Mechanical BE (Engineering Management and Economics) by IMTS INSTITUTE

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ENGINEERING MANAGEMENT & ECONOMICS

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ENGINEERING MANAGEMENT & MANAGEMENT

CONTENTS:

Unit – I

01-24

Management – Meaning and Definition – Management and Administration – Evolution of Management - Contributions of Henry Fayol, F.W. Taylor and Elton Mayo – Levels of Management – Is management a science or an Art or Profession? – Functions of Management. Unit – II

25-45

Planning : Objectives, Importance, Types, Advantages and Limitations. Methods of Planning: Objectives, Policies, Procedures, Strategies, Programmes, Budgets – Decision Making – Forecasting.

Unit– III

46-73

Organising : Meaning, Objectives and principles of organization – Types of organization – Authority and Responsibility – Delegation – Departmentation – Decentralisation – Span of Management – Organisation chart and manual. Unit– IV Directing –

74-102 Meaning

–

Communication

–

Methods of

Communication

–

Communication Barriers – Leadership – Types of Leaders – Qualities of a good leader – Motivation – Importance of motivation – Maslow’s Need Hierarchy and Herzberg’s two Factor Theory.

Unit– V

103-131

Co-ordination: Concept – Principles - Need Controlling – Need for control – steps in control process – Features of a Good control system – Types of control – Control techniques – Traditional control techniques – Modern control techniques.

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UNIT-VI DEMAND ANALYSIS OBJECTIVES,INTRODUCTION,DEFINITION

132-147

DEMAND,TYPES

DEMAND,THE LAW OF DEMAND,CHANGES IN DEMAND,LAW OF DIMINISHING MARGINAL UTILITY,THE LAW OF EQUI-

MARGINAL UTILITY,INDIFFERENCE

CURVE ANALYSIS,CONSUMER EQUILIBRIUM, ELASTICITY OF DEMAND, DEMAND FORECASTING, UNIT-VII

148-159

COST AND PRODUCTION CONCEPTS OBJECTIVES,INTRODUCTION,COST CONCEPTS RELEVANT TO MANAGERIAL ECONOMICS, DETERMINANTS OF COST, COST OUTPUT RELATIONSHIP,BREAK EVEN ANALYSIS ,PRODUCTION FUNCTION,RETURNS TO SCALE ,ECONOMIES OF SCALE UNIT-VIII

160-177

CAPITAL BUDGETING OBJECTIVES,INTRODUCTION,MEANING OF CAPITAL BUDGETING,TYPES OF CAPITAL BUDGETING DECISIONS, SUPPLY OF CAPITAL – SOURCES OF CAPITAL, CAPITAL RATIONING ,COST OF CAPITAL,PROJECT FEASIBILITY,METHODS OF PROJECT EVALUATION - METHODS OF RANKING INVESTMENT PROPOSALS,PRINCIPLES TO MEASURE CAPITAL PRODUCTIVITY – PROFITABILITY INDEX UNIT-IX

178-197

CONCEPTS OF MARKET STRUCTURE AND MACRO ECONOMICS OBJECTIVES,INTRODUCTION,MARKET STRUCTURE,NATURE AND TYPES OF COMPETITION,PERFECT COMPETITION ,MONOPOLY, MONOPOLISTIC COMPETITION, OLIGOPOLY,PRICE DISCRIMINATION, NATIONAL INCOME, CONSUMPTION FUNCTION, INFLATION, BALANCE OF PAYMENTS,MONETARY POLICY,FISCAL POLICY

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ENGINEERING MANAGEMENT AND ECONOMICS

UNIT – I MANAGEMENT  Engineer Management is concerned with the design, installation, and improvement of integrated systems of people, material, information, equipment, and energy by drawing upon specialized knowledge and skills in the mathematical, physical, and social sciences, together with the principles and methods of engineering analysis and design to specify, predict, and evaluate the results to be obtained from such systems  Scientific discipline, which designs, implements and/or develops models, processes and systems by taking into account the engineering relationships between the management tasks of planning, organizing, leading and controlling and the human element in production, research, marketing, finance and other services.  Engineering management is the fusion of business and engineering principles.

 By having knowledge of economics and management they can forecast or can predict the utility, advantages, disadvantages of the product. also get to know the scope of the product and it's contribution in growth.  Specialized form of management that is concerned with the application of engineering principles to business practice.  Career that brings together the technological problem-solving savvy of engineering and the organizational, administrative, and planning abilities of management in order to oversee complex enterprises from conception to completion.

1. 1 MEANING AND DEFINITION

MEANING MANAGEMENT - “Management” is a wide term. It carries different meanings depending on the context in which it is used. It is variously described as an “activity”, a “process”, and a “group of people” vested with the authority to make decisions. DEFINITION Some important definitions of management are as follows Louis Allen “Management is what manager does” Henry Fayol To manage is “to forecast and plan, to organize, to command, to coordinate, and to control.”

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ENGINEERING MANAGEMENT AND ECONOMICS Elmore Peterson and E.G. Plowman Management is “a technique by means of which the purposes and objectives of a particular human group are determined, clarified and effectuated.” F.W.Taylor “Management is the art of knowing what you want to do and then seeing that it is done in the best and cheapest way.” Koontz and O’Donnell Management is the “Creation and maintenance of an internal environment in an enterprise where individuals, working in groups, can perform efficiently and effectively toward the attainment of group goals. It is the art of getting the work done through and with people in formally organized groups.” From these definitions it can be inferred that the following are the features of management:

1. Management as an activity Management is basically concerned with getting things done with and through other people. The ultimate responsibility of accomplishment of the organizational objectives belongs to management. This entails the performance of several tasks, such as, the production of goods and services, marketing, financing, personnel administration, security, and so on. Understandably, these tasks cannot be performed by a single individual or a small group of individuals. Others have necessarily to be involved in the carrying out of these tasks. Management is vested with authority to use and control all organizational resources including employees of the organization. These resources enable management to perform more and better work as compared to those who do not have access to such resources. But availability of resources creates both on obligation and a risk. The obligation is to make the most efficient use of these resources so as to justify one’s existence in a society which is ever afflicted with scarcity of resources. The risk is that since management has necessarily to depend on others for the accomplishment of its goals, it may not able to use its resources with the desired efficiency, such that it may not be able to survive long enough. 2. Management as a Process

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ENGINEERING MANAGEMENT AND ECONOMICS A process means a systematic way of doing things. Management is described as a process because all managers, irrespective of their individual abilities and aptitudes, engage themselves in inters- related activities with a view to accomplishment of their desired goals. They convert diverse resources people, machines, material, money, time and space into a useful productive enterprise. Integration of unrelated resources into a total system of objective accomplishment is referred to as that process of management which comprises planning, directing, controlling and coordinating of the organizational resources. 3. Management as an Academic Discipline Practice of management has an ancient origin. As human beings realized the need and importance of working in groups, the management process i.e., acquiring and combining the necessary to achieve the group goals also came into existence. However, development of management as an academic discipline is a recent phenomenon. A discipline may be defined as a branch of knowledge or subject of instructions. As a discipline, management refers to a field of study of the principles and practice of management. Attempts to develop the principles and theories of management are relatively recent. However, since management essentially deals with human beings, there can be verified general theory or set of laws for management that may be applied to all situations. 4. Management as a Group It should be remembered that management is only on idea, as such without physical existence. Like science or government, it is an abstraction. But people who carry out management activities and functions are not abstractions. They are human beings endowed with ability to lead and motivate and to bring out the hidden capabilities. The management of a limited company is the board of directors, consisting of executive and non â&#x20AC;&#x201C;executive directors. The executive directors assisting formulating policies with the others members of the board, but they also have day-to-day responsibility for efficient management of the affairs of the company. They do so with the help of sub ordinates who are called functional managers such as production manager, sales manager, personnel manager and so on. The functional managers are assigned specific duties and are delegated necessary authority to carry out their duties. The functional managers on their part have their own sub ordinates who are assigned duties of specific areas or functions, and who report to their respective functional managers.

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1.2. MANAGEMENT AND ADMINISTRATION INTRODUCTION The two terms ‘management’ and ‘administration’ are used interchangeably. There is a lot of controversy on the usage of these two terms. In fact, William Newman makes no distinction between the two terms when he defines administration as guidance, leadership and control of the efforts of a group of individuals towards some common goals. However, there are others who make a distinction. Administration is generally regarded as a higher level activity which is mainly concerned with laying down broad goals and policies. Management, on the other hand, is concerned with the accomplishment of those goals and policies. In the words of Oliver Sheldon, administration is concerned with determination of the corporate policies, coordination of finance, production and distribution, settlement of the compass of the organization and the ultimate control of the executive. On the other hand, management is concerned with the execution of policies within the limits set up by the administration and the employment of the organization for the particular objects set before it. According to Ordway Tead,”Administration is the process and agency which is responsible for the determination of the aims for which an organization and its management are to strive. It establishes the broad policies under which they are to operate, and which gives general oversight to the continuing effectiveness of the total operations in reaching objectives sought. Management, according to him, is the process and agency which directs and guides the operations of an organization in realizing the established aims.”

Differences between Administration and Management

ADMINISTRATION

MANAGEMENT

It is concerned with determining the major

It is concerned with the doing or executive

policies and objectives of the business

Function, the policies and decisions to be

enterprise. It refers to owners of the

Implemented being those laid down by the

enterprise.

administration. It refers to employees of the enterprise.

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ENGINEERING MANAGEMENT AND ECONOMICS Decision making is mainly influenced by the

The scope for its decision making is limited.

force of public opinion, government policies,

At the most, decisions are influenced by the

as also social and religious factors.

values, opinions and beliefs of managers.

It is that part of management which is

It is a general name for the total process of

concerned with the determination and

executive control in industry or commerce. It

carrying out of the procedures by which the

has responsibility for the effective planning

progress of activities is evaluated and

and execution of various operations of the

controlled as per plans.

enterprise.

It refers to owners of the enterprise who by

It refers to employees of the enterprise who,

way of return on the capital invested by

for working within the broad policy

them, receive profits by way of dividends,

guidelines laid down by the administration,

etc.

are paid remuneration in the form of salaries and Sometimes, also a share in the profits.

1.3 CONTRIBUTIONS

1.3.1 Frederick Winslow Taylor (1856 -1915) F.W.Taylor has earned for himself an important place in the history of management thought. He is called the father of scientific management Movement which seeks to apply scientific methods to the problems of management. Some of the important techniques of scientific management are as under: 1. Work study It consists of two main elements, i.e., time study and motion study. Time study is carried out by trained engineers by using a special watch to note the time of commencement and completion of each of the several elements of the job.

Motion study aims at studying the motions performed by a worker while executing a job.

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ENGINEERING MANAGEMENT AND ECONOMICS The job itself is analyzed into individual movements and the standard time for each of the movements is determined as accurately as possible. 2. Application of scientific methods It consists of observation and recording of the facts of a problem situation with a view to determining the best method to perform a job. 3. Incentive method Taylor evolved the differential piece wage rate system to achieve increased productivity. He established two wages ratesâ&#x20AC;&#x201D;one for the worker who achieved or exceeded the standard output, and the other for standard worker.

4. Principles of management Taylor developed a theory on functional authority. He believed that profitability and efficiency could be greatly improved through the use of specialized knowledge and skill. Accordingly, he divided the work of the single foreman into eight functions with a separate person in charge of each function.

5. Experiments Taylor carried out a number of experiments, important among which are: (a) Shoveling, under which he designed different sizes of shovels for different type of materials; and (b) Metal cutting, under which he developed the most effective way of cutting metals while keeping them cool. 6. Standardization Taylor laid down standards as to cost and time for each piece of work and evolved optimum process of production for different products. 7. Mental revolution Taylor was convinced that for effective management, workers and managers had to work in harmony, not as two hostile groups but as partners in mutual progress and prosperity. He emphasized the need for a mental revolution on the part of both workers and management.

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1.3.2 Henry Fayol (1841-1925) Henry Fayol, a French industrialist concentrated on the administrative aspect of scientific management. His contributions are concentrated in his famous book “The general and industrial administration”. Fayol’s famous book falls into two parts.

Fayol divided the industrial activities into six categories. 1. Technical (Production, manufacture) 2. Commercial (Buying, Selling, Exchange) 3. Financial (Search for and optimum use of capital) 4. Security (Protection of property and Persons) 5. Accounting (Balance sheets, Cost statistics) 6. Management (Planning, Organizing, Coordinating, Directing,

Controlling)

Fayol’s fourteen principles of management are

Division of work

Authority and responsibility

Discipline

Unity of command

Unity of direction

Subordination of individual interest to general interest

Remuneration of personnel

Centralization

Scalar chain

10.

Order

11.

Equity

12.

Stability tenure of personnel

13.

Initiative

14.

Esprit decorps

Division of work Work should be divided in a proper way with reference to the available time. In general worker on the same job and the managers on the same duty acquire ability and accuracy which increase their output.

2. Authority and responsibility

Authority is the power given to a person to get work from his subordinates.

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Responsibility is the kind and amount of work expected from a man by his superior. One of the essential elements of a good management is delegation of authority to the lower levels of management and fixing responsibility on town. 3.

Discipline Discipline is very essential for the smooth running of organization. To Fayol, discipline will result from good leadership at all levels of the organization, fair agreements and judiciously enforced penalties for infractions.

Unity of command An employee must receive orders and instructions from one supervisor only. Multiple commands will cause confusions. A sound management should avoid dual commands.

5. Unity of Direction Unity of direction signifies each group of activities having the same objective must have one head and one plan. All the groups should coordinate and work together to achieve the common goal.

6. Subordination of individual interest to general interest Every employee is working in an organization and interest is to earn money to meet his personal needs. The general interest of the organization is development and progress of the organization. The employees should give importance first to the general interest than his personal interest. It will lead to effective management of the organization. 7.

Remuneration of personnel Remuneration should be fair for both employees and employers. The wage

payment

systems should satisfy the employees.

8. Centralization The organization centralized when the power is concentrated with one person. If the power is fully distributes to the subordinates of the organization is fully decentralized. For effective management of people decentralization is necessary. Decentralization helps to take a quick decision on all important problems. 9. Scalar chain

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ENGINEERING MANAGEMENT AND ECONOMICS Scalar chain principle states that instructions and orders should be sent from the top management to the lower management.

10. Order Two types of order are: 1) Materials order 2) Social order In any organization materials and for men are correct places provided. So that materials can be easily taken out and men easily located and also save time. Materials order “A place for everything and everything in its place”. Social order “A place for everything and everyone in place”. 11. Equity Equity refers to the treatment of employees equally. Equal treatment of the employees helps to achieve organizational goals. 12. Stability tenure of personnel A high employee turnover rate is not good for the efficient functioning of any organization. 13. Initiative It is concerned with thinking and execution of a plan. When employees come forward with new ideas, they must be encouraged by the superiors. It will create the morale of the employees. 14. Esprit de corps This means union is strength. In organization employees should be harmony and unity. It improves employee moral. 1.3.3 Elton Mayo Mayo was the leader of a team from the Harvard University which, in cooperation with the western electric company of Chicago, conducted the famous hawthrone experiments at the hawthrone work of the company.

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The hawthrone experiments highlighted the importance of the workerâ&#x20AC;&#x2122;s mental attitude in raising the level of output. They showed that workers would willingly accept any change in their jobs, work methods or technology, provided the need for such change was convincingly explained to them. Mere logicality or rationality of a change would not cut much ice with them. They must be satisfied that the change was aimed at promoting the organizations as also their own interests. Findings derived from the hawthrone experiments have been the source of the wealth of information on individual and group behavior

1.4 REFERENCES Check your Progress FILL UPS 1. Management is basically concerned with -----------------------------------

2. A discipline may be defined as a branch of ---------------------------------3. ----------------------is generally regarded as a higher level activity which is mainly concerned with laying down broad goals and policies. 4. Management, on the other hand, is concerned with the accomplishment of those ----------------------------------

5. ------------------------ is carried out by trained engineers by using a special watch to note the time of commencement and completion of each of the several elements of the job. 6. -------------------------- aims at studying the motions performed by a worker while executing a job. The job itself is analyzed into individual movements and the standard time for each of the movements is determined as accurately as possible. POINTS TO REMEMBER 1. Authority It is the power given to a person to get work from his subordinates. 2. Responsibility

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ENGINEERING MANAGEMENT AND ECONOMICS It is the kind and amount of work expected from a man by his superior. One of the essential elements of a good management is delegation of authority to the lower levels of management and fixing responsibility on town. 3. Materials order “A place for everything and everything in its place”. Social order “A place for everything and everyone in place”. 4. Equity refers to the treatment of employees equally. Equal treatment of the employees helps to achieve organizational goals. 5. The hawthrone experiments highlighted the importance of the worker’s mental attitude in raising the level of output. MODEL QUESTIONS WITH ANSWERS 1. Explain the difference between Administration and Management. Answer The two terms ‘management’ and ‘administration’ are used interchangeably. There is a lot of controversy on the usage of these two terms.

In fact, William Newman makes no distinction between the two terms when he defines administration as guidance, leadership and control of the efforts of a group of individuals towards some common goals. However, there are others who make a distinction. Administration is generally regarded as a higher level activity which is mainly concerned with laying down broad goals and policies. Management, on the other hand, is concerned with the accomplishment of those goals and policies. According to Ordway Tead,”Administration is the process and agency which is responsible for the determination of the aims for which an organization and its management are to strive. It establishes the broad policies under which they are to operate, and which gives general oversight to the continuing effectiveness of the total operations in reaching objectives sought. Management, according to him, is the process and agency which directs and guides the operations of an organization in realizing the established aims.”

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2. Differentiation between Administration and Management

ADMINISTRATION

MANAGEMENT

It is concerned with determining the major

It is concerned with the doing or executive

policies and objectives of the business

Function, the policies and decisions to be

enterprise. It refers to owners of the

Implemented being those laid down by the

enterprise.

administration. It refers to employees of the enterprise.

Decision making is mainly influenced by the

The scope for its decision making is limited.

force of public opinion, government policies,

At the most, decisions are influenced by the

as also social and religious factors.

values, opinions and beliefs of managers.

It is that part of management which is

It is a general name for the total process of

concerned with the determination and

executive control in industry or commerce. It

carrying out of the procedures by which the

has responsibility for the effective planning

progress of activities is evaluated and

and execution of various operations of the

controlled as per plans.

enterprise.

It refers to owners of the enterprise who by

It refers to employees of the enterprise who,

way of return on the capital invested by

for working within the broad policy

them, receive profits by way of dividends,

guidelines laid down by the administration,

etc.

are paid remuneration in the form of salaries and Sometimes, also a share in the profits.

3. Describe the contribution of F.W. Taylor. Answer F.W.Taylor has earned for himself an important place in the history of management thought. He is called the father of scientific management Movement which seeks to apply scientific methods to the problems of management. Some of the important techniques of scientific management are as under: 1. Work study It consists of two main elements, i.e., time study and motion study.

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ENGINEERING MANAGEMENT AND ECONOMICS Time study is carried out by trained engineers by using a special watch to note the time of commencement and completion of each of the several elements of the job. Motion study aims at studying the motions performed by a worker while executing a job. The job itself is analyzed into individual movements and the standard time for each of the movements is determined as accurately as possible. 2. Application of scientific methods It consists of observation and recording of the facts of a problem situation with a view to determining the best method to perform a job. 3. Incentive method Taylor evolved the differential piece wage rate system to achieve increased productivity. He established two wages ratesâ&#x20AC;&#x201D;one for the worker who achieved or exceeded the standard output, and the other for standard worker. 4. Principles of management. Taylor developed a theory on functional authority. He believed that profitability and efficiency could be greatly improved through the use of specialized knowledge and skill. Accordingly, he divided the work of the single foreman into eight functions with a separate person in charge of each function.

5. Experiments Taylor carried out a number of experiments, important among which are: (a) shoveling, under which he designed different sizes of shovels for different type of materials; and (b) metal cutting, under which he developed the most effective way of cutting metals while keeping them cool. 6. Standardization Taylor laid down standards as to cost and time for each piece of work and evolved optimum process of production for different products. 7. Mental revolution Taylor was convinced that for effective management, workers and managers had to work in harmony, not as two hostile groups but as partners in mutual progress and prosperity.

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ENGINEERING MANAGEMENT AND ECONOMICS He emphasized the need for a mental revolution on the part of both workers and management. ANSWER FOR FILL UPS

1. Getting things done with and through other people. 2. Knowledge or subject of instructions. 3. Administration 4. Goals and policies. 5. Time study 6. Motion study

1.5 LEVELS OF MANAGEMENT The number of levels of management in an organization will depend on its size, technology and diversity in its range of production. A large concern, for example, will need a number of levels of management so that activities at different centers can be properly planned, organized, directed and controlled. Similarly, a concern which uses complex technology of manufacture in which a product passes through several stages to become the final product will need several levels of management.

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TOP LEVEL MANAGEMENT It is difficult to give a precise definition of the term “top management”. In a technical sense, it means the owners of an organization, i.e., sole proprietor, partners or shareholders. The top level management generally performs the following functions: 1. Setting out general objectives and policies of the business. 2. Laying down guidelines for the departmental heads, i.e., policies as to production, marketing, finance, personnel, public relations, etc. 3. Organizing the business into various sections and departments for the efficient accomplishment of enterprise goals. 4. Marketing appointments to top positions in the company organization, such as the managing director, general manager, secretary, departmental heads, etc. 5. Reviewing the work of executives at different levels and ensuring that their performance is according to the pre-determined plans.

MIDDLE LEVEL MANAGEMENT The main functions of middle level of management 1. To monitor and control the operating performance. 2. To train, motivate and develop the supervisory level. 3. To coordinate among themselves so as to integrate the various activities of a department.

LOWER LEVEL MANAGEMENT The main functions of lower level management 1. To train and develop the efficiency of the workers. 2. To assign jobs to workers. 3. To give orders and instructions. 4. To maintain discipline and good human relations among workers. 5. To report feedback information about workers. 1.6 MANAGEMENT AS A SCIENCE A science may be defined us “representing knowledge gathered by observation and experiment, critically tested, systematically and brought under general principles”. The scientific decision making work as follows:

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ENGINEERING MANAGEMENT AND ECONOMICS 1. Identification of the problem It involves correct recognition of a business problem before attempting a solution. The problem may relate to financing of business operations, dealing with production delays, ensuring supplies of raw materials, excessive expenditure, or wastage etc. Even a correct solution to a wrong problem may serve no purpose any if implemented; it may lead to undesirable consequences. 2. Scientific inquiry It seeks to examine and evaluate alternative courses of action to resolve a given problem, taking into account the factors relevant to the problem and development of solutions. 3. Choice of the best available alternative After analyzing the problem from all angles by using quantitative and non quantitative techniques, duly taking into account the resource position of the business, the best available alternative is selected to resolve the problem. 4. Rigorous control procedure If the decision consistent with and derived from the information processed as above, it is likely to be a correct decision. But the introduction of a strict control procedure to serve as a further check on the correctness of the original decision, it is ensured that the subsequent course of events is exactly as expected from the decision.

5. Validity of principles Ever since the development of scientific management, scientific methods and techniques are being increasingly applied to solve business problems. Problems of a numeric nature are commonly solved through computers using problem solving packages. Conclusion Management is a field of knowledge that seeks to systematically understand why and how men work together to accomplish the stated objectives and to make co operative efforts to more usual man kind.

1.7 MANAGEMENT AS AN ART. An art may be defined as a skill or knowledge in a particular field of activity, or a knock or method of doing a thing.

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1. Past experience Experience is the sum total of knowledge, skill and practice derived from direct observation of, or participation in, events. Only theoretical knowledge about the principles of management may not equip the manager to tackle the problems realizing to work with groups of people. Common sense is implies a reliable ability to judge and decide with soundness, prudence and intelligence. Common sense suggests an average degree of such ability without any specialized knowledge. Only a manager with robust common sense can achieve his objectives of maximum productivity and profitability by proper arrangement, placement and timing of lifeless objects like money, men, material, etc.

2. Managerial skills a. Establishment of the overall purpose or policy of the organization. b. Planning and forecasting; c.

Organization of work, allocation of duties and responsibilities;

d. Giving instructions or orders; e. Checking performance according to plan; and f.

Coordination of work of others.

3. Human understanding The manager one who is exercises the control over the use of the resources of an organization. In this way he has an opportunity to control other human beings. The authority exercised by the manager contributes to the efficiency with which collective activity in the organization may be carried out to achieve the organizational goals. Conclusion Any art has three essential components, namely the artistâ&#x20AC;&#x2122;s vision, knowledge of craft and successful communication. An artistic skill can be developed through training. Management posses all

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ENGINEERING MANAGEMENT AND ECONOMICS these components and can rightly be described as an art which seeks to establish order in conditions of chaos.

1. 8 FUNCTIONS OF MANAGEMENT Business management consists of six important functions. 1. Planning 2. Organizing 3. Staffing 4. Directing 5. Coordinating 6. Controlling 1. Planning Planning in simple is looking ahead. It is preparing for the future. Effective planning leads efficient management. Effective planning provides answers to questions like- What to do? When to do? How to do? Who is to do? The planning process involves the following activities. (a) Determination of the goal of the organization. (b) Formulating policies, rules. Procedures etc. (c) Forecasting the future based on past and present activities. 2. Organizing Organizing establishes harmonious relationship among all the workers of an organization by providing them with suitable authority and responsibility. According to Louis A. Allen â&#x20AC;&#x153;Organization involves identification and grouping the activities to be performed and dividing them among the individuals and creating authority and responsibility relationships among them for the accomplishment of organizational objectivesâ&#x20AC;?. It involves as follows (a) Identification and analysis of activities required. For the attainment organizational objectives. (b) Assignment of duties to the individuals connected. (c) Follow up the activities. 3. Staffing Staffing process involves selecting candidates for positions, fixing salary, training and developing them for effective organizational functions. The manager performs the duties of job analysis, job description etc.

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4. Directing Once plans are made and the organization is created next step is to achievement of objectives of the organization. Directing involves the activities like guiding, supervising and motivating the sub ordinates in their jobs. Motivation helps to increase the performance of the workers. Communication provides with proper information to improve the effective management. Leadership the process by which a manager guide and influences the work of his subordinates. 5. Coordinating The tasks or activities of an organization are classified on basis on their similarity. They are divided among different individuals and departments to achieve the benefits of specialization by way of increased productivity and efficiency. Coordination is the process of integrating the work activities of various individuals and departments with the organizational goals. 6. Controlling Controlling as a function of management deals with checking and verifying the activities against the predetermined standards. The process of ensuring that actual activities conform to planned activities. Controlling process involves the following steps. (a) Establishing standards. (b) Measuring current performance. (c) Comparing this performance to the established standards. (d) Taking corrective actions of deviations of deviation are detected. 1. 9 REFERENCES Check your Progress FILL UPS 1. In a technical sense, ----------------- means the owners of an organization, i.e., sole proprietor, partners or shareholders. 2. A ----------------may be defined us â&#x20AC;&#x153;representing knowledge gathered by observation and experiment, critically tested, systematically and brought under general principlesâ&#x20AC;?. 3.

Experience is the sum total of ----------------------------- derived from direct observation of, or

participation in, events.

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ENGINEERING MANAGEMENT AND ECONOMICS 4. ------------------ process involves selecting candidates for positions, fixing salary, training and developing them for effective organizational functions. 5. ----------------- involves the activities like guiding, supervising and motivating the sub ordinates in their jobs. POINTS TO REMEMBER 1. The planning process involves the following activities. (d) Determination of the goal of the organization. (e) Formulating policies, rules. Procedures etc. (f) Forecasting the future based on past and present activities. 2. Controlling process involves the following steps. (e) Establishing standards. (f) Measuring current performance. (g) Comparing this performance to the established standards. (h) Taking corrective actions of deviations of deviation are detected.

3. MIDDLE LEVEL MANAGEMENT The main functions of middle level of management 

To monitor and control the operating performance.



To train, motivate and develop the supervisory level.



To coordinate among themselves so as to integrate the various activities of a department.

MODEL QUESTIONS WITH ANSWERS

1. What is directing? Answer One plans are made and the organization is created next step is to achievement of objectives of the organization. Directing involves the activities like guiding, supervising and motivating the sub ordinates in their jobs. Motivation helps to increase the performance of the workers. Communication provides with proper information to improve the effective management. Leadership the process by which a manager guide and influences the work of his subordinates.

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ENGINEERING MANAGEMENT AND ECONOMICS 2. Give the functions of management. Answer

FUNCTIONS OF MANAGEMENT Business management consists of six important functions. 1. Planning 2. Organizing 3. Staffing 4. Directing 5. Coordinating 6. Controlling Planning Planning in simple is looking ahead. It is preparing for the future. Effective planning leads efficient management. Effective planning provides answers to questions like- What to do? When to do? How to do? Who is to do? The planning process involves the following activities. (a) Determination of the goal of the organization. (b) Formulating policies, rules. Procedures etc. (c) Forecasting the future based on past and present activities. Organizing Organizing establishes harmonious relationship among all the workers of an organization by providing them with suitable authority and responsibility. According to Louis A. Allen â&#x20AC;&#x153;Organization involves identification and grouping the activities to be performed and dividing them among the individuals and creating authority and responsibility relationships among them for the accomplishment of organizational objectivesâ&#x20AC;?.

It involves the following: (a) Identification and analysis of activities required. For the attainment organizational objectives. (b) Assignment of duties to the individuals connected. (c) Follow up the activities. Staffing

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ENGINEERING MANAGEMENT AND ECONOMICS Staffing process involves selecting candidates for positions, fixing salary, training and developing them for effective organizational functions. The manager performs the duties of job analysis, job description etc. Directing One plans are made and the organization is created next step is to achievement of objectives of the organization. Directing involves the activities like guiding, supervising and motivating the sub ordinates in their jobs. Motivation helps to increase the performance of the workers. Communication provides with proper information to improve the effective management. Leadership the process by which a manager guide and influences the work of his subordinates. Coordinating The tasks or activities of an organization are classified on basis on their similarity. They are divided among different individuals and departments to achieve the benefits of specialization by way of increased productivity and efficiency. Coordination is the process of integrating the work activities of various individuals and departments with the organizational goals. Controlling Controlling as a function of management deals with checking and verifying the activities against the predetermined standards.

The process of ensuring that actual activities conform to planned activities. Controlling process involves the following steps. (a) Establishing standards. (b) Measuring current performance. (c) Comparing this performance to the established standards. (d) Taking corrective actions of deviations of deviation are detected 3. Explain Management as an Art as well as Science. Answer MANAGEMENT AS A SCIENCE A science may be defined us â&#x20AC;&#x153;representing knowledge gathered by observation and experiment, critically tested, systematically and brought under general principlesâ&#x20AC;?. The scientific decision making work as follows: Identification of the problem

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ENGINEERING MANAGEMENT AND ECONOMICS It involves correct recognition of a business problem before attempting a solution. The problem may relate to financing of business operations, dealing with production delays, ensuring supplies of raw materials, excessive expenditure, or wastage etc. Even a correct solution to a wrong problem may serve no purpose any if implemented; it may lead to undesirable consequences. Scientific inquiry It seeks to examine and evaluate alternative courses of action to resolve a given problem, taking into account the factors relevant to the problem and development of solutions. Choice of the best available alternative After analyzing the problem from all angles by using quantitative and non quantitative techniques, duly taking into account the resource position of the business, the best available alternative is selected to resolve the problem. Rigorous control procedure If the decision consistent with and derived from the information processed as above, it is likely to be a correct decision. But the introduction of a strict control procedure to serve as a further check on the correctness of the original decision, it is ensured that the subsequent course of events is exactly as expected from the decision. Validity of principles Ever since the development of scientific management, scientific methods and techniques are being increasingly applied to solve business problems. Problems of a numeric nature are commonly solved through computers using problem solving packages. Conclusion Management is a field of knowledge that seeks to systematically understand why and how men work together to accomplish the stated objectives and to make co operative efforts to more usual man kind. MANAGEMENT AS AN ART An art may be defined as a skill or knowledge in a particular field of activity, or a knock or method of doing a thing. Past experience

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ENGINEERING MANAGEMENT AND ECONOMICS Experience is the sum total of knowledge, skill and practice derived from direct observation of, or participation in, events. Only theoretical knowledge about the principles of management may not equip the manager to tackle the problems realizing to work with groups of people. Common sense is implies a reliable ability to judge and decide with soundness, prudence and intelligence. Common sense suggests an average degree of such ability without any specialized knowledge. Only a manager with robust common sense can achieve his objectives of maximum productivity and profitability by proper arrangement, placement and timing of lifeless objects like money, men, material, etc. Managerial skills a. Establishment of the overall purpose or policy of the organization. b. Planning and forecasting; c.

Organization of work, allocation of duties and responsibilities;

d. Giving instructions or orders; e. Checking performance according to plan; and f.

Coordination of work of others.

However, managerial skills do not mean a mere automatic discharge of the above functions. In fact, they point to the way or the style in which these functions are discharged. The way in which a manager influences others to carry out the plan or to accept instructions will greatly defend upon on how successful he is in communicating with his subordinates and motivating them. Human understanding The manager one who is exercises the control over the use of the resources of an organization. In this way he has an opportunity to control other human beings. The authority exercised by the manager contributes to the efficiency with which collective activity in the organization may be carried out to achieve the organizational goals. ANSWER FOR FILL UPS 1. top management 2. science 3. knowledge, skill and practice 4. Staffing 5. Directing

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UNIT- II PLANNING 2.1 MEANING According to KNOOTZ AND DONNEL â&#x20AC;&#x153;planning is deciding in advance what to do, how to do it, when to do it and who is to do it. Planning bridges the gap from where we are to where we want to go.â&#x20AC;?

2. 2 OBJECTIVES AND PLANNING

A Thinking Process Planning is an intellectual exercise. Planning enables the mgt to make decisions as

regards (a) What is to be done? (b) How is to be done (c) When is to be done and (d) By who is to be done?

Forecasting Forecasting describes what one expects to happen if no changes are made to escape

that happening. Planning describes what one wants to happen. Forecasting may encourage some people to do some planning, like forecast of exhaustion of natural energy resource has led some countries to plan for conservation of coal and oil.

