Engineering Economics Lecture 1-3 Summary PDF

Engineering Economics Topics Cash Flow Diagrams Cash flow diagrams visually represent the flow of money over time, typically showing inflows as upward arrows and outflows as downward arrows. Time is represented on the horizontal axis, while the amount of money is shown on the vertical axis....

Engineering Economics Topics Cash Flow Diagrams Cash flow diagrams visually represent the flow of money over time, typically showing inflows as upward arrows and outflows as downward arrows. Time is represented on the horizontal axis, while the amount of money is shown on the vertical axis. They help analyze financial situations by providing a clear presentation of cash movements. Cash flow diagrams can be used for personal budgeting, investment analysis, project evaluation, and financial planning. Understanding the timing and magnitude of cash flows is essential for decision-making and risk assessment. Cost estimating models Cost estimating models are tools used to predict the overall cost of a project by considering various factors such as materials, labor, and overhead expenses. Different types include parametric, analogous, and bottom-up estimating models. These models assist in budgeting, planning, and decision-making processes. They rely on historical data, expert judgment, and mathematical calculations. Accuracy of cost estimates depends on the quality of input data and assumptions made. Ethical dimensions in engineering decision making Engineers must consider societal impact, safety, environmental implications, and honesty when making decisions to ensure ethical outcomes. Ethical decisions may involve trade-offs between social welfare and individual interests. Codes of ethics, such as ASME and IEEE, provide guidance for engineers on ethical decision- making. Informed consent, transparency, and accountability are crucial in engineering decision- making processes. Integrating ethical considerations early in project planning helps prevent ethical dilemmas. Importance of cost estimating Cost estimating is crucial for predicting expenses accurately, aiding in budgeting, decision- making, and ensuring projects are financially viable and profitable. It helps in evaluating project feasibility. Ensures resources are used efficiently. Aids in setting competitive pricing strategies. Minimizes financial risks. Making economic decisions Making economic decisions involves analyzing choices on how to allocate resources efficiently to maximize utility and achieve goals. Decisions are influenced by scarcity and unlimited wants. Factors such as opportunity cost, marginal analysis, and incentives play key roles in decision- making. Decision-making models like cost-benefit analysis help in determining the best course of action. Understanding the concept of trade-offs is essential when making economic decisions. Key Terms Audit the Results Audit the Results involves reviewing outcomes for accuracy and reliability to ensure they align with expectations and are trustworthy. Audit process includes verifying data, calculations, and methodologies used in obtaining the results. External auditors may be hired to assess results impartially. Identifying errors or discrepancies during the audit can lead to corrections and improved decision-making. Auditing is essential for maintaining transparency and accountability in the reporting of outcomes. Average Costs Average Costs refer to the total costs of production divided by the quantity of output. They include both fixed and variable costs. Total costs divided by quantity of output gives Average Costs. Average Costs help firms determine pricing strategies. A decrease in Average Costs signifies efficiency in production. Average Costs play a crucial role in determining a firm's profitability. Book costs Book costs refer to the expenses incurred by individuals when purchasing printed materials for academic or personal use. Book costs can vary depending on factors such as demand, availability, and whether the books are new or used. Students often seek ways to reduce book costs, such as buying used books, renting them, or using e-books. Book costs are an important consideration for students when budgeting for their education. Online platforms and campus bookstores are common places where students purchase books for their courses. Bounded Rationality Bounded Rationality is the idea that individuals make decisions based on limited information, cognitive abilities, and time, leading to satisficing rather than maximizing outcomes. It suggests that individuals use simple rules of thumb rather than complex analytical processes for decision-making. Bounded Rationality contradicts the assumption of perfect rationality in classical economic theory. Herbert Simon introduced the concept of Bounded Rationality, highlighting its importance in understanding real-world decision-making. Behavioral economics incorporates Bounded Rationality to explain deviations from traditional economic models. Cash costs Cash costs refer to the actual expenses incurred in producing goods or services, including raw materials, labor, and other operating costs. Cash costs do not include non-cash expenses like depreciation. Accurately calculating cash costs is crucial for businesses to determine profitability. Analyzing trends in cash costs can help identify cost-saving opportunities. Understanding cash costs is essential for making sound financial decisions in business operations. Code of Ethics A Code of Ethics outlines principles for ethical behavior, guiding professionals on moral conduct and ensuring public trust. Codes are designed to promote integrity, honesty, and accountability in a specific field or  profession. Violations can result in disciplinary actions such as fines, suspension, or loss of license. Ethical dilemmas may arise when values conflict, and codes provide frameworks for