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MN 101 Engineering in Context B.Sc.

Engineering Level 1

Engineering in economic context


1. What is engineering Engineering and science: Engineering is not a science, but an application of science. It is an art composed of skill and ingenuity in adapting knowledge to the uses of humanity. The Accreditation Board for Engineering and Technology has adopted the definition. Engineering: Engineering is the profession in which a knowledge of the mathematical and natural Sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind. This, like most other accepted definitions, emphasizes the applied nature of engineering. The role of the scientist is to add to mankinds accumulated body of systematic knowledge and to discover universal laws of behaviour.The role of the engineer is to apply this knowledge to particular situations to produce products and services. 2. What is economics? Economics is the study of how people chose to use their limited resources (land, labour, and capital goods) to produce exchange and consume goods and services. Or It is the study of how scares resources are allocated among competing ends.

3. Relationship between economic and engineering Engineers are confronted with two important interconnected environments, the physical and the economic. Their success in altering the physical environment to produce products and services depends upon knowledge of physical laws. However, the worth of these products and services lies in their utility measured in economic terms. There are numerous examples of structures, machines, processes, and systems that exhibit excellent physical design but have little economic merit. Satisfaction in the economic environment and engineering proposals in the physical environment are linked by the production or the construction process.

THE TOTAL ENVIRONMENT Physical environment Engineering Proposals Production or Construction Economic environment Want Satisfaction

Figure 3.1. The physical and economic environments Figure 3.11 illustrates the relationship between engineering proposals, production or construction, and want satisfaction. In dealing with the physical environment engineers have a body of physical laws upon which to base their reasoning. Such laws as Boyle's law, Ohms law, and Newton's laws of motion were developed primarily by collecting and comparing numerous similar instances and by the use of an inductive process. These laws may then be applied by deduction to specific instances. They are supplemented by many formulas and known facts, all of which enable the engineer to come to conclusions that match the facts of the physical environment within narrow limits. Much is known with certainty about the physical environment. Much less, particularly of a quantitative nature, is known about the economic environment. Since economics is involved with the actions of people, it apparent that economic laws must be based upon their behavior. Economic laws can be no more exact than the description of the behavior of people acting singly and collectively. 4. Basic concepts of economics 4.1. Factors of economics 4.1.1. Resources: The economic resources, which are used in tackling economic problem, can be categorized into: Natural resources i.e. vegiration, land, sea Human resources i.e. people Man-made resources i.e. capital goods, such as tools, machinery, factoris, which have been produced so that other goods and services can be made. These resources are usually reclassified by economists into four factors of production: Land Labour Enterprise Capital 2

4.1.2. Choice Choices are made between different needs and wants. 4.1.3. Allocation of resources Two types of allocations; Market allocation Government allocation 4.1.4. Competing ends E.g. Individuals, businesses, government agencies 4.2. Fundamental economic problem How to allocate scarcity resources among competing ends. For that three questions must be answered; 1. What products will be produced 2. How will they be produced 3. To whom will they be produced 4.3. Price system: Market allocation of resources is archived through the price system. The prices people pay for goods and services balances the decisions of producers and consumers. The price system archived this balance by operating according to the: Principle of substitution Law of comparative advantage Principle of supply and demand 4.3.1. Demand: A demand is a desire to purchase goods and services supported by purchasing power. Price

Output Qty of demand Figure 4. 3.1. Demand curve

4.3.2. Supply:

Price

Qty of supply Figure 4. 3.2. Supply curve

5. Engineers role in economic development Since economic factors are the strategic consideration in most engineering activities, engineering practice may be either responsive or creative. If the engineer takes the attitude that he should restrict himself to the physical, he is likely to find that the initiative for the application of engineering has passed on to those who will consider economic and social factors. The engineer who acts in a responsive manner acts on the initiative of others. Another has envisioned the end product of his work. Although this position leaves him relatively free from criticism, this freedom is gained at the expense of professional recognition and prestige. In many ways, he is more of technicians than a professional. Responsive engineering is, therefore, a direct hindrance to the development of the engineering profession. The creative engineer, on the other hand, seeks to overcome physical limitations, but also initiates, proposes, and accepts responsibility for the success of projects involving human and economic factors. The general acceptance by engineers of the responsibility for seeing that engineering proposals are both technically and economically sound, and for interpreting proposals in terms of worth and cost, may be expected to promote confidence in engineering as a profession.

