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Introduction
MS-291: Engineering Economy/Economics
(3 Credit Hours)
Course Instructor: Dr. Muhammad Sabir
Teaching Assistant: Mr. Waqar Ahmed

What are you expecting


from this course ?

Let me ask you first ?


Economics theory? .
GDP ?
Stock Market ?
Exchange Rates ?
Economic Growth ?
Inflation ?
Taxes ?
May be Game theory?

Syllabus & Study Plan


Week

Contents

Reading Materials

Week 1 Foundation of Engineering Economy,


to
various cost concepts
Week 4 Factors: How time and Interest Affect Money

Week

Chapter 1: (B&T 2012)


Chapter 2: (B&T 2012)

Nominal and Effective Interest Rates

Chapter 3: (B&T 2012)

Contents

Reading Materials

Week 5 Present Worth Analysis, Annual Worth


to
Analysis
Week 8 Rate of Return Analysis: Single Alternative
and Multiple Alternatives
Benefit/Cost Analysis and Public Sector
Economics
Week 9

Mid-Term

Chapter 5 & Chapter 6:


(B&T 2012)
Chapter 7 & Chapter 8:
(B&T 2012)
Chapter 9: (B&T 2012)

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Syllabus & Study Plan (II)


Week

Contents

Reading Materials

Week 10 Project Financing and Noneconomic


to
Attributes
Week 14 Independent Projects with Budget
Limitations
Breakeven and Payback Analysis
Week
Week 14
to
Week 16

Recommended Books

Chapter 10: (B&T 2012)


Chapter 12: (B&T 2012)
Chapter 13: (B&T 2012)

Contents

Reading Materials

Effects of Inflation

Chapter 14: (B&T 2012)

Depreciation Measures

Chapter 16: (B&T 2012)

Reference book for Economics


Major Course Book

Week 17

Or any other book with title


Economics and is for
undergraduate level

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

In order to avoid any problem in


attendance

Please note down that final term will consist of complete


course covered rather than course covered after mid-term

Proxy..will cost 3 absentee for the


whole row until culprit is identified

# of
Class
Absentees Participation
Marks

I want to clear it in very first class


that how I am going to take care of
it
Please do not come to me that you
have this or that issue and grant me
leave leave is not my authority

4.5

3
4

-1

-2

9
10

-3
No permission to
sit in final

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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.

Important Note for Every


Class!!!
Any one attending this course MUST have his/her own
notebook/paper and a Calculator in EVERY class
Assignments will be of two types home assignments(all
graded) and Class assignments(some graded some not)
Quizzes will be of two types announced (4 in total with no
reschedule request for anyone for what so ever reason) and
surprise quizzes (again with no rescheduling request)
You should have your paper/note book & calculator
Cell phone calculator use in class is not preferable during
quizzes, mid or finalnot allowed

Final Words of Warning


Please keep your mobiles switch off during my
class . I may take strict action against you on
that. That may be as small as taking your
cell phone for 24-72 hours
Or reporting it to DSA
Can consider it for straight F Grade in case of
too much problems
Be on time for class
No entrance once the class room doors
closed

Any Question ?

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Chapter 1
Foundations Of
Engineering Economy

ENOUGH OF HARD TALK


LETS START THE WORK NOW

MS291: Engineering
Economy/Economics
Lecture 1
Course Instructor: Dr. Muhammad Sabir

Contents of the Chapter

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

Setting the Scene


Lets start with a simple question ? What is
Economics ? Anyone ?
There are variety of definitions of Economics but let
me place the most relevant one for this course
A social science that studies how individuals, firms,
governments and nations make choices on
allocating scarce resources to satisfy their
unlimited wants

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Why Engineer Need to know about


Economics ?

Why Engineer Need to know about


Economics ? (II)

Individuals, Engineers, Managers all made choice


among various alternatives in their every day life
..Any Example ?
Mostly these choice is associate with money (more
specifically capital or capital funds) but money (or
resources) is limited
The selection of any choice depends on the
expected future return of each alternative
Engineers plays a vital role in such decision due
to their ability and experience to design, analyze
and synthesize

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

Select the best


alternative

Engineers design and create


Designing involves economic decisions Why ?
Engineers must be able to incorporate economic
analysis into their creative efforts
Often engineers must select and implement from
multiple alternatives
Understanding and applying engineering
economy tools ( such as time value of money,
economic equivalence, and cost estimation) are
vital for engineers
A proper economic analysis for selection and
execution is a fundamental task of engineering

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 ?

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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

Cash flows and other


estimates

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

One or more approaches


to meet objectives

Expected life
Revenues
Costs
Taxes
Project Financing

Tools u will be learning


in this course are used
here

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

What is Utility ? Anyone ?


In economics utility refers to the power of a
good or service that satisfy human wants
E.g. A glass of water has utility that it satisfy
ones thirst
Utility is the one of the very basic and
important concept of economics
Marginal Utility refers to Utility derived from
one additional unit of a good

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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

Total Utility (Utils)

0
1

(2)
Total
Utility,
Utils

4
2
0
-2

Some Basic Concepts


Various Types of Costs
Cash Flow Diagrams
Time value of money (TVM)

TU
20
10
0

6
Marginal Utility (Utils)

(1)
Glass
of water

Units Consumed Per glass

Marginal Utility
10
8
6
4
2
0
-2

MU
1

Units Consumed Per glass

Various Type of Costs


There are different type of costs and can be
classified by various ways
This lecture includes costs classifications
mostly use by economists
Fixed & Variable Costs, Average Costs & Marginal
Costs, Private & Social Costs
Opportunity Costs
Some other important cost concept you may come
across: Sunk Cost and Sinking funds, Operation &
Maintenance Cost (O&M Costs), Life-cycle Costs
etc.

Fixed and Variable Costs


Fixed Costs: those costs that do not vary with
the quantity of output produced.any example ?
Examples: rent to paid for factory building, interest on
invested capital, maintenance, taxes etc.

Variable Costs: are those costs that do vary with


the quantity of output produced
Examples: consumption of fuel for power generation .it
will vary as the production of a factory increases or
decrease

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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

Average Costs can also be obtained by


adding Average Fixed Costs (AFC) and
Average Variable Costs (AVC) i.e: ATC =
AFC + AVC

TC = TFC + TVC

Average Costs: Formulas


AFC

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

= 1000/100 => $10

Marginal cost (MC) measures the increase in


total cost that arises from an extra unit ( or next
unit) of production
Marginal cost helps answer the following
question:
How much does it cost to produce an additional unit
of output?

MC

(change in total cost) TC

(change in quantity)
Q

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Private / Social Cost

Opportunity Costs

Private costs (benefits) of an action


accruing to the actor only

I got a lottery of worth


Rs 10 millions

Ranking the Choices

Social costs (benefits)


total costs of activity including those that accrue
to people other than the actor

The Next best use is buying house thats I


forgone for paying my Credit card debts so thats
my Opportunity cost

Example: driving a car


Private costs: fuel, maintenance
Social costs include pollution, road wear

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

For example: Govt; spent Rs. 40 billions on construction of a road from


Point A to Point B. Now it is a sunk cost, as whatever the government do,
it cannot recover full cost of it from same road surface
Example 2. If you have to go to a movie, you bought a ticket for a movie,
you lost that. Now whatever action you take you cannot recover that
money. The only way is to go home without watching a movie or buy a
new one.

THANK YOU