Accomplish Of Group Objectives It is unlikely that these people will work effectively, harmoniously and consistently

unless they have a plan which they consider to be their common property. Planning is essential to any goal directed activity. It enables people with divergent perception and motivation to work together to achieve common goals.

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Choice between Alternatives The first choice to be made by management is with regards to objective of business,

e.g., profitability, growth, consumer satisfaction, man power development, prestige and so on. The next choice is in respect of the strategy to be adopted to the accomplish of objectives

Pervasiveness of Planning Planning is a basic condition for goal directed organization. How ever it would be wrong

to regard planning as a exclusive occupation of the top level managers only. It is true that top level managers have to devote considerable time and attention to planning for the org as a whole

Flexibility Successful running of an org involves matching of its resource with the opportunities in

the business environment. This calls for a careful composing of the mix of peopleâ&#x20AC;&#x2122;s capabilities, knowledge, skill and motivation on the one hand and materials, tools and money on other

Integrated Process Planning involves selection of achievable objectives and formulation of simple and

realistic policies, programmes, procedure, etc for the accomplishment of those objectives.

The sales manager may prefer to plan for numerous models of the goods to satisfy individual consumer taste, the production manager may be keener to have a limited no of standardize models. 2. 3 NATURE OF PLANNING 1. Selection Of Optimum Goals Planning involves rational thinking and decision making concerning a purposed course of action. It also implies selection of one course if action and rejection of other possible course of action. The selected course of action is the naturally the one that promotes the over all org goals within the frame works of the resource availability and economic, social, and political factor.

2. Tackling Increases Complexities An org is the heterogeneous group of human beings who differ from one another in many aspects. It is unlikely that they will work effectively and harmoniously in the interest of the org unless

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ENGINEERING MANAGEMENT AND ECONOMICS they have a plan in the making of which they have had a share and, which they regard as common property.

3. Meeting Environmental Changes Business environment change more rapidly and sweepingly than can be imagined. Change in social values, increase in competition, new product discoveries, change in consumer taste and preferences, have each the potential to upset any org.

4. Safe Guard against Business Failures Often, business failures are blamed on cut throat competition, unpredictability of consumer taste and preferences, rapid technological changes and abrupt economic and political development. it is true that planning cannot avert all business failures 5. Unity of Action Planning enables the people within an org to work effectively and harmoniously for the accomplish of common goals. It provides them a stake in their own future and thus induces them to do their utmost to meet the challenges

2. 4 METHODS OF PLANNING MEANING Planning is basically concerned with the future impact of current decisions. In other words it seeks to examine a series of cause-effect relationships that may arise from a particular set of decisions such that if the results of any decisions do not come up to the expectations of the management, these may be replaced with alternative decisions. FEATURES OF PLANNING 

Planning is a pervasive function.



It may be with respect to the organization as a whole, or at the divisional or departmental level.



Organization planning is done by the top level management and it is generally long term in nature.



It is original and energizing in its purpose, and takes within its sweep the entire spectrum of organizational activities from production to sales, including financial and accounting.



It creates a motivational framework for all employees and serves as the basics of planning at the divisional and departmental level.

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ENGINEERING MANAGEMENT AND ECONOMICS ď&#x192;&#x2DC;

Departmental planning is concerned with development of specific plans for each department of a division so as to accomplish the divisional plans.

ď&#x192;&#x2DC;

Obviously, planning at this level is still more specific, but limited in scope as also short-term in nature.

2. 4. 1 OBJECTIVES OF PLANNING Objectives may be defined as the future results or a desired state of affairs which the organization seeks and strives to achieve. Objectives provide the organization with a purpose that keeps its attention and efforts focused in a particular direction so that it is capable of steering a steady course towards their accomplishment, taking corrective action when necessary to avoid obstacles. Kinds of objectives According to Peter Drucker, the objectives of an organization may be with respect to the following areas: (a) Market standing; (b) Innovation; (c) Productivity; (d) Physical and financial resources; (e) Profitability; (f) Managers performance and development; (g) Worker performance and attitude; and (h) Public responsibility; According to Charles Perrow, the board categories of objectives which are likely to claim the attention of an organization may be: (a) Social objectives, which are concerned with creation and maintenance of cultural values through the production of goods and services. (b) Output objectives, concerned with the kind of output, viz. durable goods, etc. (c) System objectives, concerned with growth, stability, profitability and efficiency. (d) Product objectives, concerned with quality, quantity, innovativeness of the goods and services. (e) Derived objectives, concerned with secondary areas e.g., community development.

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2. 4. 2 OBJECTIVES Departmental Objectives While the overall organization objectives are stated in general terms, because of uncertainty as regards occurrence of events favorable to their accomplishment, it is customary to lay down specific objectives for the organization. In fact, there is always considerable discrepancy between the stated formal objectives of the organization as a whole, and the operational objectives of the various divisions value and are therefore usually described in terms of philosophical ideas which are virtually impossible to achieve in the same form. Clarity of Objectives There is a hierarchy of objectives in an organization, E.g., the top management lays down overall organizational objectives and then there are operational objectives for individual divisions and departments of the organization. The objectives at each level differ in their level of clarity. The organizational objectives are generally very vague because they are only stated for public relations purposes, while the divisional and departmental objectives are relatively quite specific. However, there is a great need for clarity in the definition of objectives, to whichever level they may pertain. Clarity in statement of objectives makes the organization more efficient, because it keeps the attention focused at the right ends. Moreover, unclear objectives are likely to be overlooked if they come in conflict with the clear ones. Clarity of goals also promotes healthy superior-subordinate relations. When the subordinate knows what precisely he is expected to perform, he is more likely to perform it well than if he were merely told â&#x20AC;&#x153;to do as best as he can ". MANAGEMENT BY OBJECTIVES (MBO) Management by objectives is a management technique whereby managers at subordinate levels participate in the setting of targets so as to ensure their achievement in the basis of formal job specifications laying down key result areas. There are three distinct steps in the MBO process, namely: (1) Setting of objectives; (2) Intermediate review; and

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ENGINEERING MANAGEMENT AND ECONOMICS (3) Final review.

1. Setting Of Objectives To begin with, the corporate objectives are defined by the Board of Directors. This is followed by an analysis of management tasks by formal job specification, defining key result areas and formal responsibilities for the establishment of objectives, and the decisions to be taken by individuals. This involves meetings between superiors and subordinates throughout the organization for mutual establishment of performance targets for the subordinates. For this step in the MBO process to be successful, it is necessary that subordinates express activities and tasks in specific and measurable terms. Superiors also must do their home-work carefully at the objective setting sessions because they will have to set their own objectives with their superiors.

2. Intermediate Review Having co-ordinate the setting of individual targets with overall corporate objectives with a view to ensuring the achievement of optimum results, the next step is (a) To provide adequate control information to enable the superiors and subordinates to review periodically the progress made by subordinates towards their performance targets or standards, and (b) For superiors to provide appropriate direction and set new targets if and when it is found that any subordinate is not on the right course. The frequency of intermediate review will be different from superior to superior. The nature of remedial action in case of deviation from the standard will also be different. MERITS OF MBO Mgt by objectives leads to several benefits for the org. first, it result in better communication between superior and subordinate, because they actively participate in frequencies objectivesFirstly setting session taking into consideration each others point of view, difficulties and conflict. Secondly it makes for greater clarity in subordinateâ&#x20AC;&#x2122;s job assignments. The subordinate knows precisely what is expected of him. In any case, in the determination of the targets set for him, he will have a full say. Thirdly employees are effectively motivated. Because they are allowed considerable dissertation in the setting of targets to be achieved by them, they are totally committed to the

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ENGINEERING MANAGEMENT AND ECONOMICS achievement of their individual targets Fourthly subordinate performance is monitored more effectively due to perfect clarity along what is expected of him in a given period. Lastly it leads to improvement of planning activity. DE-MERITS OF MBO Mgt by objectives is not free from draw backs. First it requires a lot of paper work. There are frequent sections for the purpose of mutual objectives-settings and detail records have to be kept of the results of the proceedings. Secondly lower mgt levels are generally excluded from the programmed. Lastly while deficiency in performance on the part of a subordinate is favorable noticed, there may not be adequate incentives for those whose performance is up to the desired level. 2.5 REFERENCES Check your Progress FILL UPS

------------- is deciding in advance what to do, how to do it, when to do it and who is to do it.

Planning bridges the gap from -------------------------------------.

---------------------, which are concerned with creation and maintenance of cultural values through the production of goods and services

-------------------, concerned with quality, quantity, innovativeness of the goods and services

System objectives, concerned with ----------------------- and ---------------------------

POINTS TO REMEMBER 1. Planning is an intellectual exercise. Planning enables the mgt to make decisions as regards (a) What is to be done? (b) How is to be done (c) When is to be done and (d) By who is to be done?

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2. Product objectives, concerned with quality, quantity, innovativeness of the goods and services.

3. Derived objectives, concerned with secondary areas e.g., community development.

4. Departmental planning is concerned with development of specific plans for each department of a division so as to accomplish the divisional plans. MODEL QUESTIONS AND ANSWERS 1. Explain the Meaning of planning and the nature of planning. Answer According to KNOOTZ AND DONNEL â&#x20AC;&#x153;planning is deciding in advance what to do, how to do it, when to do it and who is to do it. Planning bridges the gap from where we are to where we want to go.â&#x20AC;?

NATURE OF PLANNING Selection of Optimum Goals Planning involves rational thinking and decision making concerning a purposed course of action. It also implies selection of one course if action and rejection of other possible course of action. The selected course of action is the naturally the one that promotes the over all org goals within the frame works of the resource availability and economic, social, and political factor.

Tackling Increases Complexities An organization is the heterogeneous group of human beings who differ from one another in many aspects. It is unlikely that they will work effectively and harmoniously in the interest of the org unless they have a plan in the making of which they have had a share and, which they regard as common property.

Meeting Environmental Changes Business environment change more rapidly and sweepingly than can be imagined. Change in social values, increase in competition, new product discoveries, change in consumer taste and preferences, have each the potential to upset any org.

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ENGINEERING MANAGEMENT AND ECONOMICS Safe Guard against Business Failures Often, business failures are blamed on cut throat competition, unpredictability of consumer taste and preferences, rapid technological changes and abrupt economic and political development. It is true that planning cannot avert all business failures Unity of Action Planning enables the people within an org to work effectively and harmoniously for the accomplish of common goals. It provides them a stake in their own future and thus induces them to do their utmost to meet the challenges

2. What are the features of Planning? Answer:

FEATURES OF PLANNING 

Planning is a pervasive function.



It may be with respect to the organization as a whole, or at the divisional or departmental level.



Organization planning is done by the top level management and it is generally long term in nature.



It is original and energizing in its purpose, and takes within its sweep the entire spectrum of organizational activities from production to sales, including financial and accounting.



It creates a motivational framework for all employees and serves as the basics of planning at the divisional and departmental level.



Departmental planning is concerned with development of specific plans for each department of a division so as to accomplish the divisional plans.



Obviously, planning at this level is still more specific, but limited in scope as also short-term in nature.

3. Explain the categories of Planning? Answer: According to Charles Perrow, the board categories of objectives which are likely to claim the attention of an organization may be: (a) Social objectives, which are concerned with creation and maintenance of cultural values through the production of goods and services. (b) Output objectives, concerned with the kind of output, viz. durable goods, etc.

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ENGINEERING MANAGEMENT AND ECONOMICS (c) System objectives, concerned with growth, stability, profitability and efficiency. (d) Product objectives, concerned with quality, quantity, innovativeness of the goods and services. (e) Derived objectives, concerned with secondary areas e.g., community development. ANSWER FOR FILL UPS 1. Planning 2. where we are to where we want to go. 3. Social objectives 4. Product objectives 5. growth, stability, profitability and efficiency

2. 6 POLICIES Policies may be defined as guide to thinking and action of those who have to make decisions in the course of accomplishment of the enterprise objectives. They provide ready answers to all questions faced in the running on the enterprise. CHARACTER OF GOOD POLICY 1. Broad outline A policy should provide only abroad outlines, leaving it to the managers to decide within its framework. If it is made to cover every detail, it would only hamper individual initiative and style. But at the same time, it should be definite enough to prevent it from being twisted through divergent interpretations. 2. Consistent There may be a number of policies dealing with different questions. Hence, it is necessary to ensure that the policies are not mutually contradictory. In case there is inconsistency between any two policies, decision making is bound to be slowed down, because managers will not known which of the policies has greater support of their superiors. 3. Adequate Number There should be an adequate number of policies to guide thinking and action in different fields of activity. For example, there should be definite policies dealing with production, sales, personnel, advertising, finance, etc. At the same time, there should not be any duplication.

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ENGINEERING MANAGEMENT AND ECONOMICS 4. Sound and Practicable An enterprise is known by the policies it follows. Policies are great image-builders. For this reason, policies decided by an enterprise should be sound and logical in every respect. Only then managers can rely on them and confidently tackle a variety of problems. 5. Flexible Through policies are not meant to be changed off and on, there is need to keep them flexible enough to be adjusted to suit the needs of changing times. MERITS 1. Guide to Thinking Action Policies provide the frame work within the managers have to make their decisions. Without them, managers will only group in the dark not knowing how to tackle the various issues facing them. 2. Consistency Policies establish the limits within which managers at various levels have to make their decisions. This leads to predictability and consistently in managerial function. As such, managers are enabled to act in concert for the accomplish of enterprise objective. 3. Broader Applicability Policies are shaped after weighing and evaluating a no of factors. as such, these can be applied as equal effect to problems of all types and dimension. 4. Confidence Building With well formulated policies providing ready answers to all possible questions, managers can confidently face any problem situations. Besides, if managers strictly adhere to policies, they may have nothing to fear even when some of their decisions do not produce the desired results because, in that event they can conveniently shift the blame to in adequacy of policies.

LIMITATIONS 1. No Penances for Problems Policies, however intelligently formulated, cannot provide a solution to every problem. This is so because each policy is formulated under a particular set of circumstances which may not remain the same for all times to come.

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2. No Instant Solution to Problems Policies only serve as guidelines to thinking and action by managers. They point to the limits and constrains under which managers have to make decisions to solve the problems facing them. If a manager begins to look to them for solution of every problems, he may be disappointed. 3. No Substitute for Human Judgments Policies only indicate how and within what limits problem of different kinds have to be tackled. Even so, they cannot blindly be applied to all problems - situations. The needs for the managers own sense of judgment will remain even when he has a pre determined policy to deal with every problem. 4. No Room for Initiative Too many policies stifle individual initiative, managers may get so much used to follow policies that they may lose capacity to think for themselves. 2. 7 PROCEDURES Objectives and policies may be well established but they seldom produce action. This is because they do not lay down ways through which objectives are to be accomplished and policies are implemented. This is made good by procedures which determine:

(a) The specific tasks to be performed; (b) The time when these tasks will be performed; and (c) The persons who will perform them. Procedures lay down the process of establishment time-sequence for work to be done. They may be described as plans "prescribing the exact chronological sequence of specific tasks required to perform designated work." Thus, procedures are concerned with fixing a time-table for starting a given work, going through its different phases and its completion, within the framework of the objectives and resource position of the org. MERITS 1. Basis of control Procedures prescribe the time sequence of specific tasks to be performed to accomplish a given job. Thus, they can be used to know if the work is proceeding as planed.

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2. Standardization Procedures lay down the sequence of tasks to be performed. They also enable systematic performance of work at every stage. This saves considerable time and energy on the part of managers and subordinates. 3. Consistency As the course of action to be performed with regard to each item of work is well defined, there is consistence and uniformity in performance at different levels. This leads to efficiency all around. 4. Aid to communication and co-ordination Establishment of any procedure is preceded by a great deal of communication and coordination of thinking and effort. Thus, it represents the collective wisdom of the persons concerned with putting it into effect. If any problem crops up at any stage of work, these same people will have to think and act together to find a solution. LIMITATIONS 1. Redundancy Often age-old procedures are retained even after they have outlived their usefulness. As a result, they are not adequate for the purpose of meeting the requirements of a changed situation. 2. Updating Procedures need to be constantly reviewed and evaluated. They should also be suitably modified or altered. However, often there is hesitation to undertake this exercise to suit the current needs. 2. 8 RULES A rule means a decision made by the management regarding what is to be done and what is not to be done in a given situation. It applies to a specific situation and includes self-imposed principles of action. Rules do not leave any scope for decision-making. Nor do they permit any deviation. Rules are different from policies which guide decision-making but do not eliminate discretion on the part of the manager. Rules either forbid or require particular kind of behavior, leaving no scope for discretion. Thus, " No Smoking ", or " No shipment or storage of goods without approval by the quality control section ", or " Always wear goggles while working on machines " are the examples of rules.

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ENGINEERING MANAGEMENT AND ECONOMICS SINGLE USE PLANS Single-use plans are designed to meet novel or non-respective situations, which have a limited scope. Once the specific situations in question have been met, the plans may be given up.

2. 9 PROGRAMMES A programme denotes activities of a broad nature, including many different functions and interactions. It lays down the operations to be carried out to accomplish a given work. In this sense, it prescribes how enterprise resources are to be used. Production of 500 tones of steel in January, or 1,000 bicycles in the fortnight ending 20th March is an example of a routine type of programme. There may also be programmes for some specific purposes as, for example, to reverse the downward trend in sales, or introduce a new product in the market. MERITS 1. Action-based Programmes are generally short range plans of action. Being action and result-oriented, they provide practical guides to managerial activities. 2. Greater motivation. Programmes are result- oriented in a practical sense. They provide greater motivation than, say, policies or objectives, which deal with issues in abstract, theoretical terms. LIMITATIONS 1. Greater risk of failure. Generally, programmes aim at securing immediate results. For this reason, they are often hastily devised without paying due regard to availability of resources. This increases the chance of their failure. 2.

Inadequate motivation. For successful execution of a programme, involvement of all or many segments of the enterprise is necessary.

But everyone concerned with its execution may not be duly motivated to

make it a success. A program to produce 1,000 units a month, may motivate workers in the production department, but may not have much effect on the workers in other departments

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ENGINEERING MANAGEMENT AND ECONOMICS 2. 10 BUDGETS A budget is a plan relating to a period of time, expressed in numerical terms. It may be defined as a pre-determined statement of management policy, during a given period, which provides a standard for comparison with the results actually achieved. A budget may cover projected activities of a firm for a definite period of time, providing predetermined standards of performance in the fields of sales, purchases, production income, expenditure and profits. The standards are set duly keeping in view the objectives and resource position of the enterprise. They also serve as the basis for evaluating performance in various fields, and for correcting the devotions and deficiencies, if any. MERITS The following are the main merits of budgeting: 1. Instrument of management policy A budget lays down the enterprise goals and also points the means to realize them. It helps mgt to determine its future course of action. 2. Time-bound A budget has a definite time-frame. It may be designed for a month, a quarter or at the most a year, but seldom for a period longer than that. 3. Specific targets A budget aims at specific, well-defined targets which are often expressed quantitatively. Essay type description of the targets is generally avoided. 4.

Right motivation Budgeting lays down attainable targets and also prescribes the means to achieve them. Once

the employees known what they have to achieve and how, they can be suitably motivated to work for the desired outcome. 5. Basis of control. A budget not only provides a future plan of action, but also lays down standards for various activities. It can be used to measure performance, detect deficiencies, and initiative corrective action, where necessary.

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LIMITATIONS Budgeting suffers from certain limitations, important among which are as follows: 1. Cabined and confined Once targets are set, and the resources are allocated for the purpose, action has to be within the prescribed limits. Thus, budgeting does not allow freedom to function in a flexible manner. For example, it may be possible for the production department to produce the budgeted number of units within the resources allocated to it for the purpose.

2. Excessive reliance on past experience In theory, budget-making is an exercise in a synthesis in the past, present and future, However, since it is not possible to accurately interpret the present trends, or to predict the future events, budget-makers increasingly turn to their past experience. As a result, targets for the next year are little different forms those of the past years. Any radical change in them may invite a hostile reaction from the departments concerned. 3. Danger of in accuracy in estimates Despite due caution, budgeted estimates may turn out to be wrong. Some departments may be given targets which may be impossible to achieve. On the other hand, for some departments the targets may be fixed so low that their capacities may not fully utilize.

4. Curb on initiative Often, managers treat budgets a them. As such they may not take pains to engage in rational and pragmatic decision-making, other than what is permissible within the budgeted limits. In the event, initiative is stifled and excessive emphasis is placed on the latter rather than the sprit of the budgets.

2. 11 REFERENCES Check your progress FILL UPS 1. --------------- may be defined as guide to thinking and action of those who have to make

decisions

in the course of accomplishment of the enterprise objectives 2. Through policies are not meant to be changed off and on, there is need to keep them -------------------

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ENGINEERING MANAGEMENT AND ECONOMICS enough to be adjusted to suit the needs of changing times. 3. A -------------- means a decision made by the management regarding what is to be done and what is not to be done in a given situation 4. A ------------------- denotes activities of a broad nature, including many different functions and interactions. 5. A ----------------is a plan relating to a period of time, expressed in numerical terms. 6. Budget may be defined as a -------------------------------- during a given period, which provides a standard for comparison with the results actually achieved. POINTS TO REMEMBER 1. Policies may be defined as guide to thinking and action of those who have to make decisions in the course of accomplishment of the enterprise objectives. They provide ready answers to all questions faced in the running on the enterprise

2. Objectives and policies may be well established but they seldom produce action. This is because they do not lay down ways through which objectives are to be accomplished and policies are implemented. This is made good by procedures which determine: (a) The specific tasks to be performed; (b) The time when these tasks will be performed; and (c) The persons who will perform them. 3. Rules are different from policies which guide decision-making but do not eliminate discretion on the part of the manager. 4. A budget is a plan relating to a period of time, expressed in numerical terms. It may be defined as a pre-determined statement of management policy, during a given period, which provides a standard for comparison with the results actually achieved. 5. A budget may cover projected activities of a firm for a definite period of time, providing predetermined standards of performance in the fields of sales, purchases, production income, expenditure and profits

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ENGINEERING MANAGEMENT AND ECONOMICS MODEL QUESTIONS AND ANSWERS 1. Define policy and explain the character of good policy. Answer POLICIES Policies may be defined as guide to thinking and action of those who have to make decisions in the course of accomplishment of the enterprise objectives. They provide ready answers to all questions faced in the running on the enterprise.

CHARACTER OF GOOD POLICY Broad outline A policy should provide only abroad outlines, leaving it to the managers to decide within its framework. If it is made to cover every detail, it would only hamper individual initiative and style. But at the same time, it should be definite enough to prevent it from being twisted through divergent interpretations. Consistent There may be a number of policies dealing with different questions. Hence, it is necessary to ensure that the policies are not mutually contradictory. In case there is inconsistency between any two policies, decision making is bound to be slowed down, because managers will not known which of the policies has greater support of their superiors. Adequate Number There should be an adequate number of policies to guide thinking and action in different fields of activity. For example, there should be definite policies dealing with production, sales, personnel, advertising, finance, etc. At the same time, there should not be any duplication. Sound and Practicable An enterprise is known by the policies it follows. Policies are great image-builders. For this reason, policies decided by an enterprise should be sound and logical in every respect. Only then managers can rely on them and confidently tackle a variety of problems. Flexible Through policies are not meant to be changed off and on, there is need to keep them flexible enough to be adjusted to suit the needs of changing times.

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2. What is procedure and write about its merits and de-merits? Answer

PROCEDURES Objectives and policies may be well established but they seldom produce action. This is because they do not lay down ways through which objectives are to be accomplished and policies are implemented. This is made good by procedures which determine:

Basis of control. Procedures prescribe the time sequence of specific tasks to be performed to accomplish a

given job. Thus, they can be used to know if the work is proceeding as planed. 2. Standardization. Procedures lay down the sequence of tasks to be performed. They also enable systematic performance of work at every stage. This saves considerable time and energy on the part of managers and subordinates.

2. Consistency As the course of action to be performed with regard to each item of work is well defined, there is consistence and uniformity in performance at different levels. This leads to efficiency all around. 3. Aid to communication and co-ordination. Establishment of any procedure is preceded by a great deal of communication and coordination of thinking and effort. Thus, it represents the collective wisdom of the persons concerned

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ENGINEERING MANAGEMENT AND ECONOMICS with putting it into effect. If any problem crops up at any stage of work, these same people will have to think and act together to find a solution. DE-MERITS 1. Redundancy Often age-old procedures are retained even after they have outlived their usefulness. As a result, they are not adequate for the purpose of meeting the requirements of a changed situation. 2. Updating. Procedures need to be constantly reviewed and evaluated. They should also be suitably modified or altered. However, often there is hesitation to undertake this exercise to suit the current needs. 3. Describe about Rules and Budget. Answer RULES A rule means a decision made by the management regarding what is to be done and what is not to be done in a given situation. It applies to a specific situation and includes self-imposed principles of action. Rules do not leave any scope for decision-making. Nor do they permit any deviation. Rules are different from policies which guide decision-making but do not eliminate discretion on the part of the manager. Rules either forbid or require particular kind of behavior, leaving no scope for discretion. Thus, â&#x20AC;&#x153;No Smoking ", or " No shipment or storage of goods without approval by the quality control section ", or " Always wear goggles while working on machines " are the examples of rules.

BUDGETS A budget is a plan relating to a period of time, expressed in numerical terms. It may be defined as a pre-determined statement of management policy, during a given period, which provides a standard for comparison with the results actually achieved. A budget may cover projected activities of a firm for a definite period of time, providing predetermined standards of performance in the fields of sales, purchases, production income, expenditure and profits. The standards are set duly keeping in view the objectives and resource position of the enterprise. They also serve as the basis for evaluating performance in various fields, and for correcting the devotions and deficiencies, if any.

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ANSWER FOR FILL UPS 1. Policies 2. flexible 3. rule 4. programme 5. budget 6. pre-determined statement of management policy

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UNIT – III ORGANISING 3. 1 MEANING According to Amitai Etzioni, “an organization is a social unit or human grouping, deliberately structured for the purpose of attaining specific goals. Thus, corporations, armies, schools, hospitals, churches, prisons, etc. All are organizations. But tribes, ethnic and friendship groups and families are not organizations because they do not involve any significant amount of conscious planning or deliberate structuring”. PROCESS OF ORGANISING DEFINITION The term 'organization' is used in two different senses. In the first sense it is used to denote the process of organizing. In the second sense it is used to denote the result of that process, namely, the organization structure. CONSIDERATION OF OBJECTIVES

Management writers, such as Alfred D. Chandler refer to this phenomenon as one in which "structure follows strategy." For example, the structure required for an army is different from the structure required for a business enterprise. In view of this, consideration of objectives is the first step in the process of organization is; 

Grouping Of Activities Into Departments

After the consideration of objectives, the next step is to identify the activities necessary to achieve them and to group the closely related and similar activities into divisions and departments. For example, the activities of a manufacturing concern may be grouped into such departments as production, marketing, financing and personnel. 

Deciding Which Departments Will Be Key Departments

Key departments are those which are rendering key activities, i.e., activities essential for the fulfillment goals. Such key departments demand key attention. Other departments exist merely to serve them. Experience suggests that where key departments are not formally identified, the attention of top management is focused on the minor issues raised by vocal managers. This is known as the

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ENGINEERING MANAGEMENT AND ECONOMICS 'decibel system' of management. The key departments should be placed directly under higher management. 

Determining Levels At Which Various Types Of Decisions Are To Be Made

After deciding the relative importance of various departments, the levels at which various major and minor decisions are to be made must be determined. Each firm must decide for itself as to how much decentralization of authority and responsibility it wants to have. Extreme decentralization may lead to loss of control and effective coordination as a result of which the firm as a whole may fail to achieve its overall objectives. 

Determining The Span Of Management

The next step to be taken in designing a structure is to determine the number of subordinates who should report directly to each executive. The narrower the span, the taller would be the structure with several levels of management. This will complicate communication and increase the payroll. 

Setting Up A Coordination Mechanism

Emphasizing the importance of coordination in an organization, Peter Drucker says that an organization is like a tune. It is not constituted of individual sounds but of the relations between them. As individuals and departments carry out their specialized activities, the overall goals of the organization may become submerged or conflicts among organization members may develop. For example, production managers in a manufacturing company may press for a standardized product line to hold down costs, when the larger interests of the company may be the best served by a diversified product line.

3. 2 SPAN OF MANAGEMENT MEANING The term 'span of management' is also referred to as span of control, span of supervision, span of authority or span of responsibility. It includes the number of subordinates who report directly to a manager. What Is An Appropriate Span? The search for guidelines by which we can determine the ideal number of subordinates directly reporting to a manager has long been a preoccupation of management writers. Different writers have suggested different number of subordinates for effective supervision by the managers.

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ENGINEERING MANAGEMENT AND ECONOMICS VARIOUS TYPES OF RELATIONSHIPS INVOLVED 1. Direct One To One Relationships These are relationships which relate the superior directly and individually with his immediate subordinates. Thus, A with two subordinates B and C will have two direct one to one relationships, viz. A to B and A to C. 2. Direct Group Relationships Direct group relationships exist between the superior and each possible combination of subordinates. In the above example, A may talk to B with C in attendance or A may talk to C with B in attendance.

According to Graicunas, these two cases have different psychological implications, though the individuals are the same in both the cases. Where the number of subordinates is large, the number of direct group relationships can be found out by the following formula: n (2^n/2-1), where n stands for the number of subordinates. 3. Cross-Relationships Cross-relationships are created when subordinates consult one another. In the above example, the two cross-relationships created are B with C and C with B. The formula for finding the number of these relationships is n(n-1). The formula to ascertain the number of all three kinds of relationships is as under: Number of relationships = n (2^n/2 + n-1).

FACTORS GOVERNING THE SPAN OF MANAGEMENT (CONTINGENCY APPROACH) 1. Ability Of The Manager Some managers are more capable than others and can, therefore, handle a large number of subordinates. In planning an organisation, the span of management should be based on a manager of average ability. 2. Ability Of The Employees If the employees are competent and possess the necessary skill and motivation to perform the task assigned, less attention from the manager is required and a larger span of management can be used. On the other hand, if the employees are dissatisfied with their jobs or are incompetent or untrained, close supervision by the manager is needed. This will reduce his span of management.

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3. Type Of Work If employees are doing similar jobs, the span of management can be larger. If their jobs are quite different, a small span may be necessary. This is analogous to saying that a professor of a class in which every student does identical work can handle more students than one in which instructions, assignments and testing are individualized. Similarly, where the work is machine-paced, the employees will require less supervision. For example, a supervisor can direct more employees if they are working on an assembly-line operation than if they are working in a warehouse or maintenance situation. Woodward found that the span of control of the first-line supervisor was larger in firms employing mass production and assembly-line technology than in firms employing custom or continuous process technologies. 4. Well-Defined Authority And Responsibility If the authority and the responsibility of each employee are properly defined, they need not make frequent calls on their supervisors for guidance and instructions. This helps a superior to manage a large number of subordinates. 5. Geographic Location An office manager who has 25 employees, all located in one room may be able to supervise them very well. But a sales manager who has 25 sales people located in 25 different districts would find direct supervision impossible. 6. Sophisticated Information And Control System If the company uses a sophisticated information and control system and objective standards to detect deviations from established plans, the need for close supervision is obviated. This factor also helps the superior to control a large number of subordinates.

7. level of management Span of management also varies with each level in the organisation. Gerald G. fisch has divided the management hierarchy for this purpose into four basic groups-- super managers, general managers, middle managers and supervisors. The maximum span of management of super managers, whose functions involve only broad policy control rather than direct supervision, can be 50 subordinates. But in the case of general

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ENGINEERING MANAGEMENT AND ECONOMICS managers who are more closely involved with their subordinates than super managers, the span of management has to be comparatively narrow (say 10 to 12 subordinates only). For middle managers, the appropriate span of management depends in part, on the precise mix of executive and operative supervision that their specific jobs require. Generally speaking, it can be 50 subordinates. At the supervisory level where the work involved is of routine nature, the span of management is normally quite wide, say 100 subordinates. 8. Economic Considerations Economic considerations also affect the choice of span. As we have already described above, smaller spans means a larger number of managers with the added salaries and other costs they entail. But wide spans also involve extra costs in the inefficiencies that result from diminished managerial leadership. Hence, an economic balance has to be arrived at between cost savings that result from the largest possible span and the added costs that an organisation begins to incur as the span grows too wide. 3. 3 PRINCIPLES OF ORGANISING In order to develop a sound and efficient organisation structure, there is need to follow certain principles. In the words E.F.L. Brech, "if there is to be a systematic approach to the formulation of organisation structure, there ought to be a body of accepted principles." These principles are as follows OBJECTIVES The objectives of the enterprise influence the organization structure and hence the objectives of the enterprise should first be clearly defined. Then every part of the organization should be geared to the achievement of these objectives. ď&#x192;&#x2DC;

Specialization

Effective organization must promote specialization. The activities of the enterprise should be divided according to functions and assigned to persons according to their specialization. ď&#x192;&#x2DC;

Span Of Control

As there is a limit to the number of persons that can be supervised effectively by one boss, the span of control should be as far as possible, the minimum. That means, an executive should be asked to supervise a reasonable number of subordinates only say six.

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ENGINEERING MANAGEMENT AND ECONOMICS 

Exception

As the executives at the higher levels have limited time, only exceptionally complex problems should be referred to them and routine matters should be dealt with by the subordinates at lower levels. This will enable the executives at higher levels to develop time to more important and crucial issues. 

Scalar principle

This principle is sometimes known as the 'chain of command'. The line of authority from the chief executive at the top to the first-line supervisor at the bottom must be clearly defined. 

Unity Of Command

Each subordinate should have only one superior whose command he has to obey. Dual subordinates must be avoided, for it causes uneasiness, disorder, indiscipline and undermining of authority.



Delegation

Proper authority should be delegated at the lower levels of organisation also. The authority delegated should be equal to responsibility, i.e., each manager should have enough authority to accomplish the task assigned to him. 

Responsibility

The superior should be held responsible for the acts of his subordinates. No superior should be allowed to avoid responsibility by delegating authority to his subordinates. 

