In This Course

In this course
1. Introduction to Engineering economics

2. Supply and Demand Analysis
3. Time Value of Money
4. Economic Evaluation of alternatives
5. Replacement analysis
6. Depreciation accounting
7. Financial statement analysis
8. Break-even analysis
Text books
1. Engineering economy
By Thuesen and Fabrycky
2. Contemporary engineering economics

By Chan S Park
3. Engineering Economics
By James L Riggs
4. Engineering economic Analysis

By Donald G Newnan
In todays class
What is engineering economics?

Understand the role of engineers in business
Engineering economic decisions
Concept of Value and Utility
Micro and Macro economics, Differences
As engineers, what is our job?

Engineering :
A profession in which a knowledge of
the mathematical and natural sciences is
applied with judgment to develop ways to
utilize economically the materials and
forces of nature for the benefit of
mankind.
-ABET
What Is Engineering Economics ?

The science that deals with techniques of
quantitative analysis useful for selecting
a
preferable alternative from several
technically viable ones.
Engineering Economics
Why engineering economics?

The role of an engineer is to apply scientific knowledge
to particular situations to produce products and services.
Engineers
are
confronted
with
two
important
interconnected environments, the physical and the
economic.
The worth of the product/ services lies in their utility
measured in economic terms.
The usual function of engineering is to manipulate the
elements of one environment , the physical , to create
value in the second environment, the economic.
Importance of Engineering Economics to

Engineers:
It Helps in Decision making.
ex:
Engineers mainly deal with the issues
production process, design and the quality.
of
Engineers must be concerned with the economic

aspects of designs and projects they recommend
and perform.
Decision Making:
Decision making process consists of choosing from
among alternative courses of action.
The Decision-Making Process
1. Understand the Problem
2. Identify the decision criterion
3. Allocating Weights to the Criteria
4. Developing Alternatives
5. Analyzing alternatives
6. Select the best alternative
7. Implementing
8. Monitoring
Value
Value is a measure of the worth that a person ascribes
to a good or a service.
Value of the object is inherent not in the object but in the
regard that a person has for it.
Value is independent of its utility.
Gold has high value in exchange but smaller utility
when
compared with water or food.
Air has high utility but no value in exchange
Value in exchange depends on the degree of scarcity.
UTILITY
Utility is a measure of the power of the good or a service to
satisfy human wants.
Utility of the object, like its value, inheres not in the object
itself but in the regard the person has for it.
Utility can be classified in relation to time ,form ,place
- Ice possess greater utility in summer than in
winter
- Water close to a river has little utility whereas
water in a
desert has larger utility.
How engineering relates to utility

The purpose of engineering effort is to
determine
how physical factors may be altered to
create the
most utility for the least cost.
Two classes of goods are recognized by

economists.
Consumer Goods
Producer Goods
Consumer goods:
Goods and services that directly satisfy
human wants.
Eg: Houses, books, consumer electronics, health
care etc.
Producer goods:
Goods and services that satisfies human
wants indirectly as part of the production or
construction process.
Eg: Bulldozers, machine tools, railroads, coal, cotton etc.
Mutual benefit in exchange

A buyer will purchase an object when
Money is available
Good has = or utility than ____.
A seller will sell an object

Amount of money has _______ utility
than the object.
MICRO AND MACRO

ECONOMICS
MICROECONOMICS
Microeconomics is the study of the
economic systems from the perspective
of households and business firms.
MICROECONOMICS
Micro economic concepts are simple & easy to
understand.
Ex.: How much it would cost for a university or
college to offer a new course the cost of the
instructors salary, the classroom facilities, the
class materials, and so on.
Having determined the cost, the school can then
decide whether or not to offer the course by
weighing the costs and benefits.
MACROECONOMICS
Examines
(i.e. how
firms in
particular
whole).
the aggregate behavior of the economy

the actions of all the individuals and
the economy interact to produce a
level of economic performance as a
Example: Overall level of prices in the economy (how high

or how low they are relative to prices last year) rather than
the price of a particular good or service
MACRO ECONOMICS
Macroeconomics deals with the

performance of the economic system
overall
It focuses on issues such as unemployment,

inflation, economic growth and other related
problems, which affect the economy as a whole.
These concepts are not simple & direct.
Macroeconomics vs. Microeconomics

