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This presentation is dedicated to

StudentsOf BICSE -7

Dedication

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Non-technical skills and knowledge areas that an engineer should

acquire

Adapted from Redmill : 133

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Engineering Economics

Course Code: BS 242

(BICSE-7)

Credits : 2+0

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Engineering Economics

Engineering Economics is the application of economic techniques to the evaluation of design and engineering alternatives.

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Lecture Headlines1)Introduction to engineering economics

2) Basic cost concepts

3) Time value of money and discounted cash flow calculations

4) Comparing alternatives

5) Public sector engineering economy

6)Private sector engineering economy

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1) Introduction to Engineering Economics

Economics vs. Engineering economics;

typical problems addressed by engineering economy studies - public sector,

private sector,

personal;

engineering economics studies

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2) Basic cost conceptsBasic terms and concepts –

fixed costs, variable costs, average cost, marginal cost, revenue, profit, depreciation, sunk costs; typical characteristics of cost functions; break-even analysis

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3) Time value of money and discounted cash flow calculations

What is interest; simple interest; compound interest – nominal vs. effective interest; continuous compounding; time-value equivalencies; compound interest factors; the functional notation system; cash flow diagrams; solving interest problems

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4) Comparing alternatives

Identifying and defining alternatives;

present worth comparisons;

equivalent annual worth comparisons;

rate of return comparisons

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5) Public sector and Private Sector Engineering Economy

studies the public sector; sources and costs of capital; income tax considerationsthe discount rate question; incentives for private sector investmentbenefit-cost analysis and applications

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Text bookDonald E. Newnan, Engineering Economic

Analysis, 9th Ed.

Reference book Contemporary Engineering Economics: by

Park et al, PearsonPrinciples of Economics by Sameulson 13th

EditionApplied Mathematics for Business Economics

and the Social Sciences by Frank S Budnick

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Weightage

One Hour Tests : 30 %Quizzes : 10%Assignments : 5%

Project : 10% Final Test : 45 %

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INTRODUCTION TO ECONOMICS DEFINITION OF ECONOMICS

– ACCORDING TO ADAM SMITH– ACCORDING TO DR.MARSHALL– ACCORDING TO PROF.ROBBINS

ECONOMIC CIRCLE IMPORTANCE OF ECONOMICS DEFINITION OF ENGINEERING

ECONOMICS

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INTRODUCTION TO ECONOMICS

The word economics is derived from the Greek word “Oikonomos” which means to manage the house. So it means the management of a household specially in those matters which are relating to the income and expense of the family. After sometimes the term political economy was also used for this topic and slowly political economy adopted the shape of economics.

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DEFINITION OF ECONOMICS

“Economics is the study of our behavior in producing, distributing and consuming material goods and services in a world of scarce resources”

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DEFINITION OF ECONOMICS

There are numerous definitions of economics but there are three important definitions given as below.

ACCORDING TO ADAM SMITH ACCORDING TO ALFERED MARSHALL ACCORDING TO PROF.ROBBINS

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ACCORDING TO ADAM SMITH

“Science of Wealth”

He was the founder of classical school of thought. Adam smith wrote the book”An enquiry into the nature and causes of wealth of nations in 1776.” He was called “Father of Economics”

Economics is a science of wealth: He divided his book into four parts like1. Consumption of wealth 2. Production of wealth3. Exchange of wealth4. Distributing of wealth

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DR.MARSHALL“Science of Material

Welfare” Dr.Marshall is the founder of neo classical school

of thought. He wrote a book “Principles of Economics”in 1878 and defined economics in the following words.

”Economics is a study of Man,s action in the ordinary business of life it enquires how he gets his income and how he uses it. It examines that part of an individual and social actions which is mostly closely connected with the attainment and with the use of material requisites of well being. Thus economics is on one side a study of wealth and on the other and more important side apart of the study of man.”

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PROF. ROBBINS“Science of Scarcity” Prof.Robbins criticized the Marshalls

definition and offered the most precise and scientific definition of economics.

