Process Economics

Lecture 03 – Engineering Economics

Dr. Muhammad Aslam

Assistant Professor
Department of Chemical Engineering
Course Learning Outcomes (CLOs)

By the end of this course, the students should be able to

Explain basic concepts of engineering economics

related to various economic models

Perform economic analysis of various chemical

engineering projects.

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Last Lecture-Recap

Fundamentals of Engineering Economics

Factors of production
Consumption-Distribution-Exchange of wealth
Circular-flow Model of Economy
Micro economics
Macro economics

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Today Lecture Outline

What is Engineering Economics?

Why do we need to know about this?
What do we need to know?
Why Engineering Economy is Important?
Sensitivity Analysis
Performing an Engineering Economy Study
Production and Factors of Production
Return on Factor of Production (FOP)
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What is Engineering Economics?

Definition
Economics

Engineering economics deals with the methods

that enable one to take economic decisions
towards minimizing costs and/or maximizing
benefits to chemical industry or business
organizations.

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What is Engineering Economics?

Definition - Scope
The application of economic principles to
engineering problems,
For example in comparing the comparative
costs of two alternative capital projects or
In determining the optimum engineering
course from the cost aspect
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What is Engineering Economics?

WHY DO WE NEED TO KNOW ABOUT THIS?

Understand Process Economics or Engineering Economics

Optimal cost- effectiveness Alternative possibilities

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What is Engineering Economics?

WHAT DO WE NEED TO KNOW?

Understand Process Economics or Engineering Economics

Time value of money

Estimation of cash flows

Quantitative measurements of
profitability

Systematic comparison of alternatives

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Why Engineering Economy is Important?

Decisions made by engineers, managers, corporation

presidents, and individuals are commonly the result of
choosing one alternative over another.

1 Decisions often reflect a person’s educated choice of how to best

invest funds; capital
2 Amount of capital is usually restricted (how to invest to add
value?)
3 Engineers play a major role in capital investment decisions based
on their analysis
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Why Engineering Economy is Important?

Fundamentally, engineering economy involves

formulating, estimating and evaluating the economic
outcomes when alternatives to accomplish a defined
purpose are available.

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Why Engineering Economy is Important?

Since decisions affect what will be done, the time

frame of engineering economy is primarily the future

Engineering Economics
“A collection of mathematical techniques
that simplify economic comparison and
assist people in making decisions”

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Why Engineering Economy is Important?

Numbers used in engineering economy analysis are

best estimates of what is expected to occur

Estimates often involve three

essential elements:
Cash flows

Time of occurrence

Interest rates
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Why Engineering Economy is Important?

Sensitivity Analysis
“Stochastic nature of estimates will likely make the
observed value in future differ from the estimate
made now.

Cash flowsSensitivity Analysis

Sensitivity Time
analysis is performed during the
of occurrence
engineering economic study to determine how the
decision might changerates
Interest based on varying estimates”
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Performing an Engineering Economy Study

Parameters for performing an Engineering Economics Study

Cash Flows: The estimated inflows

(revenues) and outflows (costs) of money
Analysis: Computations considering the
time value of money on cash flows to
obtain a measure of worth
Time Value of Money: Cash flows occur
over a substantial period of time.
How can we treat the same amount of
money available
Interest rates at different times?
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Performing an Engineering Economy Study

Cash Flows: The estimated inflows

(revenues) and outflows (costs) of money

Analysis: Computations considering the

time value of money on cash flows to
obtain a measure of worth
Time Value of Money: Cash flows occur
over a substantial period of time.
How can we treat the same amount of
money available
Interest rates at different times?
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Production and Factors of Production

Production
Amount of goods and services produced in a specific
period
Factors of Production (FOP)

Land
Labor
Capital
Enterprise
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Return on Factor of Production (FOP)

FOP Return
Land Rent
Labor Wages
Capital Interest
Enterprise Profit

Laws of Returns:
Explain the production behavior of the industry with one
factor variable while other factors are kept constant.
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Engineering Economics
Student Task of Today Lecture

Basic concepts

source-
Needs Wants Satisfaction
document 2
Machine

Basic Concepts

source-
Utility Capital Commodities
document 2
Machine 18
Engineering Economics
Student Task of Today Lecture

Basics Concepts

Price source-
Supply Demand
document 2

Basic Concepts Goods

Consumer Producer/
Goods Services Goods Capital Goods

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Thank you