ENGINEERIN

G
ECONOMICS
 2 Unit Outline
A. Introduction
B. Engineering and Science
C. The Bi–Environmental Nature of Engineering
D. The Engineering Process
1 LEARNING OBJECTIVES E. Plan for Engineering Economy Studies
F. The Engineering Economy and The Engineer
G. Definition of Engineering Economy
I. Learn the principles and importance of
H. Origins of Engineering Economy
economy in engineering.
I. Principles of Engineering Economy
J. Engineering Economy and The Design Process
II. Explain the engineering process in making
K. Concepts of Value and Utility
sound decision for engineering proposals.
L. Consumer and Producer Goods and Services
M. Economic Aspects of Exchange
N. Classification of Cost
O. Necessities and Luxuries
P. Demand
Q. Market Situations, Competition, Monopoly
and Oligopoly
R. The Law of Supply and Demand
S. The Law of Diminishing Return
 INTRODUCTION

Engineering activities of analysis and design has two aspects. One aspect
concerns itself with the materials and forces of nature while the other is
concerned with the needs of people, thus satisfying the human needs. Because we
live in a resource – constrained world, engineering must be closely associated
with economics. It is essential that engineering proposals be evaluated in terms
of worth and cost before they are undertaken

 Engineering is not a science, but an
application of science.
 It is an art composed of skill and
ingenuity in adapting knowledge to the
uses of humanity.
 The Accreditation Board for
Engineering and Technology has
adopted the definition that
“Engineering is the pro-fession in
which 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 and Science
 The role of the scientist is to add to mankind’s
accumulated body of systematic knowledge and to
discover universal laws of behavior.
 The role of the engineering is to apply this knowledge
to particular situations to produce products and
services.
 To the engineer, knowledge is not an end in itself but is
the raw material from which he or she fashions
structures, systems, products, and services.
 Thus, engineering involves the determination of the
combination of materials, forces, and human factors
that will yield a desired result.
 Most products and services used to
facili-tate work, communication
transportation, and national defense
and to furnish sustenance, shelter, and
health are directly or indirectly a
result of engineering activity.
 Engineering has also been
instrumental in providing leisure time
for pursuing and enjoying culture.
Through the development of instant
communication and rapid transport-
tation, engineering has provided the
means for both cultural and economic
improvement of the human race.

 Engineering is not a science, but an
application of science.
 It is an art composed of skill and
ingenuity in adapting knowledge to the
uses of humanity.
 The Accreditation Board for
Engineering and Technology has
adopted the definition that
“Engineering is the pro-fession in
which 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 and Science
 Most products and services used to
facili-tate work, communication
transportation, and national defense
and to furnish sustenance, shelter, and
health are directly or indirectly a
result of engineering activity.
 Engineering has also been
 Science is the foundation upon which the instrumental in providing leisure time
engineer builds toward the advancement of for pursuing and enjoying culture.
mankind. With the continued development of Through the development of instant
science and the worldwide application of communication and rapid transport-
engineering, the standard of living may be tation, engineering has provided the
expected to improve and further increase the means for both cultural and economic
demand for those things that contribute to improvement of the human race.
people’s love for the comfortable and beautiful.
 THE BI – ENVIRONMENTAL NATURE OF ENGINEERING

 Engineers are confined with two  Since economics is involved with the
 The usual functions of engineering are to manipulate actions of people, it is apparent that
important inter-connected
the elements of the physical environment and to create economic laws be based upon their
environments, the physical and
value in the economic environment. behavior.
economic.  However, engineers sometimes tend to disregard
 Their success is altering the physical  Economic laws can be no more exact
economic feasibility and are often appalled in practice than the description of the behavior
environment to produce products and
by the necessity for meeting situations in which action of people acting singly and
services depend upon knowledge of
must be based on estimates and judgment. collectively.
physical laws.
 However, the worth of these products
 Engineers can readily extend their inherent ability of  Want satisfaction in the economic
and their services lies in their utility
analysis to become proficient in the analysis of the environment and engineering
measured in econo-mic terms.
economic aspects of engineering application in the proposals in physical environment are
 These are numerous examples of
analysis of the economic aspects of engineering linked by the production or the
structures, machines, processes, and
application. construction process.
systems that exhibit exce-llent physical
design but have little economic merit.
The objective of engineering application is to get the greatest end result per unit of resource input. This statement is an
expression of physical efficiency, which may be stated as

Where: Physical efficiency is always be less than unity or less than 100%.

