MBEYA UNIVERSITY OF SCIENCE

AND TECHNOLOGY
DEPARTMENT OF MECHANICAL AND
INDUSTRIAL ENGINEERING
ENGINEERING ECONOMICS
Course code: ME 8311
Instructor: Emmanuel Mwangomo
LECTURE NUMBER ONE
Nature and Scope of Economics;
Definition and Scope of Engineering
Economics
 Course Aim

• Engineering Economy is the process of making

rational and intelligent decisions associated
with the allocation of scarce resources in
circumstances in which alternatives can be
enumerated.
• This course provides engineers with skills to
assess the costs and benefits of engineering
investments, such as product and technology
development programs and capital purchases.
 Course Aim

• It also presents the framework for selecting among

alternative designs, for managing technologies over their
lifecycles, and for evaluating the finances of new
ventures/projects.
• Also Emphasizes the systematic evaluation of the costs
and benefits associated with proposed technical projects.
• The student will be exposed to the concepts of the “time
value of money” and the methods of discounted cash
flow. Students are prepared to make decisions regarding
money as capital within a technological or engineering
environment.
 Course expected learning outcomes

• At the end of this course a student should be

able to:
The student will use financial functions to
model and solve engineering economic analysis
To Understand the concepts of the time value of
money and interest rates
 Demonstrate the effects of depreciation,
income taxes, inflation and price change in
engineering economic analysis problems.
 Course expected learning outcomes

Assess alternatives and cash flows under risk

with varying parameters
solve economical problems involving
comparison and selection of alternatives by
using variety of analytical techniques including
present worth analysis, annual worth analysis,
future worth analysis, rate of return analysis,
benefit-cost ratio, sensitivity and breakeven
analyses, and payback period analysis
• Course status: Core
• Course credits: 8
• Total hours spent: 80
 Course content

• Nature and Scope of Economics

• Time value of money
• Risk and Return analysis
• Investment appraisal (capital budgeting)
• Cost Classification, Techniques and Behaviour
• Value Engineering and Decision Making
Techniques
• Accounting for Depreciation and Income Taxes
 Course content

• Understanding Financial Statements;

Accounting
• Equivalence Calculations under Inflation
• Engineering Economic Decisions
 Teaching and learning activities

• Lectures and tutorials

 Assessment method:

• Continuous Assessment 40%

• Semester Examination 60%
 Reading List
• Panneer Selvam, R, (2001), Engineering
Economics‖, Prentice Hall of India Ltd, New Delhi,
• Suma Damodaran(2006), Managerial
economics‖, Oxford University press.
• Chan S.Park, (2002), Contemporary Engineering
Economics‖, Prentice Hall of India,
• Donald.G. Newman, Jerome.P.Lavelle, (2002),
Engineering Economics and analysis‖Engg. Press,
Texas,
 Reading List
• Truett & Truett, (2004), Managerial economics-
Analysis, problems & cases ― Wiley India 8th edition
• Benedict, A. & Elliott, B. (2008), Financial
Accounting: An Introduction, Harlow: Pearson
Education Ltd.
• Davies, T. &Boczko, T. (2005), Financial accounting
an introduction. Berkshire: Mc Graw Hill Education
(UK) Limited
• Wood, F. & Sangster, A. (2005) Business accounting1
& 2. 10th Edition. China: FT Prentice Hall
 Nature and Scope of Economics

• Economics is regarded as a social science; it

studies how people in an economy employ the
already scarce resources with or without using
money.
• Hence, they use these scarce resources with
alternative uses for manufacturing, buying,
and the consumption of goods and services.
 Nature and Scope of Economics
• Economics is a social science which means it
studies society and relationships between people.
• Economists analyse many different aspects of
human behaviour and decision-making within and
between markets, organisations and countries.
• Economies of scope describe situations where
producing two or more goods together results in a
lower marginal cost than producing them
separately.
 DEFINITION OF ECONOMICS
• Economics is the study of scarcity and its
implications for the use of resources,
production of goods and services, growth of
production and welfare over time, and a great
variety of other complex issues of vital
concern to society.
 Definition and Scope of Engineering
Economics
• Engineering economics is concerned the
systematic evaluation of the benefits and
costs of projects involving engineering design
and analysis.
• Engineering economics quantifies the benefits
and costs associating with engineering
projects to determine if they save enough
money to warrant their capital investments.
• Engineering is the profession in which knowledge of
the mathematical and natural sciences gained by
study experience and practice is applied with
judgment to develop ways to utilise economically the
material and forces of nature for the benefit of
mankind
• Engineering Economics is a subject of vital importance
to Engineers. This subject helps one understand the
need for the knowledge of Economics for being an
effective manager and decision maker.
• Engineering economics involves the systematic
evaluation of the economic benefits of
proposed solutions to engineering problems.
• The engineering economics involves technical
analysing with emphasis on the economic
aspects and has the objective of assisting
decisions.
 Engineering Economy
• It is used to answer many different questions
– Which engineering projects are worthwhile?
• Has the mining or petroleum engineer shown that the
mineral or oil deposits is worth developing?
– Which engineering projects should have a higher
priority?
• Has the industrial engineer shown which factory
improvement projects should be funded with the
available dollars?
– How should the engineering project be designed?
• Has civil or mechanical engineer chosen the best
thickness for insulation?