MICROECONOMIC
QUESTION
MACROECONOMIC
QUESTION
Go to business school or How many people are

take a job?
employed in the economy
as a whole?
What
determines
the What
determines
the
salary offered by Citibank overall salary levels paid
to Ravi?
to workers in a given
year?
Micro and Macro Economics

Definition and Differences
MICRO
MACRO
Microeconomics is the study of

particular markets, and
segments of the economy.
Macro economics is the study of

the whole economy, at an
aggregate level.
Examples:
Examples:
Monetary / fiscal policy. e.g. what
effect does interest rates have on
whole economy?
Reasons for inflation, and
unemployment
Economic Growth
International trade and
globalisation
Government borrowing
Supply and demand in

individual markets
Individual consumer behaviour.
Individual labour markets e.g.
demand for labour,wage
determination
Sixth Semester
Engineering Economics and Financial
Management
Lecture 2
In todays class
Understand the concepts of
Demand and supply, determinants
Law of demand
Law of supply
Equilibrium of demand and supply
Elasticity of demand
DEMAND
The willingness and ability of buyers to
purchase a given amount of goods or
services, over a range of prices, over
a given period of time.
The relationship of the quantity of a
good that will be bought at various
prices can be presented in the form of
a demand schedule or portrayed
graphically as a demand curve.
Demand Schedule
A demand
schedule shows
how much of a
good or service
consumers will
want to buy at
different prices.
Demand Schedule for Coffee Beans

Price of coffee
beans (per
pound)
Quantity of coffee
beans demanded
(billions of pounds)
$2.00
7.1
1.75
7.5
1.50
8.1
1.25
8.9
1.00
10.0
0.75
11.5
0.50
14.2
A demand curve is the graphical

representation of the demand
schedule; it shows how much of a
good or service consumers want to
buy at any given price.
Price of
coffee bean
(per gallon)
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
0
As price rises,
the quantity
demanded
falls
7
Demand
curve, D
11
13
15
17
Quantity of coffee
beans (billions of
pounds)
LAW OF DEMAND
Principle stating that as the price of a

commodity increases, the less consumers will
purchase the commodity, and vice-versa,
provided all other factors that affect buyers
decisions are unchanged.
As price decreases, the quantity demanded
increases
and
vice
versa,
other
things
remaining constant.
The law of demand operates due to

the following underlying effects.
1.Substitution effect of price change:
When the price of a commodity falls, the consumer tends to
substitute that commodity for other commodities. And,
when the price rises, other commodities will be used in its
place. This is called substitution effect.
2.Income effect of a price change:

The fall in price of the commodity leads to and therefore
is equivalent to an increase in the income of the consumer. A
part of the money that he has gained can be used to
purchase some more units of the commodity. Similarly, when
the price increases, the income of the consumer is reduced
and he will buy less of the commodity. This is called Income
effect.
DETERMINANTS OF
DEMAND
General Factors:
1. Price of the product itself.
2. Prices of related goods ( substitutes and
compliments)
3. Income of the consumer
Additional Factors:
( Related to luxury goods and durables)
4. Consumers expectations of future prices
5. Consumers expectations of future income.
Exceptions to Law of
Demand
1. GIFFEN GOODS: ( Refers to inferior
good)
Reduction in price of the commodity made
reduce its demand.
Example: Inferior goods consumed by the poor.
2. STATUS GOODS:
The more expensive these commodities
become, greater will be their demand.
Example: Luxury cars, diamonds etc.
SUPPLY
The willingness of producers to
supply the good, over a range of
prices, over a given period of
time, other things remaining the
same.
Supply Schedule
Supply Schedule for Coffee Beans
A supply schedule
shows how much of a
good or service would
be supplied at
different prices.
Price of
coffee beans
(per pound)
Quantity of
coffee beans
supplied
(billions of
pounds)
$2.00
11.6
1.75
11.5
1.50
11.2
1.25
10.7
1.00
10.0
0.75
9.1
0.50
8.0
Price of coffee
beans (per pound)
A supply curve shows

graphically how much of
a good or service people
are willing to sell at any
given price.
Supply Curve
Supply
curve, S
$2.00
1.75
1.50
As price rises, the

quantity supplied
rises.
1.25
1.00
0.75
0.50
0
11
13
15
17
Quantity of coffee beans (billions of pounds)
LAW OF SUPPLY
The law of supply states that, the
quantity supplied of a good rises
when the price of the good rises,
and vice-versa, as long as all other
factors that affect suppliers
decisions are unchanged
DETERMINANTS OF SUPPLY
1. Price of the product
2. Input / production prices
3. Amount of product supplied
4. State of technology used
Supply and Demand Equilibrium
Equilibrium : when the quantity demanded of a

