Chemical engineering economics

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. Since
economics is a driving force of human interaction,
studying it often reveals why people and
governments behave in particular ways.
 Macro and micro economics
There are two main types of economics: macroeconomics
and microeconomics. Microeconomics focuses on the
actions of individuals and industries, like the dynamics
between buyers and sellers, borrowers and lenders.
Macroeconomics, on the other hand, takes a much broader
view by analyzing the economic activity of an entire
country or the international marketplace.
A study of economics can describe all aspects of a
country’s economy, such as how a country uses its
resources, how much time laborers devote to work and
leisure, the outcome of investing in industries or financial
products, the effect of taxes on a population, and why
businesses succeed or fail.
ChE-309: Chemical Engineering Economics
(1) Introduction to economics (2) Importance of economics in
engineering (3) Plant location (4) Estimation of capital investment
(5) Physical plant cost (6) Manufacturing cost (Mid Term)

7) Market and process surveys in relation to feasibility analysis(8) General

expenses (9) Interest, taxes, insurance, and depreciation (10) Sales and
profit (11) Cost accounting (12) Alternative investments and
replacements (13) Marketing (End Term)

Recommended Books:
“Plant Design and Economics for Chemical Engineers” by M. S. Peters, K.
D. Timmerhaus, and R. E. West
“Chemical Engineering Economics” by D. E. Garrett
“Chemical Engineering Process Design and Economics: A Practical
Approach” by G. D. Ulrich, and P. T. Vasudevan
“Process Engineering Economics” by J. R. Couper
ChE-403: Chemical Engineering Plant Design
(1) Introduction to process design and development
(2) General design considerations (3) Optimal design
(4) Materials of fabrication and their selection
(5) Material transfer handling and equipment design
(6) Heat transfer equipment design (7) Mass transfer
equipment design (8) Application of computer aided
design software
Recommended Books:
“Plant Design and Economics for Chemical Engineers”
by M. S. Peters, K. D. Timmerhaus, and R. E. West
 Introduction
In this modern age of industrial competition, a successful chemical
engineer needs more than a knowledge and understanding of the
fundamental sciences and the related engineering subjects such as
thermodynamics, reaction kinetics, and computer technology. The
engineer must also have the ability to apply this knowledge to
practical situations for the purpose of accomplishing something
that will be beneficial to society. However, in making these
applications, the chemical engineer must recognize the economic
implications which are involved and proceed accordingly
Chemical engineers in the performance of their jobs will
employ economics in the preparation of capital cost
estimates, operating expense estimates, profitability
analyses including the time value of money, feasibility
studies, and to perform sensitivity and uncertainty
analyses considering many alternatives. To move up the
management ladder, they must have a working
knowledge of balance sheets, income statements, and
financial analyses of a corporate venture.
 Ten principles of economics
1. People face tradeoffs.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic
activity.
7. Governments can sometimes improve economic
outcomes
8. The standard of living depends on a country’s production.
9. Prices rise when the government prints too much money.
10. Society faces a short-run tradeoff between inflation and
unemployment.
The Economist as a Scientist
 The Economist as a Scientist

The economic way of thinking . . .

Involves thinking analytically and objectively.
Makes use of the scientific method.
Involves the use of abstract models to focus the
discussion on a main idea or theme in the complexity of
the real world.
 To apply the scientific method in economics, assumptions
are used to make the world easier to understand.
 Economic Models
 Economists use models to simplify reality in
order to improve our understanding of the
world.
 As simplifications of reality, models need
assumptions.
 Graphing Data
– Economists use three types of graphs to reveal
relationships between variables. They are:
– Time-series graphs
– Cross-section graphs
– Scatter diagrams
 Two of the Most Basic Economic
Models Are
• The Circular Flow Diagram
• The Production Possibilities Frontier.
 The Circular-Flow Diagram
Revenue Market for Spending
Goods
Goods & Goods &
Services sold
and Services
Services
bought

Firms Households

Inputs for Labor, land,

production Market for and capital
Factors
Wages, rent, of Production Income
and interest
 Journal Assignment-Circular Flow
Diagram
• Draw a circular flow diagram.
• Identify the parts of the model that
correspond to the flow of goods and services
and the flow of dollars.
The Production Possibilities Frontier

•Shows the various combinations of two

goods that can be produced by one firm.
•Assumes two goods
•Assumes fixed technology and fixed factors
of production.
 The Production Possibilities Frontier
Quantity of
Computers
Produced
3,000 D

