INTRODUCTION

TO
ENGINEERING ECONOMICS
 Topics

1. Introduction to Engineering Economics

2. Micro & Macro Engg. Economics
3. Differences, Value, Utility.
4. Demand and Supply.
 Introduction to Economics
• Economics is a social science. It studies economic phenomena
and related behavior of the people.
• Economic behavior relates to an essentially conscious effort to
derive maximum gains from the use of scarce resources and
opportunities available.
• Economics fundamentally studies about how people allocate
their limited resources, which have alternative uses, to produce,
to consume goods and services and to satisfy their endless
wants or to maximize their gains.
• Economics is most closely associated with the everyday life at
levels.
 What is Economics???

• “A science that deals with the allocation, or use of scarce resources for
the purpose of fulfilling society’s needs and wants.” – Addison-Wesley
• Alfred Marshall defines economics as “the study of mankind/ man’s
action in the ordinary business of life.”
• “Economics is the study of general methods by which men cooperate to
meet their material needs” - Marshal
• “Economics is the science which studies human behavior as a
relationship between ends and social means which have alternate uses”
– Robbins
• Economics is the study of the administration of the scarce resources and
the determinants of income and employment” – Keynes J.M
 Why Economics to Engineers
 Engineers generally design, create and execute projects
 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
 Understanding and applying time value of money, economic
equivalence, and cost estimation are vital for engineers
 A proper economic analysis for selection and execution is a
fundamental task of engineering
 Decision Making
 Decision – making a choice from two or more alternatives.
 The Decision-Making Process

1. Understand the Problem

2. Collect all relevant data/information
3. Allocating weights to the criteria
4. Define the feasible alternatives
5. Analyze and Evaluate each alternative
6. Select the “best” alternative
7. Implement and monitor
 Defining Engg. Economics
• Engineering Economy involves Formulating, Estimating,
and Evaluating the expected economic outcomes of
alternatives designed to accomplish a defined purpose.

• Engineering Economics is a discipline concerned with the

systematic evaluation of the costs and benefits of the
proposals, technical, business projects and ventures.

• The science that deals with techniques of qualitative analysis useful for
selecting a preferable alternative from several technically viable ones.
 Micro and Macro Engg Economics

• Microeconomics: Study of behavior of individual households,

firms, and governments. It includes choice they make and
interactions in specific markets. It focuses on individual part of
an economy rather than whole.

• Macroeconomics: Study of economy as a whole and it

focuses on big picture and ignores fine details.
Micro and Macro Economics
Differences Micro & Macro Economics
Value and Utility
 Demand
• Demand for a commodity refers to the quantity of the commodity which
an individual customer or household is willing and has ability to
purchase per unit of time at a particular price.
• Market demand analysis is one of the crucial requirements for the
existence of any business enterprise.
• Demand (D) is a schedule that shows the various amounts of product
consumers are willing and able to buy at each specific price in a series
of possible prices during a specified time period.
• Demand = Desire to acquire it + willingness to pay for it + ability to pay
for it.
 Law of demand:
The law of demand says “ demand for an item increases with a fall in
price and diminishes with rise in price, other things remaining the
same.”
The law of demand operates due to underlying effect:
 Substitution effects of price change.
 Income effect of price change
A Sample Demand Curve
Price (per u n it)

A
PA

0
QA
Quantity demanded(per unit of time) 14
 Factors Influencing Demand:
The shape of the demand curve is influenced by the following factors:
 Income of the people
 Price of item or product
 Prices of related goods
 Tastes and Preferences of customers.
 Advertisements Demand Curve

 Expectations

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Exceptions to the Law of Demand

1. Commodities which are used as status symbol

2. Expectations of change in the price of the

commodity

3. Giffen goods – inferior goods, in whose case

income effect is stronger than the substitution
effect. Ex- potatoes Cereals, fruits

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 Supply
• Supply is derived from a supplier desire to
maximize profits.
• When the price of a product rises, the supplier
has an incentive to increase production because
he can justify higher costs to produce the product,
increasing the potential to earn larger profits.
• Quantity Supplied = S(Price, Contributing factors)
• There is a direct relationship between price and
quantity supplied. Quantity supplied rises as price
rises, other things remaining constant. Vice versa,
Quantity supplied falls as price falls, other things
constant.

The law of supply says that as the price of an item goes up,
suppliers will attempt to maximize their profits by increasing the
quantity offered for sale.
 Factors Influencing Supply:
The shape of the demand curve is influenced by the following factors:
i. Costs of the inputs
ii. Technology
iii. Weather
 Costs of the inputs: Cost of input increases, cost of products
increases which reduces the profit margin. So producers will then
reduce production quantity which in turn affect supply.
 Technology: Will create reduction in production cost per unit,
which will create greater profit margin. So producers will supply
more.
 Weather: it is also having influence on the supply. Eg woollen
clothes in winter.
Equilibrium of Demand and Supply

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 Recap

• Intro to Engg Economics?

• Micro & Macro Engg Economics

• Differences, Value and Utility

• Demand and Supply