Engineering Economics

RUDRA PRASAD GHIMIRE, PhD

rudra.ghimire@ku.edu.np
Kathmandu University 
School of Engineering/Civil/ Electronics/Computer /DoMIC/ Law
https://sol.ku.edu.np/
Faculty of Economics
MGTS 301 – ENGINEERING ECONOMICS
Credit Hours: 3

The objective of the course is to provide students with a sound

understanding of basic concepts of economic equivalence and
methodology of engineering economy. The students will
develop proficiency with these methods and with the process for
facilitating rational decisions they are likely to encounter in
professional practice.
 Unit 1: Fundamentals of
Engineering Economy (4 Hours)
•1.1. Definitions and Concepts of Microeconomics,
Macroeconomics, Gross Domestic Product (GDP),
Managerial Economics, Law of Supply and Demand, Market
Equilibrium 1.2. Introduction to Engineering Economy,
Principles of Engineering Economy, Engineering Economy
and the Design Process
 Definitions
Economy is the art of making most of life.
- George Bernard Shaw
Economics is the study of mankind in the ordinary business of life.
- Alfred Marshall
Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative
uses.
- Lionel Robbins
 Definition

Economics comes in whenever more of one thing means less of

another.
- Fritz Machlup
The theory of economics is a method rather than a doctrine, an
apparatus of mind, a technique of thinking, which helps its
possessor to draw correct conclusions.
- John Maynard Keynes
Economics is the study of the use of scarce resources to satisfy
unlimited human wants.
- Richard Lipsey
USER OF ECONOMICS

The difference between microeconomics and macroeconomics

likely was introduced in 1933 by the Norwegian economist 
Ragnar Frisch, the co-recipient of the first 
Nobel Memorial Prize in Economic Sciences in 1969. However,
Frisch did not actually use the word "microeconomics", instead
drawing distinctions between "micro-dynamic" and "macro-
dynamic" analysis in a way similar to how the words
"microeconomics" and "macroeconomics" are used today. The
first known use of the term "microeconomics" in a published
article was from Pieter de Wolff in 1941, who broadened the
term "micro-dynamics" into "microeconomics".
 Engineering and
Economics
Engineering:
Engineering is the application of science and Math's to solve problems.
While scientists and inventors come up with innovations, it is engineers
who apply these discoveries to the real world. The
words engine and ingenious are derived from the same Latin
root, ingenerate, which means “to create.” The early English
verb engine meant “to contrive.” 
Economics: Economics is a social science concerned with the
production, distribution, and consumption of goods and services. It
studies how individuals, businesses, governments, and nations make
choices about how to allocate resources.
The English term 'Economics' is derived from the Greek word 'Oikonomia'.
Its meaning is 'household management'. Economics was first read in
ancient Greece. Aristotle, the Greek Philosopher termed Economics as a
science of 'household management'.
 Definition of Micro Economics

Micro Economics:
Microeconomics is a branch of mainstream economics that studies
the behavior of individuals and firms in making decisions regarding
the allocation of scarce resources and the interactions among these
individuals and firms.
Microeconomics studies the decisions of individuals and firms to
allocate resources of production, exchange, and consumption.
Microeconomics deals with prices and production in single markets
and the interaction between different markets but leaves the study of
economy-wide aggregates to macroeconomics.
Micro economists formulate various types of models based on logic
and observed human behavior and test the models against real-world
observations.
Definition
According to Boulding, "Microeconomics is the study of particular
firm, particular household, individual price, wage, income,
industry and particular commodity." Microeconomics is the study
of decisions that people and businesses make regarding the allocation
of resources and prices of goods and services.

Microeconomics is the study of individuals, households and

firms' behavior in decision making and allocation of resources.
It generally applies to markets of goods and services and deals with
individual and economic issues.
 Definition of Micro economics
The Economist's Dictionary of Economics defines microeconomics as
"the study of economics at the level of individual consumers, groups
of consumers, or firms" noting that "the general concern of
microeconomics is the efficient allocation of scarce resources between
alternative uses but more specifically it involves the determination of
price through the optimizing behavior of economic agents, with
consumers maximizing utility and firms maximizing profit.“
 Concepts of Microeconomics
Basic Concepts of Microeconomics
The study of microeconomics involves several key concepts, including (but not
limited to):
Incentives and behaviors: How people, as individuals or in firms, react to the
situations with which they are confronted.
Utility theory: Consumers will choose to purchase and consume a combination of
goods that will maximize their happiness or “utility,” subject to the constraint of
how much income they have available to spend.
Production theory: This is the study of production—or the process of converting
inputs into outputs. Producers seek to choose the combination of inputs and
methods of combining them that will minimize cost in order to maximize their
profits.
Price theory: Utility and production theory interact to produce the theory of
supply and demand, which determine prices in a competitive market. In a perfectly
competitive market, it concludes that the price demanded by consumers is the same
supplied by producers. That results in economic equilibrium.
Definition of macro economics

