UNIT – I.ppt

1. UNIT I INTRODUCTION TO
ECONOMICS
Dr. A. Asha
Professor/MehacnicalEngineering
KamarajCollege of Engineering & Technology,
Virudhunagar
December 2016

2. ECONOMICS
Definition:Prof.LionelRobbinsdefineseconomicsas
“Sciencewhichstudieshumanbehaviorasarelationship
betweenendsandscarcemeanswhichhavealternative
means”
AlfredMarshalldefinedeconomicsas“Astudyofmankindin
theordinarybusinesslife,itexaminesthatpartofindividual
andsocialactionswhichismostcloselyconnectedwiththe
attainmentandwiththeuseofmaterialrequisites'ofwell
being.
SimpleDefinition:Astudyofhowlimitedresourcesareused
tosatisfyunlimitedhumanwants

3. OBJECTIVES OF ECONOMICS
•Ahighlevelofemployment
•Pricestability
•Efficiency
•Anequitabledistributionof
income
•Growth

4. FLOW IN AN ECONOMY
1.Theflowofgoods,services,resourcesandmoney
paymentsresultsinasimpleeconomy
2.Householdsandbusinessfirmsarethetwomajor
entitiesinasimpleeconomy.
3.Businessorganizationsusevariouseconomic
resourcessuchasland,labourandcapitalwhichare
providedbyhouseholdstoproduceconsumergoods
andserviceswhichwillbeusedbythem.
4.Businessfirmsmakepaymenttothemoneytothe
householdsforreceivingvariousresources
5.Thehouseholdsinturnmakepaymentstothe
businessorganizations

5. FLOW IN AN ECONOMY

6. LAW OF SUPPLY AND DEMAND
Demand : The desire for a commodity
backed by necessary purchasing power.
Supply : It represents how much a market
can offer. It refers to the amount of certain
producers willing to supply when receiving
a certain price.

7. LAW OF SUPPLY AND DEMAND

8. LAW OF DEMAND
1.Thelawofdemandstatesthatifalltheotherfactors
remainequalthehigherthepriceofgoodtheless
peoplewilldemandthatgoods.
2.Theamountofgoodsthebuyerspurchaseathigher
priceislessbecauseasthepriceofagoodgoesup,so
doestheopportunitycostofbuyingthatgood.
3.Asaresultpeoplewillnaturallyavoidbuyingaproduct
thatwillforcethemtoforgotheconsumptionof
somethingelsetheyvaluemore.

9. LAW OF SUPPLY
1.Thesupplyrelationshipshowsthatifthepriceis
lowtheproducersrestrainfromreleasingmore
quantitiesoftheproductinthemarket.
2.Hencethesupplyoftheproductisdecreased.
3.Fromtheabovefigthepointofintersectionof
supplycurveanddemandcurveiscalled
equilibriumpoint.
4.Atthisparticularpointthequantityofsupplyis
equaltothequantityofdemand

10. FACTORS INFLUENCING DEMAND
•Theshapeofthedemandcurveisinfluencedbythe
followingfactors
a) Incomeofthepeople
b) Pricesofrelatedgoods
c) Tastesofconsumers.
•Iftheincomeofthepeopleincreasesthepurchasing
powerincreases.
•Foreg.IfthecostofTVsetislowereditsdemandwill
goup,asaresultthedemandforitsassociated
productssuchasVCDwouldincrease.
•Overapeirodoftimethepreferenceofthepeople
foraparticularproductmayincrease,whichin
turnwillaffectthedemand.

11. FACTORS INFLUENCING SUPPLY
1.Theshapeofthesupplycurveisinfluencedbythefollowingfactors
•Costoftheinputs
•Technology
•Weather
•Pricesofrelatedgoods
2.IfthepricesoffertilizersandcostoflabourincreasestheProfitmarginper
bagofpaddywillbereduced.
3.Hencethefarmerswillreducetheareaofcultivationandthesupplyof
paddywillbereduced.
4.IfthereisanadvancementintechnologyusedtoManufacturetheproduct
thentherewillbereductionintheproductioncostoftheproduct.Hence
morequantitywillbesupplied.
5.Weatheralsoplaysamajorrole.Duringwinterthedemandforwoolen
productswillincrease.
6.Sotheproducerswillsupplymorewoolenproductsduringwinter.

