Engineering Economics

Engineering Economics
Application of economic techniques and principle is to evaluating

engineering design and engineering alternatives
Engineers can increase the productivity by eliminating waste and

improving the effective utilisation of resources
Engineering is not a science, but an application of science
Engineering is the profession in which a knowledge of the mathematical
and natural sciences gained by study, experience, and practice is applied
with judgment
Profit = sales + other incomes – expenses - taxes
Importance of Engineering Economics
1. Increasing production and Improving productivity
2. Reducing human efforts
3. Increasing wealth by maximising profit
4. Controlling cost and Reducing cost
5. Decision-making – selection of location, selection of equipment and
replacement analysis
6. It provides a number of tools and techniques to solve engineering
problems – advertising, investment, pricing and level of output etc
7. It deals with identification of economic choices
Economics
Economic Problems
Means (Human Wants) Ends (Resources)
Unlimited Graded Limited Alternative

Wants Wants Resource Uses
Scarcity of Resources
 Economics is an science primarily concerned with the process of
mobilizing, allocating and utilizing resources for the purpose of
promoting human development and welfare.
 Economics as a branch of knowledge is concerned with the study
of the allocation of scarce resources among competitive ends.
 Problems of resource allocation are constantly faced by
individuals, enterprise and nations.
 The limited productive resources such as land, raw-materials,
skilled manpower, capital equipment's and technology etc.
The resources not only scarce and limited but also
using for alternative purpose to satisfying people in
the country.
Therefore, resources need to be used and managed
most efficiently and economically.
Efficient and economic use of resources is not an
easy task. It is achieved over time and is a function
of many physical, financial, engineering, human
and institutional factors.
Engineering Economics
 Engineers are technologists, designers, planners and builders. They are also
problem solvers, managers and decision-makers – Engineering economists
touches each of activities.
 Students of engineering in all disciplines often considered themselves about

technology and technological related aspects of business. While, money
matters will be handled by some one else.
 Therefore engineering economics focuses on both practicability and

economic feasibility.
Good Engineering
Projects
Technological Economic
Feasibility Feasibility
Engineering
Economics
Engineering economics is the application of
economic techniques and principles to the evaluation
of design and engineering alternatives.
Engineers seek solutions to problems and the
economic viability of each potential solution is
normally considered along with the solution’s technical
aspects.
Engineers are mainly concern with design and
manufacturing machines, plants, automobiles,
computers, products, environment etc of his her area
of specialization.
 The Accreditation Board for Engineering and
Technology states that Engineering is the profession in
which knowledge of the mathematical and natural
sciences gained by study.
 Engineering is not a science but application of science
 If economic criteria are not considered properly when
profit is the ultimate objective the result is bad
engineering
 Many technologically brilliant projects have been
destroyed as a result of unsound economic analysis.
 Engineers can improving and increasing production,
reducing human efforts and increasing wealth.
 Project estimating its value and justifying it from an
engineering point of view.
 The role of engineering economics is to assess the feasibility of
a project, estimate its value and justify – engineering point of
views.
 This test, however is incomplete unless practically and
economic feasibility.
 Therefore engineering economics denotes technological aspect
as well as monetary aspects.
Efficiency one of the most important concept of
engineering economics
 The concept of efficiency playing an important role in
output maximization and minimization of wastages of
resources.
 Here, there is a shortages of resources - Men, Materials,
Machines, Money and Management etc.
 In this juncture efficiency one of the most important
concept of engineering economics.
 Proper allocation of resources and best way of
utilisation of resources, while minimizing wastages and
inefficiency.
Concept of Efficiency
Higher Efficiency Lower Efficiency
Highest National income, employment and Modest or lowest National

output income, employment and output
Highest Per capita income and standard of Lowest or modest Per capita income
living and standard of living
Highest quality of life and HDI Lowest quality of life and HDI
Minimisation of wastages of resources Maximisation of wastages of resources
Therefore engineering activities must be an vital factors for

