ENE191 Chapter 1 Introduction PDF

ENS191: Engineering and Planning Economy Chapter 1 Sullivan: Introduction to Engineering Economy Sta. Maria: The Economic Environment Assoc. Prof. Maria Cristina P. Vegafria, PhD College of Engineering & Technology MSU-Iligan Institute of Technology ...

ENS191: Engineering and Planning Economy Chapter 1 Sullivan: Introduction to Engineering Economy Sta. Maria: The Economic Environment Assoc. Prof. Maria Cristina P. Vegafria, PhD College of Engineering & Technology MSU-Iligan Institute of Technology  Engineering Economy ⮚ involves the systematic evaluation of the economic merits of proposed solutions to engineering problems (Sullivan) ⮚ the analysis and evaluation of the factors that will affect the economic success of engineering projects to the end that a recommendation can be made which will insure the best use of capital (Sta. Maria) Chapter 1 The Economic Environment  The purpose of this course is to develop and illustrate the principles and methodology required to answer the basic economic question of any design: Do its benefits exceed its costs? Chapter 1 Introduction to Engineering Economy  Solutions to engineering problems must: 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. Chapter 1 Introduction to Engineering Economy  Roles engineering economic analysis can play in many types of situations. Choosing the best design for a high-efficiency gas furnace. Selecting the most suitable robot for a welding operation on an automotive assembly line. Making a recommendation about whether jet airplanes for an overnight delivery service should be purchased or leased. Determining the optimal staffing plan for a computer help desk. Chapter 1 Introduction to Engineering Economy  Seven Fundamental Principles of Engineering Economy 1. Develop the alternatives 2. Focus on the differences 3. Use a consistent viewpoint 4. Use a common unit of measure 5. Consider all relevant criteria 6. Make uncertainty explicit 7. Revisit your decisions Chapter 1 Introduction to Engineering Economy  Seven Fundamental Principles of Engineering Economy 1. Develop the alternatives Carefully define the problem. Then the choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis A decision situation involves making a choice among two or more alternatives Chapter 1 Introduction to Engineering Economy  Seven Fundamental Principles of Engineering Economy 2. Focus on the differences Only the differences in the future outcomes of the alternatives are important. Outcomes that are common to all alternatives can be disregarded in the comparison and decision. For example, if your feasible housing alternatives were two residences with the same purchase (or rental price), price would be inconsequential to your final choice. Instead, the decision would depend on other factors, such as location and annual operating and maintenance expenses. This example illustrates the basic purpose of an engineering economic analysis: To recommend a future course of action based on the differences among feasible alternatives Chapter 1 Introduction to Engineering Economy  Seven Fundamental Principles of Engineering Economy 3. Use a consistent viewpoint The prospective outcomes of the alternatives should be consistently developed from a defined viewpoint or perspective. The perspective of the decision maker, which is often that of the owners of the firm, would normally be used. The viewpoint for the particular decision be first defined and then used consistently in the description analysis and comparison of alternatives Chapter 1 Introduction to Engineering Economy  Seven Fundamental Principles of Engineering Economy 4. Use a common unit of measure For measuring the economic consequences, a monetary unit such as dollars (or Philippine pesos) is the common measure. Other outcomes which do not initially appear to be economic should be translated into the monetary unit. Chapter 1 Introduction to Engineering Economy  Seven Fundamental Principles of Engineering Economy 5. Consider all relevant criteria The decision maker will normally select the alternative that will best serve the long-term interests of the organization. In engineering economic analysis, the primary criterion relates to the long-term financial interests of the owners. This is based on the assumption that available capital will be allocated to provide maximum monetary return to the owners. Chapter 1 Introduction to Engineering Economy  Seven Fundamental Principles of Engineering Economy 6. Make uncertainty explicit Risks and uncertainty are inherent in estimating the future outcomes of the alternatives, and should be recognized. The analysis of the alternatives involves projecting or estimating the future consequences associated with each of them. The magnitude and the impact of future outcomes of any course of action are uncertain. The probability is high that today’s estimates of, for example, future cash receipts and expenses will not be what eventually occurs. Chapter 1 Introduction to Engineering Economy  Seven Fundamental Principles of Engineering Economy 7. Revisit your decisions A good decision-making process can