SM 300

Engineering Economics
 Basic Concepts
What is Economics?
Economics is the study of how societies use scarce
resources to produce valuable commodities and
distribute them among different people.
This definition uses the idea of…

Scarcity –

 Suppose infinite quantities of every good/service could

be produced or human desires were fully satisfied, what
would be the consequence?
 Free Good vs Economic Good
Free Good = Good that is available in abundance.
 Can you think of some examples?

Economic Good = Good that is scarce or limited in supply

….. compared to the unlimited WANTS

Thus,
Given unlimited wants, it is important that an economy
makes the best use of its limited (or scare) resources
This leads us to the notion of Efficiency
Efficiency = The most effective use of a society’s resources
in satisfying people’s wants and needs
 Science , Engineering and Engineering Economics
Science and the role of the Scientist
Science = Knowledge about or study of the natural world based on
facts learned through experiments and observation
The role of the scientist is to add to humankind’s accumulated body
of systematic knowledge and to discover universal laws of
behavior.
 Can you think of a scientific knowledge?
Engineering and the role of the Engineer
Engineering = The profession in which knowledge of 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.
Role of engineer is to apply the knowledge of science to particular
situations to produce products and services, mostly to satisfy
human wants.
 How can an engineering apply the scientific knowledge?
 Bi-Environmental Nature of Engineering

Engineers have to face 2 important interconnected environments–

Physical and Economic
Their knowledge of physical laws  Produce products and services
Worth of these products/services depends on their utility measured
in economic terms
 Bi-Environmental Nature of Engineering (Contd.)
Laws of the physical environment are more narrower and
more certain… hence experiments can be used to control
certain factors and arrive at similar results….
However, economic environment is uncertain since it
depends on the behavior/actions of people acting singly
and/or collectively

The usual function of engineering is to manipulate

elements of physical environment to create value in the
economic environment…
However sometimes engineers have a tendency to
disregard economic feasibility… and do not like actions
based on estimates and judgment
 Example
iSmell Personal Scent Synthesizer developed by DigiScents
Inc.
 Engineering Economy or Engineering Economics
The objective of engineering economy is to prepare engineers
to cope effectively with the bi-environmental nature of
engineering application

Engineering Economy- involves the systematic evaluation of the

economic merits of proposed solutions to engineering
problems…
To be economically acceptable (i.e. affordable), solutions to
engineering problems must demonstrate a positive balance
of long-term benefits over long-term costs, and they must
also
• Promote the well-being and survival of an organization
• Embody creative and innovative technology and ideas
• Permit identification and scrutiny of their estimated outcomes