Lecture 1 - Making Economic Decisions PDF

Lecture 1 Making Economic Decisions Copyright Oxford University Press 2014  Outline ▪ Types of Problems ▪ Role of Engineering Economic Analysis ▪ Problem-Solving / Decision-Making Process ▪ Ethical Dimensions in Engineering Decision-Making Copyright...

Lecture 1 Making Economic Decisions Copyright Oxford University Press 2014  Outline ▪ Types of Problems ▪ Role of Engineering Economic Analysis ▪ Problem-Solving / Decision-Making Process ▪ Ethical Dimensions in Engineering Decision-Making Copyright Oxford University Press 2014  Learning Objectives ▪ Distinguish between simple and complex problems ▪ Understand the role and purpose of engineering economic analysis ▪ Apply Problem-Solving / Decision Making Process ▪ Understand Ethical Dimension of Decision Making ▪ Solve simple problems associated with engineering decision making process Copyright Oxford University Press 2014  Making Economic Decisions ▪ This course develops the tools to properly analyze and solve the economic problems that are commonly faced by engineers. Copyright Oxford University Press 2014  A Sea of Problems ▪ Simple Problems ▪ Should I buy metro-rail pass or pay every time? ▪ Should our company pay the vendor cash or credit? ▪ Intermediate Problems ▪ Should I buy or lease my next car? ▪ Which CNC machine should the company purchase? ▪ Complex Problems ▪ Feasibility study of a new automobile plant. ▪ Planning for new highways Copyright Oxford University Press 2014  Role of Engineering Economic Analysis ▪ A systematic tool for comparing alternatives by their economic merits. Most suitable for problems ▪ With importance, that require organized analysis of the economic aspects ▪ Could apply to Product/Process Design, Purchase of Capital Equipment, Selection of Projects, Investment, and many other decision making processes. Copyright Oxford University Press 2014  Decision-Making Process 1. Recognize Problem / Opportunity Overall Mission / Objectives 2. Define Goals/Objectives 3. Assemble Relevant Data 5. Select the Criterion 4. Identify Feasible Alts 6. Construct a Model 7. Predict Alts’ Outcomes 9. Audit the Results 8. Choose the Best Alt. Copyright Oxford University Press 2014  Decision-Making Process 1. Recognize Problem / Opportunity ▪ Needs for New Products, Processes, or Facilities ▪ Improvement of Products, Processes, or Facilities (TQM) ▪ SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis ▪ Investment/Financing Copyright Oxford University Press 2014  Decision-Making Process 2. Define Goals/Objectives ▪ General or specific goals ▪ Systems perspective ▪ Limiting factors ▪ Multiple goals ▪ Conflicting goals Copyright Oxford University Press 2014  Decision-Making Process 3. Assemble Relevant Data ▪ Importance of Data Collection ▪ Relevance of Information ▪ Dollar Amount and Time Horizon ▪ Sources of Information – Financial Accounting System – Cost Accounting Records – Market Research – Quotations – Economic Indicators – Other Published Information Copyright Oxford University Press 2014  Example 1-1 Assemble Relevant Data ▪ Vast information ▪ What is “relevant”? From who’s viewpoint? (See the textbook p.8) – From the Manager of Shipping Dept. Alt. 1 $793.00 /30,000 copies (Printing Dept.) vs. Alt. 2 $688.00 /30,000 copies (Comm. Printer) – From General Manager Alt. 1 $793.50 / mo (Printing Dept.) vs. Alt. 2 ($793.50-$294.00)+688.50 / mo (Comm. Printer) Copyright Oxford University Press 2014  Decision-Making Process 3. Assemble Relevant Data Financial Consequences (Costs & Benefits): – Market Consequences: has established prices – Extra-Market Consequences: prices could be assigned by indirect means – Intangible Consequences: Social impacts, environmental impacts, etc. Copyright Oxford University Press 2014  Decision-Making Process 4. Identify Feasible Alternatives ▪ Include as many as possible alternatives: – Do-Nothing option – Simple solutions ▪ Bounded rationality – Number of alternatives Copyright Oxford University Press 2014  Decision-Making Process 5. Select the Criterion ▪ Multiple criteria ▪ Conflicting criteria ▪ Integrating criteria ▪ Most common criterion – Maximize profit Category Economic Criterion Fixed input Maximize the benefits or other outputs Fixed output Minimize the costs or other inputs Neither input Maximize the profits (Value of outputs nor output fixed – cost of inputs) Copyright Oxford University Press 2014  Decision-Making Process 6. Construct Models ▪ Real Systems and Models ▪ A model describes the interrelationships among the relevant data and predicts the outcomes of various alternatives. Copyright Oxford University Press 2014  Decision-Making Process 7. Predict Alternatives’ Outcomes ▪ Comparable outcomes – Single criterion – Single composite criterion ▪ Risk and uncertainty ▪ Search for more information (loop) ▪ Modification of alternatives (loop) Copyright Oxford University Press 2014  Decision-Making Process 8. Choose Best Alternative(s) ▪ Selection criterion ▪ Other intangible considerations Copyright Oxford University Press 2014  Decision-Making Process 9. Audit the Results ▪ Reality vs. prediction ▪ Learn from mistakes ▪ Replacement Analysis Copyright Oxford University Press 2014  Ethics ▪ The concept of distinguishing between right and wrong in decision making. ▪ Ethics includes: – Establishing systems of beliefs and moral obligations – Defining values and fairness – Determining duty and guidelines for conduct Copyright Oxford University Press 2014  Code of Ethics National Soc. of Professional Eng. Engineers, in the fulfillment of their professional duties, shall: 1. Hold paramount the safety, health, and welfare of the public. 2. Perform services only in areas of their competence. 3. Issue public statements only in an objective and truthful manner. 4. Act for each employer or client as faithful agents or trustees. 5. Avoid deceptive acts. 6. Conduct themselves honorably, responsibly, ethically, and lawfully so as to enhance the honor, reputation, and usefulness of the profession. (http://www.nspe.org/ethics/eh1-code.asp) Copyright Oxford University Press 2014  Ethical Dimensions in Engineering Decision Making Decision Process Step Example Ethical Lapses 1. Recognize the problem “Looking the other way”, or not to recognize the problem due to bribes or fear of retribution 2. Define goals/objectives Favoring one group of stakeholders by focusing on their objective 3. Assemble relevant data Using faulty or inaccurate data 4. Identify feasible alts. Leaving legitimate alts out of consideration 5. Select criterion to Considering only monetary consequences determine best alt when other significant consequences exist Copyright Oxford University Press 2014  Ethical Dimensions in Engineering Decision Making Decision Process Step Example Ethical Lapses 6. Construct a model Using a short horizon that favors one alt over another 7. Predict alts’ outcomes Using optimistic estimates for one alt. and pessimistic ones for the other alts 8. Choose the best alt Choosing an inferior alt, one that is unsafe, adds unnecessary cost for user, harms the environment 9. Audit the result Hiding past mistakes Copyright Oxford University Press 2014  Ethics in Engineering Economic Analysis ▪ How well and how honestly the decision-making process is conducted – the data, method of analysis, recommendations, and follow-up ▪ Recognize ethical issues exist and make them an explicit part of decision making process Copyright Oxford University Press 2014  ? Copyright Oxford University Press 2014