 
According to Kenneth E. Boulding, “Macroeconomics deals not
with individual quantities as such but with aggregates of these
quantities, not with individual income but with national income,
not with individual price but with the price- level, not with
individual output but with national output.”
According to Shapiro, "Macroeconomics deals with the functioning
of the economy as a whole.“

J. L. Hansen defines, “Macroeconomics is that branch of

economics which considers the relationship between large
aggregates such as the volume of employment, total amount of
savings, investment, national income, etc.”
Definition of macro economics
According to G. Ackley, “Macro-economics is the study of the
forces or factors that determine the level of aggregate
production, employment, and prices in an economy and their
rates of change over time.”
According to Professor Carl Shapiro, “Macroeconomics deals
with the functioning of the economy as a whole.”
RGD Allen defines, “The term macro-economics applies to the
study of relations between broad economics aggregates.”
Lipsey and Chrystal define, “Macroeconomics is the study of
how the economy behaves in broad outline without dwelling on
much of its interesting but sometimes conferring detail.”
According to Culbertson, “Macro-economics is the theory of
income, employment, prices, and money.”
Definition of macro economics
So macroeconomics is a branch of economics that deals with the
overall performance, structure, and behavior of the national or
regional economy. It discusses overall indicators such as GDP,
unemployment rate, and price index to understand the whole
economic activity.
Macroeconomics develops models that explain the relationship
between certain elements, such as national income, production,
consumption, unemployment, inflation, savings, investment,
international trade, and the international economy.
On the other hand, Microeconomics focuses primarily on the
activities of a single entity, such as firms and consumers, and
discusses how their behavior determines prices and quantities in a
particular market.
Concept of Macro economics
The basic concepts of macroeconomics are as follows:
(1) National Income: National Income is the aggregate monetary value of
all final goods & services produced in the economy in a year.
(2) Aggregate Saving: Saving is a part of income which is kept aside to
satisfy future needs.
(3) Investment: It means the creation of capital assets through
mobilisation of savings, e.g. investment in machinery, equipment, etc. 
(4) Trade Cycles: Fluctuations in business due to inflation and deflation
in the economy are called trade cycles. Economic Growth: It means an
increase in the real income of the country, over a larger period of time
It is a quantitative concept. 
(5) Economic Development: It means economic growth along with
progressive changes in the well-being of the people of the country. It is
a qualitative concept.
 Concept of Macro Economics
(6) Trade cycle
(7) Inflation
(8) Deflation
(9) Economic growth
Gross Domestic Product (GDP)
Gross Domestic Product (GDP),
Gross domestic product (GDP) is a monetary measures of the
market value of all the final goods and services produced in a
specific time period by countries.

GDP (Y) is the sum of consumption (C), investment

(I), government Expenditures (G) and net exports (X – M).
Y = C + I + G + (X − M)
Managerial Economics
According to Prof. Evan J Douglas, 'Managerial economics'
is concerned with the application of economic principles
and methodologies to the decision making process within
the firm or organization under the conditions of
uncertainty”.

Managerial economics is a branch of economics involving the

application of economic methods in the managerial decision-
making process.
Managerial economics is a stream of management studies which
emphasizes solving business problems and decision-making by
applying the theories and principles of microeconomics and
macroeconomics. It is a specialized stream dealing with the
organization's internal issues by using various economic
theories.
Managerial economics
Managerial economics is defined as the branch of economics which
deals with the application of various concepts, theories,
methodologies of economics to solve practical problems in
business management. It is also reckoned as the amalgamation of
economic theories and business practices to ease the process of decision
making. Managerial economics is also said to cover the gap between the
problems of logic and problems of policy. 
 
Managerial economics is used to find a rational solution to problems
faced by firms. These problems include issues around demand, cost,
production, marketing, and it is used also for future planning. The best
thing about managerial economics is that it has a logical solution to
almost every problem that may arise during business management and
that too by sticking to the microeconomic policies of the firm. 
 
Law of Supply
The law of supply is a fundamental principle of  economic
theory which states that, keeping other factors constant, an
increase in price results in an increase in quantity supplied.
Law of Demand
The law of demand states that quantity purchased varies inversely
with price. In other words, the higher the price, the lower the
quantity demanded other thing remaining constant.
Market Equilibrium
In economics, economic/market equilibrium is a situation in which
economic forces such as supply and demand are balanced and in the
absence of external influences the values of economic variables will not
change.