making decisions. Regular review and updates to the Code of Ethics help address emerging ethical challenges and maintain relevance. Complex problems Complex problems involve multifaceted issues with interrelated factors that often have no clear- cut solutions, requiring critical thinking and analytical skills. They may have various stakeholders with conflicting interests. Decision-making may involve trade-offs between different goals. Understanding the root causes is crucial in solving complex problems. Effective communication is essential in addressing complex issues. Cost indexes Cost indexes measure the relative change in the cost of goods and services over time, providing a useful tool for monitoring inflation. They are often used by businesses to adjust prices for inflation. Cost indexes can vary based on the specific goods or services being measured. They help in assessing the impact of price changes on consumers and businesses. Government agencies often use cost indexes to calculate adjustments in payments and benefits. Decision-making process The decision-making process involves identifying a problem, gathering relevant information, evaluating available options, making a choice, and reflecting on the outcome. Consider both quantitative and qualitative factors during the evaluation stage. Utilize decision-making tools like cost-benefit analysis to aid in making rational choices. Understand that decisions may involve trade-offs where the benefits of one option are sacrificed for another. Remember that decision-making is influenced by personal values, preferences, and external factors. Detailed estimates Detailed estimates provide thorough projections of potential costs, revenues, and outcomes for a specific project or scenario.  They involve a comprehensive analysis of various factors that can impact the financial aspects of a project. Detailed estimates are essential for effective budgeting and resource allocation. Accuracy in detailed estimates is crucial to avoid cost overruns and ensure project feasibility. These estimates often require careful consideration of historical data, market trends, and input from subject matter experts. Engineering costs Engineering costs refer to the expenses associated with designing, developing, and maintaining products, structures, or systems. These costs include both direct and indirect expenses. Direct engineering costs are directly attributable to a specific project or product. Indirect engineering costs are expenses shared among multiple projects. Engineering costs vary based on the complexity and scope of the project. Cost control measures, such as value engineering, can help manage engineering costs effectively. Engineering Economic Analysis Engineering Economic Analysis involves evaluating costs, benefits, and risks to make sound engineering decisions. Factors in time value of money using techniques like net present value and internal rate of return. Considers cash flows, depreciation, taxes, and inflation to assess the financial viability of engineering projects. Employs economic principles to optimize resource allocation and determine project feasibility. Helps in comparing alternatives, making long-term investment decisions, and managing project finances effectively. Ethics Ethics in a societal context refers to principles of moral behavior that guide individuals and organizations to act ethically and responsibly. Ethical decision-making considers the impact on stakeholders and aims for fairness and honesty. In business, ethical behavior involves adhering to laws, regulations, and corporate values. Ethics often involves navigating dilemmas where conflicting values or interests are at play. Codes of ethics help establish standards for professional conduct and promote accountability in various fields. Feasibility Study A Feasibility Study is an assessment of the practicality and potential success of a proposed project or idea. Typically includes market research, financial projections, and risk analysis. Aims to determine if the project is viable, profitable, and worth pursuing. Helps stakeholders make informed decisions by evaluating costs and benefits. Often includes recommendations on whether to proceed with the project or modify the plan. Feasible Alternatives Feasible alternatives refer to the different attainable options available to make a decision or take an action. These alternatives are viable and can be implemented within given constraints. They provide decision-makers with choices to consider before making a selection. Analyzing feasible alternatives is crucial in making informed and optimal decisions. Factors such as costs, resources, and time can influence the feasibility of alternatives. Financial consequences Financial consequences refer to the outcomes resulting from financial decisions or events, impacting individuals, businesses, or the economy. They can include gains or losses, changes in wealth, costs of borrowing, or impacts on investment decisions. Financial consequences can affect short-term financial stability or long-term financial health. These consequences can lead to adjustments in spending habits, savings rates, or investment strategies. Understanding financial consequences is crucial for making informed financial decisions and managing risk effectively. First cost First cost refers to the initial expense incurred when purchasing a product or service, excluding any additional expenses or operating costs. First cost is crucial for businesses to factor in when determining profitability and return on investment. It can include expenses such as acquisition, installation, and setup costs. Understanding first cost helps in making informed decisions regarding budget allocation and resource management. It is important to consider both short-term and long-term implications of first cost when  evaluating a purchase. Fixed costs Fixed costs are expenses