MG6863- ENGINEERING ECONOMICS

Dr. P.MANIMARAN
PROFESSOR
DEPARTMENT OF MECHANICAL ENGINEERING
KAMARAJ COLLEGE OF ENGINEERING AND
TECHNOLOGY
VIRUDHUNAGAR – 626 001
ECONOMICS: Science that deals with the
production and consumption of goods and
services and the distribution and rendering of
these for human welfare.

ECONOMIC GOALS:
1. Generating a high level of employment
2. Stabilizing the price levels
3. Economic efficiency
4. Equitable distribution in income
5. Economic growth
FLOW IN ECONOMY
•
Money payments for consumer goods and services

Consumer goods, services

Businesses
Households
1. Provide goods and services
1. Consume final goods and
to consumers
services produced by
2. Use resources, inputs businesses and services
provided by house holds 2. Provide productive inputs
to businesses

Money payments for resources, rents,

wages, salaries, interest and profit

Economic Resources: Land, Labour, capital

LAW OF SUPPLY AND DEMAND
• Elasticity of Demand: the degree of responsiveness of
quantity demanded to a change in price
• Elastic demand: when the quantity demanded
responds greatly to price changes
• Inelastic demand: when the quantity demanded
responds very little to price changes
• Elasticity of Supply: the degree of responsiveness of
change in supply to a change in price
Factors influencing Demand

• Income of the People

• Price of related goods
• Tastes of consumers
Factors influencing Supply

• Cost of the inputs

• Technology
• Weather
• Prices of related goods
CONCEPT OF ENGINEERING ECONOMCIS

Organization's point of view: Efficient and

effective functioning of the organization would
certainly help it to provide goods/services at a
lower cost which in turn will enable it to fix a
lower price for its goods or services.
 Principles of Engineering Economics

• Develop the alternatives

• Focus on the differences
• Use of consistent view point
• Use a common unit of measure
• Consider all relevant criteria
• Make uncertainty explicit
• Revisit your decisions.
• Develop the alternatives : Decisions are made out of
alternatives. The alternatives need to be identified and then
defined for subsequent analysis

• Focus on the differences : Only the differences is expected

future outcomes among the alternatives are relevant to their
comparison and should be considered in the decision

• Use a consistent viewpoint: The prospective outcomes of

the alternatives economic and other should be consistently
developed from a defined perspective

• Use a common unit of measure : Using a common unit of

measure to enumerate as many of the prospective outcomes
as possible will make easier the analysis and comparison of
alternatives.
• Consider all relevant criteria : Selection of a preferred
alternative requires the use of a criterion. 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.

• 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.

• Revisit your decisions : Improved decision making results

from an adaptive process to the extent practicable, the initial
projected outcomes of the selected alternatives should be
subsequently compared with actual results achieved.
 Engineering Economics Analysis Procedure

• Problem recognition, formulation, and evaluation

• Development of the feasible alternatives
• Development of the cash flows for each alternative
• Selection of a criterion
• Analysis and comparison of the alternatives
• Selection of the preferred alternative
• Performance monitoring and post evaluation results
 Types of Efficiency
Technical Efficiency = Output / Input x 100
Technical Efficiency = Heat equivalent of Mechanical
Energy Produced
___________________________ x 100
Calorific Value of the fuel

Economic Efficiency (Productivity) = Output / Input x 100

= Worth (Revenue) / Cost x 100
 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 the input
• By a proportionate decrease in the input which is
more than the proportionate decrease in the output
• Through simultaneous increase in the output and
decrease in the input
 Engineering Economics
In the process of managing organizations, the managers
at different levels should take appropriate economic
decisions which will help in
• minimizing investment
• operating and maintenance expenditures
besides
• increasing the revenue
• savings and other related gains of the organisation
Definition:

• deals with the methods that enable one to

take economic decisions towards minimizing
costs and/or maximizing benefits to business
organizations.
SCOPE OF ENGINEERING ECONOMICS
1. plays a very important role in all engineering decisions.

2. concerned with the monetary consequences of the projects,

products and processes.

3. helps an engineer to assess and compare the overall cost of

available alternatives for engineering projects or plants or
machine etc.

4. According to the analysis an engineer can take a decision from

an alternative in most economical one as the best.

5. Decisions require engineering economics are important

because capital investment have significant cost and lives over
several years.
6.concepts are used in the important fields like increasing
production, improving productivity reducing human efforts,
increasing wealth.

7. provides a number of tools and techniques to solve

engineering problems related to product mix, output level,
pricing the product etc.

8. helps to understand the market conditions general economic

environment in which the firm is working.

9. provides basis for resource allocation problem.

Elements of cost
Elements of cost
 MARGINAL COST
• the cost of producing an additional unit of that product.

• Let the cost of producing 20 units of a product be

Rs 10,000 and the cost of producing 21 units of the same
product be Rs 10,045.
• Then the marginal cost of producing the 21st unit is Rs
45/-
 SUNK COST
• This is known as the past cost of an equipment
or asset.
• If an equipment is purchased for Rs 1,00,000
about three years back, the present worth of
the equipment is not the same today.
• The purchase value of the equipment in the
past - sunk cost.
 MARGINAL REVENUE
• the incremental revenue of selling an additional unit of
that product.

• Let the revenue of selling 20 units of a product be Rs

15,000 and the revenue of selling 21 units of the same
product be Rs 15,085.
• the marginal revenue of selling the 21st unit is Rs 85.
 OPPORTUNITY COST
• Opportunity cost of an alternative is the return that will
be foregone by not investing the same money in another
alternative

• Person invested a sum of Rs 50,000 in shares. Expected

return is Rs.7500/-If the same amount is invested in fixed
deposit the bank at the interest rate of 18% will pay Rs
9000/-.
• The investor has to forego the amount of Rs 1500/- for
not investing in the bank.
 BREAK EVEN ANALYSIS
• Break even analysis is concerned with finding
the point at which revenues and costs agree
exactly.
• Break even point(BEP) is therefore the volume
of output at which neither a profit or loss is
incurred.
• BEP is a point where the total sales are equal
to the total cost.
BREAK EVEN CHART
BREAK EVEN CHART
BREAK EVEN ANALYSIS
CONTRIBUTION
P/V RATIO
Sequences in which operations will be performed
with the raw materials
Names of equipment which the operations will be
performed
Standard time for each operation
Timing of performing overall operations.
ELEMENTARY ECONOMIC ANALYSIS
• Price of raw material
• Transportation cost of the raw material
• Availability of the raw material
• Quality of the raw material
 EXAMPLES
• Material Selection for a product
• Design Selection for a product
• Design Selection for a process industry
• Building material selection for a construction
activities
• Process planning/process modification
 PROCESS PLANNING
To identify the most economical sequence of operations
to produce a component.
STEPS
Analyse the part drawing to get an overall picture of
what is required
Make recommendations to or consult with product
engineers on product design changes
List the basic operations required to produce the part to
the drawing or specifications
 Determine the most practical and economical
manufacturing method and the form or tooling
required for each operation.

 Devise the best way to combine the operations and

put them in sequence

 Specify the gauging required for the process.

 INFORMATION REQUIRED
Desired quantity of output
Desired quality of product
Nature of raw materials
type of technology
Available capital resources
Availability of equipments, tools and personnel