result in a decision that has an undesirable outcome. Other decisions, even though relatively successful, will have results that are significantly different from the initial estimates of the consequences. Learning from and adapting based on our experience are essential and are indicators of a good organization. Chapter 1 Introduction to Engineering Economy  Engineering Economic Analysis Procedure Problem definition Development of alternatives Development of prospective outcomes Selection of a decision criterion Analysis and comparison of alternatives. Selection of the preferred alternative. Performance monitoring and post-evaluation of results. Chapter 1 Introduction to Engineering Economy  Electronic spreadsheets are a powerful addition to the analysis arsenal. Most engineering economy problems can be formulated and solved using a spreadsheet. Large problems can be quickly solved. Proper formulation allows key parameters to be changed. Graphical output is easily generated. Chapter 1 Introduction to Engineering Economy  Economics and Consumer Demand Macroeconomics ⮚ studies the economic behavior and relationships of an entire society Microeconomics ⮚ examines relationship between individual consumers and producers Chapter 1 Introduction to Engineering Economy Sta. Maria, H. (2004). Engineering Economy  Demand and Supply How much of a product do we have? Is the demand for that product strong? Quantity Demanded ⮚ The amount of a good or service consumers are willing and able to buy at a particular price Quantity Supplied ⮚ The amount of a good or service producers are willing and able to sell at a particular price Demand shows the relationship between price and quantity demanded, all other factors being equal. Supply shows the relationship between price and quantity supplied, all other factors being equal. Sta. Maria, H. (2004). Engineering Economy Chapter 1 Introduction to Engineering Economy https://www.etownschools.org/cms/lib  Demand and Supply Consumers ⮚ Market participants buying goods and services Producers ⮚ Market participants selling goods and services Equilibrium ⮚ The price-quantity pair where the quantity demanded is equal to the quantity supplied, represented by the intersection of the demand and supply curves Equilibrium Price ⮚ The money payment at which consumers and producers agree to transact Equilibrium Quantity ⮚ The amount of output exchanged at the equilibrium price Market Price ⮚ Point where supply and demand for a product are equal (i.e. Point where supply and demand curves intersect) Chapter 1 Introduction to Engineering Economy Sta. Maria, H. (2004). Engineering Economy  Factors Affecting Demand How strong is the need or want? How available is the supply of products and services to satisfy individual needs? What alternative products could satisfy consumer needs? Price of other goods ( substitute or complementary) Outlook (consumer expectation of future income and prices) Income (normal goods versus inferior goods) Number of potential customers (popularity of market) Taste (fads or fashions) Chapter 1 Introduction to Engineering Economy https://www.etownschools.org/cms/lib  Factors Affecting Supply Productivity (Improvements in machines and production processes of a good or service) Inputs ( Change in the price of inputs required to produce the good or service.) Government Actions (Subsidies, Taxes and Regulations) Technology (Improvements in machines and production processes of a good or service) Outputs ( Price changes in other products produced by the firm) Expectations (outlook of future prices and profits) Size of Industry (Number of firms in the industry) Chapter 1 Introduction to Engineering Economy https://www.etownschools.org/cms/lib  The Law of Demand When the price of a product is increased, less will be demanded. Quantity demanded and price are negatively related (i.e. The demand is downward sloping.) Reasons: income effect and substitution effect Chapter 1 Introduction to Engineering Economy  The Law of Supply More will be supplied as prices increase. Quantity supplied and price are positively related (i.e. The supply is upward sloping.) Reason: Profitability Chapter 1 Introduction to Engineering Economy  Four Basic Laws The Law of Supply 1.If demand increases and supply remains unchanged, then it leads to and Demand _____ equilibrium price and _____ quantity. 2.If demand decreases and supply remains unchanged, then it leads to _____ equilibrium price and ______ quantity. 3.If supply increases and demand remains unchanged, then it leads to ______ equilibrium price and _____ quantity. 4.If supply decreases and demand remains unchanged, then it leads to ______ equilibrium price and _____ quantity. Chapter 1 Introduction to Engineering Economy  Four Basic Laws The Law of Supply 1.If demand increases and supply remains unchanged, then it leads to and Demand higher equilibrium price and higher quantity. 