that do not vary with the level of production, such as rent and salaries. Fixed costs remain constant regardless of the level of output. Examples include insurance premiums and lease payments. Fixed costs are incurred even if no units are produced. These costs are essential for business operations. Incremental costs Incremental costs are the additional expenses incurred by producing one more unit of a good or service, reflecting the marginal cost impact. Also known as marginal costs. Helps in making production decisions. Can vary depending on economies of scale. Important for pricing decisions. Intangible consequences Intangible consequences refer to non-monetary impacts that are difficult to measure but have significant effects on individuals, businesses, and society. These consequences can include effects on mental health, social relationships, and overall well-being. They are often overlooked in traditional financial analysis but can have long-term implications. Intangible consequences may influence decision-making processes and shape future outcomes. Measuring intangible consequences requires qualitative analysis and consideration of subjective experiences. Learning Curve Learning curve represents the rate at which a person or organization learns a new task, showing that productivity improves over time as experience accumulates. Learning curve helps predict future performance and understand how efficiency increases with experience. The curve illustrates diminishing returns, where the initial steep improvement levels off as knowledge is gained.  Factors affecting learning curves include complexity of tasks, individual abilities, and available resources for training. Lowering the time and cost per unit through experience allows for competitive advantages and improved decision-making based on learning trends. Life-cycle costs Life-cycle costs refer to the total expenses incurred over an asset's entire lifespan, including acquisition, operation, maintenance, and disposal costs. Considering life-cycle costs helps businesses make informed decisions on long-term investments. It is essential in assessing the overall financial impact of a project or product. Includes evaluating expenses beyond the initial purchase price. Helps in comparing different alternatives based on their total cost of ownership. Marginal costs Marginal costs refer to the additional cost incurred from producing one more unit of a good or service. Useful for businesses in determining the most efficient level of production. Calculated by dividing the change in total cost by the change in quantity produced. Can help inform pricing decisions and profit optimization strategies. When marginal cost is below average total cost, average total cost tends to decrease. Maximize profit Maximizing profit involves finding the optimal level of output where marginal cost equals marginal revenue, leading to the greatest possible earnings. The profit-maximizing point on a graph is where the marginal cost curve intersects the marginal revenue curve. In competitive markets, profit maximization occurs at the output level where marginal cost equals price. Factors affecting profit include production costs, pricing strategies, and market demand. Profits can be increased by either reducing costs, increasing revenue, or a combination of both. Non-recurring costs Non-recurring costs are one-time expenses that are not expected to happen again in the future, such as purchasing new equipment for a business.  These costs are not integral to the regular operations of a business. They are typically treated differently in financial analysis compared to recurring expenses. Examples include litigation expenses, restructuring costs, and expenses related to one-time events. Non-recurring costs can impact a company's profitability and financial performance in a given period. Operations and maintenance Operations and maintenance involve the ongoing activities to ensure the smooth functioning and upkeep of a system or facility. Includes regular inspections, repairs, and upkeep tasks. Helps prevent breakdowns and costly repairs. Optimizes efficiency and prolongs the lifespan of equipment. Involves managing resources effectively to maintain operations. Opportunity costs Opportunity costs refer to the benefits or value an individual misses out on when choosing one alternative over another. It is the next best alternative foregone. Helps in making decisions by comparing the benefits of different choices. Opportunity costs exist due to scarcity of resources. Can be explicit or implicit. Overhaul An overhaul involves making extensive changes or revisions to a system, process, or organization to improve efficiency, effectiveness, or competitiveness. It may include restructuring, reorganizing, modernizing, or updating existing practices. Typically initiated in response to identified weaknesses or to adapt to changing circumstances. Overhauls can be complex and resource-intensive, requiring careful planning and strategic implementation. The goal of an overhaul is often to enhance performance, reduce inefficiencies, and increase overall success. Per-unit model Per-unit model refers to a pricing strategy that sets the price based on the cost per unit produced, enabling businesses to determine profitability.  