Principles of Engineering Economics with Applications

Contents
Foreword
Preface
Acknowledgments
1 Engineering Economics: A Prologue
	1.1 Introduction
	1.2 Introduction to Economics
	1.3 Need to Study Economics
	1.4 Circular Flow of Economic Activities
	1.5 Circular Flow of Income in Different Sectors
	1.6 Demand Theory
		1.6.1 Law of Demand
		1.6.2 Assumptions Used in Defining Demand
		1.6.3 Demand Schedule
		1.6.4 Demand Curve
		1.6.5 Determinants of Demand
	1.7 Elasticity of Demand
		1.7.1 Price Elasticity of Demand
		1.7.2 Income Elasticity of Demand
		1.7.3 Cross Elasticity
	1.8 Supply
		1.8.1 Factors Affecting Supply: The Determinants of Supply
		1.8.2 Law of Supply
		1.8.3 Supply Schedule
		1.8.4 Supply Curve
	1.9 Definition and Scope of Engineering Economics
		1.9.1 Meaning of Engineering Economics
		1.9.2 Definition of Engineering Economics
		1.9.3 Concepts of Engineering Economics
		1.9.4 The Scope of Engineering Economics
		1.9.5 Engineering Economics Environment
		1.9.6 Types of Efficiency
	1.10 Consumer and Producer Goods and Services
	1.11 Necessities, Luxuries and Relation between Price and Demand
	1.12 Relation between Total Revenue and Demand
	1.13 Cost Concepts
	1.14 Relation between Cost and Volume
	1.15 The Law of Supply and Demand
	1.16 The Law of Diminishing Marginal Returns
	1.17 Break-Even Analysis
	1.18 Profit-Volume (P/V) Chart and P/V Ratio
	1.19 Competition or Market Structure
2. Fundamentals of Mathematics and Engineering Economics
	2.1 Introduction
	2.2 Theory of Consumer Behavior
	2.3 Meaning of Utility
		2.3.1 Nature of the Utility Function
		2.3.2 Existence of Utility Function
		2.3.3 The Cardinal Marginal Utility Theory
		2.3.4 Equilibrium of the Consumer
	2.4 Meaning of Demand
		2.4.1 Demand Function
		2.4.2 Quantity Demanded
		2.4.3 Change in Demand
		2.4.4 Law of Demand
		2.4.5 Ordinary Demand Function
		2.4.6 Compensated Demand Function
		2.4.7 Reasons for Downward Slope of Demand Curve
	2.5 Concept of Elasticity
		2.5.1 Own Price Elasticity
		2.5.2 Determinants of Price Elasticity
		2.5.3 Income Elasticity of Demand
		2.5.4 Cross-Price Elasticity of Demand
		2.5.5 Engel Curve and Income Elasticity
		2.5.6 Relationship between Price Elasticity and Marginal Revenue
	2.6 Law of Diminishing Marginal Utility
	2.7 Principle of Equi-marginal Utility
	2.8 Indifference Curves Theory and Ordinal Utility Theory
		2.8.1 Indifference Curves
		2.8.2 Nature of Consumer Preferences
		2.8.3 Indifference Map
		2.8.4 Rate of Commodity Substitution
		2.8.5 Properties of ICs
		2.8.6 Budget Line
		2.8.7 Consumer’s Equilibrium or Maximization of Utility
		2.8.8 Alternative Method of Utility Maximization
	2.9 Application and Uses of Indifference Curves
		2.9.1 Income and Leisure Choice
		2.9.2 Revealed Preference Hypothesis
		2.9.3 Consumer’s Surplus
3. Elementary Economic Analysis
	3.1 Introduction: Theory of the Firm
	3.2 Law of Supply
	3.3 Concept of Elasticity of Supply
	3.4 Meaning of Production
	3.5 Production Function and its Types
		3.5.1 General Production Function
		3.5.2 Cobb-Douglas Production Function
		3.5.3 Properties of Cobb-Douglas Production Function
		3.5.4 CES Production Function
	3.6 Producer’s Equilibrium
	3.7 Concept of Isoquants
	3.8 Marginal Rate of Technical Substitution
	3.9 The Elasticity of Substitution
	3.10 Iso-cost Line
	3.11 Producer’s Surplus
	3.12 Cost Minimization
	3.13 Returns to Scale and Returns to Factor
	3.14 Cost Theory and Estimation
	3.15 Concept of Costs and their Types
	3.16 Profits
		3.16.1 Normal Profits
		3.16.2 Economic Profits
	3.17 Profit maximization
	3.18 Market Structure and Degree of Competition
		3.18.1 Perfect Competition
		3.18.2 Monopoly
		3.18.3 Monopolistic Competition
		3.18.4 Oligopoly Models
		3.18.5 Monopsony
4. Interest Formulae and their Applications
