2017-SE-081 Syed Ibad Ali

Software engineering economics

Assignment no - 01
Question -1: define economics, explain economics of software development.
Answer:
Economics:
Economics is the social science that studies the production, distribution, and
consumption of goods and services. Economics focuses on the behaviour and
interactions of economic agents and how economies work.
Economics of software development:
The development of software in the presence of uncertainty is a well-developed
discipline, a well-developed academic topic, and a well-developed practice with
numerous tools, database, and models in many different software domains.
Question - 2: what are the different types of economics, which branch of
economics deal with the
Subject of software engineering explain how it relate with basic axioms of
supply and demand.
Answer:
Types of economics:
Two major types of economics are:
1. Microeconomics: which focuses on the behavior of individual consumers
and producers
2. Macroeconomics: which examine overall economies on a regional, national,
or international scale.
Talking about software engineering, microeconomics branch of economics
deals more with the types of decisions software engineers or managers make.
There are some basic axioms of microeconomics and engineering economics.

 Demand versus supply. Demand is the required quantities for a product or

service. It is also the demand for labor and materials needed to produce
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those products and services. Demand is a fundamental driving force of

market systems and the predominant reason for most economic
phenomena. The market response to a demand is called supply. 
 Supply is the required quantities for a product or service that producers are
willing and able to sell at a given range of prices. This also extends to the
labor and materials needed to produce the product and services to meet
the demand.

Question - 3: what is mean by opportunity cost. Is there any relation of

opportunity cost with uncertainty, if yes explain how?
Answer:
Opportunity cost:
Opportunity costs represent the benefits an individual, investor or
business misses out on when choosing one alternative over another.
Uncertainty:
Uncertainty is the level of occurrence of profits and losses. The uncertainty always
comes with the printable avenues. It means where there is risk, there is profit and
vice versa.
The level of uncertainty has directly related with the level of profits, there exists a
direct relation between the uncertainty (risk) and opportunity cost. It means
higher the risk, higher the profits.
Question - 4: explain ten principles of economics and how they categorized into
three different
Groups.
Answer: the ten principles of economics are categorized as:
o How people make decisions:
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1. People faces trade-offs: “there is no such thing as a free lunch.” To get

one thing that we like, we usually have to give up another thing that we
like. Making decisions requires trading one goal for another.
2. Significance of opportunity cost in decision making: because people
face tradeoffs, making decisions requires comparing the costs and
benefits of alternative courses of action.
3. Rational people think at the margin: economists generally assume that
people are rational.
o Definition of rational: systematically and purposefully doing the
best you can to achieve your objectives.
o Consumers want to purchase the bundle of goods and services
that allow them the greatest level of satisfaction given their
incomes and the prices they face.
o Firms want to produce the level of output that maximizes the
profits.
4. People respond to incentives:
o Incentive is something that induces a person to act [by offering
rewards to people who change their behavior].
o Because rational people make decisions by comparing costs and
benefits, they respond to incentives.
o Incentives may possess a negative or a positive intention. It may
be in a positive or a negative way.
 How people interact with each other:
5. Trade can make everyone better off:
o Trade is not like a sports competition, where one side gains and
the other side loses.
o Consider trade that takes place inside your home. Your family is
likely to be involved in trade with other families on a daily basis.
Most families do not build their own homes, make their own
clothes, or grow their own food.
o Countries benefit from trading with one another as well.
6. Markets are usually a good way to organize economic activity:
Many countries that once had centrally planned economies have
abandoned this system and are trying to develop market economies.
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o Definition of market economy: an economy that allocates

resources through the decentralized decisions of many firms and
households as they interact in markets for goods and services.
o Market prices reflect both the value of a product to consumers
and the cost of the resources used to produce it.
o Centrally planned economies have failed because they did not
allow the market to work.
o Adam smith and the invisible hand: adam smith’s 1776 work
suggested that although individuals are motivated by self-interest,
an invisible hand guides this self-interest into promoting society’s
economic well-being.
7. Government can sometimes improve market outcomes:
There are two broad reasons for the government to interfere with the
economy: the promotion of efficiency and equality. Government policy
can be most useful when there is market failure.
 The forces and trends that affect how the economy as a whole works:

8. A country's standard of living depends on country production:

o Differences in the standard of living from one country to another
are quite large.
o Changes in living standards over time are also quite large.
o The explanation for differences in living standards lies in
differences in productivity.
o Definition of productivity: the quantity of goods and services
produced from each hour of a worker’s time.
o High productivity implies a high standard of living.
o Thus, policymakers must understand the impact of any policy on
our ability to produce goods and services.
o To boost living standards the policy makers need to raise
productivity by ensuring that workers are well educated, have the
tools needed to produce goods and services, and have access to
the best available technology.
o Per capita income of nation
9. Prices rise when the government prints too much money:
o Definition of inflation: sustained increase in the overall level of
prices in the economy.
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o When the government creates a large amount of money, the

value of money falls.

