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* Materials & Production

Economics of Engieering

Asst. Prof. Dr. Bugra CICEK


Yildiz Technical University - Istanbul

Materials & Production


Economics

Economics
Economy (oikia nomos)
Economics is the social science that studies
Aneconomyoreconomic
economic
activity to gain ansystemconsists
understanding of
of the
theproduction,distributionortrade,
processes
that govern the production, distribution
andconsumptionof
limitedgoodsandservicesby
and
consumption of goods
and services in an
differenteconomy
agents in a given geographical location.
exchange
The economic agents can be individuals, businesses,
or governments.
Inorganizations,
other words, economics
is the study of the
production and consumption of goods and the
transfer of wealth to produce and obtain those
goods. Economics explains how people interact
within markets to get what they want or accomplish
certain goals.
http://www.ted.com/talks/julian_treasure_5_ways
_to_listen_better
Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
United States

Economic Terms

16,244,600 M$

Turkey

788,299 M$

Gross Domestic product (GDP): The total of goods and services produced by a nation over a given period,
usually 1 year. Gross Domestic Product measures the total output from all the resources located in a country, wherever the owners of
the resources live.
Asset:Anything of monetary value that is owned by a person.
Assetsinclude real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc)
Average total costis the sum of all the production costs divided by the number of units produced.
Balance of trade:The difference in value over a period of time between a country's imports and exports.
Barter system:System where there is an exchange of goods without involving money.
Bid price:The highest price an investor is willing to pay for a stock.
Break even:This is a term used to describe a point at which revenues equal costs (fixed and variable).
Budget:A summary of intended expenditures along with proposals for how to meet them.
A budgetcan provide guidelines for managing future investments and expenses.
Capital:Wealth in the form of money or property owned by a person or business and human resources of economic value.
Capitalis the contribution to productive activity made by investment is, physical capital (machinery, factories, tools and equipments)
and human capital (eg general education, health).
Capital is one of the three main factors of production other two are labour and natural resources.
Cartel:An organization of producers seeking to limit or eliminate competition among its members, most often by agreeing to restrict output
to keep prices higher than would occur under competitive conditions.Cartelsare inherently unstable because of the potential for producers
to defect from the agreement and capture larger markets by selling at lower prices.
Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Previously on Materials & Production


Economics

What we learned last week;

The basic economic terms

Why engineers need to know economics?

What makes engineering products sell?


Design
Technology

What market is and what it tells us?


The example of 4 different markets

Russia

U.K

U.S.A

France

What service is? (hizmet)

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Wealth transfer in an organised system, what it depends on?


What is supply, demand and costs?
What GDP is, What it tells us?
Why
Why
Why
Why

China
USA
Europe
Brazil

What is a Cartel?
Jewelleries in Grand Bazaar can be called Cartel?
or EU?

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Census:Official gathering of information about the population in a particular area. Government departments use the data collected in
planning for the future in such areas as health, education, transport, and housing..
Central bank:Major financial institution responsible for issuing currency, managing foreign reserves, implementing monetary policy,
and providing banking services to the government and commercial banks.
Centrally planned economy:Aplanned economic systemin which the production, pricing, and distribution of goods and services are
determined by the government rather than market forces. Also referred to as a "non market economy." Former Soviet Union, China,
and most other communist nations are examples of centrally planed economyClassical economics:The economics of Adam Smith,
David Ricardo, Thomas Malthus, and later followers such as John Stuart Mill. The theory concentrated on the functioning of a market
economy, spelling out a rudimentary explanation of consumer and producer behaviour in particular markets and postulating that in the
long term the economy would tend to operate at full employment because increases in supply would create corresponding increases in
demand.
Closed economy:Aclosed economyis one in which there are no foreign trade transactions or any other form of economic contacts
with the rest of the world.
Copyright:A legal right (usually of the author or composer or publisher of a work) to exclusive publication production, sale,
distribution of some work. What is protected by the copyright is the "expression," not the idea. Notice that taking another's idea is
plagiarism, so copyrights are not the equivalent of legal prohibition of plagiarism.
http://www.ted.com/talks/rob_reid_the_8_billion_ipod#t-286767
Cost benefit analysis:A technique that assesses projects through a comparison between their costs and benefits, including social costs
and benefits for an entire region or country. Depending on the project objectives and its the expected outputs, three types of CBA are
generally recognised: financial; economic; and social. Generally cost-benefit analyses are comparative, i.e. they are used to compare
alternative proposals. Cost-benefit analysis compares the costs and benefits of the situation with and without the project; the costs
and benefits are considered over the life of the project.

