. A desire “will become demand only if a consumer has the means to buy a thing and also he is prepared to spend the money.. Suppose Ram has the desire of haying a fan. But this desire will become demand only if he has 350 rupees and he is prepared to spend this money. Thus by demand -we mean the various quantities of a given commodity or service which -consumers would buy in the market in a given period of time at various prices. According to Pension, “Demand implies, three things (a) desire to possess a thing, (b) mean of purchasing it and (c) willingness to use those means for purchasing it.” Meaning of Demand Schedule Demand schedule depicts the “various quantities of a commodity which will be demanded at different prices. Quantity demanded will be different at different prices because with an increase in price, demand falls and with a fall in prices demand extends. Demand schedule can be of the following two types :— (i) Individual Demand Schedule. (ii) Market Demand Schedule. Individual Demand Schedule : Individual Demand Schedule shows the various quantities demanded by one person at different prices, individual Demand Schedule can be shown as follows : Price Demand of Mangoes (In Rupees) in Kgs Rs.5 1 Kg. Rs.4 2 Kgs. Rs.3 3 Kgs. Rs.2 4 Kgs. Re.1 5 Kgs. As is clear from the above schedule, the demand for mangoes of a consumer is 1 kg. when the price is 5 rupees per kg. When price falls to; Rs. 4 demand for mangoes extends to 2 kgs. Again demand for mangoes extends to 5 kgs when price is 1 rupee per kg. Individual Demand Curve. We can show the individual demand schedule with the help of the following diagram. Fig. 4 On OX-axis we measure the quantity demand while on OY-axis we take the price of mangoes per kg. When price is Rs. 5 per kg. demand is 1 kg., likewise when the price is 4 rupees, per kg. demand is 2 kgs., etc. By combining the pts. A1, A2, A3, A4, A5, we get the demand curve DD. This is called the individual demand curves. Market Demand Schedule – If we add up the demand at various prices of all consumers in the market we will get the market demand schedule. Let us suppose there are 3 consumers, A, B & C in the market. If now we add the quantity demanded by A,B and C at different prices, we will get the market demand schedule, it can be shown as follows : Market Demand Schedule : Price (Rupees) Demand of Demand Demand of Total Demand in the A of B C Market (KG) 5 Rs. per kg. 1 3 2 6 4 Rs. per kg. 2 4 3 9 3 Rs. per kg. 3 5 4 12 2 Rs. per kg. 4 6 5 15 1 Rs. per kg. 5 7 6 18 When price is Rs.5/ kg total demand of all consumers is 6kg. When price is Rs.4/- total demand of the consumer is 9kg. Market Demand curve : Market demand curve ca be shown as follows : Fig. 5 On OX-axis we take the total quantity demanded of mangoes in the market. On Y-axis, we measure the prices. When price is Rs.5/- per kg. total quantity demanded 6kg. Again when price is Rs.4/- per kg total quantity demanded goes up to 9 kgs., etc. By combining the points A,B,C,D, and E we get DD. The demand curve market as a whole. Market Demand curve can also be known by adding up the individual demand curves. We assume that there are 2 consumers A and B. If we know the demand curve of A and B we can find our the market curve as follows : Fig. 6 In the above figures (i), (ii) and (iii) we show the demand of consumer A, consumer B and total demand respectively. On OX-axis we measure demand and QY-axis we measure the price d shows the demand cure of consumer ‘A a and db shows the demand curve of consumer ’B’. At price OP, the quantity demanded by consumer ’A’ is OA while the quantity demanded by consumer ‘B’ at this price is OB. The total demand of consumers ‘A’ and ‘B’ shall be OA+OB. In diagram (iii) total demand is OT at price OP. Here OT=OA+OB. When price falls to OP the quantity demanded increases to OA OB in the 1 1 1 case of consumers A and B respectively. Now the market demand at price OP 1 shall be equal to OAi+OB . In figure (iii) the total demand is OT at price. OP . 1 1 1 Here OT1=OA +OB . By joining the points M and N, we get Dm which is the 1 1 market demand curve. Importance of the Demand Schedule. 1. With the help of demand schedule we can know the approximate changes in demand because of a change in price. 2. We can discuss the Elasticity of the demand with the help of demand/schedule. 3. Law of demand can also be discussed with the help of demand schedule. 4. Price in the market is also determined with the help of demand schedule and supply schedule. 