Lec 05: Basics of Economics within the Context

of Science, Technology, and Engineering

EEE 452: Engineering Economics and Management

M. Rokonuzzaman, PhD
[email protected]
www.the-waves.org
©️Rokonuzzaman
--use is permitted only for the purpose of EEE 452 (sections 1,2,3,4&5 offered at NSU in Spring 2024);no consumption and
distribution is allowed for any other purpose

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Definitions…
Science is about identifying variables and establishing quantitative (or at least, logically very strong)
relations among them to interpret and scale up art. Technology is about intentional manipulation of
those variables to invent or advance means for getting jobs done better.
Engineering is the use of scientific principles to design and build machines through optimum
allocation of resources; cost-effective technology solution of an economic problem (how to make the
best use of limited, or scarce resources).
Engineering economics, previously known as engineering economy, is a subset of economics
concerned with the use and "...application of economic principles” in the analysis of engineering
decisions—for exploiting unfolding technology possibilities in market economy.
It focuses on the decision making process, its context and environment. It is pragmatic by nature,
integrating economic theory with engineering practice.

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 How Science and Technology
What is Economics? Affect It?
• Economics is the social science that studies how people
interact with value; in particular, the production, Science and Technology (S&T) affects economic
distribution, and consumption of goods and services. value creation. In addition to increasing value, it also
reduces value. For example, Electric vehicle is
• Economics focuses on the behaviour and interactions of
increasing the value of cobalt, while decreasing the
economic agents and how economies work.
demand for oil. S&T affects value, production,
• Microeconomics analyses basic elements in the economy, distribution, and consumption of goods and services.
including individual agents and markets, their For example, e-book technology has transformed
interactions, and the outcomes of interactions. how we publish, distribute and consume contents of
• Individual agents may include, for example, households, books.
firms, buyers, and sellers.
S&T affects economic activities both at micro and
• Macroeconomics analyses the economy as a system macro level. For example, S&T powers price setting
where production, consumption, saving, and investment capability, creating imperfect market.
interact, and factors affecting it: employment of the
resources of labour, capital, and land, currency inflation, S&T has the capacity to affect employment, value of
economic growth, and public policies that have impact capital and natural resources, and the economic
on these elements. growth. Public policies play an important role in
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turning S&T in favor of job creation and growth.
 Scarcity and Unlimited Wants
• Scarcity: the limited nature of society’s resources
• Economics: the study of how society manages its scarce resources, e.g. how
people decide what to buy, how much to work, save, and spend how firms
decide how much to produce, how many workers to hire how society decides
how to divide its resources between national defense, consumer goods, “If economic growth could be
protecting the environment, and other needs achieved only by doing more and
more of the same kind of cooking, we
• But the society has been facing growing demand for wealth to meet increasing would eventually run out of raw
consumption. Hence, optimum distribution of scarce resource is not good materials and suffer from
enough to face the reality of increasing quality of living standards to growing unacceptable levels of pollution and
number of people with scarce resource. nuisance. Human history teaches us,
however, that economic growth
• Yes, we have scarcity in natural resources and labour. In the short-run, we cannot springs from better recipes, not just
from more cooking. New recipes
increase economic value creation from the same amount of labour and natural
generally produce fewer unpleasant
resources. But in the long run, S&T offers us means to extract increasingly more side effects and generate more
value from the same amount of other production factors. Hence, S&T has been a economic value per unit of raw
great help to produce increasing value from scarce resources to meet our material”—Paul Romer
growing consumption.
• S&T has the potential to improve both products and production processes in
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deriving increasing economic value. However, it does not keep doing it linearly.
Principle #1: People Face Trade-offs
All decisions involve trade-offs. Examples: having more money to buy stuff requires working longer
hours, which leaves less time for leisure. Protecting the environment requires resources that could
otherwise be used to produce consumer goods.
Such reality compels firms making value-cost trade offs – either creating greater value for customers at
a higher cost or creating reasonable value at a lower cost.
In the long-run, however, S&T keeps diminishing the necessity of making such trade-offs. For
example, the use of robots in painting cars increases the quality of painting and reduces the cost
simultaneously. This is due to the fact that robot painting work requires less rework. Furthermore, it
also reduces wastage of paints. In fact, robots are being used in painting furniture in Bangladesh for
improving the quality and reducing the cost.
Similarly, precision farming practice in using UAV for adaptively spraying pesticides and fertilizers
offers the opportunity to get rid off quality-cost trade-off—increasing the quality and reducing the cost
simultaneously.
Exploitation of this the capability of S&T has been changing competition strategy. As opposed to being
provider of inferior quality products at lower cost, smarter producers are after offering higher quality at
lower cost.
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Furthermore, S&T has also been empowering individuals to extract more utility in less time and cost,
Principle #2: The Cost of Something Is What You Give Up to Get It
Decisions require comparing costs and benefits of alternatives.
• Whether to go to college or to work?
• Whether to go to class or sleep in?
Economic cost is the combination of losses of any goods that have a value attached to
them by any one individual. Economic cost is used mainly by economists as means to
compare the prudence of one course of action with that of another. The factors to be taken
into consideration are money, time, and other resources; cost is the sum of explicit costs.
The opportunity cost of an item is what you give up to obtain that item. It is the relevant
cost for decision making. Decision is not taken in favour of an investment until return
from the investment selected is more than the return from the most profitable alternate
investment opportunity.
Economic cost is very easy to estimate. In exploiting economic value, however,
opportunity cost is extremely difficult to estimate. This is due to pervasive uncertainties
sustaining over a prolonged period of time. In fact, lack of inaccuracy of estimating
opportunity cost is one of the primary reasons behind the failure of incumbent firms to
dive into self-destruction for recreation.
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 Principle #3: Rational People Think at the Margin
Marginal changes are small, incremental adjustments to an existing plan of action.
Systematically and purposefully do the best they can to achieve their objectives. They make decisions by
evaluating costs and benefits of marginal changes – incremental adjustments to an existing plan.

