Engineering Economics

HU 300

Rajesh Kalli
 Course Contents
Chapter I Basic Economic Concepts
Chapter II Methods of Economic Analysis in Engineering
Chapter III Evaluating Replacement Alternatives
Chapter IV Depreciation Accounting
Chapter V Estimating Economic Elements
 References
1. Thuesen G. J. and Fabrycky W. J. Engineering Economy
2. Sullivan W. G. Bontadelli J. A and Wicks E. M. Engineering Economy
3. Leland Blank P. E and Anthony Tarquin P.E., Engineering Economy
4. Newnan Donald G. Eschenbach Ted G. Lavelle Jerome Engineering Economic
Analysis
5. Gregory Mankiw, Principles of Economics, Thomson 2002.
 Sl No. Weightage for Assessments %
1. Mid Semester 25%
2. Continuous Assessment 25%
3. End Semester 50%

Surprise Tests, Quizzes, Tutorials, Assignments,

Class Participation, Presentation & Group Discussion

Attendance 75% Compulsory

Basic concepts

Why Economics to engineers.?

Need? Want.?
Needs vs. Wants

Needs what people Wants the things

must have to live. we would like to
Food have, but can live
Clothing without.
Shelter
 Economic Choice

You make an economic choice when you only have money for certain
items, not all.
Example:
I do not have enough money for both popcorn and a Pepsi. I must choose, so I buy
the popcorn. That is my economic choice.
Opportunity Cost

Opportunity cost what you must give up when you

make an economic choice.
Example:
I chose the popcorn, so I have to give up the Pepsi.
That is my opportunity cost.
 Opportunity Cost
The
cost of any activity measured in terms of the benefit from the best
alternative forgone.

an
opportunity cost represents an alternative given up when a decision is made.

When
the best alternative is chosen from a range of alternatives the second best
choice is known as opportunity cost.

Opportunity
cost differs from people to people.
 Supply and Demand

Supplyis the amount of a Demand is what people

good or service available. are willing and able to buy.
Economics

Economics is a study of households management.

The head of a family faces the problem of managing the unlimited wants of
the family members within the limited income of the family.
All economic activities starts with unlimited human wants and limited
resources.
Therefore, economics is the study of wants, efforts and satisfaction are the
subject matter of economics.
 Economic Activities
1. Consumption extracting utility from goods and services
2. Production production of goods which posses utility
3. Exchange means buying and selling of goods and
services. It is link between consumer and producer.
4. Distribution sharing of income by the four factors of
production land, Labour, Capital and Organisation
 BASIC CONCEPTS

Aneconomic systemis a system of production and exchange of goods

and services as well as allocation of resources in a society.
complex human relations which is concerned with disposal of scarce
resources for purchase of satisfying various pvt and public needs for goods
and services.
 Wants

Economic activities starts

from wants efforts -
Sa

satisfaction
tis
fa
ct
io
n

Eff
ort
s
Introduction
Economic science is primarily concerned with the processes of
mobilizing, allocating, and utilising resources for the purpose of
promoting human development and welfare.
Economics as a branch of knowledge is concerned with the study of the
allocation of scarce resources among competing ends.
Problems of resource allocation are constantly faced by individuals,
enterprises and nations.
Introduction
The necessity for economizing arises from the fact that we have limited
productive resources such as land, raw materials, skilled manpower, capital
equipments, and technology at our disposal.
Because these resources are found in limited quantity, the goods they can
produce are also limited.
Therefore, resources need to be used and managed most efficiently and
economically.
Efficient and economic use of resources is not an easy task. It is achieved over
time, and is a function of many physical, financial, engineering, human and
institutional factors.
Introduction

Economics is a social sciences, concerned with unlimited human

wants and limited resources which are using for alternative purposes.
Therefore,
resources need to be used and managed most efficiently
and economically.
Efficientand economic use of resources is not an easy task. It is
achieved over tie, and is a function of many physical, financial,
engineering, human and institutional factors.
 INTRODUCTION

The central focus of economics is on Unlimited wants, scarcity of resources and

choices among their alternative uses.
This scarcity induces people to make choices among alternatives and the knowledge of
economics is used to compare the alternatives for choosing the best among them.
For example, a farmer can grow paddy, sugarcane, banana, cotton etc in his garden
land.
But he has to choose a crop depending upon the availability of irrigation water.
 Due to unlimited human wants and limited resources causes for some of the
basic problem of the economy

What to Produce?
How to Produce?
For Whom to Produce?