Authority

The authority is the tool by which a manager is able to accomplish the desired objective. Hence, the authority of each manager must be clearly defined. Further, the authority should be equal to responsibility. 

Efficiency

The organisation structure should enable the enterprise to function efficiently and accomplish its objectives with the lowest possible cost. 

Simplicity

The organisation structure should be as simple as possible and the organisation levels should, as far as possible, be minimum. A large number of levels of organisation mean difficulty of effective communication and coordination. 

Flexibility

The organisation should be flexible, should be adaptable to changing circumstances and permit expansion and replacement without dislocation and disruption of the basic design.

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ENGINEERING MANAGEMENT AND ECONOMICS 

Balance

There should be a reasonable balance in the size of various departments, between centralization and decentralization, between the principle of span of control and the short chain of command, and among all types of factors such as human, technical and financial.



Unity Of Direction

There should be one objective and one plan for a group of activities having the same objective. Unity of direction facilitates unification and coordination of activities at various levels. 

Personal Ability

As people constitute an organisation, there is need for proper selection, placement and training of staff. Further, the organisation structure must ensure optimum use of human resources and encourage management development programmes. 3.4 DEPARTMENTALISATION The horizontal differentiation of tasks or activities into discrete segments is called departmentalization. As noted earlier, departmentalization is one important step of building an organization. The aim is to take advantage of the divisions of labour and specialization unto a certain limit. There are several bases for departmentalization, each of which is suitable for particular corporate sizes, strategies and purposes. Following is a brief description of these bases: FUNCTIONS By far the most widely used base for departmentalization is function. Each major function of the enterprise is grouped into a department. For example, there may be production, finance and marketing departments in a manufacturing company or underwriting and claims departments in an insurance company.

A sales manager in this kind of departmentalization is responsible for the sale of all products manufactured by the company or a claims manager is responsible for dealing with all claims from different areas where the company operates.

ADVANTAGES 1. It is a simple form of grouping activities for small organizations which manufacture only limited number of products or render only a limited number of services. 2. It promotes excellence in performance because of development of expertise through specialization.

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3. It leads to improved planning and control of the key functions. 4. It ensures economy, for there is only one department related to one function for the entire company. Manpower and other resources of the company are effectively utilized by time-sharing them across products or projects. DRAWBACKS 1. It fosters sub-goal loyalties. Each manager thinks only in terms of his own departmental goals and does not think in terms of the company as a whole. This results in inter-departmental conflicts and disagreements. Decision taken by one departmental head is poorly implemented by other heads. They are seen as "who is right" rather than as "what is right". Thus there arises need for elaborate, expensive and clumsy management crutches called coordinators, committees and meetings which waste everybody's time without contributing much. 2. It does not offer a good training ground for the overall development of a manager. The manager gains expertise in handling problems of his particular department only. 3. It is unsuitable where either geographical dispersal of units is required or emphasis on separate product lines is called for.

PRODUCTS This form is eminently suited for a large organization manufacturing a variety of products.

Under this method, for each major product, a separate semi-autonomous department is created and is put under the charge of a manager who may also be made responsible for producing a profit of a given magnitude. Within each department, all the needed manufacturing, engineering, marketing, manpower and other facilities are assembled. Product departmentalization is the logical pattern to follow when each product requires raw material, manufacturing technology, and marketing methods that are markedly different from those used by other products in the organization. Several companies in India, such as Hindustan Lever (manufacturing detergents, toiletries, chemicals and agro-based products), Richardson Hindustan (manufacturing a range of vicks products, Clearasil cream and soap), and Johnson and Johnson (manufacturing a range of products for children and surgical sutures) have product-based departments.

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ENGINEERING MANAGEMENT AND ECONOMICS ADVANTAGES 1. This form relieves top management of operating task responsibility. It can therefore better concentrate on such centralized activities like finance, R and D and control. 2. This form enables top management to compare the performances of different products and invest more resources in profitable products and withdraw resources from unprofitable ones. 3. In this form, since the responsibility for each product's performance is entrusted to a particular departmental head, he is better stimulated for improving his performance. 4. In this form, those who work within a department derive greater satisfaction from identification with a recognizable goal.

DRAWBACKS 1. This form results in duplication of staff and facilities 2. Extra expenditure is incurred in maintaining a sales force for each product line. 3. Employment of a large number of managerial personnel is required. 4. Equipment in each product department may not be used fully.

ii. CUSTOMERS An enterprise may be divided into a number of departments on the basis of the customers that is services. For example, an electronics firm may have separate departments for military, industrial and consumer customers. A big automobile servicing enterprise may have separate departments for servicing cars, heavy vehicles and scooters or an educational institution may have separate departments for day, evening and correspondence courses to impart education to full-time students, locally employed students and outstation students, respectively. One big advantage of this form is that it ensures full attention to major customer groups and this helps the company to earn goodwill. The disadvantages of this form are that (i) it may result in under-utilization of resources and facilities in some departments; and (ii) there may be duplication of facilities. iii. REGIONS OR TERRITORY When several production or marketing units of an organization are geographically dispersed in various locations, it is logical to departmentalize those units on a geographical basis. The Indian

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ENGINEERING MANAGEMENT AND ECONOMICS Railways are departmentalized on this basis. Northern Railways, Western Railways, Southern Railways, Eastern Railways, Central Railways, etc., are departments in this sense.

ADVANTAGES 1. It motivates each regional head to achieve high performance. 2. It provides each regional head an opportunity to adapt to his local situation and customer need with speed and accuracy. 3. It affords valuable top-management training and experience to middle-level executives. 4. It enables the organisation to take advantage of location factors, such as availability of raw materials, labour, market, etc. 5. It enables the organisation to compare regional performances and invest more resources in profitable regions and withdraw resources from unprofitable ones. DRAWBACKS 1. It gives rise to duplication of various activities. Many routine and service functions performed by all the regional units can be performed centrally by the head office very economically. 2. Various regional units may become so engrossed in short-run competition among themselves that they may forget the overall interest of the total organisation. iv. TIME In departmentalization by time, activities are grouped on the basis of timing of their performance. For example, as a small machine shop grows in size, its owner has the choice of either adding extra shifts (thus separating identical sub-groups by time) or renting two more shops (thus separating the two sub-groups territorially). Generally, departmentalization by time is found in the production function of the enterprise. The major disadvantages of departmentalization by time are as follows: 1. Accidental occurrences, such as, machinery breakdown when carried over from one shift to another affect the product of the following shift also. 2. Workers of one shift generally develop a tendency to pass on some portion of their incomplete work to the workers of the following shift. 3. It becomes difficult for the management to correctly measure the performance of a certain department when the performance of that department does not remain confined to one-

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ENGINEERING MANAGEMENT AND ECONOMICS shift period but extends to the next shift. For example, how can one measure the performance of the head of the maintenance department whose performance is not likely to be confined to a time period as short as one shift? v. PROCESS Departmentalization is here done on the basis of several discrete processes or technologies involved in the manufacture of a product. For example, a concern engaged in the production of vegetable oil may have separate departments for crushing, refining and finishing. Similarly, a cotton textile mill may have separate departments for ginning, spinning, weaving, dyeing and printing and packing and sales.

In this way, whenever work that would otherwise be done in several different locations in an enterprise is done in one place because of the special equipment used, departmentalization by process is involved. ADVANTAGES 1. It facilitates the use of heavy and costly equipment in an efficient manner. There is very little chance for the equipment remaining idle or under-utilized because there is no duplication of the same. 2. It follows the principle of specialization-- each department is engaged in doing a special type of work. This increases efficiency. 3. It is suitable for organizations which are engaged in the manufacture of those products which involve a number of processes.

DRAWBACKS 1. It does not provide good training ground and opportunity for the overall development of managerial talent. 2. When the process is sequential, the dependent departments generally become hostile to other departments and they express their resentment either by complaining directly about other departments or by passing on inferior work to their successive departments. 3. It is difficult to compare the performance of different process-based departments, except in some notional way (for example, by calculating the profits of each department on the basis of transfer pricing).

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ENGINEERING MANAGEMENT AND ECONOMICS vi. COMBINED BASE It is quite typical to find an organization following a different base of departmentalization at different organizational levels. For example, an organization manufacturing agricultural machinery may follow 'product' as the base (tractor department, appliance department, generator department, etc) at the primary level (i.e., the level immediately below the chief executive), 'territory' as the base at the intermediate level and 'function' as the base at the ultimate level. The benefits of such an organization are as follows: 1. The problem of coordination, which plagues most functional designs, is minimized here because the project manager acts as an integrator to relate personnel from diverse disciplines. 2. There is a reservoir of specialists which ensures availability of expertise to all projects on the basis of their needs. 3. There is economy in cost-each project is assigned only the number of people it needs, thus avoiding unnecessary surplus. 4. There is an effective information decision system which enables members to respond quickly to the change in project needs. In fact, this form is, eminently suited to an organization with a continuing mission in which the specific tasks change frequently. If there is no continuing mission or if the tasks do not change or if their relative importance or sequence remains unchanged, there might be an ad hoc task force but there is no need for a matrix organization. 3.5 ORGANISATION STRUCTURE In the second sense, organization is the structural framework for carrying out the functions of planning, decision-making, control, communication, motivation, etc. The formal structure of an organization is two-dimensional--horizontal (Flat) and vertical (Tall). The horizontal dimension depicts differentiation of the total organizational job into different departments. The vertical dimension refers to the hierarchy of authority relationship with a number of levels from top to bottom. Authority flows downward along these levels. Higher the level, greater the authority and vice-versa. The usual way of depicting a formal organization is by means of an organization chart. It is a snapshot of an organization at a particular point in time which shows the flow of authority, responsibility and communication among various departments which are located at different levels of the hierarchy.

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ENGINEERING MANAGEMENT AND ECONOMICS The connecting lines on this chart show who is accountable to whom and who is in charge of what department. The chart has, however, certain limitations. It cannot show certain important aspects about the organization’s structure. These are as under: 1. It does not indicate who has the greater degree of responsibility and authority at each managerial level. 2. People often read into the chart meanings that are not intended. For example, employees may infer status and power according to one's distance on the chart from the chief executive box. 3. It does not indicate the organization’s informal relationships and channels of communication.

TYPES OF ORGANISATION (or) MECHANISTIC AND ORGANIC STRUCTURES Organization structures vary tremendously. Organizations may be departmentalized on the basis of function, product, place, or some combination of the three. An organization’s authority structure may range from highly centralized to decentralize. There may be small or large spans of management. Broadly, however, there are two types of structures: mechanistic and organic.

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ENGINEERING MANAGEMENT AND ECONOMICS A mechanistic or classical organisation structure is usually pyramid-shaped. This implies centralization of authority at the top, departmentalization of jobs, hierarchy of command, narrow span of supervision and intense division of labour. The merit of this type of structure is that it provides a clear and well-defined work setting to its employees. The demerits of this structure are as under: 1. Each individual carries out his assigned part as something apart from the overall purpose of the organisation as a whole. He does not care to know how his job fits into the entire picture. 2. Task, authority and information are arranged according to levels. As one descends through the levels, one finds the task more and simpler and the authority and information more and more reduced. People at lower levels are thus required to use very little skill and do not experience any sense of accomplishment. 3. Once the tasks of people at lower levels have been defined, it is difficult to change them. 4. Decision-making is centralized at the top. It is assumed that the boss at the top knows everything. It is he who determines what is important in the environment. 5. Communication is mostly downward between the superior and his subordinates in the form of commands. The upward flow of communication is very little and it takes place through a succession of filters. 6. There is insistence on loyalty to the organization and obedience to superiors as a condition of membership. An organic or behavioral structure has generally wider spans of control which give rise to a flat form, more general supervision and more decentralization. There is little specialization and hierarchy of command.

The merits of this type of structure are as under: 1. It is flexible; people's responsibilities and functions can be quickly changed to meet situational demands. 2. Communication takes place in all directions. The content of communication is information and advice and not commands and instructions. 3. Decision-making is not-centralized at the top. It is done by people at all levels. 4. Commitment to one's task is more highly valued than loyalty and obedience.

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ENGINEERING MANAGEMENT AND ECONOMICS 5. Task, authority and information flow to the person who has the greatest expertise to deal with the problem. He thus becomes the ad hoc focal point for every body in the organization. One demerit of organic structure is that due to people's tasks being ambiguous and changing, there is continuous uncertainty about their roles. This sometimes proves to be too exhausting for anyone to bear.

3. 6 REFERENCES Check your progress FILL UPS 1. An ------------------------------ is a social unit or human grouping, deliberately structured for the purpose of attaining specific goals. 2. The term ----------------------------- is also referred to as span of control, span of supervision, span of authority or span of responsibility. It includes the number of subordinates who report directly to a manager. 3. -------------------- are created when subordinates consult one another 4. --------------------------- is sometimes known as the 'chain of command'.

5. The-------------------------- is the tool by which a manager is able to accomplish the desired objective. POINTS TO REMEMBER

An organization is a social unit or human grouping, deliberately structured for the purpose of

attaining specific goals. Thus, corporations, armies, schools, hospitals, churches, prisons, etc.

The term 'organization' is used in two different senses.

ď&#x192;&#x2DC; ď&#x192;&#x2DC;

In the first sense it is used to denote the process of organizing. In the second sense it is used to denote the result of that process, namely, the organization structure.

3. Direct One To One Relationships These are relationships which relate the superior directly and individually with his immediate subordinates. Thus, A with two subordinates B and C will have two direct one to one relationships, viz. A to B and A to C.

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ENGINEERING MANAGEMENT AND ECONOMICS 4. Scalar principle This principle is sometimes known as the 'chain of command'. The line of authority from the chief executive at the top to the first-line supervisor at the bottom must be clearly defined MODEL QUESTIONS AND ANSWERS 1. Define organization and explain its process. Answer According to Amitai Etzioni, “an organization is a social unit or human grouping, deliberately structured for the purpose of attaining specific goals. Thus, corporations, armies, schools, hospitals, churches, prisons, etc. All are organizations. But tribes, ethnic and friendship groups and families are not organizations because they do not involve any significant amount of conscious planning or deliberate structuring”. PROCESS OF ORGANISING DEFINITION The term 'organization' is used in two different senses. In the first sense it is used to denote the process of organizing. In the second sense it is used to denote the result of that process, namely, the organization structure. CONSIDERATION OF OBJECTIVES Management writers, such as Alfred D. Chandler refer to this phenomenon as one in which "structure follows strategy." For example, the structure required for an army is different from the structure required for a business enterprise. In view of this, consideration of objectives is the first step in the process of organization is; 

Grouping Of Activities Into Departments After the consideration of objectives, the next step is to identify the activities necessary to

achieve them and to group the closely related and similar activities into divisions and departments. For example, the activities of a manufacturing concern may be grouped into such departments as production, marketing, financing and personnel.



Deciding Which Departments Will Be Key Departments

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ENGINEERING MANAGEMENT AND ECONOMICS Key departments are those which are rendering key activities, i.e., activities essential for the fulfillment goals. Such key departments demand key attention. Other departments exist merely to serve them. Experience suggests that where key departments are not formally identified, the attention of top management is focused on the minor issues raised by vocal managers. This is known as the 'decibel system' of management. The key departments should be placed directly under higher management. 

Determining Levels At Which Various Types Of Decisions Are To Be Made After deciding the relative importance of various departments, the levels at which various

major and minor decisions are to be made must be determined. Each firm must decide for itself as to how much decentralization of authority and responsibility it wants to have. Extreme decentralization may lead to loss of control and effective coordination as a result of which the firm as a whole may fail to achieve its overall objectives. 

Determining The Span Of Management The next step to be taken in designing a structure is to determine the number of subordinates

who should report directly to each executive. The narrower the span, the taller would be the structure with several levels of management. This will complicate communication and increase the payroll. 

Setting Up A Coordination Mechanism Emphasizing the importance of coordination in an organization, Peter Drucker says that an

organization is like a tune. It is not constituted of individual sounds but of the relations between them. As individuals and departments carry out their specialized activities, the overall goals of the organization may become submerged or conflicts among organization members may develop. For example, production managers in a manufacturing company may press for a standardized product line to hold down costs, when the larger interests of the company may be the best served by a diversified product line.

2. Write down the Span of management and its relationship. Answer SPAN OF MANAGEMENT MEANING The term 'span of management' is also referred to as span of control, span of supervision, span of authority or span of responsibility. It includes the number of subordinates who report directly to a manager.

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Appropriate Span The search for guidelines by which we can determine the ideal number of subordinates directly reporting to a manager has long been a preoccupation of management writers. Different writers have suggested different number of subordinates for effective supervision by the managers. VARIOUS TYPES OF RELATIONSHIPS INVOLVED i.

Direct One To One Relationships These are relationships which relate the superior directly and individually with his immediate

subordinates. Thus, A with two subordinates B and C will have two direct one to one relationships, viz. A to B and A to C.

ii.

Direct Group Relationships: Direct group relationships exist between the superior and each possible combination of

subordinates. In the above example, A may talk to B with C in attendance or A may talk to C with B in attendance. According to Graicunas, these two cases have different psychological implications, though the individuals are the same in both the cases. Where the number of subordinates is large, the number of direct group relationships can be found out by the following formula: n (2^n/2-1), where n stands for the number of subordinates.

iii. Cross-Relationships: Cross-relationships are created when subordinates consult one another. In the above example, the two cross-relationships created are B with C and C with B.

The formula for finding the number of these relationships is n(n-1). The formula to ascertain the number of all three kinds of relationships is as under: Number of relationships = n (2^n/2 + n-1).

3. What is combined base and describe its benefits? Answer COMBINED BASE It is quite typical to find an organization following a different base of departmentalization at different organizational levels. For example, an organization manufacturing agricultural machinery may follow 'product' as the base (tractor department, appliance department, generator department, etc) at the primary level (i.e.,

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ENGINEERING MANAGEMENT AND ECONOMICS the level immediately below the chief executive), 'territory' as the base at the intermediate level and 'function' as the base at the ultimate level. The benefits of such an organization are as follows: 1. The problem of coordination, which plagues most functional designs, is minimized here because the project manager acts as an integrator to relate personnel from diverse disciplines. 2. There is a reservoir of specialists which ensures availability of expertise to all projects on the basis of their needs. 3. There is economy in cost-each project is assigned only the number of people it needs, thus avoiding unnecessary surplus. 4. There is an effective information decision system which enables members to respond quickly to the change in project needs. In fact, this form is, eminently suited to an organization with a continuing mission in which the specific tasks change frequently. If there is no continuing mission or if the tasks do not change or if their relative importance or sequence remains unchanged, there might be an ad hoc task force but there is no need for a matrix organization. ANSWER FOR FILL UPS 1. An organization 2. 'span of management' 3. Cross-relationships 4. Scalar principle 5. authority

3.7 AUTHORITY AND RESPONSIBILITY SOURCES OF FORMAL AUTHORITY There are two major views on the origin or source of formal authority in organizations. These are, the classical, and the human-relations views. Classical View According to this view, authority originates at the top in the formal structure of an organization and then flows downward to subordinates. It means that managers at each level of the organization derive their authority from the managers at the higher level. For example, an assistant foreman receives authority from the foreman; a foreman receives it from the assistant production manager, an assistant production manager from the production manager, the production manager from the general manager and the general manager from the board of directors.

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Human View Relations According to this view, the authority of a superior depends on the willingness of his subordinates to accept it. The authority becomes somewhat meaningless unless those affected accept it and respond to it. If the subordinates do not accept authority, it is not real and does not exist. For example, if a superior storms along an assembly-line shouting at everyone to work hard, the subordinates may not question the superior's right to do so but they may choose not to comply with the order. The order will then be robbed of its authority.

A subordinate accepts his superior's authority because he considers it to be legitimate. According to Max Weber, the three major bases of legitimacy are tradition, rationality and charisma. Tradition as the basis of authority implies that the subordinates accept his superiorâ&#x20AC;&#x2122;s authority because it has traditional support. Rationality as the basis of authority implies that the superior has demonstrated his ability to fulfill the requirements of the position. Charisma as the basis of authority occurs in those instances where the superior possesses magnetic personality or simply extraordinary qualities which enable him to capture a following. The usefulness of this view is limited partially by the fact of life that those who have formal authority also usually have various sanctions which have a source of power in helping them enforce it. If a subordinate does not accept the authority of his superior, he knows, he will have to face several unpleasant consequences, such as, dismissal, penalty, fine etc., and hence the subordinate in his own interest accepts the authority of his superior. Most subordinates are unwilling to accept the authority of the superiors outside certain limits, which Herbert A. Simon refers to as "zones of acceptance". These areas vary from worker to worker and from situation to situation. A subordinate will reject an order outside his area of acceptance regardless of the sanctions imposed upon him. Most managers, intuitively aware of their worker's areas, avoid overstepping them. According to Chester I. Barnard, four conditions must exist to make an order acceptable to a person: 1. He must understand the order. 2. He must believe that it is not inconsistent with the purpose of the organisation. 3. He must believe that it is not incompatible with his personal interest. 4. He must be mentally and physically able to comply with it.

USES OF AUTHORITY According to Herbert A. Simon, three functions of authority deserve special notice:

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1. It Enforces Obedience To Norms The subordinate who accepts the authority of the superior is motivated to a very great extent by the fear of sanctions. He knows that if he disobeys, an elaborate set of sanctions may be invoked against him.

2. It Secures Expertise In The Making Of Decisions An extremely important function of authority is to enable the enforcement and execution of expert advice given by specialists in the organization. A fundamental device for securing this is to locate the specialist in a strategic position in the formal hierarchy of authority, that is, in a position where his decisions will be accepted as decisional premises by other organizational members. 3. It Permits Centralization Of Decision-Making And Coordination Of Activity By the exercise of authority, it is possible to centralize the function of decision-making and to force all members to take mutually consistent decisions RESPONSIBILITY Just as authority is the right to a superior to issue commands, responsibility is the obligation of a subordinate to obey those commands. Thus, when a superior assigns some work to a subordinate, it becomes his responsibility to perform it. Responsibility has two dimensions. One dimension may be expressed as responsibility for, the other as responsibility to. Responsibility for is the obligation of a person to perform certain duties written in his job description or otherwise accepted by him. Responsibility to is his accountability to his superiors. It is inevitably associated with check-up, supervision control and punishment. Responsibility cannot be delegated or transferred. The superior can delegate to a subordinate the authority to perform and accomplish a specific job. But he cannot delegate responsibility in the sense that once duties are assigned, he is relieved of the responsibility for them. This delegation of tasks does not absolve the superior from his own responsibility for effective performance of his subordinate. In other words, we can say that responsibility is divided into two parts at the time of delegation: (a) Operating responsibility; (b) Ultimate responsibility. The subordinate assumes only the operating responsibility for the task. The superior retains ultimate responsibility for getting the job done. If the subordinate fails to perform the job (operating responsibility), the superior is held responsible for his failure (ultimate responsibility). To explain that the ultimate responsibility cannot be shifted or reduced by assigning duties to another, Newman cites the example of a person borrowing money from the bank and then re loaning it to his son. This

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ENGINEERING MANAGEMENT AND ECONOMICS transaction with his son in no way reduces his own obligation and responsibility to repay the money to the bank.

Responsibility may be specific or continuing. It is specific when on being discharged by a subordinate it does not arise again. Thus, a consultant's responsibility is specific. It cases when the assignment is completed. The responsibility of a foreman is, however, of a continuing nature. Authority Should Equal Responsibility This means that the subordinate must have been delegated enough authority to undertake all the duties which have been assigned to him and for which he has accepted responsibility. A subordinate manager cannot be expected to accept responsibility for activities for which he has no authority. The advocates of this parity principle say that authority and responsibility should be exactly equal. The subordinate should not have more authority than responsibility or vice versa. Inequality between the two produces undesirable results. If authority exceeds responsibility, a misuse of authority can easily result. On the other hand, if responsibility exceeds authority, the subordinate may find himself in a very frustrating situation. But as Haimann points out, there are some situations where the strict application of this principle would not be advisable. For example, in emergency situations, executives often exceed the limits of their authority without any criticism.

3. 8 DELEGATION OF AUTHORITY MEANING A manager in an enterprise cannot himself do all the tasks necessary for the accomplishment of group goals. Clearly, his capacity to do work and to take decisions is limited. He, therefore, assigns some part of his work to his subordinates and also gives them necessary authority to make decisions within the area of their assigned duties. This downward pushing of authority to make decisions is known as delegation of authority. In the words of Louis A Allen, "If the manager requires his subordinate to perform the work, he must entrust him with part of the rights and powers which he otherwise would have to exercise himself to get that work done." It should be remembered, however, that by delegating authority the manager does not surrender his authority or give this authority away. The delegating manager always retains the overall authority which was assigned to him to perform his functions.

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ENGINEERING MANAGEMENT AND ECONOMICS As Terry has observed, "it is something like imparting knowledge. You share with others who then possess the knowledge, but you still retain the knowledge too." According to Mary Parker Follet, “the idea of delegating authority is a fallacy because many positions carry with them their own authority. The director of a hospital does not give authority to a surgeon; the position of surgeon already contains authority. If the director gives more or less authority, he is expanding or contracting the position itself.” 3.9 DECENTRALISATION OF AUTHORITY: MEANING The delegation of authority by an individual manager is closely related to an organization’s decentralization of authority. Every organisation has to decide as to how much decision-making authority should be centralized in hands of the chief executive and how much should be distributed among the managers at lower levels. In a centralized set-up, the decision-making authority is concentrated in a few hands at the top and in a decentralized set-up, it is delegated to the levels where the work is to be performed. Ernest Dale mentions four criteria to measure the extent of decentralization in an organisation. He states that whenever decentralization is greater, 1. The greater is the number of decisions made at lower levels; 2. The more important are the decisions made at lower levels; 3. The more is the number of areas in which decisions can be made at lower levels; and 4. The fewer are the people to be consulted and less is the checking required on the decisions made at the lower levels. In the words of Fayol, "everything that goes to increase the importance of the subordinate's role is decentralization and everything that goes to reduce it is decentralization."

3. 10 REFERENCES Check your progress FILL UPS 1. The delegation of authority by an individual manager is closely related to an -----------------------------2. Responsibility has two dimensions. One dimension may be expressed as ----------------------------

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ENGINEERING MANAGEMENT AND ECONOMICS -----------------3. Everything that goes to increase the importance of the subordinate's role is -------------------------4. The term 'span of management' is also referred to as ----------------------------------------------------------------------------------5. ------------------------cannot be delegated or transferred. POINTS TO REMEMBER 1. According to Chester I. Barnard, four conditions must exist to make an order acceptable to a person: 

He must understand the order.



He must believe that it is not inconsistent with the purpose of the organisation.



He must believe that it is not incompatible with his personal interest.



He must be mentally and physically

2. In other words, we can say that responsibility is divided into two parts at the time of delegation:



Operating responsibility;



Ultimate responsibility.

The delegation of authority by an individual manager is closely related to an organization’s

decentralization of authority. Every organisation has to decide as to how much decision-making authority should be centralized in hands of the chief executive and how much should be distributed among the managers at lower levels. MODEL QUESTIONS AND ANSWERS 1. Explain authority and responsibility. Answer AUTHORITY AND RESPONSIBILITY There are two major views on the origin or source of formal authority in organizations. These are, the classical, and the human-relations views.

Classical View According to this view, authority originates at the top in the formal structure of an organization and then flows downward to subordinates. It means that managers at each level of the organization derive their authority from the managers at the higher level.

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ENGINEERING MANAGEMENT AND ECONOMICS For example, an assistant foreman receives authority from the foreman; a foreman receives it from the assistant production manager, an assistant production manager from the production manager, the production manager from the general manager and the general manager from the board of directors. Human View Relations According to this view, the authority of a superior depends on the willingness of his subordinates to accept it. The authority becomes somewhat meaningless unless those affected accept it and respond to it. If the subordinates do not accept authority, it is not real and does not exist. For example, if a superior storms along an assembly-line shouting at everyone to work hard, the subordinates may not question the superior's right to do so but they may choose not to comply with the order. The order will then be robbed of its authority. A subordinate accepts his superior's authority because he considers it to be legitimate. According to Max Weber, the three major bases of legitimacy are tradition, rationality and charisma. Tradition as the basis of authority implies that the subordinates accept his superiorâ&#x20AC;&#x2122;s authority because it has traditional support. Rationality as the basis of authority implies that the superior has demonstrated his ability to fulfill the requirements of the position. Charisma as the basis of authority occurs in those instances where the superior possesses magnetic personality or simply extraordinary qualities which enable him to capture a following. The usefulness of this view is limited partially by the fact of life that those who have formal authority also usually have various sanctions which have a source of power in helping them enforce it. If a subordinate does not accept the authority of his superior, he knows, he will have to face several unpleasant consequences, such as, dismissal, penalty, fine etc., and hence the subordinate in his own interest accepts the authority of his superior. Most subordinates are unwilling to accept the authority of the superiors outside certain limits, which Herbert A. Simon refers to as "zones of acceptance". These areas vary from worker to worker and from situation to situation. A subordinate will reject an order outside his area of acceptance regardless of the sanctions imposed upon him. Most managers, intuitively aware of their worker's areas, avoid overstepping them. According to Chester I. Barnard, four conditions must exist to make an order acceptable to a person: 1. He must understand the order. 2. He must believe that it is not inconsistent with the purpose of the organisation. 3. He must believe that it is not incompatible with his personal interest. 4. He must be mentally and physically able to comply with it.

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USES OF AUTHORITY According to Herbert A. Simon, three functions of authority deserve special notice: 1. It Enforces Obedience To Norms The subordinate who accepts the authority of the superior is motivated to a very great extent by the fear of sanctions. He knows that if he disobeys, an elaborate set of sanctions may be invoked against him. 2. It Secures Expertise In The Making Of Decisions An extremely important function of authority is to enable the enforcement and execution of expert advice given by specialists in the organization. A fundamental device for securing this is to locate the specialist in a strategic position in the formal hierarchy of authority, that is, in a position where his decisions will be accepted as decisional premises by other organizational members. 3. It Permits Centralization Of Decision-Making And Coordination Of Activity By the exercise of authority, it is possible to centralize the function of decision-making and to force all members to take mutually consistent decisions RESPONSIBILITY Just as authority is the right to a superior to issue commands, responsibility is the obligation of a subordinate to obey those commands. Thus, when a superior assigns some work to a subordinate, it becomes his responsibility to perform it. Responsibility has two dimensions. One dimension may be expressed as responsibility for, the other as responsibility to. Responsibility for is the obligation of a person to perform certain duties written in his job description or otherwise accepted by him. Responsibility to is his accountability to his superiors. It is inevitably associated with check-up, supervision control and punishment. Responsibility cannot be delegated or transferred. The superior can delegate to a subordinate the authority to perform and accomplish a specific job. But he cannot delegate responsibility in the sense that once duties are assigned, he is relieved of the responsibility for them. This delegation of tasks does not absolve the superior from his own responsibility for effective performance of his subordinate. In other words, we can say that responsibility is divided into two parts at the time of delegation: o

Operating responsibility;

Ultimate responsibility.

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The subordinate assumes only the operating responsibility for the task. The superior retains ultimate responsibility for getting the job done. If the subordinate fails to perform the job (operating responsibility), the superior is held responsible for his failure (ultimate responsibility). To explain that the ultimate responsibility cannot be shifted or reduced by assigning duties to another, Newman cites the example of a person borrowing money from the bank and then re loaning it to his son. This transaction with his son in no way reduces his own obligation and responsibility to repay the money to the bank. Responsibility may be specific or continuing. It is specific when on being discharged by a subordinate it does not arise again. Thus, a consultant's responsibility is specific. It cases when the assignment is completed. The responsibility of a foreman is, however, of a continuing nature. Authority Should Equal Responsibility This means that the subordinate must have been delegated enough authority to undertake all the duties which have been assigned to him and for which he has accepted responsibility. A subordinate manager cannot be expected to accept responsibility for activities for which he has no authority. The advocates of this parity principle say that authority and responsibility should be exactly equal. The subordinate should not have more authority than responsibility or vice versa. Inequality between the two produces undesirable results. If authority exceeds responsibility, a misuse of authority can easily result. On the other hand, if responsibility exceeds authority, the subordinate may find himself in a very frustrating situation. But as Haimann points out, there are some situations where the strict application of this principle would not be advisable. For example, in emergency situations, executives often exceed the limits of their authority without any criticism.

2. Define delegation of authority Answer DELEGATION OF AUTHORITY MEANING A manager in an enterprise cannot himself do all the tasks necessary for the accomplishment of group goals. Clearly, his capacity to do work and to take decisions is limited. He, therefore, assigns

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ENGINEERING MANAGEMENT AND ECONOMICS some part of his work to his subordinates and also gives them necessary authority to make decisions within the area of their assigned duties. This downward pushing of authority to make decisions is known as delegation of authority. DEFINITION In the words of Louis A Allen, "If the manager requires his subordinate to perform the work, he must entrust him with part of the rights and powers which he otherwise would have to exercise himself to get that work done." It should be remembered, however, that by delegating authority the manager does not surrender his authority or give this authority away. The delegating manager always retains the overall authority which was assigned to him to perform his functions. As Terry has observed, "it is something like imparting knowledge. You share with others who then possess the knowledge, but you still retain the knowledge too." According to Mary Parker Follet, “the idea of delegating authority is a fallacy because many positions carry with them their own authority. The director of a hospital does not give authority to a surgeon; the position of surgeon already contains authority. If the director gives more or less authority, he is expanding or contracting the position itself.”

ANSWER FOR FILL UPS 1. organization’s decentralization of authority 2. responsibility for, the other as responsibility to. 3. decentralization. 4. span of control, span of supervision, span of authority or span of responsibility. 5. Responsibility

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UNIT â&#x20AC;&#x201C; IV DIRECTING 4. 1 DIRECTING INTRODUCTION Directing may be defined as the process of instructing, guiding and inspiring human factors in the org to achieve org objectives. It is not only issuing orders and instructing by a superior to his subordinates but also including the process of guiding and inspiring them to work effectively. Directing includes the following elements 1. Leadership 2. Motivation 3. Communication The characteristics of the directing are summarized as follows 1. Directing is an important managerial function through which the management initiates actions in the organization. 2. It is performed at the level of mgt. Every manager in the org performs his duties both as superior and a subordinate. 3. It is a continuous process and it continues throughout the life of the organization.

