ENGINEERING ECONOMICS

ENGINEERING ECONOMY

ECONOMICS – one of the social sciences which consists of that body of knowledge dealing with people

and their assets or resources .

- Sum total of knowledge that treats the creation & and utilization of goods and services for

the satisfaction of human wants.

ENGINEERING – is not a science but an application of science - art composed of skill and ingenuity in

adapting knowledge to the uses of humanity - 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 .

As defined by Arreola – branch of Economics which involves the applications of definite laws of

Economics, theories of investments and business practices to Engineering problems involving cost - the

study of economic theories and their applications to Engineering problems with the concept of obtaining

the maximum benefit at the least cost - also involves the study of cost features & other financial data

and their applications in the field of Engineering as a basis for decision.

As defined by Kasner – Engineering Economics is equated with practicality and economic feasibility. It is

also the search for the recognition of alternatives which are then compared and evaluated in order to

come up with the most practical design and creation.

As defined by Sullivan, et. al - Engineering economy is the systematic evaluation of the merits of

proposed solutions to engineering problems.

Origins of Engineering Economy

Engr. Arthur Wellington a Civil Engineer (19th Century)

- Made use of engineering economics analysis in building railroads in U.S.

Eugene Grant (1930)

- Published his book “Principles of engineering Economy

- Emphasized on techniques that depended on financial and actuarial mathematics

Two (2) Aspects of Engineering:

1. Concerns itself with the materials and forces of nature

2. Concerns of the needs of people

Why should engineers study economics?

Engineering economics poses numerous benefits because it allows those in industry to make

strategic decisions for their companies. While macroeconomic and financial competencies are key for

business operations, engineering economics further provides a mechanism for decision-making.

ENGINEERING ECONOMY TECHNIQUES:

1. The Economy Analysis – considers all factors affecting the economy of the project which can be

reduced to specific monetary values.

2. The financial Analysis – determines the methods and sources of financing . the project either through

equity capital or borrowed . or a combination of both. It is dependent on the Economy analysis for

necessary data.

3. The Intangible Analysis – determines all the aspects of the proposed project . which cannot be

reduced to monetary values and considers the uncertainty and the risks inherent in the project.

Reasons for studying Engineering Economics

1. Engineers, as a group, have wrought immense changes in improving the economic well-being of

mankind through their inventions and their applications of scientific principles to the varied problems of

industry

2. In the professional life of engineers, it is readily observed that the most successful ones are those who

gradually divorce themselves from the technical aspects of Engineering and who devote their time and

efforts to financial problems related to Engineering works.

Special characteristics of Engineering Economics: Engineering Economics

1. is closely aligned with Conventional Micro-Economics.

2. is devoted to the problem solving and decision making at the operations level.

3. can lead to sub-optimization of conditions in which a solution satisfies tactical objectives at the

expense of strategic effectiveness.

4. is useful to identify alternative uses of limited resources and to select the preferred course of action.

5. is pragmatic in nature. It removes complicated abstract issues of economic theory.

6. mainly uses the body of economic concepts and principles.

7. integrates economic theory with engineering practice

Engineering Economic Analysis Procedure

1. Problem recognition, definition, and evaluation.

2. Development of the feasible alternatives.

3. Development of the cash flows

4. Selection of a criterion (or criteria)

5. Analysis and comparison of the alternative

6. Performance monitoring & post evaluation results

BASIC TERMS and PRINCIPLES OF ECONOMICS

Two basic types of factors:

1. Tangible Factors- those which can be expressed in terms of monetary values

2. Intangible Factors – those which are difficult to express or impossible to express in terms of monetary

values. Also called irreducible factors.

Perfect Competition – occurs when a certain product is offered for sale by many. vendors or suppliers,

and there is no restriction against other vendors from entering the market.

Monopoly – the opposite of perfect competition. It occurs when a unique product or service is available

only from a single supplier and entry of all other possible suppliers is prevented.

Oligopoly – occurs when there are few suppliers and any action taken by anyone will definitely affect

the course of action of the others.