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ath arg
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This marginal cost-benefit analysis based thinking is extremely inappropriate for justifying the act in favour

th i the
of loss making uncertain alternative by taking away resources from profit making incumbent opportunities.

i e s at
t if ing
j us i n k
For example, iPod was the life saviour for Apple—saving Apple from imminent bankruptcy. While both

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revenue and profit of iPod kept growing, Steve Jobs took a decision to kill iPod. Certainly, this decision
was not justified by marginal cost-benefit analysis. In fact, thinking at the margin was suggesting otherwise
—keep increasing resource for incremental advancement of iPod for extending the profit making life of
this cash cow.
Natural tendency
Steve Jobs went against the marginal cost-benefit analysis to counter the unfolding threat--invasion of of failing to this
smartphone in taking the business of iPod. Hence, Steve Jobs plunged into the dive of reinventing decision of self-
smartphone to kill iPod—far before someone else did. End result, we all know. destruction for
recreation
If Steve were guided by marginal cost-benefit analysis, Apple’s history could have been different. In fact,
marginal cost-benefit analysis based decision making culture is highly detrimental to succeed at the the
intersection between two waves of the episodic journey of rolling waves of invention. However, such a
marginal-cost benefit analysis is quite useful during the metamorphosis phase—for creating the flywheel
Principle #4: People Respond to Incentives
• Economic incentives are what motivates you to behave in a certain way, while preferences are your needs, wants and
desires. Economic incentives provide you the motivation to pursue your preferences.
• For examples, customers are after higher quality product at less price. Producers are after more profit. On the other
hand, input providers are after higher price, and the Government is asking for more taxes and less harm on the
environment.
• Human beings are driven by economic incentive.
• Marginal changes in costs or benefits motivate people to respond.
• The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its
marginal costs!
• How can firms produce profit for investors by offering higher quality at less price for the customers and paying more
to input providers?
• Such a conflicting situation demands tradeoffs.
• However, S&T offers the opportunity of addressing conflicting incentives simultaneously.
• To create increasing value from same inputs, smart firms keep focusing on scaling up ideas out of science and
technology for creating incentives for all—often, highly conflicting.
• Success of creating incentives for all leads to price setting capability. 8
 Principle #5: Trade Can Make Everyone Better Off
• People gain from their ability to trade with one another.
• Competition results in gains from trading.
• Trade allows people to specialize in what they do best.
Rather than being self-sufficient, people can specialize in producing one good or service and exchange
it for other goods. Countries also benefit from trade & specialization: Get a better price abroad for