On the second level are economic efficiencies. These are expressed in terms of economic units of output divided by economic
units of input, each expressed in terms of a medium of exchange such as money. Economic efficiency may be stated as

Where: Economic efficiency exceeds 100% and must dos so for economic undertakings to be successful.
 THE ENGINEERING PROCESS
Determination of objectives

Identification of strategic factors

Determination of means

Evaluation of engineering proposals

Assistance in decision making

 PLAN FOR ENGINEERING ECONOMY STUDIES
The engineering process described in the previous section involves a creative element based on the employment of
engineering economy studies. These economy studies can be made on the basis of a logical plan. This plan involves:

The creative step

The definition step
The conversion step
The decision step
 DEFINITION OF ENGINEERING ECONOMY

1 2 3
It is the analysis and evaluation
of the factors that will affect the It deals with the concepts and
economic success of It involves the systematic
techniques of analysis useful in evaluation of the economic
engineering projects to the end evaluating the worth of
that a recommendation can be merits of proposed solutions
systems, products, and services to engineering problems.
made which will insure the best in relation to their cost.
use of capital.
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 Embody creative and innovative

organization, technology and ideas,

Permit identification and scrutiny of their Translate profitability to the “bottom line”
estimated outcomes, and through a valid and acceptable measure of
merit.
A few more of the countless situations in which engineering economy plays a
crucial role are:

 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.

 ORIGIN OF ENGINEERING ECONOMY

In 19th century, Arthur M. Wellington, a civil engineer address the role

of economic analysis in engineering projects and his particular area of interest
was railroad building in the United States in which the emphasis was on
techniques that depended primarily in financial and actual mathematics.
In 1930, Eugene Grant published the first edition of his textbook and
his emphasis on developing an economic of view in engineering and this point
of view involves a realization that quite as definite a body of principles govern
the economic aspects of an engineering decision as governs its physical
aspects.
In 1942, Woods and De Garmo wrote the first edition of Engineering
Economy.
PRINCIPLES OF ENGINEERING ECONOMY

Develop the Alternatives

Focus on Differences

Use a Consistent Viewpoint

Use a Common Unit of Measure

Consider All Relevant Criteria

Make Uncertainty Explicit

Revisit Your Decision

 ENGINEERING ECONOMY
&
DESIGN PROCESS

7
1

6
2

5
3

4
Problem Definition
 1 Problem Definition

A
ENGINEERING ECONOMY

It provides the basis for the rest of

the analysis.
2
DESIGN PROCESS

4
B It includes all decision situations
for which an engineering economy
analysis is required.
&

6 C It includes refinement needs and

requirements for evaluation
process.

7
 1 Problem Definition
ENGINEERING ECONOMY

2 Development of Alternatives
DESIGN PROCESS

4
&

7
 1 Problem Definition A Concentrate on redefining one
problem at a time.
ENGINEERING ECONOMY

2 Development of Alternatives

B
DESIGN PROCESS
Develop many redefinitions for the
problem.
3

4 C Avoid making judgements as new

&

problem definitions are created.

5
D Attempt to redefine a problem in terms
that are dramatically different from the
original (problem definition).
6

7 E Make sure that the true problem is well

researched and understood.
 1 Problem Definition
ENGINEERING ECONOMY

2 Development of Alternatives
DESIGN PROCESS

3 Development of Prospective
Outcomes

4
&

7
 11 Problem Definition

A Meeting or exceeding expectations

ENGINEERING ECONOMY

22 Development of Alternatives

B
DESIGN PROCESS

Safety
3 Development of Prospective
Outcomes
C Improving satisfaction
44
&

D Maintaining flexibility to meet

changing demands
5
E Meeting or exceeding all
requirements
66
F Achieving good relationships
77
 1 Problem Definition
ENGINEERING ECONOMY

2 Development of Alternatives
DESIGN PROCESS

3 Development of Prospective Outcomes

4 Selection of a Decision Criterion

&

Analysis and Comparison of

5 Alternatives

6 Selection of the Preferred Alternative

Performance Monitoring and Post-evaluation of

7 Results
CONCEPTS OF VALUE
AND UTILITY
Value designates the worth that a person attaches to
an object or service. Thus, the value of an object is
inherent not in the object but in the regard that a
person has for it. Value should not be confused with
the cost or the price of an object in engineering
economy studies. There may be little or no relation
Utility is the power to satisfy human between the values a person ascribes to an article
wants. The utility of an object has for and the cost of providing it, or the price that is
an individual is determined by him or asked for it.
her. Thus, the utility of an object, like
its value, inheres not in the object
itself but in the regard that a person
has for it.

Utility and value in the sense used here are

closely related. The utility that an object for a
person is the satisfaction he or she derives from
it. Value is an appraisal of utility in terms of a
medium of exchange.
 CONSUMER AND PRODUCER
GOODS AND SERVICES

Good or commodity is defined as any tangible economic product that contributes or indirectly to the satisfaction of human
wants.

Service is defined as any tangible economic activity that contribute directly or indirectly to the satisfaction of human wants.