19
 SCOPE OF ENGINEERING ECONOMICS
• The scope of the Engineering Economics
covers the research that considers
innovations-driven change in business, public
and financial domains, which contribute to a
qualitative transformation of economies.
 SCOPE OF ENGINEERING ECONOMICS
• Engineering economics is based on the principles of
microeconomics and is used to analyze and compare
the costs, benefits, and risks of different engineering
projects.
• It is important to understand the scope of engineering
economics, as it can provide engineers with valuable
insight into the financial aspects of their projects.
• The scope of engineering economics includes the
analysis of the costs and benefits associated with
different engineering projects.
 Definitions, nature and scope of Micro
and Macro Economics
• Micro Economics
• Microeconomics is the study of individuals,
households and firms' behavior in decision
making and allocation of resources.
• It generally applies to markets of goods and
services and deals with individual and
economic issues.
 Micro Economics

• Microeconomics shows how and why different

goods have different values, how individuals
and businesses conduct and benefit from
efficient production and exchange, and how
individuals best coordinate and cooperate
with one another.
• Generally speaking, microeconomics provides
a more complete and detailed understanding
than macroeconomics.
 Macro Economics
• Macroeconomics focuses on the performance
of economies – changes in economic output,
inflation, interest and foreign exchange rates,
and the balance of payments.
• Poverty reduction, social equity, and
sustainable growth are only possible with
sound monetary and fiscal policies.
 Macro Economics
• Macroeconomics is a branch of economics
that studies how an overall economy—the
markets, businesses, consumers, and
governments—behave.
• Macroeconomics examines economy-wide
phenomena such as inflation, price levels, rate
of economic growth, national income, gross
domestic product (GDP), and changes in
unemployment.
 Macro Economics
• Some of the key questions addressed by
macroeconomics include: What causes
unemployment? What causes inflation? What
creates or stimulates economic growth?
• Macroeconomics attempts to measure how
well an economy is performing, understand
what forces drive it, and project how
performance can improve.
Positive and Normative Economics Scope
of Economics
• The term positive economics refers to the objective
analysis in the study of economics. Most economists
look at what has happened and what is currently
happening in a given economy to form their basis of
predictions for the future.
• Normative economics (as opposed to
positive economics) is the part of economics that
deals with normative statements. It focuses on the
idea of fairness and what the outcome of the
economy or goals of public policy ought to be
 Positive and Normative Economics Scope
of Economics
• Economists commonly prefer to distinguish
normative economics ("what ought to be" in
economic matters) from positive economics
("what is").
• Many normative (value) judgments, however,
are held conditionally, to be given up if facts or
knowledge of facts changes, so that a change
of values may be purely scientific
 Central problems of Economy
• Production, Distribution, and Exchange of goods and
services are among the basic economic activities of life.
• During the period of these economic activities, every
society has to suffer from scarcity of resources and it is
the scarcity of resources that arises the problem of
choice.
• The scarce resource of an economy has several usages.
In other words, every society decides how to use scarce
resources optimally? The problems of an economy are
often summarized in the following three ways:
 Central problems of Economy
• The three Central Problems of an Economy
are?
• What to Produce and in What Quantity?
• How to Produce?
• For Whom to Produce?
What to Produce and in What Quantity?

• This problem refers to the decisions regarding

the selection of different commodities and the
quantities that need to be produced.
• Labour, land, machines, capital, equipment,
tools and natural resources are limited. So, it
is not possible to fulfil society’s every demand.
• Therefore, it is important to decide what
goods and services are required to be
produced and in what quantity?
 How to Produce?

• This problem is about the choice of techniques

that need to be adopted and used in the
production of goods and services.
 For Whom to Produce?

