Engineering Economics Basics

Introduction to Economics

• Economics is the study of production, consumption, and distribution of goods and services for human welfare.
• Key economic goals include high employment, stable prices, efficiency, equitable distribution of income, and economic growth.

Flow in an Economy

• A simple economy involves households and business organizations.
• Households provide resources (land, labor, capital) to businesses.
• Businesses use resources to produce goods and services and pay households for these resources.
• Households use the income from businesses to buy goods and services.
• This cycle demonstrates the interdependence between households and businesses.

Law of Supply and Demand

• Demand and supply are interdependent and responsive to price.
• As price decreases, demand increases and supply decreases.
• The equilibrium point is where supply equals demand, determining the price.

Factors Influencing Demand

• Income of consumers: Higher income leads to higher demand.
• Price of related goods: Prices of complements decrease demand, whereas prices of substitutes increase demand.
• Tastes and preferences: Change in consumer tastes shifts demand curves.

Factors Influencing Supply

• Cost of inputs: Increased input costs reduce supply.
• Technology: Advancements in technology increase supply.
• Weather: Conditions like drought or floods impact supply.
• Price of related goods: Effects on the supply of related goods.

Concept of Engineering Economics

• Engineering economics applies scientific principles to different physical systems.
• Pricing and demand & supply are important for efficient organizational functioning.

Types of Efficiency

• Technical efficiency: Ratio of output to input in a physical system.
• Economic efficiency: Ratio of output to input in a business system, considering costs and worth.

Other Costs/Revenues

• Marginal cost: Cost of producing an additional unit.
• Marginal revenue: Revenue from selling an additional unit.
• Sunk cost: Irrecoverable past costs.
• Opportunity cost: Value of the next best alternative forgone.

Break-Even Analysis

• Break-even point: The production volume where total revenue equals total cost (no profit, no loss).

• Break-even volume:

• calculated by dividing fixed costs by contribution per unit.

• Selling Price per unit - Variable Cost per unit

Profit/Volume Ratio (P/V Ratio)

• P/V Ratio: Contribution divided by sales; Indicates the profitability of a product or business.

• Break-even point:

  • calculated by dividing Fixed Cost by Profit/Volume Ratio

Example Problems

• Provided examples using specific numerical data to illustrate the calculation of various economic concepts like break-even analysis, contribution margin, and so on.

Value Analysis/Value Engineering

• Value analysis: A systematic process to improve the value of an existing product or service by reducing costs and/or improving function/performance.
• Value engineering: A similar process used for new product design to prevent costly mistakes.
• Steps: Identify the product, collect information, define functions, generate alternatives, evaluate, refine/develop the best alternative, and implement.

Process Planning/Process Modification

• Determining the most economical path/sequence of manufacturing operations.
• Steps Include:Analyze the part, make recommendations, list basic operations, determine manufacturing method, devise best operation sequence, and specify gauging requirements.

Make or Buy Decisions

• Analyzing if a company should produce a product or service in-house or purchase it from an external provider.
• Factors for choosing to "Make": Lower cost than buying, specific quality/control needed for component, part complexity, existing in-house capacity.

Simple Cost Analysis

• Analyzing the costs associated to make a product internally versus buying from another provider.
  • Costs to consider: Materials, labor, overhead, and fixed costs.

Interest Formulas and Their Applications

• Interest rate: The cost of borrowing money or the return on investment.
• Simple interest: Interest calculated only on the principal amount.
• Compound interest: Interest calculated on the principal and accumulated interest.

Time Value of Money

• Concept: A dollar today is worth more than a dollar in the future due to potential earnings.

• Time Value of money can be represented by a formula:

• Future Value = Present Value * (1 + i)^n

• Calculating future and present worth based on given interest rate, time, and principal amount.

Uniform Gradient Series

• Calculations for uniform gradient series considering specific interest and time factors.