Cambridge University Press 978-1-108-45885-6 — Principles of Engineering Economics with Applications Zahid A. Khan , Arshad N. Siddiquee , Brajesh Kumar , Mustafa H. Abidi Frontmatter More Information Principles of Engineering Economics with Applications Engineering economics is an essential subject for engineers. A sound understanding of this subject is required for analyzing complex economic decision-making problems in several core engineering disciplines. Adapted to meet the syllabi requirements of most universities, the text introduces the fundamental concepts of engineering economics. It shows ways to calculate time value of money using cash-flow diagrams and it explains the procedure for making economy studies to select the best alternative. It also elaborates various methods to make replacement and retention decisions, calculate depreciation costs, evaluate public sector projects, perform economy studies considering inflation, arrive at make or buy decisions etc. It further explains project planning and scheduling through CPM and PERT. The concepts and applications of value engineering are also introduced. Various methods for making forecasts, cost estimation and analysis, and decision making under different environments are also discussed. The book is strong in its ability to relate abstract engineering and managerial concepts to real life situations. Zahid A. Khan is a professor at the Department of Mechanical Engineering, Jamia Millia Islamia, New Delhi. He has published more than 100 articles in national and international journals. His research interests include optimization of design and manufacturing processes parameters, artificial neural network (ANN), fuzzy modelling, and environmental ergonomics. Arshad N. Siddiquee is a professor at the Department of Mechanical Engineering, Jamia Millia Islamia, New Delhi. He served as Assistant Director at the All India Council of Technical Education (AICTE) from 2005 to 2007. He has published more than 100 articles in national and international journals. His research interests include materials structure property correlation, welding engineering, machining, optimization of design and process parameters using fuzzy modelling. Brajesh Kumar is an associate professor at the National Institute of Financial Management (NIFM), Faridabad. His areas of interest include mathematical economics, business economics, managerial economics, computer applications in economics, research methodology, and econometrics. Mustufa H. Abidi is a researcher at the Raytheon Chair for Systems Engineering (RCSE), Advanced Manufacturing Institute, King Saud University, Riyadh. His areas of interest include application of virtual reality techniques for sustainable product development, flexible manufacturing systems, micro-manufacturing, human-computer interaction, additive manufacturing, and reverse engineering. © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-108-45885-6 — Principles of Engineering Economics with Applications Zahid A. Khan , Arshad N. Siddiquee , Brajesh Kumar , Mustafa H. Abidi Frontmatter More Information Principles of Engineering Economics with Applications 2nd edition Zahid A. Khan Arshad N. Siddiquee Brajesh Kumar Mustufa H. Abidi © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-108-45885-6 — Principles of Engineering Economics with Applications Zahid A. Khan , Arshad N. Siddiquee , Brajesh Kumar , Mustafa H. Abidi Frontmatter More Information University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, vic 3207, Australia 314 to 321, 3rd Floor, Plot No.3, Splendor Forum, Jasola District Centre, New Delhi 110025, India 79 Anson Road, #06–04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781108458856 © Cambridge University Press 2018 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First edition 2012 Second edition 2018 Printed in India A catalogue record for this publication is available from the British Library ISBN 978-1-108-45885-6 Paperback Additional resources for this publication at www.cambridge.org/9781108458856 Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-108-45885-6 — Principles of Engineering Economics with Applications Zahid A. Khan , Arshad N. Siddiquee , Brajesh Kumar , Mustafa H. Abidi Frontmatter More Information To Our Families © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-108-45885-6 — Principles of Engineering Economics with Applications Zahid A. Khan , Arshad N. Siddiquee , Brajesh Kumar , Mustafa H. Abidi Frontmatter More Information Contents Foreword xv Preface xix Acknowledgments xxi 1 Engineering Economics: A Prologue 1 1.1 Introduction 1 1.2 Introduction to Economics 1 1.3 Need to Study Economics 1 1.4 Circular Flow of Economic Activities 2 1.5 Circular Flow of Income in Different Sectors 6 1.6 Demand Theory 7 1.6.1 Law of Demand 8 1.6.2 Assumptions Used in Defining Demand 8 1.6.3 Demand Schedule 8 1.6.4 Demand Curve 9 1.6.5 Determinants of Demand 9 1.7 Elasticity of Demand 10 1.7.1 Price Elasticity of Demand 10 1.7.2 Income Elasticity of Demand 15 1.7.3 Cross Elasticity 17 1.8 Supply 20 1.8.1 Factors Affecting Supply: The Determinants of Supply 20 1.8.2 Law of Supply 21 1.8.3 Supply Schedule 21 1.8.4 Supply Curve 22 1.9 Definition and Scope of Engineering Economics 22 1.9.1 Meaning of Engineering Economics 22 1.9.2 Definition of Engineering Economics 22 1.9.3 Concepts of Engineering Economics 23 1.9.4 The Scope of Engineering Economics 23 1.9.5 Engineering Economics Environment 23 1.9.6 Types of Efficiency 24 1.10 Consumer and Producer Goods and Services 25 1.11 Necessities, Luxuries and Relation between Price and Demand 25 © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-108-45885-6 — Principles of Engineering Economics with Applications Zahid A. Khan , Arshad N. Siddiquee , Brajesh Kumar , Mustafa H. Abidi Frontmatter More Information VIII Contents 1.12 Relation between Total Revenue and Demand 27 1.13 Cost Concepts 28 1.14 Relation between Cost and Volume 29 1.15 The Law of Supply and Demand 33 1.16 The Law of Diminishing Marginal Returns 34 1.17 Break-Even Analysis 34 1.18 Profit-Volume (P/V) Chart and P/V Ratio 38 1.19 Competition or Market Structure 41 2. Fundamentals of Mathematics and Engineering Economics 45 2.1 Introduction 45 2.2 Theory of Consumer Behavior 46 2.3 Meaning of Utility 47 2.3.1 Nature of the Utility Function 47 2.3.2 Existence of Utility Function 48 2.3.3 The Cardinal Marginal Utility Theory 49 2.3.4 Equilibrium of the Consumer 50 2.4 Meaning of Demand 51 2.4.1 Demand Function 51 2.4.2 Quantity Demanded 51 2.4.3 Change in Demand 52 2.4.4 Law of Demand 52 2.4.5 Ordinary Demand Function 54 2.4.6 Compensated Demand Function 55 2.4.7 Reasons for Downward Slope of Demand Curve 55 2.5 Concept of Elasticity 56 2.5.1 Own Price Elasticity 56 2.5.2 Determinants of Price Elasticity 58 2.5.3 Income Elasticity of Demand 59 2.5.4 Cross-Price Elasticity of Demand 60 2.5.5 Engel Curve and Income Elasticity 61 2.5.6 Relationship between Price Elasticity and Marginal Revenue 63 2.6 Law of Diminishing Marginal Utility 63 2.7 Principle of Equi-marginal Utility 65 2.8 Indifference Curves Theory and Ordinal Utility Theory 67 2.8.1 Indifference Curves 67 2.8.2 Nature of Consumer Preferences 68 2.8.3 Indifference Map 69 2.8.4 Rate of Commodity Substitution 69 2.8.5 Properties of ICs 70 2.8.6 Budget Line 72 2.8.7 Consumer’s Equilibrium or Maximization of Utility 72 2.8.8 Alternative Method of Utility Maximization 74 © in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-108-45885-6 — Principles of Engineering Economics with Applications Zahid A. Khan , Arshad N. Siddiquee , Brajesh Kumar , Mustafa H. Abidi Frontmatter More Information Contents IX 2.9 Application and Uses of Indifference Curves 76 2.9.1 Income and Leisure Choice 76 2.9.2 Revealed Preference Hypothesis 77 2.9.3 Consumer’s Surplus 80 3. Elementary Economic Analysis 83 3.1 Introduction: Theory of the Firm 83 3.2 Law of Supply 83 3.3 Concept of Elasticity of Supply 86 3.4 Meaning of Production 88 3.5 Production Function and its Types 90 3.5.1 General Production Function 90 3.5.2 Cobb-Douglas Production Function 91 3.5.3 Properties of Cobb-Douglas Production Function 93 3.5.4 CES Production Function 94 3.6 Producer’s Equilibrium 94 3.7 Concept of Isoquants 96 3.8 Marginal Rate of Technical Substitution 99 3.9 The Elasticity of Substitution 100 3.10 Iso-cost Line 101 3.11 Producer’s Surplus 102 3.12 Cost Minimization 102 3.13 Returns to Scale and Returns to Factor 107 3.14 Cost Theory and Estimation 108 3.15 Concept of Costs and their Types 108 3.16 Profits 110 3.16.1 Normal Profits 111 3.16.2 Economic Profits 111 3.17 Profit maximization 112 3.18 Market Structure and Degree of Competition 112 3.18.1 Perfect Competition 113 3.18.2 Monopoly 115 3.18.3 Monopolistic Competition 117 3.18.4 Oligopoly Models 118 3.18.5 Monopsony 120 4.