Engineering Economics Chapter 01 INTRODUCTION TO ENGINEERING ECONOMICS

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Engineering Economics Chapter 01 INTRODUCTION TO ENGINEERING ECONOMICS By Muhammad Shahid Iqbal

Engineering Economics Chapter 01 INTRODUCTION TO ENGINEERING ECONOMICS By Muhammad Shahid Iqbal

Economics ¡ ¡ Economics is a social science. It studies the economics behavior of

Economics ¡ ¡ Economics is a social science. It studies the economics behavior of the people and economic phenomenon. Economic Behavior is a conscious effort to derive maximum gain from scarce resources and opportunities available to them. Economic Phenomenon deals with the production and consumption of goods & services and distribution & rendering of these for human welfare. Economics is the study of how people allocate their limited resources to their alternative uses to produce and consume goods and services to satisfy their endless wants or to maximize their gains.

Economics ¡ ¡ Land: Everything physical, which is not the result of human effort

Economics ¡ ¡ Land: Everything physical, which is not the result of human effort is within the economic definition of land. This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities. such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied to the production process. Labor: Any mental or physical work done for the sake of reward. The efforts, skills, and knowledge of people which are applied to the production process. (Human capital) Capital: Real Capital (Physical Capital ) l Tools, buildings, machinery -- things which have been produced and used in further production Financial Capital: Assets and money which are used in the production process

Economics ¡ While maximizing their gains people as producers and consumers have to make

Economics ¡ While maximizing their gains people as producers and consumers have to make choices regarding the use of resources and spending their earnings due to following basic facts of economic life. Human wants are unlimited Ø Resources available are scarce Ø People want to maximize their gains Ø ¡ Scarcity: means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Resources scarcity is a relative term it implies that resources are scarce in relation to demand for resources. Scarcity is a mother of all economic problems

Flow in an Economy Revenue Spending MARKETS FOR GOODS Goods & services sold •

Flow in an Economy Revenue Spending MARKETS FOR GOODS Goods & services sold • Firms sell • Households buy HOUSEHOLDS FIRMS • Produce and sell • Buy and consume goods and services • Own and sell factors of production goods and services • Hire and use factors of production Factors of production Goods and Services bought MARKETS Labor, land, and capital FOR FACTORS OF PRODUCTION Wages, rent and profit • Households sell • Firms buy Income = Flow of inputs and outputs = Flow of money

Flow in an Economy ¡ ¡ ¡ The flow of goods, services, resources and

Flow in an Economy ¡ ¡ ¡ The flow of goods, services, resources and money payments are shown in circular flow diagram. In a simple economy, Household and Firms are two major entities. Firms use various economic resources like land, labor and capital, which are provided y households. Firms make payment of money to the households for receiving various resources. The HH in turn make payments of money to business organizations for receiving consumer goods and services. These two entities show interdependence between themselves in a simple economy.

Engineering Economics ¡ ¡ Efficient functioning of business organizations enable it to provide goods

Engineering Economics ¡ ¡ Efficient functioning of business organizations enable it to provide goods and services at a lower price. Managers at different levels should take appropriate economic decisions in the process of managing organizations. These decisions will help in minimizing expenditures and maximizing revenues, savings and other gains of the organization. Engineering Economics is concerned with problems encountered in making economic decisions for business firms.

Engineering Economics ¡ There is a need of systematic evaluation of Investment alternatives before

Engineering Economics ¡ There is a need of systematic evaluation of Investment alternatives before a decision is made regarding such problems. ¡ ¡ ¡ Introduction of new product/service/software, the expansion of product facilities, changes in product mix, adoption of new technology. Engineering Economics seeks to provide the analytical framework for decision making from an economic point of view and to advance the role of engineers in the process of decision making. Generally Engineering Economics deals with methods that enable organizations to achieve their goals efficiently (Doing things right) and effectively (Doing the right things)

Long Range Planning ¡ ¡ Long Range planning in Business. The most aspect of

Long Range Planning ¡ ¡ Long Range planning in Business. The most aspect of management is long range planning. The need for long range planning is directed by the increasing no. of economic, social and technological factors which effect the performance of all enterprises. Managerial functions in long range planning l Identifying & forecasting a set of objectives and organization’s goals. l Establishing an overall strategy for achieving those goals l Developing a comprehensive set of plans to integrate and coordinate organizational work. l Committing the required resources to achieve the set objectives. l Planning is concerned with both ends and means.

Long Range Planning ¡ ¡ ¡ Undoubtedly profit maximization is a major objective of

Long Range Planning ¡ ¡ ¡ Undoubtedly profit maximization is a major objective of any Business firm and it so assumed in most corporate planes, however maximizing market share and maximizing growth should also be the part of planning. The basic approach is systematic analysis and evaluation of economic alternatives for managerial decision making. In long run the growth and profitability of the firm depends on its ability to in crease its productive efficiency and expand its capacity and product lines.

The scope of Engineering Economics ¡ ¡ Traditional economic theory is concerned with the

The scope of Engineering Economics ¡ ¡ Traditional economic theory is concerned with the optimum allocation of resources in our society. Engineering Economics deals with the optimum allocation of the enterprise capital. Engineering Economics employs economic theory, mathematical programming and statistical analysis to formulate and solve problems concerning the evaluation and selection of capital projects. A basic concept of engineering economics is time value of money and the techniques associated with it like compounding, discounting and economic equivalence which have wide application in capital expenditure analysis as well as in financial analysis.