ENGINEERING ECONOMICS

IQBAL HOSSAIN IMON,CE-6

1. What is Engineering Economics?

Definition: Engineering economics deals with the methods that enable one to take economic decisions
towards minimizing costs and/or maximizing benefits to business organizations.

2. Explain the scope of engineering economics?

SCOPE OF ENGINEERING ECONOMICS

1. Engineering economics plays a very major role in all engineering decisions.

2. It is concerned with the monetary consequences, financial analysis of the projects, products and
processes that engineers design.

3. Engineering economics helps an engineer to assess and compare the overall cost of available
alternatives for engineering projects.

4. According to the analysis an engineer can take decision from the alternative which is more economic.

5. Engineering economics concepts are used in the fields for improving productivity, reducing human
efforts, controlling and reducing cost.

6. Engineering economics helps to understand the market conditions general economic environment in
which the firm is working.

7. It helps in allocating the resources.

8. Engineering economics helps to deal with the identification of economic choices, and is concerned
with the decision making of engineering problems of economic nature.

3. Define price determination?

Determination of Prices means to determine the cost of goods sold and services rendered in the free
market. In a free market, the forces of demand and supply determine the prices. The Government does
not interfere in the determination of the prices.
4. What is microeconomics?
Microeconomics studies the behavior of individuals and businesses and how decisions are made based
on the allocation of limited resources. study of how we make decisions because we know we don't have
all the money and time in the world to purchase and do everything.

5. Explain the viewpoints/scope/characteristics of microeconomics?

The scope and subject matter of microeconomics is as follow:

1. Product Pricing
The main principle in microeconomics is product pricing or price mechanism. Prices of individual
commodities are determined by market forces of demand and supply.
2. Factor Pricing
Microeconomics deals with the pricing of factors of production like land, labour, capital and
entrepreneur. All factors contribute in production process. These factors get rewards in the form of
rent, wages, interest and profit respectively.
3. Welfare Theory
Micro economics also deals with the optimum allocation of resources and maximisation of social
welfare.

6. What is macroeconomics?
Macroeconomics: study of economy-wide things such as growth, inflation and unemployment

7. Explain the viewpoints/scope/characteristics of macroeconomics?

The scope of Macro economics is explained as follows:

1. Theory of Income and Employment - Macro economic analysis explains which factors determine the
level of national income and employment and what causes fluctuations in the level of income, output,
and employment. To understand, how the level of employment is determined, we have to study the
consumption function and investment function. Theory of Business Cycles is also a part and parcel of the
Theory of Income and Employment.

2. Theory of General Price Level and Inflation - Macro economic analysis shows how the general price
level is determined and further explains what causes fluctuations in it. The study of the general price
level is significant on account of the problems created by inflation and deflation.

3. Theory of Growth and Development - Macro economics consists of the theory of economic growth
and development. It explains the causes of underdevelopment and poverty. It also suggests strategies
for accelerating growth and development.
4. Macro Theory of Distribution - Macro theory of distribution deals with the relative shares of rent,
wages, interest, and profit in the total national income.

8. What is demand?
Economic demand is the number of consumers willing to purchase goods or services at a
certain price.

9. What is Supply?
• Supply is the quantity of a product that producers are willing and able to provide at different market
prices over a period of time

• Through supply, producers are aiming to meet the unlimited wants of consumers

10. Theory of demand and supply elasticity?

Price elasticity is the ratio between the percentage change in the quantity demanded,Qd ,or supplied, Qs,
and the corresponding percent change in price.

The price elasticity of demand is the percentage change in the quantity demanded of a good or
service divided by the percentage change in the price. The price elasticity of supply is the
percentage change in quantity supplied divided by the percentage change in price.

Elasticities can be usefully divided into five broad categories: perfectly elastic, elastic, perfectly
inelastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity
is greater than one, indicating a high responsiveness to changes in price. An inelastic
demand or inelastic supply is one in which elasticity is less than one, indicating low
responsiveness to price changes. Unitary elasticities indicate proportional responsiveness of
either demand or supply.

Perfectly elastic and perfectly inelastic refer to the two extremes of elasticity. Perfectly elastic
means the response to price is complete and infinite: a change in price results in the quantity
falling to zero. Perfectly inelastic means that there is no change in quantity at all when price
changes.
Using the midpoint method to calculate elasticity

To calculate elasticity, instead of using simple percentage changes in quantity and price,
economists sometimes use the average percent change in both quantity and price. This is called
the Midpoint Method for Elasticity:

The advantage of the midpoint method is that we get the same elasticity between two price
points whether there is a price increase or decrease. This is because the formula uses the same
base for both cases. The midpoint method is referred to as the arc elasticity.

Using the point elasticity of demand to calculate elasticity

A drawback of the midpoint method is that as the two points get farther apart, the elasticity
value loses its meaning. For this reason, some economists prefer to use the point
elasticity method. In this method, you need to know what values represent the initial values
and what values represent the new values.
Calculating price elasticity of demand

Calculating the price elasticity of supply

11. What is GDP?

GDP is the monetary value of all final goods and services produced. For example, let's say
Country B only produces bananas and backrubs. Figure %: Goods and Services Produced in
Country B In year 1 they produce 5 bananas that are worth $1 each and 5 backrubs that are
worth $6 each.
12. What is production?
Production is the process of making or manufacturing goods and products from raw materials
or components. In other words, production takes inputs and uses them to create an output
which is fit for consumption – a good or product which has value to an end-user or customer.
An example of production is the creation of furniture. An example of production is the amount
of corn produced.

14. What is the cost?

Cost denotes the amount of money that a company spends on the creation or production
of goods or services. It does not include the markup for profit. From a seller's point of view,
cost is the amount of money that is spent to produce a good or product.
An example of cost is for a loaf of bread to be priced at $3. An example of cost is to give up your
freedom to give freedom to another person.

18.What is NPV,IRR,inflation?
Net present value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows over a period of time.
The internal rate of return (IRR) is a metric used in financial analysis to estimate the
profitability of potential investments. IRR is a discount rate that makes the net present value
(NPV) of all cash flows equal to zero in a discounted cash flow analysis.
In market economy,prices of goods and services can always change. Some prices rise;Some
prices fall.Inflation occurs when there is a broad in the prices of goods and servies,not just of
individual items;it means,we can buy less for $1 today than we could yesterday. In other
words,inflation reduces the value of the currency over time.

19. Define GNP and NNP?

Gross national product, or GNP, includes what is produced domestically and what is produced
by domestic labor and business abroad in a year.
National income includes all income earned: wages, profits, rent, and profit income. Net
national product, or NNP, is GNP minus depreciation.
20. Difference between microeconomics and macroeconomics?