Engineering Economics

Definition of economics and economic problem

In any economic unit, whether it is an establishment or an institution, and in any economic society, regardless of the type of its economic and political system, the economic problem appears in its multifacetedness and depth of dimensions, which in itself creates a problem of “discrimination” that necessarily requires studying the various competing alternatives and “selecting” the best solutions for it. In this sense, the economic problem becomes the pillar of economics and management science together.

Economics is defined as: – “that branch of social sciences that examines how limited resources can be used to satisfy multiple and unlimited human needs.”

The definition shows two important facts:

1- The human needs to be satisfied are multiple and unlimited.
2- The resources available to satisfy human needs are limited.

These two facts are the basis of the economic problem, and without them, the study of economics would not be of great importance, rather there would be no point in studying economics. As for the economic problem, we will discuss its two parts, needs and resources, as follows.

A- Human needs

Human needs are represented in a feeling of deprivation accompanied by a certain Desire of the individual to obtain the various means of gratification to remove this deprivation, and when this need becomes clear it becomes a desire. Accordingly, to differentiate between need and desire, it can be said that a person needs, from a biological point of view, a certain type of nutrition to provide his body with units of calories, and from a health point of view, he needs comfortable, healthy housing, and from a moral point of view, he needs a degree of education and education. All these needs and others are not determined by objective criteria, and may not be in line with the desires that a person feels.

Therefore, the word desire is used to express the feeling of lack of a certain satisfaction in a person that leads him to a kind of behavior directed to achieve this satisfaction.

Human needs are either innate, with which a person is born and needs them automatically, such as the need for food, shelter, and clothing. Or it is acquired that evolves and varies with human growth and changing circumstances, such as the need for various luxury goods and services.

The individual consumes those goods and services that satisfy a specific desire or need and that achieve economic benefit for him. Utility means, in economic terms, “that power inherent in the commodity and service that satisfies a specific human desire.”


It becomes clear to us that there is a human need that turns into a desire that requires satisfaction, and there are means to satisfy the desires. These means are Economic Resources, represented in the natural, human and capital resources that are used in the production of Goods and Services. Resources are distinguished by being scarce in relation to the abundance of needs, and the criterion for scarcity is the existence of a price for those resources, and accordingly it is called economic resources to distinguish them from free resources that have no price and that exist in nature in large quantities, and no effort is made by man to obtain them, such as the sun, air and sea water. Economists prefer dividing resources according to their role in the production process, and they are called the elements of production, namely: land or nature, labor, capital, and organization.

The economic resources in society of natural, human and capital resources are the source of the production elements or factors of production that are used in the production of goods and services necessary to satisfy human needs, and this production of goods and services falls under two categories:

1- Physical or tangible production, which we generally call “commodities”, such as foodstuffs, clothes, tools, etc.
2- Non-material or intangible production, known as “services”, such as education, health and so on.

Both material and non-material production contribute to satisfying human needs, with reference to the fact that everything that has the ability to satisfy can be called a “commodity” in economic convention, regardless of its type. Goods that satisfy human needs can be divided into several divisions, such as dividing them into necessary and luxury goods, or ordinary and inferior goods, consumer goods and productive goods, alternative goods and complementary goods, and so on.

Returning to the economic problem, we say that if human needs are multiple and unlimited while the resources available to satisfy these needs are limited compared to the need for them, then the economic problem is a problem of “scarcity” and a problem of “choice”.

The economic problem is a problem of scarcity and a problem of choice:

What is meant by scarcity here is relative scarcity, Proportional, and not absolute scarcity. Resources are available and not scarce in existence, but due to the increase in needs, these resources become scarce in relation to the need for them.

In addition, the increase and multiplicity of needs with limited resources puts limits in front of what the individual can obtain in terms of goods and services, which makes the selection process inevitable. The individual may notice that he is exposed to the problem of choice more than once, and even constantly and in various aspects of his daily life. Should he choose to enter the university or work with his high school diploma? And if he wants to work, should he choose the private sector or the public sector? And if he joined the university, which college would he choose from? Is it the Faculty of Economics and Administration or Science or something else? When he wakes up, what does he wear? And what does he eat? And how does he go to university? And when? … many choices and alternatives. If the individual faced the problem of choice, and was able to choose one of the available alternatives, then he made an economic decision.

