Lecturer

MUNIBA SANA YOUNIS

MSc Management
University of Leicester (UK)
Office 318F
2nd Floor

6/24/2019

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 Total CHs: 2
Text Book
William G. Sullivan and Elin M Wicks, Estimation of future
Events. 10th Edition

Reference Books
1. A.J. Tanquin L.T. Blank, Engineering Economy, McGraw-
Hill
2. D.G Newman , J. Whitthaker, T.G Eschenbach and J.P.
Lavelle, Engineering Economic Analysis
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 Assessment

 Quizzes: 4 (10%)

 Assignment : 4 (10%)

 Class Participation(Case Studies) : 5 %

 OHT 1: 15 %

 OHT 2: 15%

 Final Examination : 45% 6/24/2019

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 Engineering Economics

Lecture 1

Introduction
Basic Concepts and Definitions

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ECONOMICS

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Introduction to Economics

The English word economics is derived from the

ancient Greek word oikonomia; a combination
of two Greek word

Oikos – Management
Nemen – Household

“House hold Management”

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Definitions
1. Science of Wealth
“Economics is a science that enquires into the nature
and causes of the wealth of nations” Adam Smith

2. Science of Welfare
“A study of men as they live and move and think in the
ordinary business of life.” Alfred Marshall

3. Science of Scarcity & Choices

“Economics is the science which studies human
behavior as a relationship between ends and scarce
means which have alternative uses” Lionel Robbins 6/24/2019

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Modern Definition of Economics

 “Economics is the study of choice making by individuals,

institutions, societies, nations and globe under
conditions of scarcity and surplus towards maximizing
benefits and satisfying their unlimited needs at present
and future” AC Dhas (2011)

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Summary

 A review of all these definitions and evaluation indicate

that the core of the subject economics is “Choice
Making”

 It is a subject concerned about achieving growth by

optimizing the given resources, based on choices.

 The evolution of the definition of economics has taken

235 years, with the origin of Adam Smith in 1776

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Concept of Scarcity & Choices

 There are fewer resources than are needed to fill human

wants and needs. These resources can be resources that
come from the land, labor resources or capital resources.
Scarcity is considered a basic economic problem. The
condition that exists when there are not enough
resources to satisfy all the wants of individuals or
society.
Example :Time, Land, Water , Food etc.

 Choices — The decisions individuals and society make

about the use of scarce resources.

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Opportunity Cost
 When there is scarcity and choices have to be made, there
are costs.

 The cost of any choice is the option or options that a person

gives up. Opportunity cost is the profit lost when one
alternative is selected over another. The concept is useful
simply as a reminder to examine all reasonable alternatives
before making a decision.

Example: you have $1,000,000 and choose to invest it in a

product line that will generate a return of 5%. If you could have
spent the money on a different investment that would have
generated a return of 7%, then the 2% difference between the
two alternatives is the foregone opportunity cost of this decision.
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Supply and Demand

 Supply and demand play a key role in setting price of a

particular product.

 Demand refers to how much (quantity) of a product or

service is desired by buyers

 Supply represents how much the market can offer in

terms of quantity.

 The relationship between demand and supply underlie

the forces behind the allocation of resources. Since
demands of buyers are endless, not all that is demanded
can be supplied due to scarcity of resources. 6/24/2019

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The Law of Demand
 The law of demand states that, if all other factors remain
equal, the higher the price of a good, the less people will
demand that good. The amount of a good that buyers
purchase at a higher price is less because as the price of
a good goes up, so does the opportunity cost of buying
that good. As a result, people will naturally avoid buying
a product that will force them to forgo the consumption
of something else they value more.(Consumer)

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The Law of Supply
 The Law of Supply demonstrates the quantities that will
be sold at a certain price. But unlike the law of demand,
the supply relationship shows an upward slope. This
means that the higher the price, the higher the quantity
supplied. Producers supply more at a higher price
because selling a higher quantity at a higher price
increases revenue. (Business)

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Supply and Demand Relationship

 Excess of Supply or when Supply >

Demand Disequilibrium

 Excess of Demand or when Demand >

Supply Disequilibrium

 State of Equilibrium Demands=Supply

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What is a Market?

 A market is a place where buyers and sellers meet and interact.

Market structure is best defined as the organizational and other
characteristics of a market.

 There are some characteristics which affect the nature of

competition and pricing.

The most important features of market structure are:

 The number of firms.
 The market share of the largest firms
 The nature of costs
 The degree to which the industry is integrated
 The extent of product differentiation
 The structure of buyers in the industry 6/24/2019

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Types of Economic Market Structure

The five major market types of market structures

 Perfect Competition. Perfect competition is a market system

characterized by many different buyers and sellers. (Fast
moving consumer Consumer good)

 Monopoly. (ptcl)

 Oligopoly.(telecom service provider, phones, airline industry)

 Monopolistic Competition. (hotel industry, beauty industry)

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 Engineering
Economics

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What is Engineering Economics?
 It deals with the concepts and techniques of
analysis useful in evaluating the worth of
systems, products, and services in relation to
their costs.

 Engineering economics involves formulating,

estimating and evaluating the expected
outcomes of alternatives designed to
accomplish a defined purpose.

 Mathematical techniques are used to simplify

economic evaluation of alternative.

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How Can it help Engineers?

It is used to answer many different questions

Q: Which engineering projects are worthwhile?
Example: Has the mining or petroleum engineer shown
that the mineral or oil deposits is worth developing?
Q: Which engineering projects should have a higher
priority?
Example: Has the industrial engineer shown which factory
improvement projects should be funded with the available
dollars?
Q: How should the engineering project be designed?
Example: Has civil or mechanical engineer chosen the best
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thickness for insulation?
Decision Making

 Decision Making is a broad topic.

It’s is a major aspect of every human existence. We are
surrounded by sea of problems which may be classified
depending on difficulty level as given below;

 Simple Problems
 Intermediate Problems
 Complex Problems

 The Decision Making Process

 Irrational Decision making 6/24/2019

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Decision Making
 There are lots of factors that are considered in making
decisions . Economic and non-economic ones such as social,
environmental, legal, political, personal

 These factors may be considered less important than the

economic factors; however it is important to cover all factors
involved that affect the decision making process.

 Engineers play a major role in investment by making decisions

based on economic analysis and design considerations

 Thus, decisions often reflect the engineer’s choice of how to

best invest funds by choosing the proper alternative out of a
set of alternatives 6/24/2019
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Why Make Decisions?

 Engineers make decisions but tools and computers do

not. Tools assist engineers in making decisions

 Decisions affect what will happen in the future and thus

the time frame of engineering economics is the future

 So, engineering economics analysis presents the best

estimates of what is expected to occur in future

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Principles of Engineering Economy

1. Develop the Alternatives

Identify, development & evaluate with research and creativity

2. Focus on the differences

Highlight the differences in future outcomes

3. Use a consistent viewpoint

Evaluations to be based on a set criteria

4. Use a Common Unit of Measure

Quantify outcomes in $ 6/24/2019

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Principles of Engineering Economy

5. Consider all relevant criteria

Economic and non economic objectives

6. Make uncertainty explicit

Unavoidable situations to be also kept in consideration
and made known

7. Revisit your decisions

Reevaluate after a decision is made for feedback an
improvement.
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Role of Engineering economics in Decision
Making (SUMMARY)
 Understand the Problem (simple, intermediate or complex)

 Collect all relevant data/information

 Define the feasible alternatives

 Evaluate each alternative

 Select the “best” alternative This is the major role of

engineering economy
 Implement and monitor
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 THANKYOU

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