MIME 310 - Chapter 4

MIME 310 - Chapter 4 - 1 McGill Faculty of Engineering MIME...

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Unformatted text preview: 1 McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Economics of Production Combining Technology (production function) and Economics (cost function) Break-Even Analysis (production rate required to generate profit) Generalized Cost Functions (non-linear) Theory of the Business Firm (micro-economic issues) Section 2: Minimization of Project Costs Generalized Relationship Typical Examples Outline Technical efficiency is an important constituent of economic efficiency. Chapter 4 Production and Cost Analysis 2 McGill Faculty of Engineering MIME 310 Engineering Economy Use of economic principles in the design and operation of systems and production processes. Objectives: Minimize design costs Minimize production costs Maximize profits in a process with established production capacity i.e. optimization Section 1: Combining Technology and Economics 3 McGill Faculty of Engineering MIME 310 Engineering Economy Cost Function Total cost associated with the production of a particular amount of goods or services over a specific period of time. Total Production Costs = Total Fixed Costs + Total Variable Costs TC = FC + VC Section 1: Combining Technology and Economics FC Associated with inputs that do not vary over the short-term VC Associated with inputs that vary over the short-term, i.e. are a function of the production rate (Q) 4 McGill Faculty of Engineering MIME 310 Engineering Economy Average cost (of production): Q TC AC = Average fixed costs: Q FC fc = Q VC vc = Average variable costs: Cost Function At a given production rate, AC = fc + vc (variable) (variable or fixed) Section 1: Combining Technology and Economics 5 McGill Faculty of Engineering MIME 310 Engineering Economy If TC is linear, i.e. TC has a constant slope equal to MC, then: TC = FC + MC Q As vc = VC / Q, vc = MC Q / Q = MC Cost Function Section 1: Combining Technology and Economics 6 McGill Faculty of Engineering MIME 310 Engineering Economy Revenue Function Revenue associated with the sale of a particular amount of goods or services over a specific period of time. Amount sold assumed to be amount produced. Generally assumed that perfect competition exists in market place, i.e. the selling price is constant , independent of production rate. Thus, TR = p Q p: unit price (AR = MR = p) Q: production rate per period Section 1: Combining Technology and Economics 7 McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Economics of Production Combining of Technology (production function) and Economics (cost function) Break-Even Analysis (production rate required to generate profit) Generalized Cost Functions (non-linear) Theory of the Business Firm (micro-economic issues) Section 2: Minimization of Project Costs Generalized Relationship Typical Examples Outline 3 Chapter 4 Production and Cost Analysis 8 McGill Faculty of Engineering MIME 310 Engineering Economy Determines the range of production rates for which the process...
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This note was uploaded on 04/17/2010 for the course MIME 310 taught by Professor Bilido during the Fall '08 term at McGill.

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MIME 310 - Chapter 4 - 1 McGill Faculty of Engineering MIME...

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