Principles of Engineering Economics (2).pdf

Concept of Utility, Law of Diminishing Marginal Utility – Concept, Law of Diminishing Return – Concept, Law of Demand & Supply: Meaning and Determinants of Demand. Demand Function, Law of Demand, Market Demand, Elasticity of demand. Types of elasticity, Measurement of elasticity. Significance and uses of the elasticity. Meaning and Determinants of Supply, Law of supply. Equilibrium of demand and supply i.e. price determination. Competition – Concept, Types (Monopoly, Oligopoly, etc.)

1. Principles of Engineering
Economics
-Prof Ms. S M Gujrathi

2. Syllabus
Concept of Utility, Law of Diminishing Marginal Utility – Concept, Law of
Diminishing Return – Concept, Law of Demand & Supply: Meaning and
Determinants of Demand. Demand Function, Law of Demand, Market
Demand, Elasticity of demand. Types of elasticity, Measurement of elasticity.
Significance and uses of the elasticity. Meaning and Determinants of Supply,
Law of supply. Equilibrium of demand and supply i.e. price determination.
Competition – Concept, Types (Monopoly, Oligopoly, etc.)
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

3. ECONOMICS
●Economics is the science that deals with the production and
consumption of goods and services and the distribution and
rendering of these for human welfare.
●The following are the economic goals
○A high level of employment
○Price stability
○Efficiency
○An equitable distribution of income
○Growth
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

4. Concept of utility
It is a subjective pleasure or usefulness that a person derives from consuming
good or services
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

5. Marginal Utility and Law of diminishing marginal utility
The increment in his
utility is called
marginal utility
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

6. Law of diminishing marginal utility
The law of diminishing marginal
utility states that as the amount
of good consumed imncreases,
the marginal utility of that good
tends to diminish
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

7. Law of Demand
The will to purchase and the ability
to pay for the particular commodity
is called the demand
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

8. Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

9. Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

10. Limitations of law of demand
1.Change in taste or fashion
2.Change in income
3.Change in other prices
4.Discovery of substitutes
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

11. INDIFFERENCE CURVE
In engineering economics, an indifference curve represents
a graphical tool used to analyze the trade-offs between two goods
or alternatives that provide the same level of utility or satisfaction
to a decision-maker. The concept is borrowed from
microeconomics, where it helps to understand how people make
choices between different goods when their overall satisfaction
remains constant.
In the context of engineering economics, it’s used to
compare different investment or project alternatives, assessing
how one might be indifferent between the two choices due to
their perceived equal benefit or cost-effectiveness.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

12. Imagine you’re running a manufacturing company, and you need to choose between two machines to improve production. The two options have
different initial costs and operating costs. You need to decide which one provides a better value for the company in terms of total cost over time.
●Machine A:
○Initial cost: $10,000
○Annual operating cost: $2,000
○Expected life: 5 years
●Machine B:
○Initial cost: $8,000
○Annual operating cost: $3,000
○Expected life: 5 years
In this case, we are looking at two factors:
1.Initial investment (the cost of buying the machine).
2.Annual operating cost (the cost of maintaining and running the machine).
Now, let’s assume you want to compare the two machines in terms of their total cost over 5 years. The total cost would include both the initial
cost and the operating cost over the 5 years.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

13. Total Cost Calculation for Each Machine
Machine A:
●Initial cost = $10,000
●Annual operating cost = $2,000
●Total operating cost over 5 years = $2,000 × 5 = $10,000
●Total cost for Machine A = Initial cost + Total operating cost = $10,000 + $10,000 = $20,000
Machine B:
●Initial cost = $8,000
●Annual operating cost = $3,000
●Total operating cost over 5 years = $3,000 × 5 = $15,000
●Total cost for Machine B = Initial cost + Total operating cost = $8,000 + $15,000 = $23,000
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

