MN 4022 Engineering Economics

Objectives
To explain syllabus, method of
assessment and text books,
etc.
To give a brief introduction to
engineering economics.
To show relationships between
Economics and Engineering.

A hybrid vehicle: Given that 52 different models of hybrid vehicles will

be available by 2012 (which is currently about 4.2% U.S. market), and
the market share of the hybrid vehicles is expected to rise to 7% by
2015, what economic and non-economic factors the customers may
be concerned about regarding the conversion to alternative fuel
vehicles?

MN 4022 Engineering
Economics
Lecturer: Gayithri Kuruppu
Dept. of Management of Technology
University of Moratuwa.

Learning Objectives
To give basic economic ingredients
for operational level decision making
(costs benefits, cost effectiveness,
opportunity costs, time value of
money, marginal analysisetc).
To give basic economic ingredients to
select preferred course of action.

Learning Outcomes
Understanding the most relevant
economic concepts for
engineering decisions mainly at
operational level.
Application of these economic
concepts to practical engineering
projects and decisions.

Syllabus
Introduction (The relationships between Engineering and
economics, and importance of engineering economics as
a separate discipline for practicing engineers).
Fundamentals (time value of money, equivalence and
cash flow diagrams)
Cash flows (time value equivalence, single payment and
annuity factors and numerical examples. Cash flows and
compounding)
Comparison methods (assumptions, net present value,
annual worth, equivalent annual cost with/without
salvage value, equivalent annual worth of fixed asset
lives and perpetual lives, internal rate of return (IRR) and
minimum acceptable rate of return and IRR irregularities,
numerical examples)

Syllabus
Analysis of alternatives (classification, mutually
exclusive alternatives, incremental analysis and
preferred method for decision making)
Project feasibility analysis (financial feasibility,
market price analysis, cost of capital and weighted
average, economy feasibility, shadow pricing, benefit
cost (B/C) analysis, irregularities of B/C analysis and
preferred method for decision making)
Sensitivity analysis (What if?, sensitivity graph and
interpretation of the analysis, discounted decision
trees and application of decision trees)
Risk management (Risk identification, risk analysis
and risk response)

Assessment and Text Book

Credits : 2, Lecture sessions: 15
Assignments:
Group assignment 20%
In class quizzes 10%
Assessment:
30% on assignments and quizzes
70% on two hour closed book written examination (Six
questions and four questions have to answer).

Text Books
Main Text:
James L Riggs, David D Bedworth, Sabah U. Randhawa
(2004) Engineering Economics, Fourth Ed.,
Supplementary Text:
Park, C (2011) Contemporary Engineering Economics, 5th
Edition.

Introduction
Engineers role have changed over the years from
Technocrats (designers, builders and planners) to
problems solvers, various types of managers, decision
makers, sellers and finally for overall persons.
For most of these overall functions engineers have to use
economics for their decision makings.
Engineering economics as a separate discipline emerge in
1930s on wards and today it is well established in
academia and industry.
Engineering economics has micro economic foundation
and some engineering background as well.

What Actually Engineering

Economist do
Engineering economists use accumulated
knowledge of engineering and economics
to identify alternative uses of limited
resources and to select the preferred
course of action.
For this preferred course of action they
use models, techniques, data, personnel
judgment based on experience...etc

Why Engineering Economy is Important to

Engineers
Decisions made by engineers, managers,
corporation presidents, and individuals are
commonly the result of choosing one
alternative over another.
Decisions often reflect a persons educated
choice of how to best invest funds (capital).
The amount of capital is usually restricted,
just as the cash available to an individual is
usually limited.

Why Engineering Economy is Important to

Engineers

The amount of capital is usually

restricted, just as the cash available to an
individual is usually limited. The decision
of how to invest capital will invariably
change the future, hopefully for the
better; that is, it will be value adding.
Engineers play a major role in capital
investment decisions based on their
analysis, synthesis, and design efforts.

Why Engineering Economy is Important to

Engineers

The factors considered in making the

decision are a combination of
economic and noneconomic factors.
Fundamentally, engineering
economy involves formulating,
estimating, and evaluating the
economic outcomes when
alternatives to accomplish a
defined purpose are available.

Economic Consideration based

Choices faced by the Engineers
Which design to select?
How to replace the existing machines?
Which investment alternative should be
used under capital scarcity?
Which alternative to use under risk and
uncertainty?
How to related risk and rates of returns?
How to carry out a break-even analysis?