12. CONCEPT OF ENGINEERING ECONOMICS
EngineeringEconomics
Itisdefinedas“Asetofprinciples,concepts,
techniquesandmethodsbywhichalternativeswithina
projectcanbecomparedandevaluatedforthebest
monetaryreturn”.
PrinciplesofEngineeringEconomics:
Developthealternatives:Decisionsaremadefromthe
alternatives.Thealternativesneedtobeidentifiedand
thendefinedforthesubsequentanalysis.
Focusonthedifferences:Onlythedifferencesin
expectedfutureoutcomesamongthealternativesare
relevantandshouldbeconsideredfordecision.

13. CONCEPT OF ENGINEERING ECONOMICS
Useaconsistentviewpoint:Theprospectiveoutcomesofthe
alternatives,economicandother,shouldbeconsistently
developedfromadefinedperspective.
Useofcommonunitofmeasure:Commonunitofmeasureto
enumerateasmanyoftheprospectiveoutcomesaspossiblewill
makeeasiertheanalysisandcomparisonofalternatives.
Considerallrelevantcriteria:Selectionofpreferredalternative
requirestheuseofcriteria.
Makeuncertaintyexplicit:Uncertaintyisinherentinprojecting
thefutureoutcomesofthealternativesandshouldberecognized
intheiranalysisandcomparison.
Revisityourdecisions:Improveddecisionmakingresultsfroman
adaptiveprocess,theinitialprojectedoutcomesoftheselected
alternativesshouldbesubsequentlycomparedwithactualresults
achieved.

14. ENGINEERING ECONOMICS ANALYSIS PROCEDURE
1.Problemrecognition,formulationand
evaluation.
2.Developmentoffeasiblealternatives.
3.Developmentofthecashflowsforeach
alternative.
4.Selectionofcriterion.
5.Analysisandcomparisonofthealternatives.
6.Selectionofthepreferredalternative.
7.Performancemonitoringandpostevaluation
results

15. ENGINEERING EFFICIENCY ECONOMIC EFFICIENCY
ENGINEERING EFFICIENCY : It is defined as the ratio of
output to the input of a physical system. The physical
system may be a diesel engine, shop floor, machine
working etc
ECONOMIC EFFICIENCY : It is defined as the ratio of
output to the input of a business system.
Worth is the annual revenue generated by the way of
operating business and cost is the total annual expenses
incurred in carrying out the business.100
OUTPUT
ENGINEERINGEFFICIENCY
INPUT
 100 100
OUPUT WORTH
ECONOMICEFFICIENCY
INPUT COST
   

16. SCOPE OF ENGINEERING ECONOMICS
1.Engineeringeconomicsplaysaverymajorroleinall
engineeringdecisions.
2.Itisconcernedwiththemonetaryconsequences,financial
analysisoftheprojects,productsandprocessesthat
engineersdesign.
3.Engineeringeconomicshelpsanengineertoassessand
comparetheoverallcostofavailablealternativesfor
engineeringprojects.
4.Accordingtotheanalysisanengineercantakedecisionfrom
thealternativewhichismoreeconomic.
5.Engineeringeconomicsconceptsareusedinthefieldsfor
improvingproductivity,reducinghumanefforts,controlling
andreducingcost.

17. SCOPE OF ENGINEERING ECONOMICS
6.Engineeringeconomicshelpstounderstand
themarketconditionsgeneraleconomic
environmentinwhichthefirmisworking.
7.Ithelpsinallocatingtheresources.
8.Engineeringeconomicshelpstodealwiththe
identificationofeconomicchoices,andis
concernedwiththedecisionmakingof
engineeringproblemsofeconomicnature.

18. ELEMENTS OF COST
Costisdefinedastheamount,measuredinmoneyorcashexpendedorother
propertytransfercapitalstockissued,serviceperformed,orliabilityincurred
inconsiderationofgoodsorservicesreceivedortobereceived.
Costmaybedefinedasthetotalofallexpensesincurredwhetherpaidor
outstandinginthemanufactureandsaleofaproduct

19. SELLING PRICE OF A PRODUCT
1.Primecost=Directmaterialcost+Directlabour
cost+DirectExpenses.
2.FactoryCost=Primecost+Factoryoverhead.
3.Costofproduction=Factorycost+Office&
Administrativeoverhead.
4.CostofSales=Costofgoodssold+Selling&
Distributionoverhead.
5.Sales=Costofsales+profit.
6.Sellingprice/Unit=Sales/Quantitysold

20. OTHER COST AND REVENUE
MARGINALCOST:Itiscostofproducinganadditional
unitofthatproduct.
MARGINALREVENUE:Itistheincrementalrevenueof
sellinganadditionalunitofthatproduct.
SUNKCOST:Itisthepastcostofanequipment/asset.
Thiscostisnotconsideredforanyanalysis.
OPPORTUNITYCOST:Theexpectedreturnorbenefit
foregoneinrejectingonecourseofactionforanother.
Whenrejectingonecourseofactiontherejected
alternativebecomestheopportunitycostforthe
alternativeaccepted.

