Introduction to Engineering Economics PDF

Introduction to Engineering Economics Engr. Julian Clement C. Villanueva Instructor Engineering as defined by the Accreditation Board for Engineering Technology is “the profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with...

Introduction to Engineering Economics Engr. Julian Clement C. Villanueva Instructor Engineering as defined by the Accreditation Board for Engineering Technology is “the profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgement to develop ways to utilize, economically the materials and forces of nature for the benefit of mankind”. Engineering Process Determination of Objectives Identification of Strategic Factors Determination of Means Evaluation of Engineering Proposals Assistance in Decision Making Engineering Economy involves the systematic evaluation of the economic merits of proposed solutions to engineering problems. to be economically acceptable solutions to engineering problems must demonstrate a positive balance of long-term benefits over long-term costs they must also promote the well-being and survival of the organization embody creative and innovative technology and ideas permit identification and scrutiny of their estimated outcomes Principles of Engineering Economy Develop alternatives Focus on differences Use a consistent viewpoint Use a common unit of measure Consider all relevant criteria Make risk and uncertainty explicit Revisit Decision Develop alternatives A decision situation involves making a choice among two or more alternatives. Developing and defining the alternatives for detailed evaluation is important because of the resulting impact on the quality of the decision Creativity and innovation are essential to the process. One alternative that may be feasible in a decision situation is making no change to the current operation or set of conditions. Use a constant viewpoint The prospective outcomes of the alternatives, economic and other, 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. However, it is important that the viewpoint for the particular decision be first defined and then used consistently in the description, analysis, and comparison of the alternatives. Consider all relevant criteria Selection of a preferred alternative requires the use of a criterion. The decision process should consider both the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner. The decision maker will normally select the alternative that will best serve the long-term interests of the owners of the organization. Make risk and uncertainty explicit Selection of a preferred alternative requires the use of a criterion. The decision process should consider both the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner. The decision maker will normally select the alternative that will best serve the long-term interests of the owners of the organization. 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 significantly different from the initial estimates of the consequences. Some terminologies of Engineering Economy Necessities Luxuries Goods Services Marketing Marketing a product Necessities are products or services that are required to support human and activities that will be purchased in somewhat the same quantity even though the prices vary considerably. Luxuries are products and services that are desired by humans and will be purchased if money is available after the required necessities have been obtained. Consumer and Producer Goods and Services Goods Defined as anything that anyone wants or needs Services Would be the performance of any duties or work for another; helpful or professional activity Marketing Refers to the distribution of goods and services Marketing a product Refers to the advertising and other efforts to promote a product sale Different type of Goods Consumer Goods Those such as food and clothing that satisfy human wants and needs. Producer Goods Raw materials and tools, used to make consumer goods. Capital Goods are the machinery, used in the production of commodities in producer goods. Supply and Demand Supply Refers to how many of a certain good or services are available for people to purchase. Demand means how many people wish to buy that good or service. Law of Supply and Demand Under conditions of perfect competition, the price at which a given product will be supplied and purchased is the price that will result in the supply and demand being equal. Supply and Demand Supply Refers to how many of a certain good or services are available for people to purchase. Demand means how many people wish to buy that good or service. Law of Supply and Demand Under conditions of perfect competition, the price at which a given product will be supplied and purchased is the price that will result in the supply and demand being equal. Law of Supply and Demand The law of supply and demand is the theory that prices are determined by the relationship between supply and demand. If the supply of a good or service outstrips the demand for it, prices will fall. If demand exceeds supply, prices will rise. The law of demand states that as prices rise, customers buy less The law of supply that when prices rise, companies see more profit potential and increase the supply of goods and services Relationship of Supply and Demand Shortage The supply is less than the demand Surplus The supply exceeds the demand Equilibrium point The supply is equal to the demand Types of Demand Elastic Demand exists when there is a greater change in quantity demanded as a response to a change in price. Inelastic Demand exists when there is a lesser change in quantity demanded as a response to a change in price. Unitary Demand exists when there is an equal change in price and quantity demanded (increase or decrease). Factors that Influence Demand Income Population Taste and preference Price Expectation Price of Related Goods Market Structures Engr. Julian Clement C. Villanueva Instructor Market Situations Market - the exchange mechanism that brings together the sellers and the buyers of product, factor of production or financial security. It may also refer to the place or area in which buyers and sellers exchange a well defined commodity. Buyer or consumer - the basic consuming or demanding unit of a commodity It may be an individual purchaser of a good or service, a household (a group of individuals who make joint purchasing decisions), or a government. Seller - an entity which makes product, good or service available to buyer or consumer in exchange of monetary consideration. Perfect Competition also known as atomistic competition refers to the market situation in which any given product is supplied by a very large number of vendors and there is no restriction against additional vendors from entering the market. Perfect competition is a type of market situation characterized by the following: Many sellers and many buyers Homogeneous products Free market-entry and exit Perfect information Absence of all economic friction Perfect Competition Many sellers and many buyers Since there is a large number of sellers and a large number of buyers, each seller and buyer will become sufficiently small to be unable to influence the price of the product transacted. Homogenous Products The products offered by the competing sellers are identical not only in physical attributes but are also regarded as identical by the buyers who have no preference between the products of various producers. Free market-entry and exit There are no barriers to entry or impediments to the exit of the existing sellers. Perfect Competition Perfect information All buyers and all sellers have complete information on the prices being asked and offered in all other parts of the market. Absence of all economic friction There is a total absence of economic friction including transport cost from one part of the market to another. This market situation provides an assurance of complete freedom on the part of both the vendors and the buyers though the latter benefits more from the reduced prices brought about by the competition while more and better services are afforded by the vendors or players in the industry. Monopoly Opposite of perfect competition Monopoly is characterized by One seller and many buyers A market comprised of a single supplier selling to a multitude or small, independentlyacting buyers. Lack of substitute products There are no close substitutes for the monopolist’s product Blockaded entry Barrier to entry are so severe that it is impossible for other sellers to enter the market Monopoly Perfect monopoly If the single vendor can prevent the entry of all vendors into the market The monopolist is in the position to set the market place Natural monopoly Market situation where economies of scale are so significant that costs are only minimized when the entire output of an industry is supplied by a single producer so that supple costs are lower under monopoly than under perfect competition and oligopoly. Oligopoly exists when there are so few suppliers of a product or service that the action of one will inevitably result in a similar action by the other suppliers. Some characterization of Oligopoly Few seller and many buyers Homogeneous or differentiated products Difficult market entry Market Situations Market Situation Sellers Buyers Perfect Competition Many Many Monopoly One Many Monopsony Many One Bilateral monopoly One Duopoly Two Many Duopsony Many Two Oligopoly Few Many One Oligopsony Many Few Bilateral oligopoly Few Few