Engineering Economics (MS-201)
BS (Electrical Engineering) Program
7th Semester, Session-2013
Lecture# 01
Introduction to Economy
(Campbell, Ch#1, Thuesen, Ch#1)
1
Engineering
Engineering is the
profession in which knowledge
of the mathematical and natural science
gained by study, experience and practice is
applied with judgment to develop ways,
to utilize economically the materials
and forces of nature for the
benefit of mankind.
2
Bi-environmental Nature of Engineering
The following figure shows how engineering is composed of physical
and economic components
The Total Environment
Engineering
Physical
environment
Produce products and
services based upon physical
laws (e.g. Newton’s law)
Production
or
construction
Economic
environment
Assessing the worth of these
products/services in
economic terms
3
Physical & Economic Efficiency
ℎ
=
=
ℎ
• Physical efficiency is related to economic efficiency.
• In feasible economic ventures the economic worth per unit of physical
output must always be greater than economic cost per unit of physical
input.
• Physical efficiency is always significant but only to the extent that it
contribute to economic efficiency.
4
Class Exercise
Physical efficiencies over 100% are not
possible but economic efficiencies can exceed
100% and must do so for economic ventures
to be successful.
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The Economic Perspective
Economics
The social science
concerned with how individuals,
institutions and society make optimal
(best) choices under conditions
of scarcity.
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Economic Resources
• All natural
resources
• Forests,
minerals, water
resources, wind
power, sunlight
• Takes initiative and
innovates
• Makes strategic
business decisions
• Bears risk
Land
Labor
Entrepreneurial
Ability
Capital
• Physical actions
and
mental
activities
• Machinist,
analysis,
physicist,
designer etc.
• Manufactured aids
used in producing
consumer goods
• Storage,
transportation,
tools, machinery
7
Reading Assignment
Difference between
capital goods &
consumer goods.
Difference between
labor and
entrepreneur.
https://en.wikipedia.org/
wiki/Resource
What is a resource?
Benefits of resources?
Types of resources
Differentiate between
multiple resources
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The Problem
The economic problem is to match limited
resources to unlimited wants and needs.
Limited
Scarce
resources
Unlimited
wants and
needs
9
Wants & Needs
Make a list of your
wants and needs
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Scarcity
• Scarcity- Not enough, rare
• Scarce economic resources mean limited goods
and services
• Scarcity in economics means there is not
enough of everything to go around.
• All resources are limited in supply. Therefore,
decisions must be made how best to use
natural resources, workers and capital.
11
12
A Question
What is an example of scarcity in your life?
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Choices
We can’t have it all. We must decide, what we
will have and what we must forgo.
The
first
lesson
of
Economics is Scarcity and
Choices: you can’t have it all.
One must make choices. 
The
first
lesson
of
emotions is Patience: You
can have it all. But you
can’t have it all at once 
The first lesson of Politics
is to disregard first lesson
of Economics. :p
14
Purposeful Behaviour
Economics assumes that individuals act
“rationally” and in their own “self-interest”
• Rational Self Interest - looking and pursuing
opportunities to increase utility and
personal satisfaction
• Costs and benefits are weighed
• Decisions are purposeful and made with a
desired outcome in mind
15
Opportunity Costs
• The idea is that “there is no free lunch”.
• To obtain more of one thing, society forgoes the
opportunity of getting the next best thing.
• That sacrifice is the opportunity cost of the
choice.
16
17
A Question
What is an example of Opportunity cost in
your life?
18
Marginal Analysis
• It is the comparison of marginal benefits and
marginal costs for decision making.
• A measure of relative benefit or cost gained or lost
from an increase or decrease in the consumption
of the good or service.
Cost
Benefit
19
An engineer deciding
between a paid full
version
of
software
Application and 30-day
free trial online version.
Should you
supersize your fries?
Should Telecom sector offer 4G services in remote areas?
University Administration conducting a
Marginal Analysis to decide whether to hire a
Phd Professor or two Asstt. Professors or
Three Lecturers?
20
Class Exercise
Perform a quick Cost-benefit analysis for a
new Caféteria in University.
21
22
Micro and Macro Economics
Micro economics
Studies the economy at the level of individual
customers, workers, goods, markets, households and
business firms.
Macro economics
Studies the economy as a whole, at the aggregate
level.
Examines total consumer behaviour, total
employment, total production, total sales etc.
23
Positive and Normative Economics
Positive Economics
• Focuses on “what is”
• Analyses actual, measureable outcomes
• Does not impose value judgements, personal feelings and
convictions
• Positive economics is economics as a science
Normative Economics
• Focuses on what someone thinks “ought to be” or “should
be”
• Makes ethical judgements- value judgements
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Class Exercise
(Mark Positive and Normative Statements)
1. The retired population of Mexico has increased over the last
15 years.
2. High mortgage interest rates encourage saving.
3. University students should be funded from a new, higher
rate of income tax.
4. Nobody should have to pay for hospital treatment.
5. Boys learn slower than girls.
6. Mobile phones should be banned in all public places.
7. Boys should be given higher university loans than girls.
8. The moon is made of cheese.
9. The present level of income tax is unfair.
10. The Nigerian balance of payments deteriorated last month.
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Quote of the Week
“If you want to be rich, you’ve got to read and
understand numbers”
Rich Dad, Poor Dad by Robert T. kiyosaki
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