14. Now, What Does the Indifference Curve Tell Us?
An indifference curve would be used to represent different combinations of initial
cost and annual operating cost that would result in the same total cost for both
machines over 5 years. In simple terms, it shows how a trade-off between initial cost
and operating cost could still result in the same overall cost.
For example:
●What if you reduce the operating cost of Machine A? You could still end up
with the same total cost as Machine B.
●Or, what if you increase the initial cost of Machine A a little bit? Could the total
cost of Machine A still equal the total cost of Machine B?
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

15. Elasticity of demand
Elasticity of demand measures how sensitive the quantity demanded of a good is to a
change in its price. In simpler terms, it shows how much demand for a product or
service increases or decreases when its price changes.
●If demand changes significantly with a price change, we say the demand is
elastic.
●If demand changes very little with a price change, we say the demand is
inelastic.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

16. Formula for Elasticity of Demand
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

17. Types of Elasticity
1.Price elasticity
2.Income elasticity
3.Cross elasticity
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

18. Price Elasticity
Price Elasticity of Demand (PED) refers to the degree of responsiveness of the quantity demanded of a good
to a change in its price. In other words, it measures how much the demand for a product increases or decreases
when its price changes.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

19. Price Elasticity
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

20. 2. Income elasticity
Income Elasticity of Demand (YED) measures the responsiveness of the quantity demanded of a
good or service to a change in consumer income. It shows how demand for a product changes as
consumer income changes.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

21. 3. Cross Elasticity
Cross Elasticity of Demand (XED) measures how the quantity
demanded of one good changes in response to a change in the
price of another good.
It helps us understand the relationship between two goods—
whether they are substitutes or complements.
It tells us if two products are:
●Substitutes (like tea and coffee)
●Complements (like printers and ink)
●Unrelated (like shoes and apples)
Example - Tea and Coffee, The rise in price of tea may increases the demand for coffee
The cross elasticity of complementary goods is positive and that between substitute is negative
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

22. Elastic and Inelastic demand
When a small change in price leads to a great change in demand, the demand is
said to be elastic or sensitive.
If a big change is price is followed only by a small change in demand, it is said to be
a case of the elastic demand
For example - prices of salt and TV
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

23. Five cases of Elasticity - Perfect Elasticity /
Infinite Elasticity (∞ Elasticity)
Perfect elasticity or infinite elasticity refers to a
situation where a very small change in price leads
to an infinite change in quantity demanded.
Suppose a component (like a screw used in mass
production) is available from multiple suppliers at ₹5
per unit.
●If one supplier charges ₹5, they can sell any
quantity.
●If they raise the price even slightly to ₹5.01,
demand becomes zero, as buyers will switch
to other suppliers.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

24. Perfectly Inelastic Demand / Zero Elasticity (Elasticity = 0)
Perfect elasticity or infinite elasticity refers to a
situation where a very small change in price leads
to an infinite change in quantity demanded.
A factory requires a specific type of machine
lubricant in a fixed quantity every month.
●Even if the price increases or decreases, the
factory still needs the same amount to function.
●Therefore, demand is perfectly inelastic.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

25. Relatively Inelastic Demand
Relatively inelastic demand means that percentage change in quantity
demanded is less than the percentage change in price.
In other words, demand changes, but not much, even when the price
changes significantly. Essential goods like salt, petrol
An engineering workshop uses a specific brand of cutting tool.
●Price increases by 20%, but quantity demanded decreases by only 5%.
●Elasticity = 5% / 20% = 0.25 → Relatively inelastic.
A power plant needs a specific grade of coal or lubricant. Even if prices
rise, demand drops only slightly because:
●There are few substitutes.
●It’s essential for operations.
●Switching involves high cost or delay.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

26. Relatively Elastic Demand
Relatively elastic demand means that the
percentage change in quantity demanded is
greater than the percentage change in price.
In other words, consumers respond significantly
to even small price changes. Luxury items like sofa,
TV, Refrigerator
A manufacturer reduces the price of a non-essential
product (e.g., an advanced measuring tool) by 10%,
and the demand rises by 25%.
●Elasticity = 25% / 10% = 2.5 → Relatively elastic
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