”The science which studies human behavior as a relationship between ends and scarce means, which have alternative uses.”

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Engineering Economics

“Engineering Economy is the discipline concerned with the economic evaluation of the costs and benefits of proposed technical projects. The principles and methodology of engineering economy are an integral part of the daily management and operation of private-sector companies and corporations, regulated public utilities, govt. unit or agencies, and non profit organizations.”

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Engineering Economy

“These principles are utilized to analyzed alternative uses of financial resources, particularly in relation to the physical assets and the operation of an organization.”

So Engineering Economy will prove to be invaluable to you in assessing the economic merits of alternative uses of your personal funds.

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Engineering Economy

“In other words we may say that the Engineering Economy is the application of economic techniques to the evaluation of design and engineering alternatives.

The Role Of Engg. Eco. The role of engineering economy is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint.

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Wants

Economic Wants

Non Economic Wants

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Economic Wants

Necessities Comforts Luxuries

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Necessities

Food Cloth Shelter

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ECONOMIC CYCLE

Goods and services

Satisfaction (UTILITY)

Economic Wants

Wealth

Economic Activity

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IMPORTANCE OF ECONOMICS IN LIFE:Now a day no body can deny the importance of economics in our real life. Our social cultural and religion values are deeply affected by the economics circumstances of the people. All the people living anywhere in the world are doing economic efforts for solving their economic problems.IN THE WORDS OF DURBIN:

“ Economics is the intellectual religion of the day”

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Branches of Economics

Micro economics

Macro economics

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Micro economic

“The study of decision making undertaking by individual”

Individual may be any one Consumer. (Rational person) Producer. (Wise) Firms. (Making decision about

products)

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MACROECONOMICS“It is the study of the behavior of

economy as a whole” National income. Economic development and planning. Unemployment. International trade. Balance of payment. Public sector. Inflation

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Some other issues

Agriculture/Industrial Sector Banking System Islamic Banking System Privatization Time Value of Money Alternative Analysis Cost Benefit Analysis Theory of Interest

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Some other issues

Nationalization Devaluation Economic Systems Islamic Economic System Theory of Exchange Rate Globalization Discount Cash Flows Poverty

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Scarce Resources

Natural Physical

Land Capital

Human Organization

Labor Entrepreneur

Rent Interest Wages ProfitRewards

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Concepts of

Public SectorPrivate SectorPersonal

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Typical Problems

What to Produce

How to Produce

Quality,Kind etc.

Strategy

For Whom to Produce

Rich, Poor orSome others

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Scarcity

These three questions create theory of Choice but the resources are scarce and so concept of scarcity arises.

“The amount of something which is less than the amount required to meet the demand of the people at market price.”

So Scarcity forces us to make choices.

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Opportunity Cost

It creates another concept called Opportunity Cost.

“Things which we sacrifice to get something”

Example Opportunity cost of Bicse is ____________.

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Possibility Lines

Opportunity Cost concept helps us to develop possibility lines as follows

Consumption Possibility Line Production Possibility Line

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Consumption Possibility Line

Commodity X

Commodity Y

Y0 X1

Y1

X2

For an increase in quantity of Y, amount of x will be sacrificed for consumption.

Consumption

Possibility Frontier.

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Production Possibility Line

Commodity X

Commodity Y

Y0 X1

Y1

X2

For an increase in quantity of Y, amount of x will be sacrificed for Production.

Production Possibility

Frontier.

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Factors considerations

Why this course? Factors that an engineer will consider for any technical

project after having the knowledge of this subject.

– Ease of maintenance

– Aesthetics (appearance)

– Quality

– Environmental concerns

– Production method

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Factors considerations

– Capital and Interest

– Time value of money and cash flows

– Cost Analysis

– Materials used

– Revenue Analysis

– Cost Benefit analysis either in Public or Private Sector

– Comparing other alternatives

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Any Question ?