Lecture 1:Introduction to
Engineering Economy
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What is Economics ?
The study of how limited resources is used to
satisfy unlimited human wants.
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What is Economics ?
The study of how individuals and societies
choose to use scarce resources that nature and
previous generations have provided.
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Resources
• Land
• Labor
• Capital
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Land
All gifts of nature, such as: water, air, minerals,
sunshine, plant and tree growth, as well as the land
itself which is applied to the production process.
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Labor
The efforts, skills, and knowledge of people which are
applied to the production process.
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Capital
• Real Capital (Physical Capital)
– Tools, buildings, machinery -- things which
have been produced and are used in
further production
• Financial Capital
Dollar Bills
– Assets and money which are used in the
production process
• Human Capital
– Education and training applied to labor in
the production process
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Production Possibility Frontier
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Production Possibility Frontier
Video Recorders
Personal Computers
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Production Possibility Frontier
Video Recorders
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Personal Computers
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Production Possibility Frontier
Video Recorders
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300
Personal Computers
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Production Possibility Frontier
Video Recorders
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300
Personal Computers
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Production Possibility Frontier
Video Recorders
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Personal Computers
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Production Possibility Frontier
Video Recorders
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Personal Computers
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Production Possibility Frontier
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Unused
Resources
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Personal Computers
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Production Possibility Frontier
Video Recorders
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Unavailable
Resources
Unused
Resources
300
Personal Computers
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Production Possibility Frontier
Video Recorders
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Unused
Resources
500
300
Personal Computers
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Production Possibility Frontier
Video Recorders
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Unused
Resources
300
400
Personal Computers
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Engineering Economy
•Engineering
Economy involves the systematic evaluation
of the economic merits of proposed solutions to engineering
problems.
•To be economically acceptable, solutions to engineering
problems must
• demonstrate a positive balance of long-term benefits over long-term
costs,
•
promote the well-being and survival of an organization,
•
embody creative and innovative technology and ideas,
•
permit identification and scrutiny of their estimated outcomes, and
• translate profitability to the bottom line through a valid and
acceptable measure of merit.
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Origins of Engineering Economy
The perspective that ultimate economy is a concern to
the engineer and the availability of sound techniques
to address this concern differentiate this aspect of
modern engineering practice from that of the past.
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Origins of Engineering Economy
• Pioneer: Arthur M. Wellington, civil engineer
– latter part of nineteenth century;
– addressed role of economic analysis in engineering
projects;
– area of interest: railroad building
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Principles Of Engineering Economy
1. Develop the Alternatives;
2. Focus on the Differences;
3. Use a Consistent Viewpoint;
4. Use a Common Unit of Measure;
5. Consider All Relevant Criteria;
6. Make Uncertainty Explicit;
7. Revisit Your Decisions
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Develop The Alternatives
The final choice (decision) is among alternatives.
The alternatives need to be identified and then
defined for subsequent analysis.
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Focus on the Differences
Only the differences in expected future outcomes
among the alternatives are relevant to their
comparison and should be considered in the decision.
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Use a Consistent Viewpoint
The prospective outcomes of the alternatives,
economic and other, should be consistently
developed from a defined viewpoint (perspective).
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Use a Common Unit Of Measure
Using a common unit of measurement to enumerate
as many of the prospective outcomes as possible will
make easier the analysis and comparison of
alternatives.
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Consider All Relevant Criteria
• Selection of a preferred alternative (decision making)
requires the use of a criterion (or several criteria).
• The decision process should consider the outcomes
enumerated in the monetary unit and those expressed in
some other unit of measurement or made explicit in a
descriptive manner.
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Make Uncertainty Explicit
Uncertainty is inherent in projecting (or estimating) the
future outcomes of the alternatives and should be
recognized in their analysis and comparison.
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Revisit Your Decisions
• Improved decision making results from an adaptive
process.
• To the extent practicable, the initial projected
outcomes of the selected alternative should be
subsequently compared with actual results
achieved.
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Engineering Economy and Design
Process
• An engineering economy study is accomplished
using a structured procedure and mathematical
modeling techniques.
• The economic results are then used in a decision
situation that involves two or more alternatives and
normally includes other engineering knowledge and
input.
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Engineering Economic Analysis
Procedure and Engineering Design
Process
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Example: Defining the Problem and
Developing Alternatives
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Example: Defining the Problem and
Developing Alternatives
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Example: Defining the Problem and
Developing Alternatives
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Example: Application of the
Engineering Economic Analysis
Procedure
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Example: Application of the
Engineering Economic Analysis
Procedure
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Example: Application of the
Engineering Economic Analysis
Procedure
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Example: Application of the
Engineering Economic Analysis
Procedure
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Example: Application of the
Engineering Economic Analysis
Procedure
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Example: Application of the
Engineering Economic Analysis
Procedure
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Example: Get Rid of the Old
Clunker?
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Example: Get Rid of the Old
Clunker?
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