good equals the quantity supplied of that good.
The price at which this takes place is the
equilibrium price
Every buyer finds a seller and vice versa.
The quantity of the good bought and sold at

that price is the equilibrium quantity.
Market Equilibrium
Market equilibrium
Price of
coffee beans
(per pound)
Supply
$2.00
1.75
1.50
occurs at point E,
where the supply
curve and the demand
curve intersect.
1.25
Equilibrium
price
1.00
Equilibrium
0.75
0.50
0
Demand
7
10
Equilibrium
quantity
13
15
17
Quantity of coffee beans

(billions of pounds)
ELASTICITY OF DEMAND (E )
d
Elasticity of demand is defined as the

percentage change in quantity
demanded caused by 1 percent
change in Price, Income etc..( that is,
the demand determinant).
Price elasticities are almost always
negative, except for Giffen goods
( exceptions to the law of demand).
Types of elasticities of
demand
Price elasticity
Income elasticity
Cross elasticity
PERFECTLY INELASTIC DEMAND
In general, the demand for a good is

said to be inelastic (or relatively
PERFECTLY ELASTIC DEMAND
The demand for a good is said to be

elastic (or relatively elastic) when
inelastic) when changes in price have a
changes in price have a relatively
relatively small effect on the quantity of
large effect on the quantity of a good
the good demanded.
demanded.
Price elasticity of demand

The
measure of relative
responsiveness of quantity demanded
to price along a given demand curve.
Problem: Price elasticity of demand

If 2000 units of X are demanded at a
price of Rs. 10/unit and 2500 units of it
are demanded at a price of Rs. 9 / unit,
Determine Price elasticity of demand.
Income elasticity of demand

The ratio of percentage change in
quantity demanded of good X to the
percentage change in the income of
=
the consumer.
Problem: Income elasticity of

demand
If the consumers demand for the
commodity increases from 100 units to
200 units a week when his income
rises from Rs.2000 to Rs. 3000. Find
his income elasticity.
What Cross elasticity of Demand?

Changes in the Prices of Related
Goods
Substitutes: Two goods are substitutes
if a fall in the price of one of the goods
makes consumers less willing to buy the
other good.
Complements: Two goods are
complements if a fall in the price of one
good makes people more willing to buy the
other good.
Cross elasticity of demand

The ratio of percentage change in
demand one good due to a change in
price of some other related good.
Problem: Cross elasticity of demand

The price of coffee increases from
Rs.50 to Rs. 70 per kg and as a result
demand for tea increases from 5kg to
10 kg. What is the cross elasticity of
demand of tea to coffee?

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In this course

1. Introduction to Engineering economics

2. Contemporary engineering economics

4. Engineering economic Analysis

What is engineering economics?

As engineers, what is our job?

What Is Engineering Economics ?

Why engineering economics?

Importance of Engineering Economics to

Engineers must be concerned with the economic

How engineering relates to utility

Two classes of goods are recognized by

Mutual benefit in exchange

A seller will sell an object

MICRO AND MACRO

the aggregate behavior of the economy

Example: Overall level of prices in the economy (how high

Macroeconomics deals with the

It focuses on issues such as unemployment,

Macroeconomics vs. Microeconomics

Go to business school or How many people are

Micro and Macro Economics

Microeconomics is the study of

Macro economics is the study of

Supply and demand in

Demand Schedule for Coffee Beans

A demand curve is the graphical

Principle stating that as the price of a

The law of demand operates due to

2.Income effect of a price change:

Supply Schedule for Coffee Beans

A supply curve shows

As price rises, the

Quantity of coffee beans (billions of pounds)

Supply and Demand Equilibrium

Equilibrium : when the quantity demanded of a

The quantity of the good bought and sold at

Quantity of coffee beans

Elasticity of demand is defined as the

PERFECTLY INELASTIC DEMAND

In general, the demand for a good is

PERFECTLY ELASTIC DEMAND

The demand for a good is said to be

inelastic) when changes in price have a

changes in price have a relatively

relatively small effect on the quantity of

large effect on the quantity of a good

the good demanded.

Price elasticity of demand

Problem: Price elasticity of demand

Income elasticity of demand

Problem: Income elasticity of

What Cross elasticity of Demand?

Cross elasticity of demand

Problem: Cross elasticity of demand

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