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Session Objectives
Course: Civil Engineering
UNIT IV
33
Study different laws in economics and application in Civil Engineering.
34
Material (manufacturer&
Skilled
supplier)
& unskilled Labour force
Financial instructions
Administrative staf
Allied products Research & development
1. By A. Marshall
It is the study of mankind in the ordinary business of life, it examines that part of
individual & social action which is most closely connected with the attainment & with
the use of material requisite well being.
2. By L. Robbins
Economics is a science which studies human behavior as a relationship between ends &
scarce means which have alternative uses.
3. By J. M. Keynes
It is the study of administration of scarce resources & of the determinants of income
employment.
In short economics can be defined as a social science concerned with proper uses &
allocation of resources for the achievement & maintenance of growth with stability.
1. The consumer gets maximum satisfaction of the goods or services for which he is paying
2. Man is sensible to balance marginal cost & marginal money gains
3. All the theories are based on the behavior of an average man i.e. their actions cannot be
reduced to scientific laws.
1. Market: It is a set of arrangement by which buyers & sellers are in contact to exchange
goods & services.
2. Free market: The market in which government does not intervene.
3. Gross investment: It is the money used for the production of new capital goods &
improvements in existing goods.
4. Net investment: It is the gross investment minus the depreciation of the existing capital
stock.
5. Assets: It is what the firm owns.
6. Liabilities: They are what the firm owes.
7. Physical capital: it is machinery, equipment &building used in producing future wealth
8. Firms revenue: It is the amount which is earned by selling goods or services in a given
period such as a year.
9. Wealth: It is addition of capital & land.
10. Goods: the physical commodities such as steel, fruits, car etc.
11. Price: It is amount of money given in exchange for a commodity or service.
12. Costs: these are the expenses incurred by the firm in producing goods & services during
the period.
13. Profit: They are excess of revenues over costs
14. Value of a commodity: it is decided by its utility & ones sentiments & expresses the
power of purchasing other goods.
15. Money: money is anything that has general acceptance & passes freely from hand to
hand as a medium of exchange.
16. Inventory: Goods held in stock by the firm for the production processing to manufacture
new goods
17. Want: It is a desire that can be fulfilled & supported by the ability & willingness to
satisfy it.
18. Services: They are the activities such as theaters which can be consumed or enjoyed at
the instant they are produced.
19. Utility: It is the capacity of a commodity to satisfy human wants & depends upon the
intensity of want which satisfies.
Law of Diminishing Utility:
The law is stated by Marshall as The additional benefit which a person derives from
a given increase in his stock of a thing diminishes with every increase in stock that he
already has.
Marginal utility:
- It can be defined as the change in total utility resulting from a one unit change in
consumption of a commodity per unit time.
- A person who is purchasing the commodity will constantly weighing it against the
price he is giving for it. He will continue till the marginal utility equals the price. E.g.
he will buy a mango for Rs. 10, but if he wants to buy two mangoes he will not pay
Rs. 20, but will try to bargain on Rs. 18 only.
- Thus the marginal utility for the second mango will be Rs. 8 & not Rs. 10.
- Thus we can also define marginal utility as addition is made to the total utility by the
consumption of last utility considered just worthwhile.
- Consider one more example of a person having only one shirt that gives him
maximum utilization. As number of shirts goes on increasing, the utility from each
additional shirt goes on decreasing
Marginal utility
8
5 Marginal utility
4.4.2 Assumptions:
- The commodity should be taken in suitable units. e.g. the water for drinking for a thirsty
man should be measured in glass as the unit & not mere spoonful.
- The consumption of commodity should be at the same time. The foods taken at 10a.m. &
at 2p.m. have the same utility.
- The taste of consumer remains the same.
- Consumer is an average man without having a strong desire for commodity & not a
miser.
- Income of consumer should remain same
- There is no change in fashion.
The law does not hold good for the collection of rare goods & for money but
holds good for all types of satisfaction whether good or bad.
At the time of purchasing a commodity we are continuously weighing in our mind a little
more or little less of it. It means that we are balancing the marginal utility of commodity
& money.
e.g. While purchasing one dozen of banana, if unit price of it seems to be high,
then we may think of less no. of bananas or bananas of small size & less price. Similarly
in the reverse way, if the price per dozen less we may think of purchasing another fruit
which will match our budget. Thus we are continuously substituting on commodity with
another with money as a bridge & aiming at maximum satisfaction. This principle is
called as law of substitution or law of economy of expenditure or law of indifference or
law of maximum satisfaction.
