Introduction to Engineering Economy

Introduction to Engineering Economy

• Engineering Economy involves systematically evaluating the economic merits of proposed solutions to engineering problems (Sullivan)
• It also analyzes and evaluates factors affecting the economic success of engineering projects, ensuring the best use of capital (Sta. Maria)
• The course aims to develop and illustrate principles and methodology to answer the fundamental economic question: Do project benefits exceed costs?

Engineering Economic Analysis Procedure

• Includes problem definition
• Development of alternatives
• Development of prospective outcomes
• Selection of a decision criterion
• Analysis and comparison of alternatives
• Selection of the preferred alternative
• Performance monitoring and post-evaluation of results

Seven Fundamental Principles of Engineering Economy

• Develop the alternatives: Carefully define the problem, identifying and defining choices for analysis. A decision involves choosing amid multiple alternatives.
• Focus on the differences: Only variations in future outcomes are significant; common elements can be ignored. For instance, if house options have the same purchase price, consider other factors like location and maintenance costs.
• Use a consistent viewpoint: Maintain consistent analysis perspective, typically the viewpoint of the decision-maker (i.e., company owners).
• Use a common unit of measurement: Use a common unit like dollars for evaluating economic factors, translating other factors into equivalent monetary values.
• Consider all relevant criteria: The decision-maker prioritizes alternatives that best serve long-term organizational interests and financially benefit owners.
• Make uncertainty explicit: Risks and uncertainty in estimating future outcomes should be recognized and analyzed. The significant impact of uncertainty in estimated outcomes of action courses should be acknowledged.
• Revisit your decisions: Reassess decisions due to potential undesirable outcomes from good decision processes or significantly varying actual outcomes from initial estimates.

Electronic Spreadsheets

• Electronic spreadsheets enhance analysis efficiency by aiding formulation and solution of engineering economy problems.
• Large problems can be solved quickly, key parameters can be adjusted, and graphical outputs are easily created.

Economics and Consumer Demand

• Macroeconomics studies economic behavior and relationships within an entire society.
• Microeconomics investigates the relationship between individual consumers and producers.

Demand and Supply

• Examining product availability and demand strength is crucial.
• Quantity demanded represents the amount consumers are willing and able to buy at a specific price.
• Quantity supplied is the amount producers are willing and able to sell at a specific price.
• Demand pertains to the relationship between price and quantity demanded, holding other factors constant, while supply pertains to the relationship between price and quantity supplied, holding other factors constant.
• Equilibrium exists when quantity demanded equals quantity supplied, determining equilibrium price and quantity.

Factors Affecting Demand

• The strength of need/want and availability of alternatives influence demand.
• Prices of substitute and complementary goods, consumer expectations of future income and prices, income levels, number of consumers, and preferences impact demand.

Factors Affecting Supply

• Productivity levels, input costs, government policies, technology, output prices, and industry size impact supply.

The Law of Demand

• Higher prices lead to lower quantities demanded.
• Demand is inversely related to price (downward sloping).

The Law of Supply

• Higher prices lead to higher quantities supplied.
• Supply is directly related to price (upward sloping).

The Law of Diminishing Returns

• When one production factor is constrained, increasing other factors will yield smaller incremental output increases.
• Adding additional workers, for instance, will successively yield progressively smaller output increases until a point of diminishing marginal returns is reached.

The Economic Environment

• Consumer goods/services—directly used by consumers to satisfy wants.
• Producer goods/services—used to produce other goods/services.

Demand Elasticity

• Elasticity of demand (ED) measures the responsiveness of quantity demanded to changes in a given variable affecting demand (e.g., price).
• The percentage change in quantity demanded divided by the percentage change in the variable on which demand depends. The factors influencing demand may include the price of the product or services, related products, consumer income, and others.

Price Elasticity (PED)

• Elastic Demand (PED > 1): Quantity demanded is significantly responsive to price changes.
• Inelastic Demand (0 < PED < 1): Quantity demanded is relatively unresponsive to price changes.
• Unitary Elastic Demand (PED = 1): Quantity demanded changes proportionally to price changes.

Perfectly Inelastic Demand (PED = 0):

• Quantity demanded does not change in response to price changes.

Income Elasticity of Demand (IED)

• Income elasticity of demand (IED) measures the responsiveness of quantity demanded to changes in consumer income.
• High IED (IED > 1): Increased income leads to a proportionally larger increase in demand.
• Unitary IED (IED = 1): Increased income leads to a proportionate increase in demand.
• Low IED (0 < IED < 1): Increased income leads to a proportionally smaller increase in demand.
• Zero IED (IED = 0): Income changes do not affect demand.
• Negative IED (IED < 0): Increased income leads to a decrease in demand.

Necessity vs. Luxury Goods

• Necessity goods (low IED): essential goods that are demanded irrespective of price fluctuations.
• Luxury goods (high IED): desired goods that consumption increases with income.

Different Market Organizations

• Perfect Competition: Many sellers, homogeneous products, easy entry/exit.
• Monopoly: One seller, unique product, blocked entry.
• Monopolistic Competition: Many sellers, differentiated products, easy entry/exit.
• Oligopoly: Few sellers, differentiated or homogeneous products, interdependent actions.