Helps analyze whether individual units are generating profit or loss. Commonly used in manufacturing, retail, and service industries. Involves calculating the cost per unit to establish an appropriate selling price. Can aid in decision-making regarding production volume and pricing strategies. Power-sizing model The power-sizing model is a theory that examines how the concentration of power within a specific sector can impact market dynamics. It explores the effects of market power on competition. It helps in understanding the influence of market dominance on pricing and output decisions. The model can be applied in various industries to analyze market structures. It aids in predicting the behavior of firms based on their levels of market power. Recurring costs Recurring costs are expenses that happen regularly and are essential for the operation or maintenance of a business or a product. They typically include items like rent, utilities, salaries, and insurance. Recurring costs are predictable and can be budgeted for in advance. Understanding recurring costs is crucial for businesses to manage cash flow effectively. These costs are distinct from one-time or non-repeating expenses. Replacement Analysis Replacement analysis involves comparing the costs and benefits of replacing an asset with a new one to determine the most cost-effective option. It helps in determining when it is financially viable to replace an existing asset. Factors considered include the initial cost of the new asset, salvage value of the old asset, and operating costs. The analysis aims to maximize efficiency and cost savings over the lifecycle of the asset. It is crucial for businesses to make informed decisions regarding equipment upgrades and replacements. Revenues Revenues refer to the income generated from sales of goods or services. It is a key metric indicating the financial health of a business. Revenues are vital for covering expenses and generating profits.  Factors influencing revenues include pricing strategies, market demand, and competition. Rising revenues may signify business growth, while declining revenues could indicate financial troubles. Understanding revenue streams and maximizing revenue potential are crucial for sustainable business operations. Rough estimates Rough estimates refer to approximations or calculations made with limited accuracy or information, often used in forecasting or decision-making. Commonly used in business planning for quick projections. Can help in assessing the feasibility of a project or investment. Should be used cautiously as they may lack precision. Frequently based on broad assumptions and simplifications. Salvage Value Salvage value refers to the resale or recycling value of an asset at the end of its useful life or when it is no longer needed. Salvage value is used to estimate the overall value of an asset over its entire lifespan. It can include the value of parts that can be sold separately or the scrap value of the entire asset. Salvage value is important for determining depreciation and the cost of capital for an asset. A higher salvage value can lead to lower depreciation expenses and impact the decision- making process for investing in new assets. Segmenting model A segmenting model is a method used to divide a market into distinct groups based on characteristics such as demographics, behavior, and needs. Helps companies tailor marketing strategies to specific customer segments. Enhances product development by focusing on the unique needs of different segments. Can improve customer satisfaction and loyalty by delivering more personalized products or services. Enables businesses to allocate resources more effectively by targeting the most profitable segments. Semi-detailed estimates Semi-detailed estimates are calculations that provide a moderately thorough analysis, giving insight into potential outcomes and trends.  Typically based on data and assumptions, offering a middle ground between rough and exhaustive estimates. Helpful in decision-making processes by providing a clearer picture of possible results. Can be used to project future trends or assess the feasibility of a project or investment. May involve quantitative analysis and consideration of various influencing factors. Simple problems Simple problems involve basic concepts and straightforward solutions, often requiring only a few steps to solve. These problems are usually focused on fundamental principles and do not involve complex analysis or detailed calculations. They are commonly found in introductory courses and serve as building blocks for more advanced topics. To solve simple problems efficiently, understanding key definitions and relationships is crucial. Practicing basic problem-solving techniques can help reinforce conceptual understanding and improve performance on assessments. Sunk Costs Sunk Costs are costs that have already been incurred and cannot be recovered, regardless of future decisions or actions. Sunk Costs should be ignored when making decisions about future investments or actions. They are expenditures that are permanently lost once they have been made. Sunk Costs are different from future costs that can be avoided or changed based on decisions. Consider only relevant future costs and benefits to make rational decisions. SWOT Analysis SWOT Analysis is a strategic planning tool used to identify a business's internal strengths and weaknesses, as well as external opportunities and threats. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. It helps businesses make informed decisions and develop strategies based on their unique circumstances. Internal factors are within the organization's control, while external factors are outside influences. SWOT Analysis can be conducted for a business, project, product, or even an individual. types of costs Types of costs refer to the classifications of expenses incurred in the production of goods or services. Fixed costs do not change with production levels. Variable costs fluctuate with production quantities. Total costs are the sum of fixed and variable costs. Marginal costs are the additional costs incurred by producing one more unit. Variable costs Variable costs are expenses that fluctuate based on the level of production or activity within a company. Includes costs such as raw materials, direct labor, and utilities. Tend to increase as production levels rise. Can be controlled through efficiency measures. Important for determining a company's breakeven point.