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Developing country, less developed country, underdeveloped country or third world country: a country characterized by low levels of
GDP and per capita income; typically dominated by agriculture and mineral products and majority of the population lives near
subsistence levels.
Dumping occurs when goods are exported at a price less than their normal value, generally meaning they are exported for less than
they are sold in the domestic market or third country markets, or at less than production cost.
Direct investment:Foreign capital inflow in the form of investment by foreign-based companies into domestic based companies.
Portfolio investment is foreign capital inflow by foreign investors into shares and financial securities. It is the ownership and
management of production and/or marketing facilities in a foreign country.
Economic growth: Quantitative measure of the change in size/volume of economic activity, usually calculated in terms of gross
national product (GNP) or gross domestic product(GDP).
Economicdevelopment:The process of improving the quality of human life through increasing per capita income, reducing poverty,
and enhancing individual economic opportunities. It is also sometimes defined to include better education, improved health and
nutrition, conservation of natural resources, a cleaner environment, and a richer cultural life.
Econometrics:The application of statistical and mathematical methods in the field of economics to test and quantify economic
theories and the solutions to economic problems.
Economic policy:A statement of objectives and the methods of achieving these objectives (policy instruments) by government,
political party, business concern, etc. Some examples of government economic objectives are maintaining full employment, achieving
a high rate of economic growth, reducing income inequalities and regional development inequalities, and maintaining price stability.
Policy instruments include fiscal policy, monetary and financial policy, and legislative controls (e.g., price and wage control, rent
control).

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Free trade:Free tradein which goods can be imported and exported without any barriers in the forms of tariffs, quotas, or other
restrictions. Free trade has often been described as an engine of growth because it encourages countries to specialize in activities in
which they have comparative advantages, thereby increasing their respective production efficiencies and hence their total output of
goods and services.
Free-trade areaA form of economic integration in which there exists free internal trade among member countries but each member is
free to levy different external tariffs against non-member nations.
International Monetary Fund (IMF)An autonomous international financial institution that originated in the Bretton Woods Conference
of 1944. Its main purpose is to regulate the international monetary exchange system, which also stems from that conference but has
since been modified. In particular, one of the central tasks of the IMF is to control fluctuations in exchange rates of world currencies in
a bid to alleviate severe balance of payments problems.
Macroeconomics:The branch of economics that considers the relationships among broad economic aggregates such as national income,
total volumes of saving, investment, consumption expenditure, employment, and money supply. It is also concerned with determinants
of the magnitudes of these aggregates and their rates of change over time.
Market: The Stage
Microeconomics:The branch of economics concerned with individual decision units--firms and households--and the way in which their
decisions interact to determine relative prices of goods and factors of production and how much of these will be bought and sold. The
market is the central concept in microeconomics.
Monopoly:A market situation in which a product that does not have close substitutes is being produced and sold by a single seller.
National debt:Treasury bills, notes, bonds, and otherdebtobligations that constitute the debt owed by the federal government. It
represents the accumulation of each year's budget deficit
Public debt: Borrowing by the Government of India internally as well as externally. The total of the nation's debts: debts of local and
state and national governments is an indicator of how much public spending is financed by borrowing instead of taxation.
Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Organization for Economic Cooperation and Development (OECD):An organization of 20 countries from the Western world including
all of those in Europe and North America. Its major objective is to assist the economic growth of its member nations by promoting
cooperation and technical analysis of national and international economic trends.
Quota:Aquotais a physical limitation on the quantity of any item that can be imported into a country, such as so many automobiles
per year. Also a method for allocating limited school places by noncompetitive means--for example, by income or ethnicity.
VAT:A form of indirect sales tax paid on products and services at each stage of production or distribution, based on the value added at
that stage and included in the cost to the ultimate customer. KDV

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

MICROECONOMICS MAKROECONOMICS
Microeconomics

From the Greek word mikros meaning small

Its the study of the individual units of economic system

In economy, microeconomics studies a limited part of the system

Economy of individuals;
Induvidual units
Firms
Households
Individual prices
Wages/salary
Particular industries

Behaviours of these units

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
What Microeconomics deal with?