2,200
C
2,000 A

B
1,000

0 300 600 700 1,000 Quantity of

Cars Produced
 The Production Possibilities Frontier
Quantity of
Computers
Produced
3,000 D

2,200
C
2,000 A
Production
possibilities
frontier
B
1,000

0 300 600 700 1,000 Quantity of

Cars Produced
Interdependence and Trade

Remember, economics is the study

of how societies produce and
distribute goods in an attempt to
satisfy the wants and needs of its
members.
The Market Forces of
Supply and Demand
 Markets

A market is a group of buyers and sellers of

a particular good or service.
The terms supply and demand refer to the
behavior of people . . . as they interact with
one another in markets.
And Economics, especially Microeconomics
is about how supply and demand interact in
markets.
 Market Types or Structures
• Competitive Markets
• Monopoly
• Monopolistic Competition
• Oligopoly
 Demand Curve
Price of
Ice-Cream
Cone
$3.00

2.50

2.00

1.50

1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Why does the Demand Curve Slope
Downward?
• Law of Demand
– Inverse relationship between price and quantity.
• Law of Diminishing Marginal Utility.
– Utility is the extra satisfaction that one receives
from consuming a product.
– Marginal means extra.
– Diminishing means decreasing.
 Market Demand
Market demand refers to the sum of
all individual demands for a particular
good or service.
Graphically, individual demand curves
are summed horizontally to obtain the
market demand curve.
 Ceteris Paribus
Ceteris paribus is a Latin phrase that
means all variables other than the ones
being studied are assumed to be
constant. Literally, ceteris paribus
means “other things being equal.”

The demand curve slopes downward

because, ceteris paribus, lower prices
imply a greater quantity demanded!
 Two Simple Rules for Movements vs.
Shifts
• Rule One
– When an independent variable changes and that variable
does not appear on the graph, the curve on the graph will
shift.
• Rule Two
– When an independent variable does appear on the graph,
the curve on the graph will not shift, instead a movement
along the existing curve will occur.
• Let’s apply these rules to the following cases of
supply and demand!
Change in Quantity Demanded versus
Change in Demand

Change in Quantity Demanded

Movement along the demand curve.
Caused by a change in the price of
the product.
 Changes in Quantity Demanded
Price of
Cigarettes
per Pack
A tax that raises the
price of cigarettes
C results in a movement
$4.00
along the demand
curve.

2.00 A

D1

0 12 20 Number of Cigarettes
Smoked per Day
 Change in Quantity Demanded versus
Change in Demand

Change in Demand
A shift in the demand curve, either to the
left or right.
Caused by a change in a
determinant other than the price.
 Determinants of Demand
Market price
Consumer income
Prices of related goods
Tastes
Expectations
What are some examples?
 Consumer Income
Normal Good
Price of
Ice-Cream
Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand

1.50

1.00

0.50 D2
D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Consumer Income
Inferior Good
Price of
Ice-Cream
Cone
$3.00

2.50 An increase
2.00
in income...
Decrease
1.50 in demand
1.00

0.50
D2 D1
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Prices of Related Goods
Substitutes & Complements
When a fall in the price of one good
reduces the demand for another good,
the two goods are called substitutes.
When a fall in the price of one good
increases the demand for another good,
the two goods are called complements.
Change in Quantity Demanded versus
Change in Demand
Variables that A Change in
Affect Quantity
Demanded This Variable . . .
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
buyers
Price of
Supply Curve
Ice-Cream
Cone
$3.00

2.50

2.00

1.50

1.00

0.50

Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Law of Supply

The law of supply states that there is a

direct (positive) relationship between
price and quantity supplied.
 Supply

Quantity supplied is the amount of a

good that sellers are willing and able
to sell.
 Change in Quantity Supplied
Price of
Ice-Cream S
Cone

C
$3.00 A rise in the price
of ice cream cones
results in a
movement along
the supply curve.
A
1.00

Quantity of
0 1 5 Ice-Cream
Cones
 Market Supply

Market supply refers to the sum of all

individual supplies for all sellers of a
particular good or service.
Graphically, individual supply curves
are summed horizontally to obtain the
market supply curve.
 Determinants of Supply

Market price
Input prices
Technology
Expectations
Number of producers
What are some examples?
 Change in Supply
S3
Price of
Ice-Cream S1
S2
Cone

Decrease in
Supply

Increase in
Supply

Quantity of
0 Ice-Cream
Cones
 Change in Quantity Supplied versus
Change in Supply
Variables that
Affect Quantity Supplied A Change in This Variable . . .
Price Represents a movement along
the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
 Equilibrium of
Price of
Supply and Demand
Ice-Cream
Cone
Supply
$3.00