	4.1 Introduction
	4.2 Why Return to Capital is Considered?
	4.3 Interest, Interest Rate and Rate of Return
	4.4 Simple Interest
	4.5 Compound Interest
	4.6 The Concept of Equivalence
	4.7 Cash Flow Diagrams
	4.8 Terminology and Notations/Symbols
	4.9 Interest Formula for Discrete Cash Flow and Discrete Compounding
		4.9.1 Interest Formulae Relating Present and Future Equivalent Values of Single Cash Flows
		4.9.2 Interest Formulae Relating a Uniform Series (Annuity) to its Present and Future Worth
	4.10 Interest Formulae Relating an Arithmetic Gradient Series to its Present and Annual Worth
		4.10.1 Finding P when given G
		4.10.2 Finding A when given G
	4.11 Interest Formulae Relating a Geometric Gradient Series to its Present and Annual Worth
	4.12 Uniform Series with Beginning-of-Period Cash Flows
	4.13 Deferred Annuities or Shifted Uniform Series
	4.14 Calculations Involving Uniform Series and Randomly Placed Single Amounts
	4.15 Calculations of Equivalent Present Worth and Equivalent Annual  Worth for Shifted Gradients
	4.16 Calculations of Equivalent Present Worth and Equivalent Annual  Worth for Shifted Decreasing Arithmetic Gradients
	4.17 Nominal and Effective Interest Rates
	4.18 Interest Problems with Compounding More-Often-Than-Once Per Year
		4.18.1 Single Amounts
		4.18.2 Uniform Series and Gradient Series
		4.18.3 Interest Problems with Uniform Cash Flows Less-Often-Than Compounding Periods
		4.18.4 Interest Problems with Uniform Cash Flows More-Often-Than Compounding Periods
5. Methods for Making Economy Studies
	5.1 Introduction
	5.2 Basic Methods
	5.3 Present Worth (P.W.) Method
	5.4 Future Worth (F.W.) Method
	5.5 Annual Worth (A.W.) Method
	5.6 Internal Rate of Return (I.R.R.) Method
	5.7 External Rate of Return (E.R.R.) Method
	5.8 Explicit Reinvestment Rate of Return (E.R.R.R.) Method
	5.9 Capitalized Cost Calculation and Analysis
	5.10 Payback (Payout) Method
6. Selection among Alternatives
	6.1 Introduction
	6.2 Alternatives having Identical Disbursements and Lives
	6.3 Alternatives having Identical Revenues and Different Lives
		6.3.1 Comparisons using the Repeatability Assumption
		6.3.2 Comparisons using the Coterminated Assumption
	6.4 Alternatives Having Different Revenues and Identical Lives
	6.5 Alternatives Having Different Revenues and Different Lives
	6.6 Comparison of Alternatives by the Capitalized Worth Method
	6.7 Selection among Independent Alternatives
7. Replacement and Retention Decisions
	7.1 Introduction
	7.2 Reasons for Replacement
	7.3 Terminologies used in Replacement Study
	7.4 Economic Service Life
	7.5 Procedure for Performing Replacement Study
	7.6 Replacement Study over a Specified Study Period
8. Depreciation
	8.1 Introduction
	8.2 Depreciation Terminology
	8.3 Methods of Depreciation
		8.3.1 Straight Line (SL) Method
		8.3.2 The Declining Balance (DB) Method
		8.3.3 Sum-of-the-Years’-Digits (SYD) Method
		8.3.4 The Sinking Fund Method
		8.3.5 The Service Output Method
9. Economic Evaluation of Public Sector Projects
	9.1 Introduction
	9.2 Benefit/Cost Analysis of a Single Project
	9.3 Selection between Two Mutually Exclusive Alternatives using Incremental B/C Analysis
	9.4 Selection Among Multiple Mutually Exclusive Alternatives using Incremental B/C Analysis
10. Economics Study Considering Inflation
	10.1 Introduction
	10.2 Effects of Inflation
	10.3 Present Worth Calculations Adjusted for Inflation
	10.4 Future Worth Calculations Adjusted for Inflation
	10.5 Capital Recovery Calculations Adjusted for Inflation
11. Make or Buy Decision
	11.1 Introduction
	11.2 Feasible Alternatives for Launching New Products
	11.3 Decisive Factors for Make or Buy Decision
		11.3.1 Criteria for Make Decision
		11.3.2 Criteria for Buy Decision
	11.4 Techniques used to Arrive at Make or Buy Decision