Economists classify goods and services as either “consumer goods and service” or “producer goods or services”.

Consumer goods and services are those products or services that are directly used by people to satisfy their wants. Examples
of consumer goods are houses, cars, clothes, appliances, food, books, movies, medical and dental services, etc.

Producer goods and services also satisfy human wants but indirectly in as much as they are used to produce the consumer
goods and services. Examples of producer goods and services are factory buildings, machine tools, airplanes, ships, busses, etc.
 ECONOMIC ASPECTS OF
EXCHANGE

Economy of exchange occurs when utilities are exchange by two or more people.
 Manual Benefits in Exchange
 Persuasion in Exchange
 CLASSIFICATIONS OF COST

 First cost the initial cost of a capitalized property, including transportation, installation for service, taxes and other related
initial expenditure in order to make the property or asset or equipment functional. This is sometimes called investment cost.

 Operation and maintenance cost

 Operating costs are incurred by the operation of physical plant or equipment needed to provided service
 Maintaining costs occur over time until the structure, system, or equipment item is retired from service.

 Fixed and variable cost

 Fixed cost is a cost that remains constant over a wide range of activity as long as the business does not permanently
discontinue operations. This includes property taxes, overhead, interest of borrowed capital, etc. It also refers to the
cost that is not a function of the independent variable.
 Variable cost is a cost that varies more or less directly with the volume of output. This includes labor, material,
power, etc.
 CLASSIFICATIONS OF COST

 Incremental and marginal cost

 Incremental cost the additional cost that will result from increasing the output of a system by one or more units.
 Marginal cost the cost of an additional unit of a product.

 Sunk cost refers to the cost in the past. This may include any past expenditure, the uncovered balance of an investment and
capital already invested that cannot be retrieved.
 NECESSITIES AND LUXURIES

 Necessities are those products or services that are required to support human life and activities, that will purchased in
somewhat the same quantity even though the price varies considerably.

 Necessity product or staple product is defined as any product that has an income-elasticity of demand less than one. This
means that as income arises, proportionately less income is spent on such products. Examples of necessity products include
basic foodstuffs like bread and rice, clothing, etc.

 Luxuries are those products or services that are desired by humans and will be purchased if money is available after the
required necessities have been obtained.

 Luxury product is defined as any product that has an income-elasticity of demand greater than one. This means that as
income rises, proportionately more income is spent on such products. Examples of luxury products include consumer
durables like electric appliances, expensive cars, holidays and entertainment, etc.
 DEMAND

 Demand is the quantity of a certain commodity that is bought at a certain price at a given place and time.

 Elastic demand occurs when a decrease in selling price result in a greater that proportionate increase in sales.

 Inelastic demand occurs when a decrease in selling price produces a less than proportionate increase in sales.

 Unitary elasticity of demand occurs when the mathematical product of volume and price is constant.
 MARKET SITUATIONS, COMPETITION,
MONOPOLY AND OLIGOPOLY
 The term “market” refers to the exchange mechanism that brings together the sellers and buyers of a product, factor of
production or financial security. It may also refer to the place or are in which buyers and sellers exchange a well-defined
commodity.

 Buyer or consumer is defined as the basic consuming or demanding unit of a commodity. It may be an individual purchaser of
a good service, a household (a group of individuals who make joint purchasing decisions), or a government.

 Seller is defined as an entity which makes product, good or service available to buyer or consumer in exchange of monetary
decision.
 MARKET SITUATIONS, COMPETITION,
MONOPOLY AND OLIGOPOLY
 The price of any commodity or product will depend largely on the market situation. The following is a tabulation of the
different market situations.

Market Situation Sellers Buyers

Perfect competition many Many
Monopoly one Many
Monopsony many One
Bilateral monopoly one One
Duopoly two Many
Duopsony many Two
Oligopoly few Many
Oligopsony few Few
Bilateral oligopoly few Few
 THE LAW OF SUPPLY AND
DEMAND

 Supply is the quantity of a certain commodity that is offered for sale at a certain price at a given place and time or is the
amount of a product made available for sale.

 Demand is the need, want or desire for a product backed by the money to purchase it. In economic analysis, demand is
always based on “willingness and ability to pay” for a product, not merely want or need for the product.

 The demand of a product is inversely proportional to its selling price

 Therefore, the relationship between price and supply is that they are directly proportional

 The law of supply and demand may be stated as follows:” Under conditions of perfect competition the price at which a given
product will be supplied and purchased is the price that will result in the supply and the demand being equal.”
 THE LAW OF DIMINISHING RETURNS

 When the use of one of the factors of production is limited, either in increasing cost or by absolute quantity, a point will be
reached beyond which an increase in the variable factors will result in a less than proportionate increase in output.
Thank you!
Ana Pauline B. Pagador, RCE