4. It has dual objectives. It aims at getting work done by the subordinates and the other hand, to provide superiors opportunities for the same more important work which their subordinates cannot do.

5. It is basically initiates at the top level of the org and the follows to bottom through the hierarchy. It emphasis that a subordinate is to be directed by his own superior only SCOPE OF DIRECTING The scope or importance of the directing in the org lies in the fact that every action is initiated through the direction. Directing inform the human beings in the organization objectives what he should do, how he should do, and when he should do. The scope of the directing in the org is summarized as follows: 1. Directing conveys mgt perspective of the org to the individuals and motivates them to function in the desired way to meet the organizational objective. Therefore, directing initiates the planning, organizing, staffing etc.

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2. Directing integrates the employee's individual efforts to make it effective to achieve org objectives, since each individuals performance of others in the organization. 3. Without having proper motivation, leadership and potential may not be fully utilized. Those motivation, leadership and communication are the elements of directing. Therefore, directing provides the way to utilize the capability of the individual and the attempts to get maximum out of them. 4. Any changes in the society, where the org exists, will affect the org structure and the individuals within it. Directing motivates individuals affected by these changes to incorporate and implement the changes. Directing within its elements provide stability in the org and maintain balances in the different parts of the organization.

4. 2 COMMUNICATION Communication is the process of passing of information from one person to another person. It should always be clear and understood by the person who receives the communication.

In our life, we are talking for nearly 27 years. This period is covering 10,000 books of 400 pages each. Usually, we spent up to 90% of working hours for communicating with others. Among this, 60% is for both talking and listening and remaining 20 to 30% for reading and writing. 4. 3 METHODS OF COMMUNICATION Generally, communication can be broadly classified into (1) Formal communication (2) Informal communication (1) FORMAL COMMUNICATION Formal communication flows through proper channel. It refers the way in which the information is sent and it has a recognized position in organizational structure. It is also named as â&#x20AC;&#x153;through proper channelâ&#x20AC;?. It regulates the flow of communication and ensures smooth, accurate and timely passing of information. It facilitates effective functioning of an organization. This type of communication can be done in two methods. (a) Written communication (b) Oral communication

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ENGINEERING MANAGEMENT AND ECONOMICS (a) Written communication The passing of information in writing is done from one person to another. E.g. circulars, posters, etc. Advantages 1. It provides a permanent record for further reference. 2. It is very suitable for lengthy messages 3. It is tangible and verifiable 4. This is the one only method for sending messages to far – off places.

Disadvantages 1. The process is slow 2. Feed back is not known immediately 3. Doubts cannot be clarified immediately 4. It requires skill and education for understanding. (b) Oral communication In this method, the information is passed on orally from one person to another. It can be done by face to face, in meetings or by telephone etc. Advantages 1. Doubts are clarified immediately 2. Feed back is known 3. It provides team sprit 4. Personality of the sender influences the process of communication 5. Quick and effective method. Disadvantages 1. There is no permanent record of the communication 2. It is more likely to be forgotten or dissorted 3. It is likely to be misunderstood and noisy 4. It is not suitable for lengthy messages. (2) INFORMAL COMMUNICATION

People who know each other in the organization talk together informally. Whenever they meet each other they normally talk about the happenings in the organization known as ‘grapevine’. The two types of information are carried out follows.

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1. Work related 2. People related

This informal communication exists outside the official network but continually interacts with formal communication. It is structure less and information passes through it in all directions. Characteristics of informal communication 1. It is mostly oral 2. It reaches people faster 3. Mostly it is found to be accurate 4. It helps the management to know the reactions of employees while making critical decisions.

Advantages 1. It is more flexible and must faster when compared to formal communication 2. It is much freer to lead less distortion 3. It carries ready conviction and acceptance. 4. 4 BARRIERS OF COMMUNICATION The message sent by the sender to the receiver which may not be effectively understood by the receiver in the same sense. It is due to several reasons. Some problems arise in its encoding and decoding or communication channel. So, the barriers to effective communications in an organization may be broadly classified in to following groups. 1. Physical barriers 2. Socio- psychological or personnel barriers 3. Organizational barriers 4. Semantic barriers 5. Mechanical barriers 1. Physical barriers These barriers are environment factors that reduce the sending and receiving of communication. It includes physical distance, distracting noises and other interferences. Difficulty in passing of message mainly increases with increase in physical distance. 2. Socio- psychological or personnel barriers It arises from motives, attitudes, judgment and emotions. Finally, it leads to psychological distances. It may be caused due to problems in encoding and decoding others sentiments, attitudes

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and motives. So, respectability and creditability of messages are subjected to several mental and social barriers. 3. Organizational barriers Usually,

information

flows

through

hierarchal

structure

organization

downward

communication. So, there may chances of information being filtered. Example: The information received from top to bottom may not reach in the same sense. Sometimes, the information may be colored favorably according to his own situations. It is done by intermediate person between top and bottom status is also a barrier of communication in a formal organizations. H.Kelly discovered a few interesting effects of status upon communication as below. a. Low status members communicate more task irrelevant information than high status members. b. High status persons appear to be restrained from communication criticison, negative attitudes. c.

Communication with high status persons tends to serve as a substitute for upward locomotion on the part of low status persons having no real possibility of upward locomotion. Poor supervision also serves as a communication barrier.

4. Semantic barriers It refers to the relationship of signs to their reference. It arises due to limitations of the symbolic system. Symbols may reach a personâ&#x20AC;&#x2122;s brain through any of the senses such as feeling or hearing. Generally, symbols may be classified as language, picture, and action. Language One of the staticâ&#x20AC;&#x2122;s report gives the information about different time consumption in communication such as first level supervisors spend 74% of their time in communication, second level supervisors spend 81% and third level supervisors by 87%.understanding of language is a major or difficulty among leader. It leads to context to the receiver. Picture Picture are visual aids in communication e.g., blue prints, charts, maps, fictions, 3- D model etc. sometimes, pictures may create confusion in the mind of the receiver.

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ENGINEERING MANAGEMENT AND ECONOMICS Action Action is also known as non-verbal communication. It speaks louder than words. The people do not listen to what he does. So, it leads to credibility group. 5. Mechanical barriers It includes inadequate arrangement for transmission of new, facts and figure, poor office layout, defective procedure as and practices.

4. 5 REFERENCES Check your progress

FILL UPS 1. Directing may be defined as the process of -------------------------------- human factors in the org to achieve org objectives. 2.

Directing is not only ----------------------------- by a superior to his subordinates but also including

the process of guiding and inspiring them to work effectively. 3.

----------------is the process of passing of information from one person to another person

------------------------ is the method, the information is passed on orally from one person to

another. It can be done by face to face, in meetings or by telephone etc. 5.

--------------------- flows through prefer channel.

6. People who know each other in the organization talk together informally. Whenever they meet each other they normally talk about the happenings in the organization known as --------------------

POINTS TO REMEMBER 1. Directing includes the following elements

1. Leadership 2. Motivation 3. Communication

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ENGINEERING MANAGEMENT AND ECONOMICS 2. Formal communication flows through prefer channel. It refers the way in which the information is sent and it has a regonised position in organisational structure. It is also named as “through proper channel”. 3. Formal communication regulates the flow of communication and ensures smooth, accurate and timely passing of information. It facilitates effective functioning of an organization.

4. Communication can be broadly classified into 

Formal communication



Informal communication

5. Physical barriers are environment factors that reduce the sending and receiving of communication. It includes physical distance, distracting noises and other interferences. Difficulty in passing of message mainly increases with increase in physical distance. 6. Picture are visual aids in communication e.g., blue prints, charts, maps, fictions, 3- D model etc. sometimes, pictures may create confusion in the mind of the receiver.

MODEL QUESTIONS AND ANSWERS 1. Define directing and characteristic of directing. Answer Directing may be defined as the process of instructing, guiding and inspiring human factors in the org to achieve org objectives. It is not only issuing orders and instructing by a superior to his subordinates but also including the process of guiding and inspiring them to work effectively. Directing includes the following elements 1. Leadership 2. Motivation 3. Communication

The characteristics of the directing 1. Directing is an important managerial function through which the management initiates actions in the organization. 2. It is performed at the level of mgt. Every manager in the org performs his duties both as superior and a subordinate.

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3. It is a continuous process and it continues throughout the life of the organization. 4. It has dual objectives. It aims at getting work done by the subordinates and the other hand, to provide superiors opportunities for the same more important work which their subordinates cannot do. 5. It is basically initiates at the top level of the org and the follows to bottom through the hierarchy. It emphasis that a subordinate is to be directed by his own superior only

2. Explain communication and its method.

Answer

COMMUNICATION Communication is the process of passing of information from one person to another person. It should always be clear and understood by the person who receives the communication. In our life, we are talking for nearly 27 years. This period is covering 10,000 books of 400 pages each. Usually, we spent up to 90% of working hours for communicating with others. Among this, 60% is for both talking and listening and remaining 20 to 30% for reading and writing.

METHODS OF COMMUNICATION Generally, communication can be broadly classified into 

Formal communication



Informal communication

FORMAL COMMUNICATION Formal communication flows through prefer channel. It refers the way in which the information is sent and it has a recognized position in organizational structure. It is also named as “through proper channel”. It regulates the flow of communication and ensures smooth, accurate and timely passing of information. It facilitates effective functioning of an organization. This type of communication can be done in two methods. (a) Written communication (b) Oral communication

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ENGINEERING MANAGEMENT AND ECONOMICS (a) Written communication The passing of information in writing is done from one person to another. E.g. circulars, posters, etc.

Advantages 

It provides a permanent record for further reference.



It is very suitable for lengthy messages



It is tangible and verifiable



This is the one only method for sending messages to far – off places. Disadvantages 

The process is slow



Feed back is not known immediately



Doubts cannot be clarified immediately



It requires skill and education for understanding.

(b) Oral communication In this method, the information is passed on orally from one person to another. It can be done by face to face, in meetings or by telephone etc. Advantages 

Doubts are clarified immediately



Feed back is known



It provides team sprit



Personality of the sender influences the process of communication



Quick and effective method.

Disadvantages 

There is no permanent record of the communication



It is more likely to be forgotten or distorted



It is likely to be misunderstood and noisy



It is not suitable for lengthy messages.

INFORMAL COMMUNICATION People who know each other in the organization talk together informally. Whenever they meet each other they normally talk about the happenings in the organization known as ‘grapevine’. The two types of information are carried out follows.

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

Work related



People related This informal communication exists outside the official network but continually interacts with

formal communication. It is structure less and information passes through it in all directions.

Characteristics of informal communication 

It is mostly oral



It reaches people faster



Mostly it is found to be accurate



It helps the management to know the reactions of employees while making critical decisions.

Advantages 

It is more flexible and must faster when compared to formal communication



It is much freer to lead less distortion



It carries ready conviction and acceptance.

3. Describe the barriers of communication. Answer

BARRIERS OF COMMUNICATION The message sent by the sender to the receiver which may not be effectively understood by the receiver in the same sense. It is due to several reasons. Some problems arise in its encoding and decoding or communication channel. So, the barriers to effective communications in an organization may be broadly classified in to following groups. 

Physical barriers



Socio- psychological or personnel barriers



Organisational barriers



Semantic barriers



Mechanical barriers

Physical barriers These barriers are environment factors that reduce the sending and receiving of communication. It includes physical distance, distracting noises and other interferences. Difficulty in passing of message mainly increases with increase in physical distance.

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Socio- psychological or personnel barriers It arises from motives, attitudes, judgment and emotions. Finally, it leads to psychological distances. It may be caused due to problems in encoding and decoding others sentiments, attitudes and motives. So, respectability and creditability of messages are subjected to several mental and social barriers.

Organizational barriers Usually,

information

flows

through

hierarchal

structure

organization

downward

Semantic barriers It refers to the relationship of signs to their reference. It arises due to limitations of the symbolic system. Symbols may reach a personâ&#x20AC;&#x2122;s brain through any of the senses such as feeling or hearing. Generally, symbols may be classified as language, picture, and action. Language One of the staticâ&#x20AC;&#x2122;s report gives the information about different time consumption in communication such as first level supervisors spend 74% of their time in communication, second level supervisors spend 81% and third level supervisors by 87%.understanding of language is a major or difficulty among leader. It leads to context to the receiver. Picture Picture are visual aids in communication e.g., blue prints, charts, maps, fictions, 3- D model etc. sometimes, pictures may create confusion in the mind of the receiver.

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ENGINEERING MANAGEMENT AND ECONOMICS Action Action is also known as non-verbal communication. It speaks louder than words. The people do not listen to what he does. So, it leads to credibility group.

Mechanical barriers It includes inadequate arrangement for transmission of new, facts and figure, poor office layout, defective procedure as and practices.

4. List out the scope of directing Answer

SCOPE OF DIRECTING The scope or importance of the directing in the org lies in the fact that every action is initiated through the direction. Directing inform the human beings in the organization objectives what he should do, how he should do, and when he should do. The scope of the directing in the org is summarized as follows: 1. Directing conveys mgt perspective of the org to the individuals and motivates them to function in the desired way to meet the organizational objective. Therefore, directing initiates the planning, organizing, staffing etc. 2. Directing integrates the employee's individual efforts to make it effective to achieve org objectives, since each individuals performance of others in the organization. 3. Without having proper motivation, leadership and potential may not be fully utilized. Those motivation, leadership and communication are the elements of directing. Therefore, directing provides the way to utilize the capability of the individual and the attempts to get maximum out of them.

4. Any changes in the society, where the org exists, will affect the org structure and the individuals within it. Directing motivates individuals affected by these changes to incorporate and implement the changes. Directing within its elements provide stability in the org and maintain balances in the different parts of the organization. ANSWER FOR FILL UPS 1. instructing, guiding and inspiring 2. issuing orders and instructing

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ENGINEERING MANAGEMENT AND ECONOMICS 3. Communication 4. Oral communication 5. Formal communication 6. ‘grapevine’

4. 6 LEADERSHIP Leader is an integral part of management and plays a vital role in managerial operation. Leadership exists in any type of organization. If there is any single factor that differentiates between successful and unsuccessful organizations, it could be considered as dynamics and effective leadership. Early notations about leadership dealt with it almost in terms of personnel abilities. Leadership is viewed as a characteristic of the individual.

Meaning and definitions of leadership Leadership is the process of influencing the behavior of others towards the accomplishment of goals in given situation. Knootz and O’Donnel have defined, “Leadership is the art of process of influencing people so that they will strive willingly towards the achievement of group goals. 4. 7 TYPES OF LEADER The behavioral exhibited by a leader during supervision of followers is known as leadership style. It can be classified into three types on the basis of how leader uses their power. Autocratic, participative and free rein. 1. Autocratic or dictatorial leadership In this type of leadership, the leader takes all decisions by himself without consulting subordinates. Full authority is held himself alone. He loves power and never delegates authority. The subordinates have to follow his direction without any question. The leader uses threats and punishments to get work from subordinates. There are three types of autocratic leaders. (a) Strict autocrat The leader follows autocratic styles in a very strict sense. He follows negative motivation for getting work from subordinates.

(b) Benevolent autocrat This leader also takes decisions by himself but his motivation style is positive.

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ENGINEERING MANAGEMENT AND ECONOMICS (c) Incompetent autocrat Some times, leader autocratic leadership style just to hide their inabilities. i.e., incompetence. But this cannot be used for a long time.

Autocratic leadership style is appropriate where 

The subordinates lack their knowledge of company goals.



The subordinates are inexperienced or lack of training



The company endorser fear and punishment as accecpted disciplinary techniques.



The leader prefers to be active and dominant in decision making



There is a little room for error in final accomplishment.

Advantages 

It facilitates quick decision making



It provides strong motivation and satisfication to the leader who decades terms



Highest productivity



Less competent subordinates needed at lower level



It can yield positive outcome under conditions of stress

Limitations 

Employee morale will be low



Absence of leader will affect the output heavily



Dissatisfaction will develop among employees



Employee turnover will be more



Full potential of subordinates and their creative ideas are not utilized



One way of communication without feedback leads to misunderstanding and communications breakdown.

2. Participative or Democratic leadership In this type of leadership, the subordinates are consulted and their feedback is taken into decision making process. Decisions are taken after group discussions. Therefore, the authority is decentralized. The participative leader attaches high importance to both work and people. He provides freedom of thinking and expression. Participative leadership is best suited where 

The leadership truly desires to hear the ideas of his employees before making decisions



The organisation has communicated its goals and the objectives to the subordinates and the subordinates have accecpted them

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The workers are reasonably knowledge and experienced



The time for task completion allows for the participation



The subordinates desire active and true involvement in matters that affectd them

Advantages 

The subordinates are motivated by participation in decision making process. This will also increase job satisfaction



Absence of leader does not affect output



Labor absenteeism and turnover will minimum



The quality of decision is improved



The leader multiplies his abilities through the contribution of his followers Limitations



It is time consuming and may delays decision-making



If subordinates are lazy and avoid work, then controlling them is difficult



It cannot be successfully applied at lower level of management and production activity



Some letters may be uncomfortable with this approach because they feel that there is an reduction of power and control over the labor



It may yield positive results when subordinates prefer minimum interaction with the leader



The leader requires considerable communicating and persuasive skill

3. Laissz – faire or free rein leadership In this type, complete freedom is given to subordinates so that they plan, they motivate, control and otherwise be responsible for their actions. Leader does not take part in decision making process. The authority is completely decentralized This type of leadership highly effective when 

The leader is interested in delegating decision making fully



The subordinates are highly intelligent and are fully aware of their roles and responsibilities and have the knowledge and skills to accomplish these tasks without supervisor Advantages



Positive effect on job satisfaction and morale of subordinates



It creates on environment of freedom, individuality as well as the team sprit



Full utilization of the potential of subordinates Limitations



Lack of discipline



Lowest productivity

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No control and co ordination. Hence, tense situation will be prevailed



Some members may put their own interests above the group and team interests.

4. 8 MOTIVATION Concept of motivation Management is the art of getting work done by the subordinates in order to attain common goals of the organisation. Getting work done is a difficult task. For this purpose, the management should inspire and motivate the people for the accomplishment of organisational objectives. The force of motivation is a dynamic force setting a person into motion or action. The word motivation is derived from motive which is an active form of a desire or need, which must satisfy. All motives are directed towards goals and the needs and desires affect or change your behavior. MEANING According to Knootz and O’Donnell, “motivation is a general term applying to the entire class of drives, desires, needs wishes and similar forces that include an individual or a group of people to work. Scott defines “Motivation means a process of stimulating people in action to accomplish desired goals”. 4. 9 IMPORTANCE OF MOTIVATION Motivation is one of the important functions of the management without which organizational objectives are difficult to achieve. It is the integral part of the management process and every manager must motivate his subordinates to create in them the will to work. Motivation is necessary for better performance. The importance are discussed below 

Motivation creates a willingness on a part of workers to do the work in a better way



Proper motivation improves the efficiency of operation



Proper utilization of human resources possible since it inspires employees to make best possible use of different factors of production



Higher motivation leads job satisfaction. As a result of this, labor absenteeism and turnover are low



Motivation helps to solve the labor problems and maintains a good labour relations

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ENGINEERING MANAGEMENT AND ECONOMICS 

Motivation is the basis of cooperation to get the best results out of the efforts of the men on the job. Efficiency and output are increased through cooperation



High motivation helps to reduce resistance to change



By providing proper motivation, all the members will try to be as efficient as possible and to improve upon their skill and knowledge



Financial and non financial incentives not only retain the existing employees but also attract the competent employees from outside enterprise.



A proper motivation scheme promotes closer relationship between enterprise and workers.

4.10 HIERARCHY OF NEEDS – MASLOW’S THEORY Maslow’s hierarchy of need theory is one of the most popular theories of motivation in the management. This theory was developed by an eminent American Psychologist Dr. Abraham H. Maslow. Dr. Maslow was the pioneer in the proper classification of human needs. Some of the salient features of this theory are as follows 

Human liking are innumerable and never ending if one liking is satisfied, another liking emerges in that place.



Adult motives are complex. No single motive determine behavior, rather, a number of motives operate at same time.



Human needs form a hierarchy. Lower level needs must at least partly be satisfied before higher level needs emerge. In other words, a higher order needs essentially satisfied



Satisfied wants do not motivate the workers. Only unsatisfied wants induce the man to work hard



Various levels needs are inter dependent and overlapping



Higher level needs can be satisfied in many more ways than the lower level needs.



The urge to fulfill needs is a prime factor in motivation of people at work. People seek growth. They want to move up the hierarchy of needs. Usually, people seek the satisfaction or higher order needs.

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Maslow’s hierarchy of need theory 1. Physiological needs Physiological needs are the biological needs to preserve human life. These needs include needs for food, clothing and shelter. These needs must be met atleast partly before higher level needs emerge. These needs are most powerful than others. 2. Safety needs Once physiological needs are satisfied, the safety or security needs become predominant. These include (1) protection from physiological dangers. (2) economic security (health insurance) (3) Desire for an orderly, predictable environment and (4) To desire to know the limits of acceptable behavior. These safty needs are really provisions against deprivation in the future. It also involves a sense of protection against danger and threats. 3. Social needs After the needs of the body and security satisfied, then a sense of belonging and acceptance becomes predominant in motivating behavior. These needs are for love, friendship, exchange of feelings and grievances, recognition, conversation, belongingness, companionship etc. social needs tend to be stronger for some people than for other’s and stronger in situation. 4. Esteem needs There are two types of esteem needs. Self esteem and esteem of others. Self esteem needs include those for self – confidence, achievement, competence, self respect, knowledge and for

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ENGINEERING MANAGEMENT AND ECONOMICS independence and freedom. The second group of esteem needs is those that related to one’s reputation needs for status, for recognition, for appreciation and deserved respect of one’s fellows. 5. Self – actualization needs These needs are also called as self – realization needs. Self – actualization refers to the desire to become everything that one is capable of becoming. For example, a doctor thinks that he is capable of saving the life of the patient. 4. 11 Herzberg’s theory – Hygiene Approach to motivation In the late 1950’s, Fredrick Herzberg and his associate have conducted a study on motivation. They have developed a theory of work motivation that has broad implications for the management and its efforts towards effective utilization of human resource. The theory, developed out of these studies, is known as Herzberg Motivation maintenance theory or Motivation hygiene theory or two factor theory of motivation.

Herzberg and his associate interviewed 200 engineers and accountants from 11 industries in Pittsburg area of USA. These men were asked to recall the specific incident in their experience which made them feel good or bad about their jobs. An analysis of their answer revealed that feelings of unhappiness or dissatisfaction were related to the environment in which people were working. Also the factors responsible for job satisfaction are quite different from those responsible for job dissatisfaction. These two feelings were not observed of each other. If a factor is responsible for job satisfaction, the absence of such a factor would not mean job – dissatisfaction, but it might be called no job –satisfaction. Similarly, the opposite of job – dissatisfaction is not job satisfaction but it might be no job – dissatisfaction. Thus, these theories are based on two factors: 

Motivational factors and



Hygiene or maintenance factor. According to Herzberg, maintenance or hygiene factors are necessary to maintain a

reasonable level of satisfaction among employees. These factors do not provide satisfaction to the employees but their absence will dissatisfy them. Therefore, these factors are called dissatisfies. Herzberg identified some maintenance or hygiene factors as (1) Company policy and administration (2) Technical supervision (3) Interpersonal relations with subordinates

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ENGINEERING MANAGEMENT AND ECONOMICS (4) Salary (5) Job security (6) Personal life (7) Working conditions (8) Status (9) Inter personal relations with superiors, and (10) Interpersonal relations with peers. Maintenance factors mostly are related to environment, outside the job. On the other hand, the motivational factors create satisfication to the workers at the time of presence but their absence does not cause dissatisfaction. Herzberg identified some motivational factors as (1) Achievement (2) Recognition (3) Advancement (4) Opportunity for growth (5) Work itself. Since these factors increase level of satisfaction in the employees, these can be used in motivating them for higher output. 4.12 REFERENCES Check your progress FILL UPS 1. ---------------------------is the process of influencing the behavior of others towards the accomplishment of goals in given situation. 2. Knootz and O’Donnel have defined, “Leadership is the ----------------------------------- so that they will strive willingly towards the achievement of group goals. 3. -----------------means a process of stimulating people in action to accomplish desired goals”. 4. ---------------------------- are the biological needs to preserve human life. These needs include needs for food, clothing and shelter. These needs must be met atleast partly before higher level needs emerge. These needs are most powerful than others. 5. ------------------ tend to be stronger for some people than for other’s and stronger in situation.

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ENGINEERING MANAGEMENT AND ECONOMICS POINTS TO REMEMBER 1. Strict autocrat: The leader follows autocratic styles in a very strict sense. He follows negative motivation for getting work from subordinates. 2. Benevolent autocrat: This leader also taking decisions him but his motivation styles is positive. 3. Incompetent autocrat: Some times, leader autocratic leadership style just to hide their inabilities. i.e., incompetence. But this cannot be used for 4. Safety needs Once physiological needs are satisfied, the safety or security needs become predominant. These include (1) Protection from physiological dangers. (2) Economic security (health insurance) (3) Desire for an orderly, predictable environment and (4) To desire to know the limits of acceptable behavior. These safety needs are really provisions against deprivation in the future. It also involves a sense of protection against danger and threats. 5. According to Herzberg, maintenance or hygiene factors are necessary to maintain a reasonable level of satisfaction among employees

MODEL QUESTIONS AND ANSWER 5. Define leadership and types of leaders. Answer

LEADERSHIP Leader is an integral part of management and plays a vital role in managerial operation. Leadership exists in any type of organization. If there is any single factor that differentiates between successful and unsuccessful organizations, it could be considered as dynamics and effective leadership. Early notations about leadership dealt with it almost in terms of personnel abilities. Leadership is viewed as a characteristic of the individual.

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Autocratic,

participative and free rein. 

Autocratic or dictatorial leadership

In this type of leadership, the leader takes all decisions by himself without consulting subordinates. Full authority is held himself alone. He loves power and never delegates authority. The subordinates have to follow his direction without any question. The leader uses threats and punishments to get work from subordinates. There are three types of autocratic leaders.

Strict autocrat The leader follows autocratic styles in a very strict sense. He follows negative motivation for getting work from subordinates. Benevolent autocrat This leader also taking decisions him but his motivation styles is positive. Incompetent autocrat Some times, leader autocratic leadership style just to hide their inabilities. i.e., incompetence. But this cannot be used for a long time. Autocratic leadership style is appropriate where 

The subordinates lack their knowledge of company goals.



The subordinates are inexperienced or lack of training



The company endorser fear and punishment as accecpted disciplinary techniques.



The leader prefers to be active and dominant in decision making



There is a little room for error in final accomplishment.

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Advantages 

It facilitates quick decision making



It provides strong motivation and satisfication to the leader who decades terms



Highest productivity



Less competent subordinates needed at lower level



It can yield positive outcome under conditions of stress

Limitations 

Employee moral will be low



Absence of leader will affect the output heavily



Dissatisfaction will develop among employees



Employee turnover will be more



Full potential of subordinates and their creative ideas are not utilized



One way of communication without feedback leads to misunderstanding and communications breakdown.



Participative or Democratic leadership In this type of leadership, the subordinates are consulted and their feedback is taken into

decision making process. Decisions are taken after group discussions. Therefore, the authority is decentralized. The participative leader attaches high importance to both work and people. He provides freedom of thinking and expression. Participative leadership is best suited where 

The leadership truly desires to hear the ideas of his employees before making decisions



The organisation has communicated its goals and the objectives to the subordinates and the subordinates have accecpted them



The workers are reasonably knowledge and experienced



The time for task completion allows for the participation



The subordinates desire active and true involvement in matters that affectd them

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ENGINEERING MANAGEMENT AND ECONOMICS Advantages 

The subordinates are motivated by participation in decision making process. This will also increase job satisfaction



Absence of leader does not affect output



Labor absenteeism and turnover will minimum



The quality of decision is improved



The leader multiplies his abilities through the contribution of his followers Limitations



It is time consuming and may delays decision-making



If subordinates are lazy and avoid work, then controlling them is difficult



It cannot be successfully applied at lower level of management and production activity



Some letters may be uncomfortable with this approach because they feel that there is an reduction of power and control over the labor



It may yield positive results when subordinates prefer minimum interaction with the leader



The leader requires considerable communicating and persuasive skill



Laissz – faire or free rein leadership

In this type, complete freedom is given to subordinates so that they plan, they motivate, control and otherwise be responsible for their actions. Leader does not take part in decision making process. The authority is completely decentralized This type of leadership highly effective when 

The leader is interested in delegating decision making fully



The subordinates are highly intelligent and are fully aware of their roles and responsibilities and have the knowledge and skills to accomplish these tasks without supervisor Advantages



Positive effect on job satisfaction and morale of subordinates



It creates on environment of freedom, individuality as well as the team sprit



Full utilization of the potential of subordinates

Limitations 

Lack of discipline



Lowest productivity



No control and co ordination. Hence, tense situation will be prevailed



Some members may put their own interests above the group and team interests.

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6. Explain motivation and its importance Answer

MOTIVATION Concept of motivation Management is the art of getting work done by the subordinates in order to attain common goals of the organisation. Getting work done is a difficult task. For this purpose, the management should inspire and motivate the people for the accomplishment of organisational objectives. The force of motivation is a dynamic force setting a person into motion or action. The word motivation is derived from motive which is an active form of a desire or need, which must satisfy. All motives are directed towards goals and the needs and desires affect or change your behavior. MEANING According to Knootz and O’Donnell, “motivation is a general term applying to the entire class of drives, desires, needs wishes and similar forces that include an individual or a group of people to work. Scott defines “Motivation means a process of stimulating people in action to accomplish desired goals”.

IMPORTANCE OF MOTIVATION Motivation is one of the important functions of the management without which organizational objectives are difficult to achieve. It is the integral part of the management process and every manager must motivate his subordinates to create in them the will to work. Motivation is necessary for better performance. The importance discussed below 

Motivation creates a willingness on a part of workers to do the work in a better way



Proper motivation improves the efficiency of operation



Proper utilization of human resources possible since it inspires employees to make best possible use of different factors of production

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ENGINEERING MANAGEMENT AND ECONOMICS 

Higher motivation leads job satisfaction. As a result of this, labor absenteeism and turnover are low



Motivation helps to solve the labor problems and maintains a good labour relations



Motivation is the basis of cooperation to get the best results out of the efforts of the men on the job. Efficiency and output are increased through cooperation



High motivation helps to reduce resistance to change



By providing proper motivation, all the members will try to be as efficient as possible and to improve upon their skill and knowledge



Financial and non financial incentives not only retain the existing employees but also attract the competent employees from outside enterprise.



A proper motivation scheme promotes closer relationship between enterprise and workers.

7. Give the detail of Maslow’s Need Hierarchy and Herzberg’s two factor theory. Answer HIERARCHY OF NEEDS – MASLOW’S THEORY Maslow’s hierarchy of need theory is one of the most popular theories of motivation in the management. This theory was developed by an eminent American Psychologist Dr. Abraham H. Maslow. Dr. Maslow was the pioneer in the proper classification of human needs. Some of the salient features of this theory are as follows 

Human liking are innumerable and never ending if one liking is satisfied, another liking emerges in that place.



Adult motives are complex. No single motive determine behavior, rather, a number of motives operate at same time.



Human needs form a hierarchy. Lower level needs must at least partly be satisfied before higher level needs emerge. In other words, a higher order needs essentially satisfied



Satisfied wants do not motivate the workers. Only unsatisfied wants induce the man to work hard



Various levels needs are inter dependent and overlapping



Higher level needs can be satisfied in many more ways than the lower level needs.

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

Physiological needs Physiological needs are the biological needs to preserve human life. These needs include

needs for food, clothing and shelter. These needs must be met atleast partly before higher level needs emerge. These needs are most powerful than others. 

Safety needs Once physiological needs are satisfied, the safety or security needs

become predominant. These include (1) protection from physiological dangers. (2) economic security (health insurance) (3) Desire for an orderly, predictable environment and (4) To desire to know the limits of acceptable behavior. These safty needs are really provisions against deprivation in the future. It also involves a sense of protection against danger and threats. 

Social needs After the needs of the body and security satisfied, then a sense of belonging and acceptance

becomes predominant in motivating behavior. These needs are for love, friendship, exchange of feelings and grievances, recognition, conversation, belongingness, companionship etc. social needs tend to be stronger for some people than for other’s and stronger in situation. 

Esteem needs There are two types of esteem needs. Self esteem and esteem of others. Self esteem needs

include those for self – confidence, achievement, competence, self respect, knowledge and for independence and freedom. The second group of esteem needs is those that related to one’s reputation needs for status, for recognition, for appreciation and deserved respect of one’s fellows. 

Self – actualization needs These needs are also called as self – realization needs. Self – actualization refers to the desire

to become everything that one is capable of becoming. For example, a doctor thinks that he is capable of saving the life of the patient.

Herzberg’s theory – Hygiene Approach to motivation In the late 1950’s, Fredrick Herzberg and his associate have conducted a study on motivation. They have developed a theory of work motivation that has broad implications for the management and its efforts towards effective utilization of human resource.

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ENGINEERING MANAGEMENT AND ECONOMICS The theory, developed out of these studies, is known as Herzberg Motivation maintenance theory or Motivation hygiene theory or two factor theory of motivation. Herzberg and his associate interviewed 200 engineers and accountants from 11 industries in Pittsburg area of USA. These men were asked to recall the specific incident in their experience which made them feel good or bad about their jobs. An analysis of their answer revealed that feelings of unhappiness or dissatisfaction were related to the environment in which people were working. Also the factors responsible for job satisfaction are quite different from those responsible for job dissatisfaction.

These two feelings were not observed of each other. If a factor is responsible for job satisfaction, the absence of such a factor would not mean job – dissatisfaction, but it might be called no job –satisfaction. Similarly, the opposite of job – dissatisfaction is not job satisfaction but it might be no job – dissatisfaction. Thus, these theories are based on two factors: 

Motivational factors and



Hygiene or maintenance factor.