The law of substitution can also be stated with the help of following graph:
H
D A
Ub Ua
G C A
Consider a customer who is having Rs.10 to spend on items A &B. He spends Rs. 6
on item A & Rs. 4 on item B which is giving him maximum satisfaction. It means that the
marginal utilities for both the items are equal. Now, consider that he spends Rs. 7 on item
A & Rs. 3 on item B, the marginal utility becomes unequal. The gain in utility of A
represented by area AEFB is less than the loss in utility of B represented by area CGHD.
As a result the marginal utility becomes unequal giving less satisfaction to him.
- The comparison between expected satisfaction with given amount of money is not always
possible, since most of the expenditure by the consumers are governed by their habits. So
the law of substitution may not hold good for small purchases but may be proved in case
of big expenditures.
- The consumer may not be aware of substitute goods that give him more satisfaction.
- People do not like to change their habits or customs & hence for many goods a little
substitution takes place.
- The law is not applicable to the goods that can not be divisible into small bits to enable
the consumers to equalize the marginal utilities.
- The law does not hold good for the free goods as the consumer does not have to pay for
it.
4.5.1 Demand
It is defined as, an economic principle that describes a consumer's desire and willingness
to pay a price for a specific good or service. Holding all other factors constant, the price of a
good or service increases as its demand increases and vice versa.
4.5.2 Supply
It is defined as, the quantity of a good; sellers wish to sell at each conceivable price.
Just like the supply curves reflect marginal cost curves, demand curves are determined by
marginal utility curves. Consumers will be willing to buy a given quantity of a good, at a given
price, if the marginal utility of additional consumption is equal to the opportunity cost
determined by the price, that is, the marginal utility of alternative consumption choices. The
demand schedule is defined as the willingness and ability of a consumer to purchase a given
product in a given frame of time.
It is aforementioned, that the demand curve is generally downward-sloping; there may be rare
examples of goods that have upward-sloping demand curves. Two different hypothetical types of
goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and
Veblen goods (goods made more fashionable by a higher price).
By its very nature, conceptualizing a demand curve requires that the purchaser be a
perfect competitorthat is, that the purchaser has no influence over the market price. This is true
because each point on the demand curve is the answer to the question "If this buyer is faced with
this potential price, how much of the product will it purchase?" If a buyer has market power, so
its decision of how much to buy influences the market price, then the buyer is not "faced with"
any price, and the question is meaningless.
Like with supply curves, economists distinguish between the demand curve of an
individual and the market demand curve. The market demand curve is obtained by summing the
quantities demanded by all consumers at each potential price. Thus, in the graph of the demand
curve, individuals' demand curves are added horizontally to obtain the market demand curve.
1. Income.
4. Consumers' expectations about future prices and incomes that can be checked.
The law of demand states that, if all other factors remain equal, the higher the price of a
good, the less people will demand that good. In other words, the higher the price, the lower the
quantity demanded. The amount of a good that buyers purchase at a higher price is less because
as the price of a good goes up, so does the opportunity cost of buying that good. As a result,
people will naturally avoid buying a product that will force them to forgo the consumption of
something else they value more. The chart below shows that the curve is a downward slope.
A, B and C are points on the demand curve. Each point on the curve reflects a direct
correlation between quantities demanded (Q) and price (P). So, at point A, the quantity
demanded will be Q1 and the price will be P1, and so on. The demand relationship curve
illustrates the negative relationship between price and quantity demanded. The higher the price
of a good the lower the quantity demanded (A), and the lower the price, the more the good will
be in demand (C).
To determine the elasticity of the demand curves, we can use this simple equation:
changequantity
Elasticity=
change price
As we mentioned previously, the demand curve is a negative slope, and if there is a large
decrease in the quantity demanded with a small increase in price, the demand curve looks flatter,
or more horizontal. This flatter curve means that the good or service in question is elastic.
Meanwhile, inelastic demand is represented with a much more upright curve as quantity
changes little with a large movement in price.
Like the law of demand, the law of supply demonstrates the quantities that will be sold at
a certain price. But unlike the law of demand, the supply relationship shows an upward slope.
This means that the higher the price, the higher the quantity supplied. Producers supply more at a
higher price because selling a higher quantity at a higher price increases revenue.
A, B and C are points on the supply curve. Each point on the curve reflects a direct
correlation between quantities supplied (Q) and price (P). At point B, the quantity supplied will
be Q2 and the price will be P2, and so on.
A hike in the cost of raw goods would decrease supply, shifting costs up, while a discount
would increase supply, shifting costs down and hurting producers as producer surplus decreases.
Economists distinguish between the supply curve of an individual firm and between the market
supply curve. The market supply curve is obtained by summing the quantities supplied by all
suppliers at each potential price. Thus, in the graph of the supply curve, individual firms' supply
curves are added horizontally to obtain the market supply curve.
