Module 1 - Introduction To Engineering Economics
Module 1 - Introduction To Engineering Economics
History:
One of the key concepts in the engineering economy is the time value of money,
which states that the value of a given amount of money changes over time due
to inflation and the opportunity cost of not investing the money elsewhere. This
concept is used to compare the costs and benefits of different alternatives by
taking into account the time frame in which they will occur.
Engineering economics also entails the use of financial methods, such as net
present value and internal rate of return, to assess the profitability of various
solutions. These tools enable engineers to assess the costs and benefits of
several alternatives and select the one that will deliver the highest return on
investment.
1. Time value of money: This concept states that the value of a given
amount of money changes over time due to inflation and the
opportunity cost of not investing the money elsewhere.
2. Net present value (NPV): This is a measure of the profitability of an
investment, calculated by taking the present value of the expected
cash flows and subtracting the initial investment.
3. Internal rate of return (IRR): This is the discount rate that makes the
NPV of an investment equal to zero. It is used to compare the
profitability of different investments.
Considering all relevant criteria helps engineers to ensure that they are
making a well-informed decision that takes into account all of the
factors that are important to the project or situation. It is an important
step in the decision-making process as it allows engineers to make a
more comprehensive and balanced assessment of the different
alternatives.
6. Make Uncertainty Explicit: The principle of making uncertainty explicit
relates to the idea that it is critical to acknowledge and account for any
uncertainty or uncertainty in the data or assumptions used in the
analysis while evaluating different alternatives. This theory is
frequently used in engineering economics to compare the costs and
advantages of many alternatives in order to select the most cost-
effective solution.
Making uncertainty explicit assists engineers in recognizing and
understanding the potential risks and uncertainties connected with
each choice, allowing them to make more educated and careful
judgments. It is a critical decision-making stage because it helps
engineers to anticipate and plan for probable risks and uncertainties.
The engineer examines the costs of materials, labor, and other aspects
for each possibility as part of the study. However, because composite
materials are a relatively new technology, the pricing is not yet fully
established in the market, and there is some uncertainty about the
cost.
Some specific tasks that engineers may perform in the economic decision-
making process are:
The design process in the engineering economy involves a series of steps that
engineers follow to identify, evaluate, and choose the most cost-effective
solution to a given problem. The specific steps of the design process may vary
depending on the specific context and goals of the project, but generally, it
includes the following stages:
1. Define the problem: The first step in the design process is to clearly
define the problem that needs to be solved. This involves identifying
the needs and goals of the project, as well as any constraints or
limitations that may impact the design.
2. Generate ideas: The next step is to generate ideas for potential
solutions to the problem. This may involve brainstorming sessions with
a team of engineers or other stakeholders or using tools such as SWOT
analysis to identify strengths, weaknesses, opportunities, and threats.
3. Evaluate alternatives: Once a range of potential solutions has been
identified, the next step is to evaluate the alternatives based on their
costs and benefits. This may involve using tools such as cost-benefit
analysis, net present value, and internal rate of return to compare the
financial feasibility of different options.
4. Select the best solution: Based on the evaluation of the alternatives,
the next step is to choose the most cost-effective solution. This may
involve considering additional factors such as technical feasibility, risk,
and stakeholder preferences in order to make a well-rounded decision.
5. Implement the solution: Once the best solution has been chosen, the
final step is to implement it. This may involve designing and building
the solution, as well as testing and verifying that it meets the desired
specifications and requirements.
Overall, the design process in the engineering economy is a systematic and
iterative process that helps engineers to identify and choose the most cost-
effective solution to a given problem.
Micro and Macro Economics
Economic is a study about how individuals, businesses and governments make
choices on allocating resources to satisfy their needs. These groups determine
how the resources are organised and coordinated to achieve maximum output.
They are mostly concerned with the production, distribution and consumption
of goods and services.
What is Microeconomics?
Microeconomics is the study of decisions made by people and businesses
regarding the allocation of resources and prices of goods and services. The
government decides the regulation for taxes. Microeconomics focuses on the
supply that determines the price level of the economy.
What is Macroeconomics?
Macroeconomics is a branch of economics that depicts a substantial picture. It
scrutinises itself with the economy at a massive scale, and several issues of an
economy are considered. The issues confronted by an economy and the
headway that it makes are measured and apprehended as a part and parcel
of macroeconomics.
1. Capitalist nation
2. Investment expenditure
3. Revenue
Examples: Aggregate demand, and national income.
Scope
It covers several issues like demand, It covers several issues like distribution,
supply, factor pricing, product pricing, national income, employment, money,
economic welfare, production, general price level, and more.
consumption, and more.
Significance
It is useful in regulating the prices of a It perpetuates firmness in the broad
product alongside the prices of factors price level, and solves the major issues of
of production (labour, land, the economy like deflation, inflation,
entrepreneur, capital, and more) rising prices (reflation), unemployment,
within the economy. and poverty as a whole.
Limitations
It is based on impractical It has been scrutinised that the
presuppositions, i.e., in misconception of composition’
microeconomics, it is presumed that incorporates, which sometimes fails to
there is full employment in the prove accurate because it is feasible that
community, which is not at all what is true for aggregate
feasible. (comprehensive) may not be true for
individuals as well.
The PPF is the area on a graph representing production levels that cannot be
obtained given the available resources; the curve represents optimal levels.
Here are the assumptions involved:
The productive resources of the community can be used for the production
of various alternative goods.
But since they are scarce, a choice has to be made between the alternative
goods that can be produced. In other words, the economy has to choose
which goods to produce and in what quantities. If it is decided to produce
more of certain goods, the production of certain other goods has to be
curtailed.
Let us suppose that the economy can produce two commodities, cotton and
wheat. We suppose that the productive resources are being fully utilized and
there is no change in technology. The following table gives the various
production possibilities.
It all available resources are employed for the production of wheat, 15,000
quintals of it can be produced. If, on the other hand, all available resources
are utilized for the production of cotton, 5000 quintals are produced. These
are the two extremes represented by A and F and in between them are the
situations represented by B, C, D and E. At B, the economy can produce
14,000 quintals of wheat and 1000 quintals of cotton.
This means that, in a full-employment economy, more and more of one good
can be obtained only by reducing the production of another good. This is due
to the basic fact that the economy’s resources are limited.
The following diagram (21.2) illustrates the production possibilities set out
in the above table.
In this diagram AF is the production possibility curve, also called or the
production possibility frontier, which shows the various combinations of the
two goods which the economy can produce with a given amount of
resources. The production possibility curve is also called transformation
curve, because when we move from one position to another, we are really
transforming one good into another by shifting resources from one use to
another.