ENGINEERING
ECONOMY
ENGINEERING ECONOMY
Economics
Study of how society, i.e. individuals, businesses
and government, should allocate scarce resources
to the production and distribution of goods and
services to the appropriate consumers.
ENGINEERING ECONOMY
Engineering Economy
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involves the systematic evaluation of the economic merits of
proposed solutions to engineering problems. To be economically
acceptable ( i.e., affordable ), solutions to engineering problems
must demonstrate a positive balance of long-term benefits over
long-term cost, and must also
promote the well-being and survival of an organization,
embody creative and innovative technology and ideas,
permit identification and scrutiny of their estimated outcomes, and
translate profitability to the “ bottom line” through a valid and
acceptable measure of merit.
ENGINEERING ECONOMY
Origins of Engineering Economy
The perspective that ultimate economy is a concern to the engineer
and the availability of sound techniques to address this concern
differentiates this aspect of modern engineering practice from that of
the past.
• Pioneer: Arthur M. Wellington, civil engineer latter part of
nineteenth century;
addressed role of economic analysis in engineering projects; area
of interest: railroad building
• Followed by other contributions which emphasized techniques
depending on financial and actuarial mathematics.
ENGINEERING ECONOMY
Principles of Engineering Economy
1.Develop the Alternatives;
• The final choice (decision) is among alternatives. The
alternatives need to be identified and then defined for subsequent
analysis.
2. Focus on the Differences;
• Only the differences in expected future outcomes among the
alternatives are relevant to their comparison and should be
considered in the decision.
ENGINEERING ECONOMY
3. Use a Consistent Viewpoint;
• The prospective outcomes of the alternatives, economic and
other, should be consistently developed from a defined
viewpoint (perspective).
4. Use a Common Unit of Measure;
• Using a common unit of measurement to enumerate as many of
the prospective outcomes as possible will make easier the
analysis and comparison of alternatives.
ENGINEERING ECONOMY
5. Consider All Relevant Criteria;
• Selection of a preferred alternative (decision making) requires the
use of a criterion (or several criteria). The decision process should
consider the outcomes enumerated in the monetary unit and those
expressed in some other unit of measurement or made explicit in a
descriptive manner.
6. Make Uncertainty Explicit;
• Uncertainty is inherent in projecting (or estimating) the future
outcomes of the alternatives and should be recognized in their
analysis and comparison.
ENGINEERING ECONOMY
7. Revisit Your Decisions
• Improved decision making results from an adaptive process;
to the extent practicable, the initial projected outcomes of
the selected alternative should be subsequently compared
with actual results achieved.
ENGINEERING ECONOMY
Engineering Economic Analysis Procedure
1.Problem recognition, formulation, and evaluation
2.Development of the feasible alternatives
3.Development of the net cash flow for each alternative
4.Selection of a criterion (or criteria)
5.Analysis and comparison of the alternatives
6.Selection of the preferred alternative
7.Performance monitoring and post evaluation of results
ENGINEERING ECONOMY
Consumer Goods and Producer Goods and Services
Consumer goods and services are those products or
services that are directly used by people to satisfy their
wants. Food, clothing, homes, cars, television sets, haircut,
movies, shoes, medical and dental services are examples.
Producer goods and services are used to produce consumer
goods and services or other producer goods. Machine tools,
factory buildings, buses, and farm machinery are examples.
ENGINEERING ECONOMY
Necessities and Luxuries
Necessities are those products or services that are required to
support human life and activities that will be purchased in
somewhat the same quantity even though the price varies
considerably.
Luxuries are those products or services that are desired by
humans and will be purchased if money is available after the
required necessities have been obtained.
ENGINEERING ECONOMY
Necessities and luxuries are relative terms, some goods and
services are considered as necessity to one person but luxury to
another person. For example, a person living in one community
may find that an automobile is a necessity to get to and from
work. If the same person lived and worked in a different city,
adequate public transportation might be available, and an
automobile would be a luxury.
ENGINEERING ECONOMY
Utility and Demand
• Utility is a measure of the value which consumers of a product or
service place on that product or service;
• Demand is a reflection of this measure of value, and is represented
by price per quantity of output;
ENGINEERING ECONOMY
Change in the Demand Schedule
Increase or decrease in demand at all price levels, resulting in a
right or left shift of the demand curve
ENGINEERING ECONOMY
The law of Demand
The law of demand may be stated as:
The demand for a commodity varies inversely as the price of
the commodity, though not proportionately.
