Engineering Economics| ME 2001 | 3 Credits | 3 0 0 3

Engineering Economics
Course Outcomes
• Understand various economic decision-making concepts applicable to engineering.
• Estimate the present, annual and future worth, rate of return for various types of cash flows.
• Evaluate uncertainty and risk analysis in future events.
• Analyses for replacement analysis and break-even analysis.
• Calculate depreciation and expenses.

Course Instructor
Rahul Khatri
Assistant Professor
Department of Mechanical Engineering
Ph: +91-9214556535
Faculty Block 1, 1AB

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 Syllabus
Thesis Outline
Introduction to Engineering Economics, Concept and Value Analysis, Economic Decision
Making, Types of Estimates, Accounting and Control, Elements of Cost, Prime Cost,
Overheads, Types of Cost, Process Cost & Cost of Production, Break Even Analysis,
Inventory Control & Management, EOQ, Financial Analysis, Simple payback, Return on
Investment, NPV (Net Present Value), IRR (Internal rate of Return), Life Cycle Cost
Method, Sensitivity Analysis, Project Financing Options.
Budget and Budgetary Control, Concept of Budgeting, Type of Budgets. Risk - Risk vs
Return, System Concept and Value Analysis, System Analysis & System Engineering, Value
Analysis. Replacement Analysis, Depreciation, Network Analysis, Network Techniques,
PERT (Programme evaluation and review technique), CPM (Critical Path Method).

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 Study Material Resources
Thesis Outline
Text Books Reference Books
T1. R. Panneerselvam, Engineering R1. E.L. Grant, W.G. Ireson and R.S.
Economics, Prentice Hall of India. Leavenworth, Principles of Engineering
T2. J.L. Riggs, D.D. Bedworth and S.U. Economic Analysis, John Wiley.
Randhawa, Engineering Economics, R2. G,J. Tuesen, W.J. Fabrycky and H.G.
McGraw Hill Education. Tuesen, Engineering Economy, Prentice
T3. P.L. Mehta, Managerial Economics, Hall of India.
Sultan Chand & Sons.
R3. L. Blank and A. Tarquin, Engineering
Economy, McGraw Hill Education.
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 Assessment Rubrics
Thesis Outline
Criteria Description Maximum
Marks
Mid Term Examination 30
Internal Assessment Quizzes and Assignments, Activity 30
(Summative) (CWS)

End Term Exam End Term Examination 40

(Summative)

Total 100
Attendance A student must have maintained a 75% attendance
(Formative) rate in order to eligible for the End Term
Examination. The 25 % allowance covers all leaves,
not just medical ones.
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 Case Study
Case 1: Renewable Energy Project : A company plans to invest in a solar energy farm capable of generating 100 MW of
electricity to supply power to nearby communities.

Economics Perspective:
• Analysing the project from an economics standpoint would involve evaluating the overall impact on society,
considering both direct and indirect effects.
• The economic analysis would assess the project's potential to create jobs, reduce carbon emissions, and contribute to
sustainable development.
• It would also include an examination of market demand, the effects on electricity prices, and potential externalities.

Engineering Economics Perspective:

• In engineering economics, the primary focus would be on the financial feasibility of the project.
• Calculations would involve determining the initial investment cost, operating expenses, and expected revenue from
electricity sales.
• Various financial metrics, such as Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period, would
be used to evaluate the project's financial viability.

Conclusion : The economics perspective provides a broader view of the project's social implications, while engineering economics
emphasizes the financial feasibility and profitability of the investment. Integrating both approaches can lead to well-informed
decisions that consider not only economic viability but also social and environmental impacts.
Case 2: Transportation Infrastructure Development : A government is considering constructing a high-speed rail network
connecting major cities in the country.

Economics Perspective:
• An economic analysis would assess the potential benefits of reduced travel time, increased connectivity, and improved
regional economic development.
• It would consider the project's impact on income distribution, employment opportunities, and economic growth across
regions.
• Furthermore, it would analyse potential negative consequences, such as environmental impacts and displacement of
communities.
Engineering Economics Perspective:
• The engineering economics analysis would focus on estimating the construction and maintenance costs, as well as
projecting the revenue from ticket sales.
• The financial assessment would include determining the project's economic life and calculating various financial metrics to
determine its profitability.

Conclusion : In this scenario, the economics perspective would emphasize the project's socio-economic impact on a national scale,
while engineering economics would provide a detailed financial assessment. Both perspectives are essential for evaluating the project's
potential success and ensuring it aligns with broader economic and societal objectives.
 Lecture 1

Introduction to Engineering Economics

• Nature, scope, basic problems of an economy

• Microeconomics and macroeconomics.