2.50 Equilibrium

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Excess Supply
Price of
Ice-Cream
Cone
Supply
$3.00 Surplus

2.50

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
 Excess Demand
Price of
Ice-Cream
Cone

Supply

$2.00
$1.50

Shortage Demand

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
 Three Steps To Analyzing Changes in
Equilibrium

Decide whether the event shifts the supply

or demand curve (or both).
Decide whether the curve(s) shift(s) to the
left or to the right.
Examine how the shift affects equilibrium
price and quantity.
 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How an Increase in Demand Affects the

Equilibrium
Price of 1. Hot weather increases
Ice-Cream the demand for ice cream...
Cone

Supply

$2.50 New equilibrium

2.00
2. ...resulting Initial
in a higher equilibrium
price...
D2

D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
 How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream 1. An earthquake reduces
Cone the supply of ice cream...
S2
S1

New
$2.50 equilibrium

2.00 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower Ice-Cream Cones
quantity sold.
Supply, Demand, and Government Policies

In a free, unregulated market system, market

forces establish equilibrium prices and
exchange quantities.
One of the things government can do is to set
price controls when the market price is seen as
unfair to either buyers or sellers.
 Price Ceilings & Price Floors

Price Ceiling
A legally established maximum price at which a
good can be sold. (Rent Controls)
Price Floor
A legally established minimum price at which a
good can be sold. (Price Supports for Agriculture)
 Price Ceilings

Two outcomes are possible when the

government imposes a price ceiling:
 The price ceiling is not binding if set above the
equilibrium price.
The price ceiling is binding if set below the
equilibrium price, leading to a shortage.
Binding means that there is an economic impact.
 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

A Price Ceiling That Is Binding...

Price of
Ice-Cream
Cone
Supply

Equilibrium
price

$3

2 Price
ceiling
Shortage
Demand

0 75 125 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

A Price Ceiling That Is Not Binding...

Price of
Ice-Cream
Cone
Supply

$4 Price
ceiling

Equilibrium
price

Demand

0 100 Quantity of
Equilibrium Ice-Cream
quantity Cones
 Effects of Price Ceilings
A binding price ceiling creates ...
 shortages because QD > QS.
 Example: Gasoline shortage of the 1970s
 nonprice rationing
 Examples: Long lines, Discrimination by
sellers
 The Price Ceiling on Gasoline Is Not Binding...
Price of
Gasoline

1. Initially, Supply
the
price ceiling
is not
binding... $4 Price
ceiling

P1

Demand

0 Quantity of
Q1 Gasoline
 The Price Ceiling on Gasoline Is Binding...
Price of S2 2. …but
Gasoline when supply
falls...
S1
P2
Price
ceiling

P1 3. …the price
ceiling becomes
4. …resulting binding...
in a shortage.

Demand

0 Quantity of
Q1 Gasoline
What are some potential impacts of
taxes?
 Taxes are used to raise
money for the government.
 Taxes discourage market
activity.
 When a good is taxed, the
quantity sold is smaller.
 Buyers and sellers share the
tax burden.
 But who bears the burden-
tax incidence.
 Copyright © 2001 by Harcourt, Inc. All rights reserved

Impact of a 50¢ Tax Levied on Buyers...

Price of
Ice-Cream
Cone Supply, S1
Price
buyers
pay $3.30 Equilibrium without tax
Price 3.00 Tax ($0.50)
without 2.80
tax

Price
Equilibrium
sellers with tax
receive
D1
D2

0 90 100 Quantity of
Ice-Cream Cones
 Copyright © 2001 by Harcourt, Inc. All rights reserved

Impact of a 50¢ Tax on Sellers...

Price of
Ice-Cream
Cone A tax on sellers
Price S2 shifts the
buyers Equilibrium
supply curve
pay with tax
upward by the
$3.30 S1 amount of the
Price 3.00 Tax ($0.50)
tax ($0.50).
without 2.80
tax Equilibrium without tax

Price
sellers
receive

Demand, D1

0 90 100 Quantity of
Ice-Cream Cones
 The Incidence of Tax

In what proportions is the burden of

the tax divided?
How do the effects of taxes on sellers
compare to those levied on buyers?

The answers to these questions depend on the elasticity of demand

and the elasticity of supply.
 “In this world nothing is certain but death and
taxes.”
. . . Benjamin Franklin
100

Today, taxes
80

account for up
60

to a third of
40

the average
American’s
20

income.
0

1789 Today