According to Herzberg, maintenance or hygiene factors are necessary to maintain a reasonable level of satisfaction among employees. These factors do not provide satisfaction to the employees but their absence will dissatisfy them. Therefore, these factors are called dissatisfies.

Herzberg identified some maintenance or hygiene factors as (1) Company policy and administration (2) Technical supervision (3) Interpersonal relations with subordinates (4) Salary (5) Job security (6) Personal life (7) Working conditions (8) Status (9) Inter personal relations with superiors, and (10) Interpersonal relations with peers. Maintenance factors mostly are related to environment, outside the job. On the other hand, the motivational factors create satisfication to the workers at the time of presence but their absence does not cause dissatisfaction.

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Herzberg identified some motivational factors as (1) Achievement (2) Recognition (3) Advancement (4) Opportunity for growth (5) Work itself. Since these factors increase level of satisfaction in the employees, these can be used in motivating them for higher output. ANSWERS FOR FILL UPS Leadership art of process of influencing people Motivation Physiological needs Social need

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UNIT – V CONTROLLING

5. 1 CO-ORDINATION, CONCEPT, PRINCIPLES AND NEED

Co ordination is the process of integrating the various departmental activities of an organization. It deals with the task of blending efforts for the successful attainment of the objectives of an organization. So it is rightly said ‘co-ordination is the heart of management’. CONCEPT OF CO-ORDINATION Louis Allen, Henry Fayol and James Moony have viewed that coordination is the ‘separate function of management’ They contended that managers should try to coordinate the organizational goals. According to Follet, ‘coordination starts from the very first stage of managerial function’. Moreover, Harold Koontz and O’Donnel described coordination as ‘ the essence of manager ship’ DEFINITION OF COORDINATION Henry Fayol defines coordination as ‘to coordinate is to harmonise all the activities of concern in order to facilitate its working and its success’.

William Gullick define coordination is the set of human and structural mechanism designed to link the parts of the enterprise together to achieve the specified objectives.

PRINCIPLES OF COORDINATION 1. Principle of Direct contact 2. Principles of Early stage 3. Principle of Reciprocal Relationship 4. Principle of Continuity

NEED FOR COORDINATION Coordination is needed for the following causes: 1. To improve the effectiveness of management 2. To increase the profitability and productivity 3. To help achieve the desired goals 4. To increase the morale of the workers 5. To ensure smooth running of an organization

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ENGINEERING MANAGEMENT AND ECONOMICS 6. To avoid conflicts in the organization 7. To assist effective functioning of other functions of management 8. To encourage interpersonal skills 9. To create mutual understanding and mutual trust 10. To integrate the workers and work 5. 2 CONTROL DEFINITIONS AND CHARACTERISTICS Controlling is the part of managerial process. Control is one of the most important element of mgt control is a process of that guides activity towards some pre determined goals. Planning and controlling are twins of mgt functions. It means measuring actual performance and taking corrective action. DEFINITION â&#x20AC;&#x153;Control is checking current performance against predetermined standards contained in the plans with a view to ensuring adequate progress and satisfactory 1. Control Process Is Universal Control is an essential function in any org whether it is an industrial unit, university, government office, hospital etc 2. Control Is a Continuous Process Control is never ending activity on the part of managers. It is a non stop process. The managers watch the operations of the mgt and to see whether they are going towards the desired end and if not actions are not taken to correct them 3. Control Is Action Based Action is essential element of control. It is the action which ensures performance according to the decide standards. 4. Control Is Forward Looking Control is linked with future not past. a proper control system prevents losses, minimizes the wastages. It acts as a preventive measure.

5. Control Is Closely Related To Planning Plans give the direction to various business activities while control verifies and measures the performance of these activities and suggests proper measure to remove the deviation. 5. 3 NEEDS FOR CONTROLLING 1. To minimize dishonest behavior of employees 2. To discover deviation inn the mgt 3. Control can minimize the mistake

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ENGINEERING MANAGEMENT AND ECONOMICS 4. To indicate corrective action 5. 4 IMPORTANCE OF CONTROLLING 1. Policy Verification Control helps to review, revise and update the plans. In this process org and mgt can verify the quality of various policies 2. Adjustment in Operation A control system act as an adjustment in organization operations. Control provides this clue by finding out whether plans are being observed and suitable progress towards the objective is being made to correct any deviations if necessary. 3. Psychological Pressure Control pressure puts a psychological pressure on the individual for better performance. The sound control system inspires employees to work hard and give better performance. 4. Co-Ordination Control helps to emerge the co ordination of the subordinates in the organization. Control ensures coordination of the activities of different department through unity of direction. 5. Employee Morale Control creates an atmosphere of order and discipline in the org. control contributes order and discipline in the organization. 6. Efficiency and Effectiveness Proper control ensures organizational efficiency and effectiveness. The org is effective if it is able to achieve its objectives. Since control focuses on the achievements or organizational objectives, it necessarily leads to organizational effectiveness. 5. 5 THE PROCESS OF CONTROLLING 1. Establishing Standards  This is the first step of the control process.  Standards may be expressed in quantitative or qualitative terms.  A standard is a criterion against which results can be measured.  Generally standards shall be accurate, precise, acceptable and workable.  Volume of products, man hour, costs, revenue, investment etc. they are quantitative standards.  Good will, employee morale, motivation etc. these areas are qualitative standard. 2. Measuring Performance  Measurement of actual performance does not mean knowing what was happened but also

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ENGINEERING MANAGEMENT AND ECONOMICS what is likely to happen.  The performance should be in quantitative terms.  The measurement technique may be personal observations, sample checking, performance report etc. 3. Comparing Actual With Standards  To find out the deviations and identify the cause of such deviations.  The employees’ morale and effectiveness of human resources statements, charts help to compare the performance quantitatively against the already got standards which got.  This approach will give the correct, quick and favorable results. 4. Finding out Deviations  An efficient manager easily finds out locating the deviation points properly.  To find out the cause of deviations the manager will have to depend on proper accurate and timely information.  The deviation between standard and actual performance is beyond the prescribed limit an analysis of deviation is made to identify the cause of deviation. 5. Correction of Deviations  Corrective action is essentially with correcting deviations from planned performance.  Deviations may be in accurate forecast poor communication, defective machines, lack of motivations etc.  For the correction of deviations, mgt should take necessary action and implement them so that in future these deviations and mistakes are minimized.  If corrective action is not being taken properly in time it will lead to heavy losses.

5. 6 REFERENCES Check your progress FILL UPS 1. ------------------- is checking current performance against predetermined standards contained in the plans with a view to ensuring adequate progress and satisfactory. 2. ------------------ give the direction to various business activities while control verifies and measures the performance of these activities and suggests proper measure to remove the deviation.

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ENGINEERING MANAGEMENT AND ECONOMICS 3. Proper control ensures organizational --------------------4. The performance should be in -------------------5. If corrective action is not being taken properly in time it will lead to --------------POINTS TO REMEMBER 1. Controlling is the part of managerial process. Control is one of the most important element of mgt control is a process of that guides activity towards some pre determined goals. 2. Co-Ordination Control helps to emerge the co ordination of the subordinates in the organization. Control ensures coordination of the activities of different department through unity of direction. 3. Needs for Controlling 1. To minimize dishonest behavior of employees 2. To discover deviation inn the mgt 3. Control can minimize the mistake 4. To indicate corrective action MODEL QUESTIONS AND ANSWERS 1. Define controlling and explain its characteristics. Answer CONTROLLING Controlling is the part of managerial process. Control is one of the most important element of mgt control is a process of that guides activity towards some pre determined goals. Planning and controlling are twins of mgt functions. It means measuring actual performance and taking corrective action. DEFINITION â&#x20AC;&#x153;Control is checking current performance against predetermined standards contained in the plans with a view to ensuring adequate progress and satisfactory. CHARACTERISTICS OF CONTROL 1. Control Process Is Universal Control is an essential function in any org whether it is an industrial unit, university,

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ENGINEERING MANAGEMENT AND ECONOMICS government office, hospital etc 2. Control Is a Continuous Process Control is never ending activity on the part of managers. It is a non stop process. The managers watch the operations of the mgt and to see whether they are going towards the desired end and if not actions are not taken to correct them 3. Control Is Action Based Action is essential element of control. It is the action which ensures performance according to the decide standards. 4. Control Is Forward Looking Control is linked with future not past. a proper control system prevents losses, minimizes the wastages. It acts as a preventive measure. 5. Control Is Closely Related To Planning Plans give the direction to various business activities while control verifies and measures the performance of these activities and suggests proper measure to remove the deviation.

2. What are the importances of controlling? Answer IMPORTANCE OF CONTROLLING

1. Policy Verification Control helps to review, revise and update the plans. In this process org and mgt can verify the quality of various policies

2. Adjustment in Operation A control system acts as an adjustment in organization operations. Control provides this clue by finding out whether plans are being observed and suitable progress towards the objective is being made to correct any deviations if necessary. 3. Psychological Pressure Control pressure puts a psychological pressure on the individual for better performance. The sound control system inspires employees to work hard and give better performance.

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4. Co-Ordination Control helps to emerge the co ordination of the subordinates in the organization. Control ensures coordination of the activities of different department through unity of direction. 5. Employee Morale Control creates an atmosphere of order and discipline in the org. control contributes order and discipline in the organization. 6. Efficiency and Effectiveness Proper control ensures organizational efficiency and effectiveness. The org is effective if it is able to achieve its objectives. Since control focuses on the achievements or organizational objectives, it necessarily leads to organizational effectiveness.

3. List out the process of controlling. Answer THE PROCESS OF CONTROLLING 1. Establishing Standards 

This is the first step of the control process.



Standards may be expressed in quantitative or qualitative terms.



A standard is a criterion against which results can be measured.



Generally standards shall be accurate, precise, acceptable and workable.



Volume of products, man hour, costs, revenue, investment etc. they are quantitative standards.



Good will, employee morale, motivation etc. these areas are qualitative standard.

2. Measuring Performance 

Measurement of actual performance does not mean knowing what was happened but also what is likely to happen.



The performance should be in quantitative terms.



The measurement technique may be personal observations, sample checking, performance report etc.

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3. Comparing Actual With Standards 

To find out the deviations and identify the cause of such deviations.



The employees’ morale and effectiveness of human resources statements, charts help to compare the performance quantitatively against the already got standards which got.



This approach will give the correct, quick and favorable results.

4. Finding out Deviations 

An efficient manager easily finds out locating the deviation points properly.



To find out the cause of deviations the manager will have to depend on proper accurate and timely information.



The deviation between standard and actual performance is beyond the prescribed limit an analysis of deviation is made to identify the cause of deviation.

5. Correction of Deviations 

Corrective action is essentially with correcting deviations from planned performance.



Deviations may be in accurate forecast poor communication, defective machines, lack of motivations etc.



For the correction of deviations, mgt should take necessary action and implement them so that in future these deviations and mistakes are minimized.



If corrective action is not being taken properly in time it will lead to heavy losses.

ANSWER FOR FILL UPS 1. Control 2. Plans 3. efficiency and effectiveness 4. quantitative terms 5. heavy losses

5. 7 METHODS AND TECHNIQUES OF CONTROL A large no of techniques have been developed for managerial control these techniques may be broadly be classified into two categories as follows

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ENGINEERING MANAGEMENT AND ECONOMICS (1) TRADITIONAL CONTROL AND TECHNIQUES (a) budgetary control (b) personal observation (c) statistical data and reports (d) profit and loss control (e) external audit control (f) over all control criteria (g) break even point analysis (h) return on investment (2) MODERN CONTROL TECHNIQUES (a) Management audit (b) Responsibility accounting (c) Human resource accounting (d) Net work techniques-PERT (1) TRADITIONAL CONTROL AND TECHNIQUES ď&#x192;&#x2DC;

BUDGETING AND BUDGETARY CONTROL A budget is numerical statement expressing the plan, policies and goals of an org for a definite

time period in future. It is generally expressed in financial terms, ex: - sales revenue, total expenditure, etc. Or in physical terms ex: - units of output, number of employees, etc. As a financial land, a budget indicates estimated revenues and cost for a certain future period. A budget serves as an important device of managerial control. It provides a standard by which actual operations can be evaluated.

A business enterprise may prepare and use various types of budgets some of which are given below: 1. Master Budget It is the summary budget incorporating all functional budgets. It gives a comprehensive picture of the proposed activities and anticipated results for the entire organization. It is finally approved by the top management. 2. Functional Budgets A functional or operating budget describes the program and responsibility of one particular department of the enterprise. Some of the important functional budgets are like:Sales budget It gives a forecast of total volume of sales and its breakup product-wise and area-wise. It shows that products will be sold, in what quantities and at what prices. It is the basic budget as all

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ENGINEERING MANAGEMENT AND ECONOMICS other budgets are based on it. Sales budget is prepared on the basis of general market conditions, past sales trend, orders on hand, sales man’s estimates. 3. Capital and Revenue Budgets Capital expenditure budget gives estimated expenditure on fixed assets like buildings, plant and machinery, furniture and fixtures, etc. On the other hand, revenue budget shows estimates of income and expenses on routine operations 4. Fixed and Flexible Budgets A fixed budget is prepared for a given level of activity and remains unchanged irrespective of the level of activity actually attained. It is rigid becomes unrealistic when the actual level of operations differs from the budget level .the main purpose of fixed budgeting is to co-ordinate sectional activities. A flexible budget shows the cost behavior at various levels of activities. It is very useful as comparison of actual expenditure with budget expenditure can be made at different levels of operation

5. Zero Based Budgeting The concept of zero based budgeting is based on the belief that the future is not a mere projection of the past .it advocates comprehensive analysis and review of budget proposals, every time such proposal are made. Zero base budgeting represents a radical departure from traditional budgeting. under traditional budgeting current years budget is taken as the base for preparing the next years budget .but in case of zero base budgeting , the budget proposal are considered from the ‘ground up’ or from scratch . Zero base budgeting forces manager to review the program every time afresh so as to justify it. It requires thorough and rational analysis of budget commitments. It offers a greater flexibility and freedom in allocating resources. But zero base budgeting is a very time consuming and difficult exercise. MEANING OF BUDGETARY CONTROL Budgetary control is a system of management control in which all operation are planned ahead in the form of budgets and actual results are compared with budgetary standards and the necessary actions are taken to ensure attainment of organizational objectives. It involves preparation and use of budgets to evaluate and regulate actual operation. According to H.J .Wheldon , “by budgetary control ,every item of actual cost is so controlled by vigilant supervision as to make it conform ,as nearly as possible ,to the predetermined budgets standard” OBJETIVES OF BUDGETARY CONTROL

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ENGINEERING MANAGEMENT AND ECONOMICS Budgetary control encompasses practically the whole range of managerial activity right from planning and policy formulation to evaluation and control. According to John Blocker, â&#x20AC;&#x153;budgetary control is planned to assist the management in the allocation of responsibilities and authority, to aid in making estimates and plans for future, to assist in analysis of variations between estimated and actual results and to develop basic of measurement of standards with which to evaluate the efficiency of operationsâ&#x20AC;?.

To be specific, budgeting serves the following important objectives:Planning Budgeting provides a definite plan of action to be followed during a specified period. It is a statement of what the management intense to achieve. A budget is a written plan and it is designed to make the goals specific. Budgets are based on forecasts or projection of future events. Budgetary system forces managers to plan their activities in advance. Budgets are helpful in financial planning.

Coordination Budgeting is aimed at harmonizing and integrating different activities of the enterprise. Master budgets seek to bring about effective cooperation and coordination between different departments. Budgets are prepared in consultation with all units of the organization. Control Budgets provide pre standards of performance for apprising actual results. Budgetary standards are set keeping in view with the objectives and resources of the organization. Significance deviations from budget figures can be reported to top mgt. budgets are prepared for various department. This can be use to detect short comings and to avoid waste of time and money so as to keep cost under control. Motivation Budgeting provides specific targets which inspire the employees. They can know their responsibility and the standards by which their performance will be judged. Thus, budgeting serves as a great motivating force.

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ADVANTAGES OF BUDGETARY CONTROL Budgeting is an all-inclusive mgt tool. An efficient system of budgetary control offers the following advantages:(1)

Planned Approach Budgets are an instrument of management policy. They lay down specific and time- bound

targets and determine the future course of action. This eliminates uncertainty and maintains focus on org goals. Every action is directed towards the attainment of budget targets

(2)

Combined wisdom Budgets are prepared in consultation with different departmental heads. Therefore, the are the

fruits of pooled judgment and experience. Budgets represents synthesis of past, present and future as they are prepare after careful analysis of events and realization assessment of future. Budgets are prepared after considerable thought. (3)

Incentive Budgets provide realistic and challenging targets and there by serve as strong incentives to

employees. Employees know what they have to achieve and how. Therefore, budgeting provides right motivation. (4)

Control by exception Budgets provide standards that can be used to detect deficiencies and to initiates corrective

action where necessary. Budgeting helps to focus the time the effort of mgt upon areas which are crucial for the success of the org. budgets are serves as a beacon light and a spot light on critical deviations.

(5)

Optimum use of resources Budgets provide allocation of resources according to the requirements and capacities of

different units. They also indicate the direction in which resources are to be employed. Therefore, budgetary control enables management to ensure the most effective utilization of human and capital resources of the enterprise. Unproductive operations and waste of resources can be minimized. (6)

Fixation of responsibility With the help of budgeting, accountability for results can be fixed on particular individuals.

Budgeting makes the employees conscious about cost and results.

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Effective co-ordination Budgets are an important tool of co-coordinating the efforts of various departments in the org.

various executives participates in the budgeting process which promotes mutual understanding and co-operation among them (8)

Financial Help Budgeting makes financial planning and control effective. Under it financial aspects of

business are considered thoroughly so that the enterprise can arrange for adequate funds as and when required. Cash budget may be used to convince the financial institutions that their loans will be paid back in time. LIMITATIONS OF BUDGETARY CONTROL Budgetary control suffers from the following weakness The effectiveness of budgeting depends upon the accuracy with which estimates are made about the future. Despite all the care and caution there is danger of in accuracy in estimates. Future events can rarely be predicted with cent person accuracy. Every often excessive reliance is placed on past experience in preparing budgets. But future is not always a reputation of the past. When conditions change budget figures become unreliable

Standard costing provides pre determined standards for the valuation of operating cost. Standards are determined scientifically on the basis of technical estimates and experience. They are reviewed periodically in the light of changing conditions. Standard costing facilitates ‘control by exception’ by focusing attention on imp variances. Only significant variances from cost standards are reported to top mgt. standards costs point out weakness and in efficiency in performance. They create cost consciousness among employees. Standards costs are also helpful in work signification, budgeting and incentive wage plan. 

PERSONAL OBSERVATION

Personal observation is the oldest and the most effective technique of control. No control device plan completely substitutes the role of personal observation. It enables a manager to take effective action immediately. Personal observation can detect information which other control devices may fail to point out. It also exercises a physiological influence on employees. They try to work better when they know what they are being observed. A manager cannot always offer personal observation as a technique of control due to lack of time. He has to devote a lot of time on other activities like planning, organizing, staffing, etc. Personal observation may have a negative impact in the case of enlightened and self motivated employees who don’t like to be closely supervised.

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

STATISTICAL DATA AND REPORTS Statistical data are being increasingly used for the purpose of managerial control. Statistical data

are often expressed in the form of averages, percentages, ratios, correlation, etc. Statistical tables, graphical charts and reports are widely used in production control, quality control, inventory control, etc. Some times special analyses are made to collect necessary information. The information so collected is presented in the form of a report which is presented to management for necessary action.



STANDARD COSTING Standard cost implies estimated cost under standard conditions. Standard costing involves

preparation of standard cost and comparison of actual cost with standard cost to find out variation. The variances are then analyzed and necessary action is taken to correct them. Standard costing provides predetermined standards for the evaluation of operating costs. Standards are determined scientifically on the basis of technical estimates and experience. They are reviewed periodically in the light of changing conditions. Standard costing facilitates ‘control by exception’ by focusing attention of important variances. Only significant variances from cost standards are reported to top management. Standard cost point out weakness and inefficiency in performance. The great cost consciousness among employees. Standard costs are also helpful in work simplification, budgeting and incentive wage plans. Standard costing is, however, not free from limitations. It is time – consuming and expensive to certain, record and use standard cost. Dual cost has to be maintained making record keeping difficult. It is necessary to frequently revise standard cost to keep them up to date in the face of changing environment. Employees may resist setting and use of standard cost. 

PROFIT AND LOSS CONTROL Profit and loss control implies control through comparison and analyses of profit or loss of

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ENGINEERING MANAGEMENT AND ECONOMICS Profit and loss control can be applied for measuring over all performance as well as for individual divisions or departments. Its effectiveness can be increased when income and expense figures are compared with those of the past years. Profit and loss control serves as a tool of feed forward control by enabling mgt to take preemptive measures for obtaining the desired results 

EXTERNAL AUDIT CONTROL External audit control involves audit of the financial accounts of an enterprise by a qualified

and independent chartered accountant. In case of joint stock companies external audit is compulsory under the companies act, 1956. its object is to ensure that the interest of share holders and other interested parties are protected against manipulations and mall practices by mgt. 

BREAK EVEN POINT ANALYSIS Break even point is the pointed at which total revenue is equal to total cost. It is a point of no

profit and no loss. Break even point analysis involves analysis of inter relationships between cost, sales volumes and profits. Therefore, it is also known as cost volume profit analysis. This analysis is help full in determining the volume of sales at which total cost is fully covered and beyond which profits will be earned. 

OVER ALL CONTROL CRITERIA Most of the control techniques are designed to regulate specific aspects like costs, profits, etc.

such piece meal control measures are not sufficient for a business enterprises. Control of over all performance is required to judge the total effectiveness of on org. such control evaluates mgt total efforts. More over, control of over all performance helps to over come weaknesses of partial control measures. According to GEORGE R TERRY “controlling over all performance is advantageous in that it encourages a manager to see the forest not simply the trees. The over all point of view is encouraged. “Control of over all performance is all the more important in the case of large enterprises which have several autonomous units located in different parts of the country. 

RETURN ON INVESTMENT CONTROL Profitability is an important measure of the efficiency of a business enterprise. Profit in relation

to the size of investment is popularly known as return on investment (ROI). This approach has been on important part of the control system of DUPOINT Company of the USA since 1919. Since its successful application several companies have adopted it as the key measure of their control system

Return On investment control offers the following advantages:-

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ENGINEERING MANAGEMENT AND ECONOMICS 1. Return On Investment provides a sound basis for comparing the relative efficiency of different divisions or department of the company 2. This control system is help full in the de-centralization of authority as the responsibility for operational efficiency can be easily measured and fixed on semi autonomous divisions. 3. It puts restraint on demand for higher allocation of resources. Each division can be allocated resources according to its return. By providing a rational basis for resource allocation Return on Investment facilitates budgetary planning and control. 4. Rate of return is a measure of over all performance and reflects the objectives of business, therefore, it may be treated as a total control system (2) MODERN CONTROL TECHNIQUES External audit serves as a control mechanism over the financial aspects of business. It detects errors and frauds in the books of accountant. But it dose not serve as a check on managerial complacency.

Management audit is an independent critical examination of the entire management process to measure the effectiveness of mgt as a whole. Its object is to determine whether or not managerial functions are being performed efficiently. It shows how far the policies and programme of mgt are help full in the accomplishment of org objectives 

RESPONSIBILITY ACCOUNTING It is a management accounting system where in cost are assigned to responsibility centers. A

distinction is made between controllable and uncontrollable costs. Every manager is made responsible for cost of his department. Targets are cost and profits are laid down for each responsibility centre which may be a division, department or section. 

HUMAN RESOURCE ACCOUNTING None of the control mechanism is discussed so far measure the value of human resources

which are critical to the success of every org. Human resource accounting (HRA) is designed for the measurement of the cost and value of employees in an organisation. It has been defined as “A process of identifying and measuring data about human resources and communicating this information to the interested parties” 

NETWORK TECHNIQUES Net work analysis is being widely used for managerial planning and control. Under net work

analysis a project is broken down into small activities which are arranged in a logical sequence. A net

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ENGINEERING MANAGEMENT AND ECONOMICS work diagram is then drawn to show interdependence and inter relation ship of various activities. The two most important network techniques are known as PERT and CPM. ď&#x192;&#x2DC;

PROGRAMME EVALUATION AND REVIEW TECHNIQUES (PERT) PERT is an integrated mgt control system designed to plan time and cost of completing a

project. A programme consists of several activities and sub activities. This activities must be completed in a proper sequence to minimize time and cost involved. The steps involved in PERT analysis are as follows:1. Identify the activities that must be performed in a project. 2. Arrange these activities in a proper and logical sequence in the form of a net work. 3. Estimate the time required to complete the individual activities and the entire project. 4. Determine the critical path involving that activity which if not completed in time will delay the entire project. 5. Improve upon the initial plan and control the project. CRITICAL PATH METHOD (CPM) CPM is used for planning and controlling the most logical sequence of activities for completing a project. It is help full in the optimum use of resources. It provides a standard method of communication project schedules and costs. Like PERT, it identifies the critical elements of a projects and facilitates control by exception. CPM is widely used for construction of project and plant maintenance.

5.8 REFERENCE Check your Progress FILL UPS 1. A_____________ is numerical statement expressing the plan, policies and goals of an org for a definite time period in future. 2. _____________ may be used to convince the financial institutions that their loans will be paid back in time. 3. Break even point is pointed at which_____________________________ 4. ______________________ provides a sound basis for comparing the relative efficiency of different divisions or department of the company. 5. _________________ is designed for the measurement of the cost and value of employees in an organization. 6. Net work analysis is being widely used for _______________________

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POINTS TO REMEMBER 1.

A fixed budget is prepared for a given level of activity and remains unchanged irrespective of the level of activity actually attained. It is rigid becomes unrealistic when the actual level of operations differs from the budget level .the main purpose of fixed budgeting is to co-ordinate sectional activities.

The ultimate purpose of budgeting is to enable the mgt to conduct the business in the most efficient manner. Budgets are designed to ensure optimum utilization of materials, machinery and man power.

PERT is an integrated mgt control system designed to plan time and cost of completing a project.

Break even point analysis involves analysis of inter relationships between cost, sales volumes and profits. Therefore, it is also known as cost volume profit analysis.

The concept of zero based budgeting is based on the belief that the future is not a mere projection of the past .it advocates comprehensive analysis and review of budget proposals, every time such proposal are made

MODEL QUESTIONS AND ANSWERS 1. Describe Methods and techniques of traditional control Answer TRADITIONAL CONTROL AND TECHNIQUES 

Budgetary control



Personal observation



Statistical data and reports



Profit and loss control



External audit control



Over all control criteria



Break even point analysis



Return on investment



BUDGETING AND BUDGETARY CONTROL A budget is numerical statement expressing the plan, policies and goals of an org for a definite

time period in future. It is generally expressed in financial terms,

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ENGINEERING MANAGEMENT AND ECONOMICS Example: - sales revenue, total expenditure, etc. Or in physical terms ex: Units of output, number of employees, etc. As a financial land, a budget indicates estimated revenues and cost for a certain future period. A budget serves as an important device of managerial control. It provides a standard by which actual operations can be evaluated. A business enterprise may prepare and use various types of budgets some of which are given below: 1. Master Budget It is the summary budget incorporating all functional budgets. It gives a comprehensive picture of the proposed activities and anticipated results for the entire organization. It is finally approved by the top management. 2. Functional Budgets A functional or operating budget describes the program and responsibility of one particular department of the enterprise. Some of the important functional budgets are like Sales budget It gives a forecast of total volume of sales and its breakup product-wise and area-wise. It shows that products will be sold, in what quantities and at what prices. It is the basic budget as all other budgets are based on it. Sales budget is prepared on the basis of general market conditions, past sales trend, orders on hand, sales manâ&#x20AC;&#x2122;s estimates. 3. Capital and Revenue Budgets Capital expenditure budget gives estimated expenditure on fixed assets like buildings, plant and machinery, furniture and fixtures, etc. On the other hand, revenue budget shows estimates of income and expenses on routine operations 4. Fixed and Flexible Budgets A fixed budget is prepared for a given level of activity and remains unchanged irrespective of the level of activity actually attained. It is rigid becomes unrealistic when the actual level of operations differs from the budget level .the main purpose of fixed budgeting is to co-ordinate sectional activities. A flexible budget shows the cost behavior at various levels of activities. it is very useful as comparison of actual expenditure with budget expenditure can be made at different levels of operation

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Zero base budgeting represents a radical departure from traditional budgeting. under traditional budgeting current years budget is taken as the base for preparing the next years budget .but in case of zero base budgeting , the budget proposal are considered from the ‘ground up’ or from scratch . Zero base budgeting forces manager to review the program every time afresh so as to justify it. It requires thorough and rational analysis of budget commitments. It offers a greater flexibility and freedom in allocating resources. But zero base budgeting is a very time consuming and difficult exercise. MEANING OF BUDGETARY CONTROL Budgetary control is a system of management control in which all operation are planned ahead in the form of budgets and actual results are compared with budgetary standards and the necessary actions are taken to ensure attainment of organizational objectives. It involves preparation and use of budgets to evaluate and regulate actual operation. According to H.J .Wheldon , “by budgetary control ,every item of actual cost is so controlled by vigilant supervision as to make it conform ,as nearly as possible ,to the predetermined budgets standard” OBJETIVES OF BUDGETARY CONTROL Budgetary control encompasses practically the whole range of managerial activity right from planning and policy formulation to evaluation and control. According to John Blocker, “budgetary control is planned to assist the management in the allocation of responsibilities and authority, to aid in making estimates and plans for future, to assist in analysis of variations between estimated and actual results and to develop basic of measurement of standards with which to evaluate the efficiency of operations”. To be specific, budgeting serves the following important objectives:Planning Budgeting provides a definite plan of action to be followed during a specified period. It is a statement of what the management intense to achieve. A budget is a written plan and it is designed to make the goals specific. Budgets are based on forecasts or projection of future events. Budgetary system forces managers to plan their activities in advance. Budgets are helpful in financial planning. Coordination Budgeting is aimed at harmonizing and integrating different activities of the enterprise. Master budgets seek to bring about effective cooperation and coordination between different departments. Budgets are prepared in consultation with all units of the organization.

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Control Budgets provide pre standards of performance for apprising actual results. Budgetary standards are set keeping in view with the objectives and resources of the organization. Significance deviations from budget figures can be reported to top mgt. budgets are prepared for various department. This can be use to detect short comings and to avoid waste of time and money so as to keep cost under control. Motivation Budgeting provides specific targets which inspire the employees. They can know their responsibility and the standards by which their performance will be judged. Thus, budgeting serves as a great motivating force. Efficiency The ultimate purpose of budgeting is to enable the mgt to conduct the business in the most efficient manner. Budgets are designed to ensure optimum utilization of materials, machinery and man power.

ADVANTAGES OF BUDGETARY CONTROL Budgeting is an all-inclusive mgt tool. An efficient system of budgetary control offers the following advantages:Planned Approach Budgets are an instrument of mgt policy. They lay down specific and time- bound targets and determine the future course of action. This eliminates uncertainty and maintains focus on org goals. Every action is directed towards the attainment of budget targets

Combined wisdom Budgets are prepared in consultation with different departmental heads. Therefore, the are the fruits of pooled judgment and experience. Budgets represents synthesis of past, present and future as they are prepare after careful analysis of events and realization assessment of future. Budgets are prepared after considerable thought. Incentive Budgets provide realistic and challenging targets and there by serve as strong incentives to employees. Employees know what they have to achieve and how. Therefore, budgeting provides right motivation.

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Control by exception Budgets provide standards that can be used to detect deficiencies and to initiates corrective action where necessary. Budgeting helps to focus the time the effort of mgt upon areas which are crucial for the success of the org. budgets are serves as a beacon light and a spot light on critical deviations. Optimum use of resources Budgets provide allocation of resources according to the requirements and capacities of different units. They also indicate the direction in which resources are to be employed. Therefore, budgetary control enables management to ensure the most effective utilization of human and capital resources of the enterprise. Unproductive operations and waste of resources can be minimized. Fixation of responsibility With the help of budgeting, accountability for results can be fixed on particular individuals. Budgeting makes the employees conscious about cost and results.

Effective co-ordination Budgets are an important tool of co-coordinating the efforts of various departments in the org. various executives participates in the budgeting process which promotes mutual understanding and co-operation among them Financial Help Budgeting makes financial planning and control effective. Under it financial aspects of business are considered thoroughly so that the enterprise can arrange for adequate funds as and when required. Cash budget may be used to convince the financial institutions that their loans will be paid back in time. LIMITATIONS OF BUDGETARY CONTROL Budgetary control suffers from the following weakness The effectiveness of budgeting depends upon the accuracy with which estimates are made about the future. Despite all the care and caution there is danger of in accuracy in estimates. Future events can rarely be predicted with cent person accuracy. Every often excessive reliance is placed on past experience in preparing budgets. But future is not always a reputation of the past. When conditions change budget figures become un reliable

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

PERSONAL OBSERVATION Personal observation is the oldest and the most effective technique of control. No control

device plan completely substitutes the role of personal observation. It enables a manager to take effective action immediately. Personal observation can detect information which other control devices may fail to point out. It also exercises a physiological influence on employees. They try to work better when they know what they are being observed. A manager cannot always offer personal observation as a technique of control due to lack of time. He has to devote a lot of time on other activities like planning, organizing, staffing, etc. Personal observation may have a negative impact in the case of enlightened and self motivated employees who don’t like to be closely supervised. 

STATISTICAL DATA AND REPORTS Statistical data are being increasingly used for the purpose of managerial control. Statistical

data are often expressed in the form of averages, percentages, ratios, correlation, etc. Statistical tables, graphical charts and reports are widely used in production control, quality control, inventory control, etc. Some times special analyses are made to collect necessary information. The information so collected is presented in the form of a report which is presented to management for necessary action. 