7. Micro and Macroeconomics In microeconomics, we are looking at economic matters on an individual basis whereas in macroeconomics we are looking at economic matter on a national scale and hence dealing with aggregates. 8. Some Important definitions 8.1. Production and Productivity: Production refers to the amount produced over a period of time. This may be for a single company, an industry or the whole economy. Productivity refers to the output per unit of input over a period of time. Usually labour productivity is considered in terms of output per unit wage cost. It is sometimes used as a measure of efficiency.

The following example shows the difference between production and productivity: Number of workers 8 9 10 Total output 80 99 100 Table 8. 1 Output per worker (i.e. Productivity) 10 11 10

In the above example, the increase in the number of workers from 8 to 9 leads to an increase in both production and productivity. However, when the workforce goes up to 10 workers, productivity falls even though output has risen. 8.2. Cost classification First cost: First cost is the initial cost of capitalized property, including transportation, installation, and other related initial expenditures. Operation and maintenance cost: Operation and maintenance cost is that group of costs experienced continually over the useful life of the activity. Fixed and variable cost: Fixed costs are costs, which do not change with the level of production, e.g. the rent of premises, the depreciation of a machine. Variable costs do change with the level of output, e.g. more steel is needed for producing 1000 cars than for making 10 cars.

8.3. Depreciation The cost of the fixed assets (e.g. vehicles, computers..) will contribute to the organizations ability to earn revenue for a number of accounting periods. Therefore, the reduction of the value of fixed assets should be considered. Depreciation is defined as: the measure of the wearing out, consumption or other loss of values of fixed asset whether arising from use or obsolescence through technology and market changes. 8.4. Interest and interest rate Interest is a rental amount charged by financial institutions for the use of money. Interest rate, or the rate of capital growth, is the rate of gain received from an investment.

8.5. Time value of money Because money can earn at a certain interest rate through its investment for a period of time, a hundred rupees received at some future date is not worth as much as a hundred rupees in hand at present. This relationship between interest and time leads to the concept of the time value of money.

A hundred rupees in hand now is worth more than a hundred rupees received n years from now. Why? Because having the hundred rupees now provides the opportunity for investing that hundred rupees for n years more than the hundred rupees to be reci-ved n years hence. Since money has earning power, this opportunity will earn a return, so that after n years the original hundred rupees plus its interest will be a large amount than the hundred rupees received at that time. Thus, the fact that money has a time value means that equal hundred rupees amounts at different points in time have different value as long as the interest rate that can be earned exceeds zero. 8.6. Purchasing power of money Prices for goods and services are driven upward or downward because of numerous factors at work within the economy. The cumulative effect of these factors determines the amount of price change. For example, increases in productivity and in the availability of goods tend to reduce prices, while government policies such as price supports and deficit financing tend to increase prices. When all such effects are taken together, the most common result has been that prices increase. 8.7. Gross domestic product (GDP) This term is often referred to by economists because it shows the value of the out put produced in a country during one year. If it increases in real terms, then there has been economic growth GDP is divided into four categories, according to the final purchaser: GDP = Consumer spending +Business investment+Government spending -Trade deficit

One example: if a retailer successfully sells a product, the sale will count toward "consumer spending" at its retail price; if the retailer fails and the product bloats its inventory, it will count toward "business investment" at its wholesale price (i.e. the price the retailer paid for it). Later, when the retailer works off the bloat, the decline in inventory will contribute a negative number toward business investment, officially lowering GDP. In other words, the GDP calculation can make the start of a recession look better, and the recovery stage look weaker, than they really are.

The chart bellow shows the GDP growth of Sri Lanka in recent years.

GDP Growth of Sri Lanka


8 6 4 2 0 -2 1996 1998 Year 2000

GDPGrowth

Figure 8.7. GDP Growth of Sri Lanka (1996-2001)


8.8. Gross national product (GNP) This term refers to the value of the output produced (and incomes earned) by all residents in a year. Thus, income earned by domestic companies and individuals abroad and remitted back to own country to raise GNP, whereas the outgoings from domestic country by foreigners and overseas companies lower the GNP. GNP and GDP tend to be used as synonyms, although GDP is definitely the preferred measure among economists and is gaining popularity in general conversation as well; the two measures are fairly close numerically. The difference is that GDP measures all production within the country by whoever happens to be working here; GNP measures the production of all citizens, wherever they happen to be working.

GNP Growth
8 6 GNP 4 Growth 2 0 -2 1996 1997 1998 1999 2000 2001 Year

Figure 8.8. GNP Growth of Sri Lanka (1996-2001)

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