Introduction to Engineering Economics

Introduction to Engineering Economics

• Engineering Economics integrates knowledge from physics, chemistry, life sciences, and mathematics to enhance human prosperity through large-scale product development.
• Economics focuses on the production, distribution, and consumption of goods and services.
• Engineering Economics involves evaluating costs and benefits related to technical projects.

Principles of Engineering Economics

• Develop Alternatives: Utilize brainstorming to generate creative options for decision-making.
• Focus on the Difference: Analyze future outcomes to prioritize and differentiate alternatives.
• Use a Consistent Viewpoint: Base prospective outcomes on a defined perspective, often representing stakeholders' interests.
• Use a Common Unit of Measure: Provide clarity by using a standard measurement for costs and profits, facilitating easier comparisons.
• Consider All Relevant Criteria: Evaluate multiple criteria in decision-making processes, considering both monetary and descriptive evaluations.
• Make Uncertainty Explicit: Acknowledge risks and uncertainties in projecting future outcomes for informed analysis.
• Revisit Your Decisions: Encourage learning and adaptation by comparing initial projections with actual results.

Economic Concepts

• Economics provides insights into resource allocation, opportunity costs, and project evaluation—fundamental in decision-making.
• Human wants are unlimited, but resources to satisfy these wants are limited, creating the need for economic choices.
• Basic economic activity involves satisfying material needs through production, consumption, and investment processes.

Basic Economic Activities

• Production: The creation of goods and services, involving factors such as land, labor, capital, and entrepreneurship.
• Consumption: Utilization of goods and services, classified into individual and collective consumption.
• Investment: Savings from production used for future capital formation.
• Distribution: Method of allocating output and wealth among individuals and production factors.

Supply and Demand Concepts

• Demand is essential in business; it reflects how much of a good will be purchased at specific prices.
• The relationship between price and quantity demanded is critical for understanding consumer behavior.

Consumer and Producer Goods

• Consumer Goods: Directly satisfy consumer needs (e.g., food, clothing, services).
• Producer Goods: Used to produce consumer goods and other producer goods (e.g., machinery, infrastructure).

Cost Concepts

• Fixed Costs: Constant expenses regardless of production levels (e.g., rents, salaries).
• Variable Costs: Fluctuate with production levels (e.g., raw materials, utility costs).
• Incremental Costs: Additional costs from producing one more unit.
• Standard Costs: Anticipated costs per output unit.
• Direct Costs: Attributable to specific outputs; Indirect Costs: Cannot be linked to specific activities.
• Cash Costs: Involve cash transactions; Book Costs: Non-cash costs like depreciation.
• Sunk Costs: Past expenses that influence future decisions but are irrecoverable.
• Opportunity Costs: The value of the next best alternative forgone by using resources for a current project.
• Investment Costs: Initial capital required for project commencement, often involving progressive payments over time.
• Operation and Maintenance Costs: Expenses related to daily operations, including labor and materials.
• Working Capital: Funds necessary for daily enterprise operations.
• Salvage Value: The estimated resale value of equipment after it has been used.