lesson 1 - introduction to engineering economy.pptx

Life is not a series of

chances … it’s a series of choices ….

Beth Flores, DZAS

Basic Concepts of Economics

What is Economics?

Economics is a science that deals with the attainment of the maximum fulfilment of society’s unlimited demands for goods and services

What is Engineering Economics?

Engineering Economics is the branch of economics that deals with the application of the laws and theories of economics to engineering and technical projects

What are Consumer and Producers Goods and Services?

Consumer goods and services refer the products or services that are directly used by people to satisfy their wants. Examples are food, clothing, shelter or home, etc.

What are Consumer and Producers Goods and Services?

Producer goods and services are those that are used to produce the consumer goods and services

What is the difference between Necessity and Luxury?

Necessity refers to the goods and services that are required to support human life, needs and activities.


Necessity product or staple product is defined as any product that has income-elasticity of demand less than one. This means that as income rises, proportionately less income is spent on such products. Examples include basic foodstuff like bread and rice, clothing, etc.


Luxuries are those goods and services that are desired by human and will be acquired only after all the necessities have been satisfied.


Luxury product is defined as any product that has income-elasticity of demand greater than one. This means that as income rises, proportionately more income is spent on such products. Examples include consumer durables like appliances, expensive cars, holidays and entertainment, etc.

What are the different market situations?

The term market refers to the exchange mechanism that brings together the sellers and the buyers of a product, factor of production or financial security. It may also refer to the place or area in which buyers and sellers exchange a well-defined commodity.


Buyer or consumer is defined as the basic consuming or demanding unit of a commodity. It may be an individual purchaser of a good or service, a household (a group of individuals who make joint purchasing decisions), or a government.


Seller is defined as an entity which makes products, goods or services available to buyer or consumer in exchange of monetary consideration.


Market Situation Sellers Buyers

Perfect Competition many many

Monopoly one many

Monopsony many one

Bilateral Monopoly one one

Duopoly two many

Duopsony many two

Oligopoly few many

Oligopsony many few

Bilateral Oligopoly few few


Perfect competition refers to the market situation in which any given product is supplied by a very large number of vendors and there is no restriction against additional vendors from entering the market.


Perfect competition is characterized by the following:

A. Many sellers and many buyersB. Homogeneous productsC. Free market entry and exitD. Perfect informationE. Absence of all economic friction


Monopoly is the opposite of perfect competition. This market is characterized by the following:

A. One seller and many buyersB. Lack of substitute productsC. Blockaded entry


Natural Monopoly is a market situation where economies of scales are so significant that costs are only minimized when the entire output of an industry is supplied by a single producer so that supply costs are lower under monopoly than under perfect competition and oligopoly.

What are the different market situations?Oligopoly exists when there are so few suppliers of a product or service that the action of one will inevitably result in a similar action by the other suppliers. This type of market is characterized by the following:

A. Few sellers and many buyersB. Homogeneous of differentiated productsC. Difficult market entry

What is a Demand?

Demand is the need, want or desire for a product backed by the money to purchase it. In economic analysis, demand is always based on “willingness and ability to pay” for a product, not merely want or need for the product.

What is a Demand?

The demand for a product is inversely proportional to the selling price. As the selling price is increased, there will be less demand for the product and as the selling price is decreased, the demand will increase.

What is a Supply?

Supply is the amount of product made available for sale.

If the selling price for a product is high, more producers will be willing to work harder and risk more capital in order to reap more profit. However, if the selling price of the product declines, capitalists will not produce as much because of the smaller profit they can obtain for their labor and risk.

What is a Supply?

Therefore the relationship between price and supply is that they are directly proportional. The bigger the selling price, the more the supply, and the smaller the selling price, the less the supply.

What is the Law of Supply and Demand?

The Law of Supply and Demand is stated as follows:“Under conditions of perfect competition, the price at which the given product will be supplied and purchased is the price that will result in the supply and the demand being equal.”

Introduction to

Engineering Economy

ORIGIN OF ENGINEERING ECONOMY

Arthur Mellen Wellington or known as A.M Wellington was a railway civil engineer of his time. He became famous because of his book entitled “The Economic Theory of the Location of Railways” which was published by John Wiley and Sons in 1887. The book was subtitled as “an analysis of the conditions controlling the laying out of railways to effect the most judicious use of capital. Wellington was later known as the “Father of Engineering Economy”.