STANDARD COSTING Standard cost implies estimated cost under standard conditions. Standard costing involves

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ENGINEERING MANAGEMENT AND ECONOMICS standards are reported to top management. Standard cost point out weakness and inefficiency in performance. The great cost consciousness among employees. Standard costs are also helpful in work simplification, budgeting and incentive wage plans. Standard costing is, however, not free from limitations. It is time – consuming and expensive to certain, record and use standard cost. Dual cost has to be maintained making record keeping difficult. It is necessary to frequently revise standard cost to keep them up to date in the face of changing environment. Employees may resist setting and use of standard cost. 

PROFIT AND LOSS CONTROL Profit and loss control implies control through comparison and analyses of profit or loss of

different departments or divisions pr branches of the enterprise. A separate performance of profit and loss statement is prepared for each product line or branch. Estimated cost and revenues are used in these statements. Such estimates are based on average level of efficiency expected of each division or branch. The actual expenses and revenues are then compared with estimates. Profit and loss control can be applied for measuring over all performance as well as for individual divisions or departments. Its effectiveness can be increased when income and expense figures are compared with those of the past years. Profit and loss control serves as a tool of feed forward control by enabling mgt to take preemptive measures for obtaining the desired results 

EXTERNAL AUDIT CONTROL External audit control involves audit of the financial accounts of an enterprise by a qualified

BREAK EVEN POINT ANALYSIS Break even point is the pointed at which total revenue is equal to total cost. It is a point of no

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ENGINEERING MANAGEMENT AND ECONOMICS 

OVER ALL CONTROL CRITERIA Most of the control techniques are designed to regulate specific aspects like costs, profits, etc.

More over, control of over all performance helps to over come weaknesses of partial control measures. According to GEORGE R TERRY “controlling over all performance is advantageous in that it encourages a manager to see the forest not simply the trees. The over all point of view is encouraged. “Control of over all performance is all the more important in the case of large enterprises which have several autonomous units located in different parts of the country. 

RETURN ON INVESTMENT CONTROL Profitability is an important measure of the efficiency of a business enterprise. Profit in relation

Return On investment control offers the following advantages:

Return On Investment provides a sound basis for comparing the relative efficiency of different divisions or department of the company



This control system is help full in the de-centralization of authority as the responsibility for operational efficiency can be easily measured and fixed on semi autonomous divisions.



It puts restraint on demand for higher allocation of resources. Each division can be allocated resources according to its return. By providing a rational basis for resource allocation Return on Investment facilitates budgetary planning and control.



Rate of return is a measure of over all performance and reflects the objectives of business, therefore, it may be treated as a total control system

2. Write down the types and objectives of budgets Answer A business enterprise may prepare and use various types of budgets some of which are given below:

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ENGINEERING MANAGEMENT AND ECONOMICS 1. Master Budget It is the summary budget incorporating all functional budgets. It gives a comprehensive picture of the proposed activities and anticipated results for the entire organization. It is finally approved by the top management. 2. Functional Budgets A functional or operating budget describes the program and responsibility of one particular department of the enterprise. Some of the important functional budgets are like:-

Sales budget It gives a forecast of total volume of sales and its breakup product-wise and area-wise. It shows that products will be sold, in what quantities and at what prices. It is the basic budget as all other budgets are based on it. Sales budget is prepared on the basis of general market conditions, past sales trend, orders on hand , sales man’s estimates. 3. Capital and Revenue Budgets Capital expenditure budget gives estimated expenditure on fixed assets like buildings, plant and machinery, furniture and fixtures, etc. On the other hand, revenue budget shows estimates of income and expenses on routine operations 4. Fixed and Flexible Budgets A fixed budget is prepared for a given level of activity and remains unchanged irrespective of the level of activity actually attained. It is rigid becomes unrealistic when the actual level of operations differs from the budget level .the main purpose of fixed budgeting is to co-ordinate sectional activities. A flexible budget shows the cost behavior at various levels of activities. it is very useful as comparison of actual expenditure with budget expenditure can be made at different levels of operation 5. Zero Based Budgeting The concept of zero based budgeting is based on the belief that the future is not a mere projection of the past .it advocates comprehensive analysis and review of budget proposals, every time such proposal are made. Zero base budgeting represents a radical departure from traditional budgeting. under traditional budgeting current years budget is taken as the base for preparing the next years budget .but in case of zero base budgeting , the budget proposal are considered from the ‘ground up’ or from scratch .

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ENGINEERING MANAGEMENT AND ECONOMICS Zero base budgeting forces manager to review the program every time afresh so as to justify it. It requires thorough and rational analysis of budget commitments. It offers a greater flexibility and freedom in allocating resources. But zero base budgeting is a very time consuming and difficult exercise. MEANING OF BUDGETARY CONTROL Budgetary control is a system of management control in which all operation are planned ahead in the form of budgets and actual results are compared with budgetary standards and the necessary actions are taken to ensure attainment of organizational objectives. It involves preparation and use of budgets to evaluate and regulate actual operation. According to H.J.Wheldon , “by budgetary control ,every item of actual cost is so controlled by vigilant supervision as to make it conform ,as nearly as possible ,to the predetermined budgets standard” OBJETIVES OF BUDGETARY CONTROL Budgetary control encompasses practically the whole range of managerial activity right from planning and policy formulation to evaluation and control. According to John Blocker, “budgetary control is planned to assist the management in the allocation of responsibilities and authority, to aid in making estimates and plans for future, to assist in analysis of variations between estimated and actual results and to develop basic of measurement of standards with which to evaluate the efficiency of operations”. To be specific, budgeting serves the following important objectives:Planning Budgeting provides a definite plan of action to be followed during a specified period. It is a statement of what the management intense to achieve. A budget is a written plan and it is designed to make the goals specific. Budgets are based on forecasts or projection of future events. Budgetary system forces managers to plan their activities in advance. Budgets are helpful in financial planning. Coordination Budgeting is aimed at harmonizing and integrating different activities of the enterprise. Master budgets seek to bring about effective cooperation and coordination between different departments. Budgets are prepared in consultation with all units of the organization. Control Budgets provide pre standards of performance for apprising actual results. Budgetary standards are set keeping in view with the objectives and resources of the organization. Significance

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ENGINEERING MANAGEMENT AND ECONOMICS deviations from budget figures can be reported to top mgt. budgets are prepared for various department. This can be use to detect short comings and to avoid waste of time and money so as to keep cost under control.

Motivation Budgeting provides specific targets which inspire the employees. They can know their responsibility and the standards by which their performance will be judged. Thus, budgeting serves as a great motivating force.

Efficiency The ultimate purpose of budgeting is to enable the mgt to conduct the business in the most efficient manner. Budgets are designed to ensure optimum utilization of materials, machinery and man power. 3. Explain Modern control technique. Answer MODERN CONTROL TECHNIQUES External audit serves as a control mechanism over the financial aspects of business. It detects errors and frauds in the books of accountant. But it dose not serve as a check on managerial complacency.

RESPONSIBILITY ACCOUNTING It is an management accounting system where in cost are assigned to responsibility centers. A

HUMAN RESOURCE ACCOUNTING None of the control mechanism is discussed so far measure the value of human resources

which are critical to the success of every org. Human resource accounting (HRA) is designed for the measurement of the cost and value of employees in an organization. It has been defined as “A process

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ENGINEERING MANAGEMENT AND ECONOMICS of identifying and measuring data about human resources and communicating this information to the interested parties” 

NETWORK TECHNIQUES Net work analysis is being widely used for managerial planning and control. Under net work

analysis a project is broken down into small activities which are arranged in a logical sequence. A net work diagram is then drawn to show interdependence and inter relation ship of various activities. The two most important network techniques are known as PERT and CPM. 

PROGRAMME EVALUATION AND REVIEW TECHNIQUES (PERT) PERT is an integrated mgt control system designed to plan time and cost of completing a

Identify the activities that must be performed in a project.



Arrange these activities in a proper and logical sequence in the form of a net work.



Estimate the time required to complete the individual activities and the entire project.



Determine the critical path involving that activity which if not completed in time will delay the entire project.



Improve upon the initial plan and control the project.

CRITICAL PATH METHOD (CPM) CPM is used for planning and controlling the most logical sequence of activities for completing a project. It is help full in the optimum use of resources. It provides a standard method of communication project schedules and costs. Like PERT, it identifies the critical elements of a projects and facilitates control by exception. CPM is widely used for construction of project and plant maintenance. ANSWER FOR FILL UPS

1. budget 2. Cash budget 3. total revenue is equal to total cost. 4. Return on Investment 5. managerial planning and control

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UNIT-VI DEMAND ANALYSIS 6:1 OBJECTIVES 

To classify various types of demand



To identify factors influencing demand



To comprehend demand concepts and exemplify their use



To understand the underlying principles of consumer behavior



To understand the concept of consumer equilibrium and indifference curve



To familiarize the concept of elasticity of demand



To comprehend the techniques of demand forecasting

6:2 INTRODUCTION Companies across the world acknowledge that consumer demand plays a significant role in the creation and survival of a firm. In the initial stage, sufficient demand for a good or service is essential for setting up of a firm. The success or failure of a business depends mainly on its ability to generate revenues by satisfying consumer preferences. The greater the customer satisfaction, the more the market share and profitability of the firm. As a result, most companies generally introduce a change in the product –mix and service-mix with a change in customer requirements and expectations. Therefore, it can be said that, the customer is the pivot around whom the modern business revolves. In this unit, we will first define the concept of demand and the law of demand. We will also discuss the consumer equilibrium and indifference curve concept with reference to the demand concept. We will also discuss the response of price changes with reference to demand. Later we will also discuss the need and types of forecasting. 6:3 DEFINITION OF DEMAND The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. The demand curve is usually downward sloping, since consumers will want to buy more as price decreases. Demand for a good or service is determined by many different factors other than price, such as the price of substitute goods and complementary goods. In extreme cases, demand may be completely unrelated to price, or nearly infinite at a given price. Along with supply, demand is one of the two key determinants of the market price. 6:4 TYPES OF DEMAND: 1. Composite Demand: if a particular goods or service is demanded to satisfy different needs, that demand is said to be composite. That is deriving different satisfaction from a particular commodity. A typical example of a commodity that has composite demand is crude oil. Crude oil is needed to produce different petroleum products like petrol, kerosene, cooking gas, etc.

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ENGINEERING MANAGEMENT AND ECONOMICS 2. Derived Demand: when a commodity is demanded for the satisfaction of another commodity, that demand is said to be derived. That is the demand for a commodity necessitating the demand for another commodity. A good example of derived demand is an increase in the demand of cars which automatically necessitate an increase in the demand of petrol. 3. Competitive Demand: when commodities have close substitute, the demand for such commodities are said to be competitive. Let us take beverage as example; there lots of different brand of beverages available and one can easily go for any in place of the others. In other words, beverage has a competitive demand. 4. Joint or Complementary Demand: A demand is said to be joint when the demand of two commodities is needed to satisfy one need. For example, the demand for cooking gas and gas cooker is jointly needed to satisfy one's cooking. Therefore, both demands are said to be joint or complementary since on complements the other. 6:4:1 FACTORS THAT DETERMINE DEMAND: 1. Price: Price determines demand since a change in price causes an opposite change in demand. That is an increase in price causes a decrease in demand and vice versa. 2. Income of the Consumer: increase in the income of a consumer tends to increase the purchasing power of the consumer, hence increases demand. Thus income is proportional to demand. 3. The Prices of other Commodities: this affects commodities with close substitutes. An increase in the price of one shifts demand to its close substitute with a lower price. 4. Population: Population is proportional to demand. The higher the population, the higher the demand of goods and services and vice versa. 5. Change in Fashion: Since people tend to go for things in vogue, demand for obsolete commodities tends to drop while we experience increase in commodities that are in vogue. 6. Change in Taste: People's demand tends to increase with their taste. Therefore a change in taste causes a change in demand. 7. Age Distribution: The higher the population of a particular age group, the higher the demand in the commodity used by that age group and vice versa. Tobacco for example is taken by people between the age of 18 and above. Thus the demand in tobacco depends on the number of people within this age limit. 8. Taxation: Taxes place on particular goods increase the price of such goods, hence reducing the demand of the commodity.

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ENGINEERING MANAGEMENT AND ECONOMICS 9. Festive Period: The demand for certain kind of commodities tends to increase during festive periods. During the Muslim's Eid-El-Kabir, the demand for ram increase. While during Christmas season, demand for gift items increases. 10. Expectation of Changes in Prices: If the price of a commodity is expected to either fall or rise, there will be an increase or decrease in the demand of that commodity. 11. Invention of New Commodity: People go for newer commodities thus reducing the demand for older ones. For example, the demand for Pentium 3 laptops is reducing as people tend to go for newer brands of computers. 6:5 THE LAW OF DEMAND 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

6:5:1 EXCEPTIONS TO LAW OF DEMAND Giffen goods: these are those inferior goods on which the consumer spends a large part of his income and the demand for which falls with a fall in their price. The demand curve for these has a positive slope. The consumers of such goods are mostly the poor. A rise in their price drains their resources and the poor have to shift their consumption from the more expensive goods to the giffen goods, while a fall in the price would spare the household some money for more expensive goods. Which still remain cheaper? These goods have no closely related substitutes; hence income effect is higher than substitution effect.

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ENGINEERING MANAGEMENT AND ECONOMICS Articles of snob appeal: Goods which serve ' status symbol ' do not follow the law of demand. These are goods of ' conspicuous consumption '.they gives their possessor utility in the sense of their ownership. Rich buy diamond as their possession is prestigious. When their price raises the prestige value goes up. Expectations regarding future prices: If the price of a commodity is rising and is expected to rise in future the demand for the commodity will increase. Emergency: At times of war, famine etc. consumers have an abnormal behaviour. If they expect shortage in goods they would buy and hoard goods even at higher prices. In depression they will buy less at even low prices. Quality-price relationship: some people assume that expensive goods are of a higher quality then the low priced goods. In this case more goods are demanded at higher prices. 6:6 CHANGES IN DEMAND A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

The demand curve usually slopes downwards from left to right; that is, it has a negative association (for two theoretic exceptions, see Veblen good and Giffen good). The negative slope is often referred to as "law of demand," which means people will buy more of a service, product, or resource as its price falls; see also price elasticity of demand. The demand curve is related to the marginal utility curve, since the price one is willing to pay depends on the utility. However, the demand directly depends on the income of an individual while the utility does not. Thus it may change indirectly due to change in demand of other commodities. These individual factors come together to determine the budget constraint and indifference curve of consumers. The demand curve is then generated by connecting the points where those lines are tangent to one another.

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If the price a consumer is willing to pay for an additional unit of a good increases initially as function of amount then the maximum price pmax he is willing to pay is more than the price he would be willing to pay for the first unit. At this price p max there is a non-zero amount A for which the consumer surplus is zero; at this price and amount the negative consumer surplus for the first units is compensated by the more attractive later units, for each of which the consumer would be willing to pay more than pmax. At this amount the price he is willing to pay for an additional unit has decreased back to p max. If the price is lower than pmax the consumer will buy more. Thus he buys either nothing or at least A. In this case the individual demand curve has a discontinuity, where, after decreasing with price as usual, the demand jumps to zero. At this price he is indifferent between buying this minimum amount and buying nothing (spending the money on something else). Geometrically p max is the slope of the steepest line through the origin and another point of the graph of the total price the consumer is willing to pay as function of amount. In the case of a smooth function this line is tangent to the graph. If the price a consumer is willing to pay for an additional unit of a good goes up and down more often, then the demand curve has more discontinuities, each associated with a line through two points of the graph of the total price the consumer is willing to pay as function of amount, with no part of the graph above the line.

6:6:1 CAUSES OF CHANGE IN DEMAND Changes in disposable income Changes in taste and fashion The availability and cost of credit Changes in the prices of related goods (substitutes and complements) Population size and composition 6:7 LAW OF DIMINISHING MARGINAL UTILITY Definition Psychological generalization that the perceived value of, or satisfaction gained from, a good to a consumer declines with each additional unit acquired or consumed. Even the most delicious food, for example, will appeal less and less to its partaker as its consumption reaches his or her satiation point and, if the consumption continues, will result in sickness (disutility). Consumers deal with this phenomenon by consuming a variety of goods rather than lots of one good.

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137

Take, for example, a chocolate bar. Let's say that after eating one chocolate bar your sweet tooth has been satisfied. Your marginal utility (and total utility) after eating one chocolate bar will be quite high. But if you eat more chocolate bars, the pleasure of each additional chocolate bar will be less than the pleasure you received from eating the one before - probably because you are starting to feel full

you

have

had

too

many

sweets

for

one

day.

This table shows that total utility will increase at a much slower rate as marginal utility diminishes with each additional bar. Notice how the first chocolate bar gives a total utility of 70 but the next three chocolate

bars

together

increase

total

utility

only

additional

units.

The law of diminishing marginal utility helps economists understand the law of demand and the negative sloping demand curve. The less of something you have, the more satisfaction you gain from each additional unit you consume; the marginal utility you gain from that product is therefore higher, giving you a higher willingness to pay more for it. Prices are lower at a higher quantity demanded because your

additional

satisfaction

diminishes

you

demand

more.

In order to determine what a consumer's utility and total utility are, economists turn to consumer demand theory, which studies consumer behavior and satisfaction. Economists assume the consumer is rational and will thus maximize his or her total utility by purchasing a combination of different products rather than more of one particular product. Thus, instead of spending all of your money on three chocolate bars, which has a total utility of 85, you should instead purchase the one chocolate bar, which has a utility of 70, and perhaps a glass of milk, which has a utility of 50. This combination will give you a maximized total utility of 120 but at the same cost as the three chocolate bars. 6:8 THE LAW OF EQUI-MARGINAL UTILITY The Law of Equi-Marginal Utility is an extension to the law of diminishing marginal utility.

The

principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among various goods and services. This law states that how a consumer allocates his money income between various goods so as to obtain maximum satisfaction. Assumptions: ď&#x192;&#x2DC; The wants of a consumer remain unchanged. ď&#x192;&#x2DC;

The prices of all goods are given and known to a consumer.

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ENGINEERING MANAGEMENT AND ECONOMICS 

He is one of the many buyers in the sense that he is powerless to alter the market price.



He can spend his income in small amounts.



He acts rationally in the sense that he want maximum satisfaction



Utility is measured cardinally. This means that utility, or use of a good, can be expressed in terms of "units" or "utils". This utility is not only comparable but also quantifiable.

Suppose there are two goods 'x' and 'y' on which the consumer has to spend his given income. The consumer’s behavior is based on two factors: (a) Marginal Utilities of goods 'x' and 'y' (b) The prices of goods 'x' and 'y' The consumer is in equilibrium position when marginal utility of money expenditure on each good is the same. The Law of Equi-Marginal Utility states that the consumer will distribute his money income in such a way that the utility derived from the last rupee spent on each good is equal. The consumer will spend his money income in such a way that marginal utility of each good is proportional to its rupee. The consumer is in equilibrium in respect of the purchases of goods 'x' and 'y' when: MUx = MUy

Where MU is Marginal Utility and P equals Price

If MUx / Px and MUy / Py are not equal and MUx / Px is greater than MUy / Py, then the consumer will substitute good 'x' for good 'y'. As a result the marginal utility of good 'x' will fall. The consumer will continue substituting good 'x' for good 'y' till MUx/Px = MUy/Py where the consumer will be in equilibrium. Thus this is also known as the law of substitution. This law is based on the assumption that utility can be cardinally measurable. But in actual practices it cannot be measured in such cardinal numbers. It is also assumed that marginal utility of money is constant. But this is not true because when the quantity of money increases, its marginal utility will diminish. This law is not applicable in the case of indivisible goods like TV sets, refrigerators, etc. Normally a person will buy only a single unit of such goods. Hence it is ridiculous to prepare an individual marginal utility schedule for such goods. 6:9 INDIFFERENCE CURVE ANALYSIS The aim of indifference curve analysis is to analyse how a rational consumer chooses between two goods. In other words, how the change in the wage rate will affect the choice between leisure time and work time. Indifference analysis combines two concepts; indifference curves and budget lines (constraints) The indifference curve An indifference curve is a line that shows all the possible combinations of two goods between which a person is indifferent. In other words, it is a line that shows the consumption of different combinations of two goods that will give the same utility (satisfaction) to the person.

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ENGINEERING MANAGEMENT AND ECONOMICS For instance, in Figure

the indifference curve is giben. A person would receive the same utility

(satisfaction) from consuming 4 hours of work and 6 hours of leisure, as they would if they consumed 7 hours of work and 3 hours of leisure.

An indifference curve for work and leisure An important point is to remember that the use of an indifference curve does not try to put a physical measure onto how much utility a person receives. The shape of the indifference curve Figure highlights that the shape of the indifference curve is not a straight line. It is conventional to draw the curve as bowed. This is due to the concept of the diminishing marginal rate of substitution between the two goods. The marginal rate of substitution is the amount of one good (i.e. work) that has to be given up if the consumer is to obtain one extra unit of the other good (leisure). The equation is below The marginal rate of substitution (MRS) = change in good X / change in good Y Using Figure 1, the marginal rate of substitution between point A and Point B is; MRS = -3 / 3 = -1 = 1 Note, the convention is to ignore the sign. The reason why the marginal rate of substitution diminishes is due to the principle of diminishing marginal utility. Where this principle states that the more units of a good are consumed, then additional units will provide less additional satisfaction than the previous units. Therefore, as a person consumes more of one good (i.e. work) then they will receive diminishing utility for that extra unit (satisfaction), hence, they will be willing to give up less of their leisure to obtain one more unit of work. The relationship between marginal utility and the marginal rate of substitution is often summarized with the following equation;

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ENGINEERING MANAGEMENT AND ECONOMICS MRS = Mux / Muy 6:10 CONSUMER EQUILIBRIUM When consumers make choices about the quantity of goods and services to consume, it is presumed that their objective is to maximize total utility. In maximizing total utility, the consumer faces a number of constraints, the most important of which are the consumer's income and the prices of the goods and services that the consumer wishes to consume. The consumer's effort to maximize total utility, subject to these constraints, is referred to as the consumer's problem. The solution to the consumer's problem, which entails decisions about how much the consumer will consume of a number of goods and services, is referred to as consumer equilibrium. 6:10:1 Determination of consumer equilibrium. Consider the simple case of a consumer who cares about consuming only two goods: good 1 and good 2. This consumer knows the prices of goods 1 and 2 and has a fixed income or budget that can be used to purchase quantities of goods 1 and 2. The consumer will purchase quantities of goods 1 and 2 so as to completely exhaust the budget for such purchases. The actual quantities purchased of each good are determined by the condition for consumer equilibrium, which is

This condition states that the marginal utility per dollar spent on good 1 must equal the marginal utility per dollar spent on good 2. If, for example, the marginal utility per dollar spent on goo d 1 were higher than the marginal utility per dollar spent on good 2, then it would make sense for the consumer to purchase more of good 1 rather than purchasing any more of good 2. After purchasing more and more of good 1, the marginal utility of good 1 w ill eventually fall due to the law of diminishing marginal utility, so that the marginal utility per dollar spent on good 1 will eventually equal that of good 2. Of course, the amount purchased of goods 1 and 2 cannot be limitless and will depend not only on the marginal utilities per dollar spent, but also on the consumer's budget. 6:11 ELASTICITY OF DEMAND Price elasticity of demand refers to the way prices change in relationship to the demand, or the way demand changes in relationship to pricing. Price elasticity can also reference the amount of money each individual consumer is willing to pay for something. People with lower incomes tend to have lower price elasticity, because they have less money to spend. A person with a higher income is thought to have higher price elasticity, since he can afford to spend more. In both cases, ability to pay is negotiated by the intrinsic value of what is being sold. If the thing being sold is in high demand, even a consumer with low price elasticity is usually willing to pay higher prices. Elasticity implies stretch and flexibility. The flexibility or the price elasticity of demand will

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ENGINEERING MANAGEMENT AND ECONOMICS change based on each item. Changing nature of both price and demand are affected by a number of factors. Generally, goods or services offered at a lower price lead to a demand for greater quantity. If you can get socks on sale you might buy several pairs or several packages, instead of just a pair. This means that though the seller offers the socks at a lower price, he usually ends up making more money, because demand for the product has increased. However if the price is set too low, the retailer may lose money by selling too many pairs of socks at a reduced rate. Price elasticity of demand evaluates how change in price influences demand. In certain circumstances, demand remains inelastic, despite higher prices. This is true of a number of medications that are available to treat certain conditions, where there is no substitute. Demand remains constant in spite of high prices. 2:11:1 Price elasticity of demand is defined as the measure of responsiveness in the quantity demanded for a commodity as a result of change in price of the same commodity. It is a measure of how consumers react to a change in price. In other words, it is percentage change in quantity demanded as per the percentage change in price of the same commodity. In simpler words, demand for a product can be said to be very inelastic if consumers will pay almost any price for the product, and very elastic if consumers will only pay a certain price, or a narrow range of prices, for the product. Inelastic demand means a producer can raise prices without much hurting demand for its product, and elastic demand means that consumers are sensitive to the price at which a product is sold and will not buy it if the price rises by what they consider too much. Drinking water is a good example of a good that has inelastic characteristics in that people will pay anything for it (high or low prices with relatively equivalent quantity demanded), so it is not elastic. On the other hand, demand for sugar is very elastic because as the price of sugar increases, there are many substitutions which consumers may switch to. Mathematical definition The formula used to calculate the coefficient of price elasticity of demand for a given product is

Conventions differ regarding the minus sign, considering remarks like "price elasticity of demand is usually negative". 6:11:2 Determinants of elasticity of demand A number of factors determine the elasticity: Substitutes: The more substitutes, the higher the elasticity, as people can easily switch from one good to another if a minor price change is made Percentage of income: The higher the percentage that the product's price is of the consumers income, the higher the elasticity, as people will be careful with purchasing the good because of its cost

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ENGINEERING MANAGEMENT AND ECONOMICS Necessity: The more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of insulin for those that need it. Duration: The longer a price change holds, the higher the elasticity, as more and more people will stop demanding the goods (i.e. if you go to the supermarket and find that blueberries have doubled in price, you'll buy it because you need it this time, but next time you won't, unless the price drops back down again) Breadth of definition: The broader the definition, the lower the elasticity. For example, Company X's fried dumplings will have a relatively high elasticity, where as food in general will have an extremely low elasticity (see Substitutes, Necessity above) Classifications of Elasticity of Demand Point-price elasticity Point Elasticity = (% change in Quantity) / (% change in Price) Point Elasticity = (∆Q/Q)/(∆P/P) Point Elasticity = (P ∆Q) / (Q ∆P) Point Elasticity = (P/Q) (∆Q/∆P)

6:11:3 Income elasticity of demand The income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income. A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the quantity demanded and may lead to changes to more luxurious substitutes. A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in the quantity demanded. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good. A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the quantity demanded of a good. These would be sticky goods. Cross elasticity of demand The cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of another good. It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2.

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ENGINEERING MANAGEMENT AND ECONOMICS Interpretation of elasticity Value

Meaning

n=0

Perfectly inelastic.

0 > n > -1

Relatively inelastic.

n = -1

Unit (or unitary) elastic.

-1 > n > -∞

Relatively elastic.

n = -∞

Perfectly elastic.

6:12 DEMAND FORECASTING DEFINITION A demand forecast is the prediction of what will happen to your company's existing product sales. It would be best to determine the demand forecast using a multi-functional approach. The inputs from sales and marketing, finance, and production should be considered. The final demand forecast is the consensus of all participating managers. You may also want to put up a Sales and Operations Planning group composed of representatives from the different departments that will be tasked to prepare the demand forecast. 6:12:1 Steps of the demand forecasts: • Determine the use of the forecast • Select the items to be forecast • Determine the time horizon of the forecast • Select the forecasting model(s) • Gather the data • Make the forecast • Validate and implement results

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6:12:2 Levels of Forecast

Description

Forecast Horizon

Short-range Duration

Medium-range Usually less than 3

Long-range 3 months to 3 years

More than 3 years

months, maximum of 1 year Applicability

Job scheduling, worker Sales and production

New product

assignments

development, facilities

planning, budgeting

planning 6:12:3 Criteria for Good Forecasting Method There are two approaches to determine demand forecast â&#x20AC;&#x201C; (1) the qualitative approach, (6) the quantitative approach. The comparison of these two approaches is shown below:

Description Applicability

Qualitative Approach

Quantitative Approach

Used when situation is vague & little

Used when situation is stable &

data exist (e.g., new products and

historical data exist

technologies) (e.g. existing products, current technology) Considerations

Involves intuition and experience

Involves mathematical techniques

Techniques

Jury of executive opinion

Time series models

Sales force composite

Causal models

Delphi method Consumer market survey 2:12:4 Methods of Forecasting Qualitative Forecasting Methods Qualitative forecasting methods can be used if we do not have historical data on products' sales. Qualitative Method

Description

Jury of executive opinion

The opinions of a small group of high-level managers are pooled and together they estimate demand. The group uses their managerial experience, and in some cases, combines the results of statistical models.

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ENGINEERING MANAGEMENT AND ECONOMICS Sales force composite

Each salesperson (for example for a territorial coverage) is asked to project their sales. Since the salesperson is the one closest to the marketplace, he has the capacity to know what the customer wants. These projections are then combined at the municipal, provincial and regional levels.

Delphi method

A panel of experts is identified where an expert could be a decision maker, an ordinary employee, or an industry expert. Each of them will be asked individually for their estimate of the demand. An iterative process is conducted until the experts have reached a consensus.

Consumer market survey

The customers are asked about their purchasing plans and their projected buying behavior. A large number of respondents is needed here to be able to generalize certain results.

6:12:5 Quantitative Forecasting Methods There are two forecasting models here â&#x20AC;&#x201C; (1) the time series model and (2) the causal model. A time series is a s et of evenly spaced numerical data and is o btained by observing responses at regular time periods. In the time series model , the forecast is based only on past values and assumes that factors that influence the past, the present and the future sales of your products will continue. On the other hand, t he causal model uses a mathematical technique known as the regression analysis that relates a dependent variable (for example, demand) to an independent variable (for example, price, advertisement, etc.) in the form of a linear equation. The time series forecasting methods are described below:

Time Series Forecasting Method NaĂŻve Approach

Description

Assumes that demand in the next period is the same as demand in most recent period; demand pattern may not always be that stable For example: If July sales were 50, then Augusts sales will also be 50

Moving (MA)

Averages MA is a series of arithmetic means and is used if little or no trend is present in the data; provides an overall impression of data over time A simple moving average uses average demand for a fixed sequence of periods and is good for stable demand with no pronounced behavioral

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ENGINEERING MANAGEMENT AND ECONOMICS patterns. Equation: F 4 = [D 1 + D2 + D3] / 4 F – forecast, D – Demand, No. – Period A weighted moving average adjusts the moving average method to reflect fluctuations more closely by assigning weights to the most recent data, meaning, that the older data is usually less important. The weights are based on intuition and lie between 0 and 1 for a total of 1.0 Equation: WMA 4 = (W) (D3) + (W) (D2) + (W) (D1) WMA – Weighted moving average, W – Weight, D – Demand, No. – Period Exponential

The exponential smoothing is an averaging method that reacts more

Smoothing

strongly to recent changes in demand by assigning a smoothing constant to the most recent data more strongly; useful if recent changes in data are the results of actual change (e.g., seasonal pattern) instead of just random fluctuations F t + 1 = a D t + (1 - a ) F t Where F t + 1 = the forecast for the next period D t = actual demand in the present period F t = the previously determined forecast for the present period • = a weighting factor referred to as the smoothing constant

Time

Series The time series decomposition adjusts the seasonality by multiplying the

Decomposition

normal forecast by a seasonal factor

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UNIT QUESTIONS 1. Define demand. Discuss the types and importance of demand. 2. What is law of demand? What are the exemptions of law of demand? 3. Explain the changes of demand curve with suitable diagram 4. Discuss the concept of Law of Diminishing marginal utility 5. Explain the concept of Law of Equi-Marginal Utility 6. Describe the principles of indifference curve analysis 7. What is Consumer Equilibrium? Explain. 8. Illustrate the elasticity of demand with its types and consequences 9. Discuss various methods of demand forecasting with their merits and demerits.

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UNIT VII COST AND PRODUCTION CONCEPTS 7:1 OBJECTIVES  To apprehend the relevance of cost concepts in decision making 

To exemplify the behaviour of costs in the short run and long run



To estimate the cost function and highlight its usefulness in managerial decisions



To understand the significance of break even analysis



To understand the basic concepts of production function



To exemplify the principles of laws of returns to scale

7:2 INTRODUCTION Prudent decisions about optimal output and optimal prices to be charged require an understanding of relationship between output rate of the firm and costs. Managerial decisions with respect to quotation of prices, efficacy of a product line, change in volume of output, and use of excess capacity depends on the cost analysis. Efficient resource combinations to produce a specific output rate illustrated in the previous chapter can be translated into cost data.

7:3 COST CONCEPTS RELEVANT TO MANAGERIAL ECONOMICS Explicit costs: are expenses for which one must pay with cash or equivalent. Because a cash transaction is involved, they are relatively easily accounted for in analysis. Implicit costs: do not involve a cash transaction, and so we use the opportunity cost concept to measure them. This analysis requires detailed knowledge of alternatives that were not selected at various decision points. Relevant here are the opportunity cost of the firm's assets and cash, and of the owner's time invested in the firm. Opportunity Costs: The opportunity cost of an asset (or, more generally, of a choice) is the highest valued opportunity that must be passed up to allow current use. Thus the monthly opportunity cost of a latte cart owned by Isabel may be, for example, the monthly income the cart could have generated if Isabel had rented the cart for someone else to use. Incremental and Sunk Costs Incremental cost is the change in cost caused by a particular managerial decision. Thus the increment is at the decision level, and may involve multiple units of change in output or input. Incremental costs may be involved when considering a product or service modification or a change in production process. Sunk costs are those parts of the purchase cost that cannot later be salvaged or modified through resale or other changes in operations. Image advertising for a new product is a classic example of a sunk cost, as is an option or investment in assets whose value is specific to a particular situation. Sunk costs reflect commitment, or irreversibility, and so is not a part of incremental analysis.

