Engineering Economics and Financial

Management

Lecture 1
 In this course
1. Introduction to Engineering economics

2. Supply and Demand Analysis

3. Time Value of Money

4. Economic Evaluation of alternatives

5. Replacement analysis

6. Depreciation accounting

7. Break-even analysis
In today’s class
 What is engineering economics?
 Understand the role of engineers in business
 Engineering economic decisions
 Micro and Macro Economics
As engineers, what is our job?

Engineering :
A profession in which a knowledge of
the mathematical and natural sciences
is applied with judgment to develop
ways to utilize economically the
materials and forces of nature for the
benefit of mankind.
-ABET
How engineering relates to utility
The purpose of engineering effort is to determine
how physical factors may be altered to create the
most utility for the least cost.
Why engineering economics?

Engineers are confronted with two important

interconnected environments, the physical and the
economic.

The usual function of engineering is to manipulate the

elements of one environment , the physical , to create
value in the second environment, the economic.
Decision Making:

• The Decision-Making Process

1. Understand the Problem
2. Identify the decision criterion
3. Allocating Weights to the Criteria
4. Developing Alternatives
5. Analyzing alternatives
6. Select the “best” alternative
7. Implementing
8. Monitoring
Engineering Economics
Common types of Engineering economic
decisions
1. Equipment or process selection
2. Equipment replacement
3. New product or product expansion
4. Improvement in Service and Quality

Engineering Economics
MACRO AND MICRO ECONOMICS
MACROECONOMICS
Players in an economic system:
1. Government
2. Firms/ Businesses/ Corporates
3. Household/ citizens
4. Financial system/ Central banks

• Macroeconomics examines the aggregate behavior of the

economy (i.e. how the actions of all the players in the
economic system interact to produce a particular level of
economic performance as a whole).
MACRO ECONOMICS

It focuses on issues such as

• GDP
• Inflation
• Deficit
• Economic policies
• Demographics
• Unemployment
• Economic growth and other related issues, which affect
the economy as a whole.

• These concepts are not simple & direct.

MICROECONOMICS

• Microeconomics is the study of individuals,

households and firms' behavior in decision making
and allocation of resources.
• Microeconomic study deals with issues like
• what choices people make,
• what factors influence their choices
• how their decisions affect the goods markets by affecting
the price, the supply and demand.
Micro and Macro Economics
Definition and Differences
MICRO
• Microeconomics is the study of
particular markets, and segments of
the economy.
• Examples:
• Supply and demand in individual
markets
• Individual consumer behaviour.
• Individual labour markets – e.g.
demand for labour, wage
determination
MACRO
• Macro economics is the study of the
whole economy, at an aggregate level.
• Examples:
• Monetary / fiscal policy. e.g. what effect
does interest rates have on whole
economy?
• Inflation, and unemployment
• Economic Growth
• International trade and globalisation
• Government borrowing
Text books
1. Contemporary engineering economics
By Chan S Park
2. Engineering Economics
By James L Riggs
3. Engineering economic Analysis
By Donald G Newnan
4. Engineering economy
4. By Thuesen and Fabrycky