Engineering Economics & Project Management

Notes

Unit 1: Introduction, Theory of Demand & Supply

1.1 Introduction to Engineering Economics

Engineering Economics

Engineering Economics is the branch of economics that helps engineers and managers make financial
and economic decisions related to engineering projects.

Relationship Between Engineering and Economics

Engineering creates products, systems, and technologies, while economics helps decide whether they
are financially beneficial and efficient.

Example:

An engineer may design two machines. Economics helps choose the machine with lower cost and
higher efficiency.

1.2 Resources, Scarcity of Resources, and Efficient Utilization of

Resources

Resources

Resources are the inputs used for producing goods and services.

Types of Resources:

1. Natural Resources – land, water, minerals.

2. Human Resources – labor and skills.
3. Capital Resources – machines, buildings, tools.
4. Entrepreneurial Resources – management and decision-making ability.

Scarcity of Resources

Scarcity means resources are limited while human wants are unlimited.

Efficient Utilization of Resources

Efficient utilization means using available resources properly without wastage to get maximum output.

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Example:

Using electricity-saving machines in industries reduces wastage and cost.

1.3 Opportunity Cost, Rationality, Costs and Benefits

Opportunity Cost

Opportunity cost is the value of the next best alternative sacrificed when one choice is made.

Example:

If ₹1 lakh is invested in business instead of a bank deposit, the bank interest lost is the opportunity cost.

Rationality

Rationality means making logical decisions to get maximum benefit with minimum cost.

Cost

Cost is the amount spent to produce goods or services.

Benefit

Benefit is the gain or advantage received from an activity or decision.

1.4 Theory of Demand

Demand

Demand is the quantity of a product that consumers are willing and able to buy at different prices
during a specific period.

Law of Demand

The law of demand states that when price increases, demand decreases, and when price decreases,
demand increases, keeping other factors constant.

Types of Demand

1. Individual Demand – demand of one consumer.

2. Market Demand – total demand of all consumers.
3. Joint Demand – demand for complementary goods.
4. Composite Demand – demand for a product used for multiple purposes.
5. Derived Demand – demand for a product due to demand for another product.

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Determinants of Demand

Factors affecting demand are: 1. Price of the product. 2. Income of consumers. 3. Price of related goods.
4. Taste and preference. 5. Population. 6. Future expectations.

Price Elasticity of Demand

Price elasticity of demand measures how much demand changes due to change in price.

Types of Price Elasticity

1. Elastic Demand – demand changes greatly with price.

2. Inelastic Demand – demand changes slightly with price.
3. Unit Elastic Demand – proportional change in demand and price.

1.5 Theory of Supply

Supply

Supply is the quantity of goods producers are willing and able to sell at different prices during a specific
period.

Law of Supply

The law of supply states that when price increases, supply increases, and when price decreases, supply
decreases, keeping other factors constant.

Determinants of Supply

1. Price of product.
2. Cost of production.
3. Technology.
4. Government policy.
5. Price of related goods.
6. Future expectations.

Supply Function

Supply function shows the relationship between quantity supplied and factors affecting supply.

1.6 Market Mechanism: Equilibrium and Comparative Static

Analysis

Market Mechanism

Market mechanism is the interaction between demand and supply that determines price and quantity
in the market.

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Equilibrium

Equilibrium is the market condition where quantity demanded equals quantity supplied.

Example:

If consumers demand 100 units and producers supply 100 units at ₹50, market is in equilibrium.

Comparative Static Analysis

Comparative static analysis studies changes in equilibrium due to changes in demand or supply factors.

Unit 2: Theory of Production & Costs

2.1 Concept of Production

Production

Production is the process of converting inputs into useful goods and services.

Factors of Production

1. Land – natural resources.

2. Labor – human effort.
3. Capital – machinery and equipment.
4. Organization/Entrepreneur – management and risk-taking.

Fixed Factors

Fixed factors are factors that cannot be changed in the short run.

Example:

Factory building and heavy machines.

Variable Factors

Variable factors are factors that can be changed in the short run.

Example:

Labor and raw materials.

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Short-run Production Function

Short-run Production Function

It shows the relationship between inputs and output when at least one factor is fixed.

Law of Variable Proportion

This law states that when more units of a variable factor are added to fixed factors, output first
increases, then decreases after a certain point.

Stages of Production

1. Increasing Returns.
2. Diminishing Returns.
3. Negative Returns.

Long-run Production Function

Long-run Production Function

It shows the relationship between inputs and output when all factors are variable.

Returns to Scale

Returns to scale refer to changes in output when all inputs are increased together.