maximisation of output and minimisation of wastages
 For an economy to be efficient, the three essential
requirements are –
1. The maximum number of workers to be employed
2. The maximum number of products and services to be
produced.
3. The flow of currency to be maximized.
 Recession is a significant decline in economic activity in
any economy.
 Moreover, if employment rate would drop, there would be
cut backs in consumer spending.
 If the availability of products drops, it can result in
excessive inflation.
 The companies exist for one reason – to make money or profit
Profit = sales + other income – expenses – taxes
 Engineers affect profits in a number of ways –
1. They create the opportunity for new sales by developing new
product or improved.
2. They create the opportunity for reducing expenses. Cost of
production of product.
3. They design and build or modify plants or processes –
produce new product, increase production capacity,
increased sales and reduce expenses.
 Engineering economics provides knowledge of engineering and
economic problem related to limited resources and select the
preferred course of action.
 It evaluations mainly on mathematical models and cost data.
 Before 1940 engineers were mainly concerned with the design,
construction and operation of machines, structures and
process.
 They gave less attention or importance to revenue and cost
aspect, human and physical – that produced the final products.
 Today, close and tangled relations among industry, the public
and government, cost and value analyses are expected more in
detailed and inclusive.
 Worker safety
 Environmental effects
 Consumer protection
 Resource conservation
 Without these analysis, an entire project can easily become more
burden than a benefit.
 For this purpose concept like cash-flows, interest rates
as well as more evaluation criteria like simple payback
period, rate of return, net present value, Break-Even-
Analysis are considered and instructed.
 Engineering is an important part of an economy, the
knowledge of engineering economics has become
mandatory for all engineers.
 Engineering economics concerned with time value of
money, cash-flow concepts, alternatives, depreciation
etc.
The Role of Engineers in Business
Create & Design
• Engineering Projects
Analyze Evaluate Evaluate
• Production Methods • Expected • Impact on Financial

• Engineering Safety Profitability Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk
 Economics play an important role in all
engineering decision-making.
 Economic criteria such as Time value of
money, interest calculation, depreciation
and taxes, replacement analysis and
others have to be considered in the
engineering projects.
 Therefore, engineering economy is
concerned with the economic aspects of
engineering is known as engineering
economics.
Individuals
Limited financial
and personal Enterprises
resources
Nations
Mobilisation of Allocation of Effective

resources Resources Utilisation of resources
 For example – how much of cost incur to production of
particular projects or technology or design or structures
and how much revenue generated by the same.
 Therefore, engineering economy is concerned with the
economic aspects of engineering is known as
engineering economics.
 In brief, Engineering economics is the application of
economic techniques to the evaluation of design and
engineering alternatives.
Engineering Decision Making Processes
1. Understand the problem – define objectives

2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives and apply sensitivity analysis
6. Select the “best” alternative
7. Implement the alternative and monitor results
Steps in an Engineering Economy Study
Rational Decision-Making Process
 Recognize the decision problem
 Collect all needed (relevant) information
 Identify the set of feasible decision
alternatives
 Define the key objectives
and constraints
 Select the best possible and implementable
decision alternative
26
A Simple Illustrative Example: Car to
Lease – Saturn or Honda?
 Recognize the decision problem • Need to lease a car
 Collect all needed (relevant) information • Gather technical and
 Identify the set of feasible decision financial data
alternatives • Select cars to consider
 Define the key objectives • Wanted: small cash outlay, safety, good
and constraints performance, aesthetics,…
 Select the best possible and • Choice between Saturn and Honda (or
implementable decision alternative others)
• Select a car (i.e., Honda, Saturn or
another brand)
27
What Makes Engineering Economic Decisions Difficult?
Predicting the Future
• Estimating the required investments
• Estimating product manufacturing costs
• Forecasting the demand for a brand new
product
• Estimating a “good” selling price
• Estimating product life and the profitability
of continuing production
28

Engineering Economics

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Engineering Economics

Application of economic techniques and principle is to evaluating

Engineers can increase the productivity by eliminating waste and

Means (Human Wants) Ends (Resources)

Unlimited Graded Limited Alternative

 Students of engineering in all disciplines often considered themselves about

 Therefore engineering economics focuses on both practicability and

Highest National income, employment and Modest or lowest National

Minimisation of wastages of resources Maximisation of wastages of resources

Therefore engineering activities must be an vital factors for

Create & Design

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on Financial

Mobilisation of Allocation of Effective

1. Understand the problem – define objectives

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