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Lecture 1-Engineering Economics

This document discusses fundamentals of engineering economics. It defines engineering as applying scientific knowledge to develop ways to utilize natural resources for humanity's benefit. Economics is defined as studying how scarce resources are used to produce and distribute goods and services. Engineering economy applies mathematical techniques to evaluate costs and benefits of projects to aid rational decision making. It is important for engineers to consider economic factors when designing and selecting between alternatives.

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Daanyal Ibn Umar
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111 views

Lecture 1-Engineering Economics

This document discusses fundamentals of engineering economics. It defines engineering as applying scientific knowledge to develop ways to utilize natural resources for humanity's benefit. Economics is defined as studying how scarce resources are used to produce and distribute goods and services. Engineering economy applies mathematical techniques to evaluate costs and benefits of projects to aid rational decision making. It is important for engineers to consider economic factors when designing and selecting between alternatives.

Uploaded by

Daanyal Ibn Umar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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FUNDAMENTALS OF

ENGINEERING ECONOMICS
What is Engineering?
The Accreditation Board for Engineering and Technology (USA) states that
engineering

“is the profession in which knowledge of the mathematical and natural sciences
gained by study, experience, and practice is applied with judgment to develop
ways to utilize, economically, the materials and forces of nature for the benefit of
mankind.”

• In this definition, the economic aspect of engineering is emphasized, as well as the


physical aspects
What is Economics?
“is the study of how people and society choose to employ scarce resources that
could have alternative uses in order to produce valuable goods/commodities &
services and to distribute them for consumption, now or in the future, …”
Ref: Paul Samuelson and William Nordhaus, Economics, 12th Ed., McGrawHill, New York, 1985.

• Economics is a social science that studies the production, consumption and


distribution of goods and services, with an aim of explaining how economies work
and how their agents interact

PRODUCTION CONSUMPTION DISTRIBUTION


What is Economy?
Economy is a system that exists to produce and provide people in a society with the
goods and services they need to live and do what they want.

The Problem of Financial Scarcity


• Our resources  limited whereas our wants/needs  unlimited
• Individuals, firms, and nations  make decisions  what goods and services they buy or
produce and which ones they must forgo
• Because of scarcity, people, firms, and nations must all make decisions over how to
allocate their individual resources
• Economics, in turn, aims to study why we make these decisions and how we allocate our
resources most efficiently
Consumer Behavior
The behavior regarding selection, purchase and consumption of goods and services for
satisfaction of ones wants is known as consumer behavior.

The rational behind the consumer behavior is as follows:


• The list of commodities is very large

• Choices is made to select the most preferred goods or services from the given list

• Estimates of consumer’s money and prices of goods and services

• Allocation of money to different goods and services


Basic Concepts of Economics
• What is scarcity?
People do not have the desired amount of commodity as they want. (Limited)

• What is price?
Value of a commodity expressed in money terms.

• What is value?
Value means how much a commodity is useful in use or how much utility it has.

• What is utility?
The ability of a commodity to satisfy human want is called utility.
Basic Concepts of Economics...
• What is want/end?
• Want/end is the desire to get and use goods and services having utility.

• Types of wants
◦ Economic Want (which can not be satisfied without the use of money)
◦ Non – Economic Want ( which can be satisfied without money )

• Classification of wants
◦ Necessities ( without which human life can not be maintained)
◦ Comforts ( which make our life easier)
◦ Luxuries ( which are satisfied in order to make oneself distinguished in the society)
Basic Concepts of Economics...
• What are goods and services?
Goods refer to all material things, which are directly or indirectly used by human beings.

Services refers to physical and mental actions performed by human beings to satisfy others
wants.

• What is wealth?
Wealth refers to all those things which are owned and used by the people and are not free to
be availed otherwise.
Principles of Economics
1. People face trade-offs
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. The standard of living depends on a country’s production
9. Prices rise when the government prints too much money
10.Society faces a short-run tradeoff between inflation and unemployment
What is Engineering Economy?
Engineering economy involves formulating, estimating and evaluating the expected
outcomes of alternatives designed to accomplish a defined purpose.
• It is a subset of Economics
• Not concerned with general economics situations – Is Project Driven

Engineering Economy is a collection of mathematical techniques which simplify economic


comparisons. It provides rational & systematic approach for evaluating different economic
decision.

Engineering Economy involves the systematic evaluation of the costs and benefits of
proposed projects.

Subject helps in understanding how to be an effective manager and decision maker.


What is Construction Economics?
Allocation of scarce resources of the construction industry profitably
• Labor and staff
• Equipment
• Material
• Money
Construction Economics provides students with the principles and concepts underlying the
relationship between economic theory and the construction industry

What is Construction Finance?


Allocation of financial resources profitably
What is Accounting?
Accounting can be called the language of business, and like any language, it aims at
effective communication of business transactions.

A system of recording, collecting, summarizing, analyzing and presenting information


about an organization or project in monetary term

Balance sheet
Profit and loss account
A statement of changes in financial position

• Financial Statements are of interest to owners and management of companies, potential


investors, financial institutions, credit rating agencies, employees, statutory and regulatory
authorities and competitors
Problem Solving/ Decision making
 Problem Solving or Decision Making Process
1. Understand the problem.
2. Collect relevant information.
3. Define alternative solutions.
4. Evaluate each alternative.
5. Select the best alternative using defined criteria.
6. Implement the solution and monitor the results.
Where the major
tools of Engr.
Economy are
applied
Importance of Engr. Economics
Why Engineering Economics is Important to Engineers?

 Engineers design and create/construct


 Designing involves economic decisions
 Engineers must be able to incorporate economic analysis into their creative efforts
 Often engineers must select and implement from multiple alternatives
 A proper economic analysis for selection and execution is a fundamental task of
engineering

In today’s competitive world of business it has become essential that engineers should
practice economical/financial analysis for engineering projects and make rational decisions.
Importance of Engr. Economics
Why Engineering Economics is Important to Civil Engineers?
• Is any individual project worthwhile? (go/no go)
Whether to invest money or not in a project?(own/borrowed)
• Given a list of feasible projects, which one is the best?
• How does each project rank compared to others on the list?
• How to achieve long-term financial goals?
• How to compare different ways to finance purchases?
• How to make short and long-term investment decisions?
Project Evaluation
Example 1: Should our company buy a construction truck on discount with more interest or no
discount with no interest?
Example 2: Should we rent or purchase a piece of equipment for our project? E.g. excavator.
EXAMPLE
• To generate several ways of doing a particular work and select the most
economical way according to the situation
THANKYOU!

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