Accordingly, we say that the solution to the economic problem requires the community to make a selection process, and decide two things:

The first thing: choosing the needs that will be satisfied using the available resources.
The second matter: Choosing between the many uses of resources and making the best use of them, and achieving efficiency from their use so that they are used in the production of the largest possible amount of goods and services at the lowest possible cost to satisfy the largest number of needs.

It is clear from this that the basic questions facing any society,

The answer requires three questions:

1- What do we produce? By this question, it is intended to identify the desires of the members of society for the goods and services to be produced, and to determine them qualitatively and quantitatively. That is, what are the commodities that society has to produce? ..Is it the clothes? Or foodstuffs? Or machines? What are the quantities of each? Undoubtedly, society will not be able to satisfy all the desires of its members, otherwise the economic problem will not disappear. Rather, it must carry out a process of balancing and choosing the best alternatives, comparing them and producing them within the limits of the available capabilities.

2- How do we produce? Here, the society must determine how it produces these commodities, that is, it tries to translate the desires and preferences of individuals into productive commodities and services that satisfy those desires. This process requires limiting all available resources for production and allocating them to different uses so that we can achieve the maximum possible utilization through this, and determine the optimal technical and technical method for producing the required goods and services.

3- Who do we produce for? This question requires reaching out to how the production is distributed among the members of society and identifying the beneficiaries thereof. The fair distribution of output does not mean that each individual’s share of produced goods and services is equal, but rather that this share is proportional to the individual’s contribution to the production process itself.

productive capabilities available to society

We knew that society’s resources are limited in relation to needs, that these resources have multiple uses and that a choice must be made between those uses, and this choice has a cost called opportunity cost. For example, if the resources available to society can be used in the production of industrial commodities, then it would have sacrificed the production of other alternative commodities in which these resources can be used in their production, which are agricultural commodities.

Thus, the opportunity cost of producing industrial commodities is the agricultural commodities that were sacrificed and wasted on him because of his choice to direct resources to produce industrial commodities.

That is, the “opportunity cost” refers to the opportunity that was sacrificed because of a particular choice without choosing another. Depending on the production possibility curve, the idea of opportunity cost can be clarified and the selection process facing society when using its resources, which represents the core of the economic problem, can be understood.

Production Possibility Curve:

We will assume at the outset that the resources of society are limited and fixed, that the level of productive art used is constant, and that society will direct all resources to produce two types of commodities, let them be industrial and agricultural commodities, for example. The following table shows the different combinations or alternative options that society can choose when directing its resources to produce both industrial and agricultural commodities:

Industrial Commodities Agricultural Commodities Combinations (Options)

0 10 A
5 8 B
6 7 C
7 5 D
8 0 E

By representing the data graphically, we get what is called the production possibility curve, which is shown in the figure. He drew the production possibility curve assuming that the economy is constrained by a fixed and definite amount of resources, and it uses these resources efficiently in the sense that while fully employing its resources, it must sacrifice the production of units of the commodity when it produces more of the other commodity. This substitution is a necessary process that reflects the law of life in every economy that employs all its productive resources.

Accordingly, the production possibility curve can be defined as: “that curve that connects the different points, which represent the combinations of commodities that can be produced in society using all the resources available to it.”

It is clear that the production possibility curve shows the maximum amount of commodities that can be produced using the available resources during a certain period and not what society desires to produce, because what society desires to produce may not be within the limits of society’s potential and the resources available to it. The above table and drawing show the different choices or different combinations of both agricultural and industrial commodities that society can produce using its available resources.

The combination represented by point (A) indicates that the community used all its resources to produce 10 units of agricultural commodities and did not produce anything from industrial commodities. The combination represented by point (B) indicates that the community uses its resources to produce 8 units of agricultural commodities and 5 units of industrial commodities. Thus, we find that any point located on the production possibility curve (A, B, C, D, E) are representative points of combinations that fall within the limits of production potential, that is, society can produce them with full employment of its resources.