2.If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity. 3.If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity. 4.If supply decreases and demand remains unchanged, then it leads to higher equilibrium price and lower quantity. Chapter 1 Introduction to Engineering Economy  The Law of Diminishing Returns “ When the use of one of the factors of production is limited, either in increasing cost or by absolute quantity, a point will be reached beyond which an increase in the variable factors will result in a less than proportionate increase in output” ⮚ Also called The Law of Diminishing Marginal Returns, The Principle of Diminishing Marginal Productivity and The Law of Variable Proportions At some point, adding an additional factor of production results in smaller increases in output. Example: A factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations. Chapter 1 Introduction to Engineering Economy  The Economic Environment Consumer goods and services ⮚ those products or services that are directly used by people to satisfy their wants Producer goods and services ⮚ used to produce consumer goods and services or other producer goods Chapter 1 Introduction to Engineering Economy Sta. Maria, H. (2004). Engineering Economy  Demand ⮚ The quantity of a certain commodity that is bought at a certain price at a given place and time Elasticity of Demand (ED) ⮚ Responsiveness of the quantity demanded of a commodity to changes in one of the variables on which demand depends ⮚ The percentage change in quantity demanded divided by the percentage change in one of the variables on which demand depends Chapter 1 Introduction to Engineering Economy https://www.toppr.com/guides/business-economics/theory-of-demand/elasticity-of-demand/  Elasticity of Demand (ED) ⮚ The percentage change in quantity demanded divided by the percentage change in one of the variables on which demand depends Variables on which demand can depend: Price of the commodity Prices of the related commodities Consumer’s income, etc. Chapter 1 Introduction to Engineering Economy https://www.tutor2u.net/economics/reference/price-elasticity-of-demand Price Elasticity of Demand (ED) Elastic Demand ⮚ Occurs when a decrease in selling price results in a greater than proportionate increase in sales Inelastic Demand ⮚ Occurs when a decrease in the selling price produces a less than proportionate increase in sales Chapter 1 Introduction to Engineering Economy Price Elasticity of Demand (PED) ⮚ If PED = 0 , demand is perfectly inelastic - demand does not change at all when the price changes – the demand curve will be vertical. ⮚ If PED is between 0 and 1 (i.e. the % change in demand from A to B is smaller than the percentage change in price), then demand is inelastic. ⮚ If PED = 1 (i.e. the % change in demand is exactly the same as the % change in price), then demand is unit elastic. ⮚ If PED > 1, then demand responds more than proportionately to a change in price i.e. demand is elastic. Chapter 1 Introduction to Engineering Economy https://www.tutor2u.net/economics/reference/price-elasticity-of-demand  Perfectly Inelastic Demand (PED = 0) If the coefficient of PED = 0, demand is perfectly inelastic (i.e. demand does not vary with a change in price) A perfectly inelastic demand curve is an extreme case for it implies that consumers are willing and able to pay any price for the product. If supply falls, equilibrium market price can rise without any contraction in the quantity demanded. Chapter 1 Introduction to Engineering Economy https://www.tutor2u.net/economics/reference/price-elasticity-of-demand  Inelastic Demand (0 < PED < 1) If the coefficient of PED < 1, then demand is said to be price inelastic. Inelastic means that when the price goes up, consumers' buying habits stay about the same, and when the price goes down, consumers' buying habits also remain unchanged With a much steeper curve Large changes in price barely affect the quantity demanded. Following a change in price, the total revenue earned by the producing firm will depend on the PED for its product. If the coefficient of PED < 1, a rise in market price (e.g. from P1 to P2) will lead to an increase in total revenue. https://www.tutor2u.net/economics/reference/price-elasticity-of-demand Chapter 1 Introduction to Engineering Economy http://theentrepreneurcoaches.com/elastic-and-inelastic-demand/  Unitary Elastic Demand (PED = 1) A demand curve with unitary price elasticity has a coefficient of PED = 1 (unity) throughout. With a demand curve of unitary price elasticity, a change in price is met with a proportionate change in demand. Total spending by consumers on the product will remain the same at each price level. https://www.tutor2u.net/economics/reference/price-elasticity-of-demand Chapter 1 Introduction to Engineering Economy http://theentrepreneurcoaches.com/elastic-and-inelastic-demand/  Elastic Demand (PED > 1) If the coefficient of PED > 1, then demand is said to be price elastic (i.e. highly responsive to a change in price) With a flatter curve If demand for a product is price elastic, a supplier stands to gain extra revenue if they reduce their prices. The change in quantity demanded will be proportionately higher than the reduction in price. People would rather stop consuming this product or switch to some alternative rather than pay a higher price https://www.tutor2u.net/economics/reference/price-elasticity-of-demand Chapter 1 Introduction to Engineering Economy http://theentrepreneurcoaches.com/elastic-and-inelastic-demand/  Perfectly Elastic Demand (P= ∞) If demand for a product is perfectly elastic, a change in market supply will not lead to any change in equilibrium price. This demand curve applies to highly competitive markets where no supplier has any “pricing power”). Chapter 1 Introduction to Engineering Economy  Income Elasticity of Demand (IED) FIVE TYPES 1. High (IED > 1): A rise in income comes with bigger increases in the quantity demanded (Income Elastic). 