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Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
Eefa unit 1
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Eefa unit 1

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  • 1. Engineering Economics & Financial Accounting Unit 1 Definition Economics The study of how the forces of supply and demand allocate scarce resources. Subdivided into microeconomics, which examines the behavior of firms, consumers and the role of government; and macroeconomics, which looks at inflation, unemployment, industrial production, and the role of government. Economics classified as: (a) Microeconomics – the study of individual economic behavior where resources are costly, e.g., how consumers respond to changes in prices and income, how businesses decide on employment and sales, voters’ behavior and setting of tax policy. (b) Managerial economies – the application of microeconomics to managerial issues (a scope more limited than microeconomics). (c) Macroeconomics – the study of aggregate economic variables directly (as opposed to the aggregation of individual consumers and businesses), e.g., issues relating to interest and exchange rates, inflation, unemployment, import and export policies What is Engineering economics? Engineering economics is the application of economic techniques to the evaluation of design and engineering alternatives. The role of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint Managerial Economics -Definition Managerial economics is the science of directing scarce resources to manage cost effectively. It consists of three branches: competitive markets, market power, and imperfect markets. A market consists of buyers and sellers that communicate with each other for voluntary exchange. Whether a market is local or global, the same managerial economics apply. NATURE OF MANAGERIAL ECONOMICS • Managerial economics aims at providing help in decision making by firms. It is heavily dependent on microeconomic theory. The various concepts of micro economics used frequently in managerial economics. Elasticity of demand
  • 2. Marginal cost Marginal revenue Market structures and their significance in pricing policies. • Macro economy is used to identify the level of demand at some future point in time, based on the relationship between the level of national income and the demand for a particular product. It is the level of national income only that the level of various products depends. In managerial economics macro economics indicates the relationship between (a) the magnitude of investment and the level of national income, (b) the level of national income and the level of employment, (c) the level of consumption and the level of national income. • In managerial economics emphasis is laid on those prepositions which are likely to be useful to management. SCOPE OF MANAGERIAL ECONOMICS: 1. Demand analysis and forecasting 2. Production function 3. Cost analysis 4. Inventory Management 5. Advertising 6. Pricing system 7. Resource allocation . MANAGERIAL ECONOMICS AND OTHER DISCIPLINES Managerial economics is closely related to other disciplines. It is intimately related to microeconomic theory, macroeconomic theory, the theory of decision-making, operations research, mathematics, statics and accounting. The management executive makes use of the concepts and methods form all these disciplines.
  • 3. Managerial Economics and Microeconomic Theory Managerial economics is mainly microeconomic in character. Microeconomic theory provides all important concepts and analytical tools to managerial economics. Managerial economic makes use of such micro economic concepts as the elasticity of demand, marginal cost, market structures, short and long-runs and so on. Microeconomic theory mainly deals with the theory of firm and the theory of pricing. The main concepts and analytical apparatus of managerial economics are drawn from these two branches of macroeconomics theory. The study of microeconomic theory, therefore, constitutes an essential condition for the better understanding of the managerial economics. Managerial Economics and Macroeconomic Theory Macroeconomic theory has comparatively less concern with the managerial economics. It is useful to managerial economics mainly in the area of forecasting. Macroeconomic theory being aggregative in character is immense importance in forecasting general business conditions. Managerial economics makes use of such macroeconomic concepts as the National Income and Social Accounting, Propensity to Consume, Marginal Efficiency of Capital, the Multiplier, the Accelerator, Liquidity Preference, Business Cycles, Public Finance and Fiscal Policy; and so on. Since the decisions at a firm level are taken in the board framework of an economic system, it becomes essential conditions. It is in this context, macroeconomic theory is useful to managerial economics. Managerial Economics and the Theory of Decision Making Managerial economics is also closely related to the theory of decision- making. The theory of decision-making is comparatively a new subject. It deals with the processes by which a particular course of action is selected from out of a number of alternatives available. In practice, the theory
  • 4. of decision-making and economic theory come in contrast with each other as they are based on a different set of assumptions. The case method employed in managerial economics is a part and parcel of the theory of decision-making. Managerial Economics and Operations Research Operations research is one of the most important developments in the fields of management science. Even though the roots of operation all areas of administrations requiring planning and control in all areas of administration requiring planning and control. Operations research has been broadly defined as the application of mathematical techniques in solving the business problems. It deals with model building – the construction of theoretical models that helps the decision-making process. The origin of Operation Research can be traced back to the inter- disciplinary research that took place in the United States and other Western countries to solve the complicated operational problems of planning and resource allocation in defense and key disciplines such as engineers, statisticians, mathematicians and other came together and developed models and other apparatus. Since then, these have grown into specialized fields known as Operations Research. Operations research has enhanced the utility of managerial economics in actual practice. Managerial economics has a very close connection with the operations research. The techniques of operations research are highly mathematical in character. One of the popular techniques evolved and very often used is the Linear or Mathematical Programming. It is applied to a variety of problems of choice. Managerial economics makes use of linear programming and other concepts of operations research for dealing with problems involving risk and uncertainty. Managerial Economics and Mathematics Mathematics is another subject with which managerial economics has a very close relation. Recent advancements have compelled the business executives to make use of mathematical concepts and techniques. Mathematics has almost become a part and parcel of the managerial economics. Managerial economics today has become metrical in character. Mathematics is useful in managerial economics in estimating various economic relationships, measuring relevant economic quantities and employing them in decision-making and forward planning. Modern business executive therefore should have the knowledge of geometry, trigonometry, and algebra and also of integral and differential calculus Managerial Economics and Statistics Statistics is also useful in many ways to managerial economics. Managerial economics obtains the basis for the empirical testing of theory from statistics. The importance of statistics to managerial economics also lies in the fact that it provides the individual firm with measures of the appropriate functional relationship involved in decision-making.Since management executives take their decisions in an uncertainly framework, the theory of probability evolved in statistics provides the logic for dealing with such uncertainty. Management executives are constantly confronted with the choice between models neglecting uncertainty and those that involve probability theory. Therefore, there exists a very close relation between statistics and managerial economics.