5. Demand schedule is very useful for the business community. With its help, businessman can know as to how much shall be the increase in demand because of a fall in price. LAW OF DEMAND Law of demand establishes a relationship between the price and the quantity demanded of a commodity. Other things remaining the same, when the price of a commodity falls its demand will go up likewise when the price of a commodity rises its demand will fall. Price and demand move in opposite directions. There is no proportionate relationship between price and demand. A 10% fall in price will not necessarily lead to a 10% increase in demand. In the words of Marshall, “The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price”. According to Samuelson, “When the price of a good is raised, less of it will be demanded. People will buy more at lower price and buy-less at higher prices.” According to Meyers, “People demand a larger quantity of goods and services only it a lower price than at a higher price.” In simple words law of demand states that, other thing being equal, more will be demanded at lower, prices than at higher prices. Law of demand can be shown with the help of the following table : Price of Apples Demand for Apples (Paisa) (Unit) 50 2 40 4 30 6 20 8 10 10 When price is 30 Paisa, consumer demand is 6 apples. When price falls to 20 Paisa, he demands 8 apples and when price goes to 40 Paisa he demands 4 apples. Thus when price falls, demand expands and -when price rises, demand contracts. Law of demand can - be shown with the help of the following diagram: Fig. 7 We see that at OP price our demand increases to OP the demand falls to 1 OM . When the price falls to OP the demand increases to OM . 1 2 2 Causes : The law applies because of the following reasons 1. Law of Diminishing Marginal Utility : It is quite natural that when a person continues buying large number pf units of the same commodity, its marginal utility will progressively fall. On the other hand when the stock of a commodity goes on falling; then its-marginal utility will progressively rise. We also know that marginal utility is measured by price. When a person purchases less amount of a commodity then the marginal utility of that commodity will be high for him and he will be ready to pay more price and vice versa. So we come to the conclusion that people purchase more at a low price and less at high price. 2. Income Effect : When price falls, real income of the consumer rises. He is therefore, in a position to purchase more units of commodity. When the price rises, real income of the consumer falls and he purchases less units of a commodity. 3. Substitution effect : When the price of one commodity falls people will purchase more of that commodity. When the price of one commodity rises people will purchase less of that commodity. The substitution effect of a price reduction is always positive and hence larger quantities will be bought at lower prices. Assumptions of the Law : The Law of Demand is based on the following assumptions : 1. Income of the buyer remains the same. 2. The taste of the buyer remains the same. 3. The prices of other goods—substitutes and complements— remain unchanged. 4. No close substitute is discovered. 5. There is no ‘prestige value’ for the product in question. Only when these conditions are assumed constant, the Law of Demand will operate. In other words, the tastes, incomes and the prices of substitutes and complements are main determinants of price relationship. Hence I they are assumed constant. Limitations of the Law/Exception to Law of Demand 1. Change in Habit, Customs and Income : Law of Demand tells us that demand goes up with a fall in price and goes down with a rise in price. But an increase in price will bring down the demand if at the same time the income of the consumer has also increased. 2. Necessaries of Life : Law of Demand is not applicable in the case of necessaries of life also. An increase in the price of flour will not bring down its demand. Likewise a fall in its price will not very much increase the demand for it. 3. Fear of Shortage in Future : If there is a fear of shortage of a commodity in future its demand will increase in the present as people would start storing it. ‘But according to the Law of Demand its demand should go up only when its price falls. 4. Fear of a Rise in Prices in Future : Similarly if the people think that the price of a particular, commodity will increase in future, they will store it. In other words, the demand of that commodity shall increase at the same price. But the Law of Demand states that demand should go up only if price will lower the demand. 