Determination of Procuct Prices

Economic theories of;


Rent, Salary, Bills, Fees etc

Can be Called Price Theory

What Microeconomics can provide?

Economics fingerprint of a specicific unit

Foresight from product point pf view


Raw Material/Consumption/ Price
Supply and Demand- Profit expectation increase/decrease in prices
The stability in price policy
The Frame of minimum-maximum cost

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

What microeconomics cannot provide?

It cannot give you a snapshot of 5 years later

It cannot be used as a medicine for a permanent problem

Structural problems annot be soved with microeconomics

Microeconomics is limited, can be a tool of macroeconomics but cannot provide solutions


Macroeconomic problems.

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Macroeconomics
From Greek word makros means larger
Macro economics is the field studying large part of the economy The whole The economic behaviour of the economy as whole.
Macroeconomics studies all individual systems but the aggregates of these
individuals, not with the induvidual incomes, but with national income, not with
individual prices but with prices level, not with indivusal output, but with national
output.

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

What Macroeconomics deal with?

Total consumption
Total savings
Total investment
Total output
National Income
Inflation & Deflation
Economic Growth
Employment& unmemployment

Can be called theory of income and employment

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

What macroeconomics can provide?


A large perspective of all the economy
Can be permanent solution of economy problems
Stable economy policies can be planned with using macroeconomics
Can provide a better understanding of microeconomics

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Both approaches are interrelated inter-dependent and complementary to each other


For a perfect economy these two studies has to be well studied

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Case Study - Example


HDMI cable business Yldz Cable Lmtd.
Due to the public protests going on in Chilie over a year , the copper prices had started
to increase rapidly. While looking for abother market for our copper need, final cost of our production has
to stay stable, for this purpose we, as Yldz Cable Lmtd. , we need to lay off( dismiss) 50 workers (labour)
and add 1 hour extra to the existing schedule of our workers.
Analyse this from Macro and microeconomic point of views.

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

ENGINEERING ECONOMIC DECISIONS

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Rational decision making process

The roles of engineers in business


What is the challenge in economic decision (what makes the difference)
What makes engineering economics decision diffucult
Strategic decisions
The fundemental principles in engineering economics

There are two primary choices in life: to accept


conditions as they exist, or accept the
responsibility for changing them.
Denis Waitley
Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Rational Decision-Making Process

Recognize the decision problem

Collect all needed (relevant) information

Identify the set of feasible decision


alternatives

Define the key objectives

Select the possible and implementable


decision alternative

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Illustrative Example: Which bank to work with for a loan?

Recognize the decision


problem

Collect all needed (relevant)


information

Identify the set of feasible


decision alternatives

Define the key objectives

Select the possible and


implementable decision
alternative

We need a loan for an investment and we


are looking for bank to take loan

Gather interest rates, payment


program,inudstrial realitons of the bank,
customers of the bank

Select the banks to consider

Compare interest rates, elasticity in


payments

Isbank or Ziraat Bank

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Engineering Economic Decisions
Design

Financial
Planning
Investment /
Loan

Manufacturing

Marketing

Profit!

Example ;

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

What makes engineering economic decisions dificult?


