Introduction-to-engineering-Economics.pdf

Introduction to Engineering Economics Engineering economy is concerned with the economic aspect of engineering. It involves the systematic evaluation with the economic merits of proposed solutions to the engineering problems. Engineering economics is the application of economic techniques to t...

Introduction to Engineering Economics Engineering economy is concerned with the economic aspect of engineering. It involves the systematic evaluation with the economic merits of proposed solutions to the engineering problems. Engineering economics is the application of economic techniques to the evaluation of design and engineering alternatives. Consumer goods and services are those products or services that are directly used by people to satisfy their wants. Producer goods and services are used to produce consumer goods and services and other producer goods. Price of goods and services is defined to be the present amount of money or its equivalent which is given in exchange for it. Necessities are 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. Luxuries are those products or services that are desired by humans will be purchased if money is available after the required to support human life and activities that will be purchased in somewhat the same quantity even though the price varies considerably. Demand is a quantity of certain commodity that is bought at a certain price at a given place and time Supply is a quantity of a certain commodity that is offered for sale at a certain price at a given place and time. Perfect competition occurs in a situation in which any given product is supplied by a large number of vendors and there is no restriction in additional suppliers entering the market. Perfect monopoly exists when a unique product or service is available from a single supplier and that vendor can prevent the entry of all others into the market. Oligopoly occurs when there are few suppliers and any action taken by anyone of them will definitely after the course of action of the others. Total Revenue is the product of the selling price per unit and the number of units sold. Total Cost is the sum of the fixed costs and the variable costs. Profit/ Loss is the difference between total revenue and the total costs. Cost Terminology Fixed costs are those unaffected by changes in activity level over a feasible range of operations for the capacity or capability available. Variable costs are those associated with an operation that vary in total with the quantity of output or other measures of activity level. Examples are the costs of material and labor used in a product or service. Incremental cost is the additional cost (or revenue) that results from increasing the output of the system by one or more units. Recurring costs are those that are repetitive and occur when an organization produces similar goods or services on a continuing basis. Nonrecurring costs are those which are not repetitive even though the total expenditure may become cumulative over a relatively short period of time. Direct costs are costs that can be reasonably measured and allocated to a specific output or work activity. Indirect costs are those that are difficult to attribute or allocate to a specific output or work activity. Overhead cost consists of plant operating costs that are not direct labor or direct material costs. Standard costs are representative costs per unit of output that are established in advance of actual production or service delivery. Cash costs are that involves payment of cash. Noncash costs (book costs) are costs that does not involve a cash payment, but rather represent the recovery of past expenditures over a fixed period of time. Example is the depreciation charged. Sunk cost is one that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action. Opportunity cost is incurred because of the use of limited resources such that the opportunity to use those resources to monetary advantage in an alternative use is foregone. Investment cost is the capital required for most of the activities in the acquisition phase. Life-cycle cost refers to a summation of all the costs, both recurring and nonrecurring, related to product, structure system, or services during its life span. Working capital refers to the funds required for current assets that are needed for the startup and support of operational activities Operational and Maintenance cost includes many of the recurring annual expense items associated with the operation phase of the life cycle. Disposal cost includes those nonrecurring costs of shutting down the operation and the retirement and disposal of assets at the end of the life cycle. These costs will be offset in some instances by receipts from the sale of assets with remaining value. Economic life coincides with the period of time extending from the date of acquisition to the date of abandonment, demotion in use, or replacement from the primary intended service. Ownership life is the period between the date of acquisition and the date of disposal by a specific owner Physical life is the period between original acquisition and final disposal of an asset Useful life is the time period that an asset is kept in productive service (either primary or backup). It is an estimate of how long an asset is expected to be used in a trade or business to produce income. The Law of Supply and Demand The law of supply and demand may be stated as follows: “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 the demand being equal” High Demand + Low Supply: If many people want apples but there aren’t many available, the price usually goes up because people are willing to pay more to get them. Low Demand + High Supply: If there are lots of apples but not many people want them, the price usually goes down because sellers want to get rid of them. In summary, the Law of Supply and Demand means that prices go up when demand is high and supply is low, and prices go down when demand is low and supply is high. The Law of Diminishing Returns “When the use of the one of the factors of the production is limited, either in increasing cost or by absolute quantity, a point will be reached beyond which an increase 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.”