5. Articles of Distinction : This law does not hold good in case of those commodities which confer, social distinction. When the price of such commodities goes up, their demand shall also increase. For .example, an increase in the price of demand will raise its demand and a fall in price will lower the demand. Giffin Goods : Sir Robert Giffin observed that sometimes people buy less of a good at a lower price and more of a good at a higher price. He cited the example of low-paid British wage-earners. During the early period of the nineteenth century, a rise in the price of bread as before. Hence, al such inferior goods are known as Giffin Goods and they are considered to be an exception to the Law of Demand. Ignorance : It is possible that a consumer may not be aware of the previous price of a commodity. In this case he might start purchasing more of a commodity when its price has actually gone up. PRICE ELASTICITY OF DEMAND We have discussed in previous chapters that when the price of a good falls, its quantity demanded rises and when the price of the good rises, its quantity demanded falls. This is generally known as law of demand. This law of demand indicates only the direction of change in quantity demanded in response to a change in price. This does not tell us by how much or to what extent the quantity demanded of a good will change in response to a change in its price. This information as to how much or to what extent the quantity demanded of a good will change as a result of a change in its price is provided by the concept of elasticity of demand. The concept of elasticity has a very great importance in economic theory as well as in engineering economics. VARIOUS CONCEPTS OF DEMAND ELASTICITY It is price elasticity of demand which is usually referred to as elasticity of demand. But, besides price elasticity of demand, there are various other concepts of demand elasticity. As we have seen in earlier chapters that demand for a food is determined by its price, incomes of the people, prices of related goods, etc. Quantity demanded of a good will change as a result of a change in the size of any of these determinants of demand. The concept of elasticity of demand therefore refers to the degree of responsiveness of quantity demanded of a good to a change in its price, income or prices of related goods. Accordingly, there are three kinds of demand elasticity : price elasticity, income elasticity, and cross elasticity. Price elasticity of demand relates to the responsiveness of quantity demanded of a good to the change in its price. Income elasticity of demand refers to the sensitiveness of quantity demanded to the change in income. Gross elasticity of demand means the degree of responsiveness of demand of a good to a change in the price of a related good, which may be either a substitute for it or a complementary with it. Besides these three kinds of elasticities there is another type of elasticity of demand called elasticity of substitution which refers to the change in quantity demanded of a good in response to the change in its relative price alone, real income of the individual remaining the same. PRICE ELASTICITY OF DEMAND Price elasticity means the degree of responsiveness or sensitiveness of quantity demanded of a good to changes in its prices. In other words, price elasticity of demand is a measure of the relative change in quantity purchased of a good in response to a relative change in its price. Price elasticity can be precisely defined as “the proportionate change in quantity demanded in response to a small change in price, divided by the proportionate change in price”. Thus, Proportion ate change in quantity demanded PriceElasticity Proportion ate change in price Change in quantity demanded  Quantity demanded Changein Price Price or, in symbolic terms q qqp e p p q p p q p =  qp q p =  p q where, e stands for price elasticity p q stands for quantity p stands price  stands for infinitesimal change. Mathematically speaking, price elasticity of demand (c ) is negative, since the p change- in quantity demanded is in opposite direction to the change in price. When price falls, quantity demanded rises and vice versa. But for the sake of convenience in understanding the magnitude of response of quantity demanded to the change in price we ignore the negative sign and take into account only the numerical value of the elasticity. Thus if 2% change in price leads to 4% change in quantity demanded of good A and 8% change in that of B, then the above formula of elasticity will give the value of price elasticity of good A equal to 2 and of good B equal to 4. It indicates that the quantity demanded of good B changes much more than that of good A in response to a given change in price. But if we had written minus signs before the numerical values of elasticities of two goods, that is, if we had written the elasticities as —2 and —4 respectively as strict mathematics would require us to do, then since —4 is smaller than —2, we would have been misled in concluding that price elasticitiy of demand of B is less than that of A. Types of price elasticity Different products react differently to the price change. A price change for a essential product such as rice has little impact on demand while the price change in other products has huge impact on demand. This gives rise to the different types of price elasticities. Price elasticities are generally classified into the following categories. • Perfectly elastic demand • Absolutely inelastic demand or perfectly