ENGINEERING ECONOMICS

LECTURE 3

Syeda Laraib Tariq

Lecturer, MED, NUTECH
FALL 2023

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 Introduction:
Thinking Like an Economist 1

Role of Engineering Economics

• Engineering economy involves the systematic evaluation
of the economic merits of proposed solutions to
engineering problems. To be economically acceptable
(i.e., affordable), solutions to engineering problems must
demonstrate a positive balance of long-term benefits
over long-term costs, and they must also
• promote the well-being and survival of an organization,
• embody creative and innovative technology and ideas,
• permit identification and scrutiny of their estimated
outcomes, and
• translate profitability to the “bottom line” through a valid
and acceptable measure of merit.
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 INTRODUCTION TO
ENGINEERING ECONOMY
Book: Chapter 1 from William Sullivan Book 16th Edition

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 Introduction:
Thinking Like an Economist 1
Principles of Engineering Economy

Principle Action
1 Develop the alternative
2 Focus on the differences
3 Use a consistent view point
4 Use a common unit of measure
5 Consider all relevant criteria
6 Make risk & uncertainty explicit
7 Revisit your decision

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 Introduction:
Thinking Like an Economist 1
Engineering Economy & Design Process
• An engineering economy study is accomplished using a
structured procedure and mathematical modeling
techniques. The economic results are then used in a
decision situation that normally includes other engineering
knowledge and input.
• 1. Problem recognition, definition, and evaluation
• 2. Development of the feasible alternatives.
• 3. Development of the outcomes and cash flows for
each alternative.
• 4. Selection of a criterion (or criteria).
• 5. Analysis and comparison of the alternatives.
• 6. Selection of the preferred alternative.
• 7. Performance monitoring and post evaluation of
results.
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 Introduction:
Thinking Like an Economist 1

Example: Defining the Problem & Developing Alternatives

• The management team of a small furniture-manufacturing company is under
pressure to increase profitability to get a much-needed loan from the bank to
purchase a more modern pattern-cutting machine. One proposed solution is to sell
waste wood chips and shavings to a local charcoal manufacturer instead of using
them to fuel space heaters for the company’s office and factory areas. (a) Define
the company’s problem. Next, reformulate the problem in a variety of creative ways.
(b) Develop at least one potential alternative for your reformulated problems in Part
(a). (Don’t concern yourself with feasibility at this point.)
SOLUTION:
(a) The company’s problem appears to be that revenues are not sufficiently covering
costs. Several reformulations can be posed: 1. The problem is to increase revenues while
reducing costs. 2. The problem is to maintain revenues while reducing costs. 3. The
problem is an accounting system that provides distorted cost information. 4. The problem
is that the new machine is really not needed (and hence there is no need for a bank loan).
(b) Based only on reformulation 1, an alternative is to sell wood chips and shavings as
long as increased revenue exceeds extra expenses that may be required to heat the
buildings. Another alternative is to discontinue the manufacture of specialty items and
concentrate on standardized, high volume products. Yet another alternative is to pool
purchasing, accounting, engineering, and other white-collar support services with other
small firms in the area by contracting with a local company involved in providing these
services.
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 Introduction:
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Problem
• A solar cell manufacturer buys Silicon Wafers and converts
them into solar cells, to be used to generate power in solar
panels. A cell manufacturer facing a sharp decline in the price
of their product in 2017-18. Facing declining profitability, the
manufacturer considers two solutions: introducing measure to
reduce wastage in production, and salvaging cells that are
damaged in production in order to sell them to toy
manufacturers.
• A. Define the company’s problem.
• B. Evaluate proposed solutions without a reference to their
feasibilities.

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 Introduction:
Thinking Like an Economist 1

Problem
• Linda and Jerry are faced with a car replacement opportunity
where an interest rate can be ignored. Jerry’s old clunker that
averages 10 miles per gallon (mpg) of gasoline can be traded
in toward a vehicle that gets 15 mpg. Or, as an alternative,
Linda’s 25 mpg car can be traded in toward a new hybrid
vehicle that averages 50 mpg.
• If they drive both cars 12,000 miles per year and their goal is
to minimize annual gas consumption, which car should be
replaced—Jerry’s or Linda’s? They can only afford to upgrade
one car at this time.

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 Practice Exercise

1.1, 1.3-1.15
(Try First and then see the Solution Manual )
Quiz 3 would be taken from similar problem in week 4

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 Market Demand & Supply

Economics by Stanley

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 Introduction:
Thinking Like an Economist 1

11 MARKET DEMAND & SUPPLY

• Market:
An Institution or Mechanism which brings together
buyers and sellers of particular goods and services.