Economists also distinguish the short-run market supply curve from the long-run market supply
curve. In this context, two things are assumed constant by definition of the short run: the
availability of one or more fixed inputs (typically physical capital), and the number of firms in
the industry. In the long run, firms have a chance to adjust their holdings of physical capital,
enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long
run potential competitors can enter or exit the industry in response to market conditions. For both
of these reasons, long-run market supply curves are generally flatter than their short-run
counterparts.
1. Production costs: how much a goods cost to be produced. Production costs are the cost of
the inputs; primarily labor, capital, energy and materials. They depend on the technology
used in production, and/or technological advances. See: Productivity.
3. Number of suppliers
4.5.10 Equilibrium
When supply and demand are equal (i.e. when the supply function and demand function
intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its
most efficient because the amount of goods being supplied is exactly the same as the amount of
goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the
current economic condition. At the given price, suppliers are selling all the goods that they have
produced and consumers are getting all the goods that they are demanding.
As you can see on the chart, equilibrium occurs at the intersection of the demand and
supply curve, which indicates no allocate inefficiency. At this point, the price of the goods will
be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.
In the real market place equilibrium can only ever be reached in theory, so the prices of
goods and services are constantly changing in relation to fluctuations in demand and supply.
4.6 The law of maximum satisfaction/ The law of equi-marginal utility/ The
law of substitution.
This law is developed by H.H Gossen so it is also called the second law of Gossen. We
know human wants are unlimited but the resources to fulfill the wants are limited. A rational
consumer always tries to maximize his satisfaction by spending his limited money income.
Consumer can maximize his satisfaction if he is able to equalize the marginal utility derived from
the consumption of different units of several commodities by spending his all limited money
income so that this law is known as law of maximum satisfaction or law of equimarginal utility.
This law is also known as law of substitution because consumer can maximize his/her
satisfaction when he/she substitutes the commodities having high marginal utility instead of
commodities having the low marginal utility.
We can describe this theory by the help of given table and figure:
Suppose income of consumer is Rs 50. There are two commodities i.e. x and y for
consumption. Price of per unit commodity is Rs 10.
On the above table by using Rs 50 consumer can consume all five units of x or five units
of y or combination of both. When he spends all his income on x he gets 40 as total utility and if
he spends all his income on y he gets 30 as total utility. But if he spends his money income on
the combination of both i.e. 3 units of x and 2 units of y he gets 48 as total utility which is the
maximum satisfaction than any other combination. In this situation utility derived from last units
is equal i.e. 8.
Suppose, consumer consumes FG amount of y commodity at that time he must reduce the
consumption of x FG=BC amount. At that time he gets utility area equal to EFGH from y and he
losses the utility area equal to ABCD from x. The area ABCD is greater than the area EFGH. It
means consumer losses more and gains less. So, maximum satisfaction is possible only when
there is equality of marginal utility from different units of same commodity.
Selling Administration
Total cost =Factory cost+ ead + Distribution+ ead
h h
Factory
Factory cost=Prime cost + ead
h
Factory
Direct material cost+ Direct labour cost +
( + Direct expenses ) h
ead
Direct
material
cost
Direct
Factory cost
labour cost
Prime cost
Direct Selling
expense overhead
Factory
overhead
Distribution
overhead
Total cost
Administrati
on
overhead Proffit or
Selling Price
Loss
4.8 Factors affecting price determination
Following are the important factors that affect the price of a product or services:
1. Product Costs
3. Legal Considerations
4. Competition
while fixing the price, it is important and logic to ask some questions like: What is the
cost? What profit should be earned on the sale of products? What can people pay for the product?
etc., the third question is an important question for a marketer. However, many marketers fix the
price in terms of total costs. Total cost is the total of Manufacturing cost, distribution cost and
administration cost. They then add a reasonable profit to it. Selling products or services below
the cost will be dangerous and it may bring loss for the business. To sustain in the business, you
have to sell products above the cost. (There are exception for introducing a new product or in a
new market, manufactures sell product below the cost for a short period.)
4.8.2 Types of costs: For fixing the price, costs can be classified in to two they are:
1. Fixed Costs
2. Variable Costs
Fixed costs are those costs which will not vary with the volume of sale or production.
The manufacturer has to bear some expenses whether he produces 100 pieces a month or 1000
pieces a month. Examples of fixed costs are: Rent for the land or building used for the
manufacturing. Rent for the store room, interest for the borrowed capital etc. These costs also
known as overhead costs. These costs are known as fixed costs and will not change as per the
variation in the production or sales.