21. CONTRIBUTION & P/V RATIO
CONTRIBUTION:Itisthedifferencebetweenthesales
andmarginalcostofsales.
CONTRIBUTION=FIXEDCOST+PROFIT
CONTRIBUTION=SALES-MARGINALCOST
CONTRIBUTION=SALES-VARIABLECOST
PROFITVOLUMERATIO=CONTRIBUTION/SALES
PROFITVOLUMERATIO=FIXEDCOST/BREAKEVENPOINT

22. BREAK EVEN ANALYSIS
Breakevenanalysis:Itimpliesthatthetotalrevenueequalsthe
totalcostatsomepointofoperation.
Breakevenpoint:Itiswheretherewillbeneitherprofitnorloss.
BREAKEVENCHART:Itshowstherelationbetweencostsand
revenueatagiventime.
TC=Totalcost
FC=Fixedcost
VC=Variablecost
Q=Volumeofproduction
s=sellingprice/unit
v=variablecostperunit
Totalcost=Fixedcost+Variablecost
TC=FC+vQ
Thetotalrevenue(S)isgivenbyS=sQ

23. BREAK EVEN ANALYSIS
Thelinearplotsofthetotalcostandtotalsales
revenueareshowninthefig.
Theintersectionpointoftheabovetwolinesiscalled
breakevenpoint&thecorrespondingquantityintheX
axisisthebreakevenquantity.
Foranyproductionquantitywhichislessthanthe
breakevenquantitythefirmwillmakelossbecause
totalcost>totalrevenue.
Foranyproductionquantitywhichismorethanthe
breakevenquantitythefirmwillmakeprofitbecause
totalrevenue>totalcost.

24. BREAK EVEN ANALYSIS
PROFIT=SALES–(FIXEDCOST+VARIABLECOST)
=sQ–(FC+vQ)
MARGINOFSAFETY:Itisdefinedasthedifference
betweentheactualsalesandsalesatthebreakeven
point.
Marginofsafety=Actualsales–SalesatBEP
(OR) =
(OR) =//
FIXEDCOSTS FC
BREAKEVENQUANTITY
SELLINGPRICE UNIT VARIABLECOST UNIT s v

 /
PROFIT
P VRATIO Profit
Sales
contribution


25. BREAK EVEN CHART

26. ELEMENTARY ECONOMIC ANALYSIS
•In manufacturing engineering economic decision
making is involved in each and every stage of
production from the design to shipping stage.
•The primary tasks for engineers is to plan for
(a) Material selection for a product
(b) Design selection for a product
(c) Building material selection for
constructions.
(d) Process Selection.

27. MATERIAL SELECTION FOR A PRODUT
Material : materials are commodities which are used
directly or indirectly in producing a product.
Material Selection:
(a)MaterialProperties:Expectedlevelof
performancefromthematerial
(b)MaterialCost:Materialmustbeavailableata
cheaperprice
(c)Materialavailability:Shouldbeeasilyavailable
(d)Processing:Shouldbeeasilymachinable.
(e)Environment:Theenvironmentalfactors
shouldnotaffecttherawmaterial

28. MATERIAL SELECTION
PROCEDURE
Translation : Express design requirements as constraints
and objectives.
Example : Tie rod
Function : Support the tensile load
Objective : Minimize mass
Constraints : Required length, load
carrying capacity.
Screening : Eliminate materials that cannot do the job.
Ranking : Find the materials that can do the job best.
Selection : Select and verify the supporting materials

29. PROCESS PLANNING
Process:Itisdefinedasagroupofactionsinstrumentaltothe
achievementoftheoutputofanoperatingsystem
ProcessPlanning:Itisthesystematicdeterminationofthe
methodsbywhichaproductistobemanufactured
economicallyandcompetitively.
ProcessPlanningprocedure:
1.Analyzethepartdrawingtogetanoverallpictureonwhat
isrequired.
2.Consultwithproductengineersonproductdesignchanges.
3.Listthebasicoperationsrequiredtoproducetheparttothe
drawingorspecifications
4.Determinethemosteconomicalmanufacturingmethod
andformortoolingrequiredtocompletetheproduct.
5.Devisethebestwayofcombinetheoperationsandput
theminsequence.
6.Specifythegaugingrequiredfortheprocess.