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Introduction
MS-291: Engineering Economy/Economics
(3 Credit Hours)
Course Instructor: Dr. Muhammad Sabir
Teaching Assistant: Mr. Waqar Ahmed
Contents
Reading Materials
Week
Contents
Reading Materials
Mid-Term
1/15/2016
Contents
Reading Materials
Recommended Books
Contents
Reading Materials
Effects of Inflation
Depreciation Measures
Week 17
Final Term
Grading Policy
Attendance Note!!!
Grading Policy
Class participation: 5%
Assignments:
10% (Including class Assignments)
Quizzes:
10% (including announced+ SQ)
Mid-term Exam:
35%
Final Exam:
40%
Attendance: 100 % (80 min.) to qualify to sit
in the final examination
# of
Class
Absentees Participation
Marks
4.5
3
4
-1
-2
9
10
-3
No permission to
sit in final
1/15/2016
Attendance Note!!!
Attendance Policy
With 10 absentees you will not be allowed to sit in exam
We will be uploading attendance during same week in which
the classes are
Anyone missing the class for whatever reason, has to adjust
his/her absences with Examination Section
We have authorities of doing attendance on BINARY
CODE. i.e. Present /Absent . With no other option for us.
Any Question ?
1/15/2016
Chapter 1
Foundations Of
Engineering Economy
MS291: Engineering
Economy/Economics
Lecture 1
Course Instructor: Dr. Muhammad Sabir
What is Economics?
Why Economics for Engineers ?
What is Engineering Economy/Economics ?
How to Performing Engineering Economy Study ?
Some Basic Concepts
Utility & Various cost concepts
Time value of money (TVM)
Interest rate and Rate of Returns
Cash Flow
Economic Equivalence
Simple and compound interest rates
Minimum Attractive Rate of Return
1/15/2016
What is Engineering
Economy/Economics ?
Engineering Economy/Economics
involves
Formulating
Estimating, and
Evaluating
expected economic outcomes of
alternatives designed to accomplish a
defined purpose
Defined
Purpose
Different
alternatives
with expected
economic
outcomes
- Formulate
- Estimate
- Evaluate
Expected
outcomes of
each alternatives
Where Engineering
Economy/Economics
learning is useful ?
It is useful in many different engineering decisions
How should the engineering project be designed ?
Has civil or mechanical engineer chosen the best thickness
for insulation ?
Which engineering projects should have a higher priority ?
Has the industrial engineer shown which factory
improvement projects should be funded with the available
resources
Which engineering projects are worthwhile ?
Has the mining or petroleum engineer shown that mineral or
oil deposits is worth developing ?
1/15/2016
Performing Engineering
Economy Study
Keeping in mind, what is economics and
engineering economy?
For doing any engineering study we will
need to do many things such as:
Problem identifications, its objectives, its
various alternatives, information about
each alternatives, choosing the best
among all alternatives etc.
Steps in an Engineering
Economy Study
Step 1 in
Study
Problem description
Objective statement
Step 2
Available data
Alternatives for solution
Step 3
Step 4
Measure of worth
criterion
(PW, B/C, IRR etc)
Step 5
Engineering Economic
Analysis
Step 6
Best alternative
Selection
Step 7
Implementation and
Monitoring
Expected life
Revenues
Costs
Taxes
Project Financing
Time Passes
Step 1 in
Study
New Problem
description
New engineering
economic study begins
Utility
Some Basic Concepts
Utility & Various cost concepts
Time value of money (TVM)
Interest rate and Rate of Returns
Cash Flow
Economic Equivalence
Simple and compound interest rates
Minimum Attractive Rate of Return
1/15/2016
Law of Diminishing
Marginal Utility Total Utility
2
3
4
(3)
Marginal
Utility,
Utils
10 ]
18 ]
24 ]
28 ]
30 ]
30
28
10
8
Utils refers to
Unit in which
utility can
be measured
30
0
1
(2)
Total
Utility,
Utils
4
2
0
-2
TU
20
10
0
6
Marginal Utility (Utils)
(1)
Glass
of water
Marginal Utility
10
8
6
4
2
0
-2
MU
1
1/15/2016
Total Costs
It maybe noted that Fixed Costs (FC) and
Variable Costs(VC) may consist of more than
one component and the sum of all respective
components will make up TFC and TVC
respectively
Total Costs (TC) is equal to sum of Total
Fixed Costs (TFC) and Total variable costs
(TVC):
Average Costs
Average Costs
Average costs can be determined by dividing the
firms total costs by the quantity of output it
produces
The average cost is the cost of each typical unit
of product
TC = TFC + TVC
Marginal Cost
Fixed cost FC
Quantity
Q
Variable cost VC
AVC
Quantity
Q
Total cost TC
Quantity
Q
Example: a firm produce 100 units of output at cost of
$1000, what is the average cost of the firm?
ATC
ATC
Total cost TC
Quantity
Q
Marginal Costs
MC
(change in quantity)
Q
1/15/2016
Opportunity Costs
Opportunity Cost:
The Next Best Decision you could make
Sunk Cost
Sunk Cost: is the costs that
are incurred in the past and
can not be recovered by any
future action
Theory states: ignore sunk costs, because they
are paid in either case, and cannot be recovered
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