Variable Costs are those costs which vary with the level of production. Cost of labor,
electricity, raw materials etc. are varying as per the level of production. These costs can be
controlled by changing the production schedule.
The total of fixed and variable cost is the total cost. Average total cost is the total costs
divided by the number of units produced. Increase in production means the lower the cost would
be. At the same time decrease in production would increase the cost.
A. Internal Factors:
1. Cost:
While fixing the prices of a product, the firm should consider the cost involved in
producing the product. This cost includes both the variable and fixed costs. Thus, while fixing
the prices, the firm must be able to recover both the variable and fixed costs.
The price of the product may also be determined on the basis of the image of the firm in
the market. For instance, HUL and Procter & Gamble can demand a higher price for their brands,
as they enjoy goodwill in the market.
4. Product life cycle:
The stage at which the product is in its product life cycle also affects its price. For
instance, during the introductory stage the firm may charge lower price to attract the customers,
and during the growth stage, a firm may increase the price.
6. Promotional activity:
The promotional activity undertaken by the firm also determines the price. If the firm
incurs heavy advertising and sales promotion costs, then the pricing of the product shall be kept
high in order to recover the cost.
B. External Factors:
1. Competition:
While fixing the price of the product, the firm needs to study the degree of competition in
the market. If there is high competition, the prices may be kept low to effectively face the
competition, and if competition is low, the prices may be kept high.
2. Consumers:
The marketer should consider various consumer factors while fixing the prices. The
consumer factor that must be considered includes the price sensitivity of the buyer, purchasing
power, and so on.
3. Government control:
Government rules and regulation must be considered while fixing the prices. In certain
products, government may announce administered prices, and therefore the marketer has to
consider such regulation while fixing the prices.
4. Economic conditions:
The marketer may also have to consider the economic condition prevailing in the market
while fixing the prices. At the time of recession, the consumer may have less money to spend, so
the marketer may reduce the prices in order to influence the buying decision of the consumers.
5. Channel intermediaries:
The marketer must consider a number of channel intermediaries and their expectations.
The longer the chain of intermediaries, the higher would be the prices of the goods.
Project finance might raise new funds from the following sources:
Loan stock
Retained earnings
Bank borrowing
Government sources
Business expansion scheme funds
Venture capital
Franchising.
4.9.1 Capital
It represents obligations, and is liquidated as money for trade, and owned by legal
entities. It is in the form of capital assets, traded in financial markets. Its market value is not
based on the historical accumulation of money invested but on the perception by the market of its
expected revenues and of the risk entailed.
4.9.2 Equity
Equity is provided by project sponsors (those who have an operational interest in the
contract) or financial investors (those who have only an investment interest). Often the project
sponsor is required by government or lending institutions to invest a certain percentage of equity
capital in the PPP project. This can be done either by the sponsor alone or be contributed by a
consortium of investors. The advantage of funding PPP projects through a consortium of equity
investors is that the consortium can be constituted to minimize project risks by assigning each
consortium member to manage the risks that correspond to their area of functional expertise.
4.9.3 Debt
Debt is defined as an amount owed to a person or organization for funds borrowed. Debt
can be represented by a loan note, bond, mortgage or other agreement stating repayment terms
and interest requirements. These different forms all imply intent to pay back an amount owed by
a specific date, which is set forth in the repayment terms.
Capital appreciation
Dividends
Voting privileges
There are also a few drawbacks of owning equity shares. Although part owners of the
business, common shareholders are in a weaker position. Senior creditors, bondholders and
preferred shareholders have prior claims on the earnings and assets of a company. While interest
payments are guaranteed to bond holders, dividends are payable to shareholders at the discretion
of the directors of a company.
In this sense, the cash flowing from the act of issuing the debenture by the company is
called a debenture capital and is different from any other capital in certain unique ways. One of
the ways in which a debenture capital differs from items like bank loans is the fact that the
remittance of the debenture capital is not hinged on the provision of any type of capital on the
part of the company. In such transactions all the company requires is a sterling reputation in the
business community, which means that the debenture capital may be described as a sort of
unsecured loan. This means that only companies with proven track records or government arms
will qualify for such a means of raising capital.
1) Terms in Economics
2) Various laws
Dictation of Notes
What are cost, price, value?
What is time value of money?
Session outcomes
Que.7 Define annuity. What are different types of annuities. What does Law of Diminishing
Marginal Utility mean? Explain with an example.
Que.10 What is market equilibrium? Explain in short equilibrium price and equilibrium
quantity with an example.
Que. 11 Explain Law of Supply .Give one example of supply schedule and draw supply curve.