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Economics - Definitions Lecture 1

CHOICE
Wants

Human SCARE
RESOURCES (allocation of
needs. UNLIMITED
(limited
resources
WANTS among goods
possibilities of
(for goods and and services to
producing for
services) achieve
Vs goods and
maximum
services)
satisfaction
When wants exceed the
Scarcity

Fig. 1: The economic problem

resources available to
satisfy them, there is
Economics is the study of choices
scarcity.
people make to cope with scarcity

ü Scarcity : Extensive Economic Problem

Economics deals with the allocation of
scarce resources among alternative uses
ü Faced with scarcity, people must make choices. to satisfy human wants.
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Basic Economics Problems Lecture 1

What commodities are being

produced and in what quantities ?
(What to produce ?) Resource
Allocation

By what methods are these

commodities produced?
(How to produce ?)
Labour Intensive; Capital Intensive

How is society’s output of goods and

services divided among its members? No of Roads Build
(For whom to produce ?)
Distribution
of Income Production Possibilities Curve of a Country

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Basic Economics Problems Lecture 1

Change in resources

Change in Technology
Increase in Decrease in
available resources available resources
Improvement in Degradation in
Technology Technology

Implies low
growth

Low
Investment

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Production Possibilities Curve of a Country
 Basic Economic Goals, Micro/Macro-economics Lecture 1

v Economics is the science that deals with the Microeconomics

production and consumption of goods and Branch of economics that deals
services and the distribution of these for with the behavior of individual
human welfare. economic units—consumers,
firms, workers, and investors—as
High level of employment
Economic Goals

ü well as the markets that these

ü Price stability units comprise.
ü Equitable distribution of income Macroeconomics
ü Growth Branch of economics that deals
Ø Some of the above goals are interdependent, with aggregate economic
not always complementary and may be variables, such as the level and
conflicting. growth rate of national output,
Ø Eg. Any move to have a significant reduction interest rates, unemployment, and
in unemployment will lead to an increase in inflation.
inflation. 11
 Engineering Economics Lecture 1

ü Engineering is an application of science.

Engineering

ü It is an art composed of the skill and simplicity in adopting knowledge to the

uses of the humanity.
ü Engineering is primarily a producer activity. Essentially a physical process
with the objective being the maximization of physical efficiency.

Physical Production or Economic

Environment Construction Environment
Engineering
Economics

• Engineering • Wants
proposals satisfaction

Engineering Economics - deals with decisions to be taken based on

need/want recognition to its satisfaction, through series of steps
involving developing alternatives, evaluating them & decision-making
and its efficient execution. 12
Economic System: Working Lecture 1

An economic system is an entire set of arrangements and institutions meant for

meeting the two-fold objectives of a society:

– increasing the availability of resources

– ensuring the economic use

Types of economic systems are based following:

ü per capita income,
ü prioritization of individuals to spend their resources, and
ü scarcity of both income and resources

Types of economy system

Ø Capitalist Economy:
Ø Socialist Economy
Ø Mixed Economy
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Capitalist Economy Lecture 1

Ø Capitalist Economy: characterized by free markets and the absence of

government intervention in the economy.

Merits: Demerits:
Ø Self regulatory. Ø Capitalism generates inequalities of
Ø Process of economic growth is faster income and wealth.
Ø Decides ‘what to produce’ and ‘how to Ø Wide differences in economic
produce’ in agreement with with the forces opportunities.
of demand and supply. Ø Distortion in the production pattern.
Ø Ensure a high degree of operative efficiency Ø Capitalism wastes its productive resources.
in the system. Ø Production of merit goods is not profitable.
Ø Provides flexibility to adapt to the changed Ø Business units produce only those goods
circumstances. and services which are profitable.
Ø Loss of human values and welfare.
Ø Increases the wastage of resources as a
result of competition.
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Socialist and Mixed Economy Lecture 1

Ø Socialist economy discards the use of market mechanism and replaces it with some
form of regulatory authority, such as the planning commission.
Ø It also abolishes the institutions of private property and inheritance.
Merits: Demerits:
Ø social security Ø cyclical fluctuations of national income and prices
Ø elimination of fluctuations of economy Ø not able to provide economic incentives
Ø coordinated development Ø continues to suffer from slow growth rate, poor
Ø elimination of social disputes. productivity of labour and low per capita income.

Ø Mixed economy:
– avoid the ill-effects of both capitalism and socialism
– secure the benefits of both
Ø The selection of detailed features of a mixed economy is made with reference to the working of
market mechanism, and its expected effects (both beneficial and harmful) on the society as a
whole.
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Thank you

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