Engineering Economics By Haris Zikrur Rehman

Scarcity, Choices & Costs Scarcity dominates our lives. Scarcity is something that is more in demand then its availability. Economics is a study of how individuals & groups deal with & respond to scarcity.

The Problem of Allocation: Choices Scarcity forces us to make choices. The desire to eat, drink, sleep and to be clothed and sheltered. For example: CAST AWAY Tom Hanks made choices.

Choice about Leisure & Work Leisure is an activity an individual engages in that does not increase the amount of goods and services the individual can consume. Work is an activity an individual engages in that increases the amount of goods and services the individual can consume

Choice: What to Produce & What to Consume Once decided how much to work say 8 hrs. Then have to decide what particular mix of food, water, clothing and shelter to produce. A decision to gather more water is equivalent to a decision to have less food, shelter e.t.c. One cannot at the same time be building shelter or producing clothing.

Choice: Present V/S Future Consumption A question arises now, How much of what I have already gathered Should I consume it now? Or should I save it for the rainy day? Thus comes the concept of Saving. Saving occurs when individuals choose to consume less then produce.

Choice: Present V/S Future Consumption (Cont.) Therefore the consumption can be increased tomorrow if you decrease your consumption today. Time can be used to construct the tool instead of producing things. Tools of this sort are called Capital and Investment.

Choice: Present V/S Future Consumption (Cont.) Capital is anything that is produced and then used to produce other things. Investment is the production of new Capital.

Scarcity forces each of us to make choices about how we will allocate our time, what particular mix of things we will consume, how we will divide our consumption between the present and the future, and whether we will sacrifice consumption now to accumulate capital so we can increase consumption tomorrow.

The Problem of Allocation: Costs Scarcity forces us to make choices; choices always have costs. Choosing between things costs you over what you did not choose. For example, buying a coke of 20 Rs costs you what you could have purchased with the 20 Rs if you hadn’t bought the Coke.

Opportunity Cost The Opportunity Cost of a choice is the value to an individual of the best alternative that the individual could have chosen but did not. Put slightly differently, the opportunity cost of a choice is the value of the best forgone opportunity.

A Production Possibilities Frontier PPF A PPF is the boundary between the output mixes that can be produced and those that, given scarce resources and available technologies, cannot. Can be illustrated by plotting maximum combinations of mixes that can be produced during working hours.

Quantity of coconuts produced Quantity of palm leaves produced PPF (Cont) Quantity of coconuts produced Quantity of palm leaves produced 100 And or 75 50 25 150 24 152 23 154 200

PFF Graph Palm Leaves Coconuts

Effect of More work on PPF The Shift between PPF1 and PPF2 illustrates the effect of an increase in the number of hours worked each day

Effect of More Capital on PPF Palm Leaves Coconuts The shift in PPF1 and PPF2 illustrates the effect of your building a tool to help you gather coconuts but not palm leaves. Capital in the form of tools is called Physical Capital; and capital in the form of individuals with developed skills is called Human Capital.