Market value of labor and material

goods they produce and buy other goods more cheaply from abroad than could be produced at home.
S&T has been contributing to expand trade. For example, many less developed countries had chronic
high unemployment among un-skilled workforce in the 1960s. The technology of dividing the factory
work into small pieces, engineering process for performing each of those pieces in a certain sequency
following some simple rules, and automating knowledge and skill intensive tasks has led to enabling
low skilled workforce of less developed countries to add value in factory work. This technology has
led to the globalization of manufacturing—expanding the global labor trade.
Similarly, technology progression has created the trade of petroleum, making many countries of the
middle east prosperous. Technology

However, technology progression has the tendency of reducing the trade of labor and natural
resources. For example, automation has been negatively affecting market value of labour. But
technology has a natural tendency of increasing both consumer and producer surpluses—thereby,
expanding the trade. Furthermore, international trade has been showing price setting characteristics
due to technology progression. 9
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity
A market economy is an economy that allocates resources through the decentralized
decisions of many firms and households as they interact in markets for goods and Adam Smith made the
services. observation that households
• Households decide what to buy and who to work for. and firms interacting in
markets act as if guided by
• Firms decide who to hire and what to produce. an “invisible hand.”
To leverage ideas for creating economic value, market economy adopted some Despite the fact that
favorable principles. economic value creation
Ownership of capital and freedom of competition appear to be highly beneficial to out of S&T benefits from
profit making competition
foster wealth creation out of science and technology. Yes, market economy principles
in nurturing ideas,
are in favor of intensifying competition to exploit profit making opportunity from progression of S&T has a
technology ideas. The scalability of ideas, however, leads to price setting capability. natural tendency of
Smart firm emerges with the capability of offering the highest quality at the lowest weakening competition,
cost. This is the outcome of consistent exploitation of science in scaling up ideas. As a and empowering the
result, the competition force of market economy slows down. The competition, accumulation of market
power.
however, is vital to nurture ideas through a flow of incremental ideas.

