ENGINEERING ECONOMICS

LECTURE 3

HUMA FAWAD
HITEC , TAXILA
FALL 2018

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 Introduction:
Thinking Like an Economist 1
Engineering Economics Analysis Procedure

• 1. Problem recognition, definition, and evaluation

• 2. Development of the feasible alternatives.
• 3. Development of the outcomes and cash flows for each
alternative.
• 4. Selection of a criterion (or criteria).
• 5. Analysis and comparison of the alternatives.
• 6. Selection of the preferred alternative.
• 7. Performance monitoring and post evaluation of
results..

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Thinking Like an Economist 1

Problem
• A solar cell manufacturer buys Silicon Wafers and converts
them into solar cells, to be used to generate power in solar
panels. A cell manufacturer facing a sharp decline in the price
of their product is 2016-17. Facing declining profitability, the
manufacturer considers two solutions: introducing measure to
reduce wastage in production, and salvaging cells that are
damaged in production in order to sell them to toy
manufacturers.
• A. Define the company’s problem.
• B. Evaluate proposed solutions without a reference to their
feasibilities.

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Problem
• Linda and Jerry are faced with a car replacement opportunity
where an interest rate can be ignored. Jerry’s old clunker that
averages 10 miles per gallon (mpg) of gasoline can be traded
in toward a vehicle that gets 15 mpg. Or, as an alternative,
Linda’s 25 mpg car can be traded in toward a new hybrid
vehicle that averages 50 mpg.
• If they drive both cars 12,000 miles per year and their goal is
to minimize annual gas consumption, which car should be
replaced—Jerry’s or Linda’s? They can only afford to upgrade
one car at this time.

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Thinking Like an Economist 1

5 MARKET DEMAND & SUPPLY

• Market:
An Institution or Mechanism which brings together
buyers and sellers of particular goods and services.

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6 MARKET DEMAND & SUPPLY

Demand:
It’s a schedule which shows the various amounts of
product which consumers are willing and able to
purchase at each price in a series of possible prices
during a specified period of time
Law of Demand:

Price for a Gadget Quantity Demanded per week

$5 10
$4 20
S3 35
$2 55
$1 80
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Thinking Like an Economist 1

7 MARKET DEMAND & SUPPLY

Foundation for Demand Law:
1. Price effect – People buy more of a product with less
price
2. Diminishing Marginal Utility – Consuming successive
units yields less extra satisfaction
3. Income & Substitution Effect – Income define the choice
of products.Lower price tends consumer to purchase
cheap product than dear product
Law of Demand:

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Thinking Like an Economist 1

8 MARKET DEMAND & SUPPLY

Individual & Market Demand:

Determinant of Demand
1. Taste – Health Conscious, Health Hazard, Old Technology, Fashion, etc
2. Number of Buyers – Population density, quotas on imports
3. Income – Superior or Normal Goods, Inferior Goods
4. Prices of Related Goods – Substitute (Butter/Margarine, Nike/Reebok),
Complimentary (Movie & Popcorn, CD & VCR, Tuition & Book, Petrol n Oil)
5. Expectations – Price rise/fall 1-8
 Introduction:
Thinking Like an Economist 1

9 MARKET DEMAND & SUPPLY

Changes in Demand Curve

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Thinking Like an Economist 1

10 MARKET DEMAND & SUPPLY

Supply:
It’s a schedule which shows the various amounts of
product a producer is willing and able to produce and
make available for sale at each price in a series of
possible prices during a specified period of time
Law of Supply:

Price for a Gadget Quantity Demanded per week

$5 60
$4 50
S3 35
$2 20
$1 5
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11 MARKET DEMAND & SUPPLY

Law of Supply:

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Thinking Like an Economist 1

12 MARKET DEMAND & SUPPLY

Determinant of Supply
1. Resource Prices – Production Cost (decline in price of
Fertilizer increase supply of wheat, etc)
2. Technology – Improvement, up gradation, R&D
3. Taxes & Subsidies
4. Prices of Other Goods
5. Expectations
6. No of Sellers

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 Introduction:
Thinking Like an Economist 1

13 MARKET DEMAND & SUPPLY

Changes in Supply Curve

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 Introduction:
Thinking Like an Economist 1

14 PRICE EQUILIBRIUM

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PROBLEM 1
• Q 1. Evaluate the following if the total demand and total supply of Mechanical Device in the
market is as below.
Quantity Demanded Price Quantity Supplied Surplus or Shortage
•
85 Rs. 3.40/- 72
80 Rs. 3.70/- 73
75 Rs. 4.00/- 75
70 Rs. 4.30/- 77
65 Rs. 4.60/- 79
60 Rs. 4.90/- 81
• Equilibrium Price and Quantity?
• New equilibrium Price and Quantity if the manufacturer experiences an escalation in the
raw material prices of the goods produced and adjusted their new supply schedule as
below:
Price Quantity Supplied

Rs. 3.40/- 60
Rs. 3.70/- 63
Rs. 4.00/- 65
Rs. 4.30/- 71
Rs. 4.60/- 75
Rs. 4.90/- 76

• Specify the new conditions of surplus or shortage in this condition. In this new condition, if
a surplus of 3 parts is a mandatory requirement to be produced and kept as spare, what
effect would it have on the price, what is the new price bracket which you can play with if
you want to offer higher price and offer discounts to customers. Comment.
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PROBLEM 2
• Apply and compute demand and supply law to the below schedule for rental apartments
in the city of Taxila as follows:

Apartment Demanded Monthly Rent Apartment Supplied Surplus or Shortage

10,000 Rs. 2500/- 15,000

12,500 Rs. 2000/- 12,500
15,000 Rs. 1500/- 10,000
17,500 Rs. 1000/- 7,500
20,000 Rs. 500/- 5,000

• What is the market equilibrium rental price per month and the market equilibrium number
of apartments demanded and supplied?
• Suppose the government wishes to decrease the market equilibrium monthly rent by
increasing the supply of housing. Assuming that demand remains unchanged by how
many units of housing would the government have to increase the supply of housing in
order to get the market equilibrium retail price to fall to:
• Rs. 1500/month
• Rs. 1000/month
• Rs. 500/month
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