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.