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Principle #7: Governments Can Sometimes Improve Market Outcomes
• Market failure occurs when the market fails to allocate resources efficiently. When the
market fails (breaks down) government can intervene to promote efficiency and equity.
• Market failure may be caused by
• an externality, which is the impact of one person or firm’s actions on the well-being of a
bystander.
• market power, which is the ability of a single person or firm to unduly influence market
prices.
Particularly, technology innovation market suffers from market failure. The necessity of a long
journey in creating profitable willingness to pay discourage private investment. Furthermore,
such a journey is fraught with pervasive uncertainties. On top of it, overall economic policies
affect both the supply and demand creation of economic value creation out of local production
of technology innovations. Hence, there has been prevailing market failure in unlocking
technology possibilities—particularly in less developed countries. Therefore, the Government
has a strong role to prime the innovation pump.
Government can address
For example, there is a possibility of reducing farming inputs by harnessing the potential of precision farming market failure
precision farming. But in the absence of it, farmers remain deprived from getting benefit from by investing in R&D, and
giving incentives for adopting
the possibility. On the other hand, growing number of science and engineering graduates have
innovation for reducing farming
been failing to get quality jobs for developing and deploying technology ideas. This is a typical input wastage.
example of market failure in exploiting prevailing possibilities.
Externalities: Technologies create both negative and positive externalities.
Technology innovation creates externality effects. For example, emission from vehicles or radiation from
cellphone towers affect the health of citizens. It’s beyond the capacity of an individual citizen to reduce
such negative externality effects. Hence, there has been a role for the Government—through policies and
regulation.
On the other hand, some technology decisions create positive externality effect. For example, the
adoption of standards and the facilitation of infrastructure roll out create positive externality effects. For
example, stimulation of charging station infrastructure in compliance with common standards will have
positive externality effect on environment.
Market Power: By exploiting the technology possibilities, smart firms can attain price setting capability—
known as market power. Differentiation, and economies of scale, scope and network externality effects are
among common factors for attaining market power. On the other hand, through outperforming competitors
in offering higher quality at lower cost by taking the advantage of technology possibilities, smart providers
can gain market power even in homogeneous products. But should the government prevent it, as it’s anti-
competitive. It depends. It’s not always a good intervention to prevent the accumulation of market power
out of technology possibilities. In many cases, it’s highly beneficial for the customers. It’s worth noting https://
that technology possibilities have natural tendency of monopoly—and the challenge is how to harness it www.cato.org/
without giving up to monopoly publications/
policy-analysis/
Well, how to restore competition. As opposed to clipping the wings of a smart performer, Government time-different-
should intervene to fuel the growth of the next wave of reinvention. Lesson should be drawn from the schumpeter-tech-
disappearance of market power of Nokia or Microsoft’s Internet browser. giants-monopoly-
fatalism
Principle #8: A country's standard of living depends on its ability to produce goods and services
The Standard of Living Depends on a Country’s Production & Better Ideas

Standard of living may be measured in different ways:

• By comparing personal incomes.
• By comparing the total market value of a nation’s production.
• Almost all variations in living standards are explained by differences in countries’ productivities.
• Productivity is the amount of goods and services produced from each hour of a worker’s time.
At the end of the day, standard of living largely depends on how much utility someone derives in
getting jobs done over certain period of time –say a day, week, month or year. This utility extraction
depends of the quality and cost of products, and how they are deployed in getting numerous jobs
done.
Technology possibilities are at the root in increasing the equality and reducing cost. Due to its power
of increasing both consumer and producer surpluses by opening the door of offering higher quality at
lower cost, technology has been playing a vital role in increasing our quality of living standards.
As we know, economic value creation, Y=F(natural resource, labor, ideas), by focusing on
technology ideas, economic actors can keep expanding the supply of economic value—leading to
growing consumption. Hence, harnessing technology possibilities is at the center of addressing our
quality of living standards. 13
Principle #9: Prices Rise When the Government Prints Too Much Money
• In economics, inflation is a general rise in the price level of an economy over a period of
time. When the general price level rises, each unit of currency buys fewer goods and
services
• One cause of inflation is the growth in the quantity of money.
• When the government creates large quantities of money, the value of the money falls—as
it outstrips the growth of economic value creation.
• Hence, Government should focus on additional wealth creation for creating scope of
printing money without causing inflation.
• Y =F(K,L ,A)
• As we know, the growth of economic value creation faces the limit set by the scarcity of
natural resources and labor. But technology ideas offer us endless frontier of wealth
creation. But to tap into it, Government should take a series of measures, including
addressing market failure, for opening and expanding the door of creating economic value
out of production and trading of technology ideas.

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Principle #10: Society Faces a Short-run Tradeoff Between Inflation and
Unemployment
Society faces a short-run trade-off between unemployment and inflation. If policymakers
expand aggregate demand, they can lower unemployment, but only at the cost of
higher inflation. If they contract aggregate demand, they can lower inflation, but at the cost
of temporarily higher unemployment.
But can technology change this apparent law—particularly, in the long-run? Yes, it can. It
can increase demand and employment and lower inflation simultaneously. Technology has
the possibility of increasing the demand and supply by improving quality and lowering the
cost of production. It has the possibility of lowering inflation and increasing employment
too. By increasing the value creation from each unit of labour and human capital, technology
possibility can increase both the economic value, employment and demand. Hence, in the
long run, technology can help the society to avoid trade-off between
unemployment and inflation

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