KIX 2002 ENGINEERING ECONOMICS ANALYSIS

Chapter 1: Introduction to Engineering Economics

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What is Economics?
● Economics:
is the study of the use of scarce resources to
satisfy unlimited human wants.
● Scarcity?
is the condition in which our wants are greater
than our limited resources.

Production capacity is limited due to

1) Resources
Land - natural resources, etc.
Capital - investment money.
Labor - the work force; size, education, quality, work ethic.
2) State of current technical knowledge
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What Economy Comprises?
i) Set of scarce resources capable of producing a finite
quantity of goods and services
ii) A population with effectively unlimited wants
iii) Social mechanism that allocates the resources
among their competing possible uses

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Factors of Production

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Three Basic Economic Questions
1) What goods and services will be produced?
2) How will goods and services be produced?
3) Whom will goods and services will be produced for?

How Does an Economy Work?

1) Working parts – decision makers make choices
2) Working mechanism

Since we are unable to have everything we desire, we must make

choices on how we will use our resources.
In economics we will study the choices of individuals, firms, and
governments.
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Working Mechanism

Coordination mechanism

Commands mechanism Market mechanism

Command Economy Market Economy

- Allocates resources (decides what, (simply a place where people buy and sell goods)
how, for whom) - Factor market
- Product market

Mixed Economy
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● Commands mechanism
● is a method of determining what, how and for whom
goods and services are produced that is based on the
instruction of a ruling body.
● Commands economy
● a central planning bureau makes decision about what will
be produced, how it will be produced and for whom it will
be produced
● Market Economy
● an economy relies exclusively on markets to coordinate
individual decisions about what, how and for whom it will
be produced

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● Mixed economy
● An economy which uses both markets and command
mechanism to coordinate economic activities

● Product markets
● Are those in which goods or services are bought and sold

● Factor markets
● Are those which factors of production change hands,
maybe bought, hired or rented

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Micro vs. Macro

Economics

Microeconomics Macroeconomics

Study of small economic units Study of the large economy as a

such as individuals, firms, and whole or in its basic subdivisions
industries (competitive markets, (National Economic Growth,
labor markets, personal decision Government Spending, Inflation,
making, etc.) Unemployment, etc.)

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 Engineering and Economics
1940s
➢ Engineers mainly concern with design, construction and operation
of machines, structures and processes Do its benefits
➢ Less attention was given to the resources exceed its
cost?
Now
➢ Engineers expected to generate novel technological solutions
and also to make skillful financial analysis of the effect of
implementation

➢ In today’s close and tangled relationships among industry, the

public, and government , cost and value analyses are supposed
to be more detailed and inclusive

➢ Without these analysis, an entire project can be burden than a

profit.
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Engineering Economy
● Involves the systematic evaluation of economic
merits of proposal solutions to engineering
problems
● 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, and
➢ Translate profitability to the ‘bottom line’ through a valid
and acceptable measure of merit

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Engineering economic analysis can play a
role in many types of situations
● 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

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Seven Fundamental Principles Of Engineering
Economy
● Develop the alternatives

● Focus on the differences

● Use a consistent viewpoint

● Use a common unit of measure

● Consider all relevant criteria

● Make uncertainty explicit

● Revisit your decisions

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Principle 1: Develop the alternatives
● The choice is among alternatives. The alternatives
need to be identified and defined for subsequent
analysis.

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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.

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Principle 3: Use a consistent viewpoint
● The prospective outcomes of the alternatives,
economic and other, should be consistently
developed from a defined viewpoint of the decision
maker.

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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 make easier the analysis and comparison of the
alternatives.

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Principle 5: Consider all relevant criteria
● Selection of preferred alternative requires the use of
criteria (or several criteria). The decision should
consider both the outcomes enumerated in monetary
unit and those expressed in some other unit of
measurement or made explicit in descriptive manner
● e.g. of criteria – long term financial interest, business
objective etc.

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Principle 6: Make uncertainty explicit
● Uncertainty is inherent in projecting (or estimating)
the future outcomes of the alternatives and should
be recognized in their analysis and comparison.

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Principle 7: Revisit your decision
● 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.

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Example: Government to invest on incinerator
Come out with several alternatives of technologies - Burn barrel,
P1
Moving grate, Fixed grate, Rotary-kiln, Fluidized bed

P2 Look at what difference among these technologies

P3 Who owned the facility?

P4 Use common unit of measure: RM

Consider – amount of waste feedstock, air pollution, spaces,

P5 under ground water contamination, maintenance, quantity of
electric generated.

P6 Less rubbish?

Revisit your decision – makes an evaluation to improve future

P7
decision making.
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Engineering Economic Analysis Procedure
1. Problem definition

2. Development of alternatives

3. Development of prospective outcomes

4. Selection of a decision criterion

5. Analysis and comparison of alternatives.

6. Selection of the preferred alternative.

7. Performance monitoring and post-evaluation of

results.
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 Engineering Design Process
Step 1: Problem recognition,
definition, and evaluation

Step 3: Development of
the outcomes & cash
Step 2: Development of flows for each alternatives
the feasible alternatives
Step 4: Selection of
criterion (or criteria)

Step 5: Analysis & (activities)

comparison of the
Step 6: Selection of the alternatives
preferred alternative

Step 7: Performance monitoring

and post-evaluation of results

23 The General Relationship between the Engineering Economic Analysis Procedure and the
Engineering Design Process
Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
 EXAMPLE 1-1 (continued) Defining the Problem
and Developing Alternatives

Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
 EXAMPLE 1-2 Application of the Engineering
Economic Analysis Procedure

continued on next slide

Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
 EXAMPLE 1-2 (continued) Application of the
Engineering Economic Analysis Procedure

continued on next slide

Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
 EXAMPLE 1-2 (continued) Application of the
Engineering Economic Analysis Procedure

continued on next slide

Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
 EXAMPLE 1-2 (continued) Application of the
Engineering Economic Analysis Procedure

Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
 EXAMPLE 1-3 Get Rid of the Old Clunker?

Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
Electronic spreadsheets are a powerful
addition to the analysis arsenal
● Most engineering economy problems can be
formulated and solved using a spreadsheet.
● Large problems can be quickly solved.
● Proper formulation allows key parameters to be
changed.
● Graphical output is easily generated

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