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1 CHAPTER 1 I N T R O D U C T I O N DEFINITIONS Economics – Study of how society (individuals, businesses and government) should allocate scarce productive resources (land, labour, capital and management skills) for the most effi- cient production of goods and services over time, and distribution, now and in the future, to the market, among various groups of consumers (adapted from Samuelson). The figure be- low illustrates these concepts. SCARCE RESOURCES PRODUCTION MARKET - Land - Labour - Capital - Management skills Goods and Services - Right time and place - Right clients - Right quality and quantity Microeconomics – Study of the economic behaviour of individual decision-making units (consumers, resource owners and business firms) in a free-market economy. Issues such as supply/demand conditions, price/production costs of goods and services, objectives of the business firm (profit, survival and growth), competitiveness and the theory of production are studied. Macroeconomics – Study of aggregate economic behaviour, i.e. at the national and interna- tional levels. Issues such as level and growth of income and consumption, general price le- vels, investment, wages, interactions between governments, businesses and society, and fis- cal policies and incentives are studied. Finance – Study of how businesses raise and allocate capital funds. Issues such as sources of funds, capital markets and costs, dividend policies and budgeting are studied. Engineering – Application of scientific principles and technology to the design, implementa- tion and efficient operation of projects. Engineering Economy – Focuses on cost, benefit, resource allocation and decision-making aspects associated with engineering projects. Requires knowledge of engineering design, economic theory, decision theory, managerial finance, operations research and environmental impact. Engineering Economic Analysis – Engineering economic analysis consists of solving prob- lems associated with project design issues at the development, implementation and operation phases that are amenable to analytical solutions. Projects can typically be implemented using
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CHAPTER 1 2 various technically feasible solutions, and engineering economic analysis provides analytical techniques to compare these various alternatives for the purpose of choosing the most desira- ble. The choice is guided by the traditional objectives of business organizations, i.e., creation of wealth (benefits must exceed costs) and most efficient use of scarce resources (maximize return per unit invested or disbursed). This process is illustrated in the figure below. ENGINEERING ECONOMIC ANALYSIS The solution is based on quantitative methods that require the systematic assessment of: Costs – implementation (investment) and production, present and future Benefits – revenues or cost savings, generally future Profits – benefits less costs over the entire project life If the project has a profit potential, economic wealth is created and the project is justified.
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