chp 4 - McGill Faculty of Engineering MIME 310 Engineering...

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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

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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

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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, then: TC = FC + MC • Q vc = VC / Q Therefore, vc = MC Cost Function Section 1: Combining Technology and Economics

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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

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8 McGill Faculty of Engineering MIME 310 Engineering Economy Determines the range of production rates for which the process generates a profit (as opposed to a loss).
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This note was uploaded on 10/15/2011 for the course MIME 310 taught by Professor Bilido during the Fall '08 term at McGill.

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chp 4 - McGill Faculty of Engineering MIME 310 Engineering...

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