Northern University Bangladesh (NUB)

Knowledge for Innovation and Change

Department of Mechanical Engineering

Assignment On
Ⅰ) Introduction to Engineering Economics.

Course Title : Engineering Economics

Course Code : ECON 3201

Submitted to :
Name : Dr. Md. Mozahedul Haque
Designation : Lecturer Submitted by :
Department : ME Name : Md Faysal Amin Patwary
Northern University Bangladesh ID : 58240100012
Department : ME
Batch : 01
Semester:3rd
Northern University Bangladesh

Date of Submission: 26 April 2025

Introduction to Engineering Economics

1. Definition of Engineering Economics

Engineering Economics, also known as Engineering Economy, is a subset of economics

concerned with the use and application of economic principles in the analysis of engineering
decisions. It involves the evaluation of the costs and benefits of projects, products, and
technologies to determine their economic feasibility and to ensure efficient allocation of
resources. This discipline combines engineering knowledge with economic theory to facilitate
decision-making processes that aim at minimizing costs and maximizing benefits.

Example
Consider a manufacturing company contemplating the purchase of a new machine. The
machine has an upfront cost of \$100,000, but it promises to reduce labor costs by \$25,000
yearly. Engineers and economists within the company would perform a cost-benefit analysis,
exploring not just direct costs and savings, but also the opportunity cost of the capital
investment, the machine’s lifespan, maintenance costs, and the time value of money. By
applying principles of Engineering Economics, the company can decide whether the investment
will be profitable in the long term or if alternative solutions present a better economic outcome.

2. Scope of Engineering Economics

Scope
The issues that are covered in this book are elementary economic analysis, interest formulae,
bases for comparing alternatives, present worth method, future worth method, annual equivalent
method, rate of return method, replacement analysis, depreciation, evaluation of public
alternatives, inflation adjusted investment decisions, make or buy decisions, inventory control,
project management, value engineering, and linear programming.

1.Product policy, sales promotion and market strategy

The scope of managerial economics extends to some of the core managerial aspects of
the firm because the decision in this regard play a very significant role in the success of the firm.
If the economics aspects of these decision are not taken care of, it may prove to be disastrous.
Some of these are , the product policy which explains how and what quality a product should
be. The expenditure on sales promotion and its benefits also required to be studied. Market
strategy has also to be planned keeping in view the economics aspects.

2. Demand Analysis and Forecasting

 A business firm is the economic unit which operates to transform productive resources
into goods and services for sales in a market. Thus the first task in the managerial decision-
making is to get accurate estimates of demand for the product of the firm. Until the firm has
clear idea of the demand for its product it is not possible to prepare production schedules and
employ resources for management, as it hieghlights the factor on which demand for their
product depends.

3. Cost Analysis
The study of the data about costs made available from the firm accounding record yield
significant cost estimation for the management’s decision-making. The managerial economics
identifies the factors causing cost uncertainty exists because all the factors determine costs are
not clearly known.

4.Production analysis
It is concerned with quantitative aspects of physical inputs. Given the technology and the
nature of the product, the managerial economist studies the production function of the firm-the
economies and diseconomies of scale, the minimum efficient scale of the plant etc. The
behaviour of costs of a firm depends directly on the nature of its production function.

5.Pricing decisions, policies and practices

Pricing of a product is an important element of the marketing mix of a firm. Besides the
knowledge of fixed and variable costs of inputs, a scientific decision about price needs the
knowledge of various elasticity of demand and the potential rivals who may enter the market.
The price policy of a firm is based on such analysis. The area of study deals with the analysis of
market structures, pricing methods, differential pricing, product pricing and pricing forecasting.

6.Profit Management
Business firms not only want to make profits but also want to make more profits. They
want profit maximization or sales revenue maximization.

According to Drucker, profit is the measure of business success in the longrun. However, an
important point worth considering is the element of uncertainty existing about profits becauses
the variations in costs and revenues. If knowledge about future were perfect, profit analysis
would have been a very easy task. Break-even analysis and profit elasticity calculations are of
great use in pricing and profit management.

7.Capital management
Decision about investment are most crucial for a firm because the funds involved are
often huge and the behaviour of the capital market is least predictable. A firm can raise funds by
issuing shares or debentures and debt instruments. It can also choose to employ its own cash
reserves. But the most difficult part is the choice of the investment projects. This is the choice of
the top-management because the committed expenditures cannot be recalled.

3. Importance of Engineering Economics

There are few engineering projects undertaken that do not have the cost of the project as a major, if not
the most important, factor in the decision to undertake the project. The cost of the project is weighed
against the potential for profit or the benefits that the project may provide. While we could envision
projects in our personal lives such as remodeling our houses, or deciding if its more economical to repair
our car versus buying a replacement, the projects we undertake as engineers are often much larger in
scope and cost. The scale of projects in engineering can be in the 100’s of millions of dollars for
significant infrastructure projects; consider, for example, the electricity grid and modernization for
renewable energy sources, the transportation network, and natural resource projects such as mines, mills,
and petroleum facilities.

While it is true that a lot of the work done by engineers involves problem solving and designing solutions
to problems; typically these solutions are constrained by completing the design in the most economical
way. Economic decisions are different but not separate from design decisions. In design we are working
with our knowledge of physics, material properties, chemistry, and design codes to formulate our
solutions. In economics we are making decisions based on factors such as market demand for products or
services, the price we can offer a product at in comparison to competitors, and changes in the inputs such
as commodity prices. We may complete the economic analysis many times with different assumptions to
determine how to proceed.

Often we concern ourselves with a comparison of the potential profit of a project relative to its cost to
build and operate. Other factors are now becoming much more important in the evaluation of projects;
social and environmental considerations are becoming as important as the economic considerations and
need to be included in our overall analysis of projects.

4. Role of Engineering Economics in Decision Making

Engineering Economics plays a crucial role in decision-making by:

 Helping select the most economically viable project among several alternatives.
 Supporting decisions on whether to continue, modify, or abandon a project.
  Aiding in resource allocation to ensure maximum return on investment.
 Allowing engineers to assess risks and uncertainties before making a final decision.
 Providing tools like cost-benefit analysis, break-even analysis, and present worth analysis to
make informed choices.

It ensures that every engineering decision is backed by solid economic reasoning, leading to better
outcomes.

5. Role of Engineering Economics in National Development

Engineering Economics significantly contributes to national development by:

 Optimizing the use of natural and financial resources for infrastructure, industries, and
services.
 Improving public project efficiency (like transportation, healthcare, and education systems) by
ensuring they are cost-effective.
 Encouraging industrial growth through wise investment in new technologies and innovations.
 Creating employment opportunities by supporting entrepreneurship and industrialization.
 Boosting the economy by improving productivity and ensuring better returns on national
investments.
 Supporting sustainable development by balancing economic growth with environmental
protection.

Thus, Engineering Economics not only benefits individual organizations but also plays a vital role in the
economic progress of a country.

Conclusion
Engineering Economics is the backbone of rational engineering decision-making.
It helps engineers think beyond just technical aspects and consider economic factors to ensure the
success of projects.
In today's competitive and resource-constrained world, understanding and applying Engineering
Economics is essential for both individual career success and the overall development of society.