Engineering Economics (ES-4)

Lecture 1.1
TOPICS:
• Key Concepts
• Principles of Engineering Economics
Key Concepts
 Engineering
• use of scientific principles
to design and build
machines, structures, and
other items, including
bridges, tunnels, roads,
vehicles, and buildings
 Engineer as a Problem Solver

“The main essence of engineering is solving problems.”

• Problem-solving underlies most disciplines, and for

Engineering, it is done through a focus on science
and technology.

• Problem-solving in engineering can mean producing

inventions that make our lives easier, increasing
productivity in the process by freeing up our time.
• Engineering design solutions exist in the context of a
business opportunity.
• Given that every problem has multiple solutions, the
issue is,
“How does one rationally select the design with
the most favorable economic result? “

• The answer to this question can also be put forth in

two words:
Engineering Economy
 Engineering
It is 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.
 Engineering Economics
• A collection of techniques that simplify comparisons
of alternatives on an economic basis.

• It is NOT a method or process for determining what

the alternatives are.

• It begins only AFTER the alternatives are identified.

 Question:

If the BEST ALTERNATIVE is actually one that

the engineer has not even recognized as an
alternative, can this alternative be selected?
 Engineering Economics
• If the best alternative is actually one that the
engineer has not even recognized as an alternative,
then all the economic analysis tools will NOT result
in its selection.
 Engineering Economics
• If the best alternative is actually one that the
engineer has not even recognized as an alternative,
then all the economic analysis tools will NOT result
in its selection.
Example
• Choosing the best design for a high-efficiency gas furnace
• Selecting the most suitable robot for a welding operation on an
automotive assembly line
• Making a recommendation about whether jet airplanes for an
overnight delivery service should be purchased or leased
• Determining the optimal staffing plan for a computer help desk
Example
• Choosing the most economical Material for specific items in
construction.
• Choosing the source of aggregates.
• Choosing the method of Concrete production.
• Purchasing/Renting Equipment for construction.
• Optimal manpower for specific work/job
 Other Terms
• ALTERNATIVES
• CRITERIA
• RISK
• UNCERTAINTY
• DECISION MAKING
 Principles of
Engineering Economics
Principles of Engineering Economics
• Principle 1: Develop the Alternatives
• Principle 2: Focus on the Differences
• Principle 3: Use a Consistent Viewpoint
• Principle 4: Use a Common Unit of Measure
• Principle 5: Consider all Relevant Criteria
• Principle 6: Make Risk and Uncertainty Explicit
• Principle 7: Revisit your Decisions
Principle 1: Develop the Alternatives
Carefully define the
problem!
Then the choice (decision)
is among alternatives.
The alternatives need to be
identified and then defined
for subsequent analysis.
Principle 2: 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.
Principle 3: Use a Consistent Viewpoint
The prospective outcomes of the alternatives, economic
and other, should be consistently developed from a
defined viewpoint (perspective).
Principle 4: Use a Common Unit of Measure
Using a common unit of
measurement to
enumerate as many of
the prospective
outcomes as possible will
simplify the analysis of
the alternatives.
Principle 5: 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
both the outcomes enumerated in the
monetary unit and those expressed in
some other unit of measurement or
made explicit in a descriptive manner.
Principle 6: Make Risk and Uncertainty
Explicit
Risk and uncertainty are inherent
in estimating the future outcomes
of the alternatives and should be
recognized in their analysis and
comparison.
Principle 7: 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.
 Activity 1.1 (Short Quiz)
1. In at least three sentences, explain why it is
important to study Engineering Economics.
2. Aside from the examples given during the lecture,
Give at least three examples Engineering Economics
can be used.