• One of the most crucial problems of the economy is to

decide which commodities shall be produced for which
sections of society.
• For instance, essential goods and services are in demand
from all sections of society, but only certain sections of
society have a demand for luxury commodities.
• At the same time, choices of goods and services rest on
prevalent tastes and preferences in an economy. Hence,
considerations regarding the socio-economic conditions
of a country or market are highly pertinent to this
problem.
 Scarcity
• Scarcity is one of the key concepts of
economics. It means that the demand for a
good or service is greater than the availability
of the good or service.
• Therefore, scarcity can limit the choices
available to the consumers who ultimately
make up the economy.
 Scarcity
• Natural resources like gold, oil, silver and
other fossil fuels are naturally rare.
• When demand exceeds the supply, these
resources become scarce and prices can go
up.
• Other commodities, like diamonds, command
a high price because of their limited
availability and control of their market.
 Scarcity
• The causes of scarcity can be due to a number
of different reasons, but there are four
primary ones.
• Poor distribution of resources, personal
perspective on resources, a rapid increase in
demand, and a rapid decrease in supply are all
potential scarcity causes.
 Choice and opportunity costs
• The opportunity cost of a choice is the value
of the best alternative given up.
• Choices involve trading off the expected value
of one opportunity against the expected value
of its best alternative.
• The evaluation of choices and opportunity
costs is subjective; such evaluations differ
across individuals and societies.
 Production Possibility Curve and
Opportunity Costs
• The Production Possibilities Curve (PPC) is a
model that captures scarcity and the
opportunity costs of choices when faced with
the possibility of producing two goods or
services.
• Points on the interior of the PPC are
inefficient, points on the PPC are efficient, and
points beyond the PPC are unattainable.
 Production Possibility Curve and
Opportunity Costs
• A production possibilities curve in economics
measures the maximum output of two goods
using a fixed amount of input.
• The input is any combination of the four
factors of production: natural resources
(including land), labor, capital goods, and
entrepreneurship.
 Production Possibility Curve and
Opportunity Costs
• In economics, the production possibilities
curve is a visualization that demonstrates the
most efficient production of a pair of goods.
• Each point on the curve shows how much of
each good will be produced when resources
shift to making more of one good and less of
another
Production Possibility Curve and
Opportunity Costs
 Understanding Economic Systems (A traditional
economy, A market economy, A command (or
planned) economy and A mixed (or hybrid) economy)

• An economic system is a means by which

societies or governments organize and
distribute available resources, services, and
goods across a geographic region or country.
• Economic systems regulate the factors of
production, including land, capital, labor, and
physical resources.
 Law of supply and demand
• The law of supply and demand predicts that if
the supply of goods or services outstrips
demand, prices will fall.
• If demand exceeds supply, prices will rise. In a
free market, the equilibrium price is the price
at which the supply exactly matches the
demand
 Law of supply and demand
• The law of supply and demand is based on
two other economic laws: the law of supply
and the law of demand.
• The law of supply says that when prices rise,
companies see more profit potential and
increase the supply of goods and services. The
law of demand states that as prices rise,
customers buy less
 Law of supply and demand
• Theoretically, a free market will move toward
an equilibrium quantity and price where
supply and demand intersect.
• At that point, supply exactly matches the
demand — suppliers produce just enough of a
good or service, at the right price, to satisfy
everyone's demands.
 Theory of Production
• In economics, production theory explains the
principles in which the business has to take decisions
on how much of each commodity it sells and how
much it produces and also how much of raw material
ie., fixed capital and labor it employs and how much it
will use.
• It defines the relationships between the prices of the
commodities and productive factors on one hand and
the quantities of these commodities and productive
factors that are produced on the other hand.
 Theory of Production
• The theory of production deals with the
relationship between the factors of production
and the output of goods and services.
• The law of variable proportions can explain
how increasing units of a single input will
cause the output to vary.
 Guiding Questions
• Why is it important for an owner of a company
to understand the theory of production?
• What is the easiest factor of production to
change in order to vary total product output?
 Cost and Revenue
• Revenue is the total amount of money
received by the company for goods sold or
services provided during a certain time period.
• Cost of Goods Sold are the direct costs
attributable to the production of the goods
sold by a company.
 Cost and Revenue
• Cost of revenue is the total of all costs
incurred directly in producing, marketing, and
distributing the products and services of a
company to customers.
• Cost of revenue can be found in the company
income statement.
Cost and Revenue
 Business Cycle

• The business cycle is the natural rise and fall

of economic growth that occurs over time.
• The cycle is a useful tool for analyzing the
economy and can help you make better
financial decisions.
• The business cycle goes through four major
phases: expansion, peak, contraction, and
trough.
• All economies go through this cycle, though
the length and intensity of each phase varies.
• The Government Reserve helps to manage
the cycle with monetary policy, while heads of
state and governing bodies use fiscal policy
 Business Cycle

• When businesses are increasing production,

they need more employees.
• As a result, more people are hired, there is
more money to spend, and businesses make
more profits and can focus on growth.
• The rate at which production and consumption
change positively is called "economic
expansion." It continues until circumstances
occur that cause production to slow.
 Business Cycle

• If business production slows, not as many

employees are needed.
• As a result, consumers have less spending
money, and businesses reduce spending on
growth.
• The rate at which production and
consumption as a whole change negatively is
called "economic contraction."
 What Influences the Business Cycle?

• The government monitors the business cycle,

and legislators attempt to influence it by
implementing tax and spending changes.
• When the economy is expanding, taxes can be
increased, and spending can be decreased.
• If it's contracting, the government can lower
taxes and increase spending. This is called
fiscal policy
 What Influences the Business Cycle?

• The Government Reserve, the nation's central

bank(BOT), influences the business cycle by
influencing inflation and unemployment with
targeted rates.
• It uses tools designed to change interest
rates, lending, and borrowing by businesses,
banks and consumers. This is called
monetary policy
END OF PRESENTATION

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