Types:

1. Increasing Returns to Scale – output increases more than inputs.

2. Constant Returns to Scale – output increases proportionally.
3. Decreasing Returns to Scale – output increases less than inputs.

2.2 Theory of Cost

Cost

Cost is the expenditure incurred in production.

Short-run Cost Curves

Short-run cost curves represent costs when at least one factor is fixed.

Long-run Cost Curves

Long-run cost curves represent costs when all factors are variable.

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Total Cost (TC)

Total cost is the sum of fixed cost and variable cost.

Fixed Cost (FC)

Fixed cost remains constant irrespective of output.

Example:

Factory rent.

Variable Cost (VC)

Variable cost changes with output.

Example:

Raw materials.

Marginal Cost (MC)

Marginal cost is the additional cost of producing one more unit.

Average Cost (AC)

Average cost is the total cost per unit of output.

2.3 Economic Concept of Profit and Profit Maximization

Profit

Profit is the excess of total revenue over total cost.

Economic Profit

Economic profit considers both explicit costs and implicit costs.

Profit Maximization

Profit maximization means producing output at the level where profit is highest.

Example:

A company chooses production quantity where revenue exceeds cost by the maximum amount.

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Unit 3: Different Types of Market and Role of
Government
3.1 Perfect Competition

Perfect Competition

Perfect competition is a market structure where many buyers and sellers deal in identical products.

Features of Perfect Competition

1. Large number of buyers and sellers.

2. Homogeneous products.
3. Free entry and exit.
4. Perfect market knowledge.
5. No control over price.

3.2 Imperfect Competition

Imperfect Competition

Imperfect competition is a market where sellers have some control over price.

Monopoly

Monopoly is a market with only one seller and many buyers.

Features:

1. Single seller.
2. No close substitutes.
3. High entry barriers.
4. Seller controls price.

Example:

Local electricity supply company.

Monopolistic Competition

Monopolistic competition is a market with many sellers offering differentiated products.

Features:

1. Many sellers.
2. Product differentiation.
3. Free entry and exit.
4. Some control over price.

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Example:

Restaurants and clothing brands.

Oligopoly

Oligopoly is a market structure with few large sellers.

Features:

1. Few firms dominate market.

2. Interdependence among firms.
3. Barriers to entry.
4. Price rigidity.

Example:

Automobile industry.

3.3 Role of Government in Socialist, Capitalist and Mixed

Economy

Socialist Economy

A socialist economy is controlled mainly by the government.

Features:

1. Public ownership.
2. Equal distribution of wealth.
3. Government planning.

Capitalist Economy

A capitalist economy is controlled mainly by private individuals and businesses.

Features:

1. Private ownership.
2. Profit motive.
3. Free market system.

Mixed Economy

A mixed economy combines features of both socialism and capitalism.

Features:

1. Both private and public sectors exist.

2. Government regulation.

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 3. Economic freedom with social welfare.

Example:

India follows a mixed economy.

Unit 4: Concept of Project

4.1 Definition and Classification of Projects

Project

A project is a temporary activity undertaken to achieve a specific objective within a fixed time and
budget.

Classification of Projects

1. Industrial Projects.
2. Infrastructure Projects.
3. Research Projects.
4. Social Welfare Projects.
5. Commercial Projects.

4.2 Importance of Project Management

Project Management

Project management is the process of planning, organizing, executing, and controlling project activities.

Importance of Project Management

1. Helps achieve objectives.

2. Controls cost and time.
3. Improves efficiency.
4. Reduces risks.
5. Ensures proper utilization of resources.

4.3 Project Life Cycle

Project Life Cycle

Project life cycle is the sequence of stages through which a project passes from beginning to
completion.

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Stages of Project Life Cycle

1. Conceptualization

Identifying project idea and objectives.

2. Planning

Preparing schedules, budgets, and resource plans.

3. Execution

Actual implementation of project activities.

4. Termination

Completion and closure of the project.

Unit 5: Feasibility Analysis of a Project

5.1 Economic and Market Analysis

Economic Analysis

Economic analysis is the process of examining whether a project is economically beneficial and
financially practical.

It studies: 1. Project cost 2. Expected revenue 3. Profit possibility 4. Resource utilization 5. Economic
benefits

Importance of Economic Analysis

1. Helps determine project feasibility.

2. Supports investment decisions.
3. Reduces financial risk.
4. Assists in profit estimation.

Market Analysis

Market analysis is the study of market conditions to understand demand, customers, competitors, and
future opportunities.

