By Muhammad Shahid IqbalModule No. 01

INTRODUCTION TO ENGINEERING ECONOMICSEngineering Economics

EconomicsEconomics is a social science that analyzes the production, distribution and consumption of goods and services. It studies the economic behavior of the people and economic phenomenon. Economic Behavior is a conscious effort to derive maximum gain from scarce resources and opportunities available to them.Economic Phenomenon deals with the production and consumption of goods & services and distribution of these for human welfare.Definition: Economics is the study of how people allocate their limited resources to their alternative uses to produce and consume goods and services to satisfy their endless wants or to maximize their gains. It explains how people interact within markets to get what they want or accomplish certain goals.

The fundamental question in economics is: How can individuals and societies optimally satisfy their wants, with limited resources?This question can be split into three:What must be produced?How must the selected products and services be produced?For whom must it be produced?

Economics

Land: Everything physical, which is not the result of human effort is land. This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities. such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied to the production process.Labor: Any mental or physical work done for the sake of reward. The efforts, skills, and knowledge of people which are applied to the production process. (Human capital)Capital: Physical Capital: Tools, buildings, machinery . Things which have been produced and used in further production. Financial Capital: Assets and money Factor of Production

While maximizing their gains people as producers and consumers have to make choices regarding the use of resources and spending their earnings due to following basic facts of economic life.Human wants are unlimitedResources available are scarcePeople want to maximize their gainsScarcity: means that society has limited resources and therefore cannot produce all the goods and services people wish to have.Resources scarcity is a relative term it implies that resources are scarce in relation to demand for resources. Scarcity is a mother of all economic problemsEconomics

SpendingRevenueIncome = Flow of inputs and outputs = Flow of moneyMARKETS FOR GOODS Flow in an Economy

Flow in an EconomyThe flow of goods, services, resources and money payments are shown in circular flow diagram. In a simple economy, Household and Firms are two major entities.Firms use various economic resources like land, labor and capital, which are provided y households.Firms make payment of money to the households for receiving various resources.The HH in turn make payments of money to business organizations for receiving consumer goods and services.These two entities show interdependence between themselves in a simple economy.

Economics is concerned with allocation of resources in a society, while engineering involves the use of resources to solve problems and to satisfy specific needs for the society.It is important for engineers to have a basic understanding of economics, in order to utilise resources optimally, and to better balance the three legs of any engineering project (cost, schedule and performance).Why is Engineering Economics important?Engineers , Architects DESIGN things and perform PROJECTSTherefore, engineers and Architects must be concerned with the economic aspects of designs that recommend, & projects they performEngineering economics is needed for many kinds of decision makingExample: Buying a car Alternatives: $18,000 now, or $600 per month for 3 years Which is better?

Engineering Economics

Science is a field of study where the basic principles of different physical systems are formulated and tested.Engineering is the application of science.It establishes varied application systems based on various scientific principles.Efficient functioning of business organizations enable it to provide goods and services at a lower price.Managers at different levels should take appropriate economic decisions in the process of managing organizations.These decisions will help in minimizing expenditures and maximizing revenues, savings and other gains of the organization.Engineering Economics is concerned with problems encountered in making economic decisions for business firms.Engineering Economics

There is a need of systematic evaluation of Investment alternatives before a decision is made regarding such problems.Introduction of new product/service/software, the expansion of product facilities, replacing existing manufacturing equipment or method, changes in product mix, adoption of new technology.Engineering Economics seeks to provide the analytical framework for decision making from an economic point of view and to advance the role of engineers in the process of decision making. Generally Engineering Economics deals with methods that enable organizations to achieve their goals efficiently (Doing things right) and effectively (Doing the right things)Engineering Economics

Technical efficiency is the effectiveness with which a given set of inputs is used to produce an output. A firm is said to be technically efficient if a firm is producing the maximum output from the minimum quantity of inputs, such as labor, capital and technology.The concept of technical efficiency is related to productive efficiency.It is the ratio of the effective or useful output to the total input in any physical system. The ratio of the energy delivered by a machine to the energy supplied for its operation.Engineering Efficiency

In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services.An economics system is said to be more efficient than another if it can provide more goods and services for society without using more resources. A system is called economically efficient if:one can be made better off without making someone else worse off.No additional output can be obtained without increasing the amount of inputs. Production proceeds at the lowest possible per-unit cost.Economic efficiency is also called ProductivityEconomics Efficiency

Methods of improving productivity.There are several ways of improving productivity.Increased output for the same input.Decreased input for the same output.By a proportionate increase in the output which is more than the proportionate increase in input.By proportionate decrease in input which is more than the proportionate decrease in outputThrough simultaneous increase in output with decrease in input

There are two concepts of efficiency: Technological efficiency occurs when it is not possible to increase output without increasing inputs. Economic efficiency occurs when the cost of producing a given output is as low as possible. Technological efficiency is an engineering matter. Given what is technologically feasible, something can or cannot be done. Economic efficiency depends on the prices of the factors of production. Something that is technologically efficient may not be economically efficient. But something that is economically efficient is always technologically efficient.Economics Efficiency

Traditional economic theory is concerned with the optimum allocation of resources in our society.Engineering Economics deals with the optimum allocation of the enterprise capital.Engineering Economics employs economic theory, mathematical programming and statistical analysis to formulate and solve problems concerning the evaluation and selection of capital projects.A basic concept of engineering economics is time value of money and the techniques associated with it like compounding, discounting and economic equivalence which have wide application in capital expenditure analysis as well as in financial analysis.The scope of Engineering Economics

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