inelastic defrrand • Unit elasticity of demand • Relatively elastic demand • Relatively inelastic demand 1. Perfectly elastic demand (e = ∞) p Here there is no need for reduction in price to cause an increase in demand, f this be the case, a firm can sell all the quantity it wants at the prevailing price, but the firm can sell none at all at even a slightly higher price. Here the demand curve is horizontal. Y Price P D 0 X Quantity demanded Fig. 8 : Perfectly elastic demand curve 2. Absolutely inelastic demand or perfectly inelastic demand (e =0) : p Absolutely inelastic demand is where a change in price howsoever large, causes no change in the quantity demanded of a product. Here, the shape of the demand curve is vertical. Some examples of absolutely inelastic demand are the demand of essential commodities such as rice, wheat etc. whose change is price does not affect the quantity demanded. Y D Price 0 X Quantity Demanded Fig. 9 : Absolutely inelastic demand 3. Unit elasticity of demand (e = 1) : p Unit elasticity is where a given proportionate change in price causes and equal proportionate change in the quantity demanded of the product. The shape of the demand curve here is that of a rectangular hyperbola. Y Price D 0 X Quantity Demanded Figure 10 : Unit Elasticity of Demand 4. Relatively Elastic of Demand (e 1) : p It is where a reduction in price leads to more than proportionate change demand. Here the shape of the demand curve in flat. Y Price P1 P2 D 0 X Q1 Q2 Quantity Demanded Fig. 11 : Relatively elastic of demand 5. Relatively in elastic demand (e 1) : p It is where a decline in price leads to less than proportionate increase in demand. Here the shape of the demand curve is steep. Y Price P1 P2 D 0 X Q1 Q2 Quantity Demanded Figure 12 : Relatively in elastic of demand Factors determining price elasticity of Demand: The elasticity of demand depends on the following factors namely 1. Nature of the product 2. Extent of usage 3. Availability of substitutes 4. Income level of people 5. Proportion of the income spent of the product 6. Urgency of demand and 7. Durability of a product. Let us have a brief explanation of these points 1. Nature of the product The demand for products that fall in the category of necessities (eg. Rice, salt, wheat etc) are usually inelastic. This is because their demand do not change even when there is a change in price. On the other hand the demand for luxuries (TV's, washing machines etc) are elastic where even a small change in price reflects on a huge change in the demand 2. Extent of usage: If a product has varied usage (eg. steel, aluminums, wood etc) then it has a comparatively elastic demand. For example, if the price of teak wood falls then its usage in many areas will be increased and the opposite happens when the price rises, the usage in some quarters will be cut down while the usage in other and will be the same. 3. Availability of substitutes: When a product has many substitutes then its demand will be relatively elastic. This is because if the price of one substitute goes down then customers switch to that substitute and vice versa. Products without substitutes or has weak substitutes have relatively inelastic demand. 4. Income level of people: People with high income are less affected by price changes in products while people with low income, are highly affected by price rise. People with high income will not change their buying habits because of the increase in price of either essential commodities or luxuries while other will cut back on purchase of certain commodities to compensate for the essential commodities if there is a price increase. 5. Proportion of income spent on the commodity: When a person spends only a very small part of his income on certain products (match boxes, salt etc) the price change in these products does not materially affect his demand for the product. Here the demand is inelastic. 6. Urgency of Demand: If a person requires buying a product immediately no matter what or no other go but to-buy a product at that point of time, with no substitutes, the demand for that product becomes inelastic. For example if one is building a lodge and is in urgent need for completing the construction then, any price change in cement or bricks or steel etc will have little impact on the demand for those products. THEORY OF PRODUCTION The act of production involves the transformation of inputs into outputs. The word production in economics is not merely confined to effecting physical transformation in the matter, “It also covers the rendering of services such as transporting, financing, wholesaling and retailing. Laws of production, or in other words, the generalizations regarding relations between inputs and outputs developed in the chapter will apply to all these types of production.

Advise: Why You Wasting Money in Costly SEO Tools, Use World's Best Free SEO Tool Ubersuggest.