These questions need to be asked because resources are scarce and can be put
to alternative uses
Cont
1. Wealth Definition Adam Smith (1723 1790) in his book An Inquiry into
Nature and Causes of Wealth of Nation defined economics as the science of
wealth promote the societys interests

2. Welfare Definition (1842 1924) Alfred Marshall wrote a book Principles

of Economics "in which he defined Economics is a study of mankind in the
ordinary business of life Welfare of people

3. Growth Definition Prof Samuelson the study of how men and society
choose with or without the use of money.
 Economics

Economic Problems

Means (Human Wants) Ends (Resources)

Unlimited Graded Limited Alternative

Wants Wants Resource Uses

Scarcity of Resources
 Cont
Scarcity Definition (1932) Lionel Robbins An Essay on the nature and significance of
economic science - Economics is a science in which studies human behavior as a
relationship between means and ends which have alternative uses.
resources that we consider infinitely abundant, and which are free in
dollar terms, are scarce in some sense

The scarcity principle is an economic principle in which a limited supply

of a good, coupled with a high demand for that good, results in a
mismatchbetween the desired supply and demand equilibrium
What is 'Economic Efficiency'
Economic efficiency implies an economic state in which every
resource is optimally allocated to serve each individual or entity
in the best way while minimizing waste and inefficiency
 Economics & Economic
Theory

Unlimited Wants Limited Resources

Scarcity

Production
Possibilities Choice
Frontiers (PPF)

Opportunity Cost Vs Money Cost

Economics Efficiency
 Branches of Economics

Micro Macro
Economics Economics
National Income
Firm Aggregate Consumption
Consumers Savings and Investment
Individual Inflation and Deflation
Industry Employment and Unemployment
General Price Level
Aggregate export and import
Micro Economics

Micro Economics (micro element) is that branch of economy

which is concerned with the decision-making of single unit of an
economic system Individual consumers or producer or the price of
particular commodities etc.

It is the study of particular firms, particular households, individual

prices, wages, incomes, individual industries, particular
commodities.
Macro Economics

Macro Economics is that branch of economics which is concerned with

the economic magnitudes relating to the economic system as a whole,
rather than to the small.

Macro economics perceives the overall dimensions of economic affairs of

a country.

Macro economics is a study of very large, economy-wide aggregate

variables like national income, total savings, total consumption, total
investment, money supply, price levels, unemployment and economic
growth rate etc.
 Differences between Micro and Macro Economics
Micro Economics Macro Economics
Individual decision-making and
smaller components of the economy
Decision-making at the national level and
aggregate economics variables
Individual income, consumption, National income, aggregate consumption,
savings, investment, firm etc
savings, investment etc
Output of an firm & industry National output and industries as a whole
Price of product/factor General Price Level
Demand/Supply of any Inflation and Deflation
product/factor Aggregate Employment and Unemployment
Employment and Unemployment in Aggregate Exports and Imports of a country
an Industry
Export & Import of a given
product/factor
What are the importance of Engineering
Economics..?
 Increasing production and Improving productivity
Reducing human efforts
Increasing wealth by maximising profit
Controlling cost and Reducing cost
Decision-making selection of location, selection of equipment and replacement
analysis
It provides a number of tools and techniques to solve engineering problems
advertising, investment, pricing and level of output etc
It deals with identification of economic choices
Primary objectives of engineering economics