		11.4.1 Simple Cost Analysis
		11.4.2 Economic Analysis
		11.4.3 Break-Even Analysis
12. Project Management
	12.1 Introduction
	12.2 Phases of Project Management
		12.2.1 Planning
		12.2.2 Scheduling
		12.2.3 Monitoring and Control
	12.3 Bar or Gantt Charts
	12.4 Network Analysis Technique
	12.5 Critical Path Method (CPM)
		12.5.1 Arrow Diagrams
		12.5.2 Activity Description
		12.5.3 Understanding Logic of Arrow Diagrams
		12.5.4 Dummy Activities
	12.6 Guidelines for Drawing Network Diagrams or Arrow Diagrams
	12.7 CPM Calculations
		12.7.1 Critical Path
		12.7.2 Critical Activities
		12.7.3 Non-critical Activities
		12.7.4 Earliest Event Time
		12.7.5 Latest Event Time
	12.8 Calculation of the Earliest Occurrence Time of Events
	12.9 Calculation of the Latest Occurrence Time of Events
	12.10 Activity Times
		12.10.1 Earliest Start Time
		12.10.2 Earliest Finish Time
		12.10.3 Latest Finish Time
		12.10.4 Latest Start Time
	12.11 Float
		12.11.1 Types of Float
		12.11.2 Negative Float
	12.12 Identification of Critical Path
	12.13 Program Evaluation and Review Technique (PERT)
		12.13.1 PERT Activity Time Estimates
		12.13.2 PERT Computations
		12.13.3 Computation of Probabilities of Completion by a Specified Date
	12.14 Project Crashing
		12.14.1 Cost Slope
		12.14.2 Cost of Crashing
13. Value Engineering
	13.1 Introduction
	13.2 Concept of Value Engineering
	13.3 Nature and Measurement of Value
	13.3.1 The VE process
	13.4 Origination Phase
	13.4.1 Organization
	13.4.2 Project Selection
	13.4.3 The VE Team
	13.5 Project or Study Mission
	13.5.1 Product Definition and Documentation
	13.6 Information Phase
	13.6.1 Qualitative Analysis of Value: Function Analysis
	13.6.2 Function Analysis Systems Technique (FAST)
	13.6.3 Constraints Analysis
	13.7 Quantitative Analysis of Value – State 1 Value Measurement
	13.7.1 Cost Derivation
	13.7.2 Worth or Importance Derivation
	13.7.3 The Value Index
	13.7.4 Value Measurement Techniques
	13.8 Innovation Phase
	13.8.1 Improvement of Value
	13.9 Evaluation Phase
	13.9.1 Pre-screening: Qualitative Analysis of Value
	13.9.2 Quantitative Analysis of Value
	13.10 Implementation Phase
14. Forecasting
	14.1 Introduction
	14.2 Basic Categories of Forecasting Methods
	14.3 Extrapolative Methods
		14.3.1 Components of Demand
		14.3.2 Moving Average Method
		14.3.3 Weighted Moving Average Method
		14.3.4 Exponential Smoothing Methods
		14.3.5 Adaptive Methods
	14.4 Causal or Explanatory Methods
		14.4.1 Regression Analysis
		14.4.2 Simple Regression Analysis
		14.4.3 Multiple Regression Analysis
	14.5 Qualitative or Judgmental Methods
		14.5.1 Build-up Method
		14.5.2 Survey Method
		14.5.3 Test Markets
		14.5.4 Panel of Experts
	14.6 Forecast Errors
15. Cost Estimation
	15.1 Introduction
	15.2 How Does an Organization Estimate Cost?
		15.2.1 Cost Estimates
		15.2.2 Cost Estimation Approach
		15.2.3 Accuracy of Estimates
		15.2.4 Cost Estimation Methods
	15.3 Unit Method
	15.4 Cost Indexes
	15.5 Cost Estimation Relationships
		15.5.1 Cost-Capacity Equation
		15.5.2 Factor Method
		15.5.3 Learning Curve
	15.6 Estimation and Allocation of Indirect Cost
16. Decision Making
	16.1 Introduction
	16.2 Terminologies used in Decision Making
	16.3 Steps in Decision Making
	16.4 Decision Making Environment
	16.5 Decision Making under Uncertainty
		16.5.1 The Maximax Criterion
		16.5.2 The Maximin Criterion
		16.5.3 The Minimax Regret Criterion
		16.5.4 The Realism Criterion (Hurwicz’s Rule)
		16.5.5 Criterion of Insufficient Reason (Laplace’s Rule)
	16.6 Decision Making under Risk
		16.6.1 Expected Monetary Value (EMV)
		16.6.2 Expected Opportunity Loss (EOL)
		16.6.3 Expected Value of Perfect Information (EVPI)
	16.7 Marginal Analysis
	16.8 Decision Trees
Appendix A
Appendix B
Appendix C
Bibliography
Index