  • 5. Managerial Economics, Management Theory and Accounting Management theory and Accounting also exercise a profound influence on managerial economics. Since decision-making is mainly the function of management, the developments in management theory do influence managerial economics which helps the process of decisionmaking at the firm level. Modern management theorists now contend that satisfying is the objective of modern firms’ rather than maximizing as thought earlier. Managerial economics cannot afford to ignore these development and changing views of management theorists as they have important bearing on the decision-making process of the firm There also exists a very close relationship between managerial economics and accounting. Accounting refers to the recording of pecuniary transactions of the firm in certain prescribed books. The decision-making process of the firm depends heavily on accounting information. Language of business consists of accounting data and statements. Therefore, managerial economists have to get him acquainted with the concepts and practices of accounting. He should also know the interpretation and use of accounting data. Growing specialization in the form of Cost and Management Accounting has become much common in recent years. Managerial economist has to keep pace with the changing times. Accounting has in fact strengthened the applied bias of managerial economics. TYPES OF FIRMS / TYPES OF BUSINESS ORGANIZATIONS When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. a) Sole Proprietorships The vast majority of small business starts out as sole proprietorships very dangerous. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume "complete personal" responsibility for all of its liabilities or debts. In the eyes of the law, you are one in the same with the business. Merits: • Easiest and least expensive form of ownership to organize. • Sole proprietors are in complete control, within the law, to make all decisions. • Sole proprietors receive all income generated by the business to keep or reinvest. • Profits from the business flow-through directly to the owner's personal tax return. • The business is easy to dissolve, if desired. Demerits: • Unlimited liability and are legally responsible for all debts against the business.
  • 6. • Their business and personal assets are 100% at risk. • Has almost been ability to raise investment funds. • Are limited to using funds from personal savings or consumer loans. • Have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business. • Employee benefits such as owner's medical insurance premiums are not directly deductible from business income (partially deductible as an adjustment to income). b) Partnerships In a Partnership, two or more people share ownership of a single business. Like proprietorships,the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. Yes, its hard to think about a "break-up" when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems. They also must decide up front how much time and capital each will contribute, etc. Merits: • Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement. • With more than one owner, the ability to raise funds may be increased. • The profits from the business flow directly through to the partners' personal taxes. • Prospective employees may be attracted to the business if given the incentive to become a partner. Demerits: • Partners are jointly and individually liable for the actions of the other partners. • Profits must be shared with others. • Since decisions are shared, disagreements can occur. • Some employee benefits are not deductible from business income on tax returns. • The partnerships have a limited life; it may end upon a partner withdrawal or death. c) Corporations
  • 7. A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique "entity", separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. Merits: • Shareholders have limited liability for the corporation's debts or judgments against the corporations. • Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.) • Corporations can raise additional funds through the sale of stock. A corporation may deduct the cost of benefits it provides to officers and employees. • Can Select corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership. Demerits: • The process of incorporation requires more time and money than other forms of organization. • Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations. • Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible form business income, thus this income can be taxed twice. d) Joint Stock Company: Limited financial resources & heavy burden of risk involved in both of the previous forms of organization has led to the formation of joint stock companies these have limited dilutives. The capital is raised by selling shares of different values. Persons who purchase the shares are called shareholder. The managing body known as; Board of Directors; is responsible for policy making important financial & technical decisions. There are two main types of joint stock Companies.