Estimating the required investments
Estimating product manufacturing costs
Forecasting the demand for a new product
Estimating good selling price
Estimating product life and the profitability of continuing
production

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Create and design


Engineering Projects i.e; Hover board

Analyse
Production Methods
Engineering Safety
Environmental impacts

Evaluate
Expected Profitability
Timing of Cah Flows
Degree of Financial Risk

Evaluate
Impact on Financial Statements
Firmss market value
Stock Price

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Accounting vs Engineering Economics

Evaluating Past Performance

Evaluating and Predicting Future Events

Accounting
Past

Engineering Economics
Present

Future

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Estimating the Process Design Based Investments for Material Sciences Engineering

Idea of the product, estimating the capacity


Gathering of the physical/chemical properties of the processed materials through literature or own lab. Analyses
Preparation of the flow chart including machinery and the equipment
Calculating the energy and mass equivalences
Characterization of the product standards in separate steps the flow chart (temparature, shape etc.)
Analysing optimum capacities of the machinery, arrangement of the calculators
Preparation of the detailed code list of the flow chart and the characteristics of processed materials
Gathering the machinery information through literature or the related companies
Transportation cost of the settlement

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Direct Investment Headlines for Materials Science Engineering
Investments on Production
1. Purchased Machinery and Equipment
a. All the machinery and equipment listed in production flow
b. Spare parts, additional equipment and materials
c. Transportation, custom, taxes, insurance fees
d. Installation (plan, subsituation) costs
2. Purchased Material installation
a. All the machinery installation in production flaw
b. Support (asistance) construction insulation, painting etc .

3. Measurement and process control equipments and computer systems


a. Purchasing, to switch on, adjustments, connection to main systems

4. Pipelines
a. Process pipelines
b. Pipeline construction

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

5. Electric-electronics (Materials and Labor Cost Included)


a. Electric electronic equipment circuits, engines, cables, connections, lightening etc.)

6. Buildings and Silos


a. Process buildings
b. Additional Buildings, offices, deposits, spare part depot, security, fire fighter unit,
transport offices and platforms, laboratories, quality control labs, etc..
7. Land Regulation and field services
a. Land regulation, roads, railways, wires, ports, social facilities, parking places etc..

8. Deputy Facilities
a. Utilities- cooling, compressed air, nitrogen tanks, gas tanks, fine raw material silos
b. Environment Protecting Units Waste water treatment, wate organic control units, incinerator,
spray dryer locating and extermination units.
c. Off the Process Units Office equipment, infromation technologies and planning units, catering
services, maintenece services, safety and security units, medical unit equipments,
d. Distirubution and packaging Product depots, coding systems, loading stations, forklifts.

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Indirect Investment Headlines for Materials Science Engineering
1. License, Royalty etc. Fees
a. Computer Programs, common technology etc..

2. Engineering Services and Supervision


a. Process Selection, design, accounting, consultant, inspection fees.

3. Construction expenses
a. Temporary facilities, roads offices, electrical construction etc.
b. Earth mover, crane etc. rental
c. Engineering, accounting of the (worksite) construction area
d. Permissions, feasibility tests, licenses
e. Tax, insurance etc.

4. Contructor Fees
5. Contingency (unexpected expenses)

Macroecomic reasons

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Percentile bands of the investment headlines for Materials Sciences Engineering

Investment
Direct investment

Average %

20.0 40.0

21.5

7.3 26.0
2.5 7.0
3.5 15.0

8.2
2.8
6.1

Purchased machinary and


equipments
Assembly of the machinary
Measurement and process
control equipment
Assembly of the pipelines
Assembly of the electronics
Buildings
Land Regulation
Deputy facilities
Land
Start-up

2.5 9.0
6.0 - 20.0
1.5 5
8.1 35.0
1.0 -2.0
6.0 12.0

3.8
7.6
2.1
12.0
1.0
6.6

Engineering and supervision


Construction expenses
Contactor fees
Contingency

4.0 21.0
4.8 22.0
1.5 5.0
6.0 18.0

8.6
9.6
2.0
8.1

Indirect investment

Percentile Band %

100.00

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Live teleconference - Q&A

Mr. Cenk UGUR


Factory Manager
Villeroy and Boch-Germany

Muhendislik ekonomisinin gorevinizdeki onemi nedir?