ENGINEERING ECONOMY
Elasticity of demand is an important variation on the
concept of demand. Demand can be classified as elastic,
inelastic or unitary.
An elastic demand is one in which the change in quantity
demanded due to a change in price is large. An inelastic
demand is one in which the change in quantity demanded due
to a change in price is small.
The formula for computing elasticity of demand is:
ENGINEERING ECONOMY
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Q1 - stands for quantity demanded before price change.
Q2 - stands for quantity demanded After price change
P1 - stands for Price Charged before price change.
P2 - stands for Price Charged After price change.
If the formula creates a number greater than 1, the demand is
elastic. In other words, quantity changes faster than price. If the
number is less than 1, demand is inelastic. In other words, quantity
changes slower than price. If the number is equal to 1, elasticity of
demand is unitary. In other words, quantity changes at the same
rate as price.
ENGINEERING ECONOMY
Elasticity of demand is illustrated in Figure 1.4. Note that a change
in price results in a large change in quantity demanded. An
example of products with an elastic demand is consumer durables.
These are items that are purchased infrequently, like a washing
machine or an automobile, and can be postponed if price rises. For
example, automobile rebates have been very successful in
increasing automobile sales by reducing price.
ENGINEERING ECONOMY
Inelastic demand is shown in Figure 1.5. Note that a change in price
results in only a small change in quantity demanded. In other words,
the quantity demanded is not very responsive to changes in price.
Examples of this are necessities like food and fuel. Consumers will
not reduce their food purchases if food prices rise, although there
may be shifts in the types of food they purchase. Also, consumers
will not greatly change their driving behavior if gasoline prices rise.
ENGINEERING ECONOMY
Unitary elasticity of demand any change in price causes a
proportional change in quantity demanded. For example, a 10%
quantity change divided by 10% price change is one. This means that
a one percent change in quantity occurs for every one percent change
in price.
ENGINEERING ECONOMY
Competition, Monopoly and Oligopoly
Perfect competition occurs in situation where a commodity or
service is supplied by a number of vendors and there is nothing to
prevent additional vendors entering the market. Under such conditions,
there is assurance of complete freedom on the part of both buyer and
seller.
Monopoly is the opposite perfect competition. A perfect
monopoly exists when a unique product or service is available from a
single vendor and that vendor can prevent the entry of all others into
the market. Under such conditions the buyer is at the complete mercy
of the vendor as to the availability and price of thee product. In reality
there seldom is a perfect monopoly. Very few products are so rare that
substitute cannot be used satisfactory.
ENGINEERING ECONOMY
Oligopoly exists when there are so few suppliers of a
product or service that action by one will almost
inevitably result in similar action by others. Thus, if one
of the only three oil companies in the country raises the
price of gasoline by P0.50 per liter, the other two would
undoubtedly do the same because they could do so and
still retain their previous competitive positions.
ENGINEERING ECONOMY
Supply
the quantity of a certain price at a given place and time. A rice
dealer may have one hundred cavans of rice in his warehouse,
but if he only wishes to sell seventy cavans, then, this quantity
represents the supply.
ENGINEERING ECONOMY
ENGINEERING ECONOMY
The law of supply and demand
The law of supply and demand may
be stated as follows:
“Under conditions of perfect
competition the price at which a
given product will be supplied and
purchased is the price that will result
in the supply and the demand being
equal.”
ENGINEERING ECONOMY
ENGINEERING ECONOMY
The Law of Diminishing Returns
“When the use of one of the factors of production is limited,
either in increasing cost or by absolute quantity, a point will be
reached beyond which an increase in the variable factors will
result in a less than proportionate increase in output.”
ENGINEERING ECONOMY
The effect of the law of diminishing
returns on the performance of an
electric motor is illustrated in
Fig.1.11. for the early increase in
input, through input of 4.0 kw, the
actual increase in output, is greater
than proportional; beyond this point
the output is less than proportional.
In the case the fixed input factor is
the electric motor.
ENGINEERING ECONOMY
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