10.Society faces a short-run trade-off between inflation and

unemployment:

o Most economists believe that the short-run effect of a monetary

injection (injecting/adding money into the economy) is lower
unemployment and higher prices.

A. An increase in the amount of money in the economy

stimulates spending and increases the demand of goods
and services in the economy.
B. Higher demand may over time cause firms to raise their
prices but in the meantime, it also encourages them to
increase the quantity of goods and services they
produce and to hire more workers to produce those
goods and services. More hiring means lower
unemployment.
o Some economists question whether this relationship still exists.
o The short-run trade-off between inflation and unemployment
plays a key role in analysis of the business cycle.
o Definition of business cycle: fluctuations in economic activity, such
as employment and production.
o Policymakers can exploit this trade-off by using various policy
instruments, but the extent and desirability of these interventions
is a subject of continuing debate.

Question - 5: what are the main principles of engineering economics explain

each with example.

Answer:
Main principles of engineering economics:

Principle 1: develop the alternatives

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 Carefully define the problem! Then the choice (decision) is among

alternatives.
 The alternatives need to be identified and then defined for subsequent
analysis.
 A decision situation involves making a choice among two or more
alternatives.
 Developing and defining the alternatives for detailed evaluation is
important because of the resulting impact on the quality of the decision.
 Engineers and managers should place a high priority on this responsibility.
 Creativity and innovation are essential to the process.
 Example: consider choosing topic for fyp, we kept two or more topics in
mind not only one.
 principle 2: focus on the differences
 Only the differences in the future outcomes of the alternatives are
important.
 Outcomes that are common to all alternatives can be disregarded in the
comparison and decision.
 Example: the two most favorable project topics were then compared to
each other.
Principle 3: use a consistent viewpoint
 The prospective outcomes of the alternatives, economic and other should
be consistently developed from a defined viewpoint (perspective).
 The perspective of the decision maker, which is often that of the owners of
the firm, would normally be used.
 The viewpoint for the particular decision be first defined and then used
consistently in the description, analysis, and comparison of the alternatives.
 Example: the leader finalized the topic which he considered right according
to his perspective after considering all the differences between the two
topics.
 principle 4: use a common unit of measure
 For measuring the economic consequences, a monetary unit such as dollars
is the common measure.
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 You should also try to translate other outcomes (which do not initially
appear to be economic) into the monetary unit.
 Using more than one monetary unit for economic analysis will complicate
the overall analysis of a project.
 Example: cost analysis of both the topics of the project was developed.
Principle 5: consider all relevant criteria
 The decision maker will normally select the alternative that will best serve
the long-term interests of the owners of the organization.
 In engineering economic analysis, the primary criterion relates to the long-
term financial interests of the owners.
 This is based on the assumption that available capital will be allocated to
provide maximum monetary return to the owners.
 Often, though, there are other organizational objectives you would like to
achieve with your decision, and these should be considered and given
weight in the selection of an alternative.
 Example: group leader focused on the idea which was most likely to be sold
at the market after the completion.
  principle 6: make risk and uncertainty explicit
 Risk and uncertainty are inherent in estimating the future outcomes of the
alternatives and should be recognized.
 The analysis of the alternatives involves projecting or estimating the future
consequences associated with each of them.
 The magnitude and the impact of future outcomes of any course of action
are uncertain.
 The probability is high that today’s estimates of, for example, future cash
receipts and expenses will not be what eventually occurs.
 Thus, dealing with uncertainty is an important aspect of engineering
economic analysis.
 Example: risk analysis of both the projects were made.
Principle 7: revisit your decisions
 A good decision-making process can result in a decision that has an
undesirable outcome.
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 Other decisions, even though relatively successful, will have results

significantly different from the initial estimates of the consequences.
 Learning from and adapting based on our experience are essential and are
indicators of a good organization.
 Example: after the evaluation of everything mentioned above, a final
decision was made after the comparisons of both the projects.