retimde teorik bilgiyi kullanma sklnz nedir?
Yatrmlar esnasnda karslastgnz en buyuk problemler nelerdir? Yatrm karar verme sebepleriniz
ve ekillenme sureci hakknda bilgi verir misiniz?
Kapasite belirlenirken arz talep dengesinin 3 yl sonraki halini nasl ngoruyorsunuz?
En buyuk masraf kalemleriniz neler ve bu masraflar azaltmak iin neler yapyorsunuz?
Yatrm karar aamasnda mhendislerin rol nedir?
Yatrm anlamnda karlatnz en buyuk baarszlk neydi, sebebi neydi? Nasl zdnz?
Ar-Ge yatrm kararlarnz verirken nelere dikkat ediyorsunuz Ar-Genin toplam cirodaki orannz nedir?
retimden ynetime gei sureciniz nasld, bu srete neler rendiniz?
Pazarlama, sat ve mhendislerin tam olarak i ilikisi nedir?
Genc mhendislere tavsiyeleriniz nelerdir
Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
What we did last week?
The conditions making engineering decisions diffucult

What are they?


The difference between accounting and engineering economics (Past, Present,
Future)
The key factors in estimating the needed investment
How to build a plant for material processing, (High tech, traditional)
Direct investments
Indirect investments
How flow chart becomes real
The investment behind the flow chart
How materials science engineering investments differ from the other
engineering investments
The importance of the machinery effects materials sciecnes enginneer,
technically and economically.
Percentile bands and the averages of the investment headlines
The research and develeopment economics (to be continued)

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Production Expenses for Materials Science Engineering

1. Plant Expenses
a- Items and Materials
- Raw Materials
- Assist Materials (related materials , I.e.; foaming agents, solvents)
- Utilities
- Maintenance Materials
- Operating Materials (gas, nitrogen etc.)
b- Labour
- Direct Plant Labour
- Production Tracking
- Maintenance Labour
- Maintenance Tracking
- Other Labour costs i.e; overtime, travel aid.

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

c. Overheads
-

Administration costs
Indirect labour costs
Personnel and industrial relations
Health, security expenses
Communication expenses
Catering restaurant
Local abonments

d. Deprecitation

2. Distrubition Costs
a. Transport and Packaging
b. Stations and deposits (dealers are not counted!)

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
2. Marketing Expenses
a. Direct
- Salaries and commissions of the marketing department
- Advertisement
- Fairs, exhibitions
- Samples, Demonstrations
b. Indirect
- Sales Tracking
- Travel and fun!
- Market Research and Sales Analyse
- Represantation offices

3. Research and Development Expenses


- High Cost Labor
- Lab. Equipment
- Information costs (consultancy, literature access etc..)
- Frontier analyses

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

4. Administration Expenses
a. Salaries of the Management
b. Accounting, inspection etc..
c. Legal management
d. Public Relations
e. Taxes and insurance

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics
Depreciation
Definition:

The allowance for wear and tear on equipment and machinery


Amount of decreasing value in a capital asset allowed to be deducted from a
business tax return
Cost Recovery

Factors or causes of depreciation


Thedevaluationof asset or depreciation is caused by many factors such as:
Physical loss
Usage: wearing out of asset due to its intended use in business to obtain products
or to support in service provision
Perishability, weathering, rusting: naturalcharacteristicsof the product making it
impossible to store the asset or it loses its physical structure at chemical level
due to certain factors.
Accident: A mishap causing assets to render lesser than original benefits.

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Technological advancement
Extinction: no longer in fashion
Inappropriateness: with other options available, asset is no longer
attractive.
Expiry:right to use has expired over time
Exhaustion:for example mines and wells whereasset loses its value as a
result of extraction of minerals

What can be depreciated?

You can depreciate property only if it meets the following


requirements:
It is used in business or held for the production of income.
It must be expected to last for more than one year. In other words, it
must have a useful life that extends substantially beyond the year it
was placed in service.
It is property that wears out, decays, gets used up, becomes obsolete,
or looses value from natural causes.
Depreciable property can be either tangible or intangible

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

As a result, depreciation in materials sciences engineering


-Old Technology
-Natural (getting old)
-Corrosion
-Gas emission related

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014

Materials & Production


Economics

Asst. Prof. Dr. Bugra Cicek- Yldz Technical University -2014