Source: http://mysite.du.edu/~jcalvert/railway/wellingt.htm

Definition of Engineering Economy

Engineering, as defined by the Accreditation Board for Engineering Technology is “the profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgement to develop ways to utilize, economically the materials and forces of nature for the benefit of mankind”.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13 TH ED. Pearson-Prentice Hall. p2

Definition of Engineering EconomyEngineering Economy involves the systematic evaluation of the economic merits of proposed solutions to engineering problems. To be economically acceptable, solutions to engineering problems must demonstrate a positive balance of long-term benefits over long-term costs, and they must also• Promote the well-being and survival of the organization• Embody creative and innovative technology and ideas• Permit identification and scrutiny of their estimated outcomes• Translate profitability to the bottom line through a valid and

acceptable measure of merit.



Engineering Economy is the dollars-and-cents side of the decisions that engineers make or recommend as they work to position a firm to be profitable in a highly competitive marketplace.



Engineering Economy involves formulating, estimating, and evaluating the expected economic outcomes of alternatives designed to accomplish a defined purpose. Mathematical techniques simplify the economic evaluation of alternative.

Source: Blank, L. and Tarquin, A. (2012). ENGINEERING ECONOMY, 7TH ED. McGraw Hill. P3

Principles of Engineering Economy#1: DEVELOP ALTERNATIVES• A decision situation involves making a choice among

two or more alternatives. Developing and defining the alternatives for detailed evaluation is important because of the resulting impact on the quality of the decision.

• Creativity and innovation are essential to the process.• One alternative that may be feasible in a decision

situation is making no change to the current operation or set of conditions.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6

Principles of Engineering Economy

#2: FOCUS ON THE DIFFERENCES• Only the differences in the future outcomes of the

alternatives are important. Outcomes that are common to all alternatives can be disregarded in the comparison and decision.

• The principle focuses on the engineering economic analysis of recommending a future course of action based on the differences among feasible alternatives.


Principles of Engineering Economy#3: USE A CONSTANT VIEWPOINT• The prospective outcomes of the alternatives, economic and

other, should be consistently developed from a defined viewpoint or perspective.

• The perspective of the decision maker, which is often that of the owners of the firm, would normally be used. However, it is important that the viewpoint for the particular decision be first defined and then used consistently in the description, analysis, and comparison of the alternatives.



#4: USE A COMMON UNIT OF MEASURE

• Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will simplify the analysis of the alternatives.

• It is desirable to make as many prospective outcomes as possible commensurable.



#5: CONSIDER ALL RELEVANT CRITERIA• Selection of a preferred alternative requires the use of a

criterion. The decision process should consider both the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner.

• The decision maker will normally select the alternative that will best serve the long-term interests of the owners of the organization.



#6: MAKE RISK AND UNCERTAINTY EXPLICIT

• Risks and uncertainty are inherent in estimating the future outcomes of the alternatives and should be recognized in their analysis and comparison.



#7: REVISIT YOUR DECISIONS• A good decision-making process can result in a decision

that has an undesirable outcome. Other decisions, even though relatively successful, will have results significantly different from the initial estimates of the consequences.


Engineering Economy and Design Process

• An engineering economy study is accomplished using a structured procedure and mathematical modelling techniques. The economic results are the used in a decision situation that normally includes other engineering knowledge and input.

• A sound engineering economic analysis procedure incorporates the basic principles (7 principles) and involves several steps.


Engineering Economy and Design Process


Application of Engineering Economic ProcedureSheila bought a small apartment building for $100,000 in a college town. She spent $10,000 of her own money for the building and obtained a mortgage from a local bank for the remaining $90,000. The annual mortgage payment to the bank is $10,500. Sheila also expects that annual maintenance on the building and grounds will be $15,000. There are four apartments each with two bedrooms in the building that can each be rented for $360 per month.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p13

Application of Engineering Economic Procedurea. Does Sheila have a problem?b. What are her alternatives? Identify at least three.c. Estimate the economic consequences and other required

data for the alternative in part b.d. Select criterion for discriminating among alternatives and

use it to advise Sheila on which course of action to pursue.

e. Attempt to analyze and compare the alternatives in view of at least one criterion in addition to cost.

f. What should Sheila do based on the information you have generated?

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p13

lesson 1 - introduction to engineering economy.pptx

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