Components of Market Analysis

1. Demand analysis – estimates customer demand.

2. Supply analysis – studies available supply.
3. Competition analysis – examines competitors.
4. Consumer analysis – studies customer behavior.
5. Price analysis – studies market price trends.

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Example:

Before starting an EV charging station project, market analysis helps estimate customer demand and
nearby competition.

5.2 Financial Analysis

Financial Analysis

Financial analysis is the evaluation of a project's financial performance and investment capability.

It helps determine whether the project can generate sufficient return.

Objectives of Financial Analysis

1. Evaluate profitability.
2. Estimate future cash flow.
3. Analyze investment risk.
4. Support investment decisions.

Capital Budgeting

Capital budgeting is the process of evaluating long-term investment projects and selecting the most
profitable option.

Example:

Choosing between two machines for factory installation.

Techniques Used in Capital Budgeting

Payback Period Method

Payback period is the time required to recover the initial investment of a project.

Formula: Payback Period = Initial Investment / Annual Cash Inflow

Shorter payback period is preferred.

Net Present Value (NPV) Method

NPV is the difference between the present value of cash inflows and cash outflows.

If NPV is positive, the project is generally accepted.

Internal Rate of Return (IRR)

IRR is the discount rate at which Net Present Value becomes zero.

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Projects with higher IRR are generally preferred.

5.3 Environmental Impact Study

Environmental Impact Study (EIS)

Environmental Impact Study is the process of examining the effects of a project on the environment
before implementation.

Objectives of Environmental Impact Study

1. Identify environmental damage.

2. Reduce harmful impacts.
3. Protect natural resources.
4. Support sustainable development.

Adverse Impact on Environment

Adverse impacts are harmful effects caused by projects.

Examples include: 1. Air pollution 2. Water pollution 3. Noise pollution 4. Deforestation 5. Waste
generation 6. Ecological imbalance

Example:

Construction of industries may increase air and water pollution.

5.4 Project Risk and Uncertainty

Risk

Risk is the possibility that actual project outcomes may differ from expected outcomes.

Uncertainty

Uncertainty means future events cannot be predicted accurately.

Types of Project Risks

Technical Risk

Risk related to technology, design failure, equipment issues, or technical problems.

Economical Risk

Risk caused by inflation, changing market prices, or interest rate changes.

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Socio‑Political Risk

Risk arising from government policy changes, political instability, strikes, or social issues.

Environmental Risk

Risk due to environmental regulations, natural disasters, or ecological problems.

Importance of Risk Analysis

1. Reduces uncertainty.
2. Improves decision making.
3. Helps prepare backup plans.
4. Improves project success rate.

5.5 Evaluation of Financial Health of a Project

Evaluation of Financial Health

Evaluation of financial health means examining whether a project is financially stable and capable of
generating profit.

Fixed Capital

Fixed capital is investment in long-term assets used for production.

Example:

Land, buildings, machines.

Working Capital

Working capital is the amount required for day-to-day business operations.

Working Capital = Current Assets − Current Liabilities

Example:

Cash, inventory and short-term expenses.

Debt

Debt is money borrowed from external sources.

Equity

Equity is the owner's contribution or ownership investment in the business.

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Shares

Shares represent ownership units of a company.

Debentures

Debentures are long-term borrowing instruments issued by companies.

Financial Ratios

Liquidity Ratio

Liquidity ratio measures the ability of a company to pay short-term obligations.

Activity Ratio

Activity ratio measures how efficiently business assets are used.

Debt–Equity Ratio

Debt-equity ratio compares borrowed funds with owner funds.

Profitability Ratio

Profitability ratio measures the earning efficiency of a project or business.

Unit 6: Project Administration

6.1 Gantt Chart

Gantt Chart

A Gantt chart is a bar chart used for scheduling and monitoring project activities.

Uses of Gantt Chart

1. Planning project activities.

2. Tracking progress.
3. Managing schedules.
4. Identifying delays.

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6.2 PERT and CPM

PERT (Program Evaluation and Review Technique)

PERT is a project management technique used to estimate project completion time under uncertainty.

Features of PERT

1. Event-oriented technique.
2. Used for uncertain projects.
3. Helps in time planning.

CPM (Critical Path Method)

CPM is a project management technique used to determine the longest path of activities in a project.

Features of CPM

1. Activity-oriented technique.
2. Used for predictable projects.
3. Focuses on cost and time control.

Critical Path

Critical path is the longest sequence of activities that determines minimum project completion time.

Example:

If delay in one activity delays the entire project, that activity lies on the critical path.

End of Notes

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