It is clear that the increase in the production of industrial commodities is in exchange for the decrease in the production of other agricultural commodities. That is, the selection process entails an opportunity cost. This cost incurred by the society to increase the production of industrial commodities is often increasing and not fixed, and therefore the production possibility curve is convex and not in the form of a straight line, and the explanation for this is due to the increasing costs and the specialized nature of the resources, because the resources that are suitable for the production of agricultural commodities may not be suitable for the production of industrial commodities. with the same level of efficiency.

For example, if agricultural workers are converted from the production of agricultural commodities to the production of industrial commodities, their productivity will be lower and their efficiency will be lower, which requires converting a relatively larger number of agricultural workers to produce a certain amount of industrial commodities, and therefore the production of each additional unit of industrial commodities will be at the expense of An increasing shortage in the production of agricultural commodities.

That is, the opportunity cost of producing industrial commodities increases as we move towards expanding the production of industrial commodities and shifting resources from the production of agricultural commodities to the production of industrial commodities.

We should point out here that any point that is located within the production possibility curve, i.e. to the left of it, such as point (G), for example, represents a combination that can be obtained and produced, but it does not represent full use and exploitation.

No to the available community resources. As for the point (F) or any other point outside the curve, that is, to the right of the production possibility curve, it represents a combination of a level of productivity that cannot be obtained because it exceeds the productive capabilities of society. But it can be said that reaching a level of productivity at any point outside the limits of the production possibility curve such as point (F) depends on the possibility of economic growth and an increase in the productive potential of society.

Shift of the Production Possibility Curve:

With the increase in the production potential and the productive capacity of society with economic growth, the production possibility curve shifts to the right, and this happens for two reasons:

(1) – Increasing the economic resources in society, through the discovery of new natural resources such as oil fields or other natural resources, or increasing the labor force in society.
(2)- Technical progress, that is, technical development and the development of production methods, which is reflected in the rise in productivity and the increase in the productive capacity of society.

Accordingly, we say that the production possibility curve can be used to show the causes and effects of economic growth in society, as the production possibility curve rises, shifting to the right, to indicate the increase in the productive capacity of the economy as a result of the increase in economic growth.

The transition of the production possibility curve may be so that it is parallel to the original curve, and this means that the ability of society to increase the production of each of the two groups of commodities has increased equally, and the curve may shift but not be parallel to the original curve, which indicates that the ability of society to produce one of the two groups of the commodities increased to a greater degree than his ability to increase production in the other group.

What is management

Management is the human activity concerned with employing the available material, human and moral resources, and working on developing and preserving them in order to achieve the goals desired by society, taking into account the surrounding circumstances. The primary task of management is to achieve the objectives sought by the organization through its conduct of various activities using the available resources.

Superior management is the one that improves the selection of its goals through the conscious study and vigilant follow-up of the surrounding climate, and that can achieve these goals by optimal investment of the available (potential) opportunities and the fullest operation of the available (potential) resources and the preservation and continuous development with efficient dealing with restrictions and obstacles, as it seeks to confront Effective competition, trying to excel, and reaching customer satisfaction more efficiently than its competitors.

Management in our world faces a different climate than it was the case a few years ago. The social and cultural reality is different and rapidly changing with the speed of change and renewal of the technological reality, the spread of the mechanism and the abolition of the effect of divergence, except if it is at the level of time or space. The economic reality is new and continues to change in light of liberalization.

Trade and remove barriers and under the market mechanisms as the basis for economic regulation and privatization, the speed and ease of technology transfer and globalization.

On the other hand, the administration faces a different and renewed political reality through the spread of democratic systems, multi-party systems, Shura systems, sharing of responsibilities, and so on. In the past, we used to talk about the future as if it was something far from imagination, and today we talk about the future while it is with us and imagine it as if it is tomorrow. Therefore, management today is characterized by rapid change and lives in the era of the information revolution and the era of smart organizations, which makes the decision-making process more difficult and complex, and it has become the element of prediction. Great importance to achieving goals and excellence in activities.


industrial engineering website that contains engineering information, engineering books, projects, exams, manufacturing, quality, project management, health and safety.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button