  • 8. (i) Private limited company. (ii) Public limited company (i) Private limited company: This type company can be formed by two or more persons. The maximum number of member ship is limited to 50. In this transfer of shares is limited to members only. The government also does not interfere in the working of the company. (ii) Public Limited Company: Its is one whose membership is open to general public. The minimum number required to form such company is seven, but there is no upper limit. Such company’s can advertise to offer its share to genera public through a prospectus. These public limited companies are subjected to greater control & supervision of control. Merits: • The liability being limited the shareholder bear no Rick& therefore more as make persons are encouraged to invest capital. • Because of large numbers of investors, the risk of loss is divided. • Joint stock companies are not affected by the death or the retirement of the shareholders. Disadvantages: • It is difficult to preserve secrecy in these companies. It requires a large number of legal formalities to be observed. • Lack of personal interest. e) Public Corporations: A public corporation is wholly owned by the Government centre to state. It is established usually by a Special Act of the parliament. Special statute also prescribes its management pattern power duties & jurisdictions. Though the total capital is provided by the Government, they have separate entity & enjoy independence in matters related to appointments, promotions etc. Merits: • These are expected to provide better working conditions to the employees & supported to be better managed. • Quick decisions can be possible, because of absence of bureaucratic control. • More Hexibility as compared to departmental organization. • Since the management is in the hands of experienced & capable directors & managers,
  • 9. these ate managed more efficiently than that of government departments. Demerits: • Any alteration in the power & Constitution of Corporation requires an amendment in the particular Act, which is difficult & time consuming. • Public Corporations possess monopoly & in the absence of competition, these are not interested in adopting new techniques & in making improvement in their working. f) Government Companies: A state enterprise can also be organized in the form of a Joint stock company; A government company is any company in which of the share capital is held by the central government or partly by central government & party by one to more state governments. It is managed by the elected board of directors which may include private individuals. These are accountable for its working to the concerned ministry or department & its annual report is required to be placed ever year on the table of the parliament or state legislatures along with the comments of the government to concerned department. Merits: • It is easy to form. • The directors of a government company are free to take decisions & are not bound by Certain rigid rules & regulations. Demerits: • Misuse of excessive freedom cannot be ruled out. The directors are appointed by the government so they spend more time in pleasing their Political masters & top government officials, which results in inefficient management.
  • 10. MANAGERIAL DECISION
  • 11. Decision making and problem solving are ongoing processes of evaluating situations or problems, considering alternatives, making choices, and following them up with the necessary actions. Sometimes the decision-making process is extremely short, and mental reflection is essentially instantaneous. In other situations, the process can drag on for weeks or even months. The entire decision-making process is dependent upon the right information being available to the right people at the right times.
  • 12. The decision-making process involves the following steps: 1. Define the problem. 2. Identify limiting factors. 3. Develop potential alternatives. 4. Analyze the alternatives. 5. Select the best alternative. 6. Implement the decision. 7. Establish a control and evaluation system. Define the problem The decision-making process begins when a manager identifies the real problem. The accurate definition of the problem affects all the steps that follow; if the problem is inaccurately defined, every step in the decision-making process will be based on an incorrect starting point. One way that a manager can help determines the true problem in a situation is by identifying the problem separately from its symptoms. Identify limiting factors All managers want to make the best decisions. To do so, managers need to have the ideal resources information, time, personnel, equipment, and supplies — and identify any limiting factors. Realistically, managers operate in an environment that normally doesn't provide ideal resources. For example, they may lack the proper budget or may not have the most accurate information or any extra time. Develop potential alternatives Time pressures frequently cause a manager to move forward after considering only the first or most obvious answers. However, successful problem solving requires thorough examination of the challenge, and a quick answer may not result in a permanent solution. Thus, a manager should think through and investigate several alternative solutions to a single problem before making a quick decision. • One of the best known methods for developing alternatives is through brainstorming, Nominal group technique , Delphi technique Analyze the alternatives
  • 13. The purpose of this step is to decide the relative merits of each idea. Managers must identify the advantages and disadvantages of each alternative solution before making a final decision. Evaluating the alternatives can be done in numerous ways. Here are a few possibilities: • • Determine the pros and cons of each alternative. Perform a cost-benefit analysis for each alternative. • Weight each factor important in the decision, ranking each alternative relative to its ability to meet each factor, and then multiply by a probability factor to provide a final value for each alternative. Select the best alternative After a manager has analyzed all the alternatives, she must decide on the best one. The best alternative is the one that produces the most advantages and the fewest serious disadvantages. Sometimes, the selection process can be fairly straightforward, such as the alternative with the most pros and fewest cons. Other times, the optimal solution is a combination of several alternatives. Implement the decision Managers are paid to make decisions, but they are also paid to get results from these decisions. Positive results must follow decisions. Everyone involved with the decision must know his or her role in ensuring a successful outcome. To make certain that employees understand their roles, managers must thoughtfully devise programs, procedures, rules, or policies to help aid them in the problem-solving process. Establish a control and evaluation system Ongoing actions need to be monitored. An evaluation system should provide feedback on how well the decision is being implemented, what the results are, and what adjustments are necessary to get the results that were intended when the solution was chosen.

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