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 Introduction:
Thinking Like an Economist 1

12 MARKET DEMAND & SUPPLY

Demand:
It’s a schedule which shows the various amounts of
product which consumers are willing and able to
purchase at each price in a series of possible prices
during a specified period of time
Law of Demand:

Price for a Gadget Quantity Demanded per week

$5 10
$4 20
S3 35
$2 55
$1 80
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 Introduction:
Thinking Like an Economist 1

13 MARKET DEMAND & SUPPLY

Foundation for Demand Law:
1. Price effect – People buy more of a product with less
price
2. Diminishing Marginal Utility – Consuming successive
units yields less extra satisfaction
3. Income & Substitution Effect – Income define the choice
of products.Lower price tends consumer to purchase
cheap product than dear product
Law of Demand:

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 Introduction:
Thinking Like an Economist 1

14 MARKET DEMAND & SUPPLY

Individual & Market Demand:

Determinant of Demand
1. Taste – Health Conscious, Health Hazard, Old Technology, Fashion, etc
2. Number of Buyers – Population density, quotas on imports
3. Income – Superior or Normal Goods, Inferior Goods
4. Prices of Related Goods – Substitute (Butter/Margarine, Nike/Reebok),
Complimentary (Movie & Popcorn, CD & VCR, Tuition & Book, Petrol n Oil)
5. Expectations – Price rise/fall
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 Introduction:
Thinking Like an Economist 1

15 MARKET DEMAND & SUPPLY

Changes in Demand Curve

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 Introduction:
Thinking Like an Economist 1

16 MARKET DEMAND & SUPPLY

Supply:
It’s a schedule which shows the various amounts of
product a producer is willing and able to produce and
make available for sale at each price in a series of
possible prices during a specified period of time
Law of Supply:

Price for a Gadget Quantity Demanded per week

$5 60
$4 50
S3 35
$2 20
$1 5
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 Introduction:
Thinking Like an Economist 1

17 MARKET DEMAND & SUPPLY

Law of Supply:

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 Introduction:
Thinking Like an Economist 1

18 MARKET DEMAND & SUPPLY

Determinant of Supply
1. Resource Prices – Production Cost (decline in price of
Fertilizer increase supply of wheat, etc)
2. Technology – Improvement, up gradation, R&D
3. Taxes & Subsidies
4. Prices of Other Goods
5. Expectations
6. No of Sellers

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 Introduction:
Thinking Like an Economist 1

19 MARKET DEMAND & SUPPLY

Changes in Supply Curve

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 Introduction:
Thinking Like an Economist 1

20 PRICE EQUILIBRIUM

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 Introduction:
Thinking Like an Economist 1
PROBLEM 1
• Q 1. Evaluate the following if the total demand and total supply of Mechanical Device in
the market is as below.
Quantity Demanded Price Quantity Supplied Surplus or Shortage
•
85 Rs. 3.40/- 72
80 Rs. 3.70/- 73
75 Rs. 4.00/- 75
70 Rs. 4.30/- 77
65 Rs. 4.60/- 79
• Equilibrium Price and Quantity?
• 60 Rs. and
New equilibrium Price 4.90/- Quantity if the
81manufacturer experiences an escalation in the

raw material prices of the goods produced and adjusted their new supply schedule as
below:
Quantity Demanded Price Quantity Supplied Surplus or Shortage
85 Rs. 3.40/- 60
80 Rs. 3.70/- 63
75 Rs. 4.00/- 65
70 Rs. 4.30/- 71
65 Rs. 4.60/- 75
• Specify the new conditions of surplus or shortage in this condition. In this new condition,
60a surplus of 3 parts is aRs.
if 4.90/-
mandatory requirement to76 be produced and kept as spare, what
effect would it have on the price, what is the new price bracket which you can play with if
you want to offer higher price and offer discounts to customers. Comment.
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 Introduction:
Thinking Like an Economist 1
PROBLEM 1
• Q 1. Evaluate the following if the total demand and total supply of Mechanical Device in
the market is as below.
Quantity Demanded Price Quantity Supplied Surplus or Shortage
•
85 Rs. 3.40/- 72 72-85=-13 shortage
80 Rs. 3.70/- 73 73-80 =-7 shortage
75 Rs. 4.00/- 75 75-75= Equilibrium D @Rs. 4.00/
70 Rs. 4.30/- 77 77-70 = 7 surplus
65 Rs. 4.60/- 79 79-65= 14 surplus
60 Rs. 4.90/- 81 81-60= 21 surplus
• Equilibrium Price and Quantity?
• New equilibrium Price and Quantity if the manufacturer experiences an escalation in the
raw material prices of the goods produced and adjusted their new supply schedule as
below:
Quantity Demanded Price Quantity Supplied Surplus or Shortage
85 Rs. 3.40/- 60 60-85 = -25 shortage
80 Rs. 3.70/- 63 63-80= -17 shortage
75 Rs. 4.00/- 65 65-75= -10 shortage
70 Rs. 4.30/- 71 71-70= +1 surplus
65 Rs. 4.60/- 75 75-65= 10 surplus
60 Rs. 4.90/- 76 76-60 = 16 surplus
• Specify the new conditions of surplus or shortage in this condition. In this new condition,
if a surplus of 3 parts is a mandatory requirement to be produced and kept as spare, what
effect would it have on the price, what is the new price bracket which you can play with if
you want to offer higher price and offer discounts to customers. Comment.
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