Supply and demand are equated in a free market through

the price mechanism. If buyers wish to purchase more of a good than is
available at the prevailing price, they will tend to bid the price up. If they
wish to purchase less than is available at the prevailing price, suppliers
will bid prices down. The price mechanism thus determines what
quantities of goods are to be produced. The price mechanism also
determines which goods are to be produced, how the goods are to be
produced, and who will get the goods—i.e., how the goods will be
distributed. Goods so produced and distributed may be consumer items,
services, labor, or other salable commodities.
Market equilibrium
Market equilibrium is a market state where the supply in the
market is equal to the demand in the market. The equilibrium
price is the price of a good or service when the supply of it is equal
to the demand for it in the market. If a market is at equilibrium, the
price will not change unless an external factor changes the supply or
demand, which results in a disruption of the equilibrium.
Introduction to Engineering
Economy,
Engineering economy deals with the economic factors.
By definition, Engineering economy involves formulating,
estimating, and evaluating the expected economic outcomes of
alternatives designed to accomplish a defined purpose. Mathematical
techniques simplify the economic evaluation of alternatives.
The Economic Theory of Railway Location, 2nd ed. New York: John
Wiley & Sons, 1987 written by Arthur M. Wellington, a civil engineer,
pioneered engineering interest in economic evaluation. His interest
was railway in USA. A text book Principles of Engineering Economy,
New York: The Ronald Press Company, 1930, was published by
Eugene Grant. He is considered as the father of engineering
economy. Current developments are pushing to encompass new
methods of risk, sensitivity, resource conservation and effective
utilization of public funds and so on.
PRINCIPLE 1 - DEVELOP THE ALTERNATIVES: The choice (decision) is
among alternatives. The alternatives need to be identified. A decision
involves making a choice among alternatives. Developing and defining
alternatives depends upon engineer’s creativity and innovation.

PRINCIPLE 2 - FOUCUS ON THE DIFFERENCE: Only the differences in

expected future outcomes among the alternatives are relevant to their
comparison and should be considered in the decision. If all prospective
outcomes of the feasible alternatives were exactly the same, obviously,
only the differences in the future outcomes of the alternatives are
important. Outcomes that are common to all alternatives can be
disregarded in the comparison and decision. For example, if two
apartments were with same purchase price or rental price, decision on
selection of alternatives would depend on other factors such as location
and annual operating and maintenance expenses.
Principles of Engineering Economy
PRINCIPLE 3 - USE A CONSISTENT VIEWPOINT: The
prospective outcomes of the alternatives, economic and other,
should be consistently developed from a defined viewpoint
(perspective). Often perspective of decision maker is owner’s
point of view. For the success of the engineering projects
viewpoint may be looked upon from the various perspective e.g.
donor, financer, beneficiary group & stakeholders. However,
viewpoint must be consistent throughout the analysis.

PRINCIPLE 4 - USE A COMMON UNIT OF MEASURE: Using a

common unit of measurement to enumerate as many of the
prospective outcomes as possible will make easier the analysis
and comparison of the alternatives. For economic
consequences, a monetary units such as dollars or rupees is the
common measure
Principles of Engineering Economy
PRINCIPLE 5 - CONSIDER ALL RELEVANT CRITERIA: Selection
of preferred alternative (decision making) requires the use of a
criterion (or several criteria). The decision process should consider
both the outcomes enumerated in the monetary unit and those
expressed in some other unit of measurement or made explicit in a
descriptive manner. Apart from the long term financial interest of
owner, needs of stakeholders should be considered.

PRINCIPLE 6 - MAKE UNCERTAINTY EXPLICIT: Uncertainty is

inherent in projecting (or estimating) the future outcomes of the
alternatives ad should be recognized in their analysis and
comparison. The magnitude & impact of future impact of any
course of action are uncertain or probability of occurrence changes
from the planned one. Thus dealing with uncertainty is important
aspect of engineering economic analysis.
Principles of Engineering Economy
PRINCIPLE 7 - REVISIT YOUR DECISIONS: Improved decision
making results from an adaptive process; to the extent practicable,
the initial projected outcomes of the selected alternative should be
subsequently compared with actual results achieved. If results
significantly different from the initial estimates, appropriate
feedback to the decision making process should occur.
Process

• Identification of problem and prospects

• Develop feasible & relevant alternatives
• Determine appropriate selection criteria.
• Analysis, comparison of various alternatives
• Evaluate & recommend the alternative
• Select the best alternative
• Implementation of the selected alternative
• Monitoring and controlling
Questions/Answers/
Discussions
Thank You/ Best Wishes