Engineering Economics

Dr. Karim Kobeissi

Chapter 1: Introduction to Engineering Economy

W h a t i s E c o n o m i c s• Economics is the science of choice.

• We live in a resource-constrained world. Available resources are insufficient

to satisfy all wants and needs.

• The resources that are available have alternative uses. You could purchase

the latest smart phone, but if you did that means forgoing some other use

for your money such as saving it or purchasing new cloths. Your decision is

an economic one. You make it with the goal of maximizing your self-interest

.

• Economics is the study of how countries (macroeconomics) and

individuals (microeconomics) make decisions to allocate limited resources.

What is Engineering Economics

Engineering economics is the application of economic concepts

and techniques to engineering projects and decisions.

Engineers often have to decide among alternatives. Which of

several designs to use? Which of several projects to pursue?

Engineering economics gives engineers the tools they need to

make decisions that maximize the use of resources.

Why study Engineering Economics?

• The Accreditation Board for Engineering and Technology (ABET) defines Engineering as:

“The profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind”

• Economically is an important qualifier in the definition of engineering.

• A successfully engineered solution is one that not only works from a technical perspective, but also from an economic one.

• An economical solution is one that makes efficient use of resources.

Engineering Economics in Context

Technical Analysis Financial Analysis Professional Judgment.

• General workflow for engineering a solution:

A Systematic Process for Making Business Decisions

1. Understand the problem

2. Identify all technically-feasible candidate solutions.

3. Define the selection criteria (e.g. Return on investment, delivery date,

performance, risk, etc.)

4. Evaluate each proposal against selection criteria. Since cost is always a

consideration, this step will include the development of cash flows and the

computation of present value (or equivalent) for each alternative. This step also

includes consideration of intangible factors (irreducible).

5. Use professional judgment to select the preferred solution.

6. Monitor performance of solution selected. Use feedback to calibrate decision

making process.

Fundamental Economic Concepts & Principles

Economic techniques are based on some fundamental concepts and

tools:• Cash flow and cash flow diagrams• Time value of money• Inflation and purchasing power• Costs• Depreciation• Taxes• Sensitivity Analysis• Uncertainty & Risks

An understanding of these economic concepts and fundamentals /principles will give us (engineers) the foundation we need to learn techniques that can we used to make decisions that maximize the use of resources.