2. Unitary (IED = 1): The rise in income is proportionate to the increase in the quantity demanded. 3. Low (0 < IED < 1): A jump in income is less than proportionate than the increase in the quantity demanded (Income Inelastic). 4. Zero (IED =0): The quantity bought/demanded is the same even if income changes (Perfectly Inelastic) 5. Negative (IED < 0): An increase in income comes with a decrease in the quantity demanded. Chapter 1 Introduction to Engineering Economy https://www.investopedia.com/terms/i/incomeelasticityofdemand.asp  IED Interpretation 1. Normal Goods ⮚ With positive IED ⮚ As consumers’ income rises, more goods are demanded at each price level a. Necessity goods : 0< IED < 1 As income rises, the proportion of total consumer expenditures on necessity goods typically declines. b. Luxury Goods: IED > 1 Consumers will buy proportionately more of a particular good compared to a percentage change in their income. 2. Inferior Goods ⮚ With negative IED (IED < 1) ⮚ As consumers’ income rises, they buy fewer inferior goods (e.g. margarine – much cheaper than butter, cheap cars) Chapter 1 Introduction to Engineering Economy  Normal Good vs Inferior Good Chapter 1 Introduction to Engineering Economy https://saylordotorg.github.io/text_principles-of-economics-v2.0/s08-02-responsiveness-of-demand  Necessities vs Luxuries Necessities (0 < IED < 1, Income Inelastic) ⮚ Those products or services that are required to support human life and activities, that will be purchased in somewhat the same quantity even though the price varies considerably ⮚ Goods that are critical to our day-to-day life ⮚ Examples: water, electricity, staple groceries (e.g. bread, milk, eggs) Luxuries (IED > 1, Income Elastic) ⮚ Those products or services that are desired by humans and will be purchased if money is available after the required necessities have been obtained ⮚ Goods we would like to have but are not likely to buy unless our income jumps or the price declines sharply ⮚ Examples: premium cars, jewelries Chapter 1 Introduction to Engineering Economy  Necessities vs Luxuries Chapter 1 Introduction to Engineering Economy https://economix.blogs.nytimes.com/2010/08/19/from-luxury-to-necessity-and-back-again/  Different Market Organizations Chapter 1 Introduction to Engineering Economy https://www.toppr.com/guides/business-economics/meaning-and-types-of-markets/types-of-market-structures/  Different Market Organizations 1. Perfect Competition ⮚ Occurs in a situation where a commodity or service is supplied by a number of vendors and there is nothing to prevent additional vendors entering the market 2. Monopoly ⮚ The opposite of perfect competition ⮚ Exists when a unique product or service in unavailable from a single vendor and that vendor can prevent the entry of all others into the market Chapter 1 Introduction to Engineering Economy  Different Market Organizations 3. Monopolistic Competition ⮚ A common form of industry (market) structure in the US, characterized by a large number of firms, none of which can influence market price by virtue of size alone ⮚ New firms can enter and established firms can exit such an industry with ease. ⮚ Some degree of market power is achieved by firms producing differentiated products Product Differentiation ⮚ A strategy that firms use to achieve market power ⮚ Accomplished by producing products that have distinct positive identities in consumers’ minds Chapter 1 Introduction to Engineering Economy  Different Market Organizations 4. Oligopoly ⮚ A form of industry (market) structure characterized by a few dominant firms ⮚ The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others ⮚ Exists when there are so few suppliers of a product or service that action by one will almost inevitably result in similar action by the others Chapter 1 Introduction to Engineering Economy  Different Market Organizations Perfect Monopoly Monopolistic Oligopoly Competition Competition Number of firms Many One Many Few Product differentiated or Homogeneous A single, unique Differentiated Either homogeneous product Price a decision variable No Yes Yes, but limited Yes Easy Entry Yes No Yes Limited Distinguished by No price Still constrained Price and quality Strategic behavior competition by market competition demand Examples Wheat farming Public utility Restaurants Manufacturing Textile firm Patented drug Clothing stores industries (e.g. automobiles, computers) Chapter 1 Introduction to Engineering Economy https://www.slideshare.net/JacelDeLaRoca/case-micro08-ppt14