Engineering

Economics

Module No. 001

Introduction To Engineering
Economics
By
Muhammad Shahid Iqbal
“The world is what YOU think of it, so
think of it DIFFERENTLY and your life
will change.”
 Class Rules
 Come in time
 Show Positive attitude
 No disturbance during lecture
 Bring your text book, class notes, note book, pen and
calculator

 DO NOT MISS YOUR QUIZ AND EXAMS

 No cell phone calls, No SMS
 Copying of assignments is strictly prohibited
 Meet the deadlines of assignments
 Maintain your attendance
 Attitude, key to success
 Have you ever wondered why some individuals, organizations, or
countries are more successful than others?
 It is not a secret. I believe that the success of an individual,
organization or country, depends on the quality of their people.
 "If you had a magic wand and there was one thing you would want
changed, The answer will be. better attitudes
 William James of Harvard University said, "The greatest discovery
of my generation is that human beings can alter their lives by
altering their attitudes of mind."
 Key to Success
 Your attitude contributes to success: A study attributed to
Harvard University found that when a person gets a job, 85% of
the time it is because of their attitude, and only 15% of the time
because of how smart they are and how many facts and figures
they know. Surprisingly, almost 100% of education dollars go
to teach facts and figures which account for only 15% of
success in work!
 Attitude is the most important word in the English language. It
applies to every sphere of life, including one's personal and
professional life. Can an executive be a good executive without
a good attitude? Can a student be a good student without a good
attitude? Can a parent, teacher, salesman, employer, employee
be good in their roles without a good attitude?
 Goal and Objectives of course
 Goal: To provide engineering student with the knowledge of
basic concepts of engineering economics as a decision making
tool to select the suitable alternatives for engineering projects
 Instructional Objectives: On successful completion of this
course, the students should attain:
 Understand the role of engineering economic analysis as a
decision-making and management/planning tool.
 Gain knowledge and understanding of theoretical
concepts/principles that form the basis of engineering
economics, such as time value of money, interest, and
depreciation
 Identify and apply various alternative evaluation methods
that are commonly used in economic decision-making
processes faced by engineers.
 Recommended Books
Principles of Economics by Engineering Economics by Engineering Economy by
N. Gregory Mankiw 5th ED R. Panneerselvam 2nd ED Leland Blank, 7th Ed

Reference Books
Any other standard book on Engineering Economics &
You may get help from Google search engine
 Economics and Engineering
Economics
 Economics
 Economics 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.
 Economics
 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?
 Factor of Production
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 or Human Capital: 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.
Physical Capital: Tools, buildings, machinery. Things
which have been produced and used in further
production.
Financial Capital: Assets and money
 Economics
 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 unlimited
 Resources available are scarce

 People want to maximize their gains

 Scarcity: 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 problems
 Flow in an Economy
Revenue Spending
MARKETS
FOR GOODS
Goods & Goods and
•Firms sell
services Services
•Households buy
sold bought

HOUSEHOLDS
FIRMS
•Buy and consume
•Produce and sell goods and services
goods and services
•Own and sell factors
•Hire and use factors
of production
of production

Labor, land,
Factors of
production MARKETS and capital
FOR
FACTORS OF PRODUCTION

•Households sell
Wages, rent Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of money
 Flow in an Economy
 The 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.
 Engineering Economics
 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 PROJECTS.
Therefore, engineers and Architects must be concerned with the
economic aspects of designs that recommend, & projects they
perform.
 Engineering economics is needed for many kinds of decision making
Example: Buying a car Alternatives:
$18,000 now, or $600 per month for 3 years
Which is better?
 Engineering Decision Making
 All engineering projects use resources, such as raw materials,
money, labor, and time. Any particular project can be
undertaken in a variety of ways, with each one calling for a
different mix of resources.
 For example, a standard light bulb requires inexpensive raw
materials and little labor, but it is inefficient in its use of
electricity and does not last very long.
 On the other hand, a high-efficiency light bulb uses more
expensive raw materials and is more expensive to manufacture,
but consumes less electricity and lasts longer.
 Both products provide light, but choosing which is better in a
particular situation depends on how the costs and benefits are
compared.
 Engineering Economic Decisions
Manufacturing Profit

Planning Investment

Marketing
The factors of time and uncertainty are the defining aspects of any
engineering economic decisions
 Role of Engineers in Business
Create & Design

• Engineering Projects

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on

• Engineering Safety Profitability Financial Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk
 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.
 Two Environment are needed for work of an engineer- Physical
Environment and Economical environment. An Engineer needs
to establish efficiency in both environments that are not
independent.
 Efficient functioning of business organizations enable it to
provide goods and services at a lower price. Engineering
Economics is concerned with problems encountered in making
economic decisions for business firms.
 Engineering economy involves formulating, estimating, and
evaluating the expected economic outcomes of alternatives
designed to accomplish a defined purpose.
 Types of Strategic Engineering Economic
Decisions in Manufacturing
 There is a need of systematic evaluation of Investment
alternatives before a decision is made regarding such problems.
 Service improvement

 Equipment and process selection

 Equipment replacement

 New product and product expansion

 Cost reduction

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 Efficiency and Economic
Efficiency
 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.
 Economic 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.
 Economics Efficiency
 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 “Productivity”
 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.
 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 output
 Through simultaneous increase in output with decrease in
input
 The scope of Engineering Economics
 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.
 Thank You

 That’s all. Have fun…however from next week we will

study well

 Questions