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ENGINEERING MANAGEMENT AND ECONOMICS Short-Run and Long-Run Costs In microeconomics and managerial economics, the short run is the decision-making period during which at least one input is considered fixed. The fixed input is commonly considered to be some aspect of capital, such the production facility, but may also be a normally variable input that is fixed because of production technology requirements, or a contractual commitment (e.g., a facility lease) related to production. So when one refers to short-run analysis, the analysis is focused on a planning period in which some input is fixed and others are variable, and the manager is selecting levels of variable input and production output to optimize given the constraint of the fixed input. In contrast, the economic long run is a planning horizon that looks beyond current commitments to a future period in which all inputs can be varied. A typical long-run analytical problem is the decision of whether to adjust capacity, seek a larger (or smaller) facility, to change product lines, or to adopt a new technology. At any given time managers must be concerned with both short-run and long-run analysis. Firms must be concerned with both the problem of optimizing in the current (short-run) situation as well positioning the firm for optimizing in the future (long-run). Fixed Costs and Variable Costs Fixed costs do not vary with the volume of goods or services produced as output. Fixed costs are the costs associated with the fixed inputs that define the economic short run. Thus fixed costs are only relevant in the economic short run. Even if the firm temporarily shuts down, it still continues to incur the fixed cost expense. This is typical of capital loans or facility lease agreements. Variable costs, in contrast, vary (usually directly) with the volume of goods or services produced as output, and thus can be avoided by a temporary shutdown. Total Cost, Average Cost and Marginal Cost Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC) Average Fixed Cost (AFC) = TFC/Q Average Variable Cost (AVC) = TVC/Q Average Total Cost (ATC) = TC/Q Marginal Cost (MC) = @TC/@Q ('@' refers to 'change in')

7:4 DETERMINANTS OF COST Several factors may influence the cost of a firm. The table briefly describes the major determinants of costs. Determinant

Description

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ENGINEERING MANAGEMENT AND ECONOMICS Factor Prices

Input prices and the amount of inputs used to influence the total cost

Technology

Innovations and better techniques decrease cost

Size of the plant

In a big size plant, initial fixed cost is high and variable cost low

Law of returns

Cost increases with decreasing returns and decreases with increasing returns

Efficiency

Costs decrease with input efficiency

Capacity Utilisation

Per unit cost of output is low with greater level of capacity utilisation

Lot size

The total cost and per unit cost decreases with the decreases with the manufacture of bigger lot

Production cycle

If output is stable and constant over a period of time, overall costs are lower. Production by breaks and disruption is bound to be costly

7:5 COST OUTPUT RELATIONSHIP In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms use these curves to find the optimal point of production, where they make the most profits. There are a few different types of cost curves, each relevant to a different area of economics. 7:5:1 THE SHORT RUN COST OUTPUT RELATIONSHIP (SATC OR SAC) The average total cost curve is constructed to capture the relation between cost per unit and the level of output, ceteris paribus. A productively efficient firm organizes its factors of production in such a way that the average cost of production is at lowest point and intersects Marginal Cost. In the short run, when at least one factor of production is fixed, this occurs at the optimum capacity where it has enjoyed all the possible benefits of specialisation and no further opportunities for decreasing costs exist. This is usually not U shaped; it is a checkmark shaped curve. This is at the minimum point in the diagram on the right.

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Figure 1 7:5:2 THE LONG-RUN AVERAGE COST CURVE (LRAC)

Figure 2 The long-run average cost curve depicts the per unit cost of producing a good or service in the long run when all inputs are variable. The curve is created as an envelope of an infinite number of shortrun average total cost curves. The LRAC curve is U-shaped, reflecting economies of scale when negatively-sloped and diseconomies of scale when positively sloped. Contrary to Viner, the envelope is not created by the minimum point of each short-run average cost curve. This mistake is recognized as Viner's Error. In the long run, when all factors of production can be changed, the scale of the enterprise can be increased. In this case productive efficiency occurs at the optimum scale of output where all the possible economies of scale have been enjoyed and the firm is not large enough to experience diseconomies of scale. This is at output level Q2 in the diagram.

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ENGINEERING MANAGEMENT AND ECONOMICS 7:6 BREAK EVEN ANALYSIS Break-even analysis is a technique widely used by production management and management accountants. It is based on categorising production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production). Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point"). It is also known as Cost-volume-profit (CVP) analysis The Break-Even Chart In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines:

Figure 3 In the diagram above, the line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made. 7:6:1 BEP CALCULATION

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ENGINEERING MANAGEMENT AND ECONOMICS Sales and cost information are used to calculate the breakeven point. Without getting into the argument as to what constitutes fixed or variable costs, fixed costs are defined as those which do not vary with output e.g. rent, rates, whereas variable costs do vary with increased or decreased output, e.g. labour, materials. Breakeven assumes fixed costs are constant, variable costs vary at a constant rate and there is only one selling price. However, with a higher or lower price, the breakeven point will be lower or higher respectively. Breakeven point is calculated by the formula:

By rearranging the formula breakeven costs or sales can be calculated. Note that profit level intentions should be added to the fixed costs as this is a "charge" to the company. Also, if one wishes to recover all new investment (value) immediately it should be added to fixed cost. In the linear Cost-Volume-Profit Analysis model the break-even point (in terms of Unit Sales (X)) can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as:

where: TFC is Total Fixed Costs, P is Unit Sale Price, and V is Unit Variable Cost.

Example 1: Calculate the break even volume and breakeven point for the following information:

Price/Unit =

Rs.1.846

Variable cost/Unit = Rs.0.767 Fixed costs =

Rs.70.000

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= 65, 000 units (volume) or Rs.120, 000

Figure 4 7:6:2 Uses of Break Even Analysis The technique used carefully may be helpful in the following situations: a) Budget planning. The volume of sales required to make a profit (breakeven point) and the 'safety margin' for profits in the budget can be measured. b) Pricing and sales volume decisions. c) Sales mix decisions, to determine in what proportions each product should be sold. d) Decisions that will affect the cost structure and production capacity of the company. 7:7 PRODUCTION FUNCTION In economics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs. A meta-production function compares the practice of the existing entities converting inputs X into output y to determine the most efficient practice production function of the existing entities, whether the most efficient feasible practice production or the most efficient actual practice production.

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ENGINEERING MANAGEMENT AND ECONOMICS In either case, the maximum output of a technologically-determined production process is a mathematical function of input factors of production. Put another way, given the set of all technically feasible combinations of output and inputs, only the combinations encompassing a maximum output for a specified set of inputs would constitute the production function. Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated quantities of output, given available technology. It is usually presumed that unique production functions can be constructed for every production technology. By assuming that the maximum output technologically possible from a given set of inputs is achieved, economists using a production function in analysis are abstracting away from the engineering and managerial problems inherently associated with a particular production process. The engineering and managerial problems of technical efficiency are assumed to be solved, so that analysis can focus on the problems of allocative efficiency. The firm is assumed to be making allocative choices concerning how much of each input factor to use, given the price of the factor and the technological determinants represented by the production function. A decision frame, in which one or more inputs are held constant, may be used; for example, capital may be assumed to be fixed or constant in the short run, and only labour variable, while in the long run, both capital and labour factors are variable, but the production function itself remains fixed, while in the very long run, the firm may face even a choice of technologies, represented by various, possible production functions. The primary purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors. Under certain assumptions, the production function can be used to derive a marginal product for each factor, which implies an ideal division of the income generated from output into an income due to each input factor of production. 7:7:1 Production function as an equation There are several ways of specifying the production function. In a general mathematical form, a production function can be expressed as: Q = f(X1, X2, X3,...,Xn) Where: Q = quantity of output X1, X2, X3,...,Xn = factor inputs (such as capital, labour, land or raw materials). This general form does not encompass joint production that is a production process, which has multiple co-products or outputs. One way of specifying a production function is simply as a table of discrete outputs and input combinations, and not as a formula or equation at all. Using an equation usually implies continual variation of output with minute variation in inputs, which is simply not realistic. Fixed ratios of factors, as in the case of laborers and their tools, might imply that only discrete input combinations, and therefore, discrete maximum outputs, are of practical interest. One formulation is as a linear function: Q = a + bX1 + cX2 + dX3,...

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ENGINEERING MANAGEMENT AND ECONOMICS Where a,b,c, and d are parameters that are determined empirically. 7:7:2 Cobb-Douglas production function (multiplicative):

Other forms include the constant elasticity of substitution production function (CES) which is a generalized form of the Cobb-Douglas function, and the quadratic production function which is a specific type of additive function. The best form of the equation to use and the values of the parameters (a,b,c, and d) vary from company to company and industry to industry. In a short run production function at least one of the X's (inputs) is fixed. In the long run all factor inputs are variable at the discretion of management. 7:7:3 Production function as a graph Any of these equations can be plotted on a graph. A typical (quadratic) production function is shown in the following diagram. All points above the production function are unobtainable with current technology, all points below are technically feasible, and all points on the function show the maximum quantity of output obtainable at the specified levels of inputs. From the origin, through points A, B, and C, the production function is rising, indicating that as additional units of inputs are used, the quantity of outputs also increases. Beyond point C, the employment of additional units of inputs produces no additional outputs, in fact, total output starts to decline. The variable inputs are being used too intensively (or to put it another way, the fixed inputs are under-utilized). With too much variable input use relative to the available fixed inputs, the company is experiencing negative returns to variable inputs, and diminishing total returns. In the diagram this is illustrated by the negative marginal physical product curve (MPP) beyond point Z, and the declining production function beyond point C. From the origin to point A, the firm is experiencing increasing returns to variable inputs. As additional inputs are employed, output increases at an increasing rate. Both marginal physical product (MPP) and average physical product (APP) is rising. The inflection point A, defines the point of diminishing marginal returns, as can be seen from the declining MPP curve beyond point X. From point A to point C, the firm is experiencing positive but decreasing returns to variable inputs. As additional inputs are employed, output increases but at a decreasing rate. Point B is the point of diminishing average returns, as shown by the declining slope of the average physical product curve (APP) beyond point Y. Point B is just tangent to the steepest ray from the origin hence the average physical product is at a maximum. Beyond point B, mathematical necessity requires that the marginal curve must be below the average curve.

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7:7:4 STAGES OF PRODUCTION To simplify the interpretation of a production function, it is common to divide its range into 3 stages. In Stage 1 (from the origin to point B) the variable input is being used with increasing efficiency, reaching a maximum at point B (since the average physical product is at its maximum at that point). The average physical product of fixed inputs will also be rising in this stage (not shown in the diagram). Because the efficiency of both fixed and variable inputs is improving throughout stage 1, a firm will always try to operate beyond this stage. In stage 1, fixed inputs are underutilized. In Stage 2, output increases at a decreasing rate, and the average and marginal physical product is declining. However the average product of fixed inputs (not shown) is still rising. In this stage, the employment of additional variable inputs increase the efficiency of fixed inputs but decrease the efficiency of variable inputs. The optimum input/output combination will be in stage 2. Maximum production efficiency must fall somewhere in this stage. Note that this does not define the profit maximizing point. It takes no account of prices or demand. If demand for a product is low, the profit maximizing output could be in stage 1 even though the point of optimum efficiency is in stage 2. In Stage 3, too much variable input is being used relative to the available fixed inputs: variable inputs are over utilized. Both the efficiency of variable inputs and the efficiency of fixed inputs decline

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throughout this stage. At the boundary between stage 2 and stage 3, fixed input is being utilized most efficiently and short-run output is maximum. 3:8 RETURNS TO SCALE Returns to scale refers to a technical property of production that examines changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant factor). If output increases by that same proportional change then there are constant returns to scale (CRTS). If output increases by less than that proportional change, there are decreasing returns to scale (DRS). If output increases by more than that proportion, there are increasing returns to scale (IRS).

Short example: where all inputs increase by a factor of 2, new values for output should be: Twice the previous output given = a constant return to scale (CRTS) Less than twice the previous output given = a decreased return to scale (DRS) More than twice the previous output given = an increased return to scale (IRS) 3:9 ECONOMIES OF SCALE Economies of scale and diseconomies of scale refer to an economic property of production that affects cost if quantity of all input factors is increased by some amount. If costs increase proportionately, there are no economies of scale; if costs increase by a greater amount, there are diseconomies of scale; if costs increase by a lesser amount, there are positive economies of scale. When combined, economies of scale and diseconomies of scale lead to ideal firm size theory, which states that per-unit costs decrease until they reach a certain minimum, then increase as the firm size increases further. Economies of scale refers to the decreased per unit cost as output increases. More clearly, the initial investment of capital is diffused (spread) over an increasing number of units of output, and therefore, the marginal cost of producing a good or service decreases as production increases (note that this is only in an industry that is experiencing economies of scale) An example will clarify. AFC is average fixed cost If a company is currently in a situation with economies of scale, for instance, electricity, then as their

initial investment of $1000 is spread over 100 customers, their AFC is

If that same utility now has 200 customers, their AFC becomes

... their fixed cost

is now spread over 200 units of output. In economies of scale this results in a lower average total cost. The advantage is that "buying bulk is cheaper on a per-unit basis." Hence, there is economy (in the sense of "efficiency") to be gained on a larger scale. Economies of scale tend to occur in industries with high capital costs in which those costs can be distributed across a large number of units of production (both in absolute terms, and, especially, relative to the size of the market). A common example is a factory. An investment in machinery is made, and one worker, or unit of production, begins to work on the machine and produces a certain number of goods. If another worker is added to the machine he or she is able to produce an additional

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ENGINEERING MANAGEMENT AND ECONOMICS amount of goods without adding significantly to the factory's cost of operation. The amount of goods produced grows significantly faster than the plant's cost of operation. Hence, the cost of producing an additional good is less than the good before it, and an economy of scale emerges.

UNIT QUESTIONS 1. Give some important cost concepts relevant to managerial economics. Explain their relationship. 2. Explain the cost-output relationship in short run and long run 3. What is break even analysis? Explain the usefulness of BEP with a suitable example 4. What is production function? Explain the importance and changes of production function 5. Discuss the concept of returns to scale with the stages of production function 6. Find the break - even point and volume for the following information: Sales 1000 units, Selling price per unit Rs. 60, Variable cost per unit Rs. 40, Fixed cost Rs. 1500.

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UNIT VIII CAPITAL BUDGETING 8:1 OBJECTIVES  To understand the meaning and concepts of capital budgeting  To evaluate the factors that determine the capital investment decision  To examine the concepts used in decision making under risk and uncertainty  To exhibit the principles to measure capital productivity, supply of capital and capital rationing  To understand the meaning and calculation of cost of capital  To analyse the various methods of appraising capital projects 8:2 INTRODUCTION Previous chapters were designed to help a firm to make decisions with its existing resources. Of equal importance are the long run investment decisions of a firm. Marketing executives may propose construction of new stores. Production engineers may plan construction of new plants to increase capacity and so on. These decisions are crucial for the firm as they involve costs and give rise to revenues over a number of years. Capital budgeting methods guide a manager in making such decisions. Long term investment decisions have an element of risk and uncertainty as well. In real world, a manager may not know the exact outcome of each possible course of action. Risk analysis helps in making decisions under risk and uncertainty. Therefore, in this chapter we will discuss methods of capital budgeting and risk analysis. 8:3 MEANING OF CAPITAL BUDGETING Capital budgeting is a required managerial tool.

One duty of a financial manager is to choose

investments with satisfactory cash flows and rates of return. Therefore, a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects is needed. This procedure is called capital budgeting. 8:3:1 NEED FOR CAPITAL BUDGETING In the form of either debt or equity, capital is a very limited resource. There is a limit to the volume of credit that the banking system can create in the economy. Commercial banks and other lending institutions have limited deposits from which they can lend money to individuals, corporations, and governments. In addition, the Federal Reserve System requires each bank to maintain part of its deposits as reserves. Having limited resources to lend, lending institutions are selective in extending loans to their customers. But even if a bank were to extend unlimited loans to a company, the management of that company would need to consider the impact that increasing loans would have on the overall cost of financing. In reality, any firm has limited borrowing resources that should be allocated among the best investment alternatives. One might argue that a company can issue an almost unlimited amount of common stock to raise capital. Increasing the number of shares of company stock, however, will serve only to distribute the same amount of equity among a greater number of shareholders. In other

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ENGINEERING MANAGEMENT AND ECONOMICS words, as the number of shares of a company increases, the company ownership of the individual stockholder may proportionally decrease. The argument that capital is a limited resource is true of any form of capital, whether debt or equity (short-term or long-term, common stock) or retained earnings, accounts payable or notes payable, and so on.

Even the best-known firm in an industry or a community can increase its

borrowing up to a certain limit. Once this point has been reached, the firm will either be denied more credit or be charged a higher interest rate, making borrowing a less desirable way to raise capital. Faced with limited sources of capital, management should carefully decide whether a particular project is economically acceptable. In the case of more than one project, management must identify the projects that will contribute most to profits and, consequently, to the value (or wealth) of the firm. This, in essence, is the basis of capital budgeting. 8:4 TYPES OF CAPITAL BUDGETING DECISIONS a) By project size Small projects may be approved by departmental managers. More careful analysis and Board of Directors' approval is needed for large projects of, say, half a million dollars or more. b) By type of benefit to the firm 

an increase in cash flow



a decrease in risk



an indirect benefit (showers for workers, etc).

c) By degree of dependence 

mutually exclusive projects (can execute project A or B, but not both)



complementary projects: taking project A increases the cash flow of project B.



substitute projects: taking project A decreases the cash flow of project B.

d) By degree of statistical dependence 

Positive dependence



Negative dependence



Statistical independence.

e) By type of cash flow 

Conventional cash flow: only one change in the cash flow sign.



Non-conventional cash flows: more than one change in the cash flow sign

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8:5 SUPPLY OF CAPITAL â&#x20AC;&#x201C; SOURCES OF CAPITAL A company might raise new funds from the following sources: capital markets: i.

new share issues, for example, by companies acquiring a stock market listing for the first time

ii.

rights issues

anchising 8:5:1 Capital Markets The capital for new projects can be raised through capital markets in the form of shares, debentures and bonds. The shares may be through primary equity shares, right issues and other form of capital market sources. 8:5:2 Loan stock Loan stock is long-term debt capital raised by a company for which interest is paid, usually half yearly and at a fixed rate. Holders of loan stock are therefore long-term creditors of the company. Debentures are a form of loan stock, legally defined as the written acknowledgement of a debt incurred by a company, normally containing provisions about the payment of interest and the eventual repayment of capital. 8:5:3 Retained earnings For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Profit re-invested as retained earnings is profit that could have been paid as a dividend. A company must restrict its self-financing through retained profits because shareholders should be paid a reasonable dividend, in line with realistic expectations, even if the directors would rather keep the funds for re-investing. At the same time, a company that is looking for extra funds will not be expected by investors (such as banks) to pay generous dividends, nor over-generous salaries to owner-directors.

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ENGINEERING MANAGEMENT AND ECONOMICS 8:5:4 Bank lending Borrowings from banks are an important source of finance to companies. Bank lending is still mainly short term, although medium-term lending is quite common these days. Short term lending may be in the form of: a) an overdraft, which a company should keep within a limit set by the bank. Interest is charged (at a variable rate) on the amount by which the company is overdrawn from day to day; b) a short-term loan, for up to three years. Medium-term loans are loans for a period of from three to ten years. The rate of interest charged on medium-term bank lending to large companies will be a set margin, with the size of the margin depending on the credit standing and riskiness of the borrower. A loan may have a fixed rate of interest or a variable interest rate, so that the rate of interest charged will be adjusted every three, six, nine or twelve months in line with recent movements in the Base Lending Rate. Lending to smaller companies will be at a margin above the bank's base rate and at either a variable or fixed rate of interest. Lending on overdraft is always at a variable rate. A loan at a variable rate of interest is sometimes referred to as a floating rate loan. Longer-term bank loans will sometimes be available, usually for the purchase of property, where the loan takes the form of a mortgage.

8:5:5 Leasing A lease is an agreement between two parties, the "lessor" and the "lessee". The lessor owns a capital asset, but allows the lessee to use it. The lessee makes payments under the terms of the lease to the lessor, for a specified period of time. Leasing is, therefore, a form of rental. Leased assets have usually been plant and machinery, cars and commercial vehicles, but might also be computers and office equipment. There are two basic forms of lease: "operating leases" and "finance leases". 8:5:6 Hire purchase Hire purchase is a form of instalment credit. Hire purchase is similar to leasing, with the exception that ownership of the goods passes to the hire purchase customer on payment of the final credit instalment, whereas a lessee never becomes the owner of the goods. An industrial or commercial business can use hire purchase as a source of finance. With industrial hire purchase, a business customer obtains hire purchase finance from a finance house in order to

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ENGINEERING MANAGEMENT AND ECONOMICS purchase the fixed asset. Goods bought by businesses on hire purchase include company vehicles, plant and machinery, office equipment and farming machinery.

8:5:7 Government assistance The government provides finance to companies in cash grants and other forms of direct assistance, as part of its policy of helping to develop the national economy, especially in high technology industries and in areas of high unemployment. For example capital assistance are provided by financial institutions like IDBE, SIDBE, IFICI and ICICI. 8:5:7 Venture capital Venture capital is money put into an enterprise which may all be lost if the enterprise fails. A businessman starting up a new business will invest venture capital of his own, but he will probably need extra funding from a source other than his own pocket. However, the term 'venture capital' is more specifically associated with putting money, usually in return for an equity stake, into a new business, a management buy-out or a major expansion scheme.

8:5:8 Franchising Franchising is a method of expanding business on less capital than would otherwise be needed. For suitable businesses, it is an alternative to raising extra capital for growth. Under a franchising arrangement, a franchisee pays a franchisor for the right to operate a local business, under the franchisor's trade name. The franchisor must bear certain costs (possibly for architect's work, establishment costs, legal costs, marketing costs and the cost of other support services) and will charge the franchisee an initial franchise fee to cover set-up costs, relying on the subsequent regular payments by the franchisee for an operating profit. These regular payments will usually be a percentage of the franchisee's turnover. Although the franchisor will probably pay a large part of the initial investment cost of a franchisee's outlet, the franchisee will be expected to contribute a share of the investment himself. The franchisor may well help the franchisee to obtain loan capital to provide his-share of the investment cost. 8:6 CAPITAL RATIONING Many companies specify an overall limit on the total budget for capital spending. There is no conceptual justification for such budget ceiling, because all projects that enhance long run profitability should be accepted. The factors for putting limit

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Net present values or IRR may strongly influence the overall budget amount



Top management’s philosophy toward capital spending.



Same managers are highly growth minded whereas others are not.



The outlook for future investment opportunities that may not be feasible if extensive current commitments are undertake.



The funds provided by the current operations less dividends.



The feasibility of acquiring additional capital through borrowing or sale of additional stock. Lead-time and costs of financial market transactions can influence spending.



Period of impending change in management personnel, when the status quo is maintained.



Management attitudes toward not.

Capital Rationing occurs when a company has more amounts of capital budgeting projects with positive net present values than it has money to invest in them. Therefore, some projects that should be accepted are excluded because financial capital is limited.

This is known as artificial constraint because the management may dictate the amount to be invested for project purposes. It is also the artificial constraints because the amount is not based on the product marginal analysis in which the return for each proposal is related to the cost of capital and projects with net present values are accepted. 8:6:1Types of Capital Rationing 

Hard Capital Rationing: This arises when constraints are externally determined. This will not occur under perfect market



Soft Capital Rationing: This arises with internal, management-imposed limits on investment expenditure.

8:6:2 Reasons for Capital Rationing There are basically two types of reasons of capital rationing. 

External Reasons These arise when a firm is unable to borrow from the outside. For example if the firm is under financial distress, tight credit conditions, firm has a new unproven product. Borrowing limits are imposed by banks particularly in relation to smaller firms and individuals.



Internal Reasons o

Private owned company: Owners might decide that expansion is a trouble not worth taking. For example there may that management fear to lose their control in the company.

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Divisional Constraints: Upper management allocates a fixed amount for each division as part of the overall corporate strategy. This arise from a point of view of a department, cost centre or wholly owned subsidiary, the budgetary constraints determined by senior management or head office.

Human Resource Limitations: Company does not have enough middle management to manage the new expansions

Dilution: For example, there may be a reluctance to issue further equity by management fearful of losing control of the company.

Debt Constraints: Earlier debt issues might prohibit the increase in the firms debt beyond a certain level, as stipulated in previous debt contracts. For example bondholders requiring in the bond contract, that they would accept a maximum Debtto-Asset ratio = 40%.

Capital Rationing could be said to signal a managerial failure to convince suppliers of funds of the value of the available projects. Although there may be something in this argument, in practice it is not a well-informed judgment. Furthermore, even if there were no limits on the total amounts of available finance, in reality the price may vary with the size as well as the term of the loan. 8:7 COST OF CAPITAL 8:7:1 Definition The opportunity cost of an investment; that is, the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. For example, when an investor purchases stock in a company, he/she expects to see a return on that investment. Since the individual expects to get back more than his/her initial investment, the cost of capital is equal to this return that the investor receives, or the money that the company misses out on by selling its stock. The cost of capital is the expected return that is required on investments to compensate you for the required risk. It represents the discount rate that should be used for capital budgeting calculations. The cost of capital is generally calculated on a weighted average basis (WACC). It is alternatively referred to as the opportunity cost of capital or the required rate of return. It is calculated based on the expected average rate of return of investors in a firm. 8:7:3 CALCULATING COST OF CAPITAL We calculate a company's weighted average cost of capital using a 3 step process: 1. Cost of capital components. First, we calculate or infer the cost of each kind of capital that the enterprise uses, namely debt and equity. A. Debt capital. The cost of debt capital is equivalent to actual or imputed interest rate on the company's debt, adjusted for the tax-deductibility of interest expenses. Specifically: The after-tax cost of debt-capital = The Yield-to-Maturity on long-term debt x (1 minus the marginal tax rate in %)

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ENGINEERING MANAGEMENT AND ECONOMICS We enter the marginal tax rate in cell C10 of worksheet "Inputs." B. Equity capital. Equity shareholders, unlike debt holders, do not demand an explicit return on their capital. However, equity shareholders do face an implicit opportunity cost for investing in a specific company, because they could invest in an alternative company with a similar risk profile. Thus, we infer the opportunity cost of equity capital. We can do this by using the "Capital Asset Pricing Model" (CAPM). This model says that equity shareholders demand a minimum rate of return equal to the return from a risk-free investment plus a return for bearing extra risk. This extra risk is often called the "equity risk premium", and is equivalent to the risk premium of the market as whole times a multiplier--called "beta"--that measures how risky a specific security is relative to the total market. Thus, the cost of equity capital = Risk-Free Rate + (Beta times Market Risk Premium). 2. Capital structure. Next, we calculate the proportion that debt and equity capital contribute to the entire enterprise, using the market values of total debt and equity to reflect the investments on which those investors expect to earn a minimum return. 3. Weighting the components. Finally, we weight the cost of each kind of capital by the proportion that each contributes to the entire capital structure. This gives us the Weighted Average Cost of Capital (WACC), the average cost of each dollar of cash employed in the business. 8:8 PROJECT FEASIBILITY 8:8:1 Facet of Project Feasibility Analysis The important facets of project analysis are: 

Market analysis



Technical analysis



Financial analysis



Economic analysis



Environmental Analysis

A. Market Analysis Market analysis is concerned primarily with two questions: 

What would be the aggregate demand of the proposed product/service in future?



What would be the market share of the projects under appraisal?

To answer the above questions, the market analyst requires a wide variety of information and appropriate forecasting methods. The kinds of information required are:

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Consumption trends in the past and the present consumption level (for telecommunication companies the number of telephone lines, mobile subscribers, air time rates, etc are important factors to be considered)



Past and present supply position (Who supplies what services?)



Production possibilities and constraints (In telecommunication industry, bandwidth and regulatory framework matters a lot)



Structure of competition (the regulations regarding competitions)



Cost structure (Cost models used in costing variable and fixed costs, direct and indirect costs)



Elasticity of demand



Consumer behaviour, intentions, motivations, attitudes, preferences, and requirements.(e.g. on telephone accessories and types of telephone products)



Distribution channels and marketing policies in use (Should the company use a pre-paid service or billing system?)



Administrative, technical, and legal constraints.

B. Technical Analysis Analysis of the technical and engineering aspects of a project needs to be done continually when a project is formulated. Technical analysis seeks to determine whether the prerequisites for the successful commissioning of the project have been considered and reasonably good choices have been made with respect to location, size, process, etc. The important questions raised in technical analysis for the ICT projects are: 

Whether the preliminary tests and studies have been done or provided for?



Whether the availability of human resources, power, and other inputs have been established?



Whether the selected scale of operation is optimal?



Whether the production process chosen is suitable?



Whether the equipment and machines chosen are appropriate?



Whether the auxiliary equipments and supplementary engineering works have been provided for?



Whether provision has been made for the treatment of effluents?



Whether work schedules have been realistically drawn up?



Whether the technology proposed to be employed is appropriate from the social point of view?

C. Financial Analysis Financial analysis seeks to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those the shareholders (owners of the firms). The aspects which have to be looked into while conducting financial appraisal in ICT projects are:

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ENGINEERING MANAGEMENT AND ECONOMICS 

Investment outlay and cost of project



Means of financing –Discussed in Module 2.4



Cost of Capital –Discussed in Module 2.3



Projected profitability-Discussed in Module 1.2



Break-even point –Discussed in Module 2.4 session 4



Cash flows of the project



Investment worth wholeness judged in terms of various criteria of merit.



Projected financial position.



Level of risk –Discussed in Module 2.2

D. Economic Analysis Economic analysis, also referred to as social cost benefit analysis, is concerned with judging a project from the larger social point of view. The questions sought to be answered in social cost benefit analysis are: 

What are the direct economic benefits and costs of the project measured in terms of shadow (efficiency) prices and not in terms of market prices?



What would be the impact of the project on the distribution of income in the society? What is the impact on digital divide of the investment project?



What would be the contribution of the project towards the fulfillment of certain merit wants like self-sufficiency, employment, and social order?

E. Environmental Analysis In recent years, environmental concerns have assumed a great deal of significance and rightly so. Investment in the ICT/Telecom industry should give much consideration on the environmental aspects. Among the question to be asked include: 

What is the likely damage caused by the project to the environment? E.g. how used prepaid vouchers/cards affect the environment? How installations of transmission stalls affect the environment?



What is the cost of restoration measures required to ensure that the damage in the environment is contained within acceptable limits?

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4:9 METHODS OF PROJECT EVALUATION - METHODS OF RANKING INVESTMENT PROPOSALS Project appraisal and evaluation requires the following: 

Detailed statement giving the expected cash inflows and outflows to be assigned to the investment those relevant cash flows.



Assessment of the impact of taxation



Discount rate to account for the time value of money



Add level rate to account for the risk associated with the investment that the risk of use of project cash flows.

A. Non Discounted Cash Flow Methods 1. Payback method (or Payback Period) The payback period is the number of years required to return the original investment from the net cash flows (net operating income after taxes plus depreciation). Example Assume the firm is considering two projects; project A and project B, each requires an investment of $100 millions. The cost of capital is 10%. Below is the summary of expected net cash flows in millions.

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The payback from the two projects is Project A: 2 and1/3 years Project B: 4 years If the firm has the policy of employing three years payback period, project A will be accepted but project B will be rejected. Decision Rule • If payback? Acceptable time limit, accept project • If payback < acceptable time limit, reject project Advantages of PB method. • It is very easy to calculate, but it can lead to wrong decision • Put more emphasis to quick return of the invested fund so that they may be put to use in other places or in meeting other needs. • Easy to apply (Simple to understand Problems with the Payback Method • Does not consider post-payback cash flows • Does not consider time value of money • Does not explicitly consider risk • The "acceptable" time period is arbitrary

Illustration In case two projects need initial outflow of $30m and has the following expected net cash inflows

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172

ARR is also known as accrual accounting rate of return unadjusted rate of return model and the book value model. Its compilations is related with

Conventional

accounting

models

calculating

income

and

required

investment

- Shows the effect of an investment on projectâ&#x20AC;&#x2122;s financial statement.

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Advantages of using ARR • It is simple to calculate using accounting data • Earning of each year is included in the calculating the profitability of the project Disadvantages of using ARR • It is inconsistency with wealth maximization as the objective of the firm • Since it uses the accounting data it includes the amount of accruals in calculating the earnings “net profit”. • It is based on the familiar accrual accounting. • It ignores the time value of money i.e. expected future dollars are erroneously regarded as equal to present dollars. B: Discounted Cash Flow Methods 1.Net Present Value Method (NPV) It is the method of evaluating project that recognizes that the dollar received immediately is preferable to a dollar received at some future date. It discounts the cash flow to take into the account the time value of money. This approach finds the present value of expected net cash flows of an investment, discounted at cost of

capital

and

subtract

from

the

initial

cash

outlay

the

project.

In case the present value is positive, the project will be accepted; if negative, it should be rejected. If the projects under consideration are mutually exclusive the one with the highest net present value should be chosen.

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Problems with NPV • Difficult to explain to non-finance people • Solution is in dollars, not percentage rates of return

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ENGINEERING MANAGEMENT AND ECONOMICS Some value of R will cause the sum of the discounted receipts to the equal the initial cost of the project, making the equation equal to zero, and that value R will be the project’s internal rate of return.