27. Unit Elasticity of Demand
Unit elasticity occurs when the percentage change in
quantity demanded is exactly equal to the percentage
change in price.A company increases the price of a
product by 10%, and the demand decreases by 10%.
●Elasticity = 10% / 10% = 1 → Unit elastic demand
Suppose a company sells general-purpose industrial
gloves.
●If the price changes slightly, and demand adjusts
proportionally, the product has unit elasticity.
●Often used in pricing strategies where revenue
stability is important.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

28. Law of Diminishing Returns
The Law of Diminishing Returns states that:
As more and more units of a variable input (like labor) are added to fixed inputs (like
land or machinery), the marginal product (additional output) of the variable input will
eventually decline, holding all other factors constant.
Explanation:
In the short run, at least one factor of production is fixed. When you keep increasing the
variable input, initially the output increases at an increasing rate, then at a diminishing rate,
and finally may even decline.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

29. Law of Diminishing Returns
Example:
●Suppose a farmer has a fixed size of land (say 1 acre).
●He adds more workers to cultivate that land.
●Initially, output increases significantly.
●After a certain point, adding more workers leads to overcrowding, and the
extra output per worker starts to fall.
●Eventually, adding more labor might even reduce total output.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

30. MR - Marginal return
AR - Avg. Return
TR - Total Return
The graph visually explains how
increasing variable inputs (like
labor) initially increase output, but
eventually lead to diminishing and
even negative returns.
It helps producers understand
where to optimize resource use
for maximum productivity.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

31. Law of Supply
Definition:
The Law of Supply states that, other things remaining constant, the quantity of a good
supplied increases with an increase in its price and decreases with a fall in its price.
In simpler terms:
Higher the price, greater the quantity supplied; lower the price, lesser the quantity
supplied.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

32. Explanation with an Example:
●Let’s say a farmer produces wheat:
●At ₹10 per kg, he is willing to supply 100 kg.
●At ₹15 per kg, he supplies 150 kg.
●At ₹20 per kg, he supplies 200 kg.
●As the price increases, he is motivated to produce and sell more to earn
higher profit.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

33. Determinants of Supply
These are the factors that influence how much of a product a seller is willing to supply:
●Price of the good – Main factor (law of supply).
●Prices of inputs – If raw materials become costlier, supply may decrease.
●Technology – Better tech increases supply.
●Government policies – Taxes or subsidies affect supply.
●Price of related goods – If another product is more profitable, supply may shift.
●Future expectations – If higher future prices are expected, supply might be held back now.
●Natural conditions – Weather affects agricultural supply.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

34. Relationship Between Demand and Supply
Factor Demand Supply
Price ↑ Quantity demanded ↓ Quantity supplied ↑
Price ↓ Quantity demanded ↑ Quantity supplied ↓
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

35. Equilibrium Point:
●The point where demand = supply is called equilibrium.
●At this point, the market is stable — there is no shortage or surplus.
●The corresponding price is called Equilibrium Price, and the quantity is
Equilibrium Quantity.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

36. Price Determination:
●If demand > supply →
shortage → price increases.
●If supply > demand → surplus
→ price decreases.
●Market automatically moves
toward equilibrium through
price adjustments.
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

37. Competition – Concept & Types
Concept of Competition:
●Competition refers to the rivalry among sellers to attract customers and increase
sales.
●It influences pricing, quality, innovation, and consumer choices.
Types of Market Structures (Competition):
Perfect Competition:
Monopoly:
Monopolistic Competition:
Oligopoly:
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

38. FeaturePerfect Comp.MonopolyMonopolistic Comp.Oligopoly
Sellers Many One Many Few
Product Identical Unique Differentiated Similar/Diff.
Price Control None High Some Some
Entry Barriers None High Low High
ExampleWheat MarketRailways Restaurants Telecom
Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE

39. Prof S M Gujrathi, Dept. of Mech Engg., Sanjivani COE