1. To provide the principles, concepts, techniques and methodology

which alternatives within a project best monetary returns.
2. If economic criteria are not considered properly for the best when
profit is the ultimate objective bad engineering.
3. Many technologically brilliant projects have been destroyed as a
result of unsound economic analysis.
4. The distinguish between engineering from science is that required
a broad understanding of the technological environment and ability
to organize all available resource, human and non human to
achieve economically and social desirable objectives.
 Cont..
The companies exist for one reason to make money or profit profits, sales
expenses and taxes are interrelated.
Profit = sales + other income expenses taxes
Making money requires that a company turn a profit it pays taxes.
Engineers affect profits in a number of ways
1. They create the opportunity for new sales by developing new product or
improved.
2. They create the opportunity for reducing expenses. Cost of production of
product.
3. They design and build or modify plants or processes produce new product,
increase production capacity, increased sales and reduce expenses.
Role of Engineering Economy in Decision
Making
Understand the Problem

Collect all relevant data/information

Define the feasible alternatives

Evaluate each alternative

Select the best alternative

Implement and monitor

Scope of Engineering economics

Time value of money

Cash Flows inflows and outflows
Interest rate and ROR
Simple and compound interest
Economic Equivalence
Break Even Analysis
Depreciation
Payback Period Method
Inflations
 Engineering Economics

Engineers can increase the productivity by eliminating

waste and improving the effective utilisation of resources.

Application of economic techniques and principle is to

evaluating engineering design and engineering
alternatives
 New Design

High Quality and Quantity of

Products

Competitive Minimization of Wastes & cost of

Production
Economy (LPG)

Fuller and Optimum Utilisation of

resources

Workers safety and Environmental

Protection
Cont..
Before 1940 engineers were mainly concerned with the design,
construction and operation of machines, structures and process.
They gave less attention or importance to revenue and cost aspect,
human and physical that produced the final products.
For this purpose concept like cash-flows, interest rates as well as
more evaluation criteria like simple payback period, rate of return,
net present value, Break-Even-Analysis are considered and
instructed.
Engineering economics concerned with time value of money, cash-
flow concepts, alternatives, depreciation etc.
Cont.
Engineering is improving and increasing production, reducing human efforts
and increasing wealth.
The role of engineering economics is to assess the feasibility of a project,
estimate its value and justify engineering point of views.
Many technologically brilliant projects have been destroyed as a result of
unsound economic analysis.
Therefore engineering economics denotes technological aspect as well as
monetary aspects.
 Engineers can improving and increasing production, reducing
human efforts and increasing wealth.
Project estimating its value and justifying it from an engineering
point of view.
The role of engineering economics is to assess the feasibility of a
project, estimate its value and justify engineering point of views.
This test, however is incomplete unless practically and economic
feasibility.
Therefore engineering economics denotes technological aspect as
well as monetary aspects.
 Engineering economics provides knowledge of engineering and
economic problem related to limited resources and select the
preferred course of action.
It evaluations mainly on mathematical models and cost data.
Before 1940 engineers were mainly concerned with the design,
construction and operation of machines, structures and process.
They gave less attention or importance to revenue and cost aspect,
human and physical that produced the final products.
 Today, close and tangled relations among industry, the public and
government, cost and value analyses are expected more in detailed
and inclusive.
Worker safety
Environmental effects
Consumer protection
Resource conservation
Without these analysis, an entire project can easily become more
burden than a benefit.
 For this purpose concept like cash-flows, interest rates as well as
more evaluation criteria like simple payback period, rate of return,
net present value, Break-Even-Analysis are considered and
instructed.
Engineering is an important part of an economy, the knowledge of
engineering economics has become mandatory for all engineers.
Engineering economics concerned with time value of money, cash-
flow concepts, alternatives, depreciation etc.
 Engineering Decision Making Processes

1. Understand the problem define objectives

2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives and apply sensitivity analysis
6. Select the best alternative
7. Implement the alternative and monitor results
Rational Decision-Making Process 47

Recognize the decision

problem
Collect all needed
(relevant) information
Identify the set of feasible
decision alternatives
Define the key objectives
and constraints
Select the best possible
and implementable
decision alternative
What Makes Engineering Economic Decisions
48
Difficult? Predicting the Future
Estimating the required
investments
Estimating product
manufacturing costs
Forecasting the demand
for a brand new product
Estimating a good
selling price
Estimating product life
and the profitability of
continuing production
The Production Possibilities Curve
(or Frontier)
C1

C2

C3

R1 R2 R3