From the above calculation, when rate is 15% the PV of investment A is zero, which indicates that its internal rate of return is 15%. The IRR for project B is approximately to 20%. IRR Decision Rules Independent Projects: Accept all as long as the IR ? hurdle rate Mutually Exclusive Projects: Compute (IRR - hurdle rate) for each project, rank from highest to lowest and accept the highest ranking project [assuming the computation (IRR - hurdle rate) > 0] IRR--Advantages/Disadvantages 1) Advantages • Considers all cash flows • Considers time value of money • Comparable with hurdle rate 2) Disadvantages • Does not show dollar improvement in value of firm if project is accepted • IRR can be affected by the scale (size) of the project, i.e., Io • Possible existence of multiple IRRs Relationship Between IRR and the NPV Profile 1) When the IRR = the firm's hurdle rate, NPV = 0 2) When the IRR < the firm's hurdle rate, NPV < 0 3) When the IRR > the firm's hurdle rate, NPV > 0 NPV and IRR Methods: Possible Decision Conflicts An accept/reject "conflict" occurs when NPV says "accept" and IRR says "reject" or NPV says "reject" and IRR says "accept"

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ENGINEERING MANAGEMENT AND ECONOMICS Ranking conflicts arise because of: 1) Timing differences in incremental cash flows 2) Magnitude differences in incremental cash flows When a conflict arises among mutually exclusive projects, pick the one with the highest NPV

4:10 PRINCIPLES TO MEASURE CAPITAL PRODUCTIVITY â&#x20AC;&#x201C; PROFITABILITY INDEX Profitability index identifies the relationship of investment to payoff of a proposed project. The ratio is calculated as follows:

Profitability Index is also known as Profit Investment Ratio, abbreviated to P.I. and Value Investment Ratio (V.I.R.). Profitability index is a good tool for ranking projects because it allows you to clearly identify the amount of value created per unit of investment, thus if you are capital constrained you wish to invest in those projects which create value most efficiently first. Nota Bene; Statements below this paragraph assume the cash flow calculated does not include the investment made in the project. Where investment costs are included in the computed cash flow a PV > 0 simply indicates the project creates more value than the cost of capital which is determined by the Weighted Average Cost of Capital (WACC). A ratio of 1 is logically the lowest acceptable measure on the index. Any value lower than 1 would indicate that the project's PV is less than the initial investment. As values on the profitability index increase, so does the financial attractiveness of the proposed project. Rules for selection or rejection of a project: If PI > 1 then accept the project If PI < 1 then reject the project

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UNIT QUESTIONS 1. What do understand by capital budgeting? Explain the need and types of capital budgeting. 2. Discuss the different sources of capital for investment 3. What is capital rationing? What are reasons for capital rationing? Explain the types of capital rationing. 4. What is cost of capital? How do you calculate the cost of capital? 5. Explain the meaning and analysis of project feasibility 6. Describe the various methods of project appraisal with their merits and demerits 7. Ms Mary Temba is a financial analyst for the East Coast Consulting (T) Ltd. responsible for the consulting work

awarded recently from

the Tanzania

Telecommunications Commission in the evaluating the two projects in the telecommunication industry. The projects costs $500mil each and the required rate of return for each of the project is 12%. The projects expected net cash flows are as follows:

a) Calculate each of the project's payback, net present value (NPV) and internal rate of return. b) Which project or projects should be accepted if they are independent? c) Which project should be accepted if they are mutually exclusive? d) How might a change in the required rate of return produce a conflict between NPV and IRR rankings of the two projects? Would this conflict exist if k is 5%? [HINT: Plot the NPV profiles] e) Why does the conflict exist?

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UNIT- IX CONCEPTS OF MARKET STRUCTURE AND MACRO ECONOMICS 9:1 OBJECTIVES 

To understand the features of different market structures prevalent in an economy



To comment on the relevance of classified market structure in India



To state the effect of time on price-output decisions of a firm



To understand few macro-economic concepts in terms of National Income, Inflation, Balance of Payments and Monetary, fiscal policies



To explain the impact if these macroeconomic indicators



To analyse the measures to control the effects these indicators

9:2 INTRODUCTION The competitive environment or the market structure in which an industry operates plays a decisive role in price and output decisions of a firm. Of the three factors of pricing, namely, customer, cost, and competition, two have already been examined. In the present chapter, we will classify the industry structure that is broadly called as market structure by the economists. A brief discussion is also done some of the important macroeconomic indicators like National Income, Consumption function, Inflation, Balance of Payments, Monetary Policy and Fiscal Policy. The various fundamental concepts of these indicators are discussed with their effects and measures. 9:3 MARKET STRUCTURE The term market structure refers to the set of industry characteristics that affect the extent of rivalry in the market, and ultimately affects market performance related to pricing and output. Elements of market structure include: 

Number and size of existing and potential entrant sellers, and number and size of existing and potential entrant buyers



The extent of entry/exit (sunk) costs and other difficulties associated with market entry (or exit)



The extent to which products are similar or different across firms



The extent of economies of scale in production



The extent to which costs are similar or different across firms



The extent of transaction costs, and the extent of travel or information costs on the part of buyers

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ENGINEERING MANAGEMENT AND ECONOMICS A market is made up of an economic institution (set of rules governing how price is set and who trades), a set of traders, and a communication environment. The market facilitates voluntary trades between buyers and sellers. Thus, for example, fine art may be sold in a market that consists of an English auction institution (auctioneer calls for price bids), a set of potential buyers and a seller, and communication occurs via verbal and visual signals in a 'face-to-face' environment. The market for loaves of bread occurs through a posted-price economic institution, involves a set of rival grocery or bakery sellers and consumer buyers, and verbal face-to-face communication. A potential entrant seller is a firm that can and would enter a market under sufficiently favorable circumstances. Potential entrants constrain the behavior of existing firms in the market. 9:4 NATURE AND TYPES OF COMPETITION 1. Perfect Competition 2. Monopoly 3. Monopolistic Competition 4. Oligopoly 9:4:1 Factors that Influence the Extent of Competition The extent to which firms compete against one another depends upon: 

The number and relative size of sellers (and buyers)



The extent to which the sellers' products are similar

The number and relative size of sellers depends on: 

Product characteristics: some product characteristics such as perishability can limit the number of sellers competing in a given regional market.



Production and cost characteristics: Products that feature very high fixed costs will also feature large economies of scale, which will naturally tend to restrict the number of sellers in a particular market. High fixed cost products include oil/gas/water pipelines, auto/jet/military product manufacture, etc.



Entry/Exit conditions: If there are large sunk costs associated with entry into a market (e.g., image advertising campaigns, development of specialized expertise, investment in specialized equipment, etc), and if there is a probability that the entrant will have to exit because market conditions failed to live up to forecasts, then there is an exit cost that reflects the sunk-cost investment. In addition, patents, copyrights, and trademarks are legal barriers to entry. Regulations limiting plant closures, or that require substantial regulatory approval can limit entry.

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ENGINEERING MANAGEMENT AND ECONOMICS 9:5 PERFECT COMPETITION 9:5:1 Nature There are many buyers and sellers, each of whom is small in size relative to the overall market 

There are no entry/exit costs or other difficulties associated with entry/exit



products made by different sellers are effectively identical



Economies of scale in production are exhausted at low output levels, which explains in part why there are many relatively small sellers



Costs are identical across firms



There are no transaction, travel or information costs

A consequence of this market structure is that there is vigorous competitive rivalry amongst the sellers, and buyers are unable to collude or monopsonize the market. Because sellers are so small relative to the overall market, no one seller can significantly affect market price by way of its outputsetting behavior, implying that sellers are price takers -- they optimize by taking the market price as a parameter unaffected by their own behavior. 9:5:2 Pricing Under Perfect Competition It is difficult to find actual market structures that perfectly match this idealized market structure, but it is useful as a benchmark for comparing less competitive market structures by. We think that some commodities and financial markets have many of the characteristics of perfect competition In competitive markets, firms are small relative to the market and so take the market price as being independent of their output decisions. Thus from the profit expression Profit = PQ - C (Q) We get the condition for a firm's optimal output: P = MC We are used to the optimal output condition being MR = MC. Why is MR = P in the case of perfect competition? Because market P is unaffected by the firm's output level -- it is a fixed parameter. As a consequence, competitive firms supply along their marginal cost curves. Why? Because as market P varies, a firm's QS is determined by where P = MC. Thus the firm's MC curve is identical to its supply curve. 9:6 MONOPOLY Monopoly implies the following market structure characteristics:

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ENGINEERING MANAGEMENT AND ECONOMICS 

There is one seller, and any number of buyers.



There are high market entry/exit costs or other barriers to potential entrants, though these may recede over time



products made by other sellers are sufficiently differentiated as to be in different markets, and thus do not provide any competitive pressure on the monopolist



Economies of scale in production often occur at relatively high output levels, though this is not necessary; for natural monopoly we see economies of scale that occur at very high output levels, which gives the single firm a cost advantage over smaller potential entrants



The monopolist's cost structure may or may not be any different than those of other sellers



High transaction, travel, or information costs can lead to or sustain a monopoly structure, though they also be small or nonexistent

9:6:1 Conditions that Lead to Monopoly Recall that a pure monopoly occurs when there is a single seller in a market. Why might this happen? 

Very high entry/exit costs or other entry barriers o

Ownership of a highly valuable patent, copyright, or trademark

Access to technology or processes not available to others

Complete ownership of a key input

Natural monopoly: Very high fixed costs



Government-created monopoly



Mafia-style threats

9:6:2 The Model of Monopoly As with a competitive firm, monopolists also would like to maximize profit. A key difference is that monopolists are so large relative to the market that their output decisions affect the market-clearing price, and vice-versa. So a monopolist wishes to maximize the following profit expression: Profit = P (Q)Q - C(Q) Note the key difference -- P (Q) is the inverse demand function, relating QD to price along the demand curve. Thus as the monopolist sells larger and larger quantities, price falls (because the firm is moving down the market demand curve as Q rises, forcing price to fall). Thus P'(Q) is less than zero. 9:6:3 Market Structure and Competitive Strategy for Perfect Competition and Monopoly While other market structures admit strategic interaction, in the perfectly competitive model the firms are so small relative to the market that they cannot affect market price (and thus cannot affect one another) by their quantity choices. Competitive firms can enjoy positive, zero, or negative economic profits. Recall that economic profits are returns over and above all explicit and implicit costs, including opportunity cost. Since economic

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ENGINEERING MANAGEMENT AND ECONOMICS profit includes opportunity cost of assets owned by the firm (as well as the entrepreneur's time), normal economic profits in a competitive setting are zero. A synonym for economic profits is the term economic rents, where the term rent refers to a return over and above normal levels due to short-term changes in the market or unique attributes of the firm. Thus in the short term there are a variety of factors than can lead to positive or negative economic profits. In a perfectly competitive long-run environment, however, there are no limits to entry and thus no way for firms to maintain positive economic profits. In other words, in highly competitive markets it is entry and exit that works to cause excessive or deficient economic profits to adjust to the normal (risk-adjusted) rate of return. In contrast, monopolies may have durable entry/exit costs that eliminate the role of entry in driving down excessive economic profits. In fact, monopolies (and other firms with market power) will spend money to both acquire a monopoly position and to maintain the entry barriers necessary to maintain a monopoly position. Thus when municipalities or universities ask for firms to bid for the right to be a monopoly supplier of some service (e.g., cable access TV or campus food service), under competitive bidding conditions we would expect that the price paid for the right to be the monopolist would be equal to the discounted present value of the anticipated future stream of economic profits that derive from this government-created monopoly. Note, however, that the government entity has adopted a 'profit center' mentality and in fact has appropriated the discounted present value of the monopoly rents. Thus municipalities may do this as a substitute for tax revenues, and universities may do this as a substitute for tuition or state appropriations, but it is the consumers who are paying up the money to make that happen.

9:7 MONOPOLISTIC COMPETITION Monopolistic competition is a market structure that combines the features of a competitive market structure (many small buyers and sellers, similar costs, no significant entry/exit costs, no information costs) with product differentiation. Thus the monopolistic competition model is the model for situations in which there is competitive interaction and product differentiation. Monopolistic competition is usually conceptualized using the Representative consumer model: In this model, all firms compete equally for all consumers. This model is appropriate for particular segments of the restaurant industry, (for example, the Mexican food restaurant market or the pizzaria market) in which firms produce differentiated products but all compete for the same consumers (people wanting Mexican food or pizza). This may also be a useful model for understanding urban gasoline station markets, where different brand-name gasolines compete against one another for same the pool of consumers, or the urban grocery store market. Another good representative consumer model application would be the airline travel market. The representative consumer model is the standard version of the monopolistic competition model.

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ENGINEERING MANAGEMENT AND ECONOMICS As we shall see, in the representative consumer model the firms dissipate all rents in equilibrium, either through entry or through non-price competition. 9:7:1 Nature In this model we have the following set of assumptions: 

There are many existing or potential entrant sellers



Sellers have very similar or identical costs



There are no significant entry/exit costs



Firms compete for the representative consumer, meaning that firms divide the market and each faces a downward-sloping demand

9:8 OLIGOPOLY Oligopoly is a very broad class of models that feature: 

few sellers



high entry/exit costs



cooperative (collusive) or non-cooperative (strategic) interaction

Oligopolies are very common in many consumer products markets, such as automobiles, breakfast cereal, soft drinks, motion picture and filmed production and distribution, long-distance telecommunications, cigarettes, etc. High entry/exit costs can be generated in the form of rentdissipating image advertising. Unlike any other class of market structure model, firms in a noncooperative oligopoly engage in strategic rivalry with one another. Strategic interaction is a key defining characteristic of non-cooperative oligopoly models. Cooperative oligopoly models are models of collusion, which may be overt or tacit. Oligopolies may or may not feature product differentiation. The common homogeneous-product, non-cooperative oligopoly models are Cournot, Bertrand, and von Stackelberg (leader-follower). Oligopoly models that feature product differentiation is usually referred to as product differentiation models, and are described below. 9:8:1 Product differentiation can occur in a monopolistically competitive environment, or in more oligopolistic environments. Product differentiation is generally viewed in the context of noncooperative rivalry, though it is possible to have a cooperative, differentiated-product market structure. When we refer to product differentiation models, however, these refer to differentiated-product oligopoly models, which are perhaps the single most common market structure scenario in US retail markets. 9:8:2 Deriving the Monopolistically Competitive Equilibrium 1. A good starting point for the monopolistically competitive market is the situation in which there are a number of firms that are monopolizing their own individual market shares.

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ENGINEERING MANAGEMENT AND ECONOMICS 2. New entrants are drawn into the market over time. As entry occurs, the given market demand is divided amongst more and more firms, meaning that entry causes an incumbent firm's demand to shift inward, reducing profits. 3. Recall that we assume that firms here have essentially identical costs. Thus the process of entry ends when economic profit is zero, which, interestingly, occurs at the point where a firm's demand is tangent to its average total cost curve. 9:8:3 Properties of the monopolistically competitive equilibrium: ď&#x201A;ˇ

zero economic profits

ď&#x201A;ˇ

each firm sets p = ac to clear the market for its own product.

ď&#x201A;ˇ

the number of firms in the market depends on: o

cost structure: lower average total costs ==) more firms for a given market demand

market demand: higher market demand ==) more firms for a given cost structure

9:8:4 Oligopoly Models Cournot model: This is a very commonly used model of noncooperative oligopoly. While it features firms engaging in quantity rivalry, which seems less reasonable than direct price competition, the Cournot model yields outcomes in which there is an inverse relationship between market concentration and the extent to which market outcomes yield marginal cost pricing. Cournot oligopoly models can feature identical or differentiated products, identical or heterogeneous costs, and a wide variety of numbers of firms. Cooperative Oligopoly Basically here we have the theory and practice of cartels and tacit collusion. Cartels are most likely to form when there is a relatively small number of firms (making coordination and monitoring easier), difficult entry conditions (allowing price increases to be more durable), a trade association that can coordinate output market shares, monitor prices, and even allocate orders, and some credible form of punishment for cheaters. Thus to be successful, cartels must be able to raise price without inducing substantial increased competition from nonmembers. Moreover, expected punishment for forming a cartel must be low relative to the advantages. Finally, the cost of establishing and enforcing an agreement must be low relative to the expected gains. 9:8:5 Competitive Strategy in Monopolistic Competition and Oligopoly A key element of competitive stategy is to create a competitive advantage, meaning a unique ability to create, distribute, or service products valued by customers. Except in rare circumstances, it usually pays to try to differentiate your products from those of your rivals. Doing so steepens the demand curve for the firm's product, thus reducing consumers' price sensitivity. This is called the principle of

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ENGINEERING MANAGEMENT AND ECONOMICS maximum differentiation. One of the few situations in which this principle does not hold is when a firm has pioneered a new market, in which case other firms may have an incentive to imitate the pioneer firm, at least initially. 9:9 PRICE DISCRIMINATION The term price discrimination (PD) refers to the situation in which the exact same product or service is sold to different people at different prices. The term 'exact same' means that the full or delivered cost is the same. Examples of cases that are not PD: 

A good made in Arcata is priced at $10 in Arcata and $12 in Portland, when the price difference reflects shipping costs



Last-minute airline reservations are more expensive than ones made several weeks in advance, when the price difference reflects the cost that last-minute reservations place on airlines that are not given the time to select the optimal sized aircraft for a given flight)



Charging less for child-size portions, when the price difference reflects the reduced cost of producing a smaller unit size



Charging higher prices for delivered goods than when the customer picks up, when the price difference reflects the delivery cost

9:9:1 What conditions are required in order for a firm to engage in PD? 

There must be consumers (or market segments) with different price elasticities of demand



The firm must be able to identify these consumers (or market segments), either directly or indirectly through their revealed preference



The firm must be able to prevent arbitrage (resales from high elasticity consumers or market segments to low elasticity consumers or market segments)

Thus student discounts to big-time college sporting events that cause student ticket prices to be much lower than those charged to professors and alumni are examples of PD. Scalping by students is an example of students and alumni exploiting an arbitrage opportunity. Arbitrage must be prevented for PD to be successful for firms, because otherwise traders in the resale markets will expropriate surplus (gains from trade) that would have otherwise gone to the seller. 9:9:2 Degrees of PD: 

First-degree PD: The firm charges each consumer exactly their willingness-to-pay. Under first-degree price discrimination, the firm gets all the gains from trade. Tyranny. Requires that the firm have a great deal of market power and a great deal of information on seller valuations.

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ENGINEERING MANAGEMENT AND ECONOMICS 

Second-degree PD: Charging different prices for different size of purchase quantities. High markups on small orders, and smaller markups on larger orders. Note that second-degree PD only occurs when the markup exceeds any handling cost difference for small vs. large orders (i.e., for large orders, the unit handling cost is lower than for small orders). Often times we see second-degree PD that creates a wholesale-retail price difference, or a retail rate-commercial (contractor) rate difference.



Third-degree PD: Perhaps the most common form of PD. The firm separates its overall demand into segments that are distinguished by their elasticity characteristics, and charges different prices to different segments. A prime example is senior/student discounts at movie theaters, on airline flights, restaurants, and for newspaper and magazine subscriptions (there are many other examples). Another is that under traditional (non-HMO) health care, hospitals used to charge people with insurance higher rates than those without, because those who pay full price will be much more price sensitive than those whose insurance companies pay.

MACROECONOMIC CONCEPTS 9:10 NATIONAL INCOME Measures of national income and output are used in economics to estimate the total value of production in an economy. The standard measures of income and output are Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP), and Net National Income (NNI). In India, the Central Statistical Organisation has been estimating the national income. National income per person or per capita income is often used as an indicator of people’s standard of living or welfare.

9:10:1 Definitions of National Income National income is a measure of the total value of the goods and services (output) produced by an economy over a period of time (normally a year). It is also a measure of the income flown from production, and/or the sum total of all the spending involved for the production of output. The following are some of the notable definitions. Alfred Marshal: “The labour and capital of the country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds… This is the net annual income or revenue of the country, or the national dividend.” Irving Fisher: “The national dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environment.” National Income Committee of India,: “National income estimate measures the volume of commodities and services turned out during a given period counted without duplication.”

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ENGINEERING MANAGEMENT AND ECONOMICS Paul A. Samuelson: “Gross national product (GNP) is the most comprehensive measure of a nation’s total output of goods and services. It is the sum of the dollar (money) value of consumption, gross investment, government purchase of goods and services and net exports”. Though there are some variations among these definitions, the basic idea is very clear – national income is simply the income of the whole nation. The basic concepts will help to understand it more precisely. 9:10:2 Basic Concepts Gross National Product Gross National Product (GNP) is the total value of output (goods and services) produced and income received in a year by domestic residents of a country. It includes profits earned from capital invested abroad. Gross Domestic Product Gross Domestic Product (GDP) is the total value of output (goods and services) produced by the factors of production located within the country’s boundary in a year. The factors of production may be owned by any one – citizens or foreigners. GNP – Net income earned from abroad = GDP

Thus, GDP measures income from where it is earned rather than who owns the factors of production. Net National Product Net National Product (NNP) is arrived at by making some adjustment, with regard to depreciation, in GNP. As noted above, GNP is the total value of output produced and income received in a year by domestic residents of a country. Over this one year period, the available plant and machinery (capital) will wear and tear and get condemned. Such decline in the capital assets due to wear and tear is measured as ‘capital depreciation’. NNP is arrived at by deducting value of such depreciation from GNP. That is GNP – Depreciation = NNP

Net Domestic Product Net domestic product (NDP) is also arrived from GDP by making adjustment with regard to depreciation in the same way described above. (NDP is calculated by deducting depreciation from GDP). GDP – Depreciation = NDP Per Capita Income Per capita income (or) output per person is an indicator to show the living standards of people in a country. If real PCI increases, it is considered to be an improvement in the overall living standard of people. PCI is arrived at by dividing the GDP by the size of population. It is also arrived by making some adjustment with GDP.

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GDP and GNP While GDP indicates productive capacity of an economy, GNP is a crude indicator for living standard. The significance of the distinction between GNP and GDP depends on the nature of a particular economy. For instance, if a country has more non-resident inflows and produces a considerable portion of its output by multinational corporations (i.e. with the help of external factors of production), its GNP will be higher than GDP. Otherwise the distinction will be negligible. 9:10:3 NI at Current Prices and Constant Prices The concepts of national income discussed above can be measured either at ‘current price’ or at ‘constant price’. The measure based on current price uses the ongoing market prices to compute the value of output. It is quite possible that the current price may always be higher than real value due to many factors like taxes and inflation (or rising prices). Hence, national income arrived at ‘current price’ includes such influences as inflation and taxes. With inflation as a common feature in almost all the economies, it is necessary to measure the national income after deducting any such increase in the value of any output or income. National income at ‘constant price’ measures the national income after making necessary adjustment to eliminate the effect of inflation. Thus it is based on unchanged price of output. As the national income at ‘constant price’ is computed based on the real worth of the purchasing power of income, it is also called as ‘real national income’ or national income in ‘real’ terms.

9:10:4 Need for the Study of National Income A national income measure serves various purposes regarding economy, production, trade, consumption, policy formulation, etc. The following are some such needs. 1. To measure the size of the economy and level of country’s economic performance. 2. To trace the trend or speed of the economic growth in relation to previous year(s) as well as to other countries. 3. To know the structure and composition of the national income in terms of various sectors and the periodical variations in them. 4. To make projection about the future development trend of the economy. 5. To help government formulate suitable development plans and policies to increase growth rates. 6. To fix various development targets for different sectors of the economy on the basis of the earlier performance. 7. To help business firms in forecasting future demand for their products. 8. To make international comparison of people’s living standards.

9:10:5 Methods of Calculating National Income There are three different methods of calculating national income. They are 1. Product or Output Method 2. Income Method

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ENGINEERING MANAGEMENT AND ECONOMICS 3. Expenditure Method As noted above, GDP is the measure of an economy’s total output. It is also used as a measure of total income and total expenditure in that economy. Hence, income is equal to expenditure and expenditure is equal to the value of output produced in the economy. Income = expenditure = output Y=E=O The model can further be extended by adding the other components of national income namely investment (I), government (G), and foreign trade (X-M). In the extended model, savings of public, taxes and import payments will be deducted from the income. Hence, they are called leakages from the circular flow. Similarly, investment expenditure, government expenditure and net expenditure on trade will be added in to the circular flow. These additions are called injections. However, after aggregating all leakages (outflow) and injections (inflow) in any one year, the total income components of the economy will be equivalent to the total expenditure or total output. Therefore, all the three methods are supposed to give same results. 9:10:5:1 Output or Product Method In the output or product method, the measures of GDP are calculated by adding the total value of the output (of goods and services) produced by all activities during any time period, such as a year. The major challenge of this method is the problem of double-counting. The output of many businesses is the inputs of some other businesses. For example, the output of the tyre industry is the input of racing bike industry. Counting the final output of both industries will result in double-counting of the value of tyre. This problem can be avoided by including only the value added at each stage of production or by adding only the final value of output produced 9:10:5:2 Income Method In the income method, the measures of GDP are calculated, by adding all the income earned by various factors of production which are engaged in the production of output. The various incomes included to compute the gross national income are: � Wages and salaries � Income of self-employed � Profits and dividends of business corporations � Interest � Rent � Surplus of government enterprises � Net flow of income from abroad All of them are known as factor incomes and they are paid in return for the inputs engaged in some productive process which have resulted in corresponding output. The sum of all these incomes (or factor prices ) provide us the measure of national income.

9:10:5:3 Expenditure Method

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ENGINEERING MANAGEMENT AND ECONOMICS In the expenditure method, the measures of GDP are calculated by adding all the expenditures made in the economy. The essential components of expenditure are: C = consumption expenditures I = domestic investment G = government expenditures X = exports of goods and services M = imports of goods and services NR = net income receipts from assets abroad The sum of all these aggregate expenditure provides us the measure of national income. GDP = E = C + I + G + (X-M) where E is aggregate expenditure 9:10:6 Problems in calculating National Income The measurement of national income encounters many problems. The problem of double-counting has already bee noted. Though there are some corrective measures, it is difficult to eliminate doublecounting altogether. And there are many such problems and the following are some of them. Black Money In countries where level of illegal activities, illegal businesses and the level of corruption are very high, the circulation of black money is so high, it has created a ‘parallel economy’. It means unreported economy which is equivalent to the size of officially estimated size of the economy. GDP does not take into account the ‘parallel economy’ as the transactions of black money are not registered. In India, black money is all-pervasive, affecting not only the economy but also the society at large. The black economy as percentage of GDP is estimated to have grown from about 3 percent in the midfifties to 40 per cent by 1995-96. Non-Monetization In most of the rural economy, considerable portion of transactions occurs informally and they are called as non-monetized economy. The presence of such non-monetary economy in developing countries keeps the GDP estimates at lower level than the actual.

Growing Service Sector In recent years, the service sector is growing faster than that of the agricultural and industrial sectors. Many new services like business process outsourcing (BPO) have come up. However, value addition in legal consultancy, health services, financial and business services and the service sector as a whole is not based on accurate reporting and hence underestimated in national income measures. Household ServicesThe national income analysis ignores domestic work, and housekeeping and social services. Most of such valuable work rendered by our women at home does not enter our national accounting. Social Services It ignores volunteer and unpaid social services. For example, the wonderful services of Mother Teresa is invaluable for millions of poor, destitute, orphans and the diseased but at the same time not included in our GDP.

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Environmental Cost National income estimation does not distinguish between environmental-friendly and environmentalhazardous industries. The cost of polluting industries is not included in the estimate. 9:11 CONSUMPTION FUNCTION In economics, the consumption function is a single mathematical function used to express consumer spending. It was developed by John Maynard Keynes and detailed most famously in his book The General Theory of Employment, Interest, and Money. The function is used to calculate the amount of total consumption in an economy. It is made up of autonomous consumption that is not influenced by current income and induced consumption that is influenced by the economy's income level. The Keynesian Consumption Function

Disposable Income (Yd) = Gross Income - (Deductions from Direct Taxation + Benefits) The standard Keynesian consumption function is as follows: C = a + c Yd where, C= Consumer expenditure a = autonomous consumption. This is the level of consumption that would take place even if income was zero. If an individual's income fell to zero some of his existing spending could be sustained by using savings. This is known as dis-saving. c = marginal propensity to consume (mpc). This is the change in consumption divided by the change in income. Simply, it is the percentage of each additional pound earned that will be spent. There is a positive relationship between disposable income (Yd) and consumer spending (Ct). The gradient of the consumption curve gives the marginal propensity to consume. As income rises, so does total consumer demand. 9:12 INFLATION In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply (monetary

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ENGINEERING MANAGEMENT AND ECONOMICS inflation); however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflation. Inflation can also be described as a decline in the real value of moneyâ&#x20AC;&#x201D;a loss of purchasing power in the medium of exchange which is also the monetary unit of account. When the general price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate, which is the percentage change in a price index over time. Inflation can cause adverse effects on the economy. For example, uncertainty about future inflation may discourage investment and saving. High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. 9:12:1 DEFINITIONS The term "inflation" usually refers to a measured rise in a broad price index that represents the overall level of prices in goods and services in the economy. Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCEPI) are two examples of broad price indices. The term inflation may also be used to describe the rising level of prices in a narrow set of assets, goods or services within the economy, such as commodities, which include food, fuel, metals, financial assets such as stocks and real estate, and service industries such as health care. Inflation is usually measured by calculating the inflation rate of a price index, usually the Consumer Price Index. The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer". The inflation rate is the percentage rate of change of a price index over time. 9:12:2 EFFECTS An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services. The effect of inflation is not distributed evenly, and as a consequence there are hidden costs to some and benefits to others from this decrease in purchasing power. For example, with inflation lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. Increases in payments to workers and pensioners often lag behind inflation, especially for those with fixed payments. High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving. And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates. With high inflation, purchasing power is redistributed from those on fixed incomes such as pensioners towards those with variable incomes whose earnings may better keep pace with the inflation. This redistribution of purchasing power will also occur between international trading partners. Where fixed exchange rates are imposed, rising inflation in one economy will cause its exports to become more expensive and affect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.

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9:12:3 CONTROLLING INFLATION Monetary policy Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping the federal funds lending rate at a low level, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. Fixed exchange rates Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability. Wage and price controls In general wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. They often have perverse effects, due to the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages. The usual economic analysis is that any product or service that is under-priced is overconsumed. For example, if the official price of bread is too low, there will be too little bread at official prices, and too little investment in bread making by the market to satisfy future needs, thereby exacerbating the problem in the long term.

9:13 BALANCE OF PAYMENTS Balance of Payment of a country is one of the important indicators for International trade, which significantly affect the economic policies of a government. As every country strives to

have a

favourable balance of payments, the trends in, and the position of, the balance of payments will significantly influence the nature and types of regulation of export and import business in particular. Balance of Payments is a systematic and summary record of a countryâ&#x20AC;&#x2122;s economic and financial transactions with the rest of the world over a period of time. (a) Transactions in good and services and income between an economy and the rest of the world,

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ENGINEERING MANAGEMENT AND ECONOMICS (b) Changes of ownership and other changes in that countryâ&#x20AC;&#x2122;s monetary gold, SDRs, and claims on and liabilities to the rest of the world, and (c) Unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting. 9:13:1 BALANCE OF TRADE AND BALANCE OF PAYMENTS The Balance of Trade takes into account only the transactions arising out of the exports and imports of the visible terms; it does not consider the exchange of invisible terms such as the Services rendered by shipping, insurance and banking; payment of interest, and dividend; expenditure by tourists, etc. The balance of payments takes into account the exchange of both the visible and invisible terms. Hence, the balance of payments presents a better picture of a countryâ&#x20AC;&#x2122;s economic and financial transactions with the rest of the world than the balance of trade. 9:13:2 Components of Balance of Payments Balance of Payments is generally grouped under the following heads i) Current Account ii) Capital Account iii) Unilateral Payments Account iv) Official Settlement Account. 9:13:3 Balance of Payments Disequilibirum The balance of payments of a country is said to be in equilibrium when the demand for foreign exchange is exactly equivalent to the supply of it. The balance of payments is in disequilibrium when there is either a surplus or a deficit in the balance of payments. When there is a deficit in the balance of payments, the demand for foreign exchange exceeds the demand for it. A number of factors may cause disequilibrium in the balance of payments. These various causes may be broadly categorized into: (i) Economic factors ; (ii) Political factors; and (iii) Sociological factors.

Correction Of Disequilibrium A country may not be bothered about a surplus in the balance of payments; but every country strives to remove, or at least to reduce, a balance of payments deficit. A number of measures are available for correcting the balance of payments disequilibrium. Automatic Corrections Deliberate Measures These measures are widely employed today. The various deliberate measures may be broadly grouped into; (a) Monetary measures (b) Trade measures; and (c) Miscellaneous.

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9:14 MONETARY POLICY Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the [1]

economy.

Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation. Monetary policy should be contrasted with fiscal policy, which refers to government borrowing, spending and taxation Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation. 9:15 FISCAL POLICY 5:15:1 DEFINITION Fiscal policy is an additional method to determine public revenue and public expenditure. In the recent years importance of fiscal policy has increased due to economic fluctuations. Fiscal policy is an important instrument in the modern time. According to Arther Simithies fiscal policy is a policy under which government uses its expenditure and revenue programme to produce desirable effects and avoid undesirable effects on the national income, production and employment. 5:15:2 OBJECTIVES To achieve desirable price level: The stability of general prices is necessary for economic stability. The maintenance of a desirable price level has good effects on production, employment and national income. Fiscal policy should be used to remove; fluctuations in price level so that ideal level is maintained. To achieve desirable consumption level: A desirable consumption level is important for political, social and economic consideration. Consumption can be affected by expenditure and tax policies of the government. Fiscal policy should be

used

increase

welfare

the

economy

through

consumption

To achieve desirable employment level:

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level.

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The efficient employment level is most important in determining the living standard of the people. It is necessary for political stability and for maximization of production. Fiscal policy should achieve this level. To achieve desirable income distribution: The distribution of income determines the type of economic activities the amount of savings. In this way, it is related to prices, consumption and employment. Income distribution should be equal to the most

possible

degree.

Fiscal

policy

can

achieve

equality

distribution

income.

Increase in capital formation: In under-developed countries deficiency of capital is the main reason for under-development. Large amounts are required for industry and economic development. Fiscal policy can divert resources and increase capital.

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ENGINEERING MANAGEMENT AND ECONOMICS

UNIT QUESTIONS: 1.

Explain the different types of market structure with their nature and price-output decisions

Discuss the various models in oligopoly with suitable examples

What is price discrimination? What are the degrees of Price discrimination? Explain.

Explain the meaning and various concepts of National Income.

Illustrate the methods of measuring National Income. What are the problems in measuring National Income?

What is Inflation? What are its effects? How do you overcome the effects of Inflation?

Discuss the meaning and consequences of Balance of Payments

Briefly explain the concepts of monetary policy and fiscal policy.

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