 How to select the right investment

proposals among the same worthwhile
but different cash flows?
How to carry out costs benefits analysis
for public sector projects?
How to carry out cost effectiveness
analysis for NGO and community
projects?
How to carry out investment
profitability analysis for private sector
projects?
How the customer affordability of your
design and products?

All these questions are related with

choices among the alternatives and
economic considerations.
These are embodied with decision making
role of engineering economists in terms
of
1. Identify alternative uses for limited
resources.
2. Analyze the data to determine the
preferred course of action.

What is Engineering
Engineering is a practicing profession. It mainly consists of
the body of knowledge of the mathematical and natural
science gained by study, experience and practice.
It is applied with judgment to develop ways to utilize
economically materials and forces of the nature for the
benefits of man kind.
Generally an engineer applies his knowledge to particular
situations to produce goods and services. In this process
Economics specially economic theories, principles,
frameworks, norms and strands helps in many ways.
Generally Engineers are planners, builders, problem solvers,
mangers and decision makers. They direct the management
functions towards the economic objectives and monitor
them through economic measures.

Economics in General Sense

Economics is an unusual subject that plays a different
roles for different people.
A major in economics will come closest to learning the
basic of the business or with economics you can study the
core reasoning that underlies all business decisions.
So you can learn economics to prepare for mainly
business.
Economics is an approach to decision making that is
valuable for all aspects of life.
Individuals, employers, and graduate schools find
techniques used in economics very useful to draw correct
conclusions.
Economics is the best major that trains you to think to
make decisions in very rational way.

Definition for Economics

Wealth related definitions
Welfare related definitions
Scarcity and wants related
definitions
Modern definitions

Wealth related definitions

Adam Smith An inquiry into nature and causes of the
wealth of nations.
David Ricardo To determine the laws which regulates
distribution of the wealth generated.
J.B. Say Economics is a science which treats of wealth.
F.A. Walker Economics is the name of that part of the
knowledge which relates to wealth.
In overall these classical economists consider the
problems of production, distribution and exchange of
wealth as the main issue in economics.

Welfare related definitions

A. Marshall Economics is the study of
mankind in the ordinary business of life
and it examines that how he acquires and
spends wealth for material welfare of
whole nation.
E. Cannon Economics is an explanation of
the general causes on which material
welfare of human beings depends.

Scarcity and wants related definitions

L. Robbinson Economics study problems arise due to
scarcity of resources.
Scarcity emerge due to limited resources and unlimited wants.
Therefore, economics
is the study of how people choose to
e
allocate limited resources to satisfy their unlimited wants.
Wicksteed Economics is about study of without wastage
how resources should be utilized by community through
proper regulation and administration.
Stiglar.J - Economics study principles of governance of
allocation of scare resources among the competing ends.
Scitovosky Economics is a social science which consider
administration of scare resources.
Enrich Roll Main issue in economics is choice related ones
and it occurs due to limited resources and their alternative
uses.

Modern definitions
H. Smith Economics is the study of how in
a civilized society obtains the share of what
other people have produced (distribution)
and how the total product of society changes
(growth) and determined (factors behind
determination of growth).
Jacob Viner Economics is all about what
economists do.

Engineering and Economics

1. Engineers were highly concerned with the design,
construction, and operation of machines, structures
and processes in 1940s whereas they gave less
attention to the resources, humans and physical
that helps to produce final output.
2. But from 1950s on especially 1990 onwards,
engineers role spread to other soft areas as well.
3. The relationships between Engineering to
economics same as such engineering to physics. But
laws and rules in economics not as precise as
physics. Because Economics deals with humans
economic behavior which is very hard to predicts.

The Development of Engineering

Economics
Wellington. A (1887), The economic theory of location of railways.
First attempt of combining engineering to economics by using
economic concepts to select preferred lengths of railways and its
curvatures.
Goldman. B and Fish. L (1920), These two contributed heavily to
financial engineering area by introducing many models lining
engineering and economics.
Grants. L (1930), Principles of Engineering Economics. This person
consider as father of Engineering Economics due to his many
contributions to many areas linking engineering and economics.
Joel Dean introduced many micro and macro concepts to
engineering.
Today engineering economics mainly focus on risks, sensitivity,
feasibility, costs benefits and cost effectiveness, etc.

Questions to discuss
Give a definition for Engineering Economics.
Explain how engineers are using Economics
for their day to decision making.
Why most of the engineers are ending as
Economists in their latter part of